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

Saturday, November 6, 2010

week ending Nov 6

A Look Inside the Fed's Balance Sheet - Assets on the Fed’s balance sheet have remained relatively stable around $2.28 trillion since mid-August when the central bank announced that it would reinvest the proceeds from its mortgage-backed securities and agency debt portfolios into Treasurys. But that’s about to change in the wake of the Fed’s announcement Wednesday that it will purchase an additional $600 billion of Treasurys over the next eight months. Though the overall size of the balance sheet is set to balloon, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds more assets in MBS — over $1 trillion — than any other portfolio, including Treasurys.Meanwhile, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March, and is falling as the last loans made through the program mature. Liquidity swaps with foreign central banks have fallen back to the millions of dollars after jumping in the spring in response to European sovereign debt concerns. Direct-bank lending was essentially flat, remaining at precrisis levels. See a full-size version. Click on interactive graphic  in large version to sort by asset class.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--November 4, 2010

US Fed Total Discount Window Borrowings Wed $47.17 Billion -(Dow Jones)- Increasing U.S. Treasury security holdings in the latest week drove a slight expansion in the Federal Reserve's balance sheet. The Fed's asset holdings in the week ended Nov. 3 rose to $2.303 trillion from $2.298 trillion a week earlier, the Fed said in a report released Thursday. The Fed's balance sheet has hovered near the $2.3 trillion mark for months, but the central bank's assets are poised to begin rising toward $3 trillion next week as it embarks on a bond-buying plan announced Wednesday. At the conclusion of its two-day policy meeting, the Fed said it would buy $ 600 billion in U.S. Treasury securities in an effort to drive interest rates down further and spur economic growth. The Fed also plans to invest proceeds from another $250 billion to $300 billion in maturing mortgage-backed securities it bought earlier into additional Treasury holdings. The Fed's Treasury holdings on Wednesday stood at $842.01 billion, Thursday's report said. That compares with $837.85 billion in the prior week.The Fed's holdings of mortgage-backed securities were steady at $1.051 trillion.Meanwhile, total borrowing from the Fed's discount lending window slipped to $ 47.17 billion on Wednesday from $47.56 billion a week earlier.

Presenting The Fed's Balance Sheet Through 2012 - Fed Will Surpass China As Top Holder Of US Debt By The End Of The Month - As is all too well known by now, starting over the next few days, the Fed will commence purchasing $75 billion in Treasury securities monthly until the end of June, and will buy an additional $35 billion in Treasurys to make up for declining holdings of MBS (due to repurchases). We still believe that as a result of the imminent drop in rates (especially those around the curve belly), as we have claimed for over a month, the feedback loop that will be created will result in a far greater repurchase frequency of MBS securities over the next 8 months, and we would not be surprised if at some point in Q2 2011, the Fed is buying $150 billion in Treasurys monthly. Since nobody will believe this until it is actually confirmed by the H.4.1., we will leave this topic alone for the time being. And after all its will "only" mean a rotation of Fed holdings, a switch in duration, and an impact on the shape of curve. What is certain is that on June 30, the Fed's balance sheet will have $2.68 trillion (or more) in holdings, of which $1.77 trillion will be in Treasurys, compared to the $840 billion today. What is also certain is that the Fed will not be able to stop there. Which is why we have extended the projection period through January 2012. At that point the Fed will hold $2.6 trillion in US Treasuries, or roughly 25% of total US marketable debt at that point.  And for those who collect now completely irrelevant statistics, the Fed will surpass China's $868 billion in UST holdings before the end of November. Yes, ladies and gentlemen, shit just got real.

Fed Set To Launch Fresh Round Of Bond Purchases -The Fed cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds. Analysts now expect a new round of Treasury purchases totaling about $500 billion over a six-month period, with the program left open-ended to allow officials to ramp up the operation if needed. The anticipated easing has weakened the U.S. dollar.  With the prospect of a long period of ultra-low returns in the United States, investors have flocked to emerging markets, pushing those currencies higher. Emerging economies, worried about a loss of export competitiveness, have cried foul. The Fed owns roughly 12.5 percent of all outstanding Treasury bonds and notes. If it were to buy $1 trillion more, as some economists expect it eventually will, the portion of its holdings compared with all outstanding Treasuries could jump to 27 percent.

Capt Bernanke on course for icebergs - This week Ben Bernanke is likely to announce a new programme of “large-scale asset purchases”. The aim of quantitative easing is to dispel deflation and reduce unemployment. Yet the plan is beset with controversy. It’s not clear whether it will have much effect on the real economy or whether the Federal Reserve chairman has fully considered the long-term consequences of his unconventional policy. Investors have already bid up asset prices in anticipation of the central bank’s move. But the financial gains from quantitative easing are a fool’s gold. It is generally agreed that a bout of quantitative easing in 2008 succeeded in calming the markets. But conditions are different today. The credit system is not dislocated and banks are willing to lend, according to the Fed’s survey of senior loan officers. The problem is not with the supply of credit but with lacklustre demand from the private sector. Any new money created by the central bank expanding its balance sheet may well end up adding to the existing pile of more than $1,000bn of excess reserves in the banking system.

Q&A: Kohn Says QE2 Won’t ‘by Huge Amount’ Turn Economy Around - Former Federal Reserve Vice Chairman Donald Kohn, who retired from the Fed two months ago and is now at the Brookings Institution think tank in Washington, D.C., says that if the Fed — as markets widely anticipate — decides this week to launch a new round of bond-buying, it will have “some benefit” but won’t “instantly and by a huge amount turn the economy around.” The U.S. central bank is widely expected to announce a new round of bond purchases, known as quantitative easing, or QE, on Wednesday, Nov. 3, after a two-day policy meeting. The following is a Q&A with the former Fed official:

Federal Reserve's, Bernanke's credibility on line - The Federal Reserve is preparing to put its credibility on the line as it rarely has before by taking dramatic new action this week to try jolting the economy out of its slumber.  If the efforts succeed, they could finally help bring down the stubbornly high jobless rate. But should the Fed overshoot in its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets - thus adding even more anxiety to an already dire situation.  The meeting of Fed policymakers Tuesday and Wednesday is set to be a defining moment of Ben S. Bernanke's second term as chairman of the central bank. Although he helped win the war against the great financial panic of 2008 and 2009, he now risks losing the peace if he fails to end the protracted economic downturn that followed.

On Still Being Conservative: Monetary Policy Edition - Neil Irwin suggests that Bernanke’s fears are that of man who is acutely aware that he has something to lose. But should the Fed overshoot in its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets – thus adding even more anxiety to an already dire situation. I understand the temptation, I do. However, when FOMC members put on their suits and go into work they are no longer private men and women. They are public administrators. Privately, they are very impressive individuals with resumes that have landed them at the seat of power. Yet, as administrators they are failing miserably.  The members are acutely aware of the dual mandate and that it is not being met in either respect. Prices are too low and unemployment is too high. This is by definition, failure.

QEII: Even if Real Rates Fall and Expected Inflation Increases, Will Firms and Households be Induced to Increase Consumption and Investment? - Thoma - It seems to me that everyone fighting today over whether QEII will work are worried about whether the Fed can affect real rates, but are forgetting about the second step in the process. Once real rates rates fall, firms and households then have to be induced to borrow more, then consume or invest (I'm including the response to expected inflation in this). Even if we manage to change real rates, and I have never quarreled with the Fed's ability to do this (though the extent depends upon their ability to affect expectations), why do people think it will bring about a strong consumption and investment response in the current environment? As Paul Krugman notes today, firms are already sitting on mountains of low opportunity cash and they aren't investing, and loans to consumers are already pretty cheap and they aren't increasing their consumption [Update: Or maybe you are hoping for a boom in exports as other countries allow the dollar to depreciate against their currency?]. Can the Fed create a enough expected of inflation (which it would have to validate later, or it will lose credibility and this will never work again) to change the behavior of firms and consumers enough to really matter?

How Would QE II Help? - Mark Thoma is doubtful QEII will pack much economic punch: Here is why I think QE will pack an economic punch, if done correctly. The expectation of permanently higher prices will cause cash-flushed firms, households, and other entities to start spending more today. Right now there is an excess money demand problem that could be stemmed by meaningfully changing the inflation outlook.  Those folks and entities hoarding money would on the margin face an greater incentive to start spending given an significant increase in inflation expectations. (Yes, many households with weakened balance sheets are deleveraging and saving more.  However, the rise in saving by these troubled households--by paying off debt, cutting back on spending, or buying other assets--should lead to more money  for other non-troubled households unless the money is being hoarded somewhere else.  Maybe the non-troubled households choose to sit on their money, maybe the creditors to whom the troubled households send their  money are sitting on the money, or maybe it's the creditors' creditors that are sitting on the money. The details are not important, what is important is that somewhere in the economy there is an excess demand for money right now that is not being met by the Fed.)

Can We Get Some More Certainty, Please? - This NY Time article highlights one of the key problems with the way the Fed currently functions (my bold below):  Everyone on Wall Street is waiting on the Fed. Whatever the outcome of Tuesday’s midterm elections, the Federal Reserve is widely expected to take new steps this week to spur the nation’s snail-paced recovery.. The question is how aggressively the Fed will act... But while investors have been staking out their positions for weeks the announcement — and the potential ramificationsremain fraught with uncertainty. Given that the Fed’s news is expected to land as Wall Street is digesting Tuesday’s election results, analysts are bracing for a volatile day, particularly if the Fed underwhelms investors.  This shouldn't be.  A modern central bank should have an explicit nominal target to help create certainty.  Yet, here we are in the 21st century guessing what the most influential central bank in the world  plans to do at  its next meeting.

Escaping from the Trap - Krugman counters Beckworth’s suggestion that quantitative easing worked during the Great Depression But in the 30s, we were mainly talking about ending expectations of deflation, or at most creating expectations of a rise in the price level to where it was before the Depression; remember that even in 1938, prices were well below 1929 levels: That’s very different from trying to create expectations of inflation looking forward with no actual deflation in our past. So yes, the US experience of the 30s is useful to consider. But I don’t see how it engenders easy optimism about the effectiveness of quantitative easing now. So lets start from what we all agree on. A credible promise to induce inflation will lead to recovery.  Now it would seem that Paul doubts the ability of Fed to actually create this inflation since the high level of unemployment we are facing is inherently disinflationary.However, isn’t this equivalent to saying “I don’t think the Fed can dramatically reduce unemployment because doing so would require that it do something that would dramatically reduce unemployment and I don’t think the Fed can do that”

Bernanke's "Radicalism" is Already Working – Beckworth = Paul Krugman replies to my post on QE in the Great Depression. He then notes that Gautti Eggertson corresponded with him on this discussion:  He points me to a 2008 paper (pdf) in which he shows that the coming of FDR, combined with America’s exit from the gold standard, was seen by markets as a huge regime change; it was, said FDR’s own budget director, “the end of Western civilization.” This regime change immediately shifted expectations of future inflation, well before there was any actual surge in monetary base. Two remarks.  First, this is the point I was trying to make in my initial post: change inflation expectations and  follow up with actual changes, as needed to support those expectations, in the monetary base.    Second, I don't understand Krugman's dismissal of this insight as relevant for today.  There are many folks out there who do think Bernanke is bringing an end to an important feature of Western Civilization today: the value and importance of the dollar. In fact, Krugman himself admitted just last week he was shocked to see such beliefs. It gets worse, there are some who believe Bernanke's QE2 could usher in civil unstrife and maybe even a civil war. As noted by Ryan Avent, Karl Smith, and others, this Bernanke radicalism is already being reflected in the markets. 

The End Of Western Civilization – Krugman - Gauti Eggertsson writes in to follow up on my piece on quantitative easing in the Great Depression. He points me to a 2008 paper (pdf) in which he shows that the coming of FDR, combined with America’s exit from the gold standard, was seen by markets as a huge regime change; it was, said FDR’s own budget director, “the end of Western civilization.”This regime change immediately shifted expectations of future inflation, well before there was any actual surge in monetary base. That, rather than the quantitative easing per se, is how monetary policy — or more accurately, expectations of future monetary policy — gained some traction in the 30s liquidity trap.Again, an important lesson — but how relevant is it to current circumstances? Bernanke, unfortunately, cannot convince people that he’s bringing the end of Western civilization.

Why I assign less weight to the liquidity trap argument - few people have been asking me about this, so here is a summary statement of some 13 points: 1. The liquidity trap argument implies that the money-short bonds margin doesn't, at current magnitudes, matter.  I am more closely wedded to marginalism than that.  The argument also sees all the action (or should I say, non-action) in one margin, the money-bonds margin.  The money-goods margin matters too.  In the liquidity trap argument, everything is decided by one irrelevance result at a single margin in a highly complex multi-trillion dollar economy. 2. Short-term interest rates being zero, and short-term interest rates being almost zero, are very different cases, especially for understanding nominal shocks and whether they can stimulate aggregate demand.  Unless short-term rates are literally the same as the rate on cash, asset swaps still can succeed.  And QEII isn't be the same as simply switching the term maturity of the debt, as Krugman has suggested.  There will be nominal effects also.

QE Has Worked Before: My Reply to Paul Krugman - Let me begin my response by encouraging Krugman and other monetary skeptics to have a little more faith in the power of monetary policy.  Here is why: QE has been done before in the United States and it worked incredibly well.  It was initiated in early 1934 when FDR and his treasury officials decided to (1) devalue the value of the dollar relative to gold and (2) quit sterilizing gold inflows.  Now this was a radical move at the time, much like QE2 is to many folks today.  The gold standard was viewed then almost as a sacred institution.  FDR was going to weaken it and allow prices to permanently increase.  How dare he! But that is exactly what was needed, a big permanent shock to inflation expectations that  served to stop the deflationary spiral, end the liquidity trap, and allow a recovery in aggregate demand.  Now this policy move was backed up with significant and permanent increases in the monetary base over time: it went from about $8 billion right before the policy change to about $24 billion by the end of the 1930s.  Below are two graphs that shows this remarkable QE program at work.  Here is the monetary base and M2 (Click on figure to enlarge.):

If I Were King Bernanke, by Paul Krugman: I’ve been asked by various people what I would do if I were Bernanke, and/or if I were in charge of the Fed. Those aren’t the same thing: Ben Bernanke isn’t a dictator, and the evidence suggests that he’d be substantially more aggressive in both his actions and his rhetoric if he weren’t constrained by the need to bring his colleagues with him. What I’d do if I were really in charge of the Fed, however, is the same thing I advocated for Japan way back when: announce a fairly high inflation target over an extended period, and commit to meeting that target. What am I talking about? Something like a commitment to achieve 5 percent annual inflation over the next 5 years — or, perhaps better, to hit a price level 28 percent higher at the end of 2015 than the level today. (Compounding) Crucially, this target would have to be non-contingent — not something you’ll call off if the economy recovers. Why? Because the point is to move expectations, and that means locking in the price rise whatever happens.

What Could Go Wrong? - Suppose Scott Sumner or his evil twin took over the Fed. The Fed would try to create expectations of returning nominal GDP back to trend relatively soon. These expectations would hit financial markets before they hit goods markets. They will hit prices before they hit wages. Presumably, the public would sell dollar-denominated bonds to try to get into foreign bonds, commodities, or possibly stocks.  The U.S. dollar depreciates, so that exports grow faster than imports. Maybe nominal interest rates do not rise as rapidly as inflation expectations, so we get an investment bubble somewhere. Overall, demand for output rises, and real wages fall, so labor demand picks up, and we return relatively quickly to full employment. That is if all goes well. But perhaps all will not go well. a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony

Why Some People Should Not Run Central Banks - Sorry for beating a dead horse here, but these two posts were hard to resist. Krugman posts this piece on his blog. In particular, he says:  In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall. This is why we have a field called macroeconomics.  Actually, this is why we have national income accounting. Next he posts this piece. Krugman is going to tell us what he would do if he were in Bernanke's shoes. First he would commit to a price level target that implies average inflation of 5% per year. Not unexpectedly, he wants more inflation than Bernanke does, but of course we have no good reason to prefer 2% to 5%, as far as I can tell. Now, the key thing is that he doesn't inform us about how he hopes to achieve this.

Comparing the Fed, the ECB, and the BoE before policies diverge - Rebecca Wilder - The coming week is G4 central bank week. The Federal Reserve Bank (Fed) announces its policy decision on November 3; the European Central Bank (ECB) and the Bank of England (BoE) will make policy announcements on November 4; and the Bank of Japan pushed forward its November 15-16 meeting to be held now on November 4-5. At this juncture, G4 ex Japan monetary policy is likely to diverge sharply: the Fed is expected to announce an extension of its asset purchase program, while the ECB and BoE are not expected to increase theirs. In fact, the policy wedge between the three central banks is already wide. Despite the ECB's enacting its covered bond purchase program, the amount is small, roughly 1.4% of Eurozone GDP (see chart below), and the central bank is sterilizing the flow - sterilizing the operation means that the ECB performs equal and opposite monetary operations to reduce bank reserves by the amount of the bond purchase program.

QE2 is risky and should be limited - The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy. Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices. Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar.The problem now extends to emerging markets, a group not directly affected in the last crisis. The lower US interest rates are causing a substantial capital flow to those economies, creating currency volatility. The economies hurt by the increasing value of their currencies are responding with measures to protect their exports and limit their imports, measures that could lead to trade conflict.

QEII in To Ease or Not to Ease? What Next for the Fed? - Richard Fisher - In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as it unfolds to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to “open the spigots,” might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rule-making “excesses” about which businesses now complain?

Confusing messages from Fed’s many voices -The Federal Reserve is confusing. Confusing is not the same thing as closed or unaccountable, however. The Fed is more open and submits to scrutiny with better grace than its international counterparts, such as the Bank of Japan or the Bank of England, both of which tend to treat outsiders with the condescension that a lawyer might show an amateur representing himself in court.But the Fed is confusing, both because there are so many voices on the 19-member federal open market committee, and because of its limited formal communications. The debate about a new round of easing – nicknamed QE2 – has thrown up several long-term communication issues for the Fed to address. First, there is growing tension between chairman Ben Bernanke’s wish to encourage debate on the FOMC and the Fed’s tradition of decision-making by consensus.

FOMC Statement: QE2 Arrives, $600 Billion by end of Q2 2011 - Update: from the NY Fed: Statement Regarding Purchases of Treasury Securities. About 86% of the purchases will be in the 2.5 to 10 year Maturity range.  The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billions over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments. Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.

The Fed Will Purchase $600 Billion in Treasury Securities - The Federal Reserve has decided to purchase $600 billion in Treasury securities through the end of the second quarter of 2011. As they note, this is around $75 billion per month. That is not enough to do much by itself (update: see here on this point), but this is an important addition to the policy: The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed. The intent is to communicate a commitment to do whatever is necessary to hit inflation and employment targets, and the commitment is intended to impact expectations and hence impact expected inflation and real interest rates. The statement that we should expect "exceptionally low levels for the federal funds rate for an extended period" is part of this communications strategy. As I've said many times, I'm skeptical about this doing much, but it could help some -- though a higher level of purchases each month would have been much better (update: and the bonds should be of longer duration than the 5-6 years bonds the Fed is planning to purchase). But with fiscal policy all but off the table, with tax cuts being the possible exception, it's the best we can hope for right now. Here's the entire statement: Press Release, November 3, 2010, For immediate release:

Redacted Version of the November 2010 FOMC Statement

Fed Statement Following November Meeting -  To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

Fed to Buy $600 Billion of Treasurys - The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth. Many outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.

Parsing the Fed: How the Statement Changed - The Fed’s statement following the November meeting announced a new round of asset purchases, putting the number at $600 billion over eight months. The central bank reiterated concerns about a slow recovery and low inflation. (Read the full November statement.)

The Fed's $600 Billion Statement, Translated Into Plain English-  The Federal Reserve just released its periodic statement explaining how the Fed's leaders view the economy and how they plan to act in the coming weeks and months. These statements come out every six weeks, and they affect stock markets and government policies around the world. But they're full of jargon and code, and the language is nearly inpenetrable to the lay reader.  To help you read the Fed's latest statement, published this afternoon, Slate and NPR's "Planet Money" have collaborated to translate it into plain English, a tool developed by Slate Labs to toggle between official text and our natural-language translation. Click on the highlighted sentences to toggle between their words and ours:

Fed QEII: $600 bln over Next 8 Months (Anti-climatic?) The dollar has sold off on the news that the Federal Reserve will buy $600 bln of Treasuries over the next 8 months.  It will relax its 35% self-imposed limited per security.  This is in addition to the $35 bln per month it anticipated form the mortgage securities maturing.   Its economic assessment and inflation assessments appear little changed.The quick take away is that the Fed’s statement and action is largely in line with expectations and although it is hard to call this anti-climatic, the initial price action has been largely reversed. The Fed’s focus still seems to be on inflation moving in the wrong direction and this is what investors will have to monitor going forward. Our general view remains that as the uncertainty surrounding the trajectory of US fiscal and monetary policy is lifted the dollar may perform better.   Short-term rates are little changed and the long-end–the 30-year has sold off and the 10-year note has slipped a bit as well.

New Fed Treasury-Buying Program Is Defined by Uncertainty - The Federal Reserve Board embarked Wednesday on the riskiest chapter yet in its attempt to lift the U.S. economy out of its toughest economic environment in generations. The Fed matched economists’ expectations and launched what has been commonly referred to as QE2, for Quantitative Easing 2. While the Fed has for several months been reinvesting the proceeds of its maturing mortgage portfolio in Treasury securities, it is restarting a broader effort to buy long-run Treasurys in bulk. Policymakers hope this will improve economic growth, even as some officials have conceded they don’t know how well the effort will work.All the Fed buying will total around $900 billion, with $600 billion coming through the newly announced action. All together, the Fed said it will be buying “roughly” $110 billion in Treasurys a month through the second quarter of 2011.

QE2 - The US Federal Reserve has announced its long-awaited renewal of quantitative easing (cutely labelled QE2). It’s $600 billion of new money to buy US Treasury notes with an average duration of five years, along with recycling of some money from the mortgage bailouts, also into T-note purchases. That sounds like a lot, but the reaction from Brad DeLong (endorsed by Paul Krugman) has been a big yawn. I had been thinking that the Fed might take the much riskier (and politically trickier) step of buying corporate bonds. That would seem more likely to promote investment, but would obviously involve a good deal of winner-picking, with the associated potential for (real or perceived) corruption. But what is really needed here is fiscal stimulus focused on job creation, combined with a long-term plan for fiscal consolidation (that is, higher taxes and/or lower expenditure). Instead, what the US appears likely to get is a permanent tax cut for the rich, partly offset by lots of job-destroying nickel-and-dime cuts in current expenditure. Many of these cuts will prove to be counterproductive or unsustainable in the long run.

What the Fed did and why: supporting the recovery and sustaining price stability - Bernanke - Notwithstanding the progress that has been made, we could hardly be satisfied. The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.  Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation

QE2 Sets Sail - Finally, quantitative easing (round 2), is here.  The Federal Open Market Committee announces: the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. That would represent a roughly 25% increase in Fed assets (currently about $2.3 trillion, including $838 billion of Treasuries); and a drop in the bucket relative to $8.6 trillion in US debt held by the public. Will it work?  That has been the subject of considerable debate, which echoes an old-school Keynesian versus Monetarist scrap: Among the Keynesian skeptics are Paul Krugman and Mark Thoma and Joe Stiglitz, who would prefer more fiscal expansion. On the other hand, David Beckworth and Scott Sumner are more optimistic that QE can be effective. The markets appear to be siding with the pro-QE camp.  Stock prices and the dollar are little changed today, which indicates that the announcement was pretty close to what was expected.  However, since Ben Bernanke raised the possibility of further expansion in a speech on Aug. 27, the stock market has headed up

Comments on FOMC statement - A few comments ...

  • QE2 (Quantitative Easing, round 2) was about what was expected. The announced amount ($600 billion) was slightly higher than expected, but it was spread over a somewhat longer time frame (through the end of Q2 2011). So the monthly amount - "about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases" - was about the expected purchase rate.
  • Most of the Fed purchases will be in the 2.5 to 10 year maturity range. I think investors were surprised at the low level of 30 year buying. Here are the details from the NY Fed: Statement Regarding Purchases of Treasury Securities.
  • Goldman Sachs believes that the FOMC will announce additional purchases throughout 2011 and probably into 2012 totalling about $2 trillion for QE2. (not counting reinvestment). If so, this is just the beginning of QE2 ...

Fed Statements Side By Side - The Fed seems to have decided to split a loaf on the conservative side, coming in with less QE than the market’s hopes, at $600 billion, but one might cynically surmise above the low end expectation of $500 billion. Side by side comparison of this FOMC statement with the next most recent courtesy Andrew Horowitz of The Disciplined Investor (you can also view it here):

Economists React: Chairman Bernanke’s Brave New World - WSJ Economics Blog - Economists and others weigh in on the Fed's decision to purchase an additional $600 billion of Treasurys, a second round of a policy known as quantitative easing and referred to as QE2.

Will the Fed's $600 billion plan be big enough to revive the economy? The Federal Reserve's long awaited, much anticipated and plenty feared plan to revive the economy is here.

After two days of debate, Ben Bernanke and his fellow members of the US central bank's policy committee voted to spend an additional $600 billion to buy long-term Treasury bonds over the next eight months. The Fed is already spending about $35 billion a month to keep an earlier announced mortgage bonding buying plan in place. So all told, the Fed is planning on pouring an addition $900 billion into the bond market in the next two months.Why? Well, it's called quantitative easing and here's how it works: Lower interest rates are supposed to spur economic growth by encouraging companies to borrow and spend. And higher demand for bonds tends to make interest rates fall. So if the Fed steps in with big purchases of bonds it can drive down interest rates.  So will it work? It's not clear. Surprisingly, interest rates on 10-year and 30-year bonds actually rose on Wednesday. In part, that's because the Fed said that it would focus most of its buying on medium-term notes, such as 5-year to 7-year bonds.

In Launching QE2, Fed Now Pushes String With Both Hands - It has been observed that many monetary policy actions undertaken by the Federal Reserve are akin to pushing on a string, or, as some are fond of saying in various parts of the country, “You can lead a horse to water, but you can’t make it drink.” That about sums up the state of a debt-deleveraging, deflationary economy: creditworthy personal and business borrowers believe the future too uncertain to undertake new loan commitments, and, in fact, many are reducing debt levels voluntarily via paydowns, whereas less- or un-creditworthy borrowers, under the new, recession-borne definitions of exactly who is less- or un-creditworthy, have little to no access to new debt. More than anything, it is the definitional changes of creditworthiness of the last few years which have contributed to record declines in personal and business debt. As now is well known, fewer than four years ago, everyone was deemed creditworthy, especially when it came to mortgages and credit cards. It is a cosmic irony that, in the lowest interest rate environment since, well, ever, fewer people and businesses now qualify for credit under the new terms and definitions being applied to the concept of creditworthiness. And therein is the Federal Reserve’s dilemma

Quantitative easing is just devaluation - As the Federal Reserve Board gets ready for yet another round of quantitative easing (i.e. printing more money), one may well ask: Why? If previous quantitative easing hasn’t spurred domestic spending, why does the Fed believe that more of the same will suddenly produce results?  It’s not domestic spending that the Fed really hopes to stimulate by printing more money, but, rather, exports. While the Fed’s zero-interest rate policy has yet to lever much in the way of a domestic spending rebound, no one can doubt its ability to drop the value of its currency. With the U.S. Treasury depleted and interest rates already at zero, that’s about all that’s left in the policy tool kit. Lurking behind the Fed’s official concerns for deflation lies its real agenda—the old standby, the “beggar thy neighbor” policy of trying to export your unemployment to your trading partners via a falling currency.

Cheap money won’t fix this economy -THE FEDERAL Reserve is responding to the stubborn economic slump by creating more money. The central bank will purchase $600 billion in Treasury bonds, in an attempt to drive interest rates even lower. Is this a good idea? Alas, it’s the only tool readily available. But even supporters of the strategy don’t think it will accomplish much, and might cause some harm. The problem is that cheap money doesn’t work very well in an economy such as this one. The economy is in a self-reinforcing trap. Consumer purchasing power is down due to high unemployment and falling earnings. Businesses are reluctant to invest because they don’t see customers. Risk-averse banks won’t lend except to the most reliable borrowers. Depressed housing prices and a foreclosure epidemic are a drag both on household net worth and on bank balance sheets. Still, cheaper money does produce a modest stimulus. Homeowners with good credit can refinance and lower their monthly payments. Consumers considering a new car can finance it for almost nothing. And the government gets to float its own deficit at low carrying costs.

Goldman: QE2 Only Adds 0.5% To GDP And That's Not Enough… Jan Hatzius of Goldman Sachs just spoke to CNBC about the impact of QE2 on U.S. growth. He sees QE2 boosting U.S. GDP by 0.5%, and doubts it will create a long-term inflation problem. Instead, inflation is going to be below the Fed's target of 2.0% for sometime, according to Hatzius. Hatzius still sees housing as the big problem in the economy. Until supplies decline, and values increase, we won't see GDP growth of higher than 3% (the next few quarters should be much smaller than that, more like 1.50-2.0%, he said). Without growth higher than this, Hatzius doesn't really see employment picking up. He projects that may take until 2012. Democrats will be hoping it's in time for the next election. Here's the video:

Fed Monetizes Government Debt: $600 Billion QE II Program Announced - With today's Fed announcement of $600 billion more in Quantitative Easing purchases, the United States has officially entered "Stage II" of the crisis. This $600 billion is in addition to the purchases already underway using the proceeds from the maturation of their massive MBS portfolio. Goodbye dollar; hello future.   Left unsaid here is exactly why the "pace of recovery" needs to be stronger.  According to the BEA and the Census Bureau, the GDP and retail sales are up quite handily.  The NAR says that existing home sales are picking up. Auto sales are coming in stronger. Without the Fed being open about the true source of its concerns, we are left to speculate. Whatever could be on their minds?  Could it be:

    • Is a Commercial Real Estate nightmare lurking in the shadows that could harm more than a few banks?
    • Have certain foreign purchasers of US debt gone missing from the auctions?
    • Are tax receipts at the federal level below expectations?
    • Are banks more wounded than we've been told?

Not Bad, But Where Is the Explicit Nominal Target? - There has been plenty said about the FOMC decision to go ahead with QE2.  Let me add that this plan could have packed a lot more punch if the Fed had committed to an an explicit nominal target.  Instead we get several loosey-goosey references in the FOMC press release about Fed needing to keep inflation  at a level consistent with its mandate.  To be fair, Ben Bernanke does mention in his Op-Ed today that most members of the FOMC believe 2% is the inflation rate consistent with a healthy economy. Still, there would be a lot more certainty and wallop to the Fed's action if it would just come out and say "The FOMC is now committed to a X% nominal target and will do whatever is necessary to maintain it." Doing so would go a long way in shoring up and stabilizing inflation expectations.  For some reason, though, the FOMC is afraid to make such an explicit commitment. Maybe it will still do so in the future.  And maybe, just maybe it will really be bold and commit to a NGDP level target. Here are some of the discussions on the FOMC's decision: Scott Sumner, Ryan Avent, Mark Thoma, Brad DeLong, James Hamilton, Paul Krugman, Gavyn Davies, and Bill Craighead.

Fed’s More Aggressive Move May Not Go Far Enough - For much of the last year, there were three basic camps on what the Federal Reserve should be doing.  One focused on the risks of the Fed’s taking more action to help the economy. This camp — known as the hawks, because of their vigilance against inflation — worried that the Fed could be sowing the seeds of future inflation and that any further action might cause global investors to panic.  Another camp — the doves — argued instead that the Fed had not done enough: inflation remained near zero, and unemployment near a 30-year high.  In the middle were Ben Bernanke and other top Fed officials, who struggled to make up their minds about who was correct. For months, they came down closer to the hawks and did little to help the economy. On Wednesday, they effectively acknowledged that they had made the wrong choice.  The risks of inaction have turned out to be the real problem.

Will Additional Fed Action Help the Economy? - Some Fed officials had previously weighed in on the effectiveness of additional monetary policy action, as had economists from around the world. Here’s a brief run-down of some expert opinions on the issue written up before today’s announcement: Leaning toward more bearish or skeptical:

Leaning toward more bullish:

QE2: Been there, done that -The Federal Open Market Committee announced today that: the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.  The market often figures out what the Fed is going to do before the Fed itself figures out what it's going to do, and this time was no exception. Today's announcement was very much what most analysts were expecting. And for that reason, the effects of the new program were in my opinion already priced into bond yields. Specifically, one estimate is that this level of security purchases might be enough to depress the 10-year yield by 20 basis points or so. But that's exactly what may have already happened as the conviction grew over the last few months that such an announcement would be forthcoming today.

Empirical Questions About the Anticipation Effects of QE2 -Taylor - No doubt there will be many empirical studies evaluating the impact of the Fed’s November 3 decision to begin another dose of quantitative easing (QE2). Ben Bernanke gave his first assessment of the impact of QE2 in an op-ed yesterday in the Washington Post. He argued that QE2 started working even before the decision on November 3. In particular he wrote that: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.” How can one determine whether stock prices rose and long-term interest rates fell in anticipation of QE2? Obviously it is very difficult because many other things affect stock and bond markets, and one can never know for sure, but the data presented in the following charts raise serious doubts that such anticipation effects were either substantial or sustainable.

Towards QE3? - The Fed’s open market committee agrees to $600bn in bond purchases until Q2 2011; most of the buying will be in the 2.5-10 year maturity range; euro/dollar exchange rate shoots up to over $1.41; Goldman Sachs expects QE3 to arrive in 2011; Bernanke says inflation too low; we say that divergence in EU and US policies is likely to lead to tension; Paul Krugman says programme is not big enough; Mohamed El Erian says programme will not help the US, and damage the rest of the world; Papandreou declares regional election to be a referendum on his economic reform programme; the IMF, meanwhile, said all the new banking rules are worthless in the absence of effective global policy co-ordination. [more]

Tight ECB, loose Fed - IF there is an economic consensus at the moment, it must surely be that official rates in the big currency blocs (the US, euro zone and Japan) aren't moving for the forseeable future. Given economic weakness, central banks are leaving rates at near-zero levels. But take a look at the graph. In the interbank market, euro zone rates have steadily been moving higher, and the gap with the US is widening. The relative yield attractions of the euro are increasing, at a time when yields are generally low. The idea of a currency war is that nations depreciate their currencies with the aim of boosting their share of export markets. The euro zone is caught between the US, set to create a lot more dollars tomorrow, and China, which pegs its currency to  the dollar. So you would think the Europeans would be very careful about any trend that seemed to drive the euro higher. This graph looks like a self-inflicted wound.

Fed’s Hoenig on QE2 - Hoenig has carried a consistent message — the Fed needs to move away from its zero-interest-rate policy now — throughout the year as a voting member of the Federal Open Market Committee. The longest-serving current Fed policymaker, Hoenig has led the Kansas City bank since 1991 and faces mandatory retirement next year. He’s spending his final time in office warning about the risks of ultra-loose policy, including a long-run inflation threat, creating asset-price bubbles and future financial instability. He advocates for higher short-term interest rates — starting with a move to 1% — as the Fed waits for the economy to recover. Hoenig draws lessons not just from the recent housing boom and bust, putting some blame on the Fed for its low interest rates earlier this decade, but from his decades at the Kansas City Fed working on bank supervision and watching the sharp ups and downs in land values — as they ravaged banks in his region. “My concern is not just for long-term inflation, but for resource allocation, asset prices and the stability that can be affected around those issues,” he said in an interview. “Having closed 350 banks and seeing the agony to those banks and communities, convinces you that artificial price increases are not the way to go. I see it and I worry about it and that’s what’s behind it.

Bernanke Versus Pimco’s Mohamed El-Erian on QE2 -  Yves Smith - Not only did the Fed announce its controversial $600 billion QE2 program today, but Ben Bernanke felt compelled to defend it in a Washington Post op-ed tonight. For the normally oracular Fed to feel it has to sell its program in a non-financial media outlet says Bernanke must recognize that he is staking on thin ice. The problem is he appears to believe the problem is at most one of perception, when it is in fact practical, that QE2 is unlikely to work, and if anything is more likely to produce collateral damage than achieve its intended aims. And no one less than the co-CEO of Pimco, a bond fund and hence presumed fan of QE@ (bonds ought to benefit from Fed intervention) expressed his considerable doubts in an op ed at the Financial Times. First to Bernanke, and the guts of his argument at the Post. After explaining why low inflation and the risk of deflation are reasons to act, he explains the presumed benefits of QE2:

QE2 blunderbuss likely to backfire - Mohamed El-Erian - Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries. The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies. Despite polite rhetoric to the contrary in the lead up to the Group of 20 leading economies summit in Korea this month, other countries are likely to counter what they view as an unnecessarily disruptive surge in capital flows caused by inappropriate and short-sighted American policy. The result will be renewed currency tensions and a higher risk of capital controls and trade protectionism.The third issue relates to the gradual erosion of America’s central role in the global economy – including as the provider of both the world’s reserve currency and its deepest and most predictable financial markets. No other country or multilateral institution can displace the US, but a combination of alternatives can serve to erode its influence over time. No wonder commodity prices surged higher and the dollar weakened markedly in anticipation of QE2, pointing to increased input costs for American companies and unwelcome pressures on their earnings.The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

Bill Gross to Ben Bernanke: Sold to You, Sucka! - Kid Dynamite - Today on CNBC, I caught Bill Gross's analysis of the Fed's announcement of QE2.  Around 11:00 at the video if you want to watch the whole thing. "To your question of selling or buying treasuries - I think for the most part those that should have bought them have bought them already and that would include PIMCO and that we would be looking forward to "handing them off" so to speak as we accelerate towards that outer orbit." As we used to say on the trading desk:  Sold to you, Sucka.

Fed May Need to Buy More Assets After QE2, Pimco's Clarida Says - The Federal Reserve may be forced to buy more assets if the $600 billion in bond purchases announced yesterday isn’t enough to boost growth and inflation, Pacific Investment Management Co.’s Richard Clarida said.  “A year from now, if unemployment is 9, 9.5 or 10 percent, we are going to see more,” Clarida, a global strategic adviser for Pimco, said during on Bloomberg Television’s "InBusiness" with Scarlet Fu. “It may take a different form; it may be concentrated in different assets, but the Fed can’t cut interest rates. They are at zero at the short-end. If they are going to ease policy, they have to do it through these quantitative measures.”

QE2 — Faux Growth Is Better Than No Growth - It's official. The Federal Reserve will print 600 billion dollars to buy up U.S. Treasuries (2.5-10 year) from now through the 2nd quarter of 2011. That's $75 billion per month. In addition, the Fed will reinvest payments on the securities it already holds to the tune of about $35 billion per month. Altogether, that's about a trillion dollars which will magically appear right out of thin air. As Tech Ticker notes, the direct effect of the Fed's action "is a steepening of the Treasuries yield curve, which most benefits (wait for it)...the banks."And if that were all there was to it, we could all go home. Unfortunately, that's not the end of it, for with these actions the Fed has set into motion a chain of events whose ultimate consequences no one fully understands.

QE2 — These Boots Are Made For Walking - I think my somewhat technical post earlier today didn't quite capture "the spirit" of how ordinary Americans like you and me—you know, the hoi polloi, the "little" people— should feel about this second round of Quantitative Easing. The new bubble in the stock market got off to a rip-roaring start: DJI = 11,434, the highest it's been since Lehman folded. The oil price weighed in at $86.71 per barrel. The Dollar Index lost 0.381. Ben's really got the ball rolling now! We have been told that every financial atrocity program (TARP, the zero Fed Funds rate, QE1, QE2, unlimited support for Fannie & Freddie, HAMP, and so on) implemented since the meltdown in October, 2008 was in our best interests. T'aint so, folks. It was all done for the bankers, every damn bit of it. You are being taken for the longest ride of your life. I was watching Glenn Beck over at Zerohedge. Glenn Beck! I actually agreed with a few things the lunatic said! You know the world has gone completely crazy if that can happen.

Goldman: QE2 Will Continue Into 2012, Will Be Over $2 Trillion, Models Do Not See Rate Hike Until 2015 - Goldman: "In practice, QE2 is likely to continue well beyond June 2011—at least well into 2012—if our forecasts for unemployment and inflation are close to the mark. We believe that purchases could ultimately cumulate to around $2 trillion...Under our longer-term projections it is easy to come up with models that show no tightening until 2015 or later." In other news, the economy will not recover for the next five years, but under the Centrally Planned Feudal State of Bernanke, the economy is irrelevant. Incidentally, Zero Hedge now believes a $5 trillion QE3 program will be announced by July 2011, when gold is trading at $10,000, the entire Treasury curve is at zero, and stock prices are meaningless courtesy of a DXY sub 50, and every commodity opening limit up daily.  Goldman's prior observations which concluded that a $4 trillion QE is needed now, not in 2011, now, and not $2 trillion as CNBC keeps saying, can be found here. Jan Hatzius' observations below presented without commentary.

Blah Blah Blah Quantitative Easing Blah Blah Blah - "I Want a New Drug" - Kid Dynamite - Let's step back into our time machine and travel alllllll the way back to the 2000-2009 decade - the one we just finished.  We suffered a massive financial crisis because we, as a country and a world really, had borrowed and lent far too much money based on paper asset prices.  Now press "live" on your remote, and return your DVR time machine to the present.  The solution our fearless leaders at the Federal Reserve have chosen is to run this play again - quantitative easing is designed to inflate asset prices, which in turn will hopefully result in people feeling wealthier, borrowing more, and spending more - it's a "virtuous cycle!!!"   Bernanke actually told us this, specifically, in an Op-ed today:Just to recap, the Fed's basic goal (in my opinion) is to force capital into risk assets.  The Fed buys treasuries, driving their yields to unappealing levels, until investors are forced to put their money into other asset classes:  stocks, corporate bonds, commodities.  As that happens, portfolio valuations increase, everyone is supposed to feel good again, and we go out and spend money, which flows through to the rest of the economy.    Now get back in the time machine and crank it back just a handful of years.  How did that work out last time?  

Benny Drops the Big One! - There is a scene from Doctor Strangelove where Major Kong, the bomb commander, is so focused on completing his mission that he loses sight of the bigger picture but he doesn't regret his actions - he goes down in a blaze of glory that ultimately dooms the World but his sense of personal triumph at achieving his wrong-headed goal is the punctuation for the film.  Watch this scene and think of Bernanke, tinkering with this or that but so focused on "fixing" the economy with the one tool at his disposal that he ends up destroying it instead.  After putting over $2Tn into our Dead Parrot Economy since the crash and getting no response, Bernanke is upping the ante with another $600Bn round of Quantitative Easing ON TOP OF the ongoing $250-$300Bn round of POMO commitments for a total of about $110Bn per month dumped into the economy between now and the end of Q2.  This represents a 10% increase in the money supply over 8 months and, therefore, a planned 10% decrease in the purchasing power of your dollar-denominated assets or, to put it bluntly - a 10% tax on everything you own.

Ask Ben Bernanke - A brief note this night, because troubles overwhelm me.  If you know Ben Bernanke, or any of the FOMC members, ask them this: where has quantitative easing ever proved to be effective?  Expect the intellectual equivalent of an “Uh….”, but understand that their is no good answer here, and that monetary policy is in the hands of those worse than amateurs.  They don’t understand what to do, but they are still being paid for it.

Bernanke And The Shibboleths -  Krugman - Everyone hates quantitative easing. The inflationistas believe that it’s the end of Western civilization (but as a correspondent points out, we want them to believe that; similar beliefs about the end of the gold standard helped recovery in the 1930s); meanwhile, the rest of the world is furious at the Fed’s actions. Clearly, Bernanke must be doing something right. As Greg Ip says, all the objections currently being offered to QE would apply equally well to conventional monetary policy — and given high US unemployment and sagging inflation, how can you argue that monetary expansion is unjustified? But what we’re seeing worldwide right now is an inability to think clearly about economics. In particular, the unconventional nature of our situation is making it clear how many people rely not on any model of how the economy works but rather on what the late Paul Samuelson called shibboleths — by which he meant slogans that take the place of hard thinking. The basic situation of the world economy is simple: we have an excess of desired saving over desired investment, even at a zero interest rate.

Putting newly printed money where your mouth is - Economists and economic writers have been going back and forth over the value of additional easing for months now. The points have all been made. Some economists think the Fed has the ability to move the economy most or all of the way back to full employment. Some think the Fed's abilities are more limited but not entirely negligible. Some think the Fed can do nothing more to help. Others believe that Fed action will be a net economic negative. The Fed seems to have concluded that it can do more, and it now appears likely that it will announce a new round of asset purchases of perhaps $500 billion in its statement tomorrow. And so we all get to an observe an imperfect but potentially informative experiment. But if the experiment is to be valuable, we must state our hypotheses clearly beforehand. The downside is that it's not a real experiment, in which we might use controls to isolate the variable we're interested in. Between now and next year, factors other than the stance of monetary policy will influence the path of recovery. These changes might themselves feed back to affect the key variable; if the euro zone were to melt down over the winter that would deal a blow to the American economy and lead to much more Fed easing than we might currently anticipate. The experiment would be a shambles. But if we avoid any large unanticipated shocks, we might reasonably learn something from the difference between our expectations and the actual outcome.

No Bang For The Buck - Now that the Fed is monetizing the America's public debt to the tune of 600 billion dollars, we might ask whether this will help the "real" economy. Like it or not, the size of the economy is measured as real (inflation-adjusted) Gross Domestic Product, which currently stands at 13,260.7 billions of chained (2005) dollars. This GDP total incorporates the 2% rise in the 3rd quarter this year, which has yet to be revised downward. Goldman Sachs' chief economist Jan Hatzius, who is well-respected but apparently doesn't mind working for the Beast, told CNBC that QE2 will add an estimated 0.5% to future GDP (video below). That's $66.3 billion, which amounts to just 11% of the dollars Ben will print. And that's not the lamest part— [Hatzius] sees QE2 boosting U.S. GDP by 0.5%, and doubts it will create a long-term inflation problem. Instead, inflation is going to be below the Fed's target of 2.0% for sometime, according to Hatzius. Hatzius still sees housing as the big problem in the economy. Until supplies decline, and values increase, we won't see GDP growth of higher than 3% (the next few quarters should be much smaller than that, more like 1.50-2.0%, he said). Without growth higher than this, Hatzius doesn't really see employment picking up. He projects that may take until 2012.

The night they burned government bonds - As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. This is Mark Thoma. But how about a big bond bonfire? (call it a bondfire if you must) How about direct financing of government debt? I never got why Japan's lost decade was accompanied with such an explosion of government debt. The way I see it, below target inflation (let alone deflation) is a license to print money, and if the banks will do nothing with it, then the government should. We seem to have forgotten the oldest trick in the book.

Will QEII Work? - As the Federal Reserve starts its two day meeting today, the general consensus is they will agree to another round of qualitative easing. However, there is a fair amount of misunderstanding about this policy. As I noted in this article on September 22, QEI was not a huge success. Simply put, the Fed purchased a large amount of bonds from financial institutions, increasing their reserves. However, that increase in reserves did not lead to a huge increase in money supply, and hence inflation. Mark Thoma makes the same observation: As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:

How QE works - The way that QE works is that the Fed will publish a schedule of how many Treasury bonds it intends to buy and when. It will then go out and buy those bonds from “the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system.” In English, what that means is that the New York Fed has a direct line to the biggest banks in the world (Goldman Sachs, Morgan Stanley, Deutsche Bank, etc — 18 in all). And it gets all those banks to compete with each other, either directly or on behalf of their clients, for who will sell the Fed the Treasury bonds it wants at the lowest price. The winners of the auction get the Fed’s newly-printed cash*, and give up Treasury bonds that they own in return. The people selling Treasury bonds to the Fed, then, are big banks, who are told in advance exactly how many Treasury bonds the Fed wants to buy. As a result, they’re likely to buy Treasuries ahead of the auction, with the intent of selling them to the Fed at a profit. This is pretty much what John said would be going on, only they buy the bonds before the auction, rather than afterwards. Once the banks have made that profit, it’ll get paid out in bonuses to the people on the bank’s Treasury desk, with the rest going to their shareholders. We’re not exactly helping the unemployed here.

Does QE work? Ask Japan - The Federal Reserve has finally announced what everyone expected – a giant program of quantitative easing aimed at restarting the stalled economic recovery. The idea is to push more money into the economy to encourage banks to lend and companies to borrow, invest and hire. In other words, the Fed thinks that by pumping an extra $600 billion into the economy (through purchases of Treasury bonds), it can rescue the recovery and prevent deflation. But will it work? One way to answer that question is to look at Japan's experience. The Bank of Japan tried out a QE program from 2001 to 2006 under generally similar conditions to what the Fed is confronting today. In both cases, central bankers faced a situation in which the real economy was stagnating after a crisis, but they were unable to use the usual monetary-policy mechanism to stimulate growth – lowering interest rates – since those rates were effectively zero and couldn't be lowered any further.

The morning after - THE world has had a little time to digest yesterday's announcement of new Treasury purchases by the Fed, and it's interesting to see what's being said, and what's being traded. The most important contribution has come from Ben Bernanke himself, who took to the pages of the Washington Post this morning to explain what the Fed is up to: Among pundits, the question being tossed around is whether QE2 will "work". Scott Sumner helpfully breaks down what that question actually means: There are three questions embedded in the simple phrase ‘will it work?’

  • 1.  Will it help the economy relative to the no-QE alternative?
  • 2.  Is the announced policy likely to help more than the policy expected right before the announcement?
  • 3.  Is it adequate to meet the Fed’s implicit policy goals
  • I believe the answer to the first question is clearly yes, the second question is “probably yes,” and the answer to the third question is clearly no.

Why Bernanke Is Gambling - In starting a second round of quantitative easing (QE2), the Fed is gambling on a program that has little potential upside and a substantial amount of risk. In the first round (QE1) the Fed bought $1.7 trillion of mortgage and Treasury bonds (beginning in March 2009) and dropped short-term rates to between zero and 0.25%. It was also preceded or accompanied by massive fiscal intervention in the form of TARP, the stimulus plan, cash-for-clunkers, homebuyer tax credits, tax cuts, mortgage modifications and extended unemployment insurance. For all of their efforts the authorities did help prevent a global financial collapse, but achieved only an extremely sluggish economic recovery that was almost completely dependent on an inventory turnaround and government transfer payments. Now, even this halting recovery is showing signs of petering out with debilitating Japanese-style deflation an increasing threat. Without further help the current economic expansion is unsustainable.

Money-Financed Fiscal Policy - In a Times article a few days ago is this interesting quote from Laurence Meyer, a former Fed governor: It was this impending gridlock that might have pushed Mr. Bernanke to move, said Laurence H. Meyer, a former Fed governor. “Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate, when short-term rates are already at zero,” Mr. Meyer said. “He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it.” I’m taking this as a explicit, and unshrouded nod to the concept of “money financed fiscal policy”. Or, what is lovingly referred to in the press as “monetizing debt”. This is a situation where the government draws up a plan to distribute money, whether through direct transfers or increases in government consumption/investment, has the Treasury issue debt in the amount decided upon Congressionally, which the Fed then purchases with newly-coined money (and for hysterics, this money is created “out of thin air”!). As Karl has noted, a program such as this would inevitably “work”. This, of course, is something that the ARRA failed to do. This is true, but it is optimal policy?

Federally Funded Friday - I feel like I’m driving in a gasoline truck at a 100 mph and towards a brick wall, says Brian Kelly. And Ben Bernanke just lit a match. I can’t help but worry that this ends badly.  - Fast Money's Brian Kelly I also remain skeptical, adds Steve Cortes. The unanimous opinion sees to be the market can not go lower and I find it reminiscent of the rhetoric we heard right before the tech bubble burst. I want to know what the Fed sees that’s so dire that it’s required them to take drastic steps, muses Guy Adami. I guess it doesn’t matter because the market just wants to go higher. But the market action has the feeling to me of a blow-off top. I don’t know when it ends, but I suspect it ends extraordinarily badly. David Stockman sums things up very nicely, saying:Today the Fed is scared to death that the boys and girls and robots on Wall Street are going to have a hissy fit. And therefore these programs, one after another, are simply designed to somehow pacify the stock market, and hoping to keep the stock indexes going up, and that somehow that will fool the people into thinking they are wealthier and they will spend money.

QE2: Bernanke Cuts Geithner Off at the Knees - Yves Smith - The Fed’s announcement of $600 billion of intermediate and long Treasury purchase, informally dubbed QE2, teed off a peppy rally in stocks, and led to further weakening of the dollar. These trends were already well in motion thanks to the central bank’s winks and nods that it was going to embark on another round of bond purchases. This move looks to be bad economics, or at least bad at achieving the Fed’s stated aim of lowering unemployment and promoting growth. The first round of QE did not arrest falling housing prices. Nor did it help unemployment. As one wag remarked, “The Fed has found another string on which to push.” Some have argued that QE2 is another sop to the banks, but that does not make sense. Moving out the yield curve in bond purchase will lower the interest rate differential between the banks’ super low borrowing costs and the interest they earn by parking the proceeds in Treasuries. If the aim were to help banks rebuild their balance sheets, the central bank would want to create a steep yield curve, one with a considerable difference between short and long-term interest rates, as Greenspan did in the wake of the savings & loan crisis. So the aim of “flattening” the yield curve is not to help banks earn easy spread income. It instead appears designed ot encourage investors to take “risk on” trades, in the cheery assumption that real economic activity will follow.

US money printing no 'magic wand' - The Federal Reserve will pump an extra $US600 billion into the US financial system to try and boost the country's ailing economy. The Australian dollar shot through parity with the greenback as soon as the measures were announced, and has remained there throughout the local trading day. In the United States official interest rates are as low as they can get - currently between 0 and 0.25 per cent. So with conventional ways to stimulate the economy exhausted, America's central bank has resorted to an urgent, almost last-ditch, solution. It is known as quantitative easing, in other words, the metaphorical printing of money.  That does not mean the printing presses are actually running, but the Federal Reserve is now electronically pumping billions of dollars into the financial system as it buys long-term government bonds in the hope that people will start borrowing and spending once again and unemployment will ease.

Backlash against Fed’s $600bn easing - The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies. The Fed’s initiative, in response to rising concern about the weakness of the US economy, has fuelled fears of a sharp drop in the dollar and a fresh flood of capital inflows into emerging markets. China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows. Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.” Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.”. An adviser to the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks. “As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin wrote in a newspaper under the Chinese central bank.

The QE backlash - Some of the continuing criticism of QE2 is along similar lines to that which we've heard before. Buttonwood rounds up some of the circulating complaints. That it's likely to be ineffective is belied, in my view, by the impact on variables widely believed to have effects on the real economy. Concern that inflation could get out of hand seems overdone, as well, for several reasons. If inflation rises because the slack in the econoy has been eliminated, the Fed will gladly hike rates (including the rate it pays on reserves) and suck money out of the economy. The research indicates that it's very hard to generate rapid inflation when you've got a substantial output gap, as America has. The spillover argument is both more of an issue and less the kind of thing the Fed should worry about. Struggling rich countries worried about appreciation of their currencies could simply respond in kind—should actually. Emerging markets must get more used to the idea that capital needs to flow their way in a rebalanced world. They are right to fear sudden surges in capital flows, however, and this is a topic that should (and will be) discussed at the G20 meetings. Limited and considered capital controls may be the way to go in some cases, if only to act as surge protectors. Shahien Nasiripour writes up another line of argument, namely that QE is all about enriching the banks:

Doubts Grow Over Wisdom Of Ben Bernanke 'Super-Put' - The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc.  It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.  The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences. Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.

Fed's new stimulus plan worries global powers - The unrestrained issuance of US dollars could trigger another crisis, an adviser to China's central bank warned Thursday, shortly after the US Federal Reserve announced that it was pumping out more money to boost growth. "As long as the world exercises no restraint in issuing global currencies such as the dollar - this is not easy - the occurrence of another crisis is inevitable, as quite a few far-sighted Westerners lament," Xia Bin, an adviser to China's central bank, said in a commentary on that is managed by the central bank. Developing countries must set up a firewall through currency and capital control to buffer itself from external shocks, Xia said.

Fed's actions rile allies (Reuters) - China on Friday rebuffed a U.S. plan to set limits for trade imbalances and Germany dubbed the Fed's money-printing policy "clueless," setting the stage for what could be a fractious G20 summit next week. Washington believes an undervalued yuan is a major cause of economic imbalances and has pressed Beijing, largely in vain, to let the currency rise more swiftly to reflect the strength of what is now the world's second-largest economy. The waters of the debate have been muddied by the Federal Reserve's decision to buy $600 billion in long-term bonds with new money in an effort to revive the flagging U.S. economy. Resentment is rumbling worldwide that the initiative will generate even more instability by ramping up currencies against the dollar, inflating asset bubbles and increasing inflation. "With all due respect, U.S. policy is clueless," German Finance Minister Wolfgang Schaeuble told a conference.

Germany Blasts Bernanke: Results of Fed Stimulus Could Be 'Horrendous' - SPIEGEL -  Germany is not impressed. One day after the United States Federal Reserve announced that it would pump $600 billion (€423 billion) into America's banking system over the next eight months, German Finance Minister Wolfgang Schäuble sharply criticized the decision.  "I don't think they are going to solve their problems that way," Schäuble told German public broadcaster ZDF in a Thursday evening interview. "They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous."  Schäuble said that the move by Fed Chair Ben Bernanke would "create additional problems for the world." He promised to bring up the issue in talks with the US and said that, by following such a monetary path, the US was violating a pledge that all industrialized countries agreed to at the last G-20 summit in Toronto in June.

China Says Fed Owes It an Explanation —China has urged the U.S. Federal Reserve to explain its decision this week to inject an extra $600 billion into the U.S. economy through a new round of asset purchases, known as "quantitative easing." "Many countries are worried about the impact of the policy on their economies," Vice Foreign Minister Cui Tiankai, China's top G-20 negotiator, told a news briefing in Beijing Friday. A summit of the Group of 20 industrial and developing nations is set for Seoul next week. "It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt," he said. The U.S. "owes us some explanation," he said, without specifying in which forum the explanation should be given.

PRC Sees US 'Central Planning' + More QE Stories - OK, so this series of stories on Federal Reserve quantitative easing is getting [1, 2, 3, 4] slightly excessive, but I just had to post about this fascinating grab bag from Reuters on how the rest of the world is apparently not very happy about US monetary policies--especially the announced $600 billion additional central bank purchases of Treasury bills to mid-2011. The prize quote, of course is China complaining of American 'central planning' [!]--this from a country that has strict capital and foreign exchange controls and is still considered a 'non-market economy' by the US to the PRC's chagrin. That's entertainment as Chinese bellyaching about the US often passes into the realm of over-the-top hyperbole, although we should of course note that any number of G-20 members are unhappy about American go-it-alone actions as well. In the immortal words of the late, great Telly Savalas, perhaps it's time the US asked of itself, 'Who Loves Ya, Baby?' With the upcoming G-20 leader's summit in South Korea just days away, let's say our American friends have a lot of explaining to do:

It goes to the Fed’s motive - IN COURTROOM dramas, the prosecutor often dredges up some seemingly irrelevant fact about the accused by arguing, “It goes to motive, your honour.” That’s where the Fed finds itself in today. Quantitative easing is fully justified by high unemployment and falling inflation at home, but the Fed is being pummeled in the court of public opinion because its motives are suspect: other countries think the Fed is trying bludgeon them into assuming more of the burden of global growth via a vastly depreciated dollar. I agree that this is how the world perceives what the Fed has done. But it’s wrong. QE is unconventional monetary policy, but it is monetary policy nonetheless. When either conventional or unconventional monetary policy eases, certain things are supposed to happen: long-term yields fall, stocks rise, the exchange rate declines. All of which is happening now. If the Fed had just cut the Federal funds rate from 3.5% to 2.75% (roughly the equivalent of what its $600 billion in Treasury purchases should achieve), we should have expected exactly the same results, without the sturm und drang about currency wars.

QE Is Not CM -  Krugman - I’m a bit shocked at the way so many people are treating US quantitative easing as somehow equivalent to Chinese currency manipulation. QE is basically expansionary monetary policy, no different in its effects (if it works) from reducing the policy interest rate. Yes, it tends to weaken the exchange rate; but it also increases domestic demand. China is engaged in currency manipulation, that is, buying foreign currency to keep the yuan weak; meanwhile, it is actually moving to reduce domestic demand, among other things raising interest rates. So the United States is moving to expand world demand, with a policy that may weaken the dollar; China is moving to reduce world demand, with a policy of deliberately weakening the yuan. America’s policy may annoy its trading partners, but they are not the target; China’s policy is predatory, pure and simple. No equivalence here.

More on QE2 - After the Fed statement on Wednesday, which I discussed here, we have plenty of opinions on what the Fed is up to. Martin Feldstein (actually from the day before the statement, but presumably his opinion did not change with the actual announcement) thinks it's risky, and some of the business press is negative, particularly this guy, who claims Bernanke doesn't know any economics, but apparently his grasp is not the best either. Predictably, Krugman and this two buddies DeLong and Thoma think the asset purchase program should have been larger. DeLong has a particular complaint about the average duration of the the Treasury purchases. Now, in the interest of encouraging people when they say something useful, the guy actually has a point here. The New York Fed page where the relevant information resides is down for maintenance today, but you can find the details of what the Fed plans to purchase here. Very little of these purchases will be of Treasuries with maturities greater than 10 years, and the average duration of purchases will be 5-6 years. On the up side, there is then less maturity mismatch on the Fed's balance sheet (which of course is risky for them), but if QE works in the fashion the Fed hopes it will, then longer-maturity asset purchases would give the Fed much more leverage.

Jobs Report Adds to Debate Over QE2 - The unexpectedly optimistic October’s nonfarm payrolls report was a step in the right direction for the U.S. recovery — but it also raises more questions about how prudent the Federal Reserve was in its radical move to aid the economy. Only two days after the Fed decided to embark on a program to buy $600 billion in Treasurys by the middle of next year — on top of up to $300 billion in purchases from reinvested mortgage proceeds — the U.S. central bankers are confronting unexpected signs of life in the labor market. Some will believe the Fed has started a risky and uncertain effort just as the economy may no longer need the help. While it’s true the unemployment rate held steady last month at 9.6%, nonfarm payrolls have reversed their declines since last May, rising by 151,000 in October. Even more importantly, private sector hiring, the engine of economic growth, increased by 159,000.

Monetary Policy in a Liquidity Trap - Matthew Yglesias is puzzled by something Paul Krugman wrote.  I don’t totally understand this argument, however: It’s also crucial to understand that a half-hearted version of this policy won’t work. If you say, well, 5 percent sounds like a lot, maybe let’s just shoot for 2.5, you wouldn’t reduce real rates enough to get to full employment even if people believed you — and because you wouldn’t hit full employment, you wouldn’t manage to deliver the inflation, so people won’t believe you. Right now we’re very far from full employment. But we still have a little inflation. And so it seems to me that if real rates go down a bit, we’ll get a bit closer to full employment, and thus a bit more inflation. The result would be a much slower than necessary recovery, but still better than the current path. I'm not sure my attempted explanation is of any use, but in case it is, it is after the jump.

Bernanke's money printing idea is interesting - but I have a better one - I'm no fan of Federal Reserve chairman Ben Bernanke. Bernanke's response to the 2008 credit crisis was to first state that it wasn't happening and then, when it happened, to say that it wouldn't be too bad. Fail. Moreover he was one of the members of the Federal Reserve Board under previous chairman Allan Greenspan who approved of policy keeping interest rates too low between 2002 and 2005, thus creating the conditions for the property bubble. Epic Fail. But credit where credit's due - the recent announcement of $600 billion in bond repurchases is a step towards a more effective form of monetary policy, though I do question whether it is needed. Back in March 2009 I wrote an article titled Thoughts on fractional lending and quantitative easing which outlined some ideas I had at the time about unconventional monetary policy.This would take the form of a deposit. The central bank creates money by fiat, and then deposits this money in as many banks and financial institutions (institutions that are part of the fractional banking structure) as it can find. This won't be a bond buyback, but a simple deposit. It is not important as to whether the commercial banks pay interest on such a deposit since paying back interest is not important - expanding the money supply is.

Why isn't the multiplier infinite? - Nick Rowe - Assume the worst case scenario. Your economy is stuck in a permanent liquidity trap. It will stay there forever, unless you do something. Do you have to do something big, measured in the trillions of dollars? Suppose you do something, something very small, that has a direct effect of increasing Aggregate Demand by $1 per year. It could be monetary policy, fiscal policy, or sacrificing a goat. And you promise to keep on doing the same thing every year forever. Now the multiplier kicks in. The direct effect of sacrificing a goat every year is to increase current and expected future AD by (say) $1. Which causes current and expected future income to rise, which causes a further rise in current and expected future AD. And so on, ad infinitum. The paleo-Keynesian multiplier is a positive feedback mechanism. It's a deviation-amplifying process. Why isn't this multiplier infinite? Why should each round of the multiplier be smaller than the last, so that the sum of all the rounds is finite? If the multiplier is infinite, we won't need to sacrifice a lot of goats. One goat should be enough to do the job of getting us out of the liquidity trap, no matter how deep we are in it currently. Why do economists suffer from multiplier pessimism? Why do they say we need to sacrifice trillions of goats?

Daylight Savings Time and the non-neutrality of money by Nick Rowe - I'm not the first economist who has drawn the analogy between Daylight Savings Time and money. Milton Friedman used the same analogy to explain why it was easier to adjust the real exchange rate through adjusting the nominal exchange rate than through adjusting millions of nominal prices. Milton Friedman's analogy is even more apt this time around. The US changed the date at which Daylight Savings Time would end. After some discussion, because the new US date didn't work so well for us up North, Canada decided it was more important to stay in synch with the US than to stay in synch with our own dawn and dusk. Canada and the US may not be an optimal currency area, but it's been decided that we are an optimal time area. No currency union, but we do have a time union. It's the equivalent of fixed exchange rates. When the US devalues its time, we devalue our time too. Why does money have real effects? It's just bits of paper. It's not real. We are still stuck on David Hume's puzzle. If we double the number of bits of paper each one should be worth half as much. It should be a purely nominal change. Nothing real should change. If we switch from meauring turkeys in pounds to measuring them in kilograms, the price per unit weight should be divided by 2.2, but the same turkey should cost exactly the same in pounds or kilograms, and we should buy exactly the same number of turkeys as before.

Ron Paul vows renewed Fed audit push next year. -U.S. Republican Representative Ron Paul on Thursday said he will push to examine the Federal Reserve's monetary policy decisions if he takes control of the congressional subcommittee that oversees the central bank as expected in January. "I think they're way too independent. They just shouldn't have this power," Paul, a longtime Fed critic, said in an interview with Reuters. "Up until recently it has been modest but now it's totally out of control."Paul is currently the top Republican on the House of Representatives subcommittee that oversees domestic monetary policy, and is likely to head the panel when Republicans take control of the chamber in January. That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.

Ron Paul Is About to Totally Revolutionize the House Monetary Policy Panel - Odds are you haven’t heard of the monetary policy subcommittee. Officially known as the House Subcommittee for Domestic Monetary Policy and Technology, it’s a subdivision of the House Financial Services Committee that has mostly occupied itself with pressing questions of issuing commemorative coins and whether or not to eliminate the penny.  That’s about to change. Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee.  Paul said his first priority will be to open up the books of the Federal Reserve to the American people.  “We need to create transparency there. To see what it is they are buying and lending, and who it is they are dealing with,” Paul said.  Paul mentioned that he hoped to use subcommittee hearings to educate the public about the causes of business cycles—which he believes are mainly attributable to monetary manipulation by central bankers.  Monetary reform is also on the agenda. Paul is a noted advocate of the gold standard.

The Fed Loses Twice - The Fed lost twice tonight, in that it will face a more skeptical Congress, and that fiscal policy will be jammed for the next two years, meaning that so-called monetary policy will have to do more of the heavy lifting. Bad timing for the Fed.  They are powerless, or even negatively powerful (They will achieve the opposite of what they are intending), because they don’t understand how monetary policy really works, particularly during times of crisis. The Fed is imitating Japan, which has done horribly over the last 20 years.  Can’t they learn from recent data?  Interest rates that are too low cause businessmen to make bad decisions. My advice to the Fed: raise rates.  You might be surprised to find that higher rates lead to greater employment. Economies don’t work well when there is no place for savers to park funds, or when investors don’t have an alternative to risk assets.  Economic agents don’t react well when crisis measures are used… it makes them sit on their hands all the more.  Nothing good ever comes from punishing the prudent, and rewarding the imprudent.

Whats Bernanke smoking "a complete mystery" how QE2 helps the economy Galbraith says: A day after launching QE2, Fed Chairman Ben Bernanke took the unusual step of offering a public rationale. In an op-ed in The Washington Post, Bernanke wrote: "Easier financial conditions will promote economic growth." The stock market is surging Thursday in response to the Fed announcement and the President's concessions on extending the Bush tax cuts. But "what [QE2] has to do with restoring economic growth is a complete mystery to me," says University of Texas Professor James Galbraith. (Indeed, if easy money were the solution the economy's problems, we'd have very low unemployment and super-high GDP given all the Fed's efforts to date.)  Instead of additional stimulus that mainly weakens the dollar and helps the banks print money with the carry trade, as detailed here, Galbraith says the Fed should focus its regulatory powers on the problems of ‘Too Big to Fail' and "bank fraud that got us into the crisis and the foreclosure frauds the banks are using to try and get themselves out of it."  Unless and until those "structural problems" in the economy are addressed, "you're not going to break the logjam that's in the credit markets and private debt situation," he says. "Monetary policy isn't going to get you very far. "

Does Ben Bernanke Believe The Stuff He Writes? - What Dr. Galbraith is alluding to is the fact that Dr. Bernanke really thinks fiscal policy is more effective than quantitative easing to the degree you want to add stimulus.  The breath-taking comment by Paul Krugman a few weeks ago about the Fed needing $8-10 trillion of QE to boost the real economy goes to this. I think you would need even more. But, of course, Bernanke has no input into fiscal policy and right now fiscal policy is a dead issue in Washington. Interest rates are already zero percent. So, Bernanke has decided to fall back on the only thing he has left and print money.  Here’s the clue that he still believes fiscal policy is more effective. "The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation."

Volcker: Fed Bond Plan Won't Do Much to Boost Economy -- Former Federal Reserve Chairman Paul Volcker says the U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery. The Fed announced Wednesday that it would purchase $600 billion in Treasurys, aiming to lower long-term interest rates in an effort to spur spending and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds. Volcker told a business audience in Seoul that the Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."

Economist Stiglitz: We need stimulus, not quantitative easing - The midterm elections, as every pundit has told you, is about jobs. But whatever happens Tuesday, the results won't do much to reduce the unemployment rate. Congress is headed either for divided government or slim Democratic majorities - and either way, the era of big action is likely over.  But Wednesday, the Federal Reserve is expected to get back in the game by announcing at least a half-trillion in long-term bond purchases. Many observers have found this at least somewhat encouraging. It may not do too much, but with inflation so low, it can't hurt. Joseph Stiglitz, the Nobel prize-winning economist at Columbia, disagrees. He thinks it can hurt, and it also won't do very much. The proper role for the Fed, he argues, is backing up Congress: We should try fiscal policy first, and if that raises interest rates (which he doesn't believe is likely), then our monetary overlords can buy bonds to bring those rates back down. We spoke last week, and a lightly edited transcript follows.

Economic stimulus: At least the Fed is trying - latimes - The Federal Reserve announced that it will try again to spur the economy through a second round of "quantitative easing," which is Washington-speak for "conjuring money out of thin air." But the Fed's plan to purchase $600 billion worth of long-term Treasury bonds won't double the country's sluggish growth rate or slash unemployment. It's just a nudge to the economy, not a shove. The problem for the Fed is that it is failing at one of its core missions — to keep unemployment low — and it's already tried all the monetary tools at its disposal. But it's hard to blame Federal Reserve Chairman Ben S. Bernanke, who's been a remarkably active leader of the central bank. The real fault lies with Congress, which hasn't been doing enough to stimulate the economy. Although there's no simple and sure way for Congress to spark the economy, lawmakers have a variety of options. The threshold question is whether they're willing to borrow more heavily to finance new tax cuts or spending — for example, more federal aid for bridges, train lines and other infrastructure projects. They should be willing to do so in the short term in conjunction with adopting a credible plan to bring the deficit under control over the coming decade.

America’s failing monetary policy - Shahien Nasiripour has delivered a massive 4,000-word article on the Fed’s monetary policy, laying out with great clarity just who’s benefiting (big banks, corporations, and the U.S. Treasury) and who’s losing (the public at large, and especially retired savers and the unemployed). To some extent, monetary policy always works like that: savers get hit when interest rates fall, while banks love it. But this time it’s even worse than usual, since businesses aren’t borrowing or investing — and insofar as they are borrowing, they’re using the proceeds to buy back their stock, rather than to employ more people. The net result is that the banks — whose collective cost of funds is now less than 1% — are now lending overwhelmingly to just one borrower: U.S. banks now own more than $1.5 trillion in Treasuries and taxpayer-backed debt issued by mortgage giants Fannie Mae and Freddie Mac, according to the latest weekly data provided by the Fed. It’s truly outrageous that banks are lending more money to the U.S. government than they are to all commercial and industrial borrowers combined; well done to Nasiripour for connecting these dots and for providing a much-needed dose of outrage at the way in which Bernanke’s monetary policy simply isn’t helping the broad mass of the U.S. population.

Federal Reserve Rains Money On Corporate America -- But Main Street Left High And Dry - Bill Gross will be one of the few to benefit from the Federal Reserve's announcement this afternoon. The legendary money manager, who oversees more than $1.2 trillion at Pacific Investment Management Co., stands to profit off the plan hatched by the nation's central bank. The Fed announced that it will buy between $850 to $900 billion of U.S. government debt, also known as Treasuries, through June to spur the recovery. Over the coming months, the Fed will then communicate its specific plans well ahead of any such purchases, allowing wealthy investors and firms a chance to buy those assets first so they can sell it back to the Fed at a profit. Folks like Gross will be the biggest beneficiaries. When it comes to helping Wall Street and corporate America, the Federal Reserve spares no expense. It expanded its authority and bailed out securities and insurance firms. It tethered the main interest rate to zero. It more than doubled its balance sheet to $2.3 trillion by purchasing mortgage-linked securities and U.S. government debt. To arrest the free-falling economy and jolt it back to life, the nation's central bank has engaged in an unprecedented campaign to ensure banks have cash and corporations access to credit.

QE2 Is Another Bank Bailout And Not A Main Street Recovery Plan I’ve shown in rather elaborate detail in recent weeks that quantitative easing does not help the real economy generate a sustained recovery. All of my work regarding QE has me wondering why the Fed would implement such a policy when the evidence appears to point to little to no gain in economic growth? The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers. Before you brush me off as some conspiracy theorist please consider the evidence.

Reinhart and Reinhart – Time to end the denial over mortgage debt - Two campaigns ended this week. In one, a hostile electorate reshaped Congress, to create a foil to Barack Obama’s policy ambitions. In the other, the Federal Reserve has spent the past few months trying to convince investors that it retains relevance even after its policy rate has lingered at zero for two years. Now the campaign season is over, further swift actions are needed to boost the fitful recovery of the American economy.All campaigns are full of inflated promises. The build-up to the Fed’s latest quantitative easing has been no exception. The problems overshadowing expansion will not be lifted by inflating the Fed’s balance sheet. In particular, the hard job of addressing the unresolved problems in the mortgage market remains unaddressed. Financial authorities have to end the charade that the problematic loans made as the real-estate bubble inflated will be repaid. Those loans and the securities using them as collateral had dicey prospects when first made and have only gone further south. After all, since the balloon popped, real estate prices have fallen 35 per cent on average, and unemployment is near 10 per cent.These unresolved legacy assets are dragging down households’ spirits, clogging intermediaries’ balance sheets, and impeding the clearing of the real estate market. The private sector will not borrow, banks will not lend, and the fiscal prospects of the US government will be clouded. A repeated pattern in financial crises is that government debt swells because the state has to take over private obligations as part of its rescue of the financial system.“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”

Why a NGDP Level Target Trumps a Price Level Target - Two recent articles speak to the advantages of a nominal GDP level target over a price level target.  The first is from The Economist article first describes the benefits of a price level target: Assume that inflation of 2%, on average, is ideal. This implies that if the price level is 100 this year, it will be 102 next year and 104 (or more precisely, 104.04) in the second year. If inflation is only 1% in one year, a conventional inflation-targeting central bank would aim only to return inflation to a rate of 2% the next. This would leave the price level at 103, lower than its original implied path. In contrast, a central bank that targets the price level wants to make up any lost ground on prices. It would seek to raise inflation to 3% in the second year to get to a target of 104.What then is left? Ramesh Ponnuru provides an answer in a National Review article titled "Hard Money" (sorry, no link):

Inflation is Confusing. Let’s Target Nominal Expenditure! - Inflation is confusing. The concept makes crazy people crazier. Reading through the accounts of QE2 on the internet the past few days have solidified my view that inflation is a thorny enough concept that we should rid it from popular vernacular. If there is anything that gets turned on it’s head when an AD recession hits, it is the concept of inflation. During normal times (full employment and capacity utilization), inflation is harmful as it drives up interest rates, discourages saving, and encourages misallocation of capital. However, none of those things apply to the current situation in which we find ourselves with a large output gap and high unemployment. Thus, we need higher inflation in order to close the output gap but that turns everything that everyone knows about inflation backward. All of a sudden inflation is good for savers, good for the unemployed, and good for economic growth. In order to square this circle, I propose we forget about inflation. And not just forget about talking about it, but forget about its use in the setting of monetary policy. Instead, we should target nominal expenditure at a steady growth rate (3% a la Woolsey, or 5% a la Sumner, Beckworth, etc.) with level targeting. What advantages does targeting nominal expenditure have? Well…

QE2 is about asset prices, not the economy - The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities between now and the end of 2011 Q2, at a pace of around $75bn per month. This was almost exactly in line with what the market had been led to expect, so there was no surprise in the extent and timing of QE2. However, there was no further softening in the Fed’s statement that interest rates are likely to remain exceptionally low for an “extended period”, which may have disappointed some observers who were looking for this language to shift in a dovish direction. Overall, the markets initial reaction was a shrug of acceptance that the Fed has done just about what it told us it would do, but certainly no more. So what has the Fed actually done? The $600bn of net Treasury purchases, which will be spread fairly evenly across the yield curve, will increase the size of the Fed’s balance sheet by around 25 per cent over the next 8 months. The monetary base in the US will rise by about 30 per cent over the same period. By the yardsticks that would be applied in any normal period, these would be considered to be extraordinary developments. But in the current environment, with short-term interest rates at the zero bound, and the economy in a liquidity trap, the effects of this monetary injection on the economy may be rather small.

Generating Inflation Expectations - A number of readers have asked how the Fed can change inflation expectations when it has little or no current traction — that is, what can the Fed actually do? Good question, which goes back to my original writing on the subject.  The key point is that we won’t be in a liquidity trap forever. Eventually something will come along — a technology-driven investment boom, a recovery of consumer spending as debt gets paid down, whatever. At that point the economy will recover to the point where inflation starts to rise — and at that point the Fed would normally begin raising rates to choke off that inflation. But if the Fed can promise not to raise rates at that point, to wait until inflation has risen substantially, it can affect long-term inflation expectations — which is what matters for investment. And higher long-term inflation expectations can boost the economy now. So what the Fed needs for inflation targeting is a way to tie its own hands — or, more accurately, the hands of future Fed officials. That was the whole point of my line about credibly promising to be irresponsible.

Guess What's Coming to Dinner: Inflation! - The surge in global food prices will soon arrive on the dinner table. However, to focus on the direct inflationary impact of higher food prices alone is to miss the bigger, far more inflationary picture implied by rising wage demands in developing countries. Beginning next year, consumers in most developed economies will discover to their surprise that “food” price inflation is creeping into an astonishingly wide variety of consumer goods. US CPI has been trending lower amidst a stagnating US economy. However, a look behind the headline economic data and across some financial market developments reveals a disturbing picture, that in fact the US economy may already have entered a “stagflationary” situation not unlike the late 1970s. This spells danger for financial asset prices.

QE2 and Commodity Prices - Storage is tied not only to interest rates, but also (and more importantly, I believe) to anticipated future changes in prices, as well as physical storage costs.  If people start to hoard commodities then current prices will go up.  This happens because storing commodities means not consuming them, and as we consume less, the marginal value of consumption goes up.  Now, at the margin, interest rates certainly do affect the decision to store.  The question is how much.  The answer, I think, is very little.  With commodities, that demand curve is very steep.  The marginal value decreases sharply with consumption, so it is a big part of the calculation.  If interest rates are the only thing driving growth in inventories, this will cause the expected price change between the present and the future to go down.  Also, as hoarding increases, the marginal costs of storage likely increase.  So, for small interest rate changes, the relative tradeoff is small, even if interest rates go negative. My point here is that it's hard for me to see large-scale hoarding even in an environment with negative real interest rates.  Hoarding can only happen if markets irrationally believe that price increases will be sustained indefinitely--i.e., a speculative bubble.  Hopefully markets will be wary of such things after recent experience in housing and stock market prices.

Monetary policy: The commodity question | The Economist - LET me address one other point about the impact of new Fed easing. Some QE2 critics worry that the Fed could end up boosting commodity prices, thereby placing a drag on growth. But whether rising commodity prices are something to avoid or tolerate depends on the exact mechanism at work. If prices increase because traders are looking for an inflation hedge or taking advantage of low rates to speculate, then that's worrisome. If prices increase because growth is boosting the demand for commodities in the real economy, then that's something to be tolerated and worked around. Indeed, the latter mechanism would indicate that the only way to keep commodity prices down would be to try and keep the global economy depressed. So which kind of rise are we observing? James Hamilton credits QE2 with lifting commodity prices and posts charts tracking price rises across a range of commodities: But what's interesting about his charts is that the steady upward trend common to all of them starts around the beginning of July—not the beginning of September, as we'd expect if QE2 were the causal factor.

Commodities Jump to a Two-Year High on Expanded Federal Reserve Stimulus - Commodities rose to a two-year high after the Federal Reserve said it would expand steps to boost the world’s largest economy, spurring demand for raw materials as a hedge against inflation. The Standard & Poor’s GSCI Index of 24 commodities gained as much as 1.5 percent to 586.046 points, the highest level since Oct. 3, 2008. It was at 585.241 points at 11:47 a.m. in London. Palladium climbed to the highest price since 2001, and white sugar reached a 21-year high. The U.S. Dollar Index fell to the lowest level in almost 11 months.  The Fed said yesterday it would buy a further $600 billion of Treasuries through June, expanding a stimulus program to cut unemployment and avert deflation. The central bank also said it will keep interest rates low for an “extended period.”

Mobius Says Fed Plan to Boost Stocks, Push Commodities `Higher and Higher' - The U.S. Federal Reserve’s bond purchase plan will further drive the rally for global stocks and push commodity prices “higher and higher,” said Templeton Asset Management Ltd.’s Mark Mobius. “We could have an optimistic scenario for quite some time,” Mobius, who oversees about $34 billion, said in a telephone interview from Beijing yesterday. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.” The MSCI World Index yesterday surged to a two-year high, gold jumped to a record and crude oil advanced to a seven-month high after the Fed announced Nov. 3 plans for $600 billion in bond purchases through next June. Asian stocks rose today, pushing a benchmark gauge to its best weekly advance this year, on speculation the Fed will succeed in stoking growth in the world’s biggest economy.  The liquidity flooding the global economy from the Fed’s quantitative easing will extend record gains for commodities and dollar depreciation cannot be avoided, said Mobius, 74, who is also the chairman of Templeton’s emerging markets group.

Fed Poised to Make Everything More Expensive - This Tuesday and Wednesday, the Fed will unleash a second round of quantitative easing  (increasing the money supply) geared at jolting the economy back into action. After failing to keep unemployment at bay and stabilize falling prices, the Fed needs to put the paddles back on the economy’s chest. The Financial Times explains: The goal of QE2 – the nickname for this new round of easing – is to push down long-term interest rates by buying long-term Treasury bonds. On its success rests both the reputation of Ben Bernanke, the Fed chairman, and the chances that the US economy can avoid a decade of weak growth. The risk of quantitative easing is hyperinflation. But the Washington Post reports that inflation can basically scare people into stimulating the economy:  The economy isn’t in free fall. But as new data on gross domestic product affirmed Friday, the economy is mired in mediocre growth, too slow to bring down the unemployment rate. Inflation, meanwhile, is running about 1 percent, below the rate Fed officials view as optimal. When inflation is a little higher, it encourages consumers and businesses to spend money before it loses value.

Bernanke downplays commodity price gains -  Federal Reserve board chairman Ben Bernanke downplayed the risk to the economy from the recent spike in commodity prices on Friday. In a question-and-answer session with college students at an event sponsored by Jacksonville University, Bernanke said with so much slack, or excess supply, in the economy, it is "very difficult" for producers to pass those higher costs to consumers. Bernanke said the price hikes in globally traded commodities stemmed from strong demand from emerging markets. While households will have to pay a higher price for gasoline, lower labor costs will help keep overall inflation low, he said. Asked about foreign concern with the Fed's new $600 billion bond buying program, Bernanke said the global economy would benefit from a pick-up in the U.S. economy

Are Rising Commodity Prices An Inflationary Signal? - Krugman -  Right now everyone seems to believe that rising commodity prices are telling us to beware of inflation. I think that’s dead wrong. Partly that’s because the sticky prices are the ones to worry about. But it’s also worth having some perspective on commodity prices themselves. Here’s a chart of real commodity prices over the past decade — specifically, of the ratio of the PPI for all commodities to the core CPI:  What I see here is a secular upward trend, presumably driven by rising demand from emerging economies in the face of limited resources, culminating in a big price rise in 2007-2008; we can argue about how much or little role speculation played in that final rise. Prices then slumped in the face of global recession, and have since recovered after the recession’s end.  Where, in all this, is evidence of huge inflationary pressures? The basic story seems, again, to be one of a secular upward trend reflecting real factors, with more or less the kinds of fluctuations around that trend that you’d expect given the business cycle.

Wages And The Slide Toward Deflation - Krugman - I get a fair number of comments to the effect that worries about deflation are all wrong, look at commodity prices. I’ve tried in the past to explain why we should focus on sluggish, sticky prices, not volatile prices like commodities — hence core inflation. But let me add another point: arguably the stickiest, sluggishiest prices are those of labor. So why not focus on wages? There are, in practice, some problems with doing this, involving composition effects, overtime, etc.. But still, if you want another indicator of the big slide in underlying inflation, look at average hourly wages: Yes, this is what happened in Japan:

The Argument Against Hyperinflation With Erik Townsend - Podcast - Many of us know the proponents of hyperinflation; Marc Faber, Gonzalo Lira, the National Inflation Association, and maybe even Peter Schiff falls into this category. When we look to countries that have experienced hyperinflation in modern times we can see direct parallels between their monetary policies and that of the US's in the past few years and we can draw a quick conclusion that we will experience hyperinflation as well. In this interview with Erik Townsend, entrepreneur and private investor, Erik argues that this conclusion is too simplistic and does not take into account the 'Five Fundamental' differences between the US Dollar and those currencies mentioned as examples of hyperinflation.

Why The  Downside To The Fed's "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation) - It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Calafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong - one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2... M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don't have the faintest grasp of more than merely trivial monetary topics.

Whoo, Whoo Baby Whoo - Krugman - David Leonhardt: What’s striking about the last six months, however, is how much more accurate the doves’ diagnosis of the economy has looked than the hawks’. Early this year, for example, Thomas Hoenig, president of the Kansas City Fed and probably the most prominent hawk, gave a speech in Washington warning about the risks of an overheated economy and inflation. Mr. Hoenig suggested that the kind of severe inflation that the United States experienced in the 1970s or even that Germany did in the 1920s was a real possibility. When he gave the speech, annual inflation was 2.7 percent. Today, it’s 1.1 percent. The doves, on the other hand, pointed out that recoveries from financial crises tended to be weak because consumers and businesses were slow to resume spending. Around the world over the last century, the typical crisis caused the jobless rate to rise for almost five years, according to research by the economists Carmen Reinhart and Kenneth Rogoff. By that timetable, the unemployment rate would rise for a year and a half more.

Bernanke May Ignore Risk of Inflation, Growth Acceleration Similar to 2004 - The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the U.S. economy.  By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake- up in currency and bond markets, said James D. Hamilton, a University of California, San Diego economist. “That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,” said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. “So the Fed has a careful tightrope act here.”

Another Sign of Disinflation - The Labor Department released its quarterly productivity report this morning, and it showed that the labor costs that went into a unit of production fell slightly this summer. That’s another sign that the economy is a long way from any kind of worrisome inflation, as I argued in a column today.According to the Labor numbers, hourly compensation rose at an annual rate of 1.8 percent from the second quarter to the third. But productivity — the amount that the average worker produces in an hour — rose more: 1.9 percent. As a result, so-called unit labor costs — the cost of labor in any given hamburger, silicon chip, airplane or you name it — fell 0.1 percent.  Economists who worry about inflation often talk about a wage-price spiral. Wages start going up, which causes the prices of good and services to go up, which in turn causes workers to ask for yet higher wages. But it is pretty hard to have a wage-price spiral when unit labor costs are falling.

Why Inflation Targets Need To Be High (Wonkish) - Paul Krugman - I see that Yglesias didn’t get my point about how a modest inflation target can’t work, which means that I didn’t explain it well.So here’s another try, with some hypothetical numbers. Suppose, first of all, that higher inflation — or more accurately, higher expected inflation — could lead to a lower rate of unemployment, like this: As drawn, I’m assuming that 5 percent unemployment is full employment, and we can’t/won’t go lower. Looking at this, you might say that 3 percent or higher inflation would be best, but 2 would still be an improvement over deflation. But how do you get inflation? Only by having a full-employment economy. So there’s a reserve relationship — a Phillips curve — which might look like this. Now, take these together. If the public believed we would have 2 percent inflation, according to the first figure this would lead to 6 percent unemployment. But according to the second figure, 6 percent unemployment would lead to only 1 percent inflation. So a Fed commitment to achieve 2 percent inflation wouldn’t be credible — because even if believed, it wouldn’t deliver. And so the whole edifice would collapse.

The Strangest Macro Model Ever - I think that I usually understand what Paul Krugman is saying, even when I disagree with him. However, I do not think that I understand Why Inflation Targets Need to be Higher well enough to say whether or not I agree with him. What I think he is saying is that the Phillips Curve constrains the ability of the Fed to set a credible inflation target. So, if the Fed says, "We are going to aim for 2 percent inflation," the market is going to say, "Sorry, but that will only raise aggregate demand enough to get you to 6 percent unemployment, which won't get you to 2 percent inflation (because of the aforementioned Phillips Curve). Therefore, we don't believe you, and so we won't let inflation go up at all. "On the other hand, if the Fed says, "We are going to aim for 3 percent inflation," the market is going to say, "That works," and inflation will go up.So you get this discontinuity. If we have 0 inflation now, the Fed can credibly commit to 3 percent inflation, but not to 2 percent inflation. Anywhere between 0 inflation and 3 percent inflation is "no man's land" in this model. I don't buy these sort of discontinuities.

What (I think) Paul Krugman was saying - Nick Rowe - Paul Krugman is a very good communicator. I try to emulate him. But I think he blew it on this post. Everybody has an off-day. No big deal. And it wasn't a simple thing to talk about anyway. This is what I think he was saying. This is my attempt to say it more clearly. The good equilibrium requires higher inflation than we have now. Paul thinks it's around 4% inflation. So if the Fed promises 4% inflation, and people believe the Fed, the economy moves to the good equilibrium. (Or the Fed could promise 5% inflation, raise the nominal interest rate to 1%, so we get the same real interest rate, and get to the good equilibrium that way.) But suppose the Fed promises 2% inflation. More than the bad equilibrium, but less than the good equilibrium. That promise can't be fulfilled. If people expect 2% inflation, the economy would go to the point on the IS curve at 2% inflation, but the Phillips Curve is below the IS curve at that point, so actual inflation would be less than 2%. If people figure this out in advance, they know the Fed's promise of 2% inflation is not credible. Even if they don't figure it out in advance, and believe the Fed's promise, they will soon discover inflation is less than the 2% they expected, so will stop believing the promise, and the economy will collapse back to the bad equilibrium.

When You Wish Upon A Star...One of the things you've got to love about Paul Krugman is that he says outloud what every economist is thinking, but doesn't have the guts to say, especially when times are tough and the future looks bleak. Here's Paul on Generating Inflation ExpectationsA number of readers have asked how the Fed can change inflation expectations when it has little or no current traction — that is, what can the Fed actually do?Good question, which goes back to my original writing on the subject. The key point is that we won’t be in a liquidity trap forever. Eventually something will come along —a technology-driven investment boom, a recovery of consumer spending as debt gets paid down, whatever. At that point the economy will recover to the point where inflation starts to rise — and at that point the Fed would normally begin raising rates to choke off that inflation. Eventually something will come along. There it is, the Walt Disney version of our economic future. In psychoanalytic theory, Paul's fantasy (a new technology driven investment boom) is called wish fulfillment— Other traditions call it magical thinking. Perhaps the most startling thing I discovered over many years of observation and study was that most so-called adults are actually children in disguise.

The Stagnation Regime of the New Keynesian Model and Current US Policy - My colleague George Evans has an interesting new paper. He shows that when there is downward wage rigidity, the "asymmetric adjustment costs" referenced below, the economy can get stuck in a zone of stagnation. Escaping from the stagnation trap requires a change in government spending or some other shock of sufficient size. If the change in government spending is large enough, the economy will return to full employment. But if the shock to government spending is below the required threshold (as the stimulus package may very well have been), the economy will remain trapped in the stagnation regime. (I also highly recommend section 4 on policy implications, which I have included on the continuation page. It discusses fiscal policy options, quantitiative easing, how to help to state and local governments, and other policies that could help to get us out of the stagnation regime):

The GDP Story: Final Demand Grew Just 0.6 Percent - Come on folks, we had the second largest inventory build-up in history. Pull that out and final demand grew at just a 0.6 percent annual rate. Does anyone thing that inventories will continue to grow at this rate? This means that instead of adding to growth inventories will subtract from an economy that has no almost no forward momentum. This is all GDP accounting 101. This should be the headline on the 3rd quarter numbers.

Yes, a Recovery Did Begin - Brad DeLong says that there was no economic recovery earlier this year, so it’s wrong to say that the recovery faltered. But look at this chart of non-farm employment: Throughout the second half of 2009, monthly job losses were slowing. In the first few months of 2010, progress continued, and job gains accelerated. And then something happened — the European debt crisis, the slowing of federal stimulus, the pick-up in local government cuts or some combination of these factors and others. Progress stopped in the spring. The economy seemed to go in reverse. The early months of 2010 look like a recovery — the early stages of one that had an enormous amount of ground to make up, yes, but a recovery nonetheless. The second half of 2010 (until, perhaps, last month) do not look like a recovery. Note that the chart above shows non-Census employment.  The above chart shows a three-month average of employment changes. The monthly numbers are noisier, but the same pattern is evident:

America's recovery: Faster growth needed - The Economist - ON FRIDAY, I pointed out the difference in the speed of recovery this time around relative to the last recession in which unemployment peaked above 10%: [R]eal output has yet to return to its pre-recession peak, even after five quarters of recovery. That's a reflection of the steepness of the previous decline but also the shallowness of the recovery. Through the first five quarters of recovery after the 1982 recession, real GDP grew by 7.8%. The total expansion this time has been just 3.5%. Little wonder that employment has risen so slowly. The main reason for the slower performance is the change in recession type. The Fed created the 1982 recession by increasing interest rates to record levels, in an attempt to wring inflation out of the economy. When the Fed was satisfied, it had enormous scope to loosen monetary policy, and the economy quickly responded to the improvement in financial conditions. This time around, the recession was caused by the collapse of a huge debt bubble, which forced banks and households to rapidly deleverage. Interest rates were low at the beginning of the recession, which left the Fed without much scope to use its main policy tool. And much more of a boost than normal was necessary, given the drag of deleveraging on recovery.  And it will be longer still before GDP returns to its potential level:

The Era of High Growth Is Over: Derivatives Expert - The times when developed economies grew at high rates are behind us and the next crisis will hit when people realize this, Satyajit Das, author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives told CNBC Tuesday. Economists estimate that in the US, growth should average around 5 to ensure employment keeps up with the population growth, but currently growth is closer to 2 percent.  "The problem is we have become so addicted to growth that we cannot live without it," Das said. As governments around the world try to find answers to the low growth dilemma, currency wars risk turning into trade wars, quantitative easing may not work because banks are not lending the money further and there are bubbles in some emerging markets, he explained.

QE2 risks currency wars and the end of dollar hegemony - As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar. The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.  China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.

Fed easing may mean 20 percent dollar drop: Gross (Reuters) - The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday. "I think a 20 percent decline in the dollar is possible," Gross said,  "When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory --- that is a debasement of the dollar in terms of the supply of dollars on a global basis," Gross told Reuters in an interview at his PIMCO headquarters. "QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices," Gross added.

Macroeconomics Is Hard - Krugman - I’m getting some fairly hysterical reactions to today’s column, many of them along the lines of “You’re an idiot — I know what it’s like out there in the real world of business” etc..  The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall.  This is why we have a field called macroeconomics. Unfortunately, the hard-won insights of macroeconomics are being rejected right now in favor of visceral feelings. And we’ll all pay the price.

Math Rage - Krugman - A number of my recent blog posts have involved pointing out adding-up constraints: you can’t have some people spending less than their income unless others spend more than their income, all the world’s currencies can’t devalue against each other, etc.. And judging from the responses, basic arithmetic makes people very, very angry. My point that if you expect debtors to pay down their debt, someone must be prepared either to increase debt or to reduce assets, leads to hysterical accusations of immorality. My point that a weak dollar is a strong euro and vice versa leads to accusations that I want everyone to become Zimbabwe. It’s kind of funny; it would be even funnier if denial of arithmetic weren’t contributing, in a very real sense, to our economic problems.

QE2 of Fed Will Inflict Heavy Forex Loss on Asian Central Banks - The second round of quantitative easing policy planned by the U.S. Federal Reserve Board has triggered sharp depreciation of the U.S. dollar and massive flow of international funds to Asia, a trend which may inflict heavy foreign-exchange loss on Asian central banks, including those of Taiwan and South Korea, from their nations’ bloated forex reserves under their custody.  An internal report of a domestic financial holding company notes that Asian central banks have been adjusting the portfolio of their forex reserves’ assets recently, reducing U.S.-dollar assets while increasing euro-denominated ones.  To lessen their loss from U.S.-dollar assets, some Asian central banks have also been buying large amounts of gold or non-U.S. dollar bonds, such as the increased holding of Japanese bonds by People`s Bank of China.

Beggar my neighbour - or merely browbeat him? - This week's statement by the Federal Reserve has achieved all that Ben Bernanke might have hoped it would achieve; stocks are up, the dollar is down, and so are US bond yields. We can't say for sure that it will "work", but all of these developments ought to be net positive for the US economy. The question I raised yesterday was whether it would be expansionary for the global economy. After all, the US is supposedly engaged in competitive devaluation. At the very least, it is pursuing a policy of "active dollar neglect". Talk of competitive devaluation conjures up visions of the 1930s, the iconic example of a time when countries beggared each other with depreciation and protectionism as they fought over a diminishing global pot of economic demand. Is that what is happening today? Is the US simply exporting its demand shortage to the rest of the world?

Fed Easing May Spark European Deflation, Impose Global `Tax,' Mundell Says - Federal Reserve debt purchases to stimulate the U.S. economy may send the euro rising against the dollar, sparking deflation in Europe, said Nobel Prize-winning economist Robert Mundell.  The European Central Bank would be unlikely to stem the euro’s gains, Mundell said in an interview in Beijing today. In an earlier speech, he said U.S. quantitative easing would hurt nations around the world.  Deflation would worsen European sovereign credit woes by making debts harder to pay off, said Mundell, who won a Nobel Prize in economics in 1999 and is credited as the intellectual father of the euro. His warning highlights potential unintended consequences of U.S. policy after Brazil said last month that the Fed risks inflating asset bubbles elsewhere.

Dollar Death Bed: Aussie Beyond Parity For First Time In 28 Years - The entire world is preparing to bury the dollar in advance of tomorrow's QE2 currency suicide by the chairman. Exhibit A: the OZ dollar which is now trading north of parity for the first time in 28 years, as Australia decidedly puts its in chips in China's basket, believing that no matter how high the OZ, China will have no problem with importing its exports. A quick look at the FX heatmaps shows that while the dollar is getting shorted across the board and the EUR is surging, and making Merkel livid once again, the Yen, at least so far, is benefiting as it has again become the short currency of choice against the AUD, in the one pair that correlation traders use to determine broad market risk more than anything. Yet with a near record number of dollar shorts in existence, will the be the proverbial cover on the news day? Or, if Bill Gross is right, are we going to see a 20% plunge in the dollar beginning tomorrow? Of course, if Gross is right, he would be buying stocks on margin, not MBS. So take notice.

US 'Strong Dollar Policy' Hilarity Returns - Oh man, I wish the weekend would have brought some blogging rest, but these American jokesters just keep upping the tragicomic quotient. With the US dollar dropping like a rock in recent months due to widespread anticipation of further quantitative easing from the Federal Reserve, I was utterly dumbfounded when one US Secretary Tim Geithner had the temerity to reiterate 'strong dollar policy' at a gathering of APEC finance ministers in Kyoto, Japan just a few hours ago: Asked if he will push for a 4 percent current account target to be included in the G20 communique at Seoul: "That is not our intention. What our intention is, is to keep trying to build support for this and to allow the experts to do the detailed hard work, to build a framework that people will have some confidence in over time. There's nothing on the table except for 'indicative guidelines' ... "I'm happy to reaffirm again that a strong dollar is in our interest as a country, it's very important to the United States, and we will never use our currency as a tool to gain competitive advantage." Having been laughed out of China before, I guess the thankless job of being US treasury secretary includes reiterating 'strong dollar policy' with a straight face despite all evidence to the contrary.

The US economic policy mix is a threat to the world - Countless column inches are devoted to the supposed wickedness of China’s currency policy. But the biggest threat to the world economy comes from the US. Its policy mix – fiscally passive, monetarily aggressive – is ineffective domestically and dangerous for everyone. Seen from Washington or London, the economy remains weak. But from a global perspective, it is advancing by some 4% a year – almost as fast as before the crisis. China and other emerging economies account for the bulk of this growth. In effect, Chinese investment has taken over from US consumption as the locomotive of global growth. Yet because it has a current-account surplus, China is widely perceived to be a drag on the global economy. This is misleadingly simplistic. While the debate over global imbalances often focuses on China, this column argues that the biggest threat to the world economy comes from the other side of the seesaw – the US. There are two issues here, theory and evidence. First let's reconsider the theory.

Brazil: "The last time there was a series of competitive devaluations. . . it ended in world war two." Is it just me or is it sounding a lot like the G-20 in Seoul is going to be a big mess? As I said last month, you should expect the rhetoric to escalate because this is a race to the bottom for the developed countries. First the rate reductions, then money printing, then the currency war, then the tariffs, then…. Obviously, the incoming Brazilian President’s hot rhetoric is in direct response to quantitative easing. So, this is a clear signal that QE will have unintended negative consequences for the emerging markets. Martin Wolf thinks America is going to win the global currency battle.

Brazil's Meirelles: Fed's latest move on G20 agenda - The head of Brazil's central bank said on Thursday that the U.S. Federal Reserve's latest plan to lower domestic borrowing costs and jumpstart the ailing economy would cause further "distortions" in world markets and complicate his country's efforts to stem the rise of its currency.
"QE creates excessive liquidity that flows over to countries like Brazil," Meirelles said. "Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries -- the U.S. and China -- to reach a different agreement not to generate so many distortions."

Fed Easing Worsens Hong Kong ‘Bubble’ Risk, Chan Says - The U.S. Federal Reserve’s expansion of stimulus will add to the risk of a housing bubble in Hong Kong and may force extra measures to cool prices, said Norman Chan, the head of the city’s central bank. The Hong Kong Monetary Authority will “take measures that are specific to the housing market if necessary,” Chan said at a press briefing in the city today. “The risk of an asset bubble in Hong Kong’s property market is rising.” Hong Kong has already tightened purchase requirements after home prices rose about 50 percent from the start of 2009 to the highest level since 1997, according to an index compiled by Centaline Property Agency Ltd. The Fed’s move to buy another $600 billion of Treasuries, announced yesterday, will “definitely add pressure to the asset markets in emerging-market economies,” Chan said.

Bernanke Defends Fed’s Buying Plan in Face of Criticism Abroad -The Federal Reserve chairman, Ben S. Bernanke, on Friday defended the central bank’s decision to inject $600 billion into the American economy, in the face of objections from European and Asian officials about the weakening of the dollar that is likely to result from the action.  “The best fundamentals for the dollar will come when the economy is growing strongly,” Mr. Bernanke told students. “That is where the fundamentals come from. We are aware the dollar plays a special role in the global economy.”  “What the U.S. accuses China of doing, the U.S.A. is doing by different means,” the German finance minister, Wolfgang Schäuble, said of the Fed’s new decision. Earlier, the Brazilian finance minister, Guido Mantega, who has warned of a global currency war, predicted that the Fed’s move would be ineffective, saying, “Throwing money out of a helicopter doesn’t do any good.”  Mr. Bernanke has defended the Fed’s decision to pump $600 billion into the banking system as a modest but necessary step to support the American recovery, and he told the students: “A strong U.S. economy is critical not just for Americans but for a global recovery.”

Has Bernanke Pleaded? - Laurence H. Meyer, a former Federal Reserve governor, said the following in today’s Times: Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate, when short-term rates are already at zero … He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it.” I am among Mr. Meyer’s many admirers, but I don’t think that’s quite right. Yes, if you go back and read Mr. Bernanke’s recent speeches and Congressional testimony, you will see he believes that last year’s stimulus bill helped the economy and that more government spending or tax cuts now would help again. But he has made a deliberate choice to avoid making that point strongly or clearly. My colleague Sewell Chan summarized the situation in an article last week, under the headline, “Bernanke’s Reluctance to Speak Out Rankles Some.” There is an argument that Mr. Bernanke made the right choice by staying on the sidelines of the stimulus debate. By doing so, he helped keep the Fed above some of the partisan fray.But the fact remains that Mr. Bernanke had perhaps more ability to influence this debate than anyone else

U.S. dollar printing is huge risk - Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing. China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank. "As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said. Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.

A currency war has no winners - It's easy to see why some policymakers hope favourable exchange rates could put America's economy back on track. Amid growing fears of a Japanese-style malaise, the other options are either off the table or likely to be ineffective. Political gridlock and soaring debt have stymied an effective second stimulus, and monetary policy has not reignited investment. But weakening the dollar to boost exports is a risky strategy – it could result in exchange rate volatility and protectionism; worse, it invites a response from competitors. In this fragile global economic environment, a currency war will make everybody a loser.Fortunately, there's an alternative. Global co-operation based on growth-enhancing policies of structural reform, economic stimulus and long-term institutional changes in the global monetary system would be far more effective.

The rising burden of government debt - The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23 trillion in 2007 to an expected $34 trillion in 2010. IMF forecasts indicate the level will reach $48 trillion in 2015. The ratio of world debt to world GDP rose from 44 percent in 2007 to 59 percent in 2010, and is expected to climb to 65 percent in 2015. Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy.

Why rising government debt burdens really matter - The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23,000bn in 2007 to an expected $34,000bn in 2010. IMF forecasts indicate the level will reach $48,000bn in 2015. The ratio of world debt to world GDP rose from 44 per cent in 2007 to 59 per cent in 2010, and is expected to climb to 65 per cent in 2015. Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy. View the FT’s interactive graphic We’ve analysed trends in the composition of world public debt and also calculated the burden of this debt - which we define as the ratio of debt to total and working-age populations. Our analysis is based on data from the IMF’s Fiscal Monitor (May 2010), the World Economic Outlook database (April 2010) and updated information from national sources. Download the full technical framework

IMF's Blanchard Says US Needs 'Credible' Plan to Cut Debt-- International Monetary Fund Chief Economist Olivier Blanchard said the U.S. needs a “credible” a plan to cut its debt and dispel fears about the economy. “It is very important that the U.S., over the next few months or a year, puts in place a very credible, medium-term plan so we can see what happens to the debt five years out, 10 years out,” Blanchard said in an interview with CNBC today. The plan “is essential. It’s not quite in place yet.” Budget deficits and sovereign debt have ballooned worldwide after governments spent trillions of dollars in stimulus to revive growth. The U.S. deficit reached $1.294 trillion in the fiscal year through September, the second highest on record. The Federal Reserve said yesterday it will buy more government bonds, expanding record stimulus in a bid to reduce unemployment and avert deflation.

Number of the Week: $10.2 Trillion in Global Borrowing - $10.2 trillion:

The amount of money advanced-nation governments will need to borrow in 2011 As the debts of advanced countries rise to levels not seen since the aftermath of World War II, it’s hard to know how much is too much. But it’s easy to see that the risk of serious financial trouble is growing. Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output. Aside from Japan, which has a huge debt hangover from decades of anemic growth, the U.S. is the most extreme case. Next year, the U.S. government will have to find $4.2 trillion. That’s 27.8% of its annual economic output, up from 26.5% this year. By comparison, crisis-addled Greece needs $69 billion, or 23.8% of its annual GDP.

Fed's Printing Press to Fund Deficit for 6 Months -  To find a buyer of all the government debt he’s printing, Treasury Secretary Tim Geinthner doesn’t need to travel to China, just walk a mile over to the Federal Reserve building.  With the Federal Reserve set to print $600 billion in order to buy Treasury securities, it is essentially funding the $1.2 trillion deficit for the next six months, according to Ed Yardeni, President of Yardeni Research. It’s even more if you count the reinvestment of proceeds from its mortgage-backed securities portfolio. “You essentially have the world’s largest hedge fund down the street from the world’s largest prime brokerage,” said Yardeni, who has held positions at both the Federal Reserve and the U.S. Treasury. “I think that QE-2.0 is a very bad idea because it increases the odds of a trifecta of bubbles in stocks, bonds, and commodities.”

CDS costs on US Treasuries rise after Fed statement (Reuters) - The cost to insure U.S. Treasury debt in the credit default swap market rose after the Federal Reserve committed to buy $600 billion more in government bonds in an attempt to help stimulate the economy. The cost of credit default swaps on U.S. government debt rose 3 basis points to 44 basis points, or $44,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

QEII: Who really owns US Treasury Debt - Okay the first place to start is Treasury's Debt to the Penny web application where we are dutifully told that total 'Public Debt' is $13.723 trillion as of close of business Tuesday Election Day. But as Bear readers know that total is broken into two sub-totals 'Debt Held by the Public' and 'Intragovernmental Holdings' with the respective totals being $9.133 trillion and $4.590 trillion. And of that latter we know that $2.6 trillion is held in the Social Security Trust Funds. Of that $9 trillion how much is actually owned by foreigners and specifically the Chinese Central Bank? Well we need to turn to another Treasury tool: Foreign Holders of US Treasuries where we find out that total foreign holdings are estimated at $4.213 trillion of which $2.772 are considered 'Foreign Official' , that is presumedly foreign exchange reserves by various central banks, while total Chinese mainland holdings are $868.4 billion. Now we could argue whether we should add Hong Kong's total of $137.8 billion to that, the Channel Islands offshore banks included under 'Great Britain' or the traditional havens for safe money of Luxembourg and Switzerland are really held on behalf of China but I think we would be hard pressed to come up with a total of more than $1.1-$1.2 trillion held by Chinese private and public entities. Which is less than 10% of total 'Public Debt' and perhaps 13% of 'Debt Held by the Public'.

3 Charts That Prove We Are Living In The Biggest Debt Bubble In The History Of Our World - Do you want to see something truly frightening?  Just check out the 3 charts posted further down in this article. These charts prove that we are now in the biggest debt bubble in the history of the world.  As Americans have enjoyed an incredibly wonderful standard of living over the past three decades, most of them have believed that it was because we are the wealthiest, most prosperous nation on the planet with economic and financial systems that are second to none. But that is not even close to accurate.  The reason why we have had an almost unbelievably high standard of living over the past three decades is because we have piled up the biggest mountains of debt in the history of the world.  Once upon a time the United States was the wealthiest country on the planet, but all of that prosperity was not good enough for us.  So we started borrowing and borrowing and borrowing and we have now been living beyond our means for so long that we consider it to be completely normal.

Recap of Fiscal Year 2010 Budget Results - CBO Director's Blog - This morning, CBO issued its Monthly Budget Review, which summarized the end-of-year budget results reported by the Treasury for fiscal year 2010. In that year, which ended on September 30, the federal government recorded a total budget deficit of $1.3 trillion, $122 billion less than the deficit incurred in 2009. The deficit fell as a share of the nation’s gross domestic product (GDP) from 10.0 percent in 2009 to 8.9 percent in 2010—the second-highest deficit as a share of GDP since 1945 and about four times the average deficit as a share of GDP recorded between 2005 and 2008. The large deficits in 2009 and 2010 reflect a combination of factors: an imbalance between revenues and spending that predates the recent recession, sharply lower revenues and elevated spending associated with those economic conditions, and the costs of federal policies implemented in response to those conditions.

Budget Deficits and Trade Deficits: NYT Reporters Do Not Understand National Income Accounting - The NYT seems very concerned that the dollar will fall if the budget deficit is not reduced. Usually economists believe that a large budget deficit will increase the value of the dollar. The logic is that higher budget deficits are believed to cause higher interest rates, which makes holding bonds and other dollar denominated assets more attractive. This is how a budget deficit can cause a trade deficit. The mechanics of this process are somewhat dubious in that there is very little relationship between budget deficits and trade deficits. However, there is a relevent accounting identity which is always true. The trade surplus is equal net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity. This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

Peterson Foundation to Launch ‘OweNo’ Anti-Deficit Ad Campaign - Pete Peterson

, the financier and former Commerce Department secretary who has become one of the most prominent proponents of reducing the deficit, is optimistic that public pressure stirred by his foundation, among other things, will prod politicians to tackle the nation’s looming fiscal problems. “My confidence, I guess, is measured partly by my putting my money where mouth is,” he says. “It’s a good place to invest money.” The Peter G. Peterson Foundation, which he started, has spent $50 million in the past two years and has 18 employees. On Tuesday, the foundation is launching a multimedia national advertising campaign dubbed “OweNo.” The aim, he said in an interview Friday, is to make the threat of unrestrained deficits tangible to ordinary Americans. “While they are very anxious and fearful about our long term future, they don’t know the specifics and what it means to them as individuals.”

A Visual History of U.S. Government Deficits - A number of my readers are claiming that the only reason Obama is running such a big deficit is that revenue has collapsed. I don't see that in the data: These figures are in constant dollars, so they're unaffected by inflation/deflation, or the collapse in GDP; they're simply an assessment of the absolute increase in spending compared to taxes. As you can see, there's a huge increase under Obama--that huge upslope is the change between 2008 and 2009 spending levels.  To be sure, some of that is attributable to Bush. But most of TARP is turning a profit, funneling money back into the treasury; the actual net cost of TARP in FY2009 was $154 billion, but $108 billion is expected to be returned to the treasury in FY2010. If treasury ultimately loses money on the program, that will be mostly due to Obama's innovations like the auto bailouts. Then there's the $800 billion stimulus package, and assorted emergency spending.

Auerback: On McArdle’s Fuzzy Deficit Accounting - There are plenty of legitimate reasons to criticize Barack Obama’s dismal stewardship of the US economy, and God knows I’ve voiced quite a few of them, but it does not follow that every criticism made of his economic policies is therefore legitimate.  There is quite the misleading sleight of hand in a Megan McArdle post yesterday, “ A Visual History of U.S. Government Deficits“. She starts by invoking her readers to set up a straw man argument: A number of my readers are claiming that the only reason Obama is running such a big deficit is that revenue has collapsed. I don’t see that in the data: This “revenues have collapsed” as the sole and therefore supposedly bogus rationale for the growth in deficits is a distortion, pure and simple. While it is clear revenues fell sharply, if you read any serious account of this financial crisis (including from economists who take umbrage at large deficits relative to GDP, such as Carmen Reinhart and Kenneth Rogoff, to the Bank of England, and the IMF), they all contend that the overwhelming reason for the fiscal deficits blowing out was direct budgetary effects of the crisis, with bailouts and stimulus program playing comparatively small role. So how do we square that with the McArdle chart? Because most of that increase in spending that she blames on Obama was not discretionary.

Phony “Fiscal Conservatives” – In The Midterms And Beyond - Should we take seriously people who, in the current US political debate, argue that they are “fiscal conservatives”?  No. These self-labeled conservatives are very far from even being willing to discuss the real issues – let alone make proposals that would have significant effects.  As Peter Boone and I argue on Bloomberg this morning, US “fiscal hawks” are just pretending.  Perhaps this will prove effective in the midterm elections, but then they will face the music – what exactly will they put on the table that will make any difference at all? Unless and until you are ready to really reform the financial sector, you cannot be taken seriously in the fiscal space.  It’s the big banks that blew up the economy, caused a devestating recession, and pushed up debt by 40 (forty) percentage points relative to GDP.  None of today’s “fiscal conservatives” showed up to work hard on constraining global megabanks over the past 18 months.  They have repeatedly and explicitly earned the right not to be taken seriously.

U.S. `Fiscal Hawks’ Mimic France: Peter Boone and Simon Johnson – The sharp budget cuts announced in the U.K. last month have people asking: could the U.S. soon take similar steps?  The two countries share some key problems, including the aftermath of a housing bust, overreliance on high-risk financial services, and government debt levels approaching the danger zone. Self-proclaimed fiscal conservatives also are likely to make a strong showing in midterm elections.  But there is a world of difference between the nations’ fiscal situations. The British, who are front-loading their cuts and may be overdoing it, are explicitly recognizing the extreme damage and future dangers to society inherent in their banks.  In contrast, our fiscal conservatives are much more French- like than British. Like President Nicolas Sarkozy, we have some politicians willing to make a fuss about tinkering around the cosmetic edges of our persistent deficits, but no one is ready to address our core issue: the U.S. financial system blew itself up, leading debt relative to gross domestic product to soar by 40 percentage points, and now is poised to do the exact same thing (or worse) again.

US Elections: The Deficit Hawks Have Already Won - Austerity economics has won in Europe. But there is a mythology traveling around that the U.S., at least, has retained the Keynesian orientation that helped cut short an economy spiraling downward into full-fledged depression. Not so. The deficit hawks have also largely won in the U.S.  The announcement last week that GDP grew at an annual rate of 2 percent only brings the point home: the U.S. needs a serious fiscal injection quickly.  But it is not going to get it. A year and a half after the recession was supposed to have ended, GDP has still not reached its pre-recession peak of 2007, the longest such stretch in post-World War II history.  Unemployment stands at 9.6 percent and underemployment above 17 percent.  With such weakness, a substantial fiscal stimulus will likely have a high multiplier if it is designed correctly– aid to the states, unemployment insurance, some serious investment in infrastructure, and federal employment of idle workers. But the deficit hawks, backed by many millions of dollars from powerful interests, will hear none of this. They are using the sudden $1 trillion rise of the budget deficit to 10 percent of GDP as a way to rally fear. 

No, People Really Don't Care About The Deficit - Krugman - They sometimes say they do — but almost always it turns out that they really mean something else. Look at all the “fiscal hawks” who suddenly lose all interest in the budget balance when tax cuts are on the line. Also, you really have to understand that voters don’t have any clear idea of how big the deficit is, let alone what makes it go up or down. Here’s my favorite (well, one of my favorite) Larry Bartels results, about views of the deficit in 1996, after Bill Clinton had already presided over a huge improvement in the budget picture: Yep, a plurality of voters — including a majority of Republicans, and a third of Democrats — thought the deficit had gone up. If Obama somehow eliminated the budget deficit over the next two years, not only would he get no credit, Republican voters would go to the 2012 polls believing that the deficit had continued to soar.

Paul Ryan Is Not A Fiscal Conservative - Simon Johnson - Writing in the Financial Times today, Paul Ryan – the incoming chair of the House Budget Committee – presents himself as a fiscal conservative, primarily focused on bringing the budget deficit and government debt under control.  He is not. Only in American could self-styled “fiscal conservatives” say that “America is eager for an adult conversation on the threat of debt,” but then decline to discuss the first order problem that has brought us here and threatens us going forward: Dangerous systemic risk brought on by the reckless behavior of big banks.  No “fiscal conservatives” showed up for the legislative fight to rein in big banks – none, and now Spencer Bachus says that restrictions on big banks should be further lifted (quoted in the FT today, p.15). We can reasonably draw only one conclusion: Paul Ryan and his colleagues are not real fiscal conservatives.  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.

The First Task for the House Republicans -- Define a Good Budget Deficit - What I had on my mind heading into the election was this column by Paul Krugman from Sunday, "Mugged by the Debt Moralizers."  Consider this passage, in particular: So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang. I am in firm agreement on the first point.  In fact, it would be hard to find someone who called for more spending than I did any sooner than I did.  (Nice summary here.)  I was expressing support for "building while it's cheap" while many of the rest of the experts were advising "timely, targeted, and temporary."  I was still advocating for it while they were having esoteric arguments about the relative size of this multiplier or that.  Don't they wish that they had commissioned all of those non-shovel-ready projects in January 2008 or February 2009?  Our biggest mistake with fiscal policy has been that we constrained our 3-year options to be a series of 1-year options.

Tough Spending Cuts Ahead (VIDEO) David Stockman, President Reagan's budget director, tells Lesley Stahl that even if the government raises taxes on the rich and everyone else - some tough spending cuts will have to be made. “Were going to have to dramatically scale back defense. We’re out of the imperialism business.   We’re out of the world policeman business.  We can’t afford it and there has never been a successful world.

AC and Fareed Expose Why We’re “Toast” - Now that the election’s over we’re just waiting to hear about how the new Congress and a humbled (or “shellacked”) President are actually going to fix our economic problems.  CNN’s Fareed Zakaria offers a lot of wisdom to the question “Can Obama and the GOP really cut the deficit?” (emphasis added):“I think frankly things look very bad in terms of America’s ability to solve some of its problems,” Zakaria told CNN. “We have very serious problems that are going to require a kind of set of comprehensive solutions. There are compromises out there to be made, Republicans have to concede some on taxes, the Democrats have to concede some on spending, and you could put together a package, in which both sides would get something, but not everything.“The problem is the political system right now doesn’t seem to function in a way where either side can accept compromise. If that produces gridlock and paralysis the problem is we really move into a fairly unsustainable fiscal situation.”

Hayek and Keynes Battle at The Economist’s Buttonwood Gathering -  On October 25th, an audience of financial managers and CEOs, politicians, central bankers and Nobel Prize-winning economists at The Economist’s Buttonwood Gathering were treated to an unusual experience: a live rap battle between John Maynard Keynes and F. A. Hayek.

Rubin’s unhelpful fiscal exhortations - No sooner do I agree to start blogging more about economic journalism than I find this op-ed from Robert Rubin in the FT. It’s a pretty sorry specimen, and I do hope it’s not representative of the genre. The op-ed, which is written in borderline-unreadable technocratese, has a simple structure: there are headwinds in the economy. What should we do about them? Spending more might be problematic. Expansionary monetary policy likewise. So what should be done? The administration should be more business-friendly. And it should put together a “serious fiscal plan”. Rubin is long on assertion and scaremongering, and short on actual argument:

Economic stimulus--the right and the wrong of it - Clearly, for ordinary Americans, the US economy is still in a funk from the financial crisis caused by the housing boom funded by the easy credit of turnover securitization of mortgage loans, coupled with the casino banking mentality spurred by proprietary trading and naked credit default swap bets. (The wealthy, on the other hand, seem to be recuperating nicely, thank you, or at least still spending on luxury goods. See Even in Moribund Economy, Wealthy Spending More on Travel, Luxury Goods, Kiplinger, Sept. 24, 2010.) The political parties have two very different answers to resolving this ongoing economic crisis for ordinary Americans.

David Broder Calls for War With Iran to Boost the Economy, by Dean Baker: This is not a joke (at least not on my part). David Broder, the longtime columnist and reporter at a formerly respectable newspaper, quite explicitly suggested that fighting a war with Iran could be an effective way to boost the economy. Ignoring the idea that anyone should undertake war as an economic policy, Broder's economics is also a visit to loon tune land. Sorry Mr. Broder, outside of Fox on 15th the world does not work this way. War affects the economy the same way that other government spending affects the economy. If spending on war can provide jobs and lift the economy then so can spending on roads, weatherizing homes, or educating our kids. Yes, that's right, all the forms of stimulus spending that Broder derided so much because they add to the deficit will increase GDP and generate jobs just like the war that Broder is advocating (which will also add to the deficit). So, we have two routes to prosperity. We can either build up our physical infrastructure and improve the skills and education of our workers or we can go kill Iranians. Broder has made it clear where he stands.

Washington Post Idiocy: Calls for War With Iran to Save America’s Economy - As many writers have documented, the corporate media is usually pro-war. See this. And so Washington Post hack David Broder’s op-ed arguing that war with Iran will save America’s economy is not all that surprising. Of course, China and Russia might not sit idly by and let their ally, Iran, be attacked. So there’s the wee complication that bombing Iran could start WWIII. And, of course, attacking Iran would increase the level of terrorism. But forget politics and national security. Broder is also plain wrong on the economics. In a blog entry entitled “Has David Broder Lost His Mind?,” Foreign Policy managing editor Blake Hounshell writes that Broder’s proposal is “crazy for a number of reasons.”

World’s richest man tells U.S. to sell assets – The U.S. government needs to consider selling assets to boost the economy and reduce the deficit, Mexican billionaire Carlos Slim said Friday. “Most aggressive monetary and fiscal policies are not enough,” Slim said at the George Washington University Global Forum in New York City. “They are temporary measures.” Mr. Slim, ranked the world’s richest man by Forbes magazine, controls Telefonos de Mexico SAB, the nation’s largest landline phone company, and is an investor in the New York Times Co. The global financial crisis is a sign that governments must rein in debt, Mr. Slim said. Fiscal and monetary policies are only “temporary medicine” and won’t help economies return to growth, he said.

Selling Off The National Parks - I must admit that some days it hardly seems worth the effort to get out of bed. I've suffered from intermittent bouts of depression all my life, but as the years go by, I've gotten used to the gathering storm. I batten down the hatches and ride it out. The emotional storm weakens, the clouds break up and the danger passes. More and more, I've come to realize that—at least for me—depression is simply an understandable, appropriate reaction to an insane, deteriorating world. There's no shame in it. I was having a very bad day when I turned on the TV and switched over to the The Gambling Channel (aka. CNBC) to see how the markets were doing. A few seconds after I put it on, I found myself watching the next segment in their What If series, and a few minutes after that, suicide did not seem like such an unreasonable option. Erin Burnett led a discussion of how much we could pare down the deficit or pay other government expenses if the Federal Government sold off all the National Parks and Monuments, meaning if we auctioned off Yellowstone, the Grand Tetons, Rocky Mountain, Sequoia, the Great Smoky Mountains, the Great Sand Dunes, the Grand Canyon, Glacier, Bryce Canyon, Big Bend, Badlands, Arches and all the other irreplaceable National Parks to condo developers or other scoundrels who can't find useful work.

Republicans List Big Goals on Budget and Economy - — Republican leaders in Congress are preparing to take power in two months with ambitious and sometimes contradictory goals for economic and fiscal policies, leaving little common ground with President Obama and much uncertainty about the potential impact on the nation’s problems.  Republicans are standing by their campaign vows to slash spending for domestic programs immediately by at least one-fifth — $100 billion in a single year — even as many mainstream economists say such deep cuts could further strain the economy and should await its full recovery. In policy documents, including a blueprint this week from Representative Eric Cantor, the likely Republican majority leader in the new Congress, the party has made clear that its main proposals for creating jobs are to cut regulations and taxes — in particular to make the Bush-era tax cuts permanent for all incomes. Extending the tax cuts, however, would add nearly $4 trillion to the debt by 2020, and hundreds of billions more in interest owed for the additional government borrowing, greatly complicating another Republican goal: balancing the budget.

Be Careful What You Wish For – Mauldin - Long-time readers know I am a Republican, but I offer some sobering advice to my friends on my side of the aisle: Be careful what you wish for. It’s one thing to get a few votes. It’s quite another to live up to promises that simply can’t be kept. We will start our analysis by looking at the GDP numbers that came out today, and we will end by pointing out that there will be no easy choices. The GDP number came in at a rather soft 2% growth, up slightly from last quarter’s 1.7%. From the standpoint of creating new jobs, 2% just doesn’t cut it.  In every previous post-recession cycle, GDP growth would typically be around 5% at this time. But this is not a business-cycle recession; it’s a deleveraging, credit-crisis recession. Thankfully, those do not show up all that often, but sadly one has come home to roost in much of the developed world this decade. The aftermath of credit-crisis recession is a slow growth period of 6-8 years, punctuated by more volatility and more frequent recessions.

We've voted. What's next for the economy? - With the two chambers of Congress split between Democrats and Republicans, the conventional wisdom likely to be repeated over the next few weeks is that political gridlock is good for the economy. While often true, that is not the case today.  Such thinking is based on the view that political gridlock inhibits or paralyzes economically unproductive government actions. With government out of the way, it follows that the private sector can allocate capital to the most productive uses.  But this view is most applicable to a private sector that is in good shape - businesses and households with robust balance sheets, positive cash flow and access to credit. In such a world, the path of least resistance translates into higher economic growth and jobs. For too many segments of our society, the ability to spend and hire is constrained not by questions of willingness but, rather, by stubbornly high unemployment, annihilative debts and, in some cases, concerns about losing one's home. As a whole, the United States is still overcoming the legacy of years of over-leverage and misplaced confidence that consumption can be financed by borrowing rather than earnings. The resulting debt overhangs act as strong headwinds to growth and employment generation.

The Republican Recipe for An Anemic Economy - Robert Reich -The real message from voters was “Fix this stinking economy.” But Republicans have no intention of doing so. With Republicans in control of the House, forget spending increases or tax cuts to stimulate the economy. Republicans don’t believe in stimulating economies. They think markets eventually clear — once the pain is sufficient. Or in the immortal words of Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.” Of course, Mellon was dead wrong. Nothing was purged. Instead, the economy sunk into deeper and deeper depression. So how do we get out of this bog?

The Mantra For 2011-12: Gridlock, Stalemate, Shutdown - I'll have much more to say about this when the dust settles in the next 24 hours or so. But nothing happened yesterday to change my mind that we'll all be using the phrase "gridlock, stalemate, shutdown" so often over the next two years that we'll sound as if we're chanting. The bottom line:

    • 1. Unless the White House is willing to capitulate completely, fiscal policy simply won't be available to deal with the economy.
    • 2. We need to hope (prayers might also be useful) that the monetary policy options available to the Federal Reserve will be far more effective than many think they are going to be.
    • 3.  The biggest fights in Washington over the next two years will be over anything having budget implications.  These are likely to be epic battles with religious fervor the likes of which haven't been seen in Washington since prohibition.
    • 4.  Multiple government shutdowns will be threatened; more than one is likely to occur.
    • 5.  It's not at all clear that financial markets have priced in the disruptions and extreme uncertainty that are about to occur.

Can The GOP Really Wait Until Next Year To Shut Down The Government? - Even though the smaller Senate GOP minority and House Republican majority won't officially be in place until January, the leadership will be facing a very difficult decision over federal spending in less than a month when the the current continuing resolution -- which is funding all federal agencies and departments that operate with annual appropriations -- expires. That's the first point at which the GOP will have to face up to one of its most prominent campaign pledges: To significantly cut federal spending. The vote to extend the CR will be the first opportunity to face that challenge head on because it can be filibustered in the Senate. The Republicans there -- (Actually, all you need is one: Can you say Jim DeMint?) are in a position to prevent the current CR from being extended if the new version doesn't reduce spending to the level they want. It's certainly possible that the Senate GOP leadership will decide ... that they want to wait until their colleagues in the House are in the majority so that they can work together to cut spending...But there are four reasons why waiting isn't the best strategy.

Foreign Money, National Security, And The Midterm Elections by Simon Johnson - Campaign contributions by non-citizens are a huge issue lurking behind the midterm elections; they will be even more important in 2012.  Think about the economic dynamics: Irrespective of how you feel about foreign capital inflows in economic terms, you have to face the political reality.  As foreigners accumulate claims on the United States, they will increasingly diversify into corporate assets (in fact, this is the advice they get from their Wall Street advisers).  Some of these corporate assets explicitly come with voting rights – but those are supposed to be voting rights over the corporation (or investment fund), not voting rights in political elections. We have effectively enfranchised foreigners in US elections.  This is clearly and absolutely not what the drafters of the Constitutions had in mind.

Gridlock will be bad for America - The most important will be a switch in control of influential Congressional committees, giving rise to fears that the administration will soon be subjected to a stream of distracting, innuendo-filled investigations. America may be entertained both by the dizzying array of such political fireworks, and the perpetual tan Republican John Boehner will bring to the Speaker’s chair. But a rightward shift in policy is a virtual certainty. That said, neither party will be able to muster the votes needed to force through legislation. This was also true in the early days of Mr Obama’s administration, when a Democratic majority in the House routinely passed his proposals but he needed to convince a small number of Republicans to pass bills in the Senate. Now the tables will be reversed: Republicans will pass bills unloved by his administration, but Democrats will block them in the Senate.  Even though the president retains his ability to veto any legislation, the outcome of this mud wrestling match is hard to predict. A stalemate in which little happens is entirely possible, particularly as the nation’s eyes turn to the absurdly long run up to the 2012 Presidential race. Alternatively, Mr Obama could risk the enmity of the left, and tack to the right.

Making religion of economics - In the past month I have had a number of conversations with economists who belong to 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. In these conversations, I've noted the bizarre fact that members of the Pointless Pain Caucus occasionally make a sharp turn and say: "Well, if you really cared about reducing unemployment you would be lobbying for a reduction in the minimum wage!" Since almost all of our extra cyclically unemployed made significantly more than the minimum wage at their last job — and will make considerably more than the minimum wage at their next job — this line of argument has always struck me as strange.

One Person's Green Infrastructure Is Another's "High Speed Pork" - "High Speed Pork" is the heading on a column in yesterday's WaPo by the non-economist economics commentator Robert J. Samuelson, who is not related to Paul A. Samuelson or even the game theorist Larry Samuelson. He has decided that high speed rail projects in the US are not worth the money and should be cancelled. Drawing on a Congressional Research Service study, he argues that even the most beneficial of the 12 under consideration, between LA and SF in CA, is not worth it in terms of diverting either air or auto traffic, with the real problem of auto traffic being commuting, according to him, although it occurs to me that in the future such lines might also be used for freight, thus possibly taking some of the burden of trucking. He also argues that the green externalities are trivial, and that the only foreign lines making money are Tokyo-Osaka and Paris-Lyon. My guess is that overly high discount rates are being used for these calculations. I see many other countries building these, including China and into areas not all that heavily populated, and I see oil prices and externality costs rising in the future. I think investing in these projects is a good idea for the long term, with the US behaving abysmally shortsightedly on these matters, egged on by bozo RJS.

Can the Dude Abide? – Barack Obama became president by brilliantly telling his own story. To stay president, he will need to show he can understand our story.  At first it was exciting that Obama was the sort of brainy, cultivated Democrat who would be at home in a “West Wing” episode. But now he acts like he really thinks he’s on “West Wing,” gliding through an imaginary, amber-lit set where his righteous self-regard is bound to be rewarded by the end of the hour.  Hey, dude, you’re a politician. Act like one.  Reductio ad absurdum: After two years of taking his base for granted, the former Pied Piper of America’s youth had to spar with Jon Stewart to try to get the attention of young people who once idolized him.  Obama still has the killer smile, but he’s more often sniffy than funny. When Stewart called White House legislation “timid,” Obama got defensive and offered a less-than-thrilling new mantra: “Yes, we can but ...”  “We have done things that people don’t even know about,” said Obama, who left his Great Communicator mantle back in Grant Park on election night.

Time to Grow Up - Part of being mature is learning to live within boundaries.  No, not everything is possible.  Immature people like Bush II, Obama, JFK, and FDR tell us that we can have our cake and eat it too.  It is not an uncommon positions for assume, particularly when they can use a particularly large cohort of workers as a tool to sap revenue from, while not retaining the funds for retirement benefits. That said, I can look at the past and be a critic.  That’s easy, there have been real jerks that have milked our society, and retained a good name, though they robbed the future to pay the past.  It is criminal what municipal politicians have done, hiding behind high assumed investment assumptions, supported by brain-dead consultants who assumed markets are magic, and always provide high returns. But there are enough targets in the present.  The evil party, the Democrats, ignore the long run effects of their deficits, and ignore the entitlements crisis that will engulf the nation.  The stupid party, the Republicans, rolled over for the idiocies of Bush II, and ignored the long term effects of debts and entitlements.  But there is a new force of anger, the t-party.  And that is about all they have, is anger.  They want their taxes reduced, but don’t want large entitlement programs reduced, or defense.  They represent small-minded libertarianism.  I am an economic libertarian, but I recognize that my views mean real pain for many in the short run, though I think those policies will be best for all in the long run.

Repeat after me: tax cuts don't pay for themselves - Here is an interesting new U.S. site we've come across, I Heart Taxes. Take a look at it. (They do a nifty line in t-shirts too.) It, in turn, pointed us towards something else we have blogged extensively about: the widely peddled notion that tax cuts somehow pay for themselves. (Our recent exchange with MP Roger Helmer was our latest in that particular series.) Now we have the respected U.S. economist Mark Thoma weighing in:  Some Republican Senate candidates have suggested that extending the Bush tax cuts — which are scheduled to expire at the end of the year — will actually be good for the country’s bottom line, as the economic growth that results will more than offset the trillions of dollars in lost revenue. But, of course, the Bush tax cuts did not even come close to paying for themselves. The Bush tax cuts cost us around $1.7 trillion in revenue from 2001 through 2008, in part because of weak output and job growth following the cuts (contrary to assertions about how the tax cuts would stimulate economic growth).As for the cost of extending the tax cuts to the wealthy, the Tax Policy Center estimates that making all the Bush tax cuts permanent, as opposed to extending them only for the middle and lower classes, would cost $680 billion over the next decade. The disappointing part is that the press still lets them get away with this.

Tax Cuts to Dominate Lame-Duck Congress - The White House and Capitol Hill are preparing for post-election chaos over a host of unresolved economic issues, from taxes to jobless benefits, potentially prolonging what has been a lengthy period of uncertainty for taxpayers and businesses.The 111th Congress returns to Washington for its final session later this month with what will likely be a weakened president, shell-shocked Democrats and an emboldened Republican Party seeking to define a new political dynamic.  In this unpredictable environment, lawmakers must grapple with a looming tax increase for more than 150 million Americans and expiring unemployment insurance for two million. They also hope to vote on a bill to fund the government's operations through at least early next year. Almost all the decisions are expected to worsen the budget deficit—one area both parties have said needs to be addressed.

Detachment from Reality and Innumeracy as Impediments to Rational Discourse - Tax cut version - On several occasions, I have observed that it is difficult to debate policy when facts are in dispute, and some individuals are impervious to the revelation of data. I was recently reminded of this by reader tim kemper's repeated assertions that the "the 2001 act and 2003 act actually increased revenues" (3/1/10). Most recently, he repeated that assertion (on 10/31) and linked to this source as proof of his assertion that tax cuts raise revenues, without realizing that the series he was pointing to was total (not just income tax) revenues, and not seasonally adjusted. Below is the actual evolution of personal income tax receipts both before and after the EGTRRA (the 2001 Bush tax cut).

As Bush Tax Cuts End, Some Options for Congress -The Bush tax cuts expire in 58 days. If Congress does not take action before then — Dec. 31 — taxes will go up for nearly all households. That has the potential to cause both political and economic problems. So Congress, even a lame-duck, repudiated Congress, is likely to act.  But what will it do?  Given the mood of the voters, the outcome will probably be closer to the Republicans’ wishes (extending all the tax cuts) than President Obama’s (extending all the cuts for households making less than $250,000 a year while allowing most of the cuts for households above that threshold to expire). Yet Democrats may still have enough sway to force some negotiation.  Here are five compromises worth considering, on what will be the first big order of business for Congress after the election:

Extend the Bush Tax Cut to the Bottom 99 Percent Only - Robert Reich - Expect the President to be under more pressure to give in to Republican demands that the Bush tax cut be extended to everyone — not just the bottom 98 percent but also the the top 2 percent, earning over $250K. He should respond by offering this olive branch: Extend the Bush tax cuts to the bottom 99 percent — to families earning less than half a million dollars. But not to the top 1 percent. The top 1 percent now gets almost a quarter of the nation’s total income — a larger share than at any time since the 1920s. The top 1 percent have also received about 40 percent of the benefits of the Bush tax cuts. The “Not for the Top 1 Percent” olive branch will draw a clear line in the sand. If Republicans won’t accept the offer, let them threaten to raise everyone else’s taxes in order to get a sweet deal for their patrons at the very top

Merely Affluent vs. Truly Rich - NYTimes - Most people know that the top income tax rates used to be much higher than they now are. What’s much less known is that the top brackets started at much higher income levels than today’s top brackets do. In other words, the tax code used to draw sharper distinctions between the merely affluent and the truly rich. In 1960, the top tax bracket — with a marginal rate of 91 percent — started at $400,000, which is the equivalent of almost $3 million today, as I mentioned in my column this week. These days, the top bracket starts at just a small fraction of $3 million: $373,650. As Bruce Bartlett has noted, inflation has warped our understanding of just how high those old cutoffs were: “High tax rates in the past that appear to apply to low incomes actually applied to incomes that were much higher in real terms.” In 1970, the top bracket started at $1.1 million in today’s terms ($200,000 in 1970 dollars). In 1980, the top threshold was $571,000 in today’s terms. Since the early 1990s, the cutoff has been roughly where it is now, adjusted for inflation. If anything, the argument for having higher tax rates on the very rich is stronger today than it was in the past, given how much larger a share of income they earn.

Obama open to discussing ‘broad’ tax cut extension for rich -  President Barack Obama is open to the idea of discussing an extension of Bush-era tax cuts for all income levels, the White House said on Thursday.Two days after congressional elections, White House spokesman Robert Gibbs signaled that Obama might consider a compromise with Republicans that would keep tax breaks not only for the middle-class but for wealthier Americans as well. "He'd be open to having that discussion and open to listening to what the debate is on both sides of that," Gibbs told reporters. "Making those tax cuts for the upper end permanent is something that the president does not believe is a good idea," Gibbs said. He said he believed the discussion would take a large part of the final weeks of this year's U.S. congressional session. The White House said the tax discussion would also be a main topic in the meeting on November 18 that Obama will host at the White House with Democratic and Republican congressional leaders

Taxation: You can't get something for nothing - Yet unsurprisingly, many of the people subject to higher taxes did not support the proposition. She spoke to a few entrepreneurs. They suggested that higher taxes might change their behaviour or even provoke them to leave the state. A credible threat? There is not much evidence that work hours decrease with higher taxes (at least for men). The evidence is mixed about how much taxes encourage movement across states. Outgoing former New York Governor David Patterson, remarked on how high earners do leave the state when taxes increase. But generally, state taxes are only part of the equation for business owners, and housing costs and proximity to a viable labour pool are also important. Progressive taxation has many advantages; indeed the rich feel less pain from a higher tax rate than the poor and middle class. But it is also true that large jumps in the marginal tax rate have undesirable and distortionary effects—especially at the margin.This is why consumption taxes make more sense. High marginal income taxes punish work and success. Why not tax consumption—something we are should be doing less of anyway? It is even possible to tax luxury goods at a higher rate, which makes consumption taxes more progressive. But alas, while there has been excellent commentary on instituting a VAT, no serious proposal has been considered by the government.

The Tax Increase No One’s Talking About - Congress and the administration have been arguing for months over extension of the Bush tax cuts:  But nobody’s talking about the nearly $80 billion hit that expiration of the 2009 stimulus bill will inflict. The stimulus bill (the American Recovery and Reinvestment Tax Act of 2009) provided $287 billion in tax cuts for 2009 and 2010 but most provisions expire at the end of this year. (Congress extended some of the business tax cuts during the summer.) The big kahuna is the Making Work Pay credit—nearly $60 billion a year going to most workers—but partial exemption of unemployment compensation, expansion of EITC and education credits, and greater refundability of the child credit deliver nearly $20 billion more. Taxes will jump for more than 95 percent of Americans when those cuts evaporate come January.  Why does a $68 billion tax increase on wealthy taxpayers throw Congress into total gridlock but no one mentions a tax hike almost 20 percent bigger?

Abolition of the Corporate Income Tax -Megan McArdle has a good post on her case for abolishing the corporate income tax. I say "good," not "excellent," because, in the midst of a comprehensive though succinct analysis, she doesn't get the issue of incidence correctly. She starts out fine, pointing out that the legal incidence--who pays the tax--is different from the economic incidence--who ultimately bears the burden. But then she doesn't pursue that and writes as if she thinks that shareholders bear the burden. We don't know for sure who bears the burden but the larger the elasticity of the supply of capital to the United States, the lower is the percent of the burden borne by shareholders. See Harvey Rosen's and Ted Gayer's Public Finance text for a nice discussion of that. The entry in the Concise Encyclopedia is a nice discussion but doesn't mention the international mobility of capital, which is a good bit higher than it was when many of the burden studies were done in the 1960s and 1970s.

Just Say No - Yesterday was election day, and while tax and spending themes played a role in congressional and gubernatorial contests, voters in many states also got to weigh in on budget issues directly. There were about a hundred ballot initiatives affecting state budgets, some increasing states’ abilities to raise revenues or determine spending levels and others curtailing them. For better or worse, in most cases the voters said no and the status quo remained. As the New York Times’ David Leonhardt writes, “voters mostly chose the status quo, rejecting measures that would have raised new taxes but also those that would have repealed existing ones.” Most ballot measures that would have drastically curtailed tax revenues went down to defeat. Colorado rejected the three tax initiatives that would have slashed revenues and crippled state and local government but would have restored the state’s place at the top of the anti-tax heap. Massachusetts voters rejected halving the state’s sales tax, but did get to let off some steam by repealing a sales tax on alcoholic beverages amidst threats of people driving up to New Hampshire to buy their booze.

What Impact Will the Election Have on Financial Reform? - There's been a lot of talk today about how the election will affect financial regulation. I don't think there's much to worry about for the next two years (though if big holes in regulation are discovered they will be difficult to plug), but there may be more to worry about over the longer term both in terms of enforcement and the rollback of new regulation. Here's part of what I said about this yesterday at MoneyWatch: What Impact Will the Election Have on Financial Reform?: How will the takeover of the House of Representatives by Republicans affect recent regulation to reform the financial sector, in particular the Dodd-Frank bill and the recent Basel III agreement. Since the Senate remains in Democratic hands, we shouldn’t expect any significant changes to the Dodd-Frank bill, particularly since Obama would likely veto any attempts to significantly alter the bill if it somehow reached his desk. But the election does bring to mind questions about potential changes in financial regulation over the next few years, and over the longer-run, particularly if this is a sign of larger Republican gains in the future.

The Volcker Rule After the Midterm Elections - Simon Johnson - The Obama administration saved the deeply troubled megabanks in the United States in early 2009 with a bundle of rescue measures that, compared with similar financial crises elsewhere, stands out as extraordinarily generous — particularly to the bankers at the epicenter of the disaster. The banks responded to this magnanimity with — by all accounts — extraordinarily generous support for the Republicans leading up to this week’s midterm elections. Why would they do this? The answer is straightforward: The Republicans have promised generally not to tighten restrictions on the financial sector, which means specifically that they will seek to make the recent Dodd-Frank financial regulatory legislation less effective.The Dodd-Frank Act is not strong legislation to start with. The administration started with overly modest goals, and the banks then devoted considerable effort to weakening the bill as it passed through the House. But some pieces that survived have the potential to make a difference — including the Volcker Rule, which in principle would force big banks to get out of the business of betting their capital in ways that can bring down the entire financial system.

Konczal: Make Your Voice Heard with a Comments Submission for the Volcker Rule - You may not be a lobbyist, but you can still make a difference in FinReg. Just a reminder: this Friday, November 5th, 2010, is the last day to submit comments on the Volcker Rule. Here is the website for this, “Public Input for the Study Regarding the Implementation of the Prohibitions on Proprietary Trading and Certain Relationships With Hedge Funds and Private Equity Funds.” The rule-making and comment period is going to represent the best form of democracy we’ll have in this process. Granted, banks have expensive lawyers on retainer to submit comments for them. But everyone out there, including those in my audience with expertise and the ability to write something like this, can do so. And their comments will at least get a shot at being as influential as a senior lobbyist.

The Volcker Rule under threat - Kevin Drawbaugh has obtained a letter from Spencer Bachus, the probable new chair of the Financial Services Committee, to Tim Geithner. And it turns out that Bachus is no fan of the Volcker Rule: If the Volcker Rule’s prohibitions are expansively interpreted and rigidly implemented against U.S. institutions while other nations refuse to adopt them, the damage to U.S. competitiveness and job creation could be substantial… I strongly recommend that your study of the Volcker Rule take account of how trading activities fit into the core business plan of global banks, as well as the consequences for U.S. banks and the banks’ clients of prohibiting those activities in the U.S. while they continue to be permitted everywhere else in the world. This might well presage a significant weakening of the Volcker Rule, which curtails banks’ proprietary trading and tries to limit their growth, and was introduced into Dodd-Frank very late in the game, reportedly over the objections of the more technocratic members of the White House economic team, including Geithner himself. You might recall Geithner standing well off to the side, with a miserable expression on his face, the day that Barack Obama announced the rule. You might also recall a letter that Geithner sent to Rep. Keith Ellison in January.

Is Financial Innovation Over? - For former Federal Reserve Board chairman Paul Volcker, this year’s landmark financial legislation was mildly disappointing. The bright-line separation of traditional banking from riskier trading activities that he had been stumping for — the Volcker rule — got watered down.  Most memorably and pointedly, Volcker proclaimed the automated teller machine the greatest financial industry innovation of recent decades. Dismissing much of the inventiveness that produced securitizations and derivatives in their many flavors, automated market mechanisms and an explosion of investment choices, Volcker groused in a London speech last December, “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth.”  The sitting Fed chairman, Ben Bernanke, concurred during recent congressional testimony, conceding, “Financial innovation is not always a good thing.” The upshot of the recent wave of creativity, he said, was too often “to take unfair advantage rather than to create a more efficient market.”

Derivatives Still Special After Overhaul -  Derivatives are like other contracts, only more so. In bankruptcy, counterparties are not prohibited from terminating their derivatives contracts or from “foreclosing” on collateral they hold in connection with those contracts. They are also not prohibited from doing these things on the eve of bankruptcy. This makes derivative counterparties special. In the financial crisis, this special treatment of derivatives under the Bankruptcy Code played a central role. Just before and after Lehman Brothers’ Chapter 11 filing, parties rushed to close out their derivatives with the investment bank. Bigger players terminated all their contracts with Lehman, leaving one “net” claim. Those lucky enough to hold collateral could take this collateral to cover their claims. New trades were entered into, new collateral was bought and sold, and the derivatives markets experienced several days of extreme turbulence. American International Group’s downward spiral was also influenced by the special treatment of derivatives, inasmuch as parties knew that their demands for ever-increasing amounts of collateral could never be questioned if A.I.G. ended up in bankruptcy court. Moreover, bankruptcy was made less attractive to A.I.G. by the knowledge that it would do little but accelerate the dismemberment of its Financial Products unit. A repeat of the dislocation of the derivatives markets, so recently experienced in Lehman, also made a bankruptcy filing unattractive to regulators.

How to spot a recession scam –There's an art to conning people. That's why they're called scam "artists." The successful ones skate right up to the edge of the truth, capitalizing on people's awareness of certain programs, trends or developments -- and people's limited understanding when it comes to the details.Toss in a recession that changed many of the rules and made more people financially desperate, and scam artists are having a field day. Here's one example: Most people know President Barack Obama pushed an economic-stimulus package worth hundreds of billions through Congress last year. So the con artists will tell you some of it could be yours, if you just pay an upfront fee to them to process your "application" for a "stimulus grant."   In normal times, you might be suspicious of the idea that the government would just hand you cash. But didn't you get a rebate check from the Internal Revenue Service a couple of years ago? And didn't Wall Street get a huge bailout? Maybe there's something to this . . .

Consumers’ right to file class actions is in danger - It hasn't gotten a lot of press, but a case involving AT&T that goes before the U.S. Supreme Courtnext week has sweeping ramifications for potentially millions of consumers. If a majority of the nine justices vote the telecom giant's way, any business that issues a contract to customers — such as for credit cards, cellphones or cable TV — would be able to prevent them from joining class-action lawsuits. This would take away in such cases arguably the most powerful legal tool available to the little guy, particularly in cases involving relatively small amounts of money. Class-action suits allow plaintiffs to band together in seeking compensation or redress, thus giving substantially more heft to their claims. The ability to ban class actions would potentially also apply to employment agreements such as union contracts.

The White House Needs Elizabeth Warren, Now More Than Ever - Simon Johnson - The White House today is under pressure, with insiders asking: After the strong showing of the Republicans in the midterm elections, should the president move to the right or to the left? This is entirely the wrong way to think about the problem – the administration needs to get beyond its mental framework of early 2009, which led it sadly astray with regard to the financial sector.  The President needs to find people and themes capable of cutting across the political spectrum; specifically he needs to promote strongly the ideas of Elizabeth Warren – what we need in financial services, above all else, is much more transparency. The premise – and central mistake – of the Obama administration in 2009-10 can be summed up in what the president said to leading bankers on that fateful day, March 27, 2009: “My administration is the only thing between you and the pitchforks”. A lot of pitchforks ended up being paid for by the 13 Bankers, in various forms (e.g., Chamber of Commerce; American Financial Services Association).

Elizabeth Warren: Too Bold to Fail? [VIDEO] - It's Elizabeth Warren's first day in the new offices. The walls are bare. The chairs still have manuals attached to them. The pungent odor of new carpeting permeates the entire fifth floor of the downtown Washington office building that houses the under-construction Consumer Financial Protection Bureau (CFPB) that Warren is putting together in her dual position as an adviser to Treasury Secretary Tim Geithner and an assistant to President Barack Obama. The new agency's 54 staffers are still learning how to navigate the maze of cookie-cutter cubicles. Warren, the straight-talking and populist-minded 61-year-old Harvard law professor who until recently headed the Congressional Oversight Panel monitoring the TARP bailout, is on a conference call with the CEO of a major financial institution. In her first weeks on the job, she has been checking in with the titans of finance—the too-big-to-fail guys—to discuss the initial initiatives of the CFPB.

Are Treasury’s Knives Coming Out Against Elizabeth Warren? - After several weeks of officially pleasant interactions, signs are emerging that the Treasury Department’s knives may be coming out against Elizabeth Warren. In recent weeks, Treasury officials have leaked details about Warren to Politico as part of what appears to be an effort to paint her as some kind of prima donna. These relatively silly stories raise troubling questions, however, about what Treasury officials may be leaking with fewer fingerprints and greater ramifications.  The Politico pieces have been petty, but there’s no doubt they both came from Treasury. On Oct. 12, Politico ran a piece featuring this anonymous nugget (among others):…..If Treasury is indeed behind the Date hit-piece, there could be no real question about Geithner’s machinations. Trash-talking Warren, her top advisers and the CFPB itself would be an unmistakable effort to compromise the entire enterprise. If it worked, Geithner could deny Warren the formal nomination as CFPB director, Warren would go the way of Brooksley Born, and less consumer-friendly officials could quietly crush the young agency.

U.S. in the Background in Basel Regulatory Debate - While U.S. financial policy makers are up to their ears in the Dodd-Frank Act rule-writing process, and with the political class preoccupied with the power shift in the midterm elections, critical voices from overseas have taken control of the continuing – now largely retrospective – debate over regulatory reform. The criticisms take aim at the recently adopted Basel III bank capital standards, and coming as they do from the likes of Mervyn King, governor of the Bank of England, they are very different from the complaints of prominent bankers who have contended that higher capital requirements will constrain lending and forestall economic growth.  International regulators, led by the Basel Committee on Banking Supervision, have done their best to refute such arguments, while giving the industry until the beginning of 2019 to adjust fully to the new rules.

Beyond Bretton Woods 2 - WHEN the leaders of the Group of Twenty (G20) countries meet in Seoul on November 11th and 12th, there will be plenty of backstage finger-pointing about the world’s currency tensions. American officials blame China’s refusal to allow the yuan to rise faster. The Chinese retort that the biggest source of distortion in the global economy is America’s ultra-loose monetary policy—reinforced by the Federal Reserve’s decision on November 3rd to restart “quantitative easing”, or printing money to buy government bonds (see article). Other emerging economies cry that they are innocent victims, as their currencies are forced up by foreign capital flooding into their markets and away from low yields elsewhere. These quarrels signify a problem that is more than superficial. The underlying truth is that no one is happy with today’s international monetary system—the set of rules, norms and institutions that govern the world’s currencies and the flow of capital across borders.

The GFC zombies that walk among us - Ideas are long lived, often outliving their originators, and taking new and different forms. Some ideas live on because they are useful, and become more so as they develop. Others die and are forgotten. But even when they have proved themselves wrong and dangerous, ideas are very hard to kill. Even after the evidence seems to have killed them, they keep coming back in zombie form. It is clear that there is something badly wrong with the state of economics. A massive financial crisis developed under the eyes of the economics profession, and yet most failed to see anything wrong. Even after the crisis, there has been no proper reassessment. Too many economists are continuing as before, as if nothing had happened. Already, some are starting to claim that nothing did happen, that the global financial crisis and its aftermath constitute a mere “blip” that should not require any rethinking of fundamental ideas. A simple return to traditional Keynesian economics and the politics of the welfare state will not be sufficient. It is necessary to develop theories and policies that respond to the realities of the 21st century economy.

It’s not the economists, it’s the economics - There’s been some interesting discussion in response to my earlier post about why we expect too much from economists, although a lot of the comments miss my larger point. What I was trying to say is that economics might not entirely be up to the task of explaining what we generally consider to be economic phenomena because we are overconfident about what the discipline has the ability to account for. You might call this the Freakonomics Fallacy: we think economics has all the answers because economics has become our major mode of understanding the social world around us. Charities are social businesses. Policy makers are cost-benefit analyzers. Education is a market. This has not always been the case. In earlier eras, we were often more likely to understand human behavior and social dynamics through other prisms, such as political science, sociology, psychology, anthropology or biology. Indeed, for better or for worse, many of these fields took a turn being the dominant social science. I’m not saying that one frame gives a more accurate or useful picture of the world than another. Just that each leads to a different way of understanding why things happen the way they do because each comes with its own set of assumptions and simplifications.

Summers’s incentives - This blog became a locus, in my absence, for a fascinating debate about economics and economists, which wended its way from David Segal to Stephen Gandel to Barbara to Justin to Brad DeLong and back to Barbara again. My favorite part of the discussion was Brad’s response to Justin. Justin made a simple point: the central tenet of economics is that incentives matter, and financial incentives in particular; economists get paid lots of money by financial institutions; and yet they get strangely touchy when anybody links these two facts. Justin had John Cochrane in mind as the strangely touchy economist, as following his link would have shown, but Brad thought he was the person being referred to, and launched into a defense of Larry Summers and his response to Raghu Rajan at the 2005 Fed meetings in Jackson Hole. Here’s Paul Krugman on the debate in question:

So Long, Tim Geithner - CNBC - There will be heavy pressure from within the Democratic party for the Obama administration to make changes that will both publicly mark a change of direction for the administration and privately send a message to party insiders that the White House is accepting its share of the blame for the loss of the House of Representatives.  Geithner is a clear candidate to play the fall-guy. In exit polls, six in 10 voters said the economy is the nation's No.1 problem. Around four in 10 believe their family's financial condition got worse since Obama took office. Geithner is the nation's chief economic official. A large share of the blame for last night's results will likely fall on him.

It's Official: The Government Isn't Getting Its Money Back Out of GM - Well, they've priced the GM IPO, and it looks like they've valued the firm at just about what we lent it:  $50 billion.  Since the government only took a 60% stake, that's well below what would be needed for the government to recover its investment.  Even with the billions they've already "paid back"--by not using all the money--Uncle Sam needed the company to be worth more like $70 billion to break even on the bailout.  IPOs are usually priced at a discount, in order to ensure that a lot of buyers are interested; this creates a robust, liquid aftermarket in the stock, so that if the company needs to go raise more capital, there will be lots of buyers and sellers.  But even if you think that the price will go up in the aftermarket, the government is going to take a hefty 30% loss on the $10 billion worth of shares that will be sold in the initial public offering.

Will Taxpayers Get Back Their Money From AIG? - Last week, Special Inspector for TARP Neil Barofsky made waves by accusing the Treasury of not being transparent enough when it comes to what AIG will cost taxpayers. After declaring a potential loss of around $45 billion last spring from AIG's bailout, Treasury revised that to a mere $5 billion loss. The new estimate came as a part of AIG revealing its planned exit strategy. Yet it's a little hard to swallow that the Treasury's AIG stake could have appreciated a whopping $40 billion in just six months. Is this new estimate a more accurate one, or will taxpayers still be losing tens of billions of dollars on the firm? I spoke at length to a Treasury source about the AIG game plan. Let me begin by explaining the Treasury's old loss estimate. Then, I'll explain what the Treasury hopes to own when the exit strategy is realized and how that would change things. Finally, we'll get into obstacles that stand in its way.

Guest Post: Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won’t Recover - As economists such as William Black and James Galbraith have repeatedly said, we cannot solve the economic crisis unless we throw the criminals who committed fraud in jail. And Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. See this, this and this. Nobel prize winning economist Joseph Stiglitz just agreed. As Stiglitz told Yahoo’s Daily Finance on October 20th: This is a really important point to understand from the point of view of our society. The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.

Advancing Oligarcy: a conversation with James Kwak - James Kwak is the author, with Simon Johnson, of 13 Bankers, an analysis of the 2008 financial crisis and is aftereffects, set within the larger context of the role of financial power throughout American history.  The book arose out of an article Kwak and Johnson wrote in The Atlantic, which compared the character of the financial crisis in the U.S. to previous crises in so-called emerging market countries.  In both types of crises, Kwak and Johnson contend, forms of oligarchy and dangerous concentrations of power played primary roles.  “The fact that our American oligarchy operates not by bribery or blackmail,” Kwak and Johnson write in 13 Bankers, “but by the soft power of access and ideology, makes it no less powerful.  We may have the most advanced political system in the world, but we also have the most advanced oligarchy.” 13 Bankers’ title refers to two events: first, the March 27, 2009 meeting between representatives of 13 financial institutions and President Barack Obama.  According to Kwak and Johnson, that meeting was the beginning of the Obama Administration’s continuation of the previous administration's “blank check”—as opposed to "takeover"—approach to managing the financial crisis:

A Superpower in Decline: Is the American Dream Over? - … America has long been a country of limitless possibility. But the dream has now become a nightmare for many. The US is now realizing just how fragile its success has become -- and how bitter its reality. Should the superpower not find a way out of crisis, it could spell trouble ahead for the global economy. By SPIEGEL Staff

Taking the measure of rot - We all know the story of the proximate causes of the economic crisis – a housing bubble enabled by not merely massive applications of credit, but credit packaged in unimaginably complex and obscure forms and a dispersion of responsibility that comes with securitization. There was a synergy of troublemaking here. Mortgage debt, after rising gently through the 1980s and 1990s, exploded after 2000, rising from about 60% of after-tax income to a peak of 100% in 2007. We know that lending standards deteriorated, to where the only requirement for getting a loan was having a pulse—and I bet you could even find some exceptions to that rule. Downpayments became optional. The habit of packaging mortgages into bonds and selling them to distant investors removed any incentive for the original lender to scrutinize the creditworthiness of borrowers—and allowed trouble to proliferate around the world when things went bad. My use of the word “bond” in the last sentence is as quaint as downpayment became, because the finest minds of Wall Street assembled all manner of mortgages into complex derivatives that no one, even some of the people who sold them, could understand.

How the Banks Put the Economy Underwater - Yves Smith @ NYTimes - IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.  This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Bank Of America: We Face Repurchase Lawsuits On $375 Billion Worth Of Mortgage Securities - From Bank of America's just-released 10-Q (via Keith McCullough), here's what the company says about repurchase lawsuits: The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating to various roles they played in MBS offerings. These cases are generally purported class action suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for more than $375 billion of securities issued by hundreds of securitization trusts contained material misrepresentations and omissions, including statements regarding the underwriting standards pursuant to which the underlying mortgage loans were issued, the ratings given to the tranches by rating agencies, and the appraisal standards that were used in violation of Section 11 and 12 of the Securities Act of 1933 and/or state securities laws. The cases generally allege unspecified compensatory damages and in some instances, seek rescission. The Corporation has previously disclosed some of these matters under other headings, in its 2009 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010,

Bank of America Edges Closer to Tipping Point: Jonathan Weil - It was only last April that Bank of America Corp. was making fools out of the doomsayers who had called for its nationalization a year earlier. Taxpayers had gotten their bailout cash back. Investors who bought its shares at the bottom were making a killing. Government leaders lauded the company's rescues, both of them, as a great success. Now the bank may be on the verge of trouble again. Its stock has fallen 41 percent since April 15. Mortgage-bond investors are demanding untold billions of dollars in refunds. The foreclosure fiasco is metastasizing. A member of the Troubled Asset Relief Program's oversight panel, AFL-CIO attorney Damon Silvers, openly worried at a hearing last week about the risk that Bank of America might need another bailout. A few more months like the last one, and we may be wishing Bank of America had never returned its $45 billion of TARP money. You wouldn't know there's anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Let's Set the Record Straight on Bank of America: Open the Books! - While we welcome Bank of America's response to our two-part essay, "Foreclose on the Foreclosure Fraudsters," it does not actually respond to any of the facts or analytical points we made. Indeed, it does not engage the issues we raised. Bank of America's response contains some useful data on foreclosures that supports points we have made in prior articles, but overwhelmingly it is a plea for sympathy; Bank of America says it is beset by deadbeat borrowers and it is distressed that it is criticized when it forecloses on their homes. Bank of America portrays itself as the victim of an ungrateful public. We showed that outside studies by a wide range of parties showed massive fraud by the bank.  Bank of America Should be Placed in Receivership NOW

Citi Slapped with Subprime RMBS Lawsuit - No sooner had rumblings over Citigroup’s “toxic mortgage pipeline” began — than the bank becomes the next in line to be embroiled in a mortgage-related lawsuit. Spotted in Citi’s just-filed third-quarter 10-Q: In addition, beginning in July 2010, several investors, including Cambridge Place Investment Management, The Charles Schwab Corporation, the Federal Home Loan Bank of Chicago and the Federal Home Loan Bank of Indianapolis, have filed lawsuits against Citigroup and certain of its affiliates alleging actionable misstatements or omissions in connection with the issuance and underwriting of residential mortgage-backed securities. As a general matter, the plaintiffs in these actions are seeking rescission of their investments or other damages. The subprime-mortgage-related proceedings described above are in their preliminary stages. Accordingly, Citigroup cannot at this time estimate the possible loss or range of loss, if any, for these actions or predict the timing of their eventual resolution.

Unofficial Problem Bank list at 894 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 5, 2010. Changes and comments from surferdude808:  The number of institutions on the Unofficial Problem Bank List remained unchanged this week at 894 as there were four additions and four removals. However, aggregate assets increased to $416.5 billion from $410.7 billion.

Q3: Office, Mall and Lodging Investment - First - the advance Q3 GDP report released last Friday showed an annualized real increase of 3.9% for investment in non-residential structures. This broke a streak of eight straight quarterly declines. However the construction spending report released this morning suggests that most (probably all) of this gain will be revised away.  Second - with the release of underlying detail data today - we can see that most of the reported small gains for non-residential structure investment in Q3 were for power and petroleum mining structures.  If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q3.This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959). The second graph is for investment in malls. The third graph is for lodging (hotels).

Wilmington Trust: A warning of more CRE Construction Losses coming? - Yesterday M&T Bank bought Wilmington Trust. From the WSJ: A Fire Sale in Wilmington Wilmington announced that M&T Bank would buy it, in an all-stock deal, for about $3.84 a share, compared with Friday's $7.11 close. Wilmington did so while releasing results that showed third-quarter, tangible book value dropped to $3.84 compared with $7.92 in the second quarter. ... Most striking is the speed of the deterioration in the loan book. This table is from the Wilmington Trust press release yesterday. It shows that commercial real estate - construction nonperforming assets jumped from $240.7 million at the end of Q2 to $461.9 million at the end of Q3. Quite a jump ...

SEC Investigating Magnetar, JP Morgan Dealings on Subprime CDO - Yves Smith - ProPublica reports that the SEC has taken interest in Magnetar’s role in a JP Morgan underwritten CDO. We discussed Magntar at length in our book ECONNED, which broke that story six weeks before ProPublica launched its report, and remains the definitive account of how those transactions were structured. (Our continuing beef with the ProPublica account is that it missed what we discussed at length in ECONNED: the systemic impact of the Magnetar trade. It isn’t simply that Magnetar was a bad actor; its Constellation CDO program played a direct and substantial role in increasing the severity and damage of the toxic phase of the subprime bubble).

Freddie Mac Q3 net loss $4.1 billion, taps Treasury (Reuters) - Freddie Mac, the second-largest provider of U.S. residential mortgage funding, on Wednesday said a faltering housing market resulted in a $4.1 billion third-quarter net loss and another draw from the Treasury to maintain positive net worth. Freddie Mac in a quarterly regulatory filing also warned it may face significant costs related to snags in the foreclosure processes at major loan-servicing companies. Freddie Mac's third-quarter loss included a $1.6 billion dividend payment on senior preferred stock purchased by the Treasury since the financial crisis and housing slump pushed the mortgage buyer into conservatorship in late 2008. Its quarterly loss narrowed from $6 billion in the previous three-month period.It has requested $100 million from Treasury under its preferred stock purchase agreement, which would increase taxpayer outlays so far to $64.2 billion.

Fannie, Freddie Solution May Cost U.S. $685 Billion, S&P Says - Fannie Mae and Freddie Mac, the mortgage firms operating under federal conservatorship, may cost taxpayers as much as $685 billion as the U.S. covers losses and overhauls the housing-finance system, Standard & Poor’s said. Costs for resolving the two government-sponsored entities could reach $280 billion, including $148 billion already delivered under a U.S. Treasury Department promise of unlimited support, New York-based S&P said today in a research report. The government may spend another $405 billion to capitalize a replacement for the two companies, which own or insure more than half the U.S. mortgage market. “It appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement,” S&P said, citing the GSEs’ growing portfolio of unsold homes, a sluggish economy, high unemployment, the prospect of rising foreclosures and billions in legacy losses.

Why banks have cut corners on foreclosures - You’d think the Street would have learned its lesson. Instead, it’s now threatened by an even bigger back-office crisis: Foreclosuregate. Banks, faced with a flood of delinquent mortgages resulting from the bad loans they made during the housing bubble, have done exactly what the brokerages did forty years ago: they’ve cut corners. They’ve foreclosed on homes without having the proper documentation, and relied on unqualified people to sign affidavits attesting to things they didn’t know—so-called “robosigners.” In a few cases, they seem to have actually tossed people who didn’t have mortgages out of their homes. As a result, federal regulators and attorneys general in all fifty states are now investigating. And, in the weeks since the scandal first erupted, other issues have appeared, calling into question the legitimacy of the way mortgages were packaged and sold, and raising the possibility that the banks might have to buy back piles of bad mortgages. Forecasts of “catastrophe, “Armageddon,” and “apocalypse” have now become routine.

Bank of America’s Servicing Nightmare - Yves Smith - An article in the Wall Street Journal about Bank of America’s says a great deal about the woes afflicting Bank of America, thanks to its enthusiastic embrace of Countrywide, both the biggest subprime lender and the biggest subprime servicer.  The irony is that one of the reasons BofA coveted a criminal enterprise like Countrywide (they knew it well enough that they cannot plead ignorance of its overly aggressive sales techniques, like calling customers six months into a mortgage and pushing them to refi with phony claims that their loans were about to reset) is that it was a very efficient servicer, at least before volumes exploded in the housing bust. Indeed, in a post last week at Institutional Risk Analytics last week (now sadly behind its firewall), Chris Whalen stressed how Countrywide was widely seen as having particularly well run servicing operations (note that being one of the best of breed may still not set the bar very high).It is clear reading the WSJ article that the acquisition, at least on the servicing side, was botched.  The article starts out by indicating that it is going to be harder for the Charlotte bank to clean up its 102,000 foreclosures with phony affidavits than it has confidently asserted to the public.

State Attorneys General Take Helm in Mortgage Mess - Have you noticed that the lead dogs investigating the mortgage foreclosure mess are not any federal prosecutors or national bank regulators, but rather the state attorneys general? I sure have. I can’t think of a more encouraging development.  Yeah, yeah, a handful of federal investigations have also been announced, but we all know that they’re not going to amount to a hill of beans. Ever since the financial crisis began two years ago, the federal overseers of the banking industry have been consistently unwilling to take the rod to the institutions they regulate. The robo-signing scandal — and it is, unquestionably, a scandal — hasn’t changed that attitude one iota.  The Treasury Department and the Federal Reserve have made it clear that they are more concerned about keeping the foreclosure mill going full speed than they are about determining whether the banks broke the law. Somehow throwing people out of their homes quickly is supposed to help the economy. Or so they keep telling us. Ah, but the states. They’re a different story. Soon after tales of robo-signing began making headlines, the state attorneys general, led by Tom Miller of Iowa, mobilized their forces. Practically overnight, all 50 of them agreed to conduct a joint investigation into the bank practices that led to the scandal.

Grayson Calls For Big Banks to Hold Extra Capital Against Title Insurance Indemnifications - Yves Smith - We’ve noted that title insurers have been refusing to eat the risk in foreclosure sales when they can’t verify the chain of title from local records. Of course, the idea that title insurance was ever really intended to be insurance in the first place is questionable: the title insurers only step up when they can verify that there appears to be absolutely no risk. A one-time client, a major NYC developer and Forbes 400 member, established a title insurer for his own residential deals because he saw the premium as free money.  Some have taken the route of writing qualified policies, but buyers appear to be waking up to that. So the industry response increasingly appears to be to have the bank selling the real estate indemnify the title insurer. Since the biggest servicers also happen to be the biggest banks in the US, this effectively means that the risk of clouded title in foreclosures is being absorbed by TBTF banks, and hence by taxpayers, a point we’ve raised in earlier posts (see “Title Insurance Woes Illustrate Liabilities of Foreclosure Mess Concentrated in TBTF Banks” and “Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers“). Needless to say, it would make more sense for the banks themselves to make proper allowance for this incremental risk, as Grayson suggests. The text of hisletter follows:

Attorneys ask courts to toss out foreclosure cases - Attorneys for Maryland homeowners are asking the courts to dismiss hundreds of foreclosure cases that depended on paperwork submitted by so-called robo-signers on behalf of mortgage servicers. Civil Justice, a Baltimore nonprofit that specializes in foreclosure issues, made the request in motions filed last week in two cases. One motion asks that all Maryland foreclosure cases with documents signed by Jeffrey Stephan of GMAC Mortgage — including the Baltimore case in question — be tossed out. The other asks for the same treatment of all Maryland cases with documents signed by Xee Moua of Wells Fargo. Both Stephan and Moua acknowledged in depositions that they signed hundreds of affidavits a day — attesting to information being used to foreclose on U.S. homeowners — without the legally required "personal knowledge" of that information.

Lawmaker Questions Power to Foreclose - A Virginia lawmaker asked the state's attorney general to launch an investigation of Mortgage Electronic Registration Systems, the middleman firm in millions of court filings that helps keep the mortgage-securitization machine moving. Robert G. Marshall, a Republican member of the Virginia House of Delegates, requested that Virginia Attorney General Ken Cuccinelli determine whether the Reston, Va., company violates state law because it doesn't pay a fee every time a loan changes hands. Opinions differ as to whether MERS must pay local fees every time it sells an interest in a loan. "There are too many people getting foreclosed on not properly," said Mr. Marshall, who represents two counties near Washington, adding that he is drafting a Virginia law that would require lenders to pay county fees before being allowed to proceed with foreclosures. "The disdain with which the conditions of law have been treated by those who want to make money too fast is very troubling to me."

Hands, burnt fingers, and American mortgages - Guy Hands has lost his lawsuit against Citigroup, wherein he accused Citigroup of defrauding his private equity group, Terra Firma Capital Partners, by lying about the number of competing bidders during the auction of the record company EMI, for which Terra Firma paid $6.8 Billion. This was one of those top-of the market deals (August 2007) that always goes pear-shaped. From the NYT : That bad business decision has cost Mr. Hands dearly. The 113-year-old EMI, once home to both the Beatles and the Rolling Stones, has struggled mightily since it was bought by Mr. Hands. He testified that he had 60 to 70 percent of his wealth tied up in EMI. His fund, Terra Firma, has lost about $2.5 billion on the investment. From a market participant’s point of view, this is something of a lose/lose outcome: it’s hard to see why IBs or investors would court the litigious and money-losing Mr Hands when he wants to raise capital for his next deal. Nor is it so great for the sell side, as it draws attention again to the conflicts of interest inherent in the universal banking model (Philip Augar, FT):

Foreclosure Fraud – Deutsche Bank Memo Notifies Securitized Loan Servicers and their Attorneys that they May have Broken the Law In an October 25, 2010 letter from Deutsche Bank to “All Holders of Residential Mortgage Backed Securities For Which Deutsche Bank National Trust Company or Deutsche Bank Trust Company Americas Acts As Securitization Trustee”, DB reports on “alleged deficiencies” in certain foreclosure proceedings and advises of the prior issuance, by the DB Trustee, of an “Urgent and Time-Sensitive Memorandum” dated October 8, 2010 to its Securitization Loan Servicers regarding servicing foreclosure procedures, demanding that the servicers “comply with all applicable laws relating to foreclosures”. The October 8, 2010 “Urgent and Time Sensitive” Memorandum attached to the October 25, 2010 Memo makes things even more interesting. Here are some select quotes:

Bank of America Refuses to Play Ball With Overhyped Pimco/Fed/Blackrock Putback Letter - Yves Smith - We’ve been astonished at the continued poor reporting on the overhyped mortgage putback possible future action by Pimco, the Fed, Blackrock and others against Bank of America. Everyone seems so mesmerized by the names and the incorrect dollar size attached (the possible action relates to $47 billion of bonds, but the potential liability is much less; we penciled it out as at best $1 billion, and banking expert Chris Whalen concurred with our generally dim view of this suit). The latest development confirms our dim view of this maybe-someday-will-be-a-case.  Let’s be clear: we are fans of sound litigation against banks. We are not fans of weak cases (and in this instance, not even yet lawsuits) being touted as asteroid-hitting-the-TARP-banks level events. First, it tends to lead possible litigants to pursue copy cat cases when they may have much better grounds for seeking redress. Second, when these cases either fizzle or drag on forever, it leads third parties to take all suits against banks less seriously, when some are on much more solid grounds. So why is this not-even-a-case getting such undeserved attention?

Justice for Some, by Joseph E. Stiglitz - The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the sub-prime mortgage crisis, it has done neither. Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can’t simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts. To some banks, this is just collateral damage: millions of Americans – in addition to the estimated four million in 2008 and 2009 – still have to be thrown out of their homes.  To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation in particular – was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.”

“Rules of Our Society Should Not Be Bought and Sold”: Roosevelt Election Roundup - “The American people are voting against the political system. They are given the choice between the marketed vision of false hope and the vision of everyman financed by those who are attempting to take away vital services. Anger at the financial bailouts is understandable and a vote to cut off government from using our future tax burden to fortify the powerful is also quite sensible. The problem is that in the era of money politics, no coalition from either party can make good on the mirage of their marketed vision. That both Alan Grayson and Russ Feingold were defeated after being ardent critics of the bailouts and the industry friendly financial regulatory reform is a clear warning that the money system can defeat the politician who represents the people’s interest against powerful vested interests. All of this points to the fundamental need for reform of government incentives in order to restore the power of votes relative to the power of money. And to the fact that reform is the precursor to limiting the domination of our state by concentrated money interests, both corporate and by wealthy individuals. The rules of our society should not be bought and sold.”

Levels of “Austerity” and Fraud - Where it comes to Foreclosuregate most of us agree that words like fraud and crime should appear the most often in any word cloud derived from an honest, intelligent discussion. Of course the likes of the NYT don’t see it that way. But that’s equally true of deficit terrorism and globalization. Yet where it comes to international debt and subsequent “austerity” assaults, commenters are most likely to regard governments and banksters as acting in good faith and to take their fraudulent depictions of what’s happening and what they’re trying to do at face value. Thus we get the basic assumptions: that all countries must constantly borrow in order to function; that deficits automatically matter; that a country’s credit rating and borrowing spread are the most important metrics of the “success” of its policy; that it must undergo “austerity” for the sake of the foregoing; that governments do this for the good of “the country”; that austerity is meant to accomplish what they claim it will accomplish. But these are all false.

Note on the Banksters, the Land Dispensation, and the Rule of Law - It’s been a long, long time since the banks were used to dealing with the law, as opposed to “the law”, their own rigged law. The trouble is that here their crimes aren’t just spread out over society as a whole, but are directly assaulting the very same “middle class” cadre they were counting on to politically support them even as they liquidated that very same cadre. The very basis of the astroturfing was this “American Dream/ownership society” scam. The banksters are now not only trying to trash their own rigged law, but are doing so in order to lawlessly assault the people literally in their homes. The very same homes, “ownership” of which was supposed to be what the banks themselves delivered and guaranteed, and which are why society was supposed to allow this finance sector to exist at all. This is looking to be an exercise in Machiavelli’s teaching that the people will put up with any level of economic and political tyranny as long as the tyrant doesn’t cross specific, gratuitous taboos.

More on the Mortgage Mess - Consumer advocates, the press, investors and homeowners have already compiled a compelling list of transgressions: conflicts of interest that have banks pushing foreclosures, without a good-faith effort to modify troubled loans. Dubious fees that inflate mortgage balances. The hundreds of thousands of flawed foreclosure affidavits that violated homeowners’ legal protections. The misplaced documents. And it goes on.  For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.  What makes the latest scandals so outrageous is that even after the financial meltdown and taxpayer bailout— and all those vows about accountability — the regulators are still behind the curve. The fundamental problem is that the banks’ drive to profit from the foreclosure process is all too often at odds with the interests of mortgage investors, homeowners and the economy’s health.

Two Extremes: Paying on Underwater Mortgages, and Living in Default - The following articles illustrate two extremes we've discussed before. The first is about borrowers with significant negative equity who are still paying their mortgage. They can't refinance. They can't sell. And it is difficult to move for new employment. This is probably a drag on economic growth. And at the other extreme are borrowers staying in their homes for extended periods without paying their mortgage or property taxes. This might be providing some "stealth stimulus" for the economy. The borrowers with negative equity are still receiving the same housing service, and making the same payment, as a few years ago. In that sense it isn't a drag on the economy. However they can't take advantage of low rates to refinance, they can't sell, it is difficult to move, and they are frequently reluctant to invest in home improvements - and they might even forgo needed repairs. For the borrowers in default, many are probably unemployed or facing other serious financial issues. If they weren’t living “rent free”, they’d probably move in with friends or relatives, or even live in their cars or worse. So the "free" housing service they are currently receiving will probably be replaced with another low cost housing alternative. So for many people in this situation, I don't think there is really much "stealth stimulus".

Millions of homeowners keep paying on underwater mortgages - For almost two years, home foreclosures have swept the nation, spreading misery among once-buoyant families, spattering lenders with red ink and undermining efforts to restart the economy. But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. . How could that be a source of future trouble? Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy. Of the estimated 15 million homeowners underwater, about 7.8 million owed at least 25% more than their properties were worth in the first quarter of this year, according to Moody's Analytics' calculations of Equifax credit records and government data. More than 4 million borrowers, including 672,000 in California, 424,000 in Florida and 121,000 in Illinois — three of the biggest real estate markets — were underwater more than 50%. Their average negative equity: a whopping $107,000.

The Stealth Stimulus of Defaulters Living for Free - The mortgage-foreclosure mess could prove expensive for banks and investors. But in some states, it will also prolong an unintended economic stimulus: free housing for millions of defaulters. The problems will be expensive for banks, and for investors in mortgage bonds, in terms of added processing costs and lost interest income. But for the millions of U.S. homeowners who have stopped making mortgage payments or who are already in the foreclosure process, the upshot is that they'll get to stay in their homes a bit longer. Given that they're not paying rent, that time has value. Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That's 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

Foreclosure shadow inventory will take more than 40 months to clear: Fitch The shadow inventory of delinquent loans, foreclosures, and REOs stands at 7 million homes, which would take the market more than 40 months to clear, more than three years, according to Fitch Ratings. And as major banks fix recent problems in the foreclosure process, that number will only grow. Liquidation and resolution timelines were extended because of the affidavit issues. Consumer advocacy groups and state attorneys general offices filed lawsuits, and regulators launched investigations. All of it, Fitch said, simply prolonged the housing correction underway and will bring about further house price declines and losses on residential mortgage-backed securities.

Fitch: Foreclosure delays to prolong housing slide - Foreclosure delays stemming from allegations that some lenders made mistakes in paperwork will drag out the time it takes for the U.S. housing market to recover, Fitch Ratings said in a report Monday. Allegations surfaced in September that banks evicted people without fully reading foreclosure documents. Major lenders, including Bank of America and Ally Financial Inc.'s GMAC Mortgage temporarily suspended some foreclosures while they reviewed foreclosure paperwork for possible errors. And attorneys general in all 50 states and the District of Columbia launched a joint investigation into whether paperwork and legal procedures were handled properly in hundreds of thousands of cases. The investigations, lender reviews and lawsuits from consumer advocacy lawyers will combine to lengthen the time it takes for distressed homes to be foreclosed, adding to the size of the so-called shadow inventory of empty homes that have yet to be sold, Fitch said

LPS: Over 4.3 million loans 90+ days or in foreclosure - LPS Applied Analytics released their September Mortgage Performance data today. According to LPS:
• The average number of days delinquent for loans in foreclosure is now 484 days
• In five judicial states (NY, FL, NJ, HI and ME), the average exceeds 500 days
• Over 4.3 million loans are 90 days or more delinquent or in foreclosure
• New problem loans (60+ days delinquent) are back on the rise
This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages.According to LPS, 9.27 percent of mortgages are delinquent, and another 3.84 are in the foreclosure process for a total of 13.11 percent. It breaks down as:
• 2.64 million loans less than 90 days delinquent.
• 2.32 million loans 90+ days delinquent.
• 2.05 million loans in foreclosure process.
For a total of 7.02 million loans delinquent or in foreclosure.This is similar to the quarterly data from the Mortgage Bankers Association.

LPS Mortgage Monitor Shows 7 Million Noncurrent Loans, 2 Million Homes in Foreclosures, Deteriorating Conditions - The LPS Mortgage Monitor has a nice series of 33 slides that shows delinquent loans had stabilized in the first half of 2010 but new problem loans are once again picking up. Over 4 million homes are 90 days late or in foreclosure.Delinquent loans still at troubling levels. Expect foreclosures to rise.There are 7 million noncurrent loans but that is down from 8.1 million at the beginning of the year. Unfortunately, things have gotten worse since July-August, just about when home prices stopped rising.

LPS Report Shows Foreclosure Timelines Continue to Stretch - Market data collected by Lender Processing Services (LPS) during the month of September reveals that foreclosure timelines continue to increase, with borrowers in the latest stages of delinquency or in foreclosure languishing without having made a mortgage payment for up to 16 months. The company’s Mortgage Monitor report released Wednesday illustrates the extreme congestion in foreclosure pipelines. LPS notes that the average time a loan remains delinquent in five particular judicial states – New York, Florida, New Jersey, Hawaii, and Maine – now exceeds 500 days. At the same time, LPS says the foreclosure timeline extension has been significantly more pronounced in non-judicial states, as well. Timelines in the 90-days-or-greater delinquency category have continued to increase even as inventories have declined. As of the end of September, 32 percent of 90-days-or-greater delinquencies could be categorized as “extremely delinquent,” with borrowers not having made payments for 12 months or more, according to LPS’ report.  The average days delinquent for loans in the 90-days-or-greater delinquency category is 316 days. The average loan in foreclosure has not had a payment made in 484 days.

Fitch Foreclosure Forecast Casts a Pall on Recovery Hopes - Not until March 1, 2014 will the last of the seven million properties that are currently delinquent, in foreclosure, or bank-owned finally return to life as homes or investments.Forty months until today’s glut of distressed properties, known as the “shadow inventory,” are finally past us. That’s the latest prediction from Fitch Ratings, the expert source on the mortgage backed securities market. As a result of the extended large inventories,  prices will fall again, probably by ten percent late by next year depending on how long the current ForeclosureGate moratoria imposed by several large lenders lasts.

Fannie, Freddie, FHA REO Inventory Increases 24% in Q3 from Q2 2010 The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 24% at the end of Q3 2010 compared to Q2 2010. The REO inventory increased 92% compared to Q3 2009 (year-over-year comparison).This graph shows the REO inventory for Fannie, Freddie and FHA through Q3 2010. The REO inventory for the "Fs" has increased sharply over the last year, from 153,007 at the end of Q3 2009 to a record 293,171 at the end of Q3 2010. There are new records for Fannie, Freddie, and FHA REO inventory individually too. Remember this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs. The REO inventory will probably increase sharply in Q4. From Fannie Mae todayOur expectation that the foreclosure pause will likely result in higher serious delinquency rates, longer foreclosure timelines, higher foreclosed property expenses, higher credit losses, higher credit-related expenses, and an increase in the number of REO properties we are unable to market for sale.

High touch: Phone a friend - They're called caves. Rooms deep within the bowels of mortgage servicing shops across the country filled with paperwork. Tens of thousands of files in one room. According to Lender Processing Services, there are 6.9 million noncurrent loans in America as of Aug. 1. Of those, 2.6 million borrowers are beyond 90-days delinquent but not in the foreclosure process. These lost borrowers trapped somewhere in the shadow inventory of loss mitigation are out there, and a growing number of high-touch servicers are trying to reach them.

Mortgage default as economic stimulus - Early in the year, I posted a few times on a coming wave of mortgage defaults generally and the economic effect of living in defaulted accommodation specifically. My conclusion at the time was that, while the consumer spending due to the free rent defaulters received was large, it was not a major factor in the overall economic growth of the economy.Please see "Strategic default: In come the waves again," "Three potential explanations for the continued fall in US savings rate," and "Why the fall in the savings rate is not meaningless," and "How strategic defaults are boosting consumer spending" for the relevant posts. The quote I want to highlight comes from the fifth post in this series called "More on strategic defaults and retail sales" which tried to get to the effect of defaulters free rent on consumer spending.  I wrote:[Rosenberg]‘s numbers are even well above Mark Zandi’s who I quoted yesterday via Diana Olick as saying that defaults were freeing up $8 billion per month for spending. That works out to almost $100 billion a year.

The Failure of Mortgage Modification - The Obama administration’s Home Affordable Modification Program for reducing mortgages of homeowners who owe more than their houses are worth has fallen far short of its objectives. Officials seem surprised by that outcome and blame the result on administrative problems. But, all along, the program’s bad economics doomed it to failure. These modification programs encourage lenders to reduce mortgage payments, so that each borrower’s housing payments (including principal, interest, taxes and insurance) are no more than 31 percent of the borrower’s gross income. The payments are to be reduced for five years or to whenever the mortgage is paid off (whichever comes first).The amount of the payment reduction depends on the borrower’s income — the less he or she earns, the more the payment is reduced.

As HAMP goes up in smoke, U.S. needs new housing plan (Reuters) - The U.S. government's main anti-foreclosure program isn't winning many friends these days because of its poor track record in getting banks to modify mortgages for cash-strapped borrowers.Of the roughly 1.4 million borrowers who entered the loan modification program, about half were kicked out and did not get the amount of money owed on their mortgage reduced.Critics of the government's Home Affordable Modification Program, or HAMP, say it's now time to give a fresh look at other ideas to stem the wave of foreclosures. Below are three proposals that are generating the most interest.

Special Report: A Marshall Plan for America’s housing woes - The federal government just reported that 4.2 million homeowners are "seriously delinquent" on their mortgages and some 10.9 million borrowers are underwater, meaning their loans exceed the value of their homes. To make matter worse, there is the threat of protracted litigation between banks and borrowers because lenders might not have followed the letter of law in processing foreclosure paperwork. An even bigger source of worry is the $426 billion in so-called second liens -- home equity loans, second mortgages and other loans "junior" to the primary mortgage -- that sit on the balance sheets of Bank of America, JPMorgan Chase, Wells Fargo and Citigroup. Add it all up and there's the potential for the U.S. housing market to languish in a stupor for years to come. As bleak as all that might sound, there could be a way out -- one that doesn't involve another government bailout.

Mugged by the Moralizers, by Paul Krugman - How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement. It’s a sentiment that resonates not just in America but in much of the world: debt is evil, debtors must pay for their sins, and from now on we all must live within our means. And that kind of moralizing is the reason we’re mired in a seemingly endless slump.  The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.  This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

Should everyone get debt relief? - Paul Krugman in his column this morning argues that debt relief is crucial to economic recovery.  I think he is basically right, but it is not clear to me to whom he would extend debt relief.  If we don't draw any distinctions between those who actively put themselves in trouble and those who are victims of circumstances beyond their control, we will leave the whole concept of the responsibility to repay debt in tatters.  Even if we don't care about the moral implications of this, we should care that if we do blanket discharges of debt, it will be much harder for consumers to obtain debt in the future. With this is mind, we should probably draw distinctions among different types of borrowers.  Here is a rough ranking of borrowers in some sort of difficulty from most to least culpable for their misfortunes:

Q3 2010: Homeownership Rate at 1999 Levels - The Census Bureau reported the homeownership and vacancy rates for Q3 2010 this morning. The homeownership rate was at 66.9%, the same level as in Q2. This is at about the level of early 1999. Note: graph starts at 60% to better show the change. The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to around 66%, and probably not all the way back to 64% to 65%. I'll revisit this soon - and the impact on the homebuilders.The homeowner vacancy rate was at 2.5% in Q3 2010. This is the same level as in Q2, and below the of 2.9% in 2008. A normal rate for recent years appears to be about 1.7%. The rental vacancy rate declined to 10.3% in Q3 2010 from 10.6% in Q2.  This decline fits with the Reis apartment vacancy data and the NMHC apartment survey. This report is nationwide and includes homes for rent. It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%.

U.S. Homeownership at Decade Low as Foreclosures Rise -The U.S. homeownership rate was unchanged at a 10-year low in the third quarter as banks stepped up property seizures from borrowers who defaulted on mortgages.  The homeownership rate was 66.9 percent, matching the second-quarter level that was the lowest since 1999, the U.S. Census Bureau said in a report today. The homeowner vacancy rate, or the share of properties vacant and for sale, was unchanged at 2.5 percent, according to the report.  Lenders are repossessing properties as borrowers fall behind in mortgage payments after the worst housing crash since the Great Depression. Banks seized a record 288,345 homes in the third quarter, up 22 percent from a year earlier, according to an Oct. 14 report from RealtyTrac Inc

More on amateur economics - I THOUGHT I made a pretty nice point on Sunday concerning the way amateurs fuel housing bubbles. I wrote then that it asn't amateur participation in the market that made prices bubbly; rather it was the influx in new amateurs, which allowed the Ponzi-like bubble to keep inflating. As evidence, I cited the unusual rise in the homeownership rate during the 2000s from 67% up above 69%. Unfortunately for me, Calculated Risk has gone and put up a chart that complicates the story:  As you can see, there's an even larger increase in the homeownership rate from the early 1990s to 2000, of nearly four percentage points, than we observe in the bubble decade. Now, this doesn't mean my earlier story was wrong (you thought I'd say that). Bubbles often begin with a "real" shift in fundamentals that generates upward price pressure. The tech boom began with a wave of investment in new, productivity-enhancing technologies. It could be that the housing bubble of the 2000s was rooted in an earlier fundamental shift.

Homeowner Vacancy Rates Remain Flat - The homeowner vacancy rate was 2.5% in the third quarter, flat from the previous three months and down from 2.6% in the first quarter the Census Bureau reported. Vacancy rates, while still high, are down from the peak of just under 3% for most of 2008.  Homeowner vacancy rates continue to be highest in the southern and western U.S., where the housing bust was worst. Homeowner vacancy rates were 2.8% in the South and 2.6% in the West, according to the Census. The Midwest was also 2.6%, while the Northeast had a housing vacancy rate of 1.6%. The rental vacancy rate was 10.3% in the third quarter, down from 10.6% in the previous three months and a peak of 11.1% a year earlier.

Home prices expected to slide another 8% - Fiserv, a market analytics company, has scaled back its home price projections considerably. In February, it forecast national price gains of about 4% through the end of 2011. The company's latest prediction is for a 7.1% drop in prices between June 30, 2010 and June 30, 2011. In fact, after five months of gains, prices in the 20 largest metro areas fell 0.2% in August, according to the latest S&P/Case-Shiller report. The good news is, "There'll be no vicious, self-reinforcing spiral down," according to Mark Zandi, chief economist with Moody's Analytics. But, he added, "more home price declines are coming."  He's forecasting another 8% drop in home prices through the third quarter of 2011, which will put the total peak-to-trough decline at 34%. Even after that, in 2012, he sees very little price growth.

Robert Shiller Sees More Housing Pain Ahead - When it comes to calling bubbles, Yale professor Robert Shiller has a pretty good track record. He raised a red flag about Internet stocks just before the market crashed in 2000, and he called the housing bubble in 2006 -- again, just before prices tumbled. Now the co-creator of the S&P/Case-Shiller Home Price index says the foreclosure crisis is another chapter in the story of mistrust of financial institutions that was ushered in with the financial crisis and the recession. And with so little confidence in the housing market, he says, prices have further to fall. In an interview with Kiplinger, Shiller shares his views on how foreclosure-gate could lead to another bailout, why the housing market won’t recover in 2011, and why he sees a good chance of a double-dip recession.

Can I Buy a House without Speculating ? - The solution, in theory, is the Case-Shiller house price index. You can roughly hedge the price of a house you own using the index. The problem is that the risk you want to hedge is that you want to sell the house and it is cheap. So long as you own the same house, the price only matters for property tax assessments. Shiller really really honestly believed that he had made the world a much better place when he confinced the Chicago Commodities board to introduce trading in the index. But then almost no one traded it (what if you held an index and nobody came ?).  I think that the correct innovation which will really fix things is one in which the balance of a mortgage is indexed to the Case-Shiller index. If the index were perfectly matched to your home, your equity in the house would just grow with repayments minus interest. Oh the interest to be paid would be constant (OK indexed to wages or the CPI to be perfect), not a constant times the balance owed. So, to the extent that the index worked, interest and principle payments and equity in the house wouldn't depend on housing price fluctuations.

Private Construction Spending Flat in September: July and August Revised Down - The Census Bureau reported overall construction spending increased in September compared to August.  [C]onstruction spending during September 2010 was estimated at a seasonally adjusted annual rate of $801.7 billion, 0.5 percent (±1.9%)* above the revised August estimate of $797.5 billion. However private construction spending was about the same as the downwardly revised August rate:  Spending on private construction was at a seasonally adjusted annual rate of $482.0 billion, nearly the same as (±1.1%)* the revised August estimate of $481.9 billion. [revised down from $498.2 billion] This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. Residential spending is 65.7% below the peak early 2006, and non-residential spending is 39.5% from the peak in January 2008.

Residential Investment declines to new low as Percent of GDP - I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. It is interesting to note that RI as a percent of GDP has declined to a post war low of 2.22%. Some people have asked how could a sector that only accounts for 2.2% of GDP be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery. Not this time. The second graph shows non-residential investment in structures and equipment and software. Equipment and software investment has been booming, and non-residential investment in structures is near a record low.

Pending Home Sales Index declines 1.8% in September - From the NAR:  Pending Home Sales Slip but Modest Recovery Expected in 2011 The Pending Home Sales Index,* a forward-looking indicator, slipped 1.8 percent to 80.9 based on contracts signed in September from an upwardly revised 82.4 in August. ... The data reflects contracts and not closings, which normally occur with a lag time of one or two months.August was revised up slightly from 82.3.  This suggests existing home sales in October and November might be slightly lower than in September and months-of-supply will probably still be in double digits putting downward pressure on house prices.

Unemployment and Foreclosures - The IMF (International Monetary Fund) has published a report which covers a number of details about the Great recession.  One area that was explored was the relationship between structural unemployment, as defined by the IMF, and increased foreclosure activity in the U.S. Two data sets that I find interesting in the report are summarized by the following graphics: We will refer to skills mismatch as the structural unemployment problem for the rest of this article. Looking at the 13 states with the biggest changes in foreclosure rates, the structural foreclosure problems are quite varied:Four states are in the worst structural unemployment category – Arizona, Hawaii, Michigan and Maryland. One state is in the third quartile for structural unemployment – California. Two states are in the second quartile for structural unemployment – Florida and Maine.  Six states are in the least structural unemployment category – Nevada, Illinois, New York, New Jersey, Connecticut and Rhode Island. This indicates that structural unemployment problems might not have much correlation to increases in foreclosure rates.

To Pay For Mortgage And Health Care, Woman Forced To Sell Letter From Obama Saying ‘Things Will Get Better’  - In January of this year, Obama read a letter from Jennifer Cline, a 28 year-old woman living in Monroe, Michigan. Cline informed Obama that she and her husband had both lost their jobs in 2007 and fallen on hard times as a result. “I lost my job, my health benefits and my self-worth in a matter of five days,” she wrote. Following the loss of her job, Cline “was diagnosed with two types of skin cancer, and she had no health insurance. She signed up for Medicaid, and treatment was successful. She went back to college after her unemployment benefit was extended.” She hoped that in “just a couple of years we will be in a great spot.” After reading the letter, Obama chose to reply with a handwritten note on White House stationary. He wrote, “Thanks for the very kind and inspiring letter. I know times are tough, but knowing there are folks out there like you and your husband gives me confidence that things will keep getting better!” But things, unfortunately, did not get better. Crunched by the costs of a down payment on her home and cancer treatments, Cline has been forced to sell her letter from the president to earn some money. She is selling the letter to autograph dealer Gary Zimet for $7,000, who will then sell it on his website, which markets autographs

Personal income declines 0.1%, Spending increases 0.2% in September - From the BEA: Personal Income and Outlays, June 2010 Personal income decreased $16.8 billion, or 0.1 percent, and disposable personal income (DPI) decreased $20.3 billion, or 0.2 percent, in September ... Personal consumption expenditures (PCE) increased $17.3 billion, or 0.2 percent. This graph shows real personal income less transfer payments since 1969. This measure of economic activity is moving sideways - similar to what happened following the 2001 recession.  This month the saving rate decreased ... This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the Setpember Personal Income report.  In September, income declined 0.1%, and spending increased 0.2% - so the saving rate decreased to 5.3% in September (5.5% using a three month average). I expect the saving rate to rise some more over the next year, perhaps to 8% or so - keeping the pace of PCE growth below income growth.

Consumer Spending Up as Incomes Fall - Personal incomes have remained largely flat for the last few months, and fell slightly in September. Consumer spending has crept up, but its future path is uncertain. (Note that the vertical axis does not begin at zero to better show the change.) Another reason to be concerned about the sustainability of consumer spending growth: Consumer spending eked upward in September (rising 0.2 percent), but incomes fell slightly (down 0.1 percent). Consumers were able to spend more only because they decided to salt away less of their paychecks, reducing their savings rates. Wages, which are the biggest component of personal incomes, were flat. Such trends seem unlikely to encourage consumers to step up their buying, which is what the economy needs in order to pick up the pace of growth.

Personal Income And Spending Both Miss Expectations, As Savings Rate Drops To 2010 Low - One thing is sure to happen when Americans buy more iPads than they can afford: the savings rate will fall. Sure enough, the just reported September savings rate dipped to 5.3%, the lowest reading in 2010, and a decline from August's downward revised 5.6%. This is due to a miss in both personal income and personal spending, the former coming at -0.1% vs Exp. of 0.2 (and a prior revised to 0.4%) with the latter at 0.2% versus expectations of 0.4% (and an upward revised prior to 0.5%). The savings rate has now declined in a straight line since peaking at 6% (2010 high), to the current low. In other words Americans have been spending more than they were making for four months in a row. And on wonders why consumer discretionary names have been doing well... Luckily, it means that courtesy of Americans' savings decline by nearly 20%, there are only so many future landfill filling gadgets that will be bought going forward.

U.S. Consumers' Spending Anemic in October - Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $62 per day during the first four weeks of October. That figure is up from $59 in September and is about the same as the $63 figure from August. From a broader perspective, spending remains in the 2009-2010 new normal monthly average range of $59 to $72 and is far below the 2008 recessionary spending range of $81 to $114.  Gallup's consumer spending measure over the last two weeks (ending Oct. 17 and Oct. 24) has averaged $67 per day and $65 per day, respectively, slightly higher than the estimate for all of October to date. The increase is likely a result of Halloween shopping, given that in the past, Gallup has seen increases in spending during the second half of October. The latest weekly figures are also up from late September, which saw some of the lowest spending weeks of 2010. Over the past four weeks, spending has averaged slightly below year-ago levels.

Consumers Issue a Cautious Christmas Spending Forecast - Gallup's initial measure of Americans' 2010 Christmas spending intentions finds consumers planning to spend an average of $715 on gifts, roughly on par with the $740 recorded in October 2009. The $25 decrease in Americans' holiday spending intentions between October 2009 and October 2010 (not a statistically significant change) contrasts with a $61 year-over-year reduction in intended spending found last October and a $108 reduction found a year prior. The muted nature of this year's decline is reflected in consumers' own evaluations of their spending changes. According to the Oct. 7-10 poll, 27% of Americans intend to spend less on Christmas gifts this year than what they spent last Christmas -- higher than the 11% who now say they will spend more, but down from the 35% and 33% in 2008 and 2009 saying they would spend less.

America's Recovery Has Now Exposed The Fact That A Large Chunk Of American Consumers Don't Even Matter - Yesterday, we learned from the BEA how consumer spending has made a full recovery, with real personal consumption expenditures (PCE) in September hitting its highest level since the crisis began. A chart of this from Carpe Diem is shown below. Meanwhile, the U.S. economy has almost fully recovered, even in real GDP terms, as shown below. A few more periods of growth and U.S. GDP will be making record highs again. But here's a thought -- What if a large chunk of American consumers don't really matter? Then, the entire situation is far less perplexing, and in fact, it turns out that the richest 5% of America accounts for a massive 37% of all consumer spending according to North Carolina State University. That's gargantuan, and maybe is the reason why many recovery skeptics have been proven so wrong ever since mid-2009. Yes tons of Americans are still in horrible shape, but they are, sadly, just a drop in the economic bucket relative to their ultra rich compatriots.

Spending by the rich - Podcast: Play in new window | Download - F. Scott Fitzgerald said the rich are different: They have more money. While the very rich are a relatively small percentage of the economy, they are often the focus of economic policy. Extension economist Mike Walden explains why. “For one simple reason: Although you may be dealing with a relatively small number of people who are very rich, they actually account for a much larger percentage of consumer spending in our economy. And, again, consumer spending — really spending — really drives our economy. “For example, if you take the richest 5 percent of income earners in the country, they actually account for 37 percent of all consumer spending. So 5 percent of the people account for 37 percent of all consumer spending.  “Furthermore, this percentage has been going up. In 2006 the top 5 percent of earners accounted for 28 percent of consumer spending. And those rich are not only big spenders; they are also big savers, and we need people to save money because that provides the capital for businesses to borrow and make improvements.

America's Two Economies - Next time you hear an economist or denizen of Wall Street talk about how the “American economy” is doing these days, watch your wallet. There are two American economies. One is on the mend. The other is still coming apart. The one that’s mending is America’s Big Money economy. It’s comprised of Wall Street traders, big investors, and top professionals and corporate executives. The Big Money economy is doing well these days. That’s partly thanks to Ben Bernanke, whose Fed is keeping interest rates near zero by printing money as fast as it dare. It’s essentially free money to America’s Big Money economy. Free money can almost always be put to uses that create more of it. Big corporations are buying back their shares of stock, thereby boosting corporate earnings. They’re merging and acquiring other companies. And they’re going abroad in search of customers. They’re selling Asian and Latin American consumers everything from cars and cell phones to fancy Internet software and iPads. Forty percent of the S&P 500 biggest corporations are now doing more than 60 percent of their business abroad. And America’s biggest investors are also going abroad to get a nice return on their money.

`Invalid' Forms by Supposed Billionaires Skew U.S. Wage Figures - Bloomberg - The Social Security Administration asked its inspector general to investigate how a $32.3 billion mistake skewed its statistics on 2009 wages in the U.S. Two people were found to have filed multiple W-2 forms that made them into multibillionaires, an agency official said yesterday. Those reports threw statistical wage tables out of whack and, in figures released Oct. 15, made it appear that top U.S. earners had seen their pay quintuple in 2009 to an average of $519 million.  The agency yesterday released corrected tables that showed the average incomes of the top earners, in fact, declined 7.7 percent to $84 million each.

Debt Collectors Face a Hazard: Writer’s Cramp - Banks have been under siege in recent weeks for widespread corner-cutting in the rush to process delinquent mortgages. The accusations have stirred outrage and set off investigations by attorneys general across the country, prompting several leading banks to temporarily cease foreclosures.  But lawyers who defend consumers in debt-collection cases say the banks did not invent the headless, assembly-line approach to financial paperwork. Debt buyers, they say, have been doing it for years.  “The difference is that in the case of debt buyers, the abuses are much worse,” says Richard Rubin, a consumer lawyer in Santa Fe, N.M.  “At least when it comes to mortgages, the banks have the right address, everyone agrees about the interest rate. But with debt buyers, the debt has been passed through so many hands, often over so many years, that a lot of time, these companies are pursuing the wrong person, or the charges have no lawful basis.”

Mirabile Dictu! Debt Collection Robo Signers Make Bank Foreclosure Robo Signers Look Good - Yves Smith - The Alice Through the Looking Glass practices, of at best adherence to the mere appearance of legality, increasingly appears to pervade the nether world where financial players go in search of money they think might be due to them. And the big problem is the word “might”. Banks proceed as if there right to collect was an ironclad certainty, when both the high error rate in their own processes, plus their cutting of legal corners to save costs, shows their confidence is unwarranted. While we have seen abuses aplenty in mortgage-land over the last six weeks, they pale compared to normal practices in the debt collection arena. Some factoids from a New York Times story: Debt collection robo signers way outdo their mortgage peers in productivity. The highest output figure I recall seeing for a foreclosure robo signer is 10,000 affidavits a month, while the Times identifies a debt collection robo signer, Cherie Thomas, who executed 2000 affidavits a day. Because these debts (auto loans, student loans, credit card debt) are traded several times, errors creep in and compound. One JP Morgan Chase employee found errors in 5000 of 23,000 delinquent accounts the bank was in the process of selling. When her manager ignored the information she provided, she alerted the general counsel. She was fired within days, apparently in retaliation.

U.S. Light Vehicle Sales 12.26 million SAAR in October - Based on an estimate from Autodata Corp, light vehicle sales were at a 12.26 million SAAR in October. That is up 17.9% from October 2009, and up 4.7% from the September 2010 sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for October (red, light vehicle sales of 12.26 million SAAR from Autodata Corp). This is the highest sales rate since September 2008, excluding Cash-for-clunkers in August 2009. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate. The current sales rate is still near the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

Components of the ISM manufacturing index - graphs

ISM non-Manufacturing Index increases in October - The October ISM Non-manufacturing index was at 54.3%, up from 53.2% in September - and above expectations of 54.0%. The employment index showed expansion in October at 50.9%, up from 50.2% in September. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. From the Institute for Supply Management: October 2010 Non-Manufacturing ISM Report On Business®: Economic activity in the non-manufacturing sector grew in October for the 10th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business

R&D Spending Declines First Time in Decade - Corporations are reluctant to spend money, even research and development notes the Wall Street Journal article R&D Spending Drops at Major Firms Research and development spending at major companies declined last year for the first time in more than a decade, according to a survey by management consulting firm Booz & Co. But R&D as a percentage of revenues was up slightly from a year earlier because revenues dropped at a faster rate than R&D spending. Booz makes an annual study of the 1,000 publicly traded companies globally that spend the most on R&D, based on their public disclosures. The consulting firm, which has studied data going back to 1997, said 2009 was the first year to show a decline in total R&D spending among these companies. The cuts last year were concentrated in auto, computing, electronics and industrial companies, some of the biggest spenders.

Exporting Our Way to Stability - Barack Obama - AS the United States recovers from this recession, the biggest mistake we could make would be to rebuild our economy on the same pile of debt or the paper profits of financial speculation. We need to rebuild on a new, stronger foundation for economic growth. And part of that foundation involves doing what Americans have always done best: discovering, creating and building products that are sold all over the world.  We want to be known not just for what we consume, but for what we produce. And the more we export abroad, the more jobs we create in America. In fact, every $1 billion we export supports more than 5,000 jobs at home.  It is for this reason that I set a goal of doubling America’s exports in the next five years. To do that, we need to find new customers in new markets for American-made goods. It is hard to overstate the importance of Asia to our economic future.

Why the economy's growth isn't easing unemployment – An economy growing 2 percent a year might be tolerable in normal times. Today, it's a near-disaster. A growth rate of 5 percent or higher is needed to put a major dent in the nation's 9.6 percent unemployment rate. Two reasons why that's unlikely well into next year and maybe beyond: • Construction — both residential and commercial — collapsed last year. And it isn't expected to regain its strength for years. Typically after recessions end, construction booms and powers a new economic expansion. • The recession that began in December 2007, after the housing bubble burst, became the Great Recession once the financial crisis erupted in September 2008. Economic recoveries that follow a financial crisis are typically long-lasting. Banks usually take years to resume lending normally.

It’s Not Just the Economy - Of the 25 congressional districts hit hardest by the recession — measured by unemployment, poverty rates and housing prices — 16 are represented by Democrats. Twelve are favored to win reelection despite the Republican tide, the latest polls indicate. Just one of the 16 is clearly leaning Republican. And of the 25 congressional districts that have fared best economically, 14 currently are represented by Democrats. The Democrat is a clear favorite in just five of those races, polls suggest. Five others are likely or leaning Republican; another four are considered competitive. The economy, in short, isn’t enough to explain the Republican surge, says political scientist Robert S. Erikson of Columbia University. Something more is happening. “People say, ‘Let’s have an ideological correction,’” he said. “They aren’t necessarily endorsing all Republican ideas but seeking to move the ship rightward” toward the center, an acceleration of a traditional midterm-election hit to the president’s party.

CFO’s Big Cost Worry: Employee Benefits - A new survey of 508 U.S. chief financial officers and senior comptrollers find far more of them (84%) worried about rising employee benefit costs than worried about rising raw material (27%) or energy costs (21%). The survey found 30% are planning on reducing health-care benefits in the coming year, 23% are planning on reducing bonuses and 18% are planning on reducing stock options or equity based compensation. The survey was conducted by Grant Thornton LLP during the first half of October

Shrinking the denominator - AS A follow-up to the previous post on jobless benefits, I mention one potential outcome that I previously left out. When jobless benefits expire, it's possible that the unemployment rate will fall as lazy workers are forced back on the job. Not likely, in my view, but possible. It's also possible that the unemployment rate will rise, as the decline in consumption associated with exhausted benefits places a drag on recovery. But there is a third possibility: the unemployment rate may fall as unemployed workers who stayed in the labour force while they collected benefits stop looking for work entirely. Remember that the unemployment rate is calculated by dividing the number of unemployed workers by the size of the labour force. When workers stop looking for work, they're no longer counted as unemployed, and they're no longer counted as part of the labour force. So if we have 20 unemployed workers out of a labour force of 110 people, we get an 18% unemployment rate. If 10 of those workers give up looking for work then they're subtracted from both categories. We then have 10 unemployed workers out of a labour force of 100 people, for an unemployment rate of 10%.

How Immigrants Create More Jobs - Over all, it turns out that the continuing arrival of immigrants to American shores is encouraging business activity here, thereby producing more jobs, according to a new study. Its authors argue that the easier it is to find cheap immigrant labor at home, the less likely that production will relocate offshore.  The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States, the authors say. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa, the study found.  In other words, immigrants may be competing more with offshored workers than with other laborers in America.

How immigration can benefit native workers - Several studies find that immigrants do not harm the wages and job prospects of native workers. This column seeks to explain these somewhat counterintuitive findings by emphasizing the scope for complementarities between foreign-born and native workers. Examining 14 European countries from 1996 to 2007, it finds that immigrants often supply manual skills, leaving native workers to take up jobs that require more complex skills – even boosting demand for them. Immigrants replace “tasks”, not workers.

Immigrant Job Gains, Native-Born Job Losses - We’ve written before about the two-track economy emerging in the United States. One dividing line between the two tracks, it seems, may be immigration status: In the year after the official end of the most recent recession, native-born workers lost 1.2 million jobs while foreign-born workers gained 656,000 jobs, according to a new analysis of government data by the Pew Hispanic Center.  Note also that the period covered by this chart would overlap with the large hiring of temporary Census workers in the spring. The Census Bureau was supposed to give hiring preference to American citizens, which the majority of immigrant workers are not. So, absent Census hiring, net job losses among the native-born probably would have been greater, and so gap between jobs gained by immigrants and those lost by native-born workers would likely have been even wider, Pew says.

Congress' Next Big Issue: How to Handle Jobless '99ers' (CNBC) Before the new Congress takes over in January, lame-duck legislators will have a big issue on their plate: What to do with those whose emergency unemployment benefits run out at the end of the November. Congress ran into the same problem during the summer, and it resulted in hundreds of thousands without jobs to go weeks not receiving benefits. Those affected have come to be known as "99ers," meaning they have exhausted the government's extensions of up to 99 weeks of compensation. Their numbers rose to record levels in September as a total percentage of the unemployed. More than one in 10 jobless Americans—1.47 million, or 10.4 percent of the total—have been out of work for more than 99 weeks, with a few million more on the fourth and final tier of benefits. They are among the individuals most impacted by the economic slowdown, and without help as many as five million more could be joining their ranks soon

The 99ers - ON FRIDAY, I noted that one of the nice surprises in America's third quarter GDP numbers was the increase in personal consumption expenditures. Spending increased at a 2.6% annual pace in the third quarter, up from a 2.2% increase during the prior three months. Then on Monday, the Commerce Department followed up with disappointing news, noting that personal incomes fell 0.1% in September after rising 0.4% in August. It will be difficult to maintain spending increases if incomes aren't growing. But the story behind the decline is an interesting one.  Nearly half of currently unemployed workers have been off the job for more than six months. Congress initially responded to the big rise in unemployment and long-term unemployment by steadily lengthening the duration of emergency unemployment benefits. In the hardest hit states, jobless workers can now collect unemployment benefits for up to 99 weeks. Democratic leaders have tried several times to create a new tier of benefits applying to those still out of work after the 99 week period, but they have been unable to put together the necessary votes. And so benefits max out at just under two years. You may note that the recession began nearly three years ago, and the worst part of the recession, coinciding with the onset of financial crisis, started just over two years ago.

ADP: Private Employment increases by 43,000 in October - ADP reports: Private-sector employment increased by 43,000 from September to October on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from August to September was revised up from the previously reported decline of 39,000 to a smaller decline of 2,000. Since employment began rising in February, the monthly gain has averaged 34,000 with a range of -2,000 to +65,000 during the period. October’s figure is within this recent range and is consistent with the deceleration of economic growth that occurred in the spring. Employment gains of this magnitude are not sufficient to lower the unemployment rate.  Note: ADP is private nonfarm employment only (no government jobs).

Employment report - While the employment report was weak, it was among the best we have seen this cycle. Nonfarm payroll employment rose by 151,000 and the unemployment rate was unchanged at 9.6%. Compared to the historic norm in earlier recoveries this employment gain was very weak, but compared to the same point in the last two jobless recoveries is was OK. Despite all the noise about uncertainty, employment growth is better than it was in the last cycle. 16 months from the end of the recession the index of payroll employment is down 0.1% as compared to a 0.8% drop at the same point in the last cycle. So if uncertainty is causing firms not to increase employment this cycle, what caused firms to not expand hiring the last cycle? It look to me like the change in the cycle commonly called the "great moderation" has caused a massive structural change in recoveries, not some political development.

October Employment Report: 151,000 Jobs, 9.6% Unemployment Rate - From the BLSNonfarm payroll employment increased by 151,000 in October, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today.  Both August and September payroll employment were revised up. This graph shows the unemployment rate vs. recessions. The unemployment rate has been stuck at 9.6% for three straight months. Nonfarm payrolls increased by 151 thousand in October. The economy has gained 829 thousand jobs over the last year, and still lost 7.5 million jobs since the recession started in December 2007.  The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). The dotted line is ex-Census hiring. The two lines have joined since the decennial Census is over. For the current employment recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

Broader U-6 Rate at 17%: The Long-Term Unemployed and the Dark Side of Jobs Report - The U.S. jobless rate was flat at 9.6% in October, but the government’s broader measure of unemployment dropped slightly to 17%, possibly due to long-term unemployed dropping out of the labor force. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. The key to the decrease in the broader unemployment rate was due to a 318,000 drop in the number of people employed part time but who would prefer full-time work. That drop reversed part of last month’s big 612,000 jump. Meanwhile, the number of discouraged workers and those who classify themselves as “marginally attached” to the labor force also increased. The broader rate decreased despite a decline of 330,000 in the number of people who are employed. That drop may sound strange considering the Labor Department reported the economy added 151,000 jobs in October. It’s important to remember that the unemployment rate and jobs numbers are calculated using separate surveys, and the often move in differing directions. The household survey, which is used to calculate the unemployment rate, also is much more volatile, covering a substantially smaller percentage of the work force. And some of this month’s weakness may be the result of earlier strength that stood in opposition to declines seen in payroll data.

The good-news/bad-news employment report - The mathematics of the monthly payroll report don’t always make sense, since it’s actually two reports: the household report, covering employment and unemployment status, and the establishment report, showing the number of people being paid in various sectors of the economy. The November report released this morning shows a clear divergence between the two: while the establishment report did well, with a healthy rise of 151,000 in total payrolls and upward revisions to previous months, the household report went nowhere, with the unemployment rate stubbornly unchanged at 9.6% and other key indicators, like the labor force participation rate and the employment-population ratio, actually heading in the wrong direction. Overall, the private sector has now added more than a million new jobs over the past year — a good start, in the wake of the 8 million job losses we saw over the course of the recession. And 400,000 of those new jobs have come in the past three months. For people with jobs, wages and hours are rising, too. Over the past 12 months, average hourly earnings are up 1.7%, while average hours worked are up 1.8%, resulting in a rise in average weekly earnings from $753.20 to $779.64.

The Employment Report - The BLS reports that unemployment was unchanged in October at 9.6%, and Nonfarm payroll employment increased by 151,000. I've seen some people calling this a strong report. It's certainly better than lower job growth numbers, so it could have been worse, but in past recoveries we've had job growth of hundreds of thousands, far more that this. So let's try to put it in perspective. Many people estimate that 7.5 million jobs have been lost since the start of the recession (and some people estimate it's even more than this). Suppose it takes 100,000 jobs per month to keep up with population growth. I think it's a bit more than this, but let's take an estimate that is generous in terms of making up lost ground. With a net gain of 50,000 jobs (rounding from 51,000), how long would it take to reemploy the 7.5 million who need jobs? The answer is (7.5 million)/(50,000) = 150 months = 12.5 years. That gives an indication of the strength of the report. Some of the 7.5 million might drop out of the labor force reducing the time a bit, but having people drop out of the labor force is not good news either.

Comparing Recoveries: Job Changes - The economy added 151,000 jobs on net in October, as the ramp up in private hiring finally overtook the job losses in the government. In just the private sector, payrolls increased by 159,000 in October, after rising by 107,000 in September. The chart above shows job changes in the most recession compared with previous ones, with the black line representing the current downturn. The line has risen since last year, but still has a long way to go before the job market fully recovers to its pre-recession level. Since the downturn began in December 2007, the economy has shed, on net, about 5.4 percent of its nonfarm payroll jobs. And that doesn’t  account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession. The unemployment rate (measured by a different government survey, and based on how many people are without jobs but are looking for work) stayed flat at 9.6 percent.

Latest Employment Data - After a report showing a gain of 150,000 jobs last month, Mark Thoma says that the glass is half empty. it could have been worse, but in past recoveries we've had job growth of hundreds of thousands, far more that this. But, as I learned by reproducing Ed Leamer's analysis, the economy almost never makes a rapid transition from low employment growth to high employment growth. Before we can get to the point where employment gains are 350,000 a month or more, we have to transition from bad numbers to mediocre numbers. At least with last month's figure, we made it to mediocre. After a couple more months of that, it is more plausible that we will see large gains.  So far, I have been surprised at how long it has taken for job growth to pick up. Still, I think that within a year we will see regular monthly employment increases of 400,000 or more. I have no formal forecasting model or clever insights, but I just don't think that the economy can stay down indefinitely.

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the bottom of the recession. The dotted line shows payroll employment excluding temporary Census workers.  The Employment-Population ratio declined to 58.3% in October from 58.5% in September. This is disappointing news. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The Labor Force Participation Rate also declined to 64.5% in October from 64.7% in September. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.  When the employment picture eventually improves, people will return to the labor force and the participation rate will increase from these very low levels. Right now workers are leaving the labor force, and even though that is keeping the reported unemployment rate from rising, it is really unwelcome news. From the BLS reportThe number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 318,000 over the month to 9.2 million, partially offsetting large increases in the prior 2 months.

The Recession’s Toll on Long-Term Unemployment - Brookings - The October employment numbers, released today by the Labor Department, show tentative progress toward recovery. The U.S. economy is creating jobs for the first time in four months, with an increase of 151,000 jobs last month. The private sector added 159,000 jobs, continuing ten straight months of private sector job growth. For the past few months, The Hamilton Project has examined the “job gap,” or the number of months it would take to get back to pre-recession employment levels (while absorbing the 125,000 people who enter the labor force each month). In this month’s posting, we also explore the impact of the Great Recession on the length of unemployment for many American workers and find that the number of long-term unemployed has risen sharply since the Recession began.

Job growth improves, but pace leaves full employment 20 years away - October’s employment report, released this morning by the Bureau of Labor Statistics, showed faster private sector employment growth than in recent months, 159,000, along with strong upward revisions to earlier data (+110,000).  Other positive news was the unexpectedly modest jobs loss in state and local government (-7,000), although job losses in this sector will likely worsen in future months given state and local budget challenges.  Even though October’s job growth is a step in the right direction, given the backlog of 14.8 million unemployed workers in this country, the pace of job growth is not strong enough to bring the unemployment rate down to pre-recession levels anytime soon.  To give this some context:  If the rate of job growth were to continue at October’s rate, the economy would achieve prerecession unemployment rates (5% in December 2007) in roughly 20 years. For the fourth straight month, the unemployment rate held steady at 9.6%.

Seasonal Retail Hiring off to fast start in October - According to the BLS employment report, retailers hired seasonal workers at about the pre-crisis pace in October.Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year. This really shows the collapse in retail hiring in 2008 and modest rebound in 2009.  Retailers hired 150.9 thousand workers (NSA) net in October. This is about the same level as in 2003 through 2006. Note: this is NSA (Not Seasonally Adjusted), retailers hired 28 thousand workers SA in October. This suggests retailers are fairly optimistic about the holiday season.

Democrats Lost More Seats in Districts With Better Economies - Of the 25 congressional districts hit hardest by the recession—measured by joblessness, poverty rates and housing prices—16 are currently represented by Democrats. Fourteen of them won reelection despite the Republican tide. Just one of 16 has definitely switched hands: Nevada’s 3rd district, which includes many suburbs of Las Vegas, where the collapse of the housing bubble was especially severe. The other district, northern California’s 11th, was still too close to call Wednesday. Republican David Harmer was leading by less than 30 votes, according to the Associated Press. In Arizona’s 4th district, which includes the southern portion of Phoenix, home prices tumbled 30% in just one year, the poverty rate  jumped five percentage points to 31.8% in 2009 and the share of the entire adult population that isn’t working (including those who are in school, retired or not looking for work) increased to 43.1% in 2008. Yet, Democratic Rep. Ed Pastor won by more than a 35-point margin.

Is the US Taking Too Much of the Brunt of the Crisis Aftermath? - Yves Smith - Before readers throw brickbats at me, I’m just acting as the messenger for two articles, one by Harvard’s Kenneth Rogoff, the other by the Financial Times’ Martin Wolf. Each points out that the US is taking a proportionately bigger hit than other big economies post crisis, particularly in terms of unemployment. And this is actually more than a bit perverse, since the normal course of action for a country in the position of the US (chronic current account deficits, high debt levels) is to depreciate the currency and/or increase import barriers, and renegotiate and restructure debt.  Both articles are of the view that the US public is going to lose patience with continued high unemployment, which amounts to exporting demand for the benefit of foreign manufacturers. Effectively, both contend it would behoove our trade partners to help solve this problem, because if they don’t, our response is likely to be unilateral and driven by politics rather than sound policy.

Two million people to lose jobless benefits in December (MarketWatch) — About 2 million long-term jobless workers could lose eligibility for unemployment-insurance payments by the end of the year due to the expiration of federal funding. A special extended-benefits program that relies on federal funds will start shutting down later this month. There’s little time to work on legislation to extend the program during the lame-duck session in Congress, and passage of additional benefits would likely be even tougher once Republicans assume majority status in the House of Representatives starting in January. A spokeswoman for Senate Majority Leader Harry Reid, of Nevada, said there’s a long list of “things to do and not a lot of time to do them” during the lame-duck session, scheduled to convene Nov. 15. “While a short-term extension into 2011 is very possible, a long-term extension appears more difficult, and could happen only if an agreement on a tax-cut extension can also be reached,” Goldman Sachs analysts wrote in a research note.

Applications for jobless aid rise sharply (AP) -- The number of people seeking jobless benefits jumped sharply last week, after two straight weeks of declines. The increase undermines hopes that unemployment claims, after falling four times in the previous five weeks, were on a sustained downward trend. That would signal layoffs were slowing and hiring was picking up. Instead, claims remain stuck at an elevated level.The Labor Department said Thursday that initial claims for unemployment aid rose by 20,000 to a seasonally adjusted 457,000 for the week ending Oct. 30. Wall Street analysts polled by Thomson Reuters had expected a smaller rise. Claims have fluctuated around the 450,000 level all year. They will need to drop below 425,000 to signal sustained job gains."Those looking for an imminent spurt of job creation are, for yet another week, likely to be disappointed,"

Long-term scarring of hysteresis on employment - Imagine having a fever so bad that it permanently raised your body temperature. Now think of the current unemployment crisis, with new numbers being announced today of a steady 9.6 percent unemployment rate, functioning at the same way. Thinking in terms of "natural" is very, well, natural to us. Some think we are hard-wired for it.   And it is a useful concept in many ways. Our body has a natural body temperature. We get shocked by disease and sickness. This raises our body temperature, but eventually we'll heal and our temperature will go back to the "natural" rate. This type of thinking piggybacks onto our thinking about unemployment. It is standard that economists now believe there is a "natural" rate of unemployment. Our economy takes a shock from a financial crisis, a shift in demand, etc., and the unemployment rate rises. But eventually we'll heal and our unemployment will go back to the "natural" rate. But what if it doesn't? What if periods of high unemployment scar the economy in such a way that it raises the permanent unemployment rate? What if periods of high unemployment lead to reduced wages and higher unemployment years down the line? This is what is known as hysteresis. (Ezra has written about hysteresis here.)

Unemployment Offices To Add Armed Guards - Armed security guards will be on hand at 36 unemployment offices around Indiana in what state officials said is a step to improve safety and make branch security more consistent. No specific incidents prompted the action, Department of Workforce Development spokesman Marc Lotter told  6News' Norman Cox. Lotter said the agency is merely being cautious with the approach of an early-December deadline when thousands of Indiana residents could see their unemployment benefits end after exhausting the maximum 99 weeks provided through multiple federal extension periods. "Given the upcoming expiration of the federal extensions and the increased stress on some of the unemployed, we thought added security would provide an extra level of protection for our employees and clients," he said.  Some offices have had guards for nearly two years but those guards were hired on a regional basis

Indiana Braces For Violence, Adds Armed Guards To Unemployment Offices In Anticipation Of 99-Week Jobless Benefits Expiration - As America reaches its two year anniversary from the immediate economic collapse that followed the Lehman bankruptcy, punctuated mostly by vast and broad layoffs across every industry, arguably the most relevant topic that few are so far discussing is the expiration of full 99 weeks of maximum claims (EUC + Extended Benefits) for cohort after cohort of laid off Americans. And since these people are certainly not finding jobs in the broader labor market (which continues to contract and thus make the unemployment percentage far better optically than the 10%+ where U-3 should be), their next natural response will be to get very angry at the teat that has suckled them for so long, and is now forcing them to go cold turkey. Which is why we read with little surprise that now in Indiana, and soon everywhere else, unemployment offices are starting to add armed security guards. Of course, the official explanation if a benign one: "Armed security guards will be on hand at 36 unemployment offices around Indiana in what state officials said is a step to improve safety and make branch security more consistent." Why the need to improve safety all of a sudden? The 99 weeks cliff of course. Which means that on your next trek to the unemployment office to collect that last stimulus paycheck from Uncle Sam, you will most likely see the masked fellow below.

Fast Track to Inequality - Jacob Hacker of Yale and Paul Pierson of Berkeley argue persuasively that the economic struggles of the middle and working classes in the U.S. since the late-1970s were not primarily the result of globalization and technological changes but rather a long series of policy changes in government that overwhelmingly favored the very rich. Those changes were the result of increasingly sophisticated, well-financed and well-organized efforts by the corporate and financial sectors to tilt government policies in their favor, and thus in favor of the very wealthy. From tax laws to deregulation to corporate governance to safety net issues, government action was deliberately shaped to allow those who were already very wealthy to amass an ever increasing share of the nation’s economic benefits. “Over the last generation,” the authors write, “more and more of the rewards of growth have gone to the rich and supperrich. The rest of America, from the poor through the upper middle class, has fallen further and further behind.”

Recession Raises Poverty Rate to a 15-Year High -The percentage of Americans struggling below the poverty line in 2009 was the highest it has been in 15 years, the Census Bureau reported Thursday, and interviews with poverty experts and aid groups said the increase appeared to be continuing this year. With the country in its worst economic crisis since the Great Depression, four million additional Americans found themselves in poverty in 2009, with the total reaching 44 million, or one in seven residents. Millions more were surviving only because of expanded unemployment insurance and other assistance.  And the numbers could have climbed higher: One way embattled Americans have gotten by is sharing homes with siblings, parents or even nonrelatives, sometimes resulting in overused couches and frayed nerves but holding down the rise in the national poverty rate, according to the report. The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

In U.S., 14% Rely on Food Stamps - A huge number of American households are still relying on government assistance to buy food as the recession continues to batter families. Food stamp recipients ticked up in August, children consumed millions of free lunches and nearly five million low-income mothers tapped into a government nutrition program for women and young children. Some 42,389,619 Americans received food stamps in August, a 17% rise from the same time a year ago, according to the U.S. Department of Agriculture, which tracks the data. That number is up 58.5% from August 2007, before the recession began. By population, Washington, D.C. had the largest share of residents receiving food stamps: More than a fifth, 21.1%, of its residents collected assistance in August. Washington was followed by Mississippi, where 20.1% of residents received food stamps, and Tennessee, where 20% tapped into the government nutrition program.

Default, pension reform and systemic risk: State of Default - WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson. The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state - unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state's bonds. The panel reluctantly agreed to provide temporary funding for the state - say for 30 days - but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

State Bailouts? They've Already Begun; Bond subsidies and transfers have allowed states to avoid making tough decisions. It won't last. The threat posed by the state fiscal crisis in the U.S. is vastly underestimated and under-appreciated—because even today too few people understand how states have been managing their finances.  A clear example of this took place in Manhattan last week at the Economist magazine's Buttonwood Conference, where a panel role-played the federal government's response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state's debt payment. What this panel and so many other 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.

New York State Faces $315 Million Budget Deficit on Lower Tax Collections - New York state faces a $315 million budget deficit because tax revenue hasn’t increased as much as projected three months ago, when lawmakers approved the spending plan, the Division of Budget said. Tax collections for this fiscal year are now forecast at $61.4 billion, down $343 million from August estimates, the division said in a report yesterday. The budget, including increased federal aid, is now estimated at $135.3 billion.  “The slowdown in economic growth in the second and third quarters of calendar year 2010 has been more pronounced than expected,” the report said. Slower growth reduced tax revenue and increased contributions to the Medicaid health-insurance program for the poor, it said. For fiscal 2012, which begins April 1, the state faces a deficit of $9 billion, up from $8.2 billion previously estimated, according to the report.

Tough Fiscal Problems Loom for Cities - Winning election candidates in the Bay Area's largest cities have little time to celebrate as their municipalities confront daunting challenges. One burning issue is how cities will tackle ballooning pension costs.  In San Jose, San Francisco and Oakland, pensions have begun to cut into funding for other services, potentially forcing leaders to shut programs to continue making pension payments. "Pension benefits are wreaking havoc on our budget; they are totally out of control," says Chuck Reed, mayor of San Jose. "It has become our most pressing issue."The pension problem is the result of twin forces. On the one hand, costs are rising as a result of pension payout increases built into employee contracts nearly a decade ago. At the same time, cities are increasingly strapped because of significant losses in pension fund investments. Prior to the most recent recession, pension payouts were largely covered by each city's pension fund investment returns. But when pension funds took a hit in the 2008 financial crisis, that forced the cities to cover the losses with their general fund budgets.

Chicago Waiting for 'Opportune Time' for $804 Million Bond Sale -- Chicago, whose credit ranking has been cut by Fitch Ratings twice in less than three months, is delaying next week’s $804 million bond sale, said Pete Scales, a spokesman for Chief Financial Officer Gene Saffold. The sale, which includes $591 million in tax-exempt refinancing bonds and almost $214 million in taxable Build Americas, will bring the total general obligations sold by the city this year to about $1.75 billion, according to data compiled by Bloomberg. The city sold $690 million in 2009. “We have decided to postpone the GO bond sale to wait for a more opportune time to access the lowest possible rates,” Scales said in an e-mail. “A new sale date hasn’t yet been determined.”

Harrisburg Doesn't Have Cash for Debt Payments - Harrisburg, the cash-strapped capital of Pennsylvania, doesn't have enough money to make two debt payments totaling $305,952 on Nov. 15. But Chuck Ardo, spokesman for Mayor Linda Thompson, said the city intends to make the payments.  Mr. Ardo didn't respond to requests for details on how the city will do so.  The debt was issued through the Harrisburg Redevelopment Authority, a municipal entity unrelated to an incinerator project whose high cost helped plunge the city of 47,000 people into a fiscal crisis.  The city doesn't have the funds to pay a $99,025 payment for a 2006 "lease revenue note." Its debt-service fund is also about $28,000 short on covering a $206,927 payment due on a 2005 taxable-revenue bond that financed the expansion of the city's minor-league-baseball stadium, Mr. Ardo said.

Detroit Utility Struggles To Stay On Top Of Theft (Michigan Radio) - If you walk into a gas station or a party store in the city of Detroit, you might see a flyer taped up, advertising "help with gas and lights." But the phone number probably won't connect to a charity program or aid organization. More likely, it'll put you in touch with a fixer who will help you steal electricity or natural gas.  Trying to shut the problem down is a team of investigators from DTE Energy. Every day of the work week, they embark on what seems like a never-ending game of whack-a-mole. They visit homes and businesses to investigate tips of energy theft. And those tips often lead to discoveries like the one recently made at a home on Detroit's west side. "Look at this," says DTE theft investigator Keith Gross, pointing to a piece of wire stuck into the side of a clapboard-sided house off Michigan Avenue. "Running right straight through the wall. Just a little piece of 16-gauge wire." The meter on the side of this house is gone. Someone has wedged a nail and what looks like a scissor blade into the box to conduct electricity, and they've connected it to a wire that's threaded into a hole in the side of the house.

Urban Decay in Flint, MI (Video)

Buffalo schools facing fiscal nightmare - The chairman of Buffalo's control board Wednesday issued a somber warning about the Buffalo Public Schools' financial picture, saying the district is confronting a "fiscal emergency" that could result in a $42 million shortfall by next this summer. Nils Olsen's comments followed a presentation by control board senior analyst Bryce Link about the district's four-year financial outlook. Due to a number of factors -- including changes at the state level regarding employee pensions and increases in payments to charter schools, as well as projected drops in sales tax revenue -- the district is looking at a budget gap for the 2010-11 fiscal year, Link said. "Three months ago, when the budget was adopted, it was balanced," he said. "Now, they're faced with a $26 million shortfall in that three-month period."

Succeed in Kindergarten, and You’re Set for Life - Raj Chetty presented this paper at NYU on Tuesday: How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star, written with John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, and Danny Yagan. Under the project studied, there were random assignments of teachers and students to classes. The striking thing in the findings is the identification of  “Good” and “Bad” kindergarten classes, as shown by more variation in the Kindergarten test scores than would occur with random variation. The “Goodness” of  the classes then have significant effects on their members for all those later life outcomes. This finding was intrinsically fascinating in itself.  It reinforces a lot of other research about the importance of early childhood for later outcomes, which deserves a lot more attention in development.

UNC worst-case budget looks grim - UNC system President Erskine Bowles painted a bleak picture Thursday of the UNC system if the more severe of two budget-cutting scenarios is necessary. As many as 1,700 jobs could be lost, he said. Bowles even suggested that if North Carolina's economic health doesn't improve, the UNC system may eventually have to close a campus - which he called a smarter strategic and fiscal move than simply chipping away at every university in the system. "If we keep having cuts, cuts, cuts, we'll have to look at eliminating schools, campuses," Bowles told members of the UNC system's Board of Governors. "If it went on for several years, that would be the smart decision. The unfortunate, smart decision."

The Education Bubble Continues - This is a brilliant analogy between the alchemist's paradox and today's educational system. More education simply dilutes the value of education. Ergo why I focus on statistics such as MBA graduates as a percent of the population and put more and more emphasis on the trades and 2 year programs than a bachelors degree in (well) pretty much anything.  All you lefties wanted education? Well, you got it. Tons of it. So much to the point that having an education is pretty much worthless and is nothing special. Education is now the new sausage party. You now need a masters degree. And if not that a doctorate. And oh, guess what? By the time you got your doctorate you not only have $100,000 in debt, you have no better job prospects because everybody else did what you did. And hey, by the way, how's that hope and change and stimulus coming along? Any of you recent Obamanaut 20 somethings fresh out of college employed? Yeah, how is that economy coming along. Too bad the republicans only took over the house. Stalemate from here on out my friends and at a 9% unemployment rate to boot.

Why do graduates lean left? - James Paterson had an op-ed in yesterday’s Weekend Australian arguing that uni graduates lean left, and blaming it in part on academic bias.  I had a look at the party id question in the Australian Survey of Social Attitudes 2009 and the differences by qualification level are certainly striking. However people with TAFE certificates and diplomas have similar affiliations to people with bachelor degrees, despite the fact that there are few ‘political’ courses taught by these institutions.  On the other hand, those who spend longer at university, postgraduates, end up with more left-wing affiliations than bachelor degree holders. This leaves open the possibility of a ‘university’ effect on political views.  Traditional political science holds that socialisation/social factors are the major sources of political affiliations and views. I think this is right, so given that most people go to uni at a time when they are forming their adult identity – including their political identity – it is plausible that the general political environment on campus affects long-term political affiliations.

For-Profit Schools, Tested Again - LAST week was challenging for the Apollo Group, the big for-profit education company that runs the University of Phoenix, Western International University and other institutions. One reason is that the Obama administration instituted new rules barring pay-for-enrollment deals among student recruiters at for-profit colleges — a development that is likely to cause significantly lower enrollment levels at Apollo and its peers. But last week also brought a disclosure from Apollo that the Securities and Exchange Commission had requested information about the company’s insider trading policies relating to stock sales made by some of its top officials in 2009. The sales the S.E.C. is focusing on occurred around the time that the Department of Education was asking questions about the University of Phoenix’s policies relating to money it receives under the federal government’s Title IV financial aid programs.

California Teachers' Fund May Cut Return Forecast to 7.5% Following Losses - The California State Teachers Retirement System, the second-largest U.S. public pension, will consider cutting its expected earnings rate on investments to 7.5 percent, increasing the need for higher contributions as it recovers from market losses.  The $132 billion pension fund’s governing board will consider approving a new rate of return, now 8 percent, at its Nov. 5 meeting in Sacramento, according to its agenda. The so- called assumed rate of return on investments is used to calculate the size of pension contributions from employers needed to pay retirees.  Public pension funds across the U.S. are adjusting their assumptions following losses in the recession that within three years may leave them $1 trillion short of the amount needed to pay benefits, according to a National Bureau of Economic Research report. The largest fund, the California Public Employees Retirement System, known as Calpers, uses a 7.75 percent assumed rate of return.  Calstrs, as the teachers’ fund is known, is 78 percent funded, meaning it is short by more than $42 billion. Reducing the assumed rate of return would lower that funding level to 74.2 percent, according to the report posted on the fund’s website.

Removing a generation of college educated graduates from purchasing homes – Higher education bubble will force many students to hold off on buying a home to service college loan debt. Renters take brunt of household correction. Demographic trends will put pressure on home and stock prices.- The net worth of U.S. households fell by $1.5 trillion in the second quarter of 2010.  Recent data from the Fed shows that even during the recovery, U.S. households continue to move backwards in making financial progress.  Who are we really kidding here?  Does this feel or have the taste of a recovery to anyone?  In fact, new data now coming out from the Census shows that from 2008 to 2009 the U.S. lost 1.3 million households.  That’s right, because of the economy people have had to consolidate households.  Yet as we will show later, much of this was shouldered by renters.  Another thing that will impact the housing market going forward is the student loan bubble.  That is right, higher education is in one giant inflated blue debt bubble and thankfully the mainstream media is now picking up on this.  Many young potential buyers won’t be able to buy a home because theoretically they already did with the cost of their education.  The numbers don’t look pretty for recent graduates with red all over their balance sheets before they even start their professional life.

New rules for student loan structures - New rules finalized last week by the U.S. Department of Education are good news for students and taxpayers. For all topics except "gainful employment," this was the final step of the negotiated rulemaking process initiated by the Department more than a year ago to ensure the integrity of the federal financial aid programs. Among other positive reforms, the rules restore the ban on incentive compensation, so that college representatives can no longer be paid based on the number of students they enroll. These rules are an important start, but we urge the Department to put additional protections in place by 2011 and to issue a strong gainful employment regulation that will go into effect in 2012.  Notice from Ticas-the institute for college access and success

Good News for the Class of 2011: You’re Hired - This year’s crop of college graduates is poised to have an easier job hunt than last year’s class, a new report shows. The National Association of Colleges and Employersindex of college hiring climbed to 126.4 in October, compared with 86.8 at the same time last year. The index is based on surveys of employers. Hiring is gauged on a scale from 0 to 200. A score of 100 indicates no change, scores below 100 show a decrease in hiring and numbers above 100 represent an increase. Nearly half of employers surveyed said they planned to increase their college hiring. Less than 10% said they expected to decrease it.

US public pensions face day of reckoning - In 2006, US regulators, reacting to the 2000 stock market crash and the so-called “perfect storm”, implemented broad rules for corporate defined benefit pension plans on liability valuation and financial reporting (SFAS 158), and on funding (the Pension Protection Act). Today, there is a similar focus on the epic underfunding of defined benefit plans at US state and local governments, estimated at $1,000bn to $3,000bn, as accounting regulators have proposed more prominent disclosure of shortfalls on sponsors’ annual financial statements. Some observers caution, however, that the new principles will fall short and merely perpetuate current methods which greatly understate governments’ pension liabilities. The US public sector, excluding the federal government, employs more than 19m people – 15 per cent of the labour force – and their pension plan assets, according to the Federal Reserve, were $2,557bn in June 2010, down from $3,198bn at year-end 2007. By any measure that total is not enough. Wilshire Associates estimates that as of June 2009, state plans were just 65 per cent funded, while local government plan funding stood at 74 per cent. Wilshire’s estimates do not reflect the 30 per cent rise in the broad US stock market since then, but few dispute that plans are still badly underfunded.

State Takeover Of Pittsburgh Pension Could Triple Payments - Pittsburgh would have to pay $2.6 billion to $3.6 billion over the next 30 years to shore up its public pension fund if the city fails to meet a state funding minimum by the end of the year, city council members were told Thursday. The city's retirement system currently has only 28% of the assets it needs to cover its obligations; if it cannot raise that to 50% by Dec. 31, Pennsylvania law will require the state to take over the retirement system and compel Pittsburgh to make the payments needed to assure pensions for 8,000 active and retired employees. Reaching the 50% threshold will require about $220 million, equivalent to about half of the city's annual budget. Making the payment from the general fund would result in painful consequences for city residents, such as loss of services or higher taxes.

Hard times worsen NY's deficit, more seek Medicaid - New York's hard times just got harder. The administration of Gov. David Paterson on Thursday said closing the latest deficit may require cuts of perhaps 1 percent in every area including a midyear cut in school aid. The Legislature would have to agree to most cuts and any across-the-board cuts. Budget Director Robert Megna said the $315 million shortfall in the current budget must be addressed by Dec. 31, when Paterson's term ends and fellow Democrat Andrew Cuomo, the current attorney general, takes office. "We've flattened out a little bit on the revenue side, where revenue seemed to be improving," Megna told reporters. "That's about half the problem."

Texas Gov. Rick Perry: Let states opt out of Social Security…Appearing on television Thursday, Texas Governor Rick Perry, a potential contender for the Republican nomination in 2012, said that he wants states to be able to opt-out of Social Security. On CNN's Parker/Spitzer, hosted by Democrat and former New York governor Eliot Spitzer and political columnist Kathleen Parker, Perry compared Social Security to a ponzi scheme and said that Americans want Washington to stop spending so much money. "Here's what I think would be a very wise thing," he began. "In 1981, Matagorda, Brazoria, and Galveston Counties all opted out of the Social Security program for their employees. Today, their program is very, very well-funded and there is no question about whether it’s going to be funded in the out years. It’s there. That’s an option out there." "So, you want to let people opt out?" responded Spitzer. "I think, let the states decide if that’s what's best for their cities," Perry replied.

The Big Lie About Social Security -  Republicans and quite a few Democrats have once again been attacking Social Security for running up the federal deficit. The president’s own deficit commission is likely to make Social Security reform a priority. In view of all the rhetoric, voters may be surprised to find out how little Social Security will actually contribute to the future budget gap. In fact, most would probably be stunned.  The Congressional Budget Office, which produces dry, cautious budget projections, recently reminded Congress that Social Security as a percent of GDP will rise from 5 to 6 percent in 2035 and simply stay at that level for the foreseeable future. In other words, the much decried shortfall amounts to only 1 percent of GDP over three decades. And this may be exaggerated. As some observe, much will depend on the flow of young immigrant workers to America. The more workers contributing to Social Security, the smaller any future deficit will be. And the CBO projections tend to make overly conservative estimates about such immigration in the decades to come.

'A Well Tailored Safety Net': Social Security and Old-Age Risk-Sharing - I guess my reputation precedes me at least a little bit. Jed Graham of Investor's Business Daily has devised a new fix for Social Security and published it as A Well Tailored Safety Net (link to chapter summary) and kindly offered to send me a copy to review. Well I am in the midst of a move South to Seattle and a new job search (see note under fold) and so won't have time for a full reading but will put some first impressions below the fold. Mr. Graham points us to a favorable review by Jonathon Chait in The New Republic A Bona-Fide Social Security Fix as well as a piece in The National Review by Reiham Salam Jed Graham on Work Disincentives and concludes with some apparent satisfaction:  It’s kind of noteworthy when these liberal and conservative publications see eye to eye on an issue as ideologically divisive as Social Security reform. It’s even more noteworthy considering that these are two of the more thoughtful people writing about economic policy. Well while Chait is a reasonably consistent liberal both him and TNR lean a lot heavier in the direction of 'neo' than 'New Deal' liberal, if we had an equally favorable opinion from The Nation maybe we could talk here.

Voting: In Your Self-Interest, Or Against It? - But back to SNAP, as that’s what got me started with this follow-up post. Below are the year-by-year levels (000′s) of SNAP dollars by state for the period from 2000 through 2009. A Google search on “where is Tea Party strongest” returns this Rasmussen report from June among its results. At 45 seconds in we learn that Tea Party affiliation is strongest in CO, KY, AL, AZ and GA. Interestingly, the growth in SNAP in three of those states — AZ, CO and GA — exceeds the national average over the period from 2000 – 2009.  A similar pattern for these five states, i.e. higher than the national average in various sub-components of PCTR, is evident in Medicare, Family Assistance, and Unemployment Insurance.  Three counties are in Alabama: Blount, Shelby and St. Clair. Three are in Utah: Cache, Iron and Washington. One is in Georgia: Forsyth. And the winner — giving astounding 93% of its vote to Bush in 2004 and 85% to McCain in 2008, all the while sucking on the public teat big time — is Madison, ID. These counties would seem to be the poster children for COPB — Cutting Other People’s Benefits — because the numbers clearly indicate that they’re sure not cutting their own.

Physicians face painful decision on Medicare - While most people are focused on the midterm elections Tuesday, the American Medical Association is gearing up for the lame-duck congressional session scheduled to start Nov. 15. Unless Congress intervenes, payments to doctors for treating Medicare patients will be cut by 23 percent on Dec. 1 and another 6.5 percent on Jan. 1.  Cecil B. Wilson, an internist from Winter Park, Fla., who became AMA president in June, is pressing for a 13-month patch that would prevent the Medicare physician cuts. In April, the Congressional Budget Office said that blocking the cuts until January 2012 would cost about $15 billion. A long-term formula fix, through 2020, would cost about $276 billion, it said.  The AMA argues that a 13-month reprieve from the reductions would give it time to work with Congress to overhaul the Medicare payment formula. In recent years, the payment formula has called for cuts, but each time lawmakers have stepped in to block them before they took effect or shortly afterward. The AMA could use a win on the issue. The organization was sharply criticized by some physicians for endorsing the new health-care law without getting the formula straightened out in return.

How do we rate the quality of the US health care system – Conclusion - If you haven’t read the introduction, go back and read it now.  That introductory post also included links to all the posts in this series on how we can rate the quality of the US health care system.  Each the pieces discussed another way to look at quality, and how the US compares to comparable countries in that domain. I expected more arguments for this series than for the cost one did.  After all, few dispute that we’re spending a lot of money on health care, but plenty of people think we’re loaded with quality.  Quality is important, though, perhaps more important than cost.  We can agree to spend a lot of money on health care, but you would hope that we’re getting our money’s worth. And there’s the rub.  If we’re going to spend way more than any other country on health care, then we should absolutely, positively have the best health care system in the world.  We don’t.  I don’t know how you could have read this series and still believe that we do:

Competition's Shortcomings in Curtailing Health-Care Costs - In last week’s post, I asked whether we can expect the health-care costs of individuals and families to fall as the number of health insurers competing in a given market area increases – as was so often posited by all sides during the recent health-care debate.  As I said last week, a health-insurance contract is unlike a widget (which, in standard Econ 101 discourse, is a simple, standard manufactured good whose price tends to fall to the lowest possible level as more producers enter to compete in the market for widgets). Rather, health insurance, in exchange for one premium, provides what is known as a tie-in sale of a set of services produced by the insurers, along with the care purchased on the insured’s behalf from doctors, hospitals and other providers. Consider the production cost of the set of services produced by a health insurer, which I enumerated last week — marketing to enrollees, risk pooling, claims processing, disease management, information services and more. There are apt to be significant economies of scale in the production of most of the services produced by insurers — and that means the unit cost of these services is likely to fall as scale increases, especially for services that rely heavily on electronic-information systems.

How an obscure provision in the health care law turned small business against Obama and the Democrats. - So how did the Obama administration lose small business? In part because, while it lowered taxes on virtually all companies with small workforces, relatively few of their owners know that. At the same time, it increased the regulatory burden—something that drives small-business owners crazy—in a small but hugely noticeable way.  The issue is the 1099 provision of the health care law the president signed last spring. The portion of the law was designed to improve compliance with the tax code. But it means a whole lot more paperwork—paperwork that is particularly onerous for small companies with lower margins and higher overhead costs to begin with.  Before the health care bill came into existence, businesses needed to send 1099 forms to the non-incorporated businesses that provide them with more than $600 in services per year. Now, businesses need to file 1099s to any business that provides them more than $600 in goods or services per year. A nearby restaurant where you have six $100 business lunches per year? You need to get their tax identification number and then fill out a 1099. Purchase $600 in office chairs? 1099.

Height, Health Care and I.Q. - On a good day, I’m 5′ 7″.  That makes me about the same height as economist John Komlos of the University of Munich, who is at the heart of Nancy Shute’s recent NPR report about how Americans’ stable stature may reflect reflect shortcomings of its healthcare: Through most of American history, we’ve been the tallest population on the planet. Americans were two inches taller than the Englishmen they fought in the Revolutionary War, thanks to abundant food and a healthy rural life, far from the disease-ridden cities of Europe. But we’re no longer at the top. Northern Europeans are now the world’s tallest people, led by the Dutch. The average Dutch man is 6 feet tall, while the average American man maxes out at 5-foot-9. Good health care and good nutrition during pregnancy and early childhood are two reasons why the Dutch have grown so tall, Komlos says. In addition, the Dutch guarantee equal access to critical resources like prenatal care. That’s not the case in the United States, where 17 percent of the population has no health insurance.

Study: Alcohol more lethal than heroin, cocaine – Alcohol is more dangerous than illegal drugs like heroin and crack cocaine, according to a new study.  British experts evaluated substances including alcohol, cocaine, heroin, ecstasy and marijuana, ranking them based on how destructive they are to the individual who takes them and to society as a whole.  Researchers analyzed how addictive a drug is and how it harms the human body, in addition to other criteria like environmental damage caused by the drug, its role in breaking up families and its economic costs, such as health care, social services, and prison.  Heroin, crack cocaine and methamphetamine, or crystal meth, were the most lethal to individuals. When considering their wider social effects, alcohol, heroin and crack cocaine were the deadliest. But overall, alcohol outranked all other substances, followed by heroin and crack cocaine. Marijuana, ecstasy and LSD scored far lower.  The study was paid for by Britain's Centre for Crime and Justice Studies and was published online Monday in the medical journal, Lancet.

More on resilience - A couple months ago, I wrote about a study showing that those who had experienced a little (but not too much) adversity were better at handling physical pain than their pain-free counterparts. Now, a new study finds the same trend – but with mental health and wellbeing. It seems that both physical and mental resilience can be achieved through a healthy amount of adversity. When we face hard times, we adapt and build a callous that helps us take on future challenges. Resilience is often considered a process that occurs in spite of adversity, but we might want to instead think of it as a phenomenon that appears because of adversity.  Indeed, we can become even more physically and mentally capable as a result of our misfortunes.

The Great Unwashed - Defying a culture of clean that has prevailed at least since the 1940s, a contingent of renegades deliberately forgoes daily bathing and other gold standards of personal hygiene, like frequent shampooing and deodorant use.  To the converted, there are many reasons to cleanse less and smell more like yourself. “We don’t need to wash the way we did when we were farmers,” Since the advent of cars and labor-saving machines, she continued, “we have never needed to wash less, and we have never done it more.”  Retention of the skin’s natural oils and water conservation are two reasons Ms. Palmer and others cite for skipping a daily shower. Some have concluded that deodorant is unnecessary after forgetting it once with no social repercussions, or are concerned about antiperspirants containing aluminum, even though both the National Cancer Institute and the Alzheimer’s Association don’t share those concerns. Shampooing as little as possible can help retain moisture in dry locks and enhance curl shape, argue adherents of the practice; for some men, it’s about looking fashionably unkempt.

Money Woes Can Be Early Clue to Alzheimer’s - It turned out that Mr. Packel was developing Alzheimer’s disease and had forgotten how to handle money. When she tried to pay their bills, Mrs. Packel, who enlisted the help of a forensic accountant, could not find most of the couple’s money. “It just disappeared,” she said.  What happened to the Packels is all too common, Alzheimer’s experts say. New research shows that one of the first signs of impending dementia is an inability to understand money and credit, contracts and agreements.  It is not just families who are affected — financial advisers and lawyers say they are finding themselves in a bind when their clients’ minds seem to be slipping.

A 'brand' new world: Attachment runs thicker than money - Can you forge an emotional bond with a brand so strong that, if forced to buy a competitor's product, you suffer separation anxiety? According to a new study from the USC Marshall School of Business, the answer is yes. In fact, that bond can be strong enough that consumers are willing to sacrifice time, money, energy and reputation to maintain their attachment to that brand.  The study advances existing brand research in consumer psychology and goes beyond the existing paradigm, indicating that traditional measurements such as brand attitude strength do not adequately explain consumers' intense loyalties to the brands they love—that they fail to explain how brands capture "consumers' hearts and minds." Brand attachment, the authors claim, does exist, is predicated on a brand/self-relationship and can better explain what drives consumer behavior and their loyalty and commitment to the brands.

Is the world getting stupider? - Dysgenic fertility means that there is a negative correlation between intelligence and number of children. Its presence during the last century has been demonstrated in several countries. We show here that there is dysgenic fertility in the world population quantified by a correlation of − 0.73 between IQ and fertility across nations. It is estimated that the effect of this has been a decline in the world's genotypic IQ of 0.86 IQ points for the years 1950–2000. A further decline of 1.28 IQ points in the world's genotypic IQ is projected for the years 2000–2050. In the period 1950–2000 this decline has been compensated for by a rise in phenotypic intelligence known as the Flynn Effect, but recent studies in four economically developed countries have found that this has now ceased or gone into reverse. It seems probable that this “negative Flynn Effect” will spread to economically developing countries and the whole world will move into a period of declining genotypic and phenotypic intelligence. It is possible that “the new eugenics” of biotechnology may evolve to counteract dysgenic fertility.

Gut bacteria change the sexual preferences of fruit flies - Imagine taking a course of antibiotics and suddenly finding that your sexual preferences have changed. Individuals who you once found attractive no longer have that special allure. That may sound far-fetched, but some fruit flies at Tel Aviv University have just gone through that very experience. They’re part of some fascinating experiments by Gil Sharon, who has shown that the bacteria inside the flies’ guts can actually shape their sexual choices. The guts of all kinds of animals, from flies to humans, are laden with bacteria and other microscopic passengers. This ‘microbiome’ acts as a hidden organ. It includes trillions of genes that outnumber those of their hosts by hundreds of times. They affect our health, influencing the risk of obesity and chronic diseases. They affect our digestion, by breaking down chemicals in our food that we wouldn’t normally be able to process. And, at least in flies, they can alter sexual preferences, perhaps even contributing to the rise of new species.

Raw Sugar Jumps to 29-Year High on Brazil's Supply Concern, Indian Exports - Raw sugar surged to a 29-year high as dry weather crimps output in Brazil, the world’s biggest producer, and India may limit exports to bolster domestic inventories.  Output in Brazil’s Center South, the country’s biggest producing-region, tumbled 30 percent in the first half of October from a year earlier, industry association Unica said on Oct. 28. Stockpiles in India, the second-largest grower, are about 4 million metric tons, compared with the nation’s preferred level of 10 million tons, according to Rabobank International. “Both Brazil and India are contributing to this frenzy,” . “The prices will remain strong.”

Sugar Soars To 30-Year High As Supply Fears Grow - The price of sugar has jumped to a 30-year high as the Brazilian harvest has tailed off sharply, hardening expectations of a shortage. Traders believe that prices could soar over the coming months as the market faces a supply shortfall driven by smaller-than-forecast crops in important growing countries from Brazil to Russia and western Europe. At the same time, inventories are at their lowest levels in decades. “All buyers we see are buying on a hand-to-mouth basis,” said Peter de Klerk of Czarnikow, the London sugar merchant. That has pushed prices up sharply, with raw sugar futures in New York soaring 135 per cent from a low of 13 cents in May.

Food Inflation Accelerating as Cooking Oil Poised to Catch Grains - Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.  Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says.  “China’s economy is growing and there’s no reason why the country will take any less food next week, next month, or next year,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. “We’ve been able to produce more food in the past 2,000 years, but can we do it fast enough to meet the demand from China and other emerging economies to stave off a crisis?”

FAO Food Price Index Hits 27-Months High in Oct (Reuters) - Global food prices rose in October, with the FAO Food Price Index climbing for the fifth month in a row and reaching the highest level in 27 months, the U.N. Food and Agriculture Organisation said on Tuesday. The index -- which measures monthly price changes for a food basket composed of cereals, oilseeds, dairy, meat and sugar -- averaged 197.1 points last months, up from an updated 188.7 points in September, and was the highest since July 2008, the FAO data showed.

Wholesale food prices soar as commodity costs rise - Soaring wheat and other commodity costs on world markets have pushed up UK wholesale food prices at the fastest rate in two years, official figures showed this morning. Prices of food produced in the UK were 9.8% higher last month than a year ago, the biggest annual increase since October 2008, the Office for National Statistics reported. Imported food prices climbed 4.5% on the year, the fastest rate since October 2009. Food prices are likely to be pushed even higher in coming months, with refined sugar surging to a record peak of $783.90 a tonne today. Consumers are now starting to pay more for bread and meat as a result of sharp increases in the price of wheat and corn following poor harvests, the British Retail Consortium reported this week. Vegetable oil and margarine showed double-digit price hikes, while fruit showed its biggest price increases since April 2009. This helped push up food prices overall at 4.4%, the BRC said, the fastest rate in more than a year.

Food Companies Warily Try to Pass Along Higher Costs - An inflationary tide is beginning to ripple through America's supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades. Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald's Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients. For food executives, how quickly to pass along higher costs presents difficult choices. Missteps could be costly when the economy remains weak. Many Americans, nervous about high unemployment, have pledged allegiance to their pennies and are willing to trade down on brands, switch supermarkets, opt for Burger King over Applebee's, or stop dining out altogether to save money.  "The big challenge will be, how much can we swallow and how much can we pass along?" said Jack Brown, chief executive of Stater Bros. Markets, a 167-store grocery chain in southern California.

What’s For Dinner: Corporate Food Tyranny (1 of 2) - Last April the Farm-to-Consumer Legal Defense Fund (FTCLDF) filed a lawsuit against the FDA’s interstate raw milk ban. While the suit is unlikely to prevail given likely court deference to the imperial executive branch, it’s already done important work in eliciting a remarkable statement of the FDA’s ideology and general attitude toward the American people. Before I get to the FDA brief, let’s first recap the pending food bill. This bill has been the subject of great controversy, with many like me calling it a Food Tyranny bill, others dismissing this as overly alarmist. I will establish in this two-parter that there’s nothing exaggerated in the alarm we raise. I’ll cite the evidence of the government’s stated ideology and its record of action to date. But first let’s look at what the food bill actually says. (There are actually many of these bills. So far the only one which passed was HR 2749 in 2009. This was the main House food “safety” bill. The Senate’s corresponding version is S 510, currently in limbo. Reid had said he’d seek cloture during the lame duck session, but it’s now questionable whether that will be possible. Henceforth I’ll refer to this pending conference as “the” food bill, although there are significant differences between the House and Senate versions.

Corporate Food Tyranny (2 of 2) - Yesterday I described the pending food bill in some detail, discussing its many dubious and sinister features. I established that it cannot accomplish the food safety goals it claims to seek and can’t even be intended to accomplish such goals. Its intent must lie elsewhere. For insight into the mindset and motives of the government, we can’t ask for better testimony than the FDA’s own brief asking for dismissal of the suit filed against it by Farm-to-Consumer. (The FDA’s motion to dismiss was rejected in August.)

Cotton Soars to Record as China Mill Buying May Further Erode Tight Supply - Cotton soared to a record $1.402 a pound in New York on concern that global demand led by China will outstrip production and erode inventories. Prices have rallied more than 80 percent this year on concern that damage to China’s crop may force domestic mills to import more cotton than estimated, reducing global stockpiles already forecast to drop to a 14-year low. The fiber has been the best-performing commodity on the Thomson Reuters/Jefferies CRB Index over the past 12 months.  “Even at $1.35, demand has not cooled off,” said Rogers Varner, the president of brokerage Varner Bros. in Cleveland, Mississippi. “It’s a bull feast.” Cotton for December delivery rose 4.13 cents, or 3 percent, to $1.3965 a pound at 10:20 a.m. on ICE Futures U.S. Prices have more than doubled in the past 12 months, reaching the highest price since the fiber began trading 140 years ago.

Cotton Rallies to Record as Adverse Weather, Rising Demand Tighten Supply - Cotton extended its rally to the highest price ever, surging the maximum allowed by ICE Futures U.S., as adverse weather threatens supply in China, where increasing demand is growing from textile mills.  A cold spell last week in China, the world’s biggest user of the fiber, and hailstorms in Texas damaged crops. Before the bad weather, China’s harvest was expected to be 18.5 million bales less than domestic use this season, U.S. Department of Agriculture data show. Cotton futures surged 23 percent last month in New York, the biggest gain since June 2007.  “The Chinese market is just on fire,” “We have seen a lot of the mills back off, but China is still paying.”

Cotton Clothing Price Tags to Rise – Synthetic linings. Smaller buttons. Less Italian fabric. And yes, even more polyester. Unusually high cotton prices have apparel makers scrambling to keep down costs, but consumers be warned: cotton clothing will be getting more expensive.  The problem is a classic supply and demand imbalance, with the price of cotton rising almost 80 percent since July and prices expected to remain high. “World cotton production is unlikely to catch up with consumption for at least two years,” said Sharon Johnson, senior cotton analyst with the First Capital Group, in an e-mail.  Cotton inventories had been low because of weak demand during the recession. This summer, new cotton crops were also depleted because of flooding in Pakistan and bad weather in China and India, all major cotton producers.

Biggest U.S. cities running out of water - Some parts of the United States have begun to run low on water. That is probably not much of a surprise to people who live in the arid parts of America that have had water shortages for decades or even centuries. No one who has been to the Badlands in South Dakota would expect to be able to grow crops there.The water problem is worse than most people realize, particularly in several large cities which are occasionally low on water now and almost certainly face shortfalls in a few years. This is particularly true if the change in global weather patterns substantially alters rainfall amounts in some areas of the US. 24/7 Wall St. looked at an October 2010 report on water risk by environmental research and sustainability group Ceres. We also considered a comprehensive July 2010 report from the Natural Resources Defense Council, which mapped areas at high risk of water shortage conflict. 24/7 Wall St. also did its own analysis of water supply and consumption in America's largest cities, and focused on the thirty largest metropolitan areas. One goal was to identify potential conflicts in regions that might have disputed rights over large supplies of water and the battles that could arise from these disputes.

NRDC: Study Finds Safety of Drinking Water in U.S. Cities at Risk - We often take the purity of our tap water for granted -- and we shouldn't. NRDC's What's on Tap?, a carefully researched, documented and peer-reviewed study of the drinking water systems of 19 U.S. cities, found that pollution and deteriorating, out-of-date plumbing are sometimes delivering drinking water that might pose health risks to some residents.Many cities around the country rely on pre-World War I-era water delivery systems and treatment technology. Aging pipes can break, leach contaminants into the water they carry and breed bacteria -- all potential prescriptions for illness. And old-fashioned water treatment -- built to filter out particles in the water and kill some parasites and bacteria -- generally fails to remove 21st-century contaminants like pesticides, industrial chemicals and arsenic.What's on Tap? found one overarching truth: If steps are not taken now, our drinking water will get worse.

U.S. gov’t awards $2.4 billion for high-speed rail - The U.S. government awarded $2.4 billion in funding last week to 54 railroad projects across 23 states in the U.S. This latest round of funding is in addition to the $8 billion that was awarded in January as part of the comprehensive public works project to construct the “first nationwide program of high-speed intercity passenger rail service.” The funds are going toward new railroad lines and stations, as well as efforts to update and refurbish existing ones to coalesce with the high-speed plan announced in January as part of the American Recovery and Reinvestment Act. In this round of funding, Florida received $800 million to build a high-speed railroad connecting Tampa and Orlando with train speeds reaching up to 168 mph at some points along the route, making the trip under an hour compared with 90 minutes by car. The state’s ultimate plan is to extend the line from Orland down to Miami, according to the Federal Railroad Administration (FRA).

Why Electric Vehicles Need A Smarter Grid - Electric cars are hitting a responsive chord with consumers. But the environmental and economical benefits of these cars will be stunted if their cords don't plug into a smarter electrical grid. At the recent GridWise Global Forum leaders addressed the development of the infrastructure to support how electrified cars will charge up, where they will get their juice, and how soon it will all be made available. Governments at the state and federal level are doing their part to encourage consumer adoption of these EVs through generous tax rebates. Consumers will be incentivised by federal tax credits of up to $7,500 for electric vehicles. California, Georgia and Tennessee are among states dangling additional credits in front of potential buyers.  Additionally, the Obama administration has earmarked $400 million in grants to electrify the transportation sector. However, the development and consumer adoption of a smarter electrical grid--one that integrates advanced communication, automation and information technologies with our current electrical infrastructure--remains a significant roadblock. Without it, EVs and their charging stations will stop short of truly realizing the benefits of personal and public investments.

Turning up the Power - Experts disagree on what will actually keep the lights on in 2020. Nuclear is poised for a comeback, though it's unlikely that by 2020 the atom will provide much more than the 8.3 percent it offers today's domestic energy market. There are lots of innovative renewable options — biofuels from pond scum? kites in the jet stream that harvest subspace winds? — but so far the race to commercial viability hasn't produced one cheap enough to compete with coal, oil, and gas. So expect more of a slog than a race in the next decade. We'll generate more renewable energy by 2020, yet it won't account for more than 10 percent of what we need, according to the National Research Council.  Here's the pessimist's version: The world's thirst for oil (and our sluggish investment in alternative energy) means we will be caught short when global crude production reaches its limits — and some experts say it has already happened. That's the forecast of the Peak Oil scenario, which posits that the sharp decline in oil supplies will trigger a sudden economic collapse. Bottom line: Buy sturdy shoes, because you'll be walking a lot. "Life in the U.S.A. will become deeply local and austere,"

U.S. nuclear renaissance not here yet - Three decades after the Three Mile Island accident seemed to doom the nuclear power industry, the idea of a nuclear renaissance has been gaining public acceptance as a way to generate energy without greenhouse gas emissions and meet the nation's electricity demands. But not one new plant is even close to being built. The latest sign came last week that a revival might still be a long way off. Baltimore's Constellation Energy Group — once widely viewed as a leader in developing new nuclear plants — abandoned that business and left its French partner to pursue a new reactor at Calvert Cliffs in Southern Maryland. While Paris-based EDF Group, the world's largest nuclear power operator, has indicated repeatedly that it is committed to "making new nuclear a reality" in the United States, obstacles remain for the French government-backed entity and other proponents of a nuclear comeback here.

U.S. Weighs Funding for Renewable Energy Projects - President Obama's top advisers recommended cutting off funding for a federal loan-guarantee program meant to spur the construction of wind and solar farms and other alternative energy projects, saying taxpayer dollars might be better spent elsewhere. But the advisers, including Mr. Obama's outgoing National Economic Council Director Lawrence Summers, energy policy czar Carol Browner and Ron Klain, chief of staff to Vice President Joe Biden, warned Mr. Obama that pulling money from the program would risk antagonizing powerful allies in Congress, and would "signal the failure of a Recovery Act program that has been featured prominently by the administration," according to an Oct. 25 memorandum viewed by The Wall Street Journal. The memo questions the logic behind subsidizing a big wind farm project in Oregon that Energy Secretary Steven Chu praised last month as "part of the administration's commitment to doubling our renewable energy generation by 2012." Mr. Chu said the federal government would provide, subject to conditions, a partial guarantee for a $1.3 billion loan for the project.

January-to-October tied for hottest in satellite record - New U.S. daily high temperature records in October outpace record lows by nearly 5-to-1  - For all the talk of plummeting ocean temperatures, last month was tied for the second hottest October in the UAH satellite record (with 2003, 2006, and 1998 — October 2005 was slightly hotter).  And we had the rare event of “two simultaneous hurricanes in the Atlantic Ocean on October 30,” as Meteorologist Jeff Masters noted (see below)In this country, Steve Scolnik of CapitalClimate reports:… new record high temperatures are outpacing record low temperatures in the U.S. for the 8th consecutive month. Preliminary data from the National Climatic Data Center (NCDC) for October show over 1500 new record highs, vs. slightly more than 300 lows, giving a ratio of 4.75 to 1. For the year to date, new highs are exceeding new lows by a ratio of 2.8 to 1….new record warm minimum temperatures also exceeded record high maximums as they have in nearly every month so far in 2010. The excess of high minimum records was particularly strong in the summer, when as many as 3761 were reported in August alone.

Arctic Sea Ice hits a record low for this time of year - The graph above shows daily Arctic sea ice extent as of November 1, 2010, along with daily ice extents for years with the previous four lowest minimum extents. Light blue indicates 2010, dark blue shows 2009, purple shows 2008, dotted green indicates 2007, and dark gray shows the 1979 to 2000 average. The gray area around the average line shows the two standard deviation range of the data. Sea Ice Index data. —Credit: National Snow and Ice Data Center Following the minimum ice extent on September 19, 2010, the ice cover quickly expanded as polar darkness returned to the Arctic and air temperatures dropped. Ice grew at an average daily rate for the month of October of 92,700 kilometers per day (35,800 square miles per day). This was similar to the growth rate in 2009, but slower than the growth rate following the 2007 and 2008 minimum ice extents. It was slightly faster than the 1979 to 2000 average rate of 82,200 square kilometers (31,700 square miles) per day. At the end of October, ice growth slowed, and at the end of the month extensive open water areas remained in the Beaufort, Chukchi, Kara and Barents Seas. This region had the warmest ocean surface temperatures at the end of the melt season.

Current global warming may reverse circulation in Atlantic Ocean, as it did 20,000 years ago - Universitat Autònoma de Barcelona scientists have researched how ocean currents in the Atlantic were affected by climate change in the past. The study shows that there was a period when the flow of deep waters in the Atlantic was reversed. The results are relevant for the near future since similar changes are expected to occur in the course of climate warming over the next 100 years.The Atlantic Ocean circulation (termed meridional overturning circulation, MOC) is an important component of the climate system. Warm currents, such as the Gulf Stream, transport energy from the tropics to the subpolar North Atlantic and influence regional weather and climate patterns. Once they arrive in the North the currents cool, their waters sink and with them they transfer carbon from the atmosphere to the abyss. These processes are important for climate but the way the Atlantic MOC responds to climate change is not well known yet.

Ocean pH dropping faster than expected - Thanks to rising carbon dioxide (CO2) levels, some Arctic waters are already experiencing pH dips that could be harmful to sea life. What’s more, this acidification seems to be happening more rapidly than models have predicted. This sobering conclusion was reached by researchers who met on Wednesday to discuss ocean acidification at the Geological Society of America meeting in Denver. “Models are probably underestimating at least by a few years the impact of ocean acidification in the Arctic,” says Jeremy Mathis, a chemical oceanographer at the University of Alaska in Fairbanks. “We don’t know what the organisms’ responses are yet, but the conditions are already there to potentially be disruptive to the ecosystems.” Marine organisms from plankton to crabs are dependent on carbonate ions in the ocean to build their skeletons and shells. But as CO2 dissolves in the water it lowers the pH, which shrinks the pool of such ions available for animals to use.

CO2 Evidence – NASA (655,000 year chart)

Sign of the Times: Hearings on “Scientific Fraud” of Global Warming Expected - So the Republicans run and win a campaign in a treacherous economic environment, when people are desperate for something tangible to improve their situation in life. And the Republicans will start that new era by putting science on trial. Fresh off a dramatic victory in which it retook the House leadership, the Republican Party intends to hold major hearings probing the supposed “scientific fraud” behind global climate change. The Atlantic’s Marc Ambinder related the news in a little-noticed article Wednesday morning. What this Scopes Monkey trial for climate change won’t do is create one new job or improve one life in America. Well, maybe some climate denier whose new book could get a bump. The larger effort here is to weaken the EPA, who is under court order to regulate greenhouse gas emissions as a pollutant. Over time, the even larger effort is to discredit climate science, and science itself, and allow the public the peace of mind of retreating into selfishness. I don’t think that’s a wrong calculation; everyone likes to be told not to worry about something.

A surge in lawsuits challenging E.P.A. on climate - With many eyes on how Tuesday’s elections will affect Congressional action on climate and energy issues, a new report points out that the battle over greenhouse gas emissions has been raging quietly on another front: the courts. Litigation over greenhouse gas regulation is sharply on the rise, according to a report issued on Wednesday by DB Climate Change Advisors, the climate change investment and research business of Deutsche Asset Management. The number of climate-change related lawsuits doubled in 2006-7, hit a plateau for several years and is now increasing again. DB says that such suits are on track to triple in 2010 and perhaps grow into the indefinite future.

Obama drops 'cap-and-trade' plan on global warming - Environmental groups and industry seem headed for another battle over regulation of greenhouse gases, as President Barack Obama said he will look for ways to control global warming pollution other than Congress placing a ceiling on it. "Cap-and-trade was just one way of skinning the cat; it was not the only way," Obama said at a news conference Wednesday, a day after Democrats lost control of the House. "I'm going to be looking for other means to address this problem." Legislation putting a limit on heat-trapping greenhouse gases and then allowing companies to buy and sell pollution permits under that ceiling narrowly passed the House in 2009 as a centerpiece of Obama's domestic agenda, but it stalled in the Senate. Republicans dubbed the bill "cap-and-tax" because it would raise energy prices. They then used it as a club in the midterm elections against Democrats who voted for it. Thirty of the bill's supporters were among some 50 House Democrats whom voters turned out of office Tuesday.

UN report warns of threat to human progress from climate change - The United Nations warned today that a continued failure to tackle climate change was putting at risk decades of progress in improving the lives of the world’s poorest people. In its annual flagship report on the state of the world, the UN said unsustainable patterns of consumption and production posed the biggest challenge to the anti-poverty drive. “For human development to become truly sustainable, the close link between economic growth and greenhouse gas emissions needs to be severed,” the UN said in its annual human development report (HDR).

Predictive Power of Dairy Cattle Methane Models Insufficient to Provide Sound Environmental Advice, Study Finds - Canadian and Dutch researchers have shown that current equations to predict methane production of cows are inaccurate. Sound mitigation options to reduce greenhouse gas emissions of dairy farms require a significant improvement of current methane equations, according to a study of the Dutch-Canadian team in the journal Global Change Biology.On a global basis, according to the FAO livestock is responsible for some 18% of all greenhouse gases emitted. Methane is the most important greenhouse gas on a dairy farm.The FAO estimates that about 52% of all greenhouse gases from the dairy sector is in the form of methane. Several whole-farm models are available that predict the total amount of greenhouse gases (the sum of CO2, CH4 en N2O) of dairy farms. Such whole-farm models are applied to make an inventory of total greenhouse gas emission on farm, and to estimate the effect of management changes (changes in breeding, nutrition, etc.) on greenhouse gas emissions. Methane is the single most important element in such estimates. Methane is 25 times more potent than CO2. Hence, the accuracy of estimation of total greenhouse gas emissions of whole-farm models largely depends on the accuracy of the prediction of methane emitted per cow.

World Bank Struggles With Coal Power - A generally favorable review of the World Bank’s efforts to fight climate change revealed this eco-dilemma: Should the World Bank finance new-technology coal plants knowing that the improved technology could give a boost to greenhouse-gas spewing coal power? The bank’s Independent Evaluation Group notes that the International Finance Corp., the bank’s private sector arm, loaned $450 million in April 2008 to finance the Tata Mundra Ultra Mega Power Plant in Gujarat, India. The four-gigawatt plant “probably resulted in improved design standards for environmental performance,” the review said, and that may have resulted in a 10% reduction in emissions. At the same time, though, IEG called the coal plant “one of the largest point sources of carbon dioxide on the planet,” — hardly a World Bank point of pride.

Controversial carbon-burial project cancelled -Shell’s plan to inject 400,000 tonnes of compressed carbon dioxide annually under a shopping mall in Barendrecht, the Netherlands, has been cancelled after years of protest from the town’s residents. The company wanted to use aging natural gas beds a kilometre and a half below the town as a largish-scale test of carbon sequestration. The idea was to send carbon dioxide emissions from Shell’s Pernis refinery near Rotterdam to the site, potentially beginning at the end of 2012 (Business Week). But Dutch minister of economic affairs Maxime Verhagen told his nation’s House of Representatives on Thursday 4 November that the project would be stopped due to a ‘complete lack of local support’, as well as a delay of more than three years in obtaining permits.

IEA: Climate pledge failure would boost oil prices: report (Reuters) – A reduction of ten percent in oil demand could knock about $20 off the price of a barrel of crude by 2035 if nations meet their climate change pledges and cut fossil fuel subsidies, the International Energy Agency says. “The weaker and slower the response to the climate challenge, the greater the risk of oil scarcity and the economic cost for consuming countries,” the Financial Times on Thursday quoted a draft of the 2010 World Energy Outlook (WEO) as saying. The report by the IEA, which advises 28 developed countries on energy issues, is due for release on November 9. The inflation-adjusted price of oil would be $113 by 2035 in the WEO scenario that takes into account new environmental policies, versus $135 in the main scenario, with demand at 99 million barrels per day (bpd) and 107 million bpd respectively.

Spill Cleanup Proceeds Amid Mistrust. — A couple of weeks ago, enormous orange-brownish strings of something were seen floating out here in the open water near the mouth of the Mississippi.  Scientists said that the brownish streaks in the water were due to an outbreak of algae, not oil.  The water looked like chocolate syrup in some parts and Coca-Cola in others, said Cindy Cruikshank, who has been fishing for 53 of her 59 years. It smelled like an auto-body shop, and it left stains on the hull of her boat. Along with other fishermen and environmentalists around the country, she had no doubts: this was oil.  “I know what I saw,” she said.

Got Oil? -A late-breaking session was added to Monday’s schedule at the Geological Society of America meeting in Denver, Colorado, to discuss the status of oil from the Deepwater Horizon spill. The talk, titled “An Update on the Deepwater Horizon Oil Spill: Where is the Oil Now?” aimed to provide an update on how much oil is left in the environment, where it all went, what scientists are doing to find it, and what long-term impacts can be expected.  The main speaker was Dawn Lavoie, Gulf Coast Science Coordinator for the US Geological Survey, who served as the USGS’ 'boots-on-the-ground' person during the spill. Lavoie didn’t spend much time answering the questions of how much oil is left and where, since no one really knows yet. Rather, she reiterated the familiar refrain: “There’s still a lot of uncertainty about what’s out there.” Lavoie pointed to the efforts that scientists are making to get at these questions and said that a coordinated effort to sample for oil in sediments has been completed. Pointing to lessons learned from Exxon Valdez, where fresh oil is still found buried in shallow sediments, Lavoie said that “we need to be thinking long-term in terms of decades” for monitoring of impacts and restoration.

Dead Coral Found Near Site of Gulf Oil Spill - - A survey of the seafloor near BP’s blown-out well in the Gulf of Mexico has turned up dead and dying coral reefs that were probably damaged by the oil spill, scientists said Friday.  The coral sites lie seven miles southwest of the well, at a depth of about 4,500 feet, in an area where large plumes of dispersed oil were discovered drifting through the deep ocean last spring in the weeks after the spill.  The documented presence of oil plumes in the area, the proximity to BP’s well and the recent nature of the die-off make it highly likely that the spill was responsible, said Charles Fisher, a marine biologist from Pennsylvania State University who is the chief scientist on the gulf expedition, which was financed by the federal government.  “I think that we have a smoking gun,” Dr. Fisher said. “The circumstantial evidence is very strong that it’s linked to the spill.”

Giant Coral Die-Off Found; Gulf Spill "Smoking Gun" -A massive deep-sea coral die-off was discovered this week about 7 miles (11 kilometers) southwest of the source of the Gulf of Mexico oil spill, scientists announced Thursday.Large communities of several types of bottom-dwelling coral were found covered with a dark substance at depths of about 4,600 feet (1,400 meters) near the damaged Deepwater Horizon wellhead, according to a scientific team on the National Oceanic and Atmospheric Administration (NOAA) ship Ronald H. Brown. "The coral were either dead or dying, and in some cases they were simply exposed skeletons," said team member Timothy Shank of Woods Hole Oceanographic Institution. "I've never seen that before. And when we tried to take samples of the coral, this black—I don't know how to describe it—black, fluffylike substance fell off of them." About 90 percent of 40 large groups of severely damaged soft coral were discolored and either dead or dying, the researchers say. A colony of hard coral at another site about 1,300 feet (400 meters) away was also partially covered with a similar dark substance that's likely oil from the BP spill.

Brazil Libra Field May Hold 16 Billion Barrels of Oil -Brazil said the government’s Libra field may hold “gigantic” reserves of as much as 15 billion barrels, almost twice initial estimates, which would make it the biggest discovery in the Americas in more than three decades.  Oil was found below a layer of salt at the first exploration well at the government’s field, according to an e-mail sent today by the national petroleum regulator, known as ANP. Brazil drilled to a depth of 5,410 meters (17,750 feet) at the well and may reach 6,500 meters by December, the ANP said.  A deposit of 15 billion barrels would be almost twice the size of state-controlled Petroleo Brasileiro SA’s nearby Tupi field, would eclipse Brazil’s total current reserve base and also be the biggest find in the Americas since Mexico discovered Cantarell in 1976. Deepwater fields in Brazil’s so-called pre- salt region have yielded the largest discoveries outside the Middle East in the past decade, said Julius Walker, an oil analyst at the Paris-based International Energy Agency.

Brazil’s Libra oil field one of biggest finds - Brazil has cemented its status as the world’s most promising source of new oil with an estimate that its barely explored Libra field could produce as much as 15 billion barrels of crude.The ultra-deepwater oil deposit is the latest in a string of finds that have in the past three years catapulted Brazil into a position of global prominence as its reserves rapidly increase. Although earlier estimates had suggested the Libra field contains eight billion barrels – a figure the Brazilian National Petroleum Agency said on Friday remains its “best estimate” – Libra could be the biggest find in the Americas in more than three decades. Together with Tupi, a nearby field also in Brazil’s offshore that contains five billion to eight billion barrels, Libra “represents far and away the biggest source of new oil we’ve found in several decades. And there appears to be plenty of promise that they will find more,” said Julius Walker, senior oil analyst with the International Energy Agency. “Which makes it a very big deal. We’re talking about the single biggest source of new non-OPEC crude oil.”

Trends in USA Petroleum Production and Consumption - As I hope was made clear from my previous series, “Refining the Peak Oil Rosy Scenario,” the logistic equation developed by Hubbert for the analysis of oil production data (henceforth “Hubbert’s Equation”), has a number of inherent limitations, especially when it comes to modeling the decline-side of the production curve. In brief, Hubbert’s Equation inherently assumes that the increasing side and the declining side of the production curve will be symmetric and can be accurately described by a single rate constant for production “a” and single total recoverable amount of oil, Q∞. In particular, Hubbert’s Equation inherently assumes that a peak in production will occur and the decline side of the production curve will be the mirror image of the growth-side of the curve. This model cannot specifically account for changes (i.e., increases or decreases) in the production rate constant “a” or in total recoverable amount of oil, Q∞. that may occur on the decline-side of the curve.

IEA Sceptical of Iraq Oil Increases - According to the Financial Times, which apparently obtained a draft of the next World Energy Outlook: Iraq will miss its target of producing 12m barrels of oil a day by 2017 and could take another 20 years to achieve even half that level of output, says the International Energy Agency. In a draft of its annual World Energy Outlook report, the IEA gives a downbeat assessment of Iraq’s ambitions. However, it predicts its crude oil production will overtake that of neighbouring Iran “by soon after 2015”. Certainly some scepticism as to the schedule and plateau level is in order. Whether this much, I'm not sure - a lot is uncertain.  A number of big oil companies are going to lose a lot of money if things go as the IEA predicts.

IEA says Iraq will miss 2017 production target - The International Energy Agency (IEA) has said that Iraq is expected to miss its target of producing 12m barrels of oil a day by 2017 and could take another 20 years to achieve even half that level of output, Financial Times has reported. However, the IEA predicts Iraq's crude oil production would overtake that of neighbouring Iran "by soon after 2015."

India predicts 40% leap in demand for fossil fuels  – 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 is 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.

Evidence That Oil Fields Renew Themselves - Tuscon Citizen - Off the Louisiana coastline is an underwater mountain known as Eugene Island.  This island spews natural gas spontaneously.  In the late 60’s crude oil was discovered and by 1970, a platform in the area pumped about 15,000 barrels a day of high-quality crude oil.  The field was estimated to have reserves of 60 million barrels. Then in the late 80’s the production of the well was reduced to less than 4000 barrels a day.  The well was considered depleted.  Then in 1990 the well started producing 15,000 barrels a day and reserves were estimated to be around 400 million barrels. A study of the geological age of the new oil was substantially different than the age of the oil pumped in the 70’s and 80s. The seismic data found that the oil was coming from a previously unknown deeper source. This phenomenon is not unique to Eugene Island.  It is happening in other Gulf of Mexico wells and in oil fields in Alaska. Replenishment of oil fields was also recorded in Uzbekistan.  In the Middle East where oil has been pumped for 20 years it has been discovered that known oil reserves have doubled to over 680 billion barrels.

OPEC raises mid- and long-term oil demand forecasts - Global oil demand is expected to rise slightly more than previously expected in the next two decades, the Organization of the Petroleum Exporting Countries (OPEC) said Thursday, in its annual forecast.  The Vienna-based cartel also said fossil fuels would continue to dominate the energy mix, and that there would be no revolutionary shift towards alternatively-powered vehicles.  Demand was seen as rising to 89.9 million barrels per day (bpd) until 2014, rising 5.4 million from 2009. (One barrel equals 159 litres.)  This projection was 800,000 bpd higher than last year's.  'A recovery is clearly on the way, with the economic outlook far brighter in most parts of the world than a year or so ago,' OPEC Secretary General Abdalla Salem El-Badri said in the report.

Alaska Loses Future Oil Reserves - The Alaska Permanent Fund was created in 1976, just after the North Slope began bringing oil to market. It was a great way to put money into the hands of the state's residents. And production was flowing. During the first half of the 1980s, Alaska's oil production enjoyed a certain degree of success. Production was over two million barrels per day by 1988. Since then, things have gone straight downhill... And last week, things got even worse for the state's future oil production. Last week, the U.S. Geological Survey dropped on bomb on Alaska's future oil reserves. The USGS revised a 2002 estimate for the amount of conventional, undiscovered oil contained in the National Petroleum Reserve in Alaska (NPRA). We're not talking about a little tweaking of the numbers here... The USGS report estimated that the NPR contains approximately 896 million barrels of oil — 90% less than its previous estimate.

Alaskan October Oil Output Drops 5.9% on Lower Field Output - Alaskan oil production in October fell 5.9 percent from a year earlier because of lower output from fields including BP Plc-operated fields such as Prudhoe Bay, Endicott and Northstar. Production averaged 654,418 barrels a day last month, compared with 695,235 in October 2009, according to the Alaska Tax Division. Output increased 3 percent from September when fields were returning to production from maintenance that began in July. The last time output in Alaska posted a year-on-year gain was in 2002, state records show.

Oil to Rise as Capacity Drops, Morgan Stanley Says - Crude oil prices will rise as spare production capacity drops to “untenable levels” by the end of 2012, Morgan Stanley said in a research report. Spare capacity passed its peak this year and may decline to 4.1 million barrels a day by the end of 2011 from 5.9 million barrels today, Hussein Allidina, an analyst at Morgan Stanley, said in the report today. It could drop to 2.5 million barrels a day by end-2012, he said. “Tighter, impossible levels of spare capacity are seen from 2013 to 2015,” the report said. “With demand relatively inelastic in the short run, we reiterate our view that higher prices will be needed to ration demand. The bank maintained its end-2010 forecast of $95 a barrel, its 2011 forecast of $100 and 2012 estimate of $105 a barrel.

Fed Easing Could Send Oil Above $90 A Barrel - Brent crude oil could rise above $90 a barrel before the end of the year if the Federal Reserve announces a new asset purchase programme of $500bn or more, says Francisco Blanch, global head of commodity research at Bank of America Merrill Lynch. He believes the perception that more quantitative easing from the Fed has been fully priced in by commodity markets is misleading. “We believe oil is only starting to reflect current dollar weakness, leaving room for oil prices to rise as emerging market currencies strengthen.” Mr Blanch notes that although global oil demand is running at a relatively strong pace, Opec has failed to add more supplies to the market – with the result that global petroleum inventories are starting to draw down. “With demand already on a robust upward trend, winter weather around the corner and more QE ahead, we think global demand will hit a record in 2011. If Opec fails to raise production substantially over the next few months – a scenario implied by current freight rates – oil inventories will inevitably draw down at a fast pace.

Dollar Tumbles on Prospects for ECB to End Stimulus as Fed Sets Purchases - Oil may return to $100 a barrel for the first time since the 2008 financial crisis as the U.S. Federal Reserve’s stimulus measures weaken the dollar, drawing investors to raw materials.  Crude may rally to three digits next year as central banks pump cash into their economies to revive growth, according to JPMorgan Chase & Co. and Bank of America Merrill Lynch. The Dollar Index sank 7 percent in the past two months as the Fed moved closer to extending a bond-purchase program, luring investors to commodities including oil.   “The past few years have shown that the more liquidity in the system, the more cheap money in the system, the more money flows into commodities, in particular energy.”

Libya Says Oil At $100 Good For Producers - Oil producers would be increasingly comfortable with crude prices of $100 a barrel, because higher food prices and a weaker dollar are eroding their income, the top oil official for OPEC member Libya said on Tuesday.The comments add to indications the Organization of the Petroleum Exporting Countries is unlikely to step in soon to quell rallying prices. Saudi Arabia on Monday also shifted upwards from a price range of $70-$80 it has backed for around two years."Now the price will be more comfortable for the producers if it is around $100," Shokri Ghanem, chairman of Libya's National Oil Corporation, told Reuters. "The dollar is down and the prices of the other commodities are up."

Challenges will grow as reserves become harder to reach - Kamel Bennaceur, the chief economist of Schlumberger who will participate on Tuesday in an ADIPEC panel discussion on new frontier challenges, shares his views on the oil and gas industry. The chief executive of Schlumberger has recently called for greater standardisation and streamlining of technologies used in oil exploration and production. Could you explain why this is important? The industry is facing more challenges because of the need to replenish the production base. That's for both oil and gas. The industry needs to make a large effort to replace its current production sources. The other message is that the reserves will be harder to produce because they will be in remote and challenging areas. The size of the discoveries is not going to increase and in the past five years 50 per cent of oil and gas discoveries were in offshore. Even in OPEC countries the cost of production will increase.

How much oil is there, how much more will we use and at what price? Passions run high where oil is concerned. Witness the tumult over the BP drilling disaster in the Gulf of Mexico. But much of the public discussion about oil has been long on emotion and opinion while short on scientific fact, a state of affairs that Steven Gorelick, a professor of environmental Earth system science at Stanford, takes steps to rectify in his book, Oil Panic and the Global Crisis – Predictions and Myths, published earlier this year. In Geofluids, a reviewer wrote, "Gorelick weaves an intriguing story from what might have been a dreadfully boring, yet impressive collection of data and observations." For close to a century, there have been predictions that it is only a matter of time – perhaps just a few decades – before world oil reserves begin to run dry. The prospect seems worrisome, but with continuing advances in renewable energy, does it really matter? Stanford Report talked with Gorelick, a senior fellow at Stanford’s Woods Institute for the Environment, to get answers to that and other questions.

AP Enterprise: 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

The Peak Oil Debate is Over - The following is a transcription of Dr. James Schlesinger’s keynote address: "The Peak Oil Debate is Over." Transcript provided by Rick Munroe Dr. Schlesinger served as Chairman of the Atomic Energy Commission (1971-73), Secretary of Defense (1973-75), Director of the CIA and was the first Secretary of Energy (1977-79). His wealth of experience at the highest levels of public administration is consolidated by his octogenarian wisdom. What follows is the text of his insightful presentation at ASPO-Washington on Friday, October 8, 2010. Italics have been added (either to reflect Dr. Schlesinger’s verbal emphasis or to highlight points which are particularly noteworthy).

The Peak Oil Crisis: The Leading Edge - Last week an organization in California, The Post Carbon Institute, released a new book, "The Post Carbon Reader," which draws a much broader picture of the serious issues facing mankind. With 30 authors, each specializing in some aspect of the multiple troubles we face, the scope of the book touches on nearly every aspect of our civilization that is out of balance, unsustainable, and headed for a fall. The basic proposition of the book is that the world has reached the limits of growth in terms of its population, economic activity, and the ability of the atmosphere to absorb more carbon emissions. Either the world's peoples must transform themselves into a sustainable number living in a sustainable manner or there will be many dire consequences right up to the possibility that the human race itself could become extinct. Clearly, this is serious stuff.

Tightening Oil Markets Will Bring The Speculators Back - With oil prices now already above $80 per barrel and likely to hit triple-digit levels within months, you can expect to hear a lot more about the role of speculators in the marketplace. It’s always easier to find a convenient whipping boy than to recognize that depletion and the prospect of ever more costly fuel in the future are the real problems. For many people, the fact that oil prices fell below $40 per barrel during the depths of the last recession meant that oil had no business ever trading at triple-digit levels in the first place. For them, $147-per-barrel oil was just a speculative bubble that, like all bubbles, inevitably burst. Few could deny that speculators weren’t long oil when it soared to almost $150 per barrel, just as they were short oil when prices came crashing down. But focusing on the role of speculators is very much putting the cart before the horse.

A Future Without Oil - Our current system of trade is based on the availability of cheap fossil fuels. Yet the time nears when prices will rise and oil will become increasingly scarce. If we want to avoid this vulnerability, we must now begin to think about ways to reduce our dependency and promote the idea of self-sustaining towns and communities. In June, Lloyds Insurance and Chatham House issued a report called “Sustainable Energy Security: strategic risks and opportunities for business”, which argued that “energy security is now inseparable from the transition to a low-carbon economy and business plans should prepare for this new reality”. So what might it look like if our response to climate change is also designed to respond to energy security, and the imminent peaking in world oil production (or ‘peak oil’)? The Transition movement, which began in Ireland and is now active in hundreds of communities around the world, is a huge collective experiment in trying to figure this out. Its premise is that just as cheap energy, particularly liquid fuels, have made economic globalisation possible, so will it become increasingly difficult to sustain as these fuels become scarcer...

Saudi Arms Deal is About Iran – Ron Paul - This month the US Administration notified Congress that it intends to complete one of the largest arms sales in US history to one of the most repressive regimes on earth. Saudi Arabia has been given the green light by the administration to spend $60 billion on some 84 new F-15 aircraft, dozens of the latest helicopters, and other missiles, bombs, and high-tech military products from the US weapons industry.  Saudi Arabia, from where 15 of the 19 September 11 hijackers came, is a family-run dictatorship, where there are no political parties, no independent press, and where any form of political dissent is met with the most severe punishment. We are told that we must occupy Afghanistan to encourage more rights for women, an issue on which the Saudi regime makes the Taliban look rather liberal by comparison. We are told that our increasingly aggressive policies toward Iran are justified by that country’s rigid Islamic laws and human-rights violations, while the even more repressive Islamic rule in Saudi Arabia is never mentioned.

Suicide Is Painless - The fact that the US currently spends 7 times as much on Defense as the next nearest country is proof that the military industrial complex has gained unwarranted influence and a disastrous rise of misplaced power has occurred. When you critically analyze why we would need to spend 7 times as much as China on military when there is no country on earth that can challenge us, the answer can only be OIL. Our own military came to the following chilling conclusion in their Joint Operating Environment report, issued earlier this year: By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.  The U.S. military knows we are on the verge of an oil crisis. There are no new supplies ready to come on line before 2015. The President and his advisors know that an oil crisis is in our immediate future. We have military bases in Saudi Arabia, Iraq, and Kuwait. We have active fighting forces in Afghanistan and Pakistan. We have a naval armada of aircraft carriers in the Persian Gulf. Our forces completely encircle Iran. Is this a coincidence when the countries with the largest oil reserves in the world are noted?

EXCLUSIVE: PSYCHOLOGICAL INOCULATION FOR A CENTURY OF CHALLENGES -  So what I try to do is provide a kind of psychological inoculation. People are going to be afraid, and they're going to be angry. People who are angry and afraid are easily manipulated. If you look at Orwell's 1984, the Two Minutes' Hate in that book was really to get people thoroughly into that unthinking frame of mind and keep them there so you could basically tell them whatever you want them to believe. So I try to tell people that this is coming-this is what the herd is going to do. When people are angry and afraid, they don't do anything useful; they play an enormous blame game, and they're susceptible to manipulation by demagogues. A whole political culture could take a giant leap in a different direction which could be a substantially negative direction that could then have horrendous impact on everyone else. Until people recognize that that is coming, and see it for what it is, they will be susceptible to it.

The Looming Rare Earths Train Wreck -  Over the past few months, industry and government officials in the U.S. and Japan have been increasingly alarmed as China, which has a near-monopoly on rare earths, has reduced its exports of those elements by some 40 percent. Adding yet more anxiety to the situation are projections about a possible shortfall in the supply of these elements. London-based Roskill Consulting Group, a research firm that specializes in metals and minerals, recently predicted that demand for rare earths could outstrip supply as soon as 2014. Rare earths are important because they have special features at the quantum mechanics level that allow them to have unique magnetic interactions with other elements. A myriad of “green” technologies -- from electric and hybrid-electric cars to wind turbines and compact fluorescent light bulbs – depend on rare earths. And there are no cost-effective substitutes for them.

Bruederle Calls for German `Raw Materials Inc.' to Prevent China Monopoly - German Economy Minister Rainer Bruederle called on companies in Germany to form a commodities syndicate to focus investment on obtaining rare-earth metals and push back on a Chinese monopoly over the materials. Bruederle, on a trip to Canada, said the formation of a “Raw Materials Inc.” would constitute an effort by German industry to press back against the formation of a monopoly he compared with the Organization of Petroleum Exporting Countries. “There’s the danger that we could get an iron-ore OPEC or a rare-earths OPEC,” Bruederle told reporters in Ottawa, referring to China’s dominance of the market for rare earths.  Policymakers in Europe, the U.S. and Japan have called on China to restore rare-earth exports after the Chinese government in July announced cuts in production of the elements used in everything from hybrid vehicles and flat-screen TVs to weapons systems. China produces more 90 percent of the world’s rare earths.

Time to fix up your house? The price of materials is rising ... If you’re planning to add an addition to the house, or maybe replace the downspouts before winter sets in, you might want to consider doing it soon. Why? The price of building materials is starting to rise. Copper (used in those downspouts), aluminum (think siding and windows), and plastic (pipes and insulation) are all getting more costly. But the price increases don’t mean the US economy is growing at a healthy pace. Instead, the more expensive materials prices reflect higher worldwide commodity prices where demand is stronger. And many of those commodities are paid for with the greenback, which is down 18 percent over the past year.“ Owners should be prepared for sticker shock in a few months and move ahead now with construction,”

Copper Rises 50% in `Red Gold' Rush on China Doubling Usage - Investors are driving up the price of copper and the stocks of companies that mine the metal used to electrify the world’s cars, homes and offices. China’s consumption will almost double by the end of 2020 to account for 49 percent of world copper sales, according to CRU, a London-based mining and metals consulting firm. Plans for three exchange-traded products backed by the metal, including one by BlackRock Inc., the world’s largest money manager, may increase pressure on suppliers.  “Copper is red gold,” said Jeremy Gray, global head of resources at Standard Chartered Plc in Hong Kong. Gray predicts the metal could rise by 50 percent to $12,000 a metric ton in the next six to 12 months. “We’re on the verge of the biggest commodities bull market we have ever seen,” he said.

China Can Use More Copper Than World Has Now - China is on pace to almost triple its annual use of copper to 20 million tons in 25 years, according to CRU, a London-based metals and mining consulting firm. That’s more than the world produces today. Rising demand will create a potential global shortage of 11 million tons a year by 2035, CRU forecasts.  “There is absolutely torrid growth taking place in central China,” says Daniel Rosen, a principal of the Rhodium Group, a New York-based economic advisory firm. “It’s going to build an Eastern China over again.”  The per-capita gross domestic product of inland provinces is less than half of that on the coast, according to data from China’s National Bureau of Statistics.

China Coal Prices Reach Nine-Month High on Demand for Forecast Cold Winter - Coal prices at Qinhuangdao port, a benchmark for China, rose to the highest in nine months on expectations of a colder-than-usual winter.  The price of power-station coal with an energy value of 5,500 kilocalories per kilogram rose 2.7 percent to between 755 yuan ($113) and 775 yuan a metric ton as of today, compared with a week earlier, according to data from the China Coal Transport and Distribution Association. That’s the highest since Feb. 8.  China will likely have abnormally low temperatures this winter because of the La Nina weather pattern, the official Xinhua News Agency said in August. Coal prices have gained 7 percent since the start of September, when power stations started stockpiling coal for the winter, data from the association showed.

Manufacturing Mayhem in Mexico: From Nixon to NAFTA and Beyond - Ben Ehrenreich at the London Review of Books has written one of the best  articles on the current situation in Mexico that I have seen. Thousands of people are dying there, caught up in a sinister nexus where all the main players -- drug cartels, their officials backers (and servants), the various Drug Warriors on both sides of the border, the corporations profiteering from the Drug War, the august and respectable financial institutions who move the money for both the cartels and their official antagonists, and the American and Mexican politicians who happily game the murderous system for their own cynical advantage -- are reaping huge rewards, while a whole society is being destroyed. As Ehrenreich points out in the succinct but detailed historical background he provides, the current Drug War-fueled destruction is just part and parcel of a larger assault on the underpinning of Mexican society -- a wider campaign that includes brutal economic war, and the relentless militarization of society on both sides of the border. On the U.S. side, it is again a thoroughly bipartisan affair, ranging from Richard Nixon to Clinton's NAFTA and beyond.

Will trade action bring back American jobs? - In the debate about global trade imbalances, we often hear it said that because Americans produce nothing that China exports to the US, any move to restrict Chinese imports to the US would have no employment effect on Americans.  A forced contraction in Chinese exports would simply result in an equivalent increase in the exports of some other country, let’s call it Mexico.  Mexico would benefit from US trade action, but the US wouldn’t. There are many reason for opposing trade war between the two countries – the two most important being, in my opinion, that trade war will result in slower global growth than a negotiated settlement, and that the importance of the US-China relationship involves a lot more than economic issues.  But the argument that China trade has no impact on US employment is I think a very weak one. In the first place, China doesn’t simply produce slippers, lighters and toys to sell to the US.  Chinese growth is heavily capital intensive, and China produces many things that Americans produce or used to produce until quite recently – including automobiles, steel, chemicals, advanced metal products and, soon enough, aircraft.  Remember also that China’s import substitution will have as big an impact on trade as export support.

The "Dalai Lama" effect on international trade - The Chinese government frequently threatens that meetings between its trading partners’ officials and the Dalai Lama will be met with animosity and ultimately harm trade ties with China. We run a gravity model of exports to China from 159 partner countries between 1991 and 2008 to test to which extent bilateral tensions affect trade with autocratic China. In order to account for the potential endogeneity of meetings with the Dalai Lama, the number of Tibet Support Groups and the travel pattern of the Tibetan leader are used as instruments. Our empirical results support the idea that countries officially receiving the Dalai Lama at the highest political level are punished through a reduction of their exports to China. However, this ‘Dalai Lama Effect’ is only observed for the Hu Jintao era and not for earlier periods. Furthermore, we find that this effect is mainly driven by reduced exports of machinery and transport equipment and that it disappears two years after a meeting took place.

Why China is interested in Poland - One is the enormous infrastructure investment that has turned Poland into Europe’s largest building site. Some €67bn ($94bn) in EU structural funds are pouring into the country during the current 2007-2013 EU budget cycle, spurring it to make up centuries of poor roads and railways. In an interview on Wednesday with the FT, Magdalena Jaworska, the deputy head of the GDDKiA, the government road-building agency, says that without EU, Poland would only be building about a third of the highways and expressways currently under construction. Those contracts have already attracted Chinese interest: China Overseas Engineering Group, one of the country’s largest engineering companies, is building two segments of the A2 highway running from Berlin to Warsaw.

Global Manufacturing Picking Up - Manufacturing activity around the world looks like its picking up. J.P. Morgan’s global manufacturing index — an aggregate of different countries’ purchasing managers surveys — increased for the first time since April last month, rising to rose to 53.7 from 52.5 in September. Anything over 50 indicates expansion. (See a list of activity by country) What the rebound in the index might mean is that the inventory dynamics that led manufacturing to downshift in the late spring and summer have run their course. It’s a story that goes something like this: Early in the recovery, manufacturers around the world stepped up production to rebuild inventories that were depleted in the downturn. But they overshot by a bit, lifting inventories above what was necessary, and so had to throttle back a bit to bring inventories back into balance. Now they’ve done that, so manufacturing growth is heating up again.

World-Wide Factory Activity, by Country - interactive table - Manufacturing activity expanded faster in most major economies in October, with the U.S., euro zone and China all picking up steam.There was some divergence in the euro zone, ranging from continued strength in Germany to further contraction in Greece. Meanwhile, Asian factory activity in South Korea and Taiwan continued to shrink. Click on the top of any column to resort the chart.

Pushed to the breaking point - THERE has been a very slight, nearly imperceptible increase in global growth expectations over the last few weeks. Growth in emerging Asia remains extremely rapid, and China's economy continues to surprise to the upside (too much so, in the eyes of Chinese leaders). America's recovery continued in the third quarter, and the latest data on industrial production and employment show them once more moving in the right direction. Britain's economy has proven an expected juggernaut through the third quarter, though that may come undone by early next year as austerity begins to bite. But the good news has largely missed Europe in recent months. After a relatively good economic summer (the result of a banner period of economic catch-up in the Germany economy) things have once again turned sour. And there may be worse things ahead. At the moment, Europe seems to be heading straight for a period of increasing strain. Something must eventually give way. It's worth having a look at the position in which Europe currently finds itself. This chart comes courtesy of Rebecca Wilder at Angry Bear.

Low prices are good for consumers - The WSJ's Numbers Guy (Flawed math ...): Millions of jobs are the cost of doing business with China, according to dozens of members of Congress seeking re-election. Representatives from both major parties signed a letter last month asking the House leadership to pressure China to allow its currency to appreciate against the dollar. The letter cited a think tank study finding that trade with China reduces U.S. employment by 2.4 million jobs. It sounds like the job loss estimates come from something like an economic impact study where reduced spending is translated into jobs. Grossly simplifying the model but not the logic, if our annual trade deficit with China is $200 billion and displaced jobs are earn $100,000 each year then we've lost 2 million jobs. The article goes on to explain why this simple logic likely overstates job losses (which can't accurately be measured).

Andy Xie: Boost Family Income in China - China must resolve the core issue of low family income levels in the course of implementing its economic adjustments, said financial analyst Andy Xie at the Caixin Summit in Beijing. "People have misunderstood this, as it is not only a monetary policy issue," said Xie, a board member at the firm Rosetta Stone Advisors, in an address Friday. Family income in China currently accounts for less than 40 percent of China's GDP, Xie said, and raising that percentage is a key issue for a country working to improve overall economic conditions. "If the Chinese government raises its family income's share in economy by one-third or even 50 percent, to a normal level in the world, its trade conflicts with other countries will be effectively alleviated," he said. "Otherwise, the problem will never be solved."

iPod Nation's Revaluation Is No Panacea for U.S.: Yukon Huang - In a politically charged atmosphere, the odds are increasing that China will be compelled to revalue its currency by 5 percent in the coming months and perhaps 20 percent over the coming two or three years. Arguments over China’s exchange-rate policy, though, largely focus on the wrong thing. Instead of fixating on the total trade figures, the regional supply chain -- where sophisticated components of assembled goods are actually made -- needs to be better understood. With a closer look at the overall picture in East Asia, it’s clear that even major currency adjustments won’t necessarily reduce global trade tensions and an appreciation of China’s currency may not benefit the West. China critics say a major yuan appreciation would reduce an unsustainable U.S.-China trade imbalance. China defenders say a large adjustment by itself wouldn’t help as the production of goods would shift to other developing countries, not the U.S. It will also increase American import prices or even make the U.S. trade gap worse.

The Real Danger to the Economy by George Soros - Conflict between the United States and China dominated the meeting of the IMF on October 9 and 10. The United States was pressing China to revalue the renminbi upward while China was blaming the turmoil in currency markets on the United States policy of providing cheap credit. When Brazil’s finance minister spoke of an imminent currency war he was not far off the mark. China and the US were talking past each other but it would have been better if they had listened to each other because both sides were making valid points. Both China and the US, and the global economy as a whole, would fare much better if both sides accepted the other side’s recommendation. The rest of the world echoed the American viewpoint—that China has been undervaluing its currency to help its export-driven economy—with greater or lesser stridency. Faced with opposition from developing countries, China is likely to yield and the renminbi will appreciate; only the pace and extent of the move is in question. But China’s viewpoint is also valid: the US ought to apply fiscal stimulus—i.e., more government spending—rather than monetary stimulus. Unfortunately the Obama administration is not in a position to do so because it is under domestic political pressure to hold down the deficit.

Beware of Wounded Lions, by Kenneth Rogoff - G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire.  According to a recent joint report by the International Monetary Fund and the International Labor Organization, fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg. The new US Congress is looking for scapegoats for the country’s economic quagmire. And, with a president who has sometimes openly questioned rigid ideological adherence to free trade, anything is possible, especially in the run-up to the 2012 presidential election.Protectionist trade measures, perhaps in the form of a stiff US tariff on Chinese imports, would be profoundly self-destructive, even absent the inevitable retaliatory measures. But make no mistake: the ground for populist economics is becoming more fertile by the day.

Why the U.S. midterm elections are bad for the global economy - With all of this incessant talk about the decline of American global influence, we tend to forget that the U.S. is still by far the world's largest economy, and what happens in the U.S. matters to everyone, everywhere. That's why people from Beijing to Brasilia are watching the midterms with heightened interest. Shifts in U.S. policy, on issues such as trade, China, the budget, banking reform and so on, directly impact the global economy and attempts to reform it. And with the Republicans taking control of the House of Representatives (but not the Senate), we're definitely in for a shift from the politics and policies of the first two years of the Obama presidency.What do those shifts mean for the world economy? My guess is: Nothing good. Here's why: First, we've got the gridlock problem. A divided Washington probably means that not much will get done to aid the stalling U.S. recovery. Forget about a second stimulus. We're more likely to see extra pressure on Obama to cut spending. And that's not good for growth. Longer-term issues, such as financial reform, could just drift.

Currency Swings Show Faith in G-20 Pledge Fading - Traders are losing confidence in Group of 20 finance officials’ pledge to avoid foreign-exchange manipulation, less than a week after the leaders vowed to stop devaluing currencies to prop up their economies. Volatility among Group of Seven currencies rose to the highest level in four months since the G-20 meeting ended on Oct. 23, according to the JPMorgan G-7 Volatility Index. Euro- dollar fluctuations jumped 30 percent since Sept. 20, a day before Federal Reserve policy makers said they were prepared to buy bonds and pump more money into the financial system, data compiled by Bloomberg show. While G-20 nations committed to refrain from “competitive devaluation,” officials from South Korea and South Africa said last week that 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 the Great Depression.

South Korea in the G-20 Spotlight - South Korea has an historic opportunity when it chairs the G-20 meeting in Seoul on November 11-12, for this will be the first time that a non-G-7 country has hosted the G-20 since the larger body supplanted the G-7 as the steering committee of the world economy. But there is a danger that the G-20 will now prove too unwieldy.  South Korea justifiably views its role as host as another opportunity to mark its arrival on the world stage. But it should make more of its opportunity than this, and instead exercise substantive leadership. Otherwise, its turn at the G-20’s helm risks resembling the chaotic Czech presidency of the European Union in 2009, which confirmed some larger EU members’ belief that it is a mistake to let smaller countries do the driving.The challenge for South Korea stems from the inevitable tradeoff between legitimacy and workability. The G-7 was small enough to be workable, but too small to claim legitimacy. The United Nations is big enough to claim legitimacy, but too big to be workable.

China Lets HKMA Buy Yuan Assets, Diversify Reserves -  China granted the Hong Kong Monetary Authority a license to invest in yuan stocks and bonds, giving the city’s central bank the opportunity to diversify its $266 billion in reserves.  The HKMA would need to build up holdings of Chinese assets to allow for the possibility of a shift in the Hong Kong dollar’s exchange-rate peg to the yuan from the U.S. dollar in coming years. Demand for yuan in the city has increased after China loosened restrictions on its use in international trade and allowed the development of an offshore market for the currency this year in Hong Kong. Hong Kong should end its pegged regime to the greenback, as its monetary policy is tied to the “dithering” U.S. economy, Deutsche Bank AG, the world’s biggest currency trader, wrote in a report yesterday

Yuan Settlements Jump 160% as Nokia Shuns Dollars: China Credit - International trade transactions settled in yuan more than doubled to a record in the third quarter as companies including Nokia Oyj and Metro AG turned to a currency that rose 24 percent against the dollar in six years. The value of settlements jumped 160 percent from the prior three months to 126.5 billion yuan ($19 billion), the People’s Bank of China reported late yesterday. The amount exceeded all but one of seven forecasts in a Bloomberg survey of analysts. Metro, Germany’s biggest retailer, says paying Chinese suppliers in yuan benefits both parties. “Doing business with China is much easier now,” said Thomas Burkhalter, finance director of Metro’s Hong Kong-based purchasing unit. “In the past, we have faced problems when there was a sudden movement in the U.S. dollar, which led suppliers to demand additional costs to cover exchange losses.”

China's Korea Bond Holdings Triple as Reserves Exit Dollars (Bloomberg) -- China’s holdings of South Korean government bonds almost tripled in the first 10 months of this year as policy makers shifted part of the world’s largest foreign-exchange reserves out of U.S. Treasuries and into emerging-market assets. The amount of Korean Treasury bonds owned by China totaled 5.59 trillion won ($5 billion) at the end of October, 198 percent more than at the start of the year, according to data released today by South Korea’s Financial Supervisory Service. China boosted its holdings of the securities by 438 billion won in October, the biggest increase since May. Its holdings of U.S. Treasuries fell 2.3 percent in the first eight months of 2010 to $868.4 billion, U.S. data show. “Overseas investors are attracted to Korea’s economic outlook as they see satisfactory returns compared to securities with similar ratings even though yields fell,” said Choi Woon Kon, head of the securities market team at the financial regulator. “We’re also seeing investors attracted to these assets because they think the won will strengthen.”

Korea expected to see steep rise in national debts - A time bomb is ticking: snowballing national debt. Korea’s national debt has increased at a rapid pace, spawning fears that the country could face a debt crisis akin to the one Europe has gone through in the wake of the global financial crisis. What is of greater concern is that the pace of the debt growth is expected to gain momentum as the government must eventually spend more and more due to the rapidly aging population and possible reunification of the two Koreas. With snowballing debt, the ability of the Lee Myung-bak administration to manage the debt is being put into question. Korea has been in the limelight in the global community following the global financial crisis thanks to its fiscal soundness. In 2007, the ratio of Korea’s national debt to Gross Domestic Product (GDP) stood at 30.7 percent, well below the European Union (EU)’s 59.3 percent.

Korea Should Cool Foreign Inflows, Central Bank Says(Bloomberg) -- South Korea needs to cool excessive foreign capital flows into the nation’s stock market to protect its financial system as the rising won attracts overseas investors, the Bank of Korea said. “We should seek ways to ease excessive inflows of foreign investment into stocks and guard against a sudden reversal in such inflows,” the central bank said in a report today. “Some of these funds are flowing into the country on expectations for a rise in the value of the won, so we should also manage our macroeconomic policy with caution so that the exchange-rate outlook doesn’t get set for one direction,” the bank also said in the financial stability report.

South Korea Warns It's Close to Curbing Capital Inflows - South Korea on Thursday issued its strongest warning in months that it was close to taking steps aimed at curbing fund inflows, saying it would "aggressively" consider taking such measures. "The government believes it needs to turn away from the perception that controlling capital flows is always bad and consider introducing measures to improve the macroeconomic prudence," the Ministry of Strategy and Finance said in a statement. "The government will 'aggressively' consider implementing relevant measures, the ministry said after listing recent remarks made internationally in favor of capital controls.

Asia Girds for Stronger Currencies, Bubble Threat From Fed Move - Asia-Pacific officials are preparing for stronger currencies and asset-price inflation as they blamed the U.S. Federal Reserve’s expanded monetary stimulus for threatening to escalate an inflow of capital into the region.Chinese central bank adviser Xia Bin said Fed quantitative easing is “uncontrolled” money printing, and Japan’s Prime Minister Naoto Kan cited the U.S. pursuing a “weak-dollar policy.” The Hong Kong Monetary Authority warned the city’s property prices could surge and Malaysia’s central bank chief said nations are prepared to act jointly on capital flows. “Extra liquidity due to quantitative easing will spill into Asian markets,” said Patrick Bennett, a Hong Kong-based strategist at Standard Bank Group Ltd. “It will put increased pressure on all currencies to appreciate, the yuan in particular has been appreciating at a slower rate than others.”

Asia May Coordinate to Prevent Currency Speculation, Thailand's Korn Says - Asian nations may undertake joint measures to prevent excessive speculation in their currencies, Thai Finance Minister Korn Chatikavanij said after the U.S. embarked on a second round of quantitative easing.  “The central bank told me that they are in close talks with other regional central banks,” Korn told reporters in Bangkok today. “If necessary, they may jointly issue measures to prevent excessive speculation.”  Regional policy makers are willing to act jointly on capital flows if needed to ensure stability, Malaysia’s central bank Governor Zeti Akhtar Aziz said in an emailed statement.

Yuan Gains Drive Premium on Dollar Loans to a Two-Year High: China Credit - The outlook for appreciation in the yuan is leading Chinese banks to charge the highest premium for U.S. dollar loans since the first quarter of 2008.  The difference between six-month interbank rates for dollars in London and Shanghai was 3.16 percentage points, 2.24 points more than at the start of the year, according to prices from ICAP Plc. That reflects banks extending $13.4 billion of foreign-currency loans in September, while taking in deposits of $9.7 billion, central bank data show.  “The dollar shortage may worsen as the yuan continues to rise,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. “On the one hand, there is strong demand from Chinese companies, which are eager to borrow money in dollars as the yuan rises. On the other, the supply is limited because both depositors and financial institutions are trying to curb growth in dollar holdings to avoid exchange-rate risks.”

Tokyo threatens yen intervention - JAPAN'S Finance Minister Yoshihiko Noda on Thursday renewed his threat that the government will intervene in currency markets to stem the yens's strength if needed.  'Excessive volatility in exchange rates have a negative impact on economic and financial stability, and we can't overlook it,' Mr Noda said in a parliamentary session, according to Dow Jones Newswires.  'We will continue to watch foreign-exchange developments with great interest and we will take decisive action, including intervention, if needed,' he said as the unit hovered near 15-year highs against the dollar.  Mr Noda made the remarks as the Bank of Japan kicked off its two-day policy board meeting on Thursday, an event brought forward to follow a US Federal Reserve meeting that concluded Wednesday with fresh stimulus measures.

Bank of Japan Confronts Two-Decade Land Slump With Asset-Purchase Program - The Bank of Japan’s planned purchases of real-estate investment trusts and exchange-traded funds may bolster investor confidence and support markets that have failed to recover ground lost since the global financial crisis.  Governor Masaaki Shirakawa and his policy board will start a two-day policy meeting today to discuss the purchases, which are part of a broader 5 trillion-yen ($62 billion) fund unveiled last month. The bank brought forward its November meeting date by more than a week to speed up the purchases. REIT prices have climbed since the BOJ announced its asset fund on Oct. 5 and analysts say the program may help curb a two- decade slide in land prices, easing the pain deflation has inflicted on an economy coping with slower growth and a stronger currency. Shirakawa last week said he wants the BOJ’s purchases to deepen trading.

Four Rather Sick Patients “If I were BoJ, I would set a trap for all the currency speculators in the world. I would intervene in the currency market, appearing unsuccessfully, to lure speculators to commit more and more funds. I would get into a spit fight with the US Treasury and appear scared from time to time, egging the speculators on. I would quietly sell ¥10 trillion per day, not completely offsetting the speculative inflow and allowing dollar-yen to drop slowly with rising trading volume. I would play the game for two months and let dollar yen drop to low 60s until ¥500 trillion of speculative funds are sunk at an average price of 75. I would then announce unlimited supply of yen at 120. The speculators would suffer losses of ¥ 312 trillion instantaneously. They have to unwind their positions to stop losses. Just in case that they don’t unwind, I would announce the price would be raised to 130 one month later. I would use half of the profit to retire 16% of the national debt and donate the other half to Melinda and Bill Gates Foundation for helping Africa. I would refloat the currency, after all the speculative positions have been closed, and impose 0.1% Tobin tax on yen currency trading to stop future speculation

Currency wars and the emerging markets - Monetary expansion in the developed economies has confronted emerging markets with the trilemma. If they resist currency appreciation, they lose monetary control and get inflation and asset price bubbles (as well as political pressure over trade competitiveness). The alternatives are equally unpalatable. Reverse the trend of the past two decades towards freeing capital markets that has nurtured financial development; or accept exchange-rate appreciation and loss of competitiveness. The conventional prescription is to permit the appreciation – after all, it raises real incomes, and competitiveness is underpinned by rapid productivity growth – and switch away from export-led growth to more reliance on domestic demand. But many countries, China most vocally, are concerned that significant appreciation will hit marginal exporters, slow growth, and create unemployment.  The threat of a currency war between the US and China is one of the main concerns for the G20 ahead of this month’s meeting in Seoul. This column say that while policymakers appear to grasp some of the issues, they underestimate the impact of quantitative easing by large economies on exchange rates worldwide.

Latin America's Central Banks May Delay Rate Rises on Fed Move, HSBC Says -Latin American central banks may delay interest rate increases as their currencies strengthen because of the Federal Reserve’s move to stimulate the U.S. economy, HSBC Holdings Plc said.  Policy makers may be “reluctant” to raise borrowing costs to avoid luring additional foreign inflows as investors seek higher yields, analysts at HSBC, including Pablo Goldberg, wrote in a note to clients dated yesterday. Government measures will likely fail to contain currency gains in Latin America, which should continue in the “medium term,” they wrote.  “While emerging-market yields are reaching new lows and Latam currencies are close to their most appreciated levels in real terms, a continuation of the ‘low for longer’ scenario suggests valuations could get even more stretched,” the analysts wrote. “Although nations have used capital controls for many years, we might be on the verge of seeing a major proliferation.”

Brazil warns more Fed liquidity could lead to protectionist policies - With the Fed pledging to keep interest rates low for some time, Brazil is trying to prevent its currency from appreciating, which makes its exports less competitive, as investors dump the greenback and buy emerging market assets in search of higher yields. “The Fed's decision is cause for concern. They are policies that impoverish those around them and end up prompting retaliatory measures” Brazil's Foreign Trade Secretary Welber Barral told reporters. “And then you have this type of cancer, which is protectionism, that spreads very fast,” he said. He did not say if Brazil would take any action. Brazil decided to double to 4 percent taxes on foreign investors buying local bonds in an effort to curb the strength of its currency, the real.

Brazil ready to retaliate for US move in ‘currency war’ -At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said. Ms Rousseff added: “The last time there was a series of competitive devaluations. . . it ended in world war two.”

Those Poor Brazilian Victims of Currency War - Having coined the endearing term "international currency war," Brazilian Finance Minister Guido Mantega and his erstwhile superiors are now complaining about the (largely anticipated) $600 billion greenback aerial bombardment the Fed will soon mount with extreme prejudice. With the Brazilian real up nearly 40 percent since early 2009, the country's industries are running into serious headwinds in export markets and are understandably keen on the government doing something about it. While Brazil has slapped taxes on foreigners buying local bonds, it hasn't done a heck of a lot to curb inflows. So, President Lula and President-Elect Rousseff are jetting of to the G20 to protest pretty soon. Oh my, what hath the Americans done? Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle. Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.

Chart of the week: Brazil’s shifting export structure - President Luiz Inácio Lula da Silva will now hand power to his chosen successor, Dilma Rousseff, at the end of 2010, but during eight years as Brazil’s leader he - like his predecessors - made it a priority to substitute high-value manufactured goods for low-value commodities. But the chart (after the break) that is launching a new feature on beyondbrics shows the structure of Brazilian exports is shifting in the wrong direction: Brazil’s export earnings from manufactured goods continue to fall while those from primary goods continue to rise - and, this year, have taken over as the main source of earning for the first time.

Egypt eyes the century bond club - Mexico successfully launched a century bond last month, proving in the year of its 200th anniversary that investors are confident the country will still be there in another hundred. Egypt, with 7,000 years of history behind it, and public finances whose management is much improved, has good reason to think it can match the feat. Youssef Boutros Ghali, the finance minister, said this week that Egypt did not need the extra money, but that he was considering offers from international investment banks to help issue $500m of 100-year notes. That would help to give Egypt more visibility in international markets and build on the success of 10 and 30 year dollar bonds that it launched earlier this year, taking advantage of low borrowing costs after a nine year absence from the market.

The Big Blink - World growth is likely to remain subdued over the next few years, with industrial countries struggling to repair household and government balance sheets, and emerging markets weaning themselves off of industrial-country demand. As this clean-up from the Great Recession continues, one thing is clear: the source of global demand in the future will be the billions of consumers in Africa, China, and India.  But it will take time to activate that demand, for what is now being produced around the world for industrial-country consumers cannot simply be shipped to emerging-market consumers, especially the poorer ones among them.If we want to talk about billions of new consumers, rather than the tens of millions who have incomes similar to the middle classes in industrial countries, we must recognize that many emerging-market consumers have much lower incomes than industrial-country consumers, and live in vastly different conditions. Their needs are different, and producers around the world have, until recently, largely ignored them.

Global imbalances, the renminbi, and poor-country growth - Discussions on how best to move towards a more balanced world economy have frequently ignored how proposals to redress these imbalances will impact poor countries. Highly publicised global imbalances in the current accounts of the balance of payments – embodied in deepening US current account deficits since the mid-1990s and sizable Chinese foreign exchange reserve accumulation since the early 2000s – have drawn much attention to the question of renminbi misalignment. A rapid appreciation of the renminbi would involve substantial risks not only for China’s growth but also for global and poor-country growth.

Currency wars and Indian policy - Suddenly the esoteric world of international finance is resonating to the clash of currencies.  The Economist put “Currency wars” on its cover, with evocative imagery of an aerial dogfight between paper planes of currency notes from different countries. As that issue pointed out, there are three separate but related battles going on. First, there is the old and serious problem of a more or less inflexible pegging of the Chinese yuan (aka renminbi) to the US dollar.  Second is the exceptionally loose monetary policy being followed (after the 2008-2009 global crisis) by leading industrial countries, including the US, UK, Japan and, to a somewhat lesser extent, the eurozone. Third is the spillover impact on (and response of) many emerging economies as they are confronted with the flood of international liquidity flowing into their countries. What about India? What have we done? Our authorities (government and the Reserve Bank of India) seem to have succumbed to watchful inaction. As I pointed out in September, since March 2009 the rupee has been allowed to rack up the sharpest appreciation (by a long margin) in real effective exchange rate terms in our recorded history. – China and India output jumps sharply - Manufacturers sharply increased output in China and India in October, powered largely by rising domestic demand and defying a widespread slowdown in the rest of Asia. The official purchasing managers’ index released by the China Federation of Logistics and Purchasing rose to 54.7 from 53.8 in September, indicating strong growth in spite of Beijing’s efforts to slow the economy to avoid asset bubbles. The widely watched HSBC China manufacturing PMI, also released on Monday, moved up to 54.8 from 52.9 in one of the biggest month-on-month rises since the series began in April 2004. The PMI indices, in which a figure above 50 indicates expansion and a lower figure indicates contraction, showed that Chinese manufacturing surged in October for the third successive month. HSBC said the rate of expansion in new business for Chinese manufacturing companies was at a six-month high, in spite of a relatively small increase in export orders, suggesting that growth was firmly centred on the domestic market. Hongbin Qu, HSBC’s chief China economist, said the upbeat numbers suggested the economy would grow at an annualised rate of around 9 per cent in the fourth quarter of the year.

For Love and Money: Second-generation Indian Americans 'Return' to India The grapevine was abuzz in Anand's extended family in New Delhi. They speculated that having lost his job in New York, Anand had moved to Mumbai temporarily, at least until his career path in the United States would be on the "right" track again. After all, why would US-born and raised Anand move to India unless compelled to, when so many in India aspired to move to the United States?  "My chachi [aunt] actually thinks I got fired from Infysoft," noted Anand with an expression that conveyed both amusement and exasperation. "She said, 'Your dad said you were doing 'good' and you quit and came here? What's up?' Anand is part of a small but growing number of second-generation immigrants who are moving or considering moving to their parents' native countries for professional and personal reasons.

India: Economic power house or poor house? - India’s economic miracle is a perfect example of how appearances can be deceiving. The dominant narrative on the country goes like this: as the fourth largest economy in the world, with a steady annual growth rate of close to 9 per cent, India is a rising economic superstar. Bangalore is the new Silicon Valley. Magazines such as Forbes and Vogue have launched Indian editions. The Mumbai skyline is decorated with posh hotels and international banks.  There are numbers to back up this narrative. The average Indian takes home $1,017 (U.S.) a year. Not much, but that’s nearly double the average five years ago and triple the annual income at independence, in 1947. The business and technology sector has grown tenfold in the past decade. Manufacturing and agriculture are expanding, and trade levels are way up. India is also on the up and up in terms of human well-being. Life expectancy and literacy are steadily rising, while child mortality continues to decline. The poverty rate is down to 42 per cent from 60 per cent in 1981. While 42 per cent still leaves a long way to go, India’s situation seems rosy compared with that of, say, Malawi and Tanzania, which have poverty rates of 74 per cent and 88 per cent, respectively.

‘The middle class has lost track of how poor this country is’ (India) Much like the Mahatma Gandhi National Rural Employment Guarantee Act in the first term of the United Progressive Alliance, the Food Security Act was its most ambitious social welfare programme. Since discussions on the Act in the National Advisory Council began, its provisions have consistently been diluted under attempts by the government to narrow its scope and vision. The draft Bill, submitted last week by the NAC to the government, falls way short of its promise. This prompted Jean Dreze to call it a “minimalist programme” and ask: why not food security for all? Excerpts from an interview in which the development economist and author explains how the government is reneging on its commitment to the poor:

ECB, Bank of Japan Keep Wary Eye On Fed -- The U.S. Federal Reserve is poised to pump more dollars into the U.S. economy, casting a long shadow over imminent decisions by other big central banks wary about what the Fed's move might do to the dollar.The European Central Bank, the Bank of England and the Bank of Japan all hold meetings this week, amid concerns the Fed's monetary injection may send the dollar down against the euro and the yen, potentially holding back exports and harming the shaky recoveries in Europe and Japan. While Jean-Claude Trichet, head of the European Central Bank, has voiced his concern about excessively volatile exchange rate shifts, it is the Bank of Japan that is particularly worried about what the Fed might be planning. It has brought forward its policy meeting to Thursday and Friday to be able to respond quickly if the Fed's policy leads to another bout of dollar selling.

BOJ to Hold Fire Unless Big Fed Move - The Bank of Japan will meet this week just a day after the U.S. Federal Reserve policy review set to approve a new round of monetary easing via government bond buying. BOJ officials say they have rescheduled their meeting to Nov. 4-5 from mid-November to heed calls from the market to speed up the launch of its 5-trillion yen ($62 billion) asset buying scheme and the decision had nothing to do with the Fed.  However, there is no doubt that the rescheduled meeting will give the BOJ a better chance to act quickly if the Fed surprises markets and triggers a new wave of dollar selling that would drive the yen to record highs and threaten the Japanese economy.

Australia Unexpectedly Raises Rates; Currency Jumps –The Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger growth will cause inflation to accelerate, driving the nation’s currency to parity with the U.S. dollar.  Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.  The move signals Stevens wants to avoid a repeat of 2007, when he held off raising rates for months as slowing inflation masked a buildup in price pressures. Growth in Australia, which skirted a recession during the crisis, may strengthen as energy companies such as BG Group Plc add construction jobs. “They’re trying to nip inflation in the bud,”

The Path of Least Resistance - As with anything in economic forecasting, what I am about to say is at best an educated guess.  Given the present environment, where is the global economy likely to go? Any analysis like this has to contend with political factors that drive the major imbalances of the global economy.  Here are the imbalances as I see them:

  • China insists on keeping its currency cheap in order to promote employment at home.
  • The US does not care about deficits or currency debasement, as it seeks Keynesian remedies to its economic crises.  (Little realizing that they are making things worse…)
  • The Eurozone protects profligate euro-fringe nations, at the possible cost of destroying the Eurozone as a whole.

G4 GDP, reaction ECB - It's complicated. The ECB is currently juggling two objectives: perpetually assuaging bond investors in the face of a shaky financial system, and managing policy for an economy with a single currency and sovereign government issuers. But is it really so complicated? The chart above illustrates the peak (deemed 2008 Q1 here) to trough and recovery of GDP across the G4 (Eurozone, UK, US, and Japan). None of the G4 have returned to 2008 Q1 levels of production (pre-2008). Ironically, as the US Fed readies itself for QE2, the American economy has returned the farthest back up the "production path". The German recession was deeper, but the rebound has been quick. Annual GDP growth in Q2 2010 was well above potential, 3.7% over the year, and the labor market continues to see gains. But German growth has not been sufficient-enough to bring neither its nor the Eurozone's level of GDP back to pre-2008 levels

Thirty-Three Hours May Induce ECB Surrender on Weak Dollar - With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan Governor Masaaki Shirakawa to do more for his economy and Bank of England Governor Mervyn King to leave the door open to more aid. Even as European Central Bank President Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.

Trichet Signals ECB May Stay on Exit Course After Fed Decision - European Central Bank President Jean- Claude Trichet signaled the bank intends to stick to its exit strategy even after the Federal Reserve eased policy further, sending the euro to a 10-month high, and tensions on Europe’s bond markets increased.  Policy makers will decide on possible further exit steps next month, Trichet said at a press conference in Frankfurt today after the ECB left its benchmark interest rate at a record low of 1 percent. “The non-standard measures are by definition temporary in nature,” he said.  The ECB’s removal of emergency stimulus is being complicated by renewed concerns about the fiscal health of countries like Ireland, Portugal and Greece, and by the Fed’s move to buy another $600 billion of Treasuries to prop up the U.S. economy. Widening bond spreads and an appreciating euro may undermine the Europe’s economic recovery.

Those Poor Swiss Victims of Currency War (Really) - .] I've just come from an interesting talk here at the LSE featuring IMF Chief Economist Olivier Blanchard simply entitled "The State of the World Economy." Not being a particularly big fan of Blanchard--and his somewhat odd reminiscing about his time at the LSE with one Larry Summers didn't help--the subject matter was at least intriguing. Among other things, even Blanchard sees a role for capital controls once inflows reach inflation-threatening thresholds. One of the most obvious bits that I looked forward to was discussion of "international currency war" being waged by the United States on all and sundry. We all know who the most prominent complainers are since their complaints are loud and clear--Brazil, China, and so forth. However, Blanchard reminded all of us that the Swiss are also actively trying to manage their exchange rate. Not only do they fear a decline of export competitiveness, but they also have to deal with "organic" inflows as a consequence of being an international centre of finance. A few months ago, I featured Swiss foreign exchange intervention that was increasing in light of EUR/CHF slumping since its largest trading partner is the EU. As it turns out, the magnitude of Swiss action deserves more mention than we previously thought.

Numbers Diminish at Protests in France— Several hundred thousand people demonstrated again on Thursday to protest changes in France’s retirement age, but the numbers were down significantly from previous national days of protest, and it appeared that President Nicolas Sarkozy and his government had won an important victory.  Mr. Sarkozy’s approval ratings are hovering around 30 percent, a historic low, but loyalists say he will now be able to contrast his firmness in carrying through a historic reform with the behavior of previous governments that backed down in the face of the “democracy of the streets.” In Marseille, where the strikes are thought to have had the greatest impact on day-to-day life, the streets and sidewalks are full of garbage, and the port remains blocked. Residents are a little exasperated that it is not clear when things might return to normal. In an uncharacteristic show of bipartisanship, local leaders from Mr. Sarkozy’s ruling party have been joined in recent days by opposition Socialists in calling for an end to the strikes.

The Value of Work in OECD Countries (graphic)

ANALYSIS-Tough EU debt rules could threaten sluggish Italy - Italy's weak growth outlook will make it very hard for Rome to comply with European budget rules if proposed revisions that put tighter controls on public debt levels are imposed strictly. EU leaders meet on Thursday to discuss a reform of budget rules that aims to put more emphasis on reining in overall borrowing, a crucial issue for Italy, whose public debt is near Greek levels at just under 120 percent of gross domestic product. Rome has so far escaped the market turmoil that has hit countries like Greece or Spain, partly because the government moved swiftly to rein in its current deficit with a package of austerity measures in July. But according to a proposal endorsed by EU financial ministers last week, the reformed budget rules will introduce a formula assessing whether a country with public debt above the EU's recommended limit of 60 percent of GDP is also reducing it at a satisfactory pace.

Angela Merkel forces Europe to protect euro from future collapse - The leaders of 26 European countries bowed resentfully today to German determination to rewrite the EU's Lisbon Treaty to shore up the euro. Angela Merkel declared she was happy after a summit meeting of EU leaders in Brussels agreed to establish a stiff new regime aimed at immunising the euro against the threats that brought the currency to the brink of collapse this year. Under the new system, to be in place by 2013, the Germans insist that highly indebted eurozone countries struggling to repay will be forced to restructure their debt in a process of "managed insolvency" and that their creditors will need to take large "haircuts". The German chancellor said this was a quantum leap in the way the euro was run. "The inclusion of private institutions is very important to me," Merkel said. "We won't allow only the taxpayers to bear all the costs of a future crisis."

Germany Draws Line in the Sand on Eurozone Bailouts, Insists Bondholders Take Pain - Yves Smith - The contradictions of the Eurobailout mechanism were bound to be resolved at some point, smoke and mirror and insufficient firepower relative to the magnitude of the problem will only take you so far. The Eurozone rescue operation, although it looked like it was aimed at so called Club Med, aka PIGS sovereigns (Portugal, Ireland, Greece, and Spain) was at least as much about preventing the banks that are exposed to their debt from taking too much pain, and those banks are mainly French and German.  The current vogue, austerity measures, sounds straightforward until the ugly reality kicks in, that all it does is put countries into a deflationary spiral, making debt loads ever worse. As Satyajit Das pointed out a month ago: The “cure” may be worse than the disease. After implementing austerity measures, Ireland’s nominal gross domestic product (”GDP”) has fallen by nearly 20%. The budget deficit as a percentage of GDP has doubled to 14% from 7% Government debt as a percentage of GDP has increased to 64% from 44% at the start of the crisis.

Angela Merkel: 'The Crisis Has Deeply Shaken Us' - Spiegel - In a SPIEGEL interview, German Chancellor Angela Merkel, 56, discusses the recent controversial deal she struck with French President Nicolas Sarkozy on the euro, disputes within her coalition government in Berlin and her country's contentious immigration and integration debate.

Angela Merkel’s Fear of Europe – Ever since the global financial crisis erupted in September 2008, the European Union has been in turmoil. On the one hand, the euro protected the eurozone, particularly Germany’s export economy, from speculative attacks and the chaos of currency volatility. On the other hand, the second phase of the crisis mercilessly exposed the euro’s Achilles heel: the absence of economic or financial unification within the eurozone. Rising tensions within the EU have been the inevitable result. Germany’s actions throughout the crisis have been plainly contradictory. Rather than moving forward in the direction of an economic union, it reverted to a policy favoring national solutions. But that position is difficult to reconcile with Germany’s inability to call into question the euro or European structures and treaties. The contradictory stance of Chancellor Angela Merkel’s government was exacerbated by the transition from the grand coalition during her first term to the current conservative/liberal coalition. At that point, self-inflicted domestic political weakness collided with the fiscal constraints of the euro rescue.

For once, Angela Merkel is right - Angela Merkel is right. It is not often that I have said this about the German chancellor. I continue to disagree with her overbearing obsession with fiscal stability at a time like this, and her refusal to engage in a dialogue on macroeconomic imbalances. But on the specific question of the need for a change in the European Union treaties to create a permanent crisis resolution mechanism, she is indeed right. The current Lisbon treaty is simply inadequate to deal with the legal and political complexities of an institutional crisis mechanism. Such an institution is needed to replace the European Financial Stability Facility when it expires in 2013.  Of course, as everybody in Brussels is keen to confirm, there is no “appetite” for another treaty change after a tortuous decade to get Lisbon agreed. But frankly, who cares? Germany’s constitutional court has left Ms Merkel little leeway. Without a treaty change, the EFSF must run out. The eurozone would be back to where it was in May.

Angela Merkel consigns Ireland, Portugal and Spain to their fate – Germany has had enough. Any eurozone state that spends its way into a debt crisis or cannot adapt to a monetary union set for Northern rhythms will face “orderly” bankruptcy. Bondholders will discover burden-sharing. Debt relief will be enforced, either by interest holidays or haircuts on the value of the bonds. Investors will pay the price for failing to grasp the mechanical and obvious point that currency unions do not eliminate risk: they switch it from exchange risk to default risk. “We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers,” said German Chancellor Angela Merkel. Or in the words of Bundesbank chief Axel Weber: “Next time there is a problem, (bondholders) should be part of the solution rather than part of the problem. So far the only ones who have paid for the solution are the taxpayers.”

Borrowing costs for Ireland and Portugal increase sharply - From the Financial Times: Debt costs jump for Dublin and Lisbon: Borrowing costs for Ireland and Portugal shot up as investors took fright at European proposals to force them to take a greater share of losses in future state bail-outs. ... The moves ... follow agreement at last week’s European Union summit on a Franco-German proposal on a mechanism to resolve future Greek-style sovereign debt crises. The yield on the Ireland 10-year bonds jumped to 7.1%, and the spread to the German 10-year bonds is at 462 bps - both are new highs. The yield on the Portugal 10-year bonds increased to 6.1%, and Greece 10-year bonds are now yielding 10.7%.

The world backs away from Ireland, Spain, Portugal - Ireland and Spain are no longer eligible for investment by Russia’s two sovereign wealth funds — a canny spot by Bloomberg. The two countries still appear on the Ministry’s English language website, which we assume has not yet been updated. And such retreat could not have come at a worse time for eurozone peripherals. Yields on Irish 10-year bonds have risen 132 basis points since mid-October to 7.44 per cent. And 10-year bonds from Portugal — which saw a lacklustre bond auction on Wednesday– are up 55 basis points in the same period to 6.29 per cent. And yet –  even with such enticing high yields in an (increasingly) low-yield environment — it seems investors like Russia’s €130bn-strong SWFs just don’t want it. This is of course is a bit of a problem for peripheral Europe. Without traditional investors left to support their debt they may well have to turn to the European Financial Stability Facility (EFSF) . The headline number here is €440bn, but because of the facility’s structure available funds are likely to be a lot less.

Yields on Irish and Portuguese bonds jump after bailout plans - BORROWING costs for Dublin and Lisbon jumped yesterday after investors were spooked by EU plans to force bondholders to share in the pain in the event of another sovereign debt crisis.  Last week, EU leaders signed up to German chancellor Angela Merkel’s plan to deal with any repeat of Greece’s debt crisis, which stipulates that bondholders must share in any losses.  At the time, Jean Claude-Trichet, president of the European Central Bank, warned that the proposed system would see borrowing costs jump, as creditors passed on the added risk to borrowers.  Yesterday’s movements in the bond markets suggest he was right. Ireland saw the premium it pays over German bunds rise to 4.67 per cent, while the yield on its 10-year bonds reached 7.14 per cent, a rise of 0.22 points. Portugal saw its yield rise 0.16 per cent to 6.11 per cent, while borrowing costs for Greece and Spain also ticked up.

Nations May Get Three-Day Notice on Sovereign-Debt Rating Cuts, EU Says -  Credit ratings companies may be forced to give governments three-days’ notice of any change to their sovereign-debt rating, under European Union proposals.  Extending the warning period to 72 hours, from the current 12 hours, would give countries a chance to point out “factual errors” and “new developments” which may influence the rating, the European Commission said in a report on possible rules for credit ratings companies published today.  “Sovereign-debt ratings play a crucial role for the rated countries, since a downgrading has the immediate effect of making a country’s borrowing more expensive,” the Brussels- based EU executive said.

Borrowing cost sets record as yields on debt hit 7.19pc - Market 'spooked' by Germany's plan for tougher regulation. THE cost of Government debt hit a new high yesterday. It comes as figures from Citigroup show Ireland is increasingly relying on its own banks and insurers to fund Government borrowing.  The premium that lenders demand to hold Irish rather than German bonds hit 4.58pc early yesterday. The difference in the cost of borrowing between the two countries, known as the spread, is now at its highest level since the launch of the Euro. The yield on Irish Government debt has hit 7.19pc.

Ireland May Have Just One Month to Stave Off Bailout Danger - Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout.  The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.  “The behavior of international bond markets suggests the government’s various announcements haven’t convinced markets that we are on a credible, stable path,” said Karl Whelan, an economics professor at University College Dublin and a former economist at the Federal Reserve. “The budget is going to be crucial in determining if we can change that attitude.” The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April. That’s putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country’s banks.

In keeping with Halloween, here's a scary one - The Irish Government has taken a three-month holiday from borrowing, instead running down reserves of cash borrowed earlier in the year. The four-year plan, due in about two weeks, and the Budget on December 7, are just preludes to the main event -- the re-entry of the Irish Government into the bond market in the New Year.  The €1.5bn not borrowed in October plus the €1.5bn not borrowed in November represent borrowing postponed, not borrowing avoided. The decision to exit the market for a while was taken because the market had turned against Ireland, with interest rates on the benchmark 10-year bond moving above six per cent. But the cash reserves are finite and will run low in the Spring of 2011 unless Ireland re-enters the market with a pretty big issue.  Realistically the Government needs to do this in January, or February at the latest. And the first issue needs to be big -- maybe €4bn or €5bn.

The Irish Mess (IV) - The domestic politics of Ireland are still on a tightrope. Their coalition government, which had has been studiously ignoring three empty parliamentary seats, has now been told by the Supreme Court to get on with it and hold by-elections for one of them, which has been unoccupied for a scandalous 18 months.  The by-election is to be held before the December 7th budget vote; the budget is going to be another slasher, even more than the previews suggested, which isn’t going to please a remarkably patient crowd of electors all that much, despite efforts to hide the full impact by way of some accounting wheezes. Since the Irish budget is fully funded for a few more months (ex any revenue surprises, or God forbid, further bank loan writedowns), they can in principle trundle along like this until their date with destiny in Q2 2011, when they have to raise funds again. We will see if the budget gets thrown out or not; or the government. It will be close, on either count. In the mean time, international politics and the bond markets aren’t running the Irish government’s way, at all. Merkel’s line in the sand exacerbated the freakout in the Irish bond markets; and in the Portuguese and Spanish ones, too. At last Ambrose Evans-Pritchard (last four paras here) and Charles Butler sorta agree about something to do with Spain. That is a portent of the apocalypse, if ever there was one.

Schauble favours system of market-imposed fiscal discipline - -In a wide-ranging speech in Paris, Wolfgang Schauble explains that he wants to create conditions in which market-based pricing serves as an effective method to impose fiscal discipline on governments; he also advocates a policy for the eurozone to increase its current account surplus with the rest of the world; Wolfgang Munchau says Germany tries to impose its domestic economic concept of Ordnungspolitik on the eurozone, an effort likely to fail; Jose Socrates presents his optimistic budget to the Portuguese parliament; the French government is to include an alternative pessimistic growth scenario in its budgetary projections; peripheral eurozone banks will see a significant increase in funding costs once the ECB exits; the euro is back up $1.40, and bond spread remain at recent elevated levels; Martin Feldstein, meanwhile, says that QE2 is dangerous, as the assumptions underlying its potential effectiveness are wrong. [more]

Ireland Debt Swaps at Record High as Allied Signals 60% Chance of Default - The cost of insuring Irish sovereign debt surged to a record as credit-default swaps on Allied Irish Banks Plc subordinated debt signaled a 62 percent probability of default within five years.  Contracts insuring 10 million euros ($14 million) of Allied Irish’s junior bonds cost about 3.25 million euros upfront and 500,000 euros annually, according to data provider CMA. That’s up from 400,000 euros a year in April. Swaps on the government’s debt jumped 27 basis points to 545. Political pressure for bondholders to share the burden of losses is growing. German Finance Minister Wolfgang Schaeuble said today the euro’s stability depends on making investors pay for future debt crises, brushing aside warnings that Europe’s most indebted countries are being hurt by proposals for a permanent-debt crisis mechanism.

Clearing House warns of higher Irish debt margin requirements - A late night update ... from the Financial Times: Clearing house warning to Irish bond traders Fears over the health of the eurozone bond market intensified after one of Europe’s biggest clearing houses warned investors they could be compelled to stump up substantially more money to trade in Ireland’s debt....Such a curb would be a blow to the Irish debt market and comes amid growing concerns over the fragility of the euro­zone’s peripheral economies. And from the Irish Times: Government to postpone publication of four-year plan A detailed four-year budget had been scheduled for publication in the next week or so but it emerged yesterday that the plan will not be disclosed until closer to the December budget.

Ireland sinks deeper into danger zone as bond yields near 8% - IRISH BORROWING rates climbed to yet another record in the hours before Minister for Finance Brian Lenihan unveiled a €6 billion package of budget measures for 2011. That the Government is not currently borrowing affords but a measure of comfort as the pressure will only intensify before its return to the market in the new year. Several malign forces are working against Lenihan as he pushes against the tide to regain market confidence, not least the dire state of the public finances and the mountainous scale of the banking bailout. He is not helped in his task, however, by an increasingly assertive German push for private investors to take their share of the pain in the event of future sovereign rescues in the euro zone. In the face of opposition from European Central Bank (ECB) chief Jean-Claude Trichet, chancellor Angela Merkel succeeded last week in bringing that very question to the forefront of the EU agenda.

Ireland slashes budget by £5bn as fears of Greek-style bailout grow - Ireland's cost of borrowing hit record levels again today after plans to slash €6bn (£5.2bn) in the upcoming budget – twice that predicted three months ago – were announced by a government struggling to control the country's fiscal crisis. Finance minister Brian Lenihan conceded the cuts were worse than originally anticipated but that they were "deemed necessary and will underline the strength of our resolve and show the country is serious about tackling our public finance difficulties".The announcement came as fears that Ireland would seek a Greek-style bailout in the new year grew sharply with borrowing rates on the international markets rose to historic highs.

Ireland is running out of time - Ireland has been desperately unlucky. The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue.Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc. Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke.Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks. The uber-strong euro does not help. Under the IMF’s rule of thumb, currencies should fall by 1.1pc to offset every 1pc of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18pc against the dollar since June. (less in trade-weighted terms).

Will Ireland need to use the EFSF? - The yield on the Ireland 10-year bond surged again today to 7.68%. The Portugal 10-year yield is near a record at 6.57%.At what point does it make sense for Ireland to use the European Financial Stability Facility (EFSF)? Wolfgang Münchau at the Financial Times worked through the details in September and estimated the EFSF borrowing costs would be around 8%: Could any country risk a eurozone bail-out? It is not all that hard to conceive of a situation in which the borrower would end up paying a total interest rate of 8 per cent ... Three issues arise from this set-up. The first is that no country would ever want to borrow from the EFSF, unless it was absolutely unavoidable. The typical situation where an EFSF loan would be useful would be a case of egregious market failure. If the borrower is insolvent, the EFSF cannot help. So probably at around 8%. Ireland apparently will not need to borrow until sometime in 2011 - and they will do everything possible to avoid the EFSF, still the yields are getting close for the EFSF to make sense

According to bond markets, Ireland is not yet Greece -Yves Smith's article (The Irish Mess (IV)) is good, providing a network of associated links including one to Ambrose Evans-Pritchard. He states the following:  Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke. Ambrose Evans-Pritchard's article is well worth a read; but I'd like to talk about bond markets for just a bit. Yes, the probability of Irish default is increasingly being priced into bond markets; however, Irish bond market conditions have not yet reached those of Greece in May 2010 (the bailout announcement), nor are they really close...yet. The Irish yield curve (proxied by the 10-year government bond yield minus the 2-year government bond yield, now the 2-10) is still positively sloped. This is important. See, when there is a binary outcome being priced into a sovereign bond market, default or no default, investors go straight to the long end of the term structure, and the yield curve inverts (negative slope). In a default situation, the longer end of the curve offers a higher expected return where the potential yield compression is much larger.

Leaving euro would only make problems worse, says Trinity economist – LEAVING the euro would cause severe disruption to the Irish economy and would not help solve the fiscal crisis, a leading economist said yesterday.Dr Philip Lane of Trinity College Dublin said the economic problems would only be exacerbated if Ireland left the single currency. "The disruption caused if we left the euro would be enormous. The Government would have to implement severe controls on our currency, which is unthinkable given how globalised our economy is. As well as this, high interest rates would inevitably follow, which would cause huge problems, so it would not be helpful at all," he said. Dr Lane described the stability and growth pact, which demands that a eurozone country's deficit not exceed more than 3pc of GDP, as "irrelevant", and added that the political difficulties for any government trying to resist calls to spend a budget surplus had to be recognised.

European Bond Spreads - As followup to the previous post, here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Nov 2nd): From the Atlanta Fed:  Some peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal. Since the September FOMC meeting, the 10-year Greece-to-German bond spread has narrowed by 45 basis points (bps), from 8.62% to 8.17%, through November 2, though the spread has risen by 110 bps in the past two weeks. Similarly, with other European peripherals’ spreads, Portugal’s is essentially unchanged over the intermeeting period but is 56 bps higher than two weeks prior, and Ireland’s spread is actually 70 bps higher since the last FOMC meeting and 100 bps higher since October 19. The Atlanta Fed data is a couple days old. Nemo has links to the current data on the sidebar of his site.

Moody's says eurozone sovereign default unlikely - The eurozone economies of Greece, Portugal and Ireland are likely to avoid sovereign bond defaults because of a strong domestic investor base of local banks and pension funds that will buy their government’s debt even in times of stress, according to Moody’s. The US rating agency says investors should not worry about losses from bond defaults in these three so-called peripheral eurozone economies, considered the weakest in the 16-nation bloc.

Some in Europe lag behind -  Atlanta Fed's macroblog - Since around June, news of European fiscal deficits, financial markets stresses, potential sovereign debt defaults, or even a breakup of the euro zone has faded. The focal points of global economic policy have shifted to the sluggish recovery in developed countries and potential for further unconventional monetary stimulus.  A cursory look at a few key data reflects an improved European economic outlook from this summer. The simple dollar/euro exchange rate (see chart 1) shows that since June 1 the euro has appreciated nearly 15 percent against the dollar. While many different factors affect exchange rates—and increasing expectation of further monetary stimulus in the United States has helped the euro appreciate against the dollar—some of the appreciation seems to reasonably reflect the relative improvement of market sentiment about the fiscal situation in several European countries. Similarly, looking at the major stock indexes (mostly in Western European nations) shows a steady improvement from the lows of this summer, with the Euro Stoxx 50 index rising nearly 11 percent since June 1 (see chart 2). Thus, looking at most aggregate European data paints a picture of relative improvement, though most forecasters expect sluggish growth going forward. It's when one examines individual countries that it becomes clear some are lagging behind.

ECB Rejects Request for Greek Swap Files, Citing `Acute' Risks - The European Central Bank refused to disclose internal documents showing how Greece used derivatives to hide its government debt because of the “acute” risk of roiling markets, President Jean-Claude Trichet said. The ECB turned down a request and an appeal by Bloomberg News to release two briefing documents officials drafted for the central bank’s six-member Executive Board in Frankfurt this year. The notes outline how Greece used the swaps to hide its borrowings, according to a March 3 note attached to the papers and obtained by Bloomberg News. “The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy,”

The Greek Crisis: Argentina Revisited? - FRBSF Economic Letter - Greece's enormous fiscal deficit and high debt level culminated earlier this year in the euro zone's first sovereign debt crisis. High yields on Greece's debt indicate that markets have priced in the possibility of default. Compared with Argentina, which defaulted on its debt in 2001, Greece's fiscal position is much worse. However, unlike Argentina, Greece is supported by other euro zone countries and is not vulnerable to speculative currency attacks, advantages that offer it some protection from default.

Fed Helping Spanish Debt Keeps ECB Mum on Dollar: Euro Credit - European governments are getting an unlikely assist from the Federal Reserve as the prospect it will buy more Treasuries helps the bonds of Greece, Portugal, Italy and Spain to their first simultaneous monthly gains since July.  Speculation the U.S. central bank will pump more liquidity into the bond market has helped revive investor demand for higher-yielding European debt by driving Treasury yields down. The Fed has asked bond dealers and investors to estimate how much it might purchase in the next six months in its so-called quantitative-easing program and what the effect on yields will be, ahead of this week’s policy meeting.  Portuguese bonds posted their first monthly gain in three in October, delivering returns of 2.6 percent, even as the government and opposition struggled to strike a deal on the 2011 budget until just days before parliament is scheduled to start discussions on the measure. Longer-dated Greek bonds recorded back-to-back monthly gains for the first time since March and the yield on 10-year Italian bonds fell in October to the lowest level in more than four years.

EU leaders trigger another bond market crisis - Irish and Portuguese spreads reach new records, as the bond markets digest the outcome of last EU Summit; Bini Smaghi of the ECB launches a scathing criticism of the German proposal for an orderly sovereign default, arguing there is nothing orderly about it; market participants are now increasingly betting on the probability of at least of eurozone default/restructuring; we believe that EU leaders remain complacent about the future of the eurozone, as they push their narrow national interests; Le Monde says it is crazy to negotiate another treaty, and demands that all lawyers leave the room; Jean Claude Juncker criticised cacophony of ECB – in a thinly veiled attack on Axel Weber; Edward Hugh, meanwhile, says the Spanish unemployment statistics are misleading: unemployment has gone up, not down. [more]

What do markets want? - The news that the European Commission's Economic Sentiment Indicator fell sharply in May underlines the economic risks the continent is now facing. With governments around Europe moving towards fiscal austerity, at a time when over-indebted households are still reluctant to spend, the danger is that Europe will move back into recession.  Why are European governments embarking on such a risky strategy? In peripheral economies such as Greece, Ireland or Spain, the governments have no choice: the markets have made it clear that otherwise they will no longer be willing to continue lending to them. Governments have thus had to cut spending and raise taxes at the worst possible time. While this will worsen peripheral downturns, it is what the markets are demanding.  And so it must have been utterly exasperating for the Spanish government when, late last week, Fitch downgraded Spanish debt on the basis that Spain's adjustment process will lower its medium run growth prospects. It seems a case of damned if you do, damned if you don't.  What, might Spanish politicians well ask, do markets want?

Rethinking Early Retirement in Europe – Protests continued this week in France as the Parliament approved a bill that would raise the minimum age for reduced French retirement benefits to 62 from 60. The age to collect full benefits will rise to 67 from 65. That is not very different from the rules in effect in many countries. In the United States, workers must be 62 to collect reduced Social Security benefits, with the age for full benefits scheduled to rise from 66 now to 67 for younger workers. But where France stands out is in how many people do retire when they are still relatively young. Figures compiled by the Organization for Economic Cooperation and Development show that in 2009 only one Frenchman in five, ages 60 to 64, was in the work force, either holding down a job or looking for one. In the United States, by contrast, 61 percent of men in that age group were working, triple the French rate. In Japan, on the other hand, three-quarters of such men were in the labor force.

UK-Swiss deal undermines global efforts to tackle tax avoidance - The government might call it pragmatism but its talks with Switzerland, about how to tackle the £100bn or so which Britons have hidden in Swiss bank accounts, suggest that it is suffering from both naivety and a severe case of beggar-thy-neighbour. What the two governments have said is that they will try to do a deal to give the UK some of the tax that its citizens owe on their Swiss billions – while still not revealing the identities of those same tax dodgers. When the Treasury signed a declaration of intent last week with Hans-Rudolf Merz, a Swiss federal councillor, it would understandably have been thinking of the large amount of tax that will flow from Swiss banks into Treasury coffers, if and when the final deal is done. But this is naive. Sophisticated tax dodgers will already be moving their money on to less co-operative tax havens, to remain well ahead of the HMRC. Negotiations on a UK-Swiss tax deal are not even due to begin until early 2011, so they have plenty of warning.

The United Kingdom’s Dramatic Response to the Economic Crisis—The new coalition government in England is embarking on an ambitious austerity program.  One goal is to eliminate 490,000 jobs in the public sector; a related goal is to slash government expenditures by 19 percent over the next four years. Administrative budgets—overhead—of government agencies are to be slashed by 34 percent. (The U.S. population is five times as great as the U.K.’s—so imagine our eliminating 2,450,000 public sector jobs!) By a combination of tax increases and spending cuts, the U.K. government hopes to eliminate the annual national budget deficit, currently more than 11 percent of GDP (similar to ours), by 2015. Among popular programs to be trimmed or eliminated are housing subsidies for middle-class persons. Defense expenditures are to be reduced by 8 percent, education spending by 3.6 percent, and the teaching budgets of public universities by 40 percent. Since spending on technical subjects is to be protected, other disciplines, such as the humanities, will face especially steep cuts and tuition will rise.

McCarthy warning: IMF is at our door – Economist Colm McCarthy has starkly warned that the International Monetary Fund will be running Ireland by February if the Budget "fails to convince the financial markets". In what he calls a "scary scenario", outlined in the Sunday Independent today, Mr McCarthy says "the game is up" if the Government flunks the Budget on December 7.  The sense of impending doom is also evident in the latest Sunday Independent/Quantum Research poll, which found that a massive 64 per cent believe it to be "inevitable" that Ireland will need the help of the IMF in the new year. Mr McCarthy has said that if the Budget does "too little" to convince the financial markets, the Government will be unable to finance itself -- "which means an IMF/European bail-out and economic policy dictated from outside the country for the first time since the State was founded".  He warns that the country's cash reserves will run low by next spring, unless Ireland re-enters the bond market with a "pretty big issue" of up to €5bn.

UK to sell half of forests - AlJazeera (video) The UK government has confirmed plans to sell off up to half of its state-owned forests to private companies. The around 150,000 hectares of land could be used for commercial development, which worries many conservations. Harry Smith reports from Sherwood Forest, one of England's most popular woodlands.

American Wusses, Try Some UK Fiscal Machismo - And now for some commentary on little girlie man economics favoured by a lot of Americans nowadays, including a certain commentator for the New York Times. On the 21st of last month, the rather polarizing American economist Paul Krugman predicted the worst for Britain's bludgeoning budget cuts administered by the coalition government. That such massive cuts are being pushed by an alliance of parties nominally at opposing ends of the political spectrum on several issues suggests that there is public support for such cuts despite (several) isolated pockets of discontent. For some kicks, let's quote Krugman's conclusion on the so-called "fashion" for austerity:  But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. My goodness, we're all done for here in Britain! I'd better pack my bags and search for greener pastures, right? Well not quite. A few days later on the 26th, the UK's Office of National Statistics indicated that in Q3 2010 the British economy grew by 0.8% quarter-on-quarter or 3.2% on an annualized basis. The latter compares rather favourably to the performance of Krugman's own deficit-happy nation that only managed a 2% annualized rate of growth despite massive helicopter droppings.

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