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

Saturday, January 15, 2011

week ending Jan 15

Fed Assets Rise to Record $2.47 Trillion in QE Purchase Program - The Federal Reserve’s total assets rose by $32.2 billion to $2.47 trillion, the fifth record in six weeks, as the central bank bought Treasury securities as part of the second round of its quantitative easing strategy.  Treasuries held by the Fed rose by $31.1 billion to $1.06 trillion as of yesterday, according to a weekly release by the central bank today. Mortgage-backed securities held by the Fed were unchanged at $992.1 billion, while holdings of federal agency debt fell by $1.13 billion to $146.3 billion in the week ended Jan. 12.  M2 money supply fell by $23.1 billion in the week ended Jan. 3, the Fed said. That left M2 growing at an annual rate of 3.3 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.  The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market.

US Fed Total Discount Window Borrowings Wed $43.96 Billion - The U.S. Federal Reserve's balance sheet expanded in the latest week as the central bank continued with a plan to buy billions of dollars worth of government debt.  The Fed's asset holdings in the week ended Jan. 12 climbed to $2.471 trillion, from $2.439 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.062 trillion on Wednesday from $1.031 trillion. Much of the increase stems from purchases of securities set to mature over one to 10 years. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $43.96 billion Wednesday from $44.62 billion a week earlier. But borrowing by commercial banks rose to $87 million Wednesday from $ 10 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts fell to $3.346 trillion, from $3.355 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.611 trillion from $2.621 trillion in the previous week.

Federal Reserve Earned $81 Billion in 2010 - The Federal Reserve system is doing its part to cut the budget deficit. The central bank earned $81 billion in fiscal 2010, of which a bit more than $78 billion will be remitted to the Treasury. That’s $31 billion more than last year. According to the Fed’s news release yesterday,  The resulting $81 billion in net profits were then distributed as follows: $78.4 billion to the Treasury, $1.6 billion as dividends to member banks, and $0.6 billion retained to “equate surplus with paid-in capital.”

Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events? - SF Fed (pdf) Abstract Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems. This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries. We conduct our analysis using a set of structural and time series statistical models. We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models. In contrast, the decline in inflation has been less surprising. We identify a number of factors that help to account for the degree to which models were surprised by recent events. First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB. Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events. Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe.

Fed Officials Signal Intent to Back Bond Buys - Federal Reserve Chairman Ben Bernanke appears to have support from other Fed officials to continue his $600 billion bond-buying program when they convene for their next policy meeting on January 26-27. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, was the latest to signal a desire for continuity from the Fed, even though he is highly skeptical of the program's effectiveness. "I wish we hadn't done it, but that doesn't mean I want to stop it right now," Mr. Plosser said in an interview with The Wall Street Journal.

Q&A with Minneapolis Fed's Kocherlakota - Minneapolis Fed President Narayana Kocherlakota sat down with the Wall Street Journal’s Jon Hilsenrath in his Minneapolis office on Jan. 6. Below are extended excerpts of the interview, which resulted in the following profile. The interview lasted more than an hour:

Fed Chief Gets a Likely Backer -  Narayana Kocherlakota gets his first crack at voting at Federal Reserve policy meetings later this month, and the wonky former academic said he is likely to support the Fed's controversial $600 billion bond-buying program. Mr. Kocherlakota, who became president of the Federal Reserve Bank of Minneapolis just over a year ago, acknowledged he was hesitant about launching the program and is reluctant to expand it. "The bar for dissent from the committee is going to be pretty high for me," Mr. Kocherlakota, 47 years old, said in an extensive interview last week, his first with the national media.

A Fed on hold - Back in November, we previewed the new voting membership of the FOMC and speculated on its possible consequences for monetary policy in 2011: Three of the four new voters are in the Soft Hawk (Kocherlakota) or Hawk camp (Fisher and Plosser). We concluded that overall the voting composition would be slightly more hawkish than the 2010 version, and could make life a bit more difficult for Bernanke if he needed to do anything bold. But since then, the US recovery has accelerated somewhat and outright deflation is less of a threat. In other words, barring a severe negative economic shock (which certainly can’t be ruled out), really bold new measures are unlikely to be on the table anyways.

Bernanke Defends Crisis Lending - U.S. Federal Reserve Chairman Ben Bernanke, in a letter to Sen. Bernard Sanders, defended emergency actions the Fed took to stem the financial crisis and disputed allegations of conflict-of-interest issues at the Fed. ( Read the full letter.) Sanders, an independent from Vermont and a vocal critic of the Fed, had argued in a recent letter that companies such as Goldman Sachs Group Inc. received low-cost loans from the Fed while senior executives from the company served on the Fed’s regional boards of directors. Bernanke, however, said the Fed’s board of governors, not Federal Reserve Bank directors, made decisions about the emergency rescue programs. “Federal Reserve Bank directors had no involvement in a Reserve Bank’s decision to make credit available under any of these emergency lending facilities,” Bernanke said.

Fed Paper Details Benefits of Asset Purchases -- The Federal Reserve’s asset buying program has boosted growth, lowered unemployment and warded off what almost certainly would have been a descent into a deflationary price environment, new research published by the Federal Reserve Bank of San Francisco argues. The paper, made available on the bank’s website Friday, attempts to accomplish something many have wanted to see, which is a firm quantification of the impact of central bank’s asset buying program. The paper argues the totality of what the Fed is doing with asset buying has had a salutatory impact on the economy. In the program’s first phase, the Fed purchased $1.25 trillion in mortgages, along with hundreds of millions in agency and Treasury debt. It followed that with a decision to reinvest the proceeds of maturing mortgages into Treasurys. Then, late last year the Fed said it would buy an additional $600 billion in longer-dated government bonds.

Fed’s Fisher: Bond Buying Likely to Run Its Course - The Federal Reserve’s bond buying program is likely to run its planned course and stop, and it would take a lot to drive the central bank to go beyond what it has said it will do, a top Fed official said. “I did express a good deal of concern about this new program” to buy $600 billion in Treasury debt by this summer, Federal Reserve Bank of Dallas President Richard Fisher said in an interview Monday with Dow Jones Newswires and the Wall Street Journal. That said, “we are proceeding with that program” and while it’s not clear what influence recent data has on the effort, “I expect that program to be carried through” to its planned end, Fisher said. He added, however, that going beyond $600 billion is unlikely, saying “I wouldn’t be personally terribly keen on that idea given what I’m seeing in the economy now.”

Fed Official Says Debt-Buying Will Help Economy - The Federal Reserve’s new effort to support the recovery by purchasing $600 billion of Treasury securities will create roughly 700,000 jobs in the private sector, according to a new study by researchers at the central bank.  The study amounts to the first concrete estimate by the Fed of the economic effects of the debt-buying program it announced on Nov. 3. The program has been politically controversial, with conservatives accusing the Fed of printing money, financing the federal deficit and devaluing the dollar.  In a forum here on Saturday during the annual meeting of the American Economic Association, the Fed’s vice chairwoman, Janet L. Yellen, used the new study to offer a staunch defense of the program, which is supposed to last through June. “It will not be a panacea, but I believe it will be effective in fostering maximum employment and price stability,” Ms. Yellen said, referring to the two parts of the Fed’s legal mandate.

Yellen Says Fed Asset Purchases Create 3 Million Private Jobs - The Federal Reserve’s two rounds of asset purchases totaling $2.3 trillion will have helped boost private payrolls by about 3 million jobs by 2012, said Fed Vice Chairman Janet Yellen, citing research by four central bank economists. Policy makers’ November decision to start a second round of asset purchases of $600 billion through June “is intended to support economic recovery from an exceptionally deep recession,” the 64-year-old central banker said in the text of a speech today in Denver. “I believe it will be effective in fostering maximum employment and price stability.” Yellen gave the most detailed accounting yet of the benefits the central bank sees from its stimulus, adding her voice to a defense of the policy by Chairman Ben S. Bernanke and other officials. Republican lawmakers and officials in China, Germany and Brazil have criticized the purchases, saying they threaten to weaken the dollar and stoke asset-price bubbles.

Get a Model, Plug in Guesses, Cure Unemployment - Just when you thought you’d heard the last of “jobs created or saved,” the Obama administration’s quarterly report card on its $814 billion fiscal stimulus, along comes the Federal Reserve with its own model-derived guesstimates. The Fed’s full menu of securities purchases “will have raised private payroll employment by about 3 million jobs,” said Fed Vice Chairman Janet Yellen. Yellen’s projections are based on simulations performed by the Fed’s macroeconomic model, known as FRB/US, not real jobs. That would be the same model that failed to grasp that mortgage loans made during a period of exceptionally low interest rates by lenders with no skin in the game might not be repaid, putting major financial institutions on the brink of insolvency; the same model that failed to understand how new and exotic derivatives based on these mortgages would perform; the same model that failed to see the millions of jobs that would be lost if housing and credit bubbles were allowed to inflate until they burst; and the same model that predicted an unemployment rate of 8.8 percent in the fourth quarter of 2010 without the enactment of a fiscal stimulus. 

Yellen Speech May Offer `Proxy' For Plan to Unwind Fed's Asset Purchases - Federal Reserve Vice Chairman Janet Yellen presented a possible timeline of about seven years before the Fed’s balance sheet is restored to normal levels, while saying the central bank’s asset purchases will end up creating 3 million jobs by 2012.  Yellen, speaking in Denver on Jan. 8, referred to a model created by Fed economists that assumes the central bank will complete its second round of large-scale Treasuries purchases within a year. The Fed’s balance sheet would stay “elevated” for two years before returning to a normal size over five years, she said, alluding to the economists’ research. 

Fed profitability datapoint of the day - At the end of 2010, the Federal Reserve system had $2.423 trillion in assets and $2.367 trillion in liabilities, which means that the simplest measure of its total equity — assets minus liabilities — comes to $56.6 billion. The Fed also managed to earn net income of $80.9 billion in 2010. Which means that its return on assets was incredibly high at 3.3%, while its return on equity was an astonishing 143%. I think it’s fair to say that no bank in the history of the world has ever had income of anywhere near $80 billion in one year: that’s over $700 per US household. Somehow, the Fed is making roughly $60 per household per month, and remitting that money straight to the Treasury And it’s a useful reminder of just how massive the Fed’s balance sheet has become — and also of how monetary policy can make a serious dent in the funding-need side of fiscal policy.

The Fed’s QE2 Traders, Buying Bonds by the Billions - In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy.  To critics, it is a Hail Mary play — an admission that the economy’s persistent weakness has all but exhausted the central bank’s powers and tested the limits of its policy making. Around the world, some warn the unusual strategy will weaken the dollar and lead to crippling inflation. But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easingQE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm

The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street - The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds. But as U.S. News and World Reported noted last month: the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy.... a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement. The following charts from Doug Short update this trend: Click for a larger image Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday: The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.. “Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.” Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:

The Long Swim – How the Fed Could Become Insolvent -  In a world of fiat money, a central bank can always print more of its own currency. So unless it takes on debt or other obligations denominated in something other than its own currency, it’s impossible for a central bank to become formally insolvent. Nonetheless, it can become functionally insolvent, void of any ability to command resources or influence markets. That’s what happened in Zimbabwe, with a hyperinflation.  As of  today, we’re nowhere near such a catastrophe. But there is another way, long before hyperinflation destroys its currency, for a central bank to become functionally insolvent. It’s a trap into which our own Federal Reserve System has already stuck its foot and now seems to be getting ready to stick its neck.

Virginia Creates Subcommittee To Study Monetary Alternatives In Case Of Terminal Fed "Breakdown", Considers Gold As Option - In what may one day be heralded as the formal proposal that proverbially started it all, the Commonwealth of Virginia introduced House Resolution No. 557 to establish a joint subcommittee to "to study whether the Commonwealth should adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve System in the event of a major breakdown of the Federal Reserve System." In other words, Virginia will study the fallback plan of a "timely adoption of an alternative sound currency that the Commonwealth's government and citizens may employ without delay in the event of the destruction of the Federal Reserve System's currency" and avoid or "at least mitigate many of the economic, social, and political shocks to be expected to arise from hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System." Most importantly as pertain to the currency in question, "Americans may employ whatever currency they choose to stipulate as the medium for payment of their private debts, including gold or silver, or both, to the exclusion of a currency not redeemable in gold or silver that Congress may have designated 'legal tender'." Whether this resolution will ever get off the ground, and actually find that the world is at great risk should gold not be instituted as a backstop currency, is irrelevant. The mere fact that it is out there, should provide sufficient impetus to other states to consider the ultimate Plan B.

M2 Goes Stratospheric As Liquidity Deluge Accelerates - One look at the M2 chart below shows that the reliquification of the market by the Fed is proceeding according to plan: having increased for 23 of the past 25 weeks, the M2 has hit another all time high in the final week of 2010 at $8,848 billion, a $14 billion weekly increase, and a $316 billion annual increase. But that is not all: more important to those who believe that the Fed merely creates one and zeroes that never do anything practical, and most certainly do not add to inflation, will be delighted to learn that in addition to the $14 billion increase in M2 liquidity, reserve balances added another $26 billion in liquidity, as the absolute number declined from $1027 billion to $1001, or a gross addition of $40 billion in the week. The chart below shows the net liquidity addition from M2 and from excess reserves. Should reserves, which are currently poised just north of the $1 trillion barrier, continue collapsing, watch out below... or above (if one actually cares about things like inflation).

Toward Sensible Monetary Policy - Dr_Ron_Paul - Not surprisingly, since my chairmanship was announced, apologists for the Fed have been recycling the old canard about how increased transparency threatens the Fed's so-called political independence. By independence, they are referring to the Fed's ability to greatly impact the economy with virtually no meaningful oversight. We only recently learned that the bankers at the Fed were able to use the latest financial crisis to bail out Wall Street cronies and foreign central banks with billions of dollars that were created and wasted, instead of appropriated and voted on by representatives of the people. The Fed and its supporters in Congress vehemently fought even this small bit of transparency and without this one-time provision in the financial reform act forcing disclosure, we would still not have this information. Indeed, we are in the dark on so much of what the Fed has done. This is extremely dangerous for our country, yet this power and secrecy is defended as some kind of public good, which is patently ridiculous.

10 Things That Would Be Different If The Federal Reserve Had Never Been Created The vast majority of Americans, including many of those who believe that they are "educated" about the Federal Reserve, do not really understand how the Federal Reserve really makes money for the international banking elite.  Many of those opposed to the Federal Reserve will point to the record $80.9 billion in profits that the Federal Reserve made last year as evidence that they are robbing the American people blind.  But then those defending the Federal Reserve will point out that the Fed returned $78.4 billion to the U.S. Treasury.  As a result, the Fed only made a couple billion dollars last year.  Pretty harmless, eh?  Well, actually no.  You see, the money that the Federal Reserve directly makes is not the issue.  Rather, the "magic" of the Federal Reserve system is that it took the power of money creation away from the U.S. government and gave it to the bankers.

Fed's Beige Book: "Economic activity continued to expand moderately" -- Fed's Beige BookReports from the twelve Federal Reserve Districts suggest that economic activity continued to expand moderately from November through December.... Contacts in the manufacturing sector in all Districts reported that activity continued to recover, with the Richmond and Chicago Districts citing especially solid gains in orders. However, the Boston, Atlanta, and Dallas Districts noted that business remained weak for manufacturers selling into the construction sector. Retailers in all Districts indicated that sales appeared to be higher in this holiday season than in 2009 and, in some cases, better than expectations.

U.S. Inflation Set to Soar as the Country's Chief Export Boomerangs Back Home - One common explanation for that phenomenon is that U.S. inflation has been 'exported' to China and elsewhere through the U.S. Federal Reserve's monetary policy. And given the perennial U.S. balance of payments deficit, it's good to know the country has found something it can successfully export! However, the bad news here is that inflation does not stay exported - and in 2011 it may boomerang back to make life on Main Street miserable.U.S. monetary policy has involved excessive money creation since 1995, fueling asset bubble after asset bubble. However, it has not produced inflation in the United States because the dollar is a reserve currency, so excess dollars flow to countries whose economies are more vulnerable to inflationary pressures. In the 1990s, the excess dollars flowed to Argentina, whose currency was pegged to the dollar. The imported inflation wrecked Argentina's sound policies of that decade and contributed to a debt-fueled collapse in 2001. Since 2008, the excess money has gone to China, India, Brazil and other fast-growing emerging markets. It also has fueled a massive growth in foreign exchange reserves among the world's central banks. Central bank holdings of forex reserve have grown more than 16% per annum since 1998.China, India, and Brazil all currently have massive inflation problems. China, which has increased its inflation by holding down its currency against the dollar, has been very proactive in tackling inflation as of late.

Has The Fed Lit Inflation Fuse? - What do higher commodity prices and a warning on soaring U.S. government debt have in common? Both are fueled by the Federal Reserve's money presses.  Both Standard & Poor's and Moody's Investors Service warned Thursday that U.S. debts are piling up so fast that our precious AAA rating is at risk. It may not sound that serious, but if we lose our AAA rating we'll have to pay more — a lot more — to borrow money. That isn't an issue yet, since under its "quantitative easing" the Fed's been printing money and buying Treasury and other bonds. In other words, it's doing what every central banker says it shouldn't do: monetizing the debt. Our government is spending too much, racking up deficits of over $1 trillion a year. The Fed is encouraging this by printing more money. Eventually this will end — and not necessarily in a gentle way. The U.S. now has $14 trillion in public debt. At the average rate on the 10-year Treasury over the past two years, 3.24%, that $14 trillion costs about $450 billion to service. But if interest rates should rise to, say, their 20-year average of 5.5%, the cost of carrying that debt surges to about $760 billion a year — bigger than the U.S. defense budget.

QE2 is Working - One goal of QE2 is to raise inflation expectations.  According to the latest Cleveland Fed data on expected inflation, QE2 is doing just that: (Click on figure to enlarge.) Though far from perfect, QE2 should be considered successful on this objective.  Raising inflation expectations is important for two complementary reasons. First, absent any negative productivity shock, higher expected inflation indicates the Fed is also raising expectations of future total dollar spending (that is how the prices will rise).  Higher nominal spending, in turn, means the real economy should be improving too, given sticky prices and excess economic capacity.  Such an improved economic outlook will cause households and firms to increase current spending. Second, higher expected inflation also increases the opportunity cost of holding low-yielding liquid assets like money and treasuries. This will encourage folks to adjust their portfolios away from money and treasuries to higher yielding assets. 

Don't Worry; They'll Just Change the Rules To anyone paying the slightest bit of attention, these remain very uncertain and trying times. On one side of the intellectual divide are the folks who are counting on deflationary forces overwhelming the normal credit-operated machinery of modern life, resulting in an implosion of economic activity. On the other side are those counting on hyperinflation as the most likely outcome of the grand printing experiment currently being conducted across the globe with its epicenter located within the United States. In the middle of the intellectual divide are people like me, who are leaning slightly towards one view or the other. Some are expecting an imminent recovery (whatever that means), some a long, slow grind downwards, and others a rapid, if not chaotic, plunge into new and unwelcome territory of one sort or another. There are no right or wrong views here. All sides are on equally firm intellectual standing. However, I want to let you know why it is that I lean towards the inflationary line a bit (okay, a lot, by some people's standards) and why I think that a wide-scale, final fiscal collapse is in the cards.

Core measures of inflation increase in December - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.7% annualized rate) in December. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. ... Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.2% annualized rate) in December. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis.  Over the last 12 months, the median CPI rose 0.6%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.5%, and the CPI less food and energy rose 0.8%  So these three measures: core CPI, median CPI and trimmed-mean CPI, all increased less than 1% over the last 12 months.

Inflation (or Lack Thereof) - According to the BLS, inflation blipped up in December: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment. Much of that increase was due to the cost of energy, which rose 7.7% in December (gasoline prices were up 13.8%).  The "core" CPI, which excludes food and energy prices, was up 0.1% in the month, and 0.8% for the year.  While there was some energy-induced inflation in the month, the annual rates of change in both overall (red) and core (blue) inflation remain subdued: Those rates remain well-below the Fed's informal 2% target. The traditional inflation-unemployment dilemma of monetary policy just isn't an issue for the Fed right now.

Time For Fed To Emphasize Other Price Gauges - It’s time for the Federal Reserve to start emphasizing its own alternative measures of inflation trends. To gauge where prices are heading, since the 1970s the Fed’s been focusing the public’s attention on a core inflation measure that strips out volatile food and energy prices, making the central bank sometimes look arbitrary and out of touch with reality. Two little-known measures compiled by economists at the Federal Reserve Banks of Dallas and Cleveland since the 1990s may provide the solution. Instead of just taking out energy and food from the PCE price index published by the Commerce Department, the Dallas Fed throws out whatever item shows the biggest price swing, both increases and decreases, and averages out what’s left.  As well as eliminating gasoline and fresh foods, the Dallas Fed indicator has recently stripped out volatile hotel rates and used car prices.Instead of just taking out energy and food from the PCE price index published by the Commerce Department, the Dallas Fed throws out whatever item shows the biggest price swing, both increases and decreases, and averages out what’s left.  As well as eliminating gasoline and fresh foods, the Dallas Fed indicator has recently stripped out volatile hotel rates and used car prices.

Economy to Grow 3-4% in 2011 But Hiring Still Lags: Bernanke  Federal Reserve Chairman Ben Bernanke said Thursday that the US economy is strengthening, with three to four percent growth likely this year, but that it won't reduce unemployment "at the pace we'd like it to "We see the economy strengthening," Bernanke said during Small Business forum co-sponsored by the FDIC and CNBC. "It has looked better in the last few months. We think a 3 to 4 percent-type of growth number for 2011 seems reasonable."  "Now that's not going to reduce unemployment at the pace we'd like it to, but certainly it would be good to see the economy growing and that means more sales, more business," he added. The Fed chairman also said the housing recovery is "a slow process."

Fed's Rosengren: Two Key Questions about the Economic Recovery - The first question is, what role will housing play in the recovery? ... housing has traditionally been an important sector of the economy for generating recovery. ... I expect housing will not provide as much support to this recovery as it has in previous ones. My sense is that residential investment, consumer durables, and services related to housing will be less robust than is usual in many recoveries, thus playing a role in what I think will be only a gradual improvement in the economy and employment.  A second key question involves the concerns about Fed actions stoking inflation. ... Some observers and analysts have voiced great concern that the nascent economic recovery, combined with the actions of the Federal Reserve that have expanded its balance sheet, will lead to significant inflation. However, Figure 11 [see previous post for similar graph] provides a variety of different measures of core inflation; core CPI, core PCE, trimmed core CPI and trimmed core PCE. It is striking how much all four series have declined. In fact many of these series are at their historical lows.

Fed Watch: Are Oil Prices About to Undermine the Recovery? - Calculated Risk directs us to an LA Times story identifying the possibility that rising gasoline prices will undermine the recovery. He also reminds us that James Hamilton recently wrote on the subject as well, concluding: I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending. I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate. I would add that the current price appears inline with the general upward trend since the beginning of last decade. Here I extrapolated on the 2000-2006 trend: From this point on, I tend to think the issue is less of will oil continue to rise, but at what speed will it rise. The trend over the last decade appears to make a lie of recent claims that we have entered into a period of plentiful energy (see also James Hamilton), and while higher oil prices will tend to crimp growth, a gradual price increase should allow for non-disruptive adaptation on the part of economic agents.

Fed Watch: Shifting to Autopilot - Incoming data this week suggest the US economy continues to meander on its upward path, albeit at a rate that is decisively lackluster, at least relative to the magnitude of the output gap. That path of growth guarantees the Fed completes the current large scale asset purchase program. But soon we will have to turn our attention to what comes next. The baseline scenario is that the Fed holds pat - holding the balance sheet steady for the remainder of 2011, a scenario endorsed by at least two policymakers this week. Still, we should continue to challenge this assumption.. Thursday we saw some reminders that the path to recovery is not a straight line. First, initial unemployment claims retraced some of the recent declines. Mark Thoma has the story here. To be sure, given the noise in this series, one week of data contains limited information. In general, the downward trend remains intact. Still, it argues against expectations the job market is set to rocket forward. Housing news continues to tell the same old story. The record level of foreclosures in 2010 is not expected to be a record for long, while more evidence collects that housing prices are still falling.

Fed Watch: A Mixed Bag of Data-  Today's data flow suggests ongoing expansion, but should also send a note of caution. Industrial activity continues to respond to firming demand, but capacity has yet to show solid gains. Firms are still not sufficiently confident, or lack sufficient demand, to justify widespread investment. Similarly, consumer spending continues along its upward trend, although the increase in energy costs are likely constraining the pace of that growth and keeping a lid on consumer confidence. Something of a mixed bag largely consistent with the general consensus view. Start with the better than expected industrial production report, via Bloomberg: Industrial production in the U.S. rose in December more than forecast, boosted by gains in business equipment and home electronics that indicate factories remain at the forefront of the recovery.. I have taken to looking at the capacity data for signs of a solid, self-sustaining recovery. Here we see the most tentative signs of improvement, or at least stabilization

Economists: It Doesn't Look Good For U.S. Economy In Next Decade - To hear a number of prominent economists tell it, it doesn't look good for the U.S. economy, not this year, not in 10 years. Leading thinkers in the dismal science speaking at an annual convention offered varying visions of U.S. economic decline, in the short, medium and long term. This year, the recovery may bog down as government stimulus measures dry up. In the long run, the United States must face up to inevitably being overtaken by China as the world's largest economy. And it may have missed a chance to rein in its largest financial institutions, many of whom remain too big to fail and are getting bigger. First, the boost to growth from government spending will be drying up this year, he said. Renewal of expiring tax cuts is no more than a decision not to raise taxes, and the impact of one-year payroll tax cut is likely modest, he said.

The pluses and minuses of reluctant consumers - Atlanta Fed's macroblog - If you've been keeping up with news from last weekend's convergence of economists at the annual meeting of the Allied Social Science Associations, you will probably have heard of this optimistic-sounding conclusion by Harvard economist Martin Feldstein: "It is not hard to imagine that a few years from now the current account imbalances of the US and China will be very much smaller than they are today or even totally gone."  An advance copy of the article was provided a few weeks ago at Real Time Economics, and considerable commentary has followed since (here, here, here, and here, for example). Some skepticism about the probability of a substantial decline in Chinese saving rates was noted in a recent post at The Curious Capitalist, which focuses on some interesting new research that relates high Chinese saving rates to an increase in income volatility.

New Move to Make Yuan Global Currency - China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country's plan to foster global trading in its currency. The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong. The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment.  "We're preparing for the day when renminbi becomes fully convertible,"

Chinese Bank Launches Yuan Service in New York. A state-owned Chinese bank says its New York City branch has begun offering accounts denominated in China's tightly controlled yuan in a new move to expand the currency's global reach. Bank of China's announcement comes ahead of Chinese President Hu Jintao's visit to Washington next week. The White House says President Barack Obama will press U.S. complaints about China's currency controls that critics say keep the yuan undervalued and swell its multibillion-dollar trade surplus. In a statement on its website, the bank said account holders can exchange up to the yuan equivalent of $4,000 per day, with a limit of $20,000 per year, while the limits are half those levels for non-account customers.

The Dollar: Dominant no more?-- If the euro’s crisis has a silver lining, it is that it has diverted attention away from risks to the dollar. It was not that long ago that confident observers were all predicting that the dollar was about to lose its “exorbitant privilege” as the leading international currency. First there was financial crisis, born and bred in the US. Then there was the second wave for quantitative easing, which seemed designed to drive down the dollar on foreign exchange markets. All this made the dollar’s loss of pre-eminence seem inevitable. The tables have turned. Now it is Europe that has deep economic and financial problems. Now it is the European Central Bank that seems certain to have to ramp up its bond-buying program. Now it is the Eurozone where political gridlock prevents policymakers from resolving the problem.

Eichengreen on the Dollar - At Project Syndicate, Barry Eichengreen sees some interesting similarities between today's debates over the dollar's global role and those of the 1960's, when the Bretton Woods system was nearing its collapse:  In 1964, it was the rapidly growing economies of Europe, still catching up to the US, that were howling about the Federal Reserve. As a result of a recklessly expansionary American policy, they argued, they were being flooded with imported finance. The US was “exporting inflation.” American officials countered that the financial inflows reflected Europe’s underdeveloped capital markets. Europe’s inflation problem was a byproduct of its central banks’ reluctance to tighten policy more aggressively, and European countries’ hesitancy to let their currencies rise, reflecting their long-standing commitment to export-led growth. The effort to replace the dollar with IMF "Special Drawing Rights" (SDRs) ultimately failed, and no agreement was reached on achieving greater flexibility within the context of the Bretton Woods system:

Dollar/euro Irrelevance - Krugman - A number of comments, both here and on my euro article, focus a lot, one way or another, on the respective roles of the euro and the dollar as international currencies; some of the comments drop dark hints about US plots to derail the euro, or petrodollars, or whatever. Really, it’s not a big deal, as I wrote way back when (2003, I think). There are some advantages to having a reserve currency, but they’re really not large. And they certainly aren’t at the heart of the issues now creating so much trouble in Europe. Oh, and by the way, the dollar/euro exchange rate isn’t relevant at all; a strong currency doesn’t imply a strong economy, and may often imply the opposite.

Pension pledges have left UK and US 'insolvent' - The world's most advanced economies, including Britain and the US, would be insolvent if they accounted properly for the pension and health pledges made to their aging populations, an authoritative report has warned. More painful austerity measures, of higher taxes and further spending cuts, will be necessary in the years ahead "to cover the gap between expected future liabilities and expected future income", the World Economic Forum said in its Global Risks 2011 report. "Age-related liabilities dwarf short-term issues such as the cost of fiscal stimulus [in the recession]," the report added. It estimated that the undisclosed cost of age-related spending in the UK is roughly 3.5 times the size of the UK economy – or around £5 trillion. "Under a proper accounting framework, most advanced economies would be fiscally insolvent... In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults."

Debt Default Fears will Spread to US and Japan, Warns Citigroup's Willem Buiter - Worries about the risk of a sovereign state defaulting on its debt, which thrust the eurozone into crisis, will soon encompass the two major economies as well, according to Citigroup economists led by Mr Buiter, who sat on the Bank's Monetary Policy Committee.  The team has published a note forecasting much more strife to come in the wake of Greece and Ireland's recent bail-outs and eurozone governments' borrowing costs hitting record highs.  "Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving," the team wrote. "There is no absolutely safe sovereigns." There are likely to be several sovereign debt restructurings in the next few years, the analysts said, with Portugal likely to need to access the emergency funding facilities soon. Against this backdrop, the US and Japan - dubbed the "fiscal sustainability deniers" - cannot keep ignoring the question of how safe their public finances are, the team said.

U.S. In Danger Of Losing AAA Credit Rating - Both Moody’s and S&P warned today that the United States is in danger of losing its stellar credit rating due to our fiscal problems: Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction. Moody’s Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating. “We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” Standard & Poor’s Corp. on Thursday also didn’t rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country’s fiscal situation. The U.S. currently has a triple-A rating with a stable outlook at both agencies.

Poor US Debt Trajectory Could Mean Negative Outlook - The U.S.'s top triple-A rating could be put on negative outlook if a plan to stabilize and ultimately reverse the upward debt trajectory of the country doesn't materialize, Moody's Investors Service said Thursday.  "We have become increasingly clear about the fact that if there are not off-setting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," Sarah Carlson, senior analyst at Moody's, told Dow Jones Newswires.

Uncle Sam Wants His AAA Rating - Two major credit ratings agencies warned Thursday that the United States might tarnish its triple-A credit rating if its national debt kept growing. It was not the first time the agencies, Standard & Poor’s and Moody’s Investors Service, warned that the nation’s gilt-edged rating might fall into jeopardy. But the two statements, made within hours of each other, were seized on by deficit hawks as further evidence that the government must reduce spending and debt to avert disaster. But many economists say the reckoning, if it comes, is still years or even decades away. The bond market shrugged at Thursday’s news. Indeed, even some experts who want to see the deficit reduced said now is not the time to cut federal spending drastically, given the weakness in the economy and high unemployment.

Markets Shrug Off Fresh Warnings About US Sovereign Debt - TOP credit-rating firms have cautioned the US on its rating, pointing to a deteriorating fiscal situation that they say needs correction.  The warnings echoed previous statements by the companies, however, and financial markets largely ignored them. Treasury yields, which move in the opposite direction as prices, were lower in late-morning New York trade and the cost of insuring US debt against the risk of default, already below that of Germany, the euro-zone benchmark, barely budged. "My traders are shrugging it off as stuff we've heard before," said Tom Di Galoma, head of interest-rate trading at Guggenheim.

Central banker urges China to cut US debt holdings: report - China should further diversify its huge foreign exchange reserves away from U.S. government debt to reduce its risk exposure, a central bank official said in comments published on Monday. "We should change the single-currency focus on buying U.S. Treasuries and adopt a more diversified structure for foreign exchange reserves to reduce risk," Xu Nuojin, deputy-director of the People's Bank of China in Guangzhou, was quoted as saying.  Analysts estimate that about two-thirds of the reserves, which hit a record $2.65 trillion at the end of September, are parked in dollar assets, although the currency composition is a state secret. China should channel more of its foreign exchange reserves into resources and equities, Xu said.

China Demands The US Make Statement Promising Its Dollar Assets Will Be Held Safe - This headline is getting a little bit of attention this morning: Ahead of a state visit from Hu Jintao, Chinese Foreign Minister Cui Tiankai says his country is looking for some kind of "positive statement" about the safety of US dollar holdings.  Big deal? As a sign of what China is concerned about, perhaps. Would a statement from the US really accomplish anything? Eh, not really. That being said, expect more and more headlines on US-Sino relations. Hu's visit begins on the 18th.

Is China Really Funding the US Debt? -I keep hearing people erroneously claim that China is funding US deficit spending. It seems that every eejit with a fundamental misunderstanding of mathematics (and access to animated talking bears) has been pushing this concept. It turns out to be only partially true — and by partially, I mean 7.5% true. But that means the statement is 92.5% false. The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt — about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes. As of last week, January 4, 2011, the United States’ total public debt outstanding has surpassed 14 trillion dollars. Political Calculations has whipped up a chart showing exactly who is holding US debt, and funding our deficit:

Who Owns the U.S. National Debt? - The answer is illustrated below: The United States' total public debt outstanding was approximately $13.562 trillion at the end of the government's fiscal year on 30 September 2010. As of 4 January 2011, the United States' total public debt outstanding has surpassed 14 trillion dollars and is continuing to grow rapidly.  Despite that near half-trillion dollar increase, the percentage composition of who owns the U.S. national debt shown in the chart above is relatively unchanged. On the whole, U.S. individuals and institutions, when including the Social Security, U.S. Civil Service and Military trust funds own 62.2% of the U.S. national debt, while foreign nations own the remaining 37.8%.

Greenspan Warns of Risks From U.S. Debt - Former Fed Chairman Alan Greenspan said the U.S. could face a bond-market crisis if politicians don't act soon to start cutting the nation's debt. In an interview with Kelly Evans, Alan Greenspan discusses the dangers of current fiscal policy while challening his critics to prove him wrong on any decision he made as Fed Chairman. In an interview Friday with The Wall Street Journal, Mr. Greenspan said that eventually Congress would pass a budget that includes many proposals by a White House debt-reduction panel. "I think that the type of budget agreement that was put together by Alan Simpson and Erskine Bowles is the type of budget that will be passed by Congress," Mr. Greenspan said. "The only question is, will it be before or after the bond-market crisis."

Fisher: Fed Has Done Enough, Now Congress’s Turn - Believing the Federal Reserve has done enough to aid the economy, a top Federal Reserve official is calling on Congress to help improve the economy’s outlook by reducing uncertainty and get its financial house in order. “The Fed has done much… to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home,” Federal Reserve Bank of Dallas President Richard Fisher said Wednesday. The official said none of his business contacts “are complaining about the cost of borrowing, the lack of liquidity or the availability of capital.” Instead, “all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.”

Fed's Fisher Says Monetary Policy Not Cure for Nation's `Fiscal Pathology' - Federal Reserve Bank of Dallas President Richard Fisher said monetary policy isn’t a “salve for the nation’s fiscal pathology” and that Congress should focus on reducing the federal deficit and creating incentives for companies to grow.  “There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity,” Fisher, 61, said in a speech in New York today. “The Fed has done much, in my words, to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home.”  Through its asset purchases, known as quantitative easing, the Fed runs “the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance,” said Fisher, who votes this year on the FOMC. The program “roughly means we are purchasing the equivalent of all newly issued Treasury debt through June.”

US runs $79.9b December budget deficit – The U.S. government ran a budget deficit of nearly $80 billion in December, the Treasury Department said Wednesday, in a new report likely to add fuel to an intense debate over government spending. December’s $79.9 billion deficit marked the 27th consecutive month of red ink for the federal government. The report comes as newly empowered congressional Republicans are moving to rein in spending and as a showdown loomed over raising the U.S. debt ceiling. Federal outlays were $316.8 billion in December, while receipts were $236.8 billion, up 8 percent from a year ago on higher corporate and payroll tax receipts.

Reducing the Budget Deficit - CBO Director's Blog-  I participated this morning in a panel discussion about budget deficits at the annual meeting of the American Economic Association. The panelists were asked to talk about what should, or will, or might, happen regarding the fiscal imbalance and the likely economic impact. Of course, CBO doesn’t make policy recommendations, so I couldn’t talk about what should happen. We also don’t make political forecasts—finding economic and budget projections quite difficult enough—so I couldn’t talk about what will happen. What CBO does is to examine for the Congress the effect of alternative policies, so it’s natural for me to talk about what might happen, and that’s what I did.

US Deficit Fixes Needed 'Fairly Soon,' CBO's Elmendorf Says - The U.S. needs to cut its budget deficit soon through changes in spending and tax policies to reduce the risk of a fiscal crisis, according to the head of the nonpartisan Congressional Budget Office.  Changes to U.S. fiscal policy “need to be large, need to affect programs that are popular and tax payments that people make, and it will need to be enacted fairly soon,” Douglas Elmendorf, director of the congressional office that estimates the impact of legislation on the federal budget, said today.  Elmendorf joins economists and policy makers such as Federal Reserve Chairman Ben S. Bernanke in warning about risks to the economy from annual budget deficits running at near 10 percent of gross domestic product for the third year in a row.  “If we do not change our course we will let our past crush our future in a very fundamental budgetary sense,”

Which country prints more and runs bigger government deficits: Canada or the US? - Rebecca Wilder - I'd like to revisit the US Treasury market. Specifically, I'll look at the Canadian-US bond spreads, which tell an interesting tale of Fed purchases and US deficit fears. First, the Canadian over US government bond spreads for two longer term issues, 10yr and 30yr in chart below, have been falling for some time. Today (Jan. 10, 2011), the 10-yr Canadian Treasury over the 10-yr Treasury spread is around -12 basis points (bps), i.e., the Canadian 10-yr bond is 12 bps lower than the US 10-yr. The 30-yr spread is roughly -86 bps. The recent divergence of the 'spread' between these two spreads presents a bit of a conundrum, since the two have more or less moved in lockstep.The conundrum is this: the 30-yr spread has deviated well below its 2002-2011 average of 8 bps, while the 10-yr spread is sitting roughly at its average, -13 bps. But this is not a conundrum if you consider recent US policy, holding all else equal.

Don't Believe What’s Said About Debt Ceiling - There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased that, before any more unnecessary bloodcurdling language is used that increases everyone’s anxiety, it’s worth taking a few steps back from the edge. First, not raising the current federal debt limit absolutely will not immediately shut down the federal government. In fact, the federal debt ceiling has virtually nothing to do with whether federal departments and agencies continue to operate.  Government shutdowns occur when the appropriation that funds a department or agency isn’t enacted. In fact, unless the Treasury or the Office of Management and Budget informs them, federal departments and agencies likely have no idea about the government’s cash position or where the cash came from when they obligate funds and carry out the activities funded by their appropriation. The agencies and departments are legally required to conduct these activities; gathering the cash to pay for them is a completely separate process.

The Problem With Opposing a Debt Limit Increase Without Opposing the Policies That Breach the Debt Limit - Hmmm….. According to a Reuters/Ipsos poll released this week: The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs… Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase. Yet from the same poll: Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.  Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program. Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.

Americans Hate Taxes And The National Debt, Don’t Know What They Want To Cut -- Two new polls show the eternal conumdrum that America finds itself in when it comes to Federal spending, the Budget Deficit and National Debt, and taxes. Americans all seem to agree that debt is bad, that taxes shouldn’t go up, and that we need to cut spending, but they aren’t willing to commit to the kind of spending cuts that would be necessary to really solve the problems we find ourselves dealing with. First, there’s a new poll from Reuters that shows, not surprisingly, that Americans are almost universally opposed to raising the debt ceiling:Either they’d have to increase revenue, meaning taxes, or they’d have to start cutting spending, and when it comes to spending, the American public has no idea what it wants.  So, if you’re not going to make big spending cuts, then the only other option is to raise taxes, right? Not according to a new poll from CBS News:

Why do we have a debt ceiling? - Can someone please explain to me why we have a debt ceiling at all? Its existence seems to violate every tenet of risk management and good governance. James Hamilton put it well back in 2006: One of the peculiar embarrassments of the American political process is the fact that Congress votes separately on the deficit and debt, as if they were two different decisions… If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default. The greater the likelihood markets attach to such an event, the higher will be the interest rate the government has to pay on Treasury debt.. Looked at another way, this has very little to do with hypocrisy or the voting records of individual legislators. Instead, it’s a built-in systemic stupidity: the existence of the debt ceiling can cause lots of harm, while it does no good whatsoever. As a result, at the margin it will always needlessly raise US borrowing costs, at least by some small amount.

More Silliness on the Debt Ceiling and Government Shutdowns - Over at The Caucus blog at the New York Times, Carl Hulse yesterday posted about a letter from Reps. Barney Frank (D-MA) and Norm Dicks (D-WA) to Defense Secretary Robert Gates asking him "to explain the military impact of putting the government into default," that is, what would happen if Republicans in Congress refuse to increase the federal debt ceiling when it's reached later this year.  Here's the money quote from Hulse's post: More specifically, they asked the secretary what the effect would be on combat operations and military personnel in Afghanistan and Iraq “if Congress were to fail to raise the debt limit and a government shutdown occurred.”

Chamber of Commerce prez: Debt ceiling hike “will be done” - Some Republican officials have insisted in recent days that they cannot support hiking the debt ceiling unless Obama and Dems make major concessions on bringing down spending. Since many observers say failure to raise the debt ceiling would be catastrophic for the country, this effort by Republicans looks like an effort to use the showdown as a bargaining chip to force the Dems' hand on spending cuts. That's why the appearance above by Chamber president Tom Donohue is key. "We absolutely support the expansion of the debt," Chamber president Tom Donohue said. He added that officials should make a few gestures in the direction of spending cuts, but dismissed the brinksmanship as mainly political posturing. "We've got to do the debt ceiling," he said. "There'll be a lot of political carrying on, but it will be done."

Debt Limit a Worry at House GOP Retreat - Much of the talk today at the retreat for GOP House members in Baltimore is about raising the debt ceiling, a difficult vote that Republicans will face within a few months. “We’ll see what that vote looks like, but right now everybody’s sending a cautionary tone that we’re worried about making the vote, that’s not what the election was about last November,” Rep. Tom Rooney (R., Fla.) said during a break in the closed-door sessions. Republican leaders say they recognize the debt limit must be raised to reassure the markets and the public that the U.S. will honor its obligations. At the same time, many GOP freshmen are skittish about the politically sensitive vote. Republicans say the only way they’ll pass the increase is by packaging it with significant spending cuts. But there is no agreement yet on what those cuts should be.

The debt ceiling and default - ALMOST everyone takes it for granted that a failure to raise the debt ceiling will eventually force the United States to default on its Treasury debt. This notion is superficially puzzling. The question is addressed in this week’s issue of The Economist. I’ll dig into it a bit more here. A default would result from failure to pay principal or interest. The debt ceiling doesn’t bar either. Treasury can roll over maturing issues so long as the overall stock of outstanding debt doesn’t rise. (A caveat: Treasury must invest surplus Social Security and Medicare taxes by issuing non-marketable debt to the plans’ trust funds, which erodes the remaining capacity for marketable debt.) As for interest, even in today’s straightened circumstances, revenue is more than enough to cover interest charges. The helpful table below from Lou Crandall of Wrightson ICAP shows that in every month this year, projected cash receipts comfortably exceed interest payments

The US won’t default, even if the debt ceiling stays - Greg Ip makes a very important point today, which I haven’t seen made anywhere else: even if the US debt ceiling isn’t lifted, that doesn’t mean the government will default. In any given month, the government’s income dwarfs its debt-service obligations, which means that the government could simply pay all interest on Treasury bonds out of its cashflow. Greg hasn’t run the numbers on principal maturities, but I’m pretty sure that they too could be covered out of cash receipts—and when that happened, of course, the total debt outstanding would go down, and we wouldn’t be bumping up against the ceiling any more. The point here is that the government has enormous expenditures every month, and debt service constitutes an important yet small part of them. If the debt ceiling weren’t raised, it stands to reason that just about any other form of government spending would get cut before Tim Geithner dreamed of defaulting on risk-free bonds.

Peacockery - Krugman - Greg Ip is too kind in this article, in which he questions why Paul Ryan should have received an award for fiscal responsibility. Ip makes it out as if Ryan is a former good guy who has fallen astray; but there was never any reason to take his claims of being a deficit hawk seriously. In particular, why would anyone consider a plan to replace Medicare fee-for-service with vouchers an effective way to curb future expenses? We’ve already done that: it’s called Medicare Advantage. And it has been a fiscal disaster: instead of unleashing the magic of the marketplace to reduce costs, it has ended up being a serious drain on the budget. Now, Ryan created apparent savings by coupling a plan for vouchers with an arbitrary limit on the size of these vouchers.  But what happens when it turns out that the vouchers aren’t enough to buy adequate insurance? The point is that it takes more to be serious about deficits than to scribble down some numbers and claim that you’re being tough. Tell me what you’re actually going to cut and/or how you’re going to raise more revenue, and then let’s talk.

Economical arithmetic - I just attended a panel of the great and serious discussing the US budget deficit. The numbers are pretty impressive – on current projections, US government expenditure (properly measured) is likely to be around 25 per cent of national income (around 3 trillion/year) and the default budget deficit is around 10 per cent of national income. While current and former CBO directors went over the usual options, it struck me that I had seen those numbers before. Roughly speaking, the share of US national income going to the top 1 per cent of the income distribution has risen from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability of the financial sector. As I’ve argued before, this payment to the top percentile can be seen as a kind of tax paid by the population as a whole for the benefits of living in the kind of economy that has developed over the past few decades of financialisation.

Math is Math: There Was No "Second Stimulus" - One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let's combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.) Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let's be nice (in context) and use the lower one. StateMultiplier = 1.5 David Dayden notes that budget cuts in just two (large) states can be matched against the Fed's "stimulus" monies. Let's see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring "reserve"): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B.  The Federal Stimulus is $55-60B

Could Federal Spending be Capped at 20 Percent of GDP? Should it Be? - As the budget debate heats up, we will hear much about capping U.S. federal government spending at 20 percent of GDP, roughly its level for several decades leading up to the global financial crisis. Likely presidential candidate Rep. Mike Pence (R-Ind.) has been among the most vocal backers of this idea. Together with colleagues, he has packaged it in the form of a proposed Spending Limit Amendment.  Part of its attraction is that the 20 percent solution appears to require no real sacrifice. If we were content with the level of government services enjoyed in past, pre-crisis decades, why would there be any hardship in holding to that level in the future? Unfortunately, the pretense that it would be possible to maintain the same level of real government services as in the past without future increases in spending is an illusion. The reality is that holding government spending to past levels would require a significant reduction in real public services

Budget Battles: Did Gates “Cut” Defense Cash? - Actually, despite what some breathless headlines say this morning, the changes that the defense secretary made to the Pentagon’s ledger are fairly modest. That $78 billion figure? In context, it means that over the next five years, the Pentagon will spend $78 billion less than it projected it would. Non-war spending will remain in the ballpark of over half a trillion dollars; Gates said the budget for fiscal 2012 will be $553 billion. What really happened is that Gates and the White House stopped increasing the military’s cash. The following years’ budgets will grow less steeply than they did in previous years — only between one and two percent higher — and by fiscal 2015, they’ll flatline. In the past, Gates has talked about the military’s financial “spigot” closing. Under this plan, the tap will flow at essentially the current rate — still more than President Bush’s first post-9/11 Pentagon budgets. With inflation, you’ll see the budgetary numbers grow somewhat over the next few years, but not significantly.

The 'Ponzi scheme' of 'artificial prosperity' - The Obama administration's $78 billion cut to US defense spending is a mere "pin-prick" to a behemoth military-industrial complex that must drastically shrink for the good of the republic, a former Reagan administration budget director recently told Raw Story. "It amounts to a failed opportunity to recognize that we are now at a historical inflection point at which the time has arrived for a classic post-war demobilization of the entire military establishment," David Stockman said in an exclusive interview. "The Cold War is long over," he continued. "The wars of occupation are almost over and were complete failures -- Afghanistan and Iraq. The American empire is done. There are no real seriously armed enemies left in the world that can possibly justify an $800 billion national defense and security establishment, including Homeland Security." Short of that, he suggested, the United States has "reached the point of no return" with its artificial creation of wealth, and will eventually face a sharp economic decline. Stockman last fall criticized the extension of the Bush tax cuts while the federal government continued to borrow money abroad to pay for its public welfare and warfare programs. His solution to deficit spending -- a huge across-the-board tax increase -- is contrary to the current anti-tax ideology shared among tea party activists as well as fiscal conservatives in the Republican Party.

Exclusive: America has ‘reached the point of no return,’ Reagan budget director warns - The Obama administration's $78 billion cut to US defense spending is a mere "pin-prick" to a behemoth military-industrial complex that must drastically shrink for the good of the republic, a former Reagan administration budget director recently told Raw Story. "It amounts to a failed opportunity to recognize that we are now at a historical inflection point at which the time has arrived for a classic post-war demobilization of the entire military establishment," David Stockman said in an exclusive interview."The Cold War is long over," he continued. "The wars of occupation are almost over and were complete failures -- Afghanistan and Iraq. The American empire is done. There are no real seriously armed enemies left in the world that can possibly justify an $800 billion national defense and security establishment, including Homeland Security." Short of that, he suggested, the United States has "reached the point of no return" with its artificial creation of wealth, and will eventually face a sharp economic decline.  Stockman last fall criticized the extension of the Bush tax cuts while the federal government continued to borrow money abroad to pay for its public welfare and warfare programs. His solution to deficit spending -- a huge across-the-board tax increase -- is contrary to the current anti-tax ideology shared among tea party activists as well as fiscal conservatives in the Republican Party.

The Tax Rate that Maximizes Economic Growth, Part 3 - Today I will build a model that explains over three quarters of the annual movement in real GDP between 1929 and the present. The model depends on marginal tax rates, government spending, the Fed, and demographic trends. This post isn’t light reading and will demand a bit of attention, but I’m going to try to make it worth your while. Let’s just say there’s a lot here that contradicts what you’ll read in your standard economics textbook.This post continues the “Kimel curve” theme I’ve been following for the past few weeks, namely that there is a top that maximizes the growth of real GDP. That is relatively easy to find: run a regression with growth in real GDP as the dependent variable, and the top marginal income tax rate and the top marginal income tax rate squared as explanatory variables. (If you haven’t seen any posts in this series, or aren’t familiar with regression analysis, you might want to take a look the first post in the series .) Official and relatively reliable data for GDP is available going back to 1929. The growth maximizing top marginal tax rate according to that simple model is in the neighborhood of 65%.

Lessons from the Top 1%: Fixing Tax Revenues - How much money will the U.S. federal government expect to collect from the Top 1% of American taxpayers if it changes their income tax rates?  Well, instead of leaving the question to professionals, we're going to make it possible for you to get in on the action too with our latest tool! Now you too can ignore the dynamic effects of how the highest income earners in the U.S. might react to such a change and pretend that you'll collect as much or as little as what an expert-produced static tax analysis would predict!  How? Easy! We've taken the IRS' own data from 1986 through 2008, along with the maximum tax rates that applied through that time, and used it to create a model that can determine approximately how much the U.S. government would have collected from the Top 1% of U.S. taxpayers!

Inequality among the rich in one graph and one thought experiment - Someone in the 80th percentile is a lot closer, in dollar terms, to someone in the 20th percentile than to someone in the 95th percentile. But are they more like someone in the 20th percentile than someone in the 95th percentile? That's trickier. Kevin Drum posed a nice thought experiment to his readers the other day.  Let's say that you're in your 30s, married, two children, and you make $100,000 a year. I offer you a fair coin flip with the following possible outcomes:  Heads: You will be stripped of most of your assets and will earn $30,000 per year for the rest of your life. That's all you get, and neither friends nor family can top it up for you. Tails: You will earn $1 million per year for the rest of your life. Treat this as a serious question. Would you take me up on my offer to flip the coin? Just about no one did. Drum didn't conduct a scientific survey, but "it's suggestive that in terms of lifestyle, if not political goals, a $100K wage earner actually feels somewhat closer to the zillionaires than to someone barely scraping by.

Pawlenty Proposes Making Congressmen Do Their Own Taxes - Former Minnesota Governor Tim Pawlenty has an interesting plan for tax reform: "require every member of Congress to do their own taxes." In response to a question on ABC's "Good Morning America" about reducing the deficit, Pawlenty commented on the complexity of the current tax code. He proposed a system where Congressmen do not get the "help of an accountant, a lawyer or a tax specialist." Everyday Americans must file their own taxes and Pawlenty would require congressmen to do the same:

The truth about tax havens: part 2 - The offshore world is all around us. More than half of world trade passes, at least on paper, through tax havens. More than half of all banking assets and a third of foreign direct investment by multinational corporations are routed offshore. An impression has been created in sections of the world's media, since a series of stirring denunciations of tax havens by world leaders in 2008 and 2009, that the offshore system has been dismantled, or at least tamed. In fact quite the opposite has happened. The offshore system is in very rude health — and growing fast. It is no coincidence that London, once the capital of the greatest empire the world has known, is the centre of the most important part of the global offshore system. The City's offshore network has three main parts. Two inner rings – Britain's crown dependencies of Jersey, Guernsey and the Isle of Man; and its overseas territories, such as the Cayman Islands – are substantially controlled by Britain, and combine futuristic offshore finance with medieval politics. The outer ring comprises a more diverse array of havens, such as Hong Kong, which are outside Britain's direct control but have strong links.

Zombie Economics and Just Deserts: Why the Right Is Winning the Economic Debate - Economist Paul Krugman recently decried "zombie economics," policies advocated by "free-market fundamentalists [who] have been wrong about everything yet now dominate the political scene more thoroughly than ever." I share his chagrin, but suggest that the problem is that Krugman was wrong to also assert that "economics is not a morality play." In fact, I believe that defeating the zombie-like resilience of laissez faire capitalism will require directly refuting the moral belief in the inherent fairness of free market outcomes.  Consider a recent suggestion by Harvard economist Greg Mankiw that tax policy should be based on a "Just Deserts Theory" under which "people should get what they deserve." This principle, a restatement of Equity Theory, has long played a central role in tax debates, and is one that I, like many liberals, heartily endorse. Indeed, I think that widespread support for free markets is based more on belief in their inherent morality than on belief that they promote economic growth, potentially explaining the religious fervor of free-market fundamentalists defending their faith despite the considerable counter-evidence provided by recent events.

Economics and Morality - Paul Krugman - Mark Thoma directs me to Eric Schoeneberg, who argues that the right is winning economic debates because people believe, wrongly, that there’s something inherently moral about free-market outcomes. My guess is that this is only part of the story; there’s more than a bit of Ayn Randism on the right, but there’s also the appeal of simplicity: goldbuggism is intellectually easy, Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it.  Still, Schoeneberg is right about the tendency to ascribe moral value to market values, and the need for a counter-narrative. I’m going to think about that; but right now, let me describe how I see the US income distribution in terms of justice or the lack thereof.

The Bill Daley Problem – Simon Johnson - Until this week, Bill Daley was on the top operating committee at JP Morgan Chase.  His bank – along with the other largest U.S. banks – have far too little equity and far too much debt relative to that thin level of equity; this makes them highly dangerous from a social point of view.  These banks have captured the hearts and minds of top regulators and most of the political class (across the spectrum), most recently with completely specious arguments about why banks cannot be compelled to operate more safely.  Top bankers, like Mr. Daley’s former colleagues, are intent of becoming more global – despite the fact that (or perhaps because) we cannot handle the failure of massive global banks.  The system that led to the crisis of 2008, and the recession that has so severely damaged so many Americans, encouraged excessive risk-taking by major private sector financial institutions and, yes, Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises (although these were most definitely not the major drivers of the crisis

Matt Stoller: Understanding the Strategy of the Democratic Power Class - Since the 1970s, Democratic elites have focused on breaking public sector unions and financializing the economy. Carter, not Reagan, started the defense build-up. Carter, not Reagan, lifted usury caps. Carter, not Reagan, first cut capital gains taxes. Clinton, not Bush, passed NAFTA. It isn’t the base of the Democratic party that did this, but then, voters in America have never had a lot of power because they are too disorganized. And there wasn’t a substantial grassroots movement to challenge this, either. Obama continues this trend. It isn’t that he’s not fighting, he fights like hell for what he wants. He whipped incredibly aggressively for TARP, he has passed emergency war funding (breaking a campaign promise) several times, and nearly broke the arms of feckless liberals in the process. I mean, when Bernie Sanders did the filiBernie, Obama flirted with Bernie’s potential 2012 GOP challenger. Obama just wants policies that cement the status of a aristocratic class, with crumbs for everyone else (Republican elites disagree in that they hate anyone but elites getting crumbs). And he will fight for them.

Global Regulators Quietly Agree to Target Credit Bubble - Part of the larger “Basel III” banking reform package, the “countercyclical capital buffer” heralds a step change in the way national banking regulators interact and is the first concrete example of “macroprudential” regulation that seeks to moderate the economic cycle. “This is very significant, because it takes the regulatory community into protecting the health of the entire system rather than just individual banks,” said Paul Tucker, deputy governor of the Bank of England, who represents the UK at Basel. The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses. Regulators in every other country would have to follow suit and impose a proportional surcharge on their own banks, based on the size of those institutions’ exposure to the bubble country.

When Basel III Met the Yankee Bubblemeisters - Not being content with one housing bubble and its demise, let's just say the US in its own inimitable way is trying to inflate another one via shenanigans such as the $600 billion Fed bond purchase programme. Now we come to another conundrum of international organization in the form of the upcoming Basel III macroprudential banking regulations. Interestingly enough, some of its framers propose including a mechanism for various countries to report that asset bubbles are afoot at home. In theory, the others would then be able to raise financial firms' capital requirements to guard against troubles in the said country spilling across borders via this early warning device. It sounds great in theory, but what if the world's largest economy is so magnificently distorted already by, say, still-historically elevated housing prices as to preclude rational analysis in neat and tidy Basel III frameworks? Beats me, and nobody should be surprised to see the bubblemeisters push back at the global negotiating table for Basel III:

Under the regulator’s microscope: Credit default swaps - Some argue that the widening spreads between sovereign debt in Germany and that of other European countries has been exacerbated by activity in the market for credit default swaps. In the past year there has been much discussion on (naked) short selling, frequently associated with the question of “naked CDS” (the widely-used acronym for credit default swaps). Yet naked CDS are of a different nature and deserve to be treated soThis column argues that “naked credit default swaps” are of a different nature to naked short selling and deserve to be treated so. It explores insights from the academic literature, market participants, and securities regulators.

The Anti-Regulators Are the "Job Killers" The new mantra of the Republican Party is the old mantra -- regulation is a "job killer." It is certainly possible to have regulations kill jobs, and when I was a financial regulator I was a leader in cutting away many dumb requirements. But we have just experienced the epic ability of the anti-regulators to kill well over ten million jobs. Why then is there not a single word from the new House leadership about investigations to determine how the anti-regulators did their damage? Why is there no plan to investigate the fields in which inadequate regulation most endangers jobs? While we're at it, why not investigate the areas in which inadequate regulation allows firms to maim and kill. This column addresses only financial regulation.

Broad Tack Expected in Implementing ‘Volcker Rule’ —Top U.S. financial regulators charged with issuing recommendations on how to implement the "Volcker rule" appear to be leaning against suggesting precise rules for specific assets or trades, and instead might focus on the amount of risk being carried by a firm or trading desk, according to people briefed on the negotiations. Included in the sweeping financial-overhaul law passed last summer, the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, seeks to prevent banks from putting capital at risk by prohibiting proprietary trading and banning certain relationships with hedge funds and private-equity funds. It left much of the details on how to do that with regulators.

MONEY MARKETS-Big investors prefer $1-a-share money funds (Reuters) - Large U.S. investors prefer that money market funds stick to a $1-a-share target, instead of letting their shares float as proposed by a government working group, two surveys released on Tuesday showed. The surveys come several weeks before the Securities and Exchange Commission releases data that some speculate could show the net asset value (NAV) of some money funds fell below $1 per share or "broke the buck." A $1-per-share price has been the cornerstone for the $2.8 trillion money market fund industry. Supporters of the floating NAV concept have said changes in a fund's share price gauge its riskiness. The SEC will release the NAV of money market funds on a 60-day lagging basis, dubbed "shadow NAV." Analysts said it was unlikely that any fund's shadow NAV fell below $1 given that fund managers have had ample time to clean up their portfolios. Thirty-nine percent of treasurers and financial professionals said their companies will either pare or pull all cash from money funds because of the possibility of a NAV falling below $1, the Association for Financial Professionals said on Tuesday.

SEC Probes Financial Firms on Sovereign Fund Bribes - The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds, according to two people with direct knowledge of the matter.  The sweep in part focuses on whether banks, hedge funds and private equity firms paid placement agents to win access to the state-owned money, said the people, who declined to be identified because the investigation isn’t public. An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the Foreign Corrupt Practices Act.  “The SEC takes a broad view of who is considered a government official,” said Gary DiBianco, an attorney at Skadden Arps in London. “Accordingly, we can expect the SEC will view sovereign wealth fund employees as government officials under the FCPA, and the SEC will closely scrutinize relationships with consultants or agents who may have connections to state-controlled entities.”

U.S.O.F.C.: If the Fraud Stops, the Financial System Collapses - U.S.O.F.C.: the United States of Organized Financial Crime. The Status Quo is dependent on a Financial Mafia for its wealth, and it is loathe to surrender it. What happens if fraud and misrepresentation of risk is expunged from the U.S. financial system? In President Bush's memorable phrase: This sucker's going down.There is a fascinating disconnect between the "law and order" society ceaselessly depicted on TV and the realities of the American financial system, which is now totally dependent on lies, fraud, embezzlement and misrepresentation of risk. Remove those and the system implodes. As I observed in Fraud and Complicity Are Now the Lifeblood of the Status Quo:Fraud, collusion, embezzlement, manipulation and misrepresentation of risk are not isolated incidents, they are now the essential fabric of our entire financial system.

MIT Lecture by Charles Ferguson on the Financial Crisis

Richard Alford: Why Has the PPIP Scandal Been Swept Under the Rug? - The SIGTARP quarterly report released in October included audits of some aspects of the PPIP. This audit and a prior audit of the PPIP manager selection process reveals that the PPIP has not meet the goals set for it and has allowed the private participants to profit disproportionately to the money that they invested and the risks that they incurred. Only with blood in the street and the financial world on the edge of a precipice after the Lehman, Prime Reserve Fund, and AIG episodes would the Treasury come up with TARP and ask the Congress for enabling legislation and funding.  In short, PPIP has not meaningfully advanced the advertised goals of increasing transparency and liquidity in the markets for real estate assets. In additions, it is clear that the design of the program and the manager selection process and transparency of the PPIP itself are faulty. However, the PPIP has allowed the private investors to reap returns disproportionate to their shares of the risk and monies invested. It ought to be a scandal for numerous reasons.

Should We Buy Geithner’s Resistance to Naming “Systemically Important” Firms? - Yves Smith  - According to the Financial Times, Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions: Tim Geithner, the Treasury secretary, has questioned the feasibility of identifying financial institutions as “systemically important” in advance of a crisis, just as the regulatory council he chairs is supposed to start doing precisely that… Note this take was precipitated by a new SIGTARP report that offered rather mild criticism of the bailout of Citigroup last fall, including that it was done ad hoc, based on qualitative considerations. We’ll discuss that report separately.  Of course, Geithner does seem to have a history of being slow to complete tasks assigned to him, and with the benefit of hindsight, there is usually an ulterior motive. For instance, when he took the Treasury Secretary role, his first task was to come up plan for how to deal with the floundering financial system, and it was appallingly bad.

More Bank Reforms Needed, Economists Say - In recent months, regulators around the world have taken steps toward ensuring banks are able to weather tough times. New international rules will require big global banks to hold more equity to protect their depositors and other creditors. In the U.S., lawmakers have adopted measures intended to rein in risk at big banks and keep closer tabs on potential threats throughout the financial system. Over the past few days, though, economists here offered a litany of reasons why the reforms fall short. Among their concerns: The new capital requirements aren't tough or simple enough, there is too much uncertainty about how governments will deal with distress at the biggest lenders, and little has been done to prevent the kind of crisis that could occur if trouble broke out at many smaller institutions, such as hedge funds.

SEC Enforcement Chief Khuzami Under Scrutiny Over Citi Settlement - Yves Smith - We were very critical of the SEC settlement with Citigroup, negotiated by its head of enforcement Robert Khuzami, over Citi’s failure to report losses on subprime holdings as the market for those holding tanked. In our post “The Wages of Sin: Former Citi Execs Pay Token Fines for Lying to Investors,” we remarked: A news story today provides further confirmation of the rule by the banking classes in the US, with only token gestures to the rule of law. It looks like we aren’t the only people to have found the settlement appallingly light. Per Bloomberg: The U.S. Securities and Exchange Commission’s internal watchdog is reviewing an allegation that Robert Khuzami, the agency’s top enforcement official, gave preferential treatment to Citigroup Inc. executives in the agency’s $75 million settlement with the firm in July.

SIGTARP on Citi Rescue: Ignoring a Bomb That Has Yet to Be Defused - Yves Smith - On the one hand, I must confess to a “I love the smell of napalm in the morning” response to reading the SIGTARP report on the extraordinary assistance extended to Citigroup, starting in November 2009. The well-documented, blow by blow account, taken from the perspective of regulators, dovetails neatly with the reports here and on other blogs during those fear-filled, gripping times. But on the other hand, the SIGTARP report is annoying, in that it fails to connect some critical dots, diminishes the importance of its key finding, and is far too complimentary to the officialdom. It’s odd that the reports of the Congressional Oversight Panel are consistently more hard-hitting than those of SIGTARP. While most commentators were pleased with its report on AIG (it correctly criticized Geithner for failing to renegotiate the credit default swaps payouts to AIG counterparties, we found the report pulled its punches and incorrectly backed the Fed on its retrading of the AIG financing.

Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was Based On 'Gut Instinct' - Citigroup, the nation's third-largest bank by assets, was on the verge of being closed by regulators the week of Nov. 24, 2008 as depositors rapidly withdrew money and the bank's counterparties declined to provide it credit, according to a government report released Thursday. The new findings shed light on the degree to which Citigroup, the financial services behemoth with a long history of finding itself in trouble and receiving government support, was actually in danger of failing during the fall of 2008. Until now, few were aware that Citi was perilously close to being shut down.  "We were on the verge of having to close this institution because it can't meet its liquidity Monday morning," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, during a meeting the previous Sunday night, according to the report by the Special Inspector General for the Troubled Asset Relief Program.

Goldman Bankers, Ascendant Again - In the pecking order at Goldman Sachs Group Inc., traders trounced investment bankers for most of the past decade. Now, the Wall Street firm's army of investment bankers is making a comeback. The 63-page internal report released by the New York company on Tuesday showed how Goldman is trying to reassert the traditional primacy of deal making while playing down the firm's recent reliance on trading. One of the biggest reasons why: Trading caused most of the turmoil, suspicion and reputational damage suffered by Goldman since the financial crisis erupted. Goldman officials say forthcoming changes detailed in the report aren't punishment for traders. But an overhaul in how the company discloses financial results, starting with fourth-quarter figures due Jan. 19, will wind up slicing how much what the firm defines as trading contributes to Goldman's overall revenue. In a securities filing Tuesday, Goldman detailed its plan to report trading revenue generated on behalf of clients separately from revenue that comes from trades and investments made by the firm.

Under Fire, Goldman Sachs Reveals New Information On Lucrative Trading Activities - Wall Street giant Goldman Sachs generated at least 18 percent of its revenues last year through trading and investing for its own benefit, according to a regulatory filing made Tuesday detailing the first nine months, flatly contradicting the firm's previous claims that such speculative activity made up a much smaller slice of its business. In recent months, as Goldman has fended off widespread accusations that it has become the leading example of the gambling culture permeating Wall Street -- placing bets for its own profit rather than engaging in old-fashioned banking services -- the company has insisted that trading made up no more than one-tenth of its revenues. But the company's disclosures filed Tuesday with the Securities and Exchange Commission revealed that trading and investing comprises almost twice that percentage.

Goldman Sachs: “We Consider Our Size An Asset That We Try Hard To Preserve” - To great fanfare, this week Goldman Sachs unveiled the report of its Business Standards Committee, which makes recommendations regarding changes for the internal structure of what is currently the 5th largest bank holding company in the United States.  Some of the recommended changes are long overdue – particularly as they address perceived conflicts of interest between Goldman and its clients.  What is most notable about the report, however, is what it does not say.  There is, in fact, no mention of any issues that are of first order importance regarding how Goldman (and other banks of its size and with its leverage) can have big negative effects on the overall economy.   The entire 67 page report reads like an exercise in misdirection.Goldman Sachs is ignoring the main point of the debate made by – among others – Mervyn King, governor of the Bank of England, on p.10 of his Bagehot Lecture in October 2010, regarding why big banks need to be much more financed by equity (and therefore have much less leverage, meaning lower debt relative to equity).

Barclays’ Bob Diamond to Non-Bankers: Drop Dead - Yves Smith - Despite its artful packaging, Diamond’s presentation was yet another reminder of the banking industry’s continued extortion game, namely, that they can take outsized, leveraged risks and when they work out, pay themselves handsome rewards, and when they don’t, dump them on the taxpayer. And they’ve only been encouraged to up the ante. Not only did they get to keep their winnings from their last “wreck the economy” exercise, no senior executive was fired, no boards were replaced, and UBS was the only major bank required to give a detailed account of how its screwed up so badly as to need government support. And before you tell me Barclays was never bailed out, tell me exactly how well it would have fared had any other major UK or international bank failed, or had the officialdom not provided extraordinary liquidity support when interbank funding dried up.

We owe it to bankers to feel their pain - At last someone has dared to defend the oppressed people of the banking community. Bob Diamond, chief executive of Barclays, who himself has to suffer the trauma of an £8m bonus, said yesterday that the bankers' "period of remorse and apology should be over". And you feel his pain, because the first words to cross your mind when you see a banker are "remorseful and apologetic". Then you're left worrying, "Oh, how I wish the poor souls were slightly less burdened with remorse about their bonus, and didn't apologise with such agonising sincerity about putting it into their wife's name in a series of untraceable accounts based in uninhabitable islands off Ecuador."But at last they've learnt to stand up for themselves, and Bob Diamond has emerged as their Martin Luther King. Soon the whole banking community will declare: "Say it out loud, I'm 27 million quid in the black and I'm proud."

JP Morgan threatens small depositors - Well done to Ron Lieber for calling bullshit on Chase’s PR spin: In a remarkable display of staying on message, it gave the same comment last week when The Wall Street Journal, CNN Money and the trade publication US Banker asked it to explain the reasoning for the new monthly fees. “We don’t want to raise fees on our customers,” a company spokesman said. “But unfortunately, regulation is forcing us to do it. And as a result, some customers may end up unbanked.” This statement is striking for a number of reasons, and the eye-popping earnings the bank announced on Friday don’t exactly make the company more worthy of sympathy. As Ron says, the Chase statement is trivially false: of course Chase wants to raise fees on its customers. That’s what it always wants. It can’t increase earnings by becoming so attractive that more and more people flock to it. Instead, it would rather increase earnings by steadily culling the least profitable parts of its customer base, and replacing them with richer and more profitable depositors.

Traders’ Smaller Bonuses Still Top Pay for Brain Surgeons, 4-Star Generals - Wall Street traders discouraged by declining bonuses this month can take solace: They still earn much more than brain surgeons and top U.S. generals.  An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated. After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets (see table below).  The pay gap between finance and other professions widened between the 1980s and 2006, exceeding the record set before the Great Depression, according to a 2009 study by Thomas Philippon, a professor at New York University’s Stern School of Business. After the 2008 financial crisis, Wall Street started paying a larger portion of bonuses in stock and restricted cash. Yet there’s little sign the gap with Main Street is narrowing.

Outsized Pay on Wall Street Persists - Yves Smith  - A piece at Bloomberg today confirms that the financial crisis did nothing to shift the gap between what someone can earn on Wall Street versus more worthwhile lines of work: Wall Street traders discouraged by declining bonuses this month can take solace: They still earn much more than brain surgeons and top U.S. generals. An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated. After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets (see table below).  It’s important to stress that this is a new pattern. In the stone ages of my youth, top earners in investment banking were on a par roughly with top heart surgeons and when someone became a partner at Goldman, his cash compensation fell sharply. The old line was that partners lived poor and died rich. And their aspirations were modest by contemporary standards: a nice apartment in the better sections of the Upper East side, having their kids in private schools, and having a summer home

...abandon claims that they had been sold trash - Via Benzinga, L. Randall Wray notes more of the same for socializing the costs of our financial woes: In truly depressing news, Secretary Treasury Geithner announced he was funneling $2.8 billion more bail-out funds to Bank of America. In the deal, Fannie and Freddie would agree to abandon claims that they had been sold trash in fraudulent “mortgage backed securities” by the BofA. (A similar deal was provided to Ally Financial.)  As I have written, holders of the securities have gradually realized that the securitizations did not meet the “reps and warranties” asserted by the banks that pooled mortgages. A growing number of investors have demanded that the originating banks take back the fraudulent securities, including Fannie and Freddie, as well as the NYFed and PIMCO. But true to form, Timmy prefers to backstop the control fraud banks rather than forcing them to bear the costs of their frauds.

US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages  The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months. All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks. This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed. Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans

FDIC Set to Weigh Pay Revamp, Liquidation Authority -  The Federal Deposit Insurance Corp. plans next week to consider how to discourage executive-pay practices that spur too much risk taking, as well as regulations that start the process of giving the government power to seize and dismantle large, troubled financial firms. The agency's board is scheduled to take up the two proposals at a Jan. 18 meeting, the FDIC said Wednesday. The FDIC, led by Sheila Bair, gained the authority to dismantle large, faltering financial firms as part of the Dodd-Frank financial-overhaul law signed by President Obama over the summer. The financial-overhaul law also requires regulators to bar incentive-based payments that encourage excessive risk taking among financial firms. They have been considering whether to require large financial firms to defer a chunk of executive pay to discourage risk taking that contributed to the financial crisis,

Fannie and Freddie’s Managers Bought Nonprime Paper For the Same Reason Merrill Did - The Republican members of the Financial Crisis Inquiry Commission have conducted a preemptive strike. They issued a report arguing that the problem with Fannie and Freddie was regulation and politics and that Fannie and Freddie are responsible for the U.S. financial crisis – so regulation is the great evil. This subdivides into four arguments: the Community Reinvestment Act (CRA), Congress' rejection of an administration proposal to give OFHEO greater supervisory powers, specifically, the power to place Fannie and Freddie in receivership, the ability of Fannie and Freddie to borrow due to their status as Government-Sponsored Enterprises (GSEs), and the rules on Fannie and Freddie making a rising percentage of their loans to those with below median income. The CRA argument fails on multiple levels. The CRA became law in 1977 so it is a poor candidate to explain the rise of a crisis a quarter-century later. Its enforcement did become slightly stronger under the Clinton administration, but it became far weaker under the Bush administration. If the CRA caused banks to make more bad home loans, then bad loans should have fallen this decade as enforcement efforts fell.

The Paycheck Data CEOs Don't Want Us to See - Corporate America is working feverishly behind the scenes to smother a new federal mandate, enacted last year, that just might revitalize the drive to roll back excessive executive pay. Lobbyists for Corporate America messed up big-time last summer. They let slip into law, via the 2,300-page Dodd-Frank financial reform bill, an obscure provision that could give future lawmakers a powerful lever for ratcheting down excessive CEO pay.Now those lobbyists are pushing hard to undo their mistake — and progressives, led by AFL-CIO president Rich Trumka, are pushing back.  The winner won’t be clear until later this year when the Securities and Exchange Commission, the federal watchdog agency over Wall Street, releases the final regulations that will enforce the Dodd-Frank legislation. That legislation includes an assortment of provisions that impact executive pay. One of these — “say on pay” — guarantees shareholders a regular opportunity to cast “advisory” votes on the CEO pay packages that corporate boards produce.

Progress on Overhaul of Corporate-Tax Rules- Top financial executives from several big U.S. companies endorsed the idea of revamping corporate-tax rules following a Friday meeting with Treasury Secretary Timothy Geithner. The session produced no specific breakthrough, signaling many more meetings ahead on the Obama administration's efforts to overhaul corporate taxes.  Still, executives described the discussion as productive. Much of it focused on the administration's aim to overhaul corporate taxes in a way that doesn't add to the budget deficit—a goal known as "revenue neutrality."  Some business executives at the meeting suggested a more lenient standard that could add somewhat to future budget deficits, but also would allow them to keep some existing tax breaks, according to industry officials with knowledge of the situation.

Banks Loosen Purse Strings - U.S. banks are expanding their loans to consumers for the first time since the credit crisis erupted, as lending standards begin to loosen and demand for new loans edges higher.J.P. Morgan Chase & Co., which Friday posted a 47% profit jump for its fourth quarter, said its total loans increased 6% since the end of September. While most of the loan growth came from loans to businesses, the nation's No. 2 bank by assets said total credit-card balances rose for the first time in two years. Consumers were more willing to pull out their plastic. Credit-card usage was up 10% year-over-year. The bank issued 3.4 million new credit cards in the fourth quarter, up 4% from the same period a year earlier. "We see the consumer is getting stronger," said J.P. Morgan Chairman James Dimon. He added that many Americans are still saving and paying down their debts, which he said will make them better borrowers.

Number of the Week: Big Banks Gobble Up Market Share - 13.3%: Assets of the top five U.S. banks as a percentage of all U.S. financial firms’ assets. Size has advantages. But in the case of the biggest U.S. banks, it could also be one of the greatest weaknesses in the global financial system. The top five U.S. commercial and investment banks — Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo and Goldman Sachs — have emerged from the financial crisis larger than ever. As of the third quarter of 2010, they had a total of $8.6 trillion in assets, according to data provider Capital IQ. That’s 13.3% of all U.S. financial firms’ assets, up from 11.8% three years earlier, when the financial crisis hit.

Unofficial Problem Bank list increases to 933 Institutions  - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 14, 2011. Changes and comments from surferdude808:  It was a quiet week for the Unofficial Problem Bank List as there were only two additions and one removal, which leaves the list at 933 institutions with assets of $410.4 billion.

Corporate Profits Are Booming. Why Aren’t the Jobs? - To gaze upon the world of American corporations is to see a sunny place of terrific profits and princely bonuses. American businesses reported that third-quarter profits in 2010 rose at an annual rate of $1.659 trillion, the steepest annual surge since officials began tracking such matters 60 years ago. It was the seventh consecutive quarter in which corporate profits climbed.  Staring at such balance sheets, you might almost forget that much of the nation lives under slate-gray fiscal skies, a place of 9.4 percent unemployment and record levels of foreclosures and indebtedness.  And therein lies the enduring mystery of this Great Recession and Not So Great Recovery: Why have corporate profits (and that market thermometer, the Dow) spiked even as 15 million Americans remain mired in unemployment, a number without precedent since the Great Depression? Employment tends to lag a touch behind profit growth, but history offers few parallels to what is happening today.

CMBS delinquencies rose 79% in 2010: Moody's -The number of delinquencies within the conduit/fusion space of commercial mortgage-backed securities rose 79% in 2010, ending December at 8.79% up from 4.9% a year earlier, according to Moody's Investors Service. Analysts said the rate also climbed 16 basis points last month from 8.63% in November. While the rate continues to increase, it slowed considerably during the second half of last year. And the average monthly rate of change was slightly lower than 2009 despite greater volatility and large increases early in 2010. Moody's expects new CMBS issuance of about $37 billion in 2011 and projects its delinquency tracker to end this year between 9.5% and 11%. The rate of delinquencies should moderate as the "capital markets continue to heal and the flow of loans into special servicing is slowing."

REAL ESTATE: Commercial delinquencies rising as landlords struggle - Trepp measures loans that were bundled into bonds, called commercial mortgage-backed securities. Commercial loans are a telltale for the economy, though one that lags. . As tenants disappear, owners of hotels, shopping malls, and offices stop making loan payments, which can push building owners into default. The rapid rise in commercial debt delinquency comes three years after a spike in residential foreclosures kicked down the national economy. Some economists worried that a similar collapse in commercial debt could drag the national economy into a second recession, but recent signs of increased transactions suggest the commercial borrowers may be digging their way out. Unlike residential loans, which are generally owned by big lenders or pension funds, commercial loans are often held by small and regional banks that wanted a chance at big returns during the construction boom of the 2000s. As a result, some local banks carry investment portfolios laden with delinquent construction loans or commercial mortgages.

Stress Tests For Banks Will Be Kept Secret - Wall Street's largest firms will undergo scrutiny by the Federal Reserve in the coming months, as they submit to a new round of "stress tests," designed to gauge their financial health, the Financial Times reports. Like the earlier set of tests, completed in 2009, these will attempt to determine whether financial companies are able to withstand another crisis. But while the results of the first tests were made public in an effort to reassure taxpayers and investors, the results of the new analysis -- which will also test whether banks are able to increase the dividends they pay to shareholders -- will be kept secret. For the 19 financial groups under review, this will be the first time since the financial crisis that they have had to be tested simultaneously, the New York Times noted. The banks -- including Citigroup, Bank of America, Goldman Sachs, Wells Fargo and JPMorgan -- have seen regulators limit their ability to pay dividends, in the wake of the historic $700 billion taxpayer bailout.

$2.6 Billion to Cover Bad Loans: It’s a Start - Bank investors cheered the announcement last week that Bank of America would pay $2.6 billion to buy back mortgages it had improperly sold during the housing bubble to Fannie Mae and Freddie Mac, the beleaguered mortgage finance giants. It seemed a sweet deal for the bank, whose Countrywide Home Loans unit had peddled tens of billions of dollars in risky loans to the taxpayer-owned companies. While it is unfortunate that the Bank of America deal won’t recoup much for taxpayers, the resolution could have one important benefit. It might just open the door to a much-needed reckoning of the liabilities created by questionable mortgage practices at the nation’s largest banks. These institutions have not yet made a full and realistic accounting of their liabilities.  It seems clear, after all, that Bank of America will not be the only institution forced to buy back billions of dollars’ worth of loans because it did not meet the lending standards promised to buyers. Costs associated with foreclosure improprieties that have come to light in courts across the country — robosigners, forged legal documents — are also likely to be substantial.

How to Fix Mortgage Mess in Three Steps -  Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages -- or one in 10 -- are under water, with the property’s value at least 25 percent below what’s owed.  We need a new limited-purpose mortgage system, which confines banks and other mortgage makers to doing just one thing -- connecting lenders with borrowers, not leveraging the taxpayer. And we need the government to directly oversee the mortgage initiation process, organize a competitive market in home loans, and fully disclose all the details of mortgages on the Web so investors in these loans will know what they are buying.

    • Step 1: Set up a new government agency -- the Federal Financial Authority. The FFA would hire companies to verify, rate, appraise and disclose mortgage applications. These contractors would work exclusively for the FFA, eliminating any conflict of interest. Liar loans and no-doc loans would be history.

    • Step 2: Limit buyers of home loans to doing so only through closed-end mortgage mutual funds. If a fund manager chooses poor mortgages, the value of his fund’s shares will fall, but the fund itself won’t go broke. Mortgage defaults will never again lead to financial-sector collapse.

    • Step 3: Establish an electronic mortgage auction and require mutual funds to purchase loans at this market so borrowers receive the best price (lowest interest rate).

Why It Could Be Very Hard for Banks to Avoid Ibanez Mortgage Catastrophes - Although it’s only been a couple of days since the Massachusetts Supreme Court handed down its ruling in the "Ibanez" case, analysts are already announcing that it won’t be as big of a deal as it might seem. I don’t share their confidence.
Recall that in a decision released Friday, the highest court in Massachusetts declared that Wells Fargo and US Bancorp wrongfully foreclosed on two properties whose mortgages were unarguably in default. The court held that Well Fargo and US Bancorp had failed to show that the mortgages had been assigned to them at the time of the foreclosure. In the Ibanez case—actually, it was two mortgage cases decided at once—the banks could not show that they were entitled to foreclose because in the case of each of the mortgages, there were holes in the chain of title that the banks could not—or did not—close. Basically, if your bank is foreclosing on your home in Massachusetts, you should be contacting a lawyer and planning to contest the bank’s right to foreclose right now.  The effect of this case is unlikely to be limited to Massachusetts. Other states will apply their own laws, of course. But the Massachusetts Supreme Court is regarded as one of the the best courts in the US, which means that this decision will be taken as what lawyers call "persuasive precedent" in other states.

Implications of the Ibanez Case Ruling - The Too Big To Fail banks have been waiting with trepidation for a ruling from the Supreme Judicial Court of the State of Massachusetts on the case titled US Bank National Association (as trustee) vs. Antonio Ibanez. They were right to be fearful. The state supreme court has ruled against the banks and upheld a lower court order that nullified foreclosures by US Bancorp and Wells Fargo, on the grounds that neither bank had the legal right under Massachusetts law to foreclose. Today’s ruling has far-reaching consequences for the banks and the housing market in general, as it throws into serious question the legal soundness of millions of mortgages in the US if, as expected, courts in other states come to similar conclusions as the Supreme Judicial Court of Massachusetts. The Ibanez case tied together two separate but similar foreclosure actions in Massachusetts.  Both foreclosures took place on the same day, the banks having previously published their intention to foreclose in a local newspaper as required by law. The banks then purchased the properties at prices described by the court as significantly below market value.

The Ibanez case and housing-market catastrophe risk - The 16-page decision in the case of US Bank vs Ibanez does not make for easy reading. But it’s a very important case: it’s a solid precedent saying that if a bank doesn’t own a mortgage, then it can’t foreclose on a home. That was the decision of the lower court in Massachusetts, back in March 2009, and it has now been unanimously upheld on appeal to the Massachusetts supreme court. After speaking to crack Reuters reporter Jonathan Stempel, I’m even more worried about this case than I was before. The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.

Christopher Whalen: Massachusetts Mortgage Decision Could Kill Top Banks  - The bank stress tests are back and you'll sure be hearing the phrase "Too Big To Fail" uttered over and over again. The purpose of this test is to allow the 19 big banks to raise their dividends or repurchase stock. In order to get the approval they must submit their new capital plans to the Federal Reserve by this Friday. It will be a big banking week with concerns about Portugal and on Friday, JP Morgan is set to report is earnings. I decided to speak with Christopher Whalen, Senior Vice President and Managing Director of Institutional Risk Analytics.
LL: Stress tests will be back on the big 19 banks before they can return capital back to shareholders. Which ones do you think will be the first ones to be able to do this?
CW: Depends on degree of regulatory capture. None of the top eight bank holding companies should be able to change dividends this year if we have regulators worthy of the description. Bank of America, Wells Fargo, JPMorgan, US Bancorp still have issues to address with mortgage servicing/securitization mess.
LL: Any concerns of banks failing this test?
CW: No. These tests are not meant to be failed

More Reasons Why Banks Should Worry About Ibanez Decision - Yves Smith - Banks and the securitization industry have been spinning the Ibanez decision as hard as they can, even going so far as to put forward Baghdad Bob style claims that the Massachusetts Supreme Judicial Court ruling said that mortgage assignment in blank worked, when a reading of the ruling show the polar opposite.  Industry participants have been claiming that the ruling is no big deal, since Massachusetts law has some quirks and the securitization documents on the two mortgages at issue were a real mess.  One of the court’s big beefs was that even if you were to try to use the pooling & servicing agreement to prove that the loans in question belonged to the securitzations in question, the loan schedules in question fell far short of providing the necessary detail to identify the particular properties (address, name of borrower, loan number or servicing number). Georgetown law professor Adam Levitin has done a bit of digging to see if the securitization industry defenders’ claims, that most mortgages in RMBS meet the documentation standard set forth in Ibanez, actually holds up. He find that many deals fail to meet the decisions’ requirements:

FDIC Calls for Better Disclosure of Servicer Conflicts of Interest in Second Mortgates -- Yves Smith - There are lots of reasons why servicers are failing to make deep enough mortgage mods to salvage viable borrowers (ones who still have a decent level of income). One of the most troubling is that the parent bank often also has a large book of second mortgages, and writing down first mortgages would require them to ding their second mortgage book. Various conservative estimates have indicated that more realistic valuations of second mortgages would blow a big hole in the balance sheets of the four biggest banks in the US. (The banks’ defense is that borrowers are often still paying their second mortgages when they’ve defaulted on their first. And that occurs because borrowers who are stressed try to stay current on as many obligations as they can, so if they can’t pay both their first and second mortgage, they will often default on the first but keep paying like clockwork on the smaller second mortgage). The FDIC seems to be the lone regulator trying to protect investors. And this is simply common sense. Investors are refusing to buy any new deals save those with some sort of government guarantee precisely because securitization industry participants behaved so badly during the housing bubble. Yet the industry refuses to implement even minor measures to make it safe for investors to get back into the pool

Group: Exclude Foreclosure Protection From New Mortgage Rules - Protections for homeowners facing foreclosure should be excluded from mortgage-lending rules being developed by federal bank regulators, an industry group said Monday. The Mortgage Bankers Association said in a letter to regulators that the two issues should be considered separately. Combining them “runs the risk of giving short-shrift to two highly complex and critically important issues,” Federal regulators have been working on defining which home loans are considered safe enough to be exempt from a new requirement that issuers of mortgage-backed securities hold on to 5% of the risk. The Federal Deposit Insurance Corp. has been arguing that these so-called risk-retention rules should also contain standards for mortgage-servicing companies, which collect home-loan payments and distribute them to investors. It has been battling behind the scenes with the Federal Reserve and Office of the Comptroller of the Currency, which question whether those standards should be included.

Fed Bid to Limit Rescission Rights Sparks Consumer Outrage - The Federal Reserve is moving ahead with plans to change the right-of-rescission rule as part of the Truth in Lending Act (TILA) despite intense outcry from consumer advocates, civil rights groups,  and top members of the Senate Banking Committee. Revised TILA will require borrowers to repay a mortgage in full before a loan is rescinded. Consumer groups say the measure is designed to prevent homeowners from using the right-of-rescission protection as a defense against improper foreclosure. The Fed’s proposal is designed to ward off frivolous lawsuits that will delay foreclosures and have an adverse impact on economic recovery by ensuring “a clearer and more equitable process for resolving rescission claims” that closely mirrors present court requirements. The central bank wants to lift what it views as undue compliance burdens and litigation risk for creditors.

Fed Foreclosure Proposal Headed to New Consumer Bureau - A controversial Federal Reserve staff proposal that would make it harder for borrowers to prevent foreclosures will likely be punted over to the new Consumer Financial Protection Bureau amid pressure from lawmakers, consumer advocates and civil rights groups. A senior Fed staffer this week announced at a lawyers’ conference that the proposal, which would limit borrowers’ “right of rescission,” won’t move forward at the Fed and will be taken up by the consumer watchdog agency, according to several people who were either at the conference or briefed on the matter. Transferring the rescission proposal from the Fed to the Consumer Financial Protection Bureau may ease some consumer advocates’ concerns. “Even if the rule is not being acted on now, this will still be an issue that will have to be addressed,” “But we’re heartened that we won’t have a change in rescission rules soon that will gut protections from homeowners. That would be a disaster.”

So What Else Has the American Securitization Forum Said That is Wrong? - Yves Smith - As readers may recall, the American Securitization Forum came out, in what it no doubt thought was guns-a-blazing style, to attack critics of securitization abuses. In particular, the ASF was taking aim at theories of the sort advanced on this blog, and later in Congressional hearings and in a Congressional Oversight Panel report, that the notes (meaning the promissory note, meaning the borrower IOU) in many cases, if not pervasively, had not been endorsed and conveyed as required by the pooling and servicing agreements, which are the contracts that govern mortgage securitizations. Normally, this would not be such a big deal. Contracts are often breached; the usual remedy is to get a a waiver, which sometimes might involve a payment of some sort. But securitizations are particularly inflexible agreements. So given that the PSAs can’t be renegotiated, the securitization industry needs to find a way to argue that everything is hunky dory, despite the ever rising volume of lower court cases in which banks have had trouble foreclosing because borrower’s counsel challenges them to show that they are holders of the note. The big salvo was the ASF’s white paper, published last November, whose argument has been repeated and elaborated a tad. In effect, the white paper ignores the specific requirements of the PSA, and instead argues that “industry practices”, meaning the widespread disregard for contractual commitments, were OK. (We’ve taken apart the paper in previous posts, see here, here, and here)

ASF Lies Yet Again, Brazenly Asserts That Ibanez Ruling Validates Reliance on PSA for Transfers, Blank Assignments -  Yves Smith - If the ASF keeps this sort of nonsense up, it’s soon going to have the status of Pravda in the later stages of the Soviet Union, a mouthpiece of falsehoods that the officialdom is particularly eager to promote. Immediately after the Ibanez ruling, in which two foreclosure actions were voided due to the failure of the servicers to prove that the trusts who allegedly owned the mortgages had standing, the American Securitization Forum issued a press release that said: The ASF is pleased the Court validated the use of the conveyance language in securitization documents as being sufficient to prove transfers of mortgages under the unique aspects of Massachusetts law. Importantly, unlike the lower court, the Court also said assignments of mortgage can be executed in blank, as long as a complete chain of transfers can be shown through the applicable deal documents. Even odder, people who ought to know better, ranging from Amherst Securities to FT Alphaville, are uncritically parroting the ASF party line. Let’s look at what the decision actually says.

Adam Levitin Takes Apart Securitization Industry Posturing on Ibanez, Harp Decisions - Yves Smith  - There’s a great post up by Georgetown law professor Adam Levitin on the implications and misreading of two mortgage decisions last week, the Massachusetts Ibanez case and Harp in Maine. Here are key sections: Ibanez means that to foreclosure in Massachusetts, a securitization trust needs to prove:  (1) a complete and unbroken chain of title from origination to securitization trust (2) an executed PSA (3) a PSA loan schedule that unambiguously indicates that association of the defaulted mortgage loan with the PSA. Just having the ZIP code or city for the loan won’t suffice. I don’t think this is a big victory for the securitization industry–I don’t know of anyone who argues that an executed PSA with sufficiently detailed schedules could not suffice to transfer a mortgage. That’s never been controversial. The real problem is that the schedules often can’t be found or aren’t sufficiently specific. So what does this mean? There’s still a valid mortgage and valid note. So in theory someone can enforce the mortgage and note. But no one can figure out who owns them

Megan McArdle on Foreclosure Fraud Crisis - Megan McArdle has a series of posts on the foreclosure crisis. What’s a ‘Libertarian Solution’ to the Foreclosure Mess?, Reader response, Foreclosure Options. It comes off the question highlighted at Balloon Juice:  Why aren’t libertarian outlets discussing the foreclosure crisis? Given that McArdle and I are likely to disagree on many points, I found it a solid read and hope more libertarians get engaged in this important conversation.  I may have more later, but a few high-level points right now.

BOMBSHELL: Check Out This Industry Catalog And Price Sheet For FABRICATED Foreclosure Documents - You wanted concrete proof of widespread lost mortgage documentation?  Feast your eyes upon this. A foreclosure lawyer sent this little beauty by email.  I had no idea the market was so robust for missing mortgage documents.  And apparently there is inflation within the foreclosure fabrication circles.  Prices to replace missing documents keep going up...;-)

Big Banks To New Jersey: Stop Bugging Us About Foreclosure Documents - When New Jersey tightened its rules for foreclosures in response to the crisis over false loan documents, it took the unprecedented step of ordering the six largest servicers -- Ally Bank/GMAC, Bank of America (BAC), Citibank (C), JPMorgan Chase (JPM), Wells Fargo (WFC) and OneWest -- to explain why they should be allowed to continue with their foreclosures. If any of them couldn't adequately justify itself, New Jersey would suspend all the foreclosure actions by that bank in the state and appoint a special master to investigate its past and proposed processes. On Jan. 5, the banks responded, and in essence each said: Look judge, we're good guys committed to keeping people in their homes whenever possible, and while we admit that in the past we had problems -- teeny-tiny problems -- we've fixed them already. Most of the banks' briefs then argued, with varying degrees of aggressiveness, that the court doesn't have the power to impose a foreclosure moratorium or appoint a special master because that would break court rules, violate New Jersey's Constitution and the U.S. Constitution -- including the banks' due process rights -- and overstep the judiciary's role. They also claimed it was generally wrong because the banks were regulated federally. Only Chase declined to challenge the court's authority to impose the moratorium or appoint a special master.

State guilty of ‘delusional behavior’ in slow response to foreclosure chaos, critics say - Fed up with the foreclosure chaos, the New Jersey courts demanded that banks prove the integrity of their home repossession systems or face shutdown. To demonstrate the need for the Dec. 20 order, New Jersey cited flaws in six Florida foreclosure cases, including three in Palm Beach County, as examples. In Nevada and Arizona, attorneys general last month sued Bank of America for a dual-track foreclosure system that offers homeowners hope with a loan modification, while at the same time taking away the home in court. Called deceptive and labeled consumer fraud in the lawsuits, the practice is also prevalent in the Sunshine State. And on Friday, the Massachusetts Supreme Court issued a bombshell ruling against banks' ability to foreclose on homes - a decision could reverberate nationwide. The moves by other states to address the foreclosure morass has Florida homeowner advocates and defense attorneys asking why more isn't being done here.

Judges Berate Bank Lawyers in Foreclosures - With judges looking ever more critically at home foreclosures, they are reaching beyond the bankers to heap some of their most scorching criticism on the lawyers.  In numerous opinions, judges have accused lawyers of processing shoddy or even fabricated paperwork in foreclosure actions when representing the banks.  Judge Arthur M. Schack of New York State Supreme Court in Brooklyn has taken aim at an upstate lawyer, Steven J. Baum, referring to one filing as “incredible, outrageous, ludicrous and disingenuous.”  But New York judges are also trying to take the lead in fixing the mortgage mess by leaning on the lawyers. In November, a judge ordered Mr. Baum’s firm to pay nearly $20,000 in fines and costs related to papers that he said contained numerous “falsities.” The judge, Scott Fairgrieve of Nassau County District Court, wrote that “swearing to false statements reflects poorly on the profession as a whole.”

DC Puts Its Bankster-Friendly Solution for Foreclosure Fraud on the Table - Yves Smith  - We’ll analyze a proposal to fix the foreclosure mess put out by a DC think tank known as Third Way. Third Way is an influential think tank whose board is composed of a special Wall Street-type – the Rubin Democrat. These people sit at the nexus of politics and finance, and are conduits for big bank friendly information flow into the administration and Congress. The President of the think tank, Jonathan Cowan, was the Chief of Staff for Andrew Cuomo at HUD in the 1990s, and the new White House Chief of Staff Bill Daley, who just left the most senior operating committee of JP Morgan, was on their Board of Directors. So by looking at this proposal, we are looking at the state of play among high level policy makers in DC, particularly of the New Dem bent. This is how the administration will probably try to play foreclosure-gate.  Their proposal, not surprisingly, is yet another bailout.  This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.

Facing Scrutiny, Banks Slow Pace of Foreclosures -  Over the last several months, some banks have been reluctant to seize homes from distressed borrowers, economists and government officials say, as they face scrutiny from regulators and the prospect of sanctions when investigations wrap up in the coming weeks and months.  The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period, reflected in the severe drop in foreclosed homes being auctioned on the courthouse plaza.  The pace of foreclosures could be curtailed further by courts. In a closely watched case, the highest court in Massachusetts invalidated two foreclosures in that state on Friday. The court ruled that two banks, U.S. Bancorp and Wells Fargo, failed to prove they owned the mortgages when they foreclosed on the homes.

Housing: The see-no-evil muddle-through approach -- David Streitfeld reckons that if mortgage delinquencies continue to pile up without turning into foreclosure actions, that could be good for the economy as a whole: Foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years.  Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say, I think he’s probably right. Consumer confidence is a key factor in the health of the housing market and there’s an obvious connection from lower supply to higher prices, to higher confidence in housing as an asset class. That confidence might well turn out to be misplaced, of course. But a warm occupied home is a much happier thing, economically speaking, than a cold and empty one, even if the occupiers haven’t made a mortgage payment in years. Foreclosures carry a large economic cost and all things being equal, the less of them there are the better.

The economic impact of the foreclosure slowdown - Lord, give us a housing market in which foreclosures are initiated and processed quickly and where prices reflect market fundamentals … but not yet. Or anytime soon, really. With apologies to Saint Augustine, that seems to be the message of an article in The New York Times on Friday, by David Streitfeld: The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years.  As Streitfeld explains, the slowdown is the result of the increased regulatory and legal scrutiny on the way banks initiate foreclosures. So, among the positives: fewer houses coming to market, increased consumer confidence in housing, more loan modifications.There are other considerations too. As Mike Konczal has written, foreclosures are “mini-neutron bombs on property values and neighborhoods.” Not to mention what foreclosures do to households’ credit and wealth, and consequently on their willingness to spend in the rest of the economy.

Mass. court ruling has potential to void thousands of foreclosures - The Massachusetts Supreme Court on Friday upheld a lower court ruling voiding two foreclosures because the banks failed to show the proper paperwork to prove they owned the loans-a decision that challenges the way mortgages were bundled and sold around the world. The Massachusetts court is the highest to ruled on this issue and the decision has the potential to invalidate thousands of foreclosures across the state.  It also provides more ammunition to borrowers in other states who could push the case to the U.S. Supreme Court.  If the nation's highest court rules that these transfers are not legal, the multi-trillion-dollar mortgage-backed securitization industry could face massive liability

2010 Year-End Foreclosure Report RealtyTrac® today released its Year-End 2010 U.S. Foreclosure Market Report™, which shows a total of 3,825,637 foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on a record 2,871,891 U.S. properties in 2010, an increase of nearly 2 percent from 2009 and an increase of 23 percent from 2008.  Foreclosure filings were reported on 257,747 U.S. properties in December, a decrease of nearly 2 percent from the previous month and down 26 percent from December 2009 — the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008. “Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings,”

Banks repossess 1 million homes in 2010 - The bleakest year in foreclosure crisis has only just begun. Lenders are poised to take back more homes this year than any other since the U.S. housing meltdown began in 2006. About 5 million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts forecast. "2011 is going to be the peak," said Rick Sharga, a senior vice president at foreclosure tracker RealtyTrac Inc. The firm predicts 1.2 million homes will be repossessed this year by lenders. The outlook comes after banks repossessed more than 1 million homes in 2010, RealtyTrac said Thursday. That marked the highest annual tally of properties lost to foreclosure on records dating back to 2005.One in 45 U.S. households received a foreclosure filing last year, or a record high of 2.9 million homes. That's up 1.67 percent from 2009.

US Foreclosure Filings May Jump 20% in 2011 as Crisis Peaks - The number of U.S. homes receiving a foreclosure filing will climb about 20 percent in 2011, reaching a peak for the housing crisis, as unemployment remains high and banks resume seizures after a slowdown, RealtyTrac Inc. said.  “We will peak in foreclosures and probably bottom out in pricing, and that’s what we need to do in order to begin the recovery,” Rick Sharga, RealtyTrac’s senior vice president, said  “But it’s probably not going to feel good in the process.”  A record 2.87 million properties got notices of default, auction or repossession in 2010, a 2 percent gain from a year earlier, the Irvine, California-based data seller said today in a report. The number climbed even after a plunge in filings in the last part of the year -- including a 26 percent drop in December -- as lenders came under scrutiny for their practices.

December Foreclosure Filings Slump By Biggest Annual Amount In History As Fraudclosure Clampdown Persists - RealtyTrac has reported its December foreclosure data: at a total of 257,747 default notices, foreclosure auctions and bank repossessions, total foreclosure activity dropped by 1.8% in December and 26.3% from a year earlier, "the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008." Specifically, December Default notices (NOD, LIS) decreased 4 percent from the previous month and were down 35 percent from December 2009; Scheduled foreclosure auctions (NTS, NFS) decreased 3 percent from the previous month and were down 20 percent from December 2009; and bank repossessions (REO) increased nearly 4 percent from the previous month — thanks in part to substantial month-over-month increases in some states such as Nevada (71 percent increase), Arizona (52 percent increase) and California (47 percent increase) —  but were still down 24 percent from December 2009.

More banks walking away from homes, adding to housing crisis - A new type of property is adding to neighborhood blight: the bank walkaway. Research to be released Thursday, the first of its kind locally, identifies 1,896 "red flag" homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found. Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs. "The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities,". "The role of the servicer is to be the person in charge of that property's disposition. You're seeing situations where servicers are not living up to that standard."

10.8 percent of Clark County homes in foreclosure last year - More than 9 percent of Nevada’s households had a foreclosure filing in 2010 as the state held its nation-leading ranking for the fourth consecutive year, despite a drop from 2009, according to statistics released Thursday. That equates to one in every 11 households with a notice of default or in some other stage of the foreclosure process, California-based RealtyTrac reported. Clark County recorded 88,198 foreclosure filings in 2010, which represents 10.8 percent of its units, or about one filing for every nine households. That’s a 7 percent decline from 2009 but 31 percent higher than 2008, RealtyTrac reported. Nevada’s 106,100 filings represented a 5.3 percent decline from 2009, despite an 18 percent rise in filings in December over November and 14 percent over December 2009, the firm reported.

Will Massachusetts Mortgage Ruling Boost House Prices? - On Friday, the Massachusetts Supreme Court ruled in two separate cases that banks have to have proof that they own a house before starting a foreclosure. In the past, banks were allowed to start the eviction process, and often even finish it, even if they didn't have all the paperwork on hand that proved they, or their investors, owned the house. Only after the bank was challenged did it have to produce evidence that it had the right to foreclose. Sounds obvious, but for banks it's a big deal. At the height of the real estate boom, mortgages were bought and sold by banks often into trusts owned by thousands of investors. In many cases, the paperwork that detailed those transactions was sloppy. Sometimes it was lost or destroyed. The result is that many banks don't have the documents readily on hand to prove they own a house. If pushed, most can establish that they have the right to foreclose. But that's a costly process, so mostly banks have been trying to only produce that paperwork when pushed after foreclosures have already been filed. While the ruling may reduce the number of houses for sale for the next few months, it's not clear that it would boost housing prices.

The Housing Slump Has Salem on a Witch Hunt Again -  The foreclosure crisis has helped resurrect an ancient tradition: the house cleansing. Buyers such as Mr. Barletta are turning to witches, psychics, priests and feng shui consultants, among others, to bless or exorcise dwellings. Sellers, too, are adopting the trend to help move a property stuck on the market. In recent months, foreclosure and other distressed sales have represented about a third of all home sales, according to the National Association of Realtors. With so many foreclosures riddling the market, some buyers find that a coat of paint is hardly enough to rid a house of its creepy quotient.

Auditors See Rising Defaults in Rural Loans - Seeking to buoy a strained rural economy in the midst of the recession, Congress ordered up a huge increase in federal mortgage guarantees for small-town home buyers as part of the 2009 economic stimulus package. Now, a newly released audit has found that the rural loan program, administered by the United States Department of Agriculture, was plagued by lax government oversight and many of the same sloppy banking practices that fed the broader mortgage debacle.  Although the auditors looked at only a tiny sample of the 133,053 loan guarantees made in 2009, they estimated that tens of thousands might have been done improperly and warned that a wave of defaults might be looming.

The Future of Foreclosure - For all that I said that the legal issues involved in the foreclosure mess are surpassingly difficult for a non-lawyer to understand, the Levitin piece I linked is still worth reading.  One paragraph in particular should strike a chill into peoples' hearts: In theory, these loans should be put-back to the seller. Will that happen? I'm skeptical. If not, that means that investors will be eating the loss. The servicer and the trustee aren't necessarily getting off scot free, though. They might get hit with Fair Debt Collection Practices Act and Fair Credit Reporting Act suits from the homeowners (plus anything else a creative lawyer can scrape together). And mortgage insurers might start using this case as an excuse for denying coverage. REO purchasers and title insurers should be feeling a little nervous now, although I doubt that anyone who bought REO before Ibanez will get tossed out of their house if they are living in it. Going forward, though, I don't think there's a such thing as a good faith purchaser of REO in MA.

CoreLogic: House Prices declined 1.6% in November - Notes: CoreLogic reports the year-over-year change.  From CoreLogic: CoreLogic® Home Price Index Shows Decline for Fourth Straight Month CoreLogic ... released its November Home Price Index (HPI) which shows that home prices in the U.S. declined for the fourth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.07 percent in November 2010 compared to November 2009 and declined by 3.35 percent in October 2010 compared to October 2009. Excluding distressed sales, year-over-year prices declined by 2.21 percent in November 2010 compared to November 2009 and declined by 2.24 in October 2010 compared to October 2009. ... This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is down 5.07% over the last year, and off 30.9% from the peak.  The index is only 1.2% above the low set in March 2009, and I expect to see a new post-bubble low for this index - possibly as early as next month or maybe in early 2011.

Will home prices fall back below 2009 low? - As I have noted in the past, since the home price index data provided by Radar Logic is more timely, unadjusted and un-smoothed it is particularly useful for gaining deeper visibility over our housing markets especially in light of the distortions created by the massive government tax gimmick and other malfeasance. By contrast, recognize that because the S&P/Case-Shiller (CSI) data is a two month lagged and a three month moving average, the index data will reflect price movement resulting from the government's housing tax scam (asBostonBubble pointed out) until at least the February 2011 release. The Radar logic data, on the other hand, while lagged by 60 days is reported daily and, more importantly, is NOT SMOOTHED or adjusted so you can expect to see the underlying trends more precisely and substantially sooner than with the CSI. The latest data shows that as of the middle of early November, prices are 2.27% below the level seen in November 2009.

Housing and Economy: Housing Market Slips Into Depression Territory… In the past few years, we’ve all been careful to choose our words carefully, not calling it a recession until it fit the technical definition and avoiding any inappropriate use of the “D” word — Depression.  Things were bad but the broader economy never reached Depression territory. The housing market, on the other hand, just crossed that threshold. Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9-percent decline seen during the Depression years between 1928 and 1933, Zillow reported. November marked the 53rd consecutive month (4 ½ years) that home values have fallen. What’s worse, it’s not over yet: Home values are expected to continue to slide as inventories pile up, and likely won't recover until the job market improves.

Home price drops exceed Great Depression: Zillow (Reuters) - Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow. Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month. It is a dubious milestone for the U.S. housing market which has failed to gain much traction despite a host of government programs to reduce delinquencies and encourage demand with temporary tax credits and lower interest rates.

NAHB Forecast: Single Family Starts to increase 21% in 2011 - To put the following forecasts into prespective, there were around 474,000 single-family housing starts in 2010, and about 588,000 total housing starts From MarketWatch: Home-building rebound in 2011 a small matter Home building is set for a rebound in 2011, with single-family housing starts projected to climb 21% to 575,000 units, the [National Association of Home Builders chief economist David Crowe] said Wednesday. I expect a rebound for housing starts, but that forecast seems overly optimistic. Economist Tom Lawler is forecasting single-family starts at 520,000 in 2011. Here is a long term graph of housing starts through November ... Even if single-family housing starts increased to 575,000 (the NAHB forecast) that would still leave starts below the bottom of the '90/'91 recession.

Housing’s Anemic Rebound to Give Little Boost to U.S. Economy - This may be the year the U.S. housing market starts crawling up from rock bottom. Held back by foreclosures, the pace will be so weak it won’t do much for economic growth. Home prices probably will start to gain in 2011’s third quarter and rise 0.6 percent for the year, the first annual advance since 2006, according to Fannie Mae, the largest U.S. mortgage buyer. Real residential investment, an inflation- adjusted measure of homebuilding, will increase 9.6 percent in 2011 after five years of declines to a record low, based on the median forecast of 30 economists at a Federal Reserve Bank of Chicago symposium last month. “There’s a good chance of a housing turnaround this year, but it’s not going to be enough to give much help to the economy,” said Karl Case, co-creator of the S&P/Case-Shiller Index that tracks U.S. home prices. “We’re coming off 50-year lows and we still have to deal with the foreclosure mess.”

Are Small Businesses Hiring Again? - The U.S. economy will not recover without a dramatic turnaround in the small business sector. That's just a fact. According to the Small Business Administration, companies with fewer than 500 employees account for 44% all private payroll and created 64% of net jobs between 1993 and 2008. (Net is the number of new jobs minus the number of jobs lost.)Our economy's reliance on small business can help explain why recovery from the recession is so stubbornly slow. As Rex Nutting explains in the Wall Street Journal today, large and medium-sized businesses are actually doing quite well right now. One index that surveys these companies finds the sector itself is growing at 5% per year. But as Nutting explains, the overall economy is only growing at 3%. The culprit: small business, which is nearly stagnant.

Small-Business Sentiment Takes Step Back - After four consecutive gains, the National Federation of Independent Business index of small-business optimism fell back in December. The NFIB’s index slipped 0.6 point to 92.6 last month. “Apparently, the “management change” in Washington and marginally better retail-sales numbers weren’t enough to pump up spirits at the New Year celebrations,” the NFIB said. A big drag came from the subindex of expected business conditions in six months. It fell seven percentage points to 9%. In addition, the subindex on earnings trends fell four points to -34%. Even so, small-business owners expect an improvement in demand, with the expected sales index up two percentage points to 8%.

Household Credit and Personal Saving - FRBSF Economic Letter - In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.

Consumer Sentiment declines in January - The preliminary Reuters / University of Michigan consumer sentiment index declined to 72.7 in January from 75.2 in December. This was below the consensus forecast of 75.5.  (chart) Sentiment is still at levels usually associated with a recession - and sentiment is well below the pre-recession levels. In general consumer sentiment is a coincident indicator, and this suggests the recovery is still relatively sluggish.

Retail Sales increased 0.6% in December - On a monthly basis, retail sales increased 0.6% from November to December(seasonally adjusted, after revisions), and sales were up 7.9% from December 2009.This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 13.5% from the bottom, and now 0.2% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 7.4% on a YoY basis (7.9% for all retail sales).  Here is the Census Bureau report:

Sales Up, But Stores Fret Over Outlook - Retailers saw their best holiday season since the start of the recession, but a loss of momentum in December fed concerns about the strength of the sector's revival in the new year. December retail sales at stores ranging from car dealers to grocers rose 7.9% from a year ago, the Commerce Department said Friday, and overall sales surpassed their pre-recession peak. But the pace slowed toward the end of the season, inching up 0.6% between November and December to $380.9 billion, after growing 0.8% the month prior. A rash of early-season discounts prompted some shoppers to make their purchases earlier.

Are Record Retail Sales Good For US consumers? - Collectively, Americans spent nearly $381 billion last month, according to a report on Friday from US Department of Commerce. That was up 0.6% from November, and nearly 8% more than we all spent in December 2009. More importantly, it was the first time since the beginning of the recession that US retail sales hit a new peak, besting a high that was set back in November 2007, just before the downturn started. But is it good news for consumers, and long-term health of the American economy, to spending so much so soon after the Great Recession? That's not as clear. Here's why: Over-consumption, particularly of houses, was what got us into the Great Recession. In fact, when we wrote our story of the top 25 people to blame for the financial crisis, the American Consumer was right up there on the list. The recession was when consumers were supposed to kick the consumption habit. The new buzz phrase "the new normal" is all about how we Americans are going to be less reliant on debt, and more thrifty.

U.S. Consumer Spending Down Sharply in Early January - Overall self-reported daily consumer spending in stores, restaurants, gas stations, and online averaged $55 per day in the week ending Jan. 9 -- down as expected from the $75 average for the month of December, but also well below the $68 average for the same week in 2010. Throughout 2010, consumer spending remained relatively close to that of 2009 -- the "new normal" trend. Spending surged in December of each year and then fell back in January as expected, given seasonal spending trends; Gallup's spending data are not seasonally adjusted. Weather may be partly responsible for the sharper drop in early January 2011 -- Gallup has found that it can affect weekly spending. Regardless, there are no signs that an improvement in consumer spending is taking place in early January 2011.

Ceridian-UCLA: Diesel Fuel index increases in December - This is the new UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce IndexTM This graph shows the index since January 1999. Press Release: Year-End Surge Reported in Latest Ceridian-UCLA Pulse of Commerce Index™ The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, surged 2.4 percent in December and pushed the PCI above its previous 2010 peak established in May. This performance, combined with November’s 0.4 percent increase, was enough to offset three previous consecutive months of decline.

AAR: Rail Traffic increases in December - From the Association of American Railroads: AAR Reports December 2010 Rail Traffic. The AAR reports carload traffic in December 2010 was up 9.4% compared to December 2009, and traffic is also above December 2008. Intermodal traffic (using intermodal or shipping containers) is up 13.3% over December 2009 and up over December 2008. Total carloads for the year were 14.8 million, up 7.3% over the 13.8 million in 2009. Total intermodal volume in 2010 was 11.3 million trailers and containers, up 14.2% over 2009’s 9.9 million units. The 7.3% increase in carloads and 14.2% increase in intermodal volume in 2010 over 2009 might be the largest annual percentage increases in history; they’re definitely the largest since 1988, the earliest year for which we have comparable data.This graph shows U.S. average weekly rail carloads (NSA). Traffic increased in 16 of 19 major commodity categories year-over-year.

Manufacturers See Weaker Dollar as ‘Slightly Positive’-  A 10% fall in the value of the U.S. dollar would help boost exports and profits at most manufacturers but also lead to higher prices for key raw materials like copper, zinc, nickel and crude oil, according to an industry group survey released Thursday. “The results suggest that a fall in the value of the dollar would have at least a slightly positive impact on overall manufacturing sector exports, but that exports from a sizeable proportion of companies would not be impacted,”

Capacity Utilization and Unemployment - According to the latest data released by the Fed, both capacity utilization and industrial production increased in December: Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. ... At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009. I had graphed the relationship between unemployment and capacity utilization in the past, and there was a fairly close relationship between the two series, so I was about to write that this is good news for unemployment. But when I updated the graph with the latest data, the relationship appears to have broken down to some degree:

Will bigger paychecks bring a better economy? - As a key piece of President Obama's signature tax-cut package begins boosting paychecks this month, American workers will confront a critical question that could determine the pace of country's economic recovery: Spend or save?  One of the most visible components of the $858 billion plan passed by Congress is a 2-percentage-point reduction in the federal payroll tax for all workers that will last through the year. The administration hopes the increase in take-home pay - about $1,000 for an average family, according to White House estimates - will boost consumer spending, which in turn drives the nation's economy.  But how much of that money will actually be spent rather than saved or used to pay down debt remains a hotly debated topic among economists. Many consumers will not even notice the increase because it is spread over the course of a year, rather than distributed as a lump sum. Critics also note that the payroll tax cut will leave the lowest-income workers with a smaller paycheck than last year, even though they are the most likely group to spend the money.

60% Of New Jobs In 2010 Were In Low-Paying Industries - Following last week's disappointing job report, investment research group TrimTabs brings us an even sharper picture of an economy not on the verge of an economic recovery. (Hat tip to Zero Hedge.) TrimTabs drills into the Labor Bureau's data for new jobs added in last year, to reveal some unsetting details: "Of the 1.1 million private jobs gained in the last year, 650,000 or 60% are jobs that have absolutely no real wealth creation capacity, nor do they provide any real benefits." 60% of new jobs went to Temporary Help, Leisure & Hospitality and Retail trade. Leisure and hospitality pays an average hourly wage of $13.14, while a retail salesperson brings in an average of $11.84 an hour, according to the BLS' database. Temporary help services can be slightly more lucrative at the higher end (Registered Nurses earn $32.77 an hour), but packers and packagers only earn an average of $8.62 per hour.

Is Income Redistribution the Key to Economic Growth? - That’s the thesis Mark Thoma puts forth in this article at the Fiscal Times. There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.

Income Distribution Part II, Here's another thought relating to this post. Our basic notion of social insurance is that each of us is placed, at birth, in a set of circumstances beyond our control. Before birth, we're not able to write insurance contracts that will compensate us for being born poor, for being born with a serious disease or birth defect, or for other possible bad events. There is then some role for the government in stepping in to provide the insurance that the private market cannot provide, by redistributing income from the rich to the poor, providing health care, or other interventions. The problem we have to deal with is that, as we teach students in Econ 101, prices help to allocate resources efficiently. To a degree, people are rich by virtue of the fact that society puts a high value on their services, and society puts a high value on their services because these are the services society wants. To provide the services that society wants, people have to be motivated to provide them. Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff.

Higher Investment Best Way to Reduce Unemployment, Recent Experience Shows - Some economists argue that the efforts now underway to reduce government spending as a share of GDP will have adverse effects on unemployment. This is not what the data show. Consider this chart which shows the pattern of government purchases as a share of GDP and the unemployment rate over the past two decades. (The data are quarterly seasonally adjusted from 1990Q1 to 2010Q3.) There is no indication that lower government purchases increase unemployment; in fact we see the opposite, and a time-series regression analysis to detect timing shows that the correlation is not due to any reverse causation from high unemployment to more government purchases.

Jobs Report Signals a Long Haul for a Recovery - The year 2010 ended on a disappointing note, as the economy added just 103,000 jobs in December, suggesting that economic deliverance will not arrive with a great pop in employment.  Signs still point to a long slog of a recovery, with the unemployment rate likely to remain above 8 percent — it sits at 9.4 percent after Friday’s report — at least through the rest of the president’s four-year term.  The latest report was also a let-down for some within the White House, as recent economic data had suggested that the recovery would gain speed going into 2011. The political stakes are high, as Democrats and Republicans wrestle over who should take credit for the progress of the jobs market, or the blame for its failure to ignite.

Jobs: Stalled Out in 2010 - The January 2011 jobs report, covering the U.S. employment situation through December 2010, painted pretty much the same picture as every other jobs report has since March 2010: the post-2007 jobs recovery has stalled out, with no sustained improvement observed in the U.S. employment situation during the past nine months.  Through December 2010, the total employment level of the United States is 7,378,000 less than what it was at the pre-recession peak in November 2007, which is about the same as what was recorded in June 2010 and October 2010.  Compared to the previous month of November 2010, the number of individuals counted as being employed increased by 297,000. Breaking down that small improvement by age, we find that the numbers of employed teens (Age 16-19) and young adults (Age 20-24) declined by 95,000 and 61,000 respectively, while the number of older workers (Age 25+) rose by a robust 392,000

US Productivity Exceptionalism - Nick Rowe - Stephen's got standards. So I'm going to steal his graphs from his last post, and write the post he could easily have written. Before you look at Stephen's graphs, ask yourself this question. How well did the US fare in the Great Recession, in terms of GDP and employment, compared to other G7 countries? Now look at the dark blue lines (that's the US) in both graphs. Compare them to the other lines. Did you see what you expected to see, on both graphs? I could understand if the US had the worst output and employment during the recession. I could fake up some explanation. I could understand if the US had the best output and employment during the recession. I could fake up some other explanation. What I can't understand is why the US had the second best output, and yet by far the worst employment. That would require two fake explanations, and it would be hard to make those two explanations consistent.

The End of Procyclical Labor Productivity? - The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back. These days U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers. It seems fairly clear to me that calling this "structural change" is somewhat of a misnomer. . For workers to lose jobs in contracting industries and to not find them in expanding industries is not "structural change" but rather something else.

Labour markets: Sticky, sticky wages | The Economist: what we see is a two-track labour market. Workers who never lost their jobs... have potentially enjoyed pay increases. But... jobless workers... have struggled to find work and who can generally only do so at a significant wage cut relative to their previous pay.... I mentioned a few explanations ventured by Rob Shimer....One big issue is the problem that nominal wages aren't very flexible in a downward direction. Another issue could be that since existing firms aren't motivated to hire new and cheap workers, new firms are needed to absorb jobless workers, but new firm creation is hampered by tight credit conditions. Mr Shimer also speculated that unemployed workers could somehow be different—uniquely unskilled or improperly skilled—or they could be pinned in place by housing conditions in particularly bad job markets.... Why wouldn't firms swap out older, more expensive workers for the cheaper unemployed ones available to them? One possibility is that firms are worried about the disruptive impact of such workforce turnover and have decided that it's better to keep employing existing labour at existing wages...

Will Paychecks Shrink in 2011? - Workers expecting a raise in the next year, might get something very different--a pay cut. Wages have already been growing very slowly during the recession, up just 1.5%. That's down from 3.5% at the beginning of the recession. And when you factor in inflation, real wages, which is the measure of whether you can buy more or less stuff with your paycheck, are basically flat. But is the pay picture set to get worse? Perhaps. As growing number of the 14.5 million Americans looking for a job re-enter the workforce, the pressure on wages might cause salaries to fall for the first time in decades. Here's why: Wages typically don't fall, even in recession. What's changing is that the unemployment rate has stayed high much longer than in past recession. It's been above 9% for 20 months and, despite dropping in December, is likely to stay there for most of 2011. What's more, nearly half of the unemployed--6.4 million--have been out of work for more than 6 months. The longer someone is jobless the more likely they are to work for less.

Job Openings in U.S. Decrease for Third Time in Four Months - Job openings in the U.S. fell in November from the highest level in two years, signaling a sustained labor market recovery will take time to develop.  The number of positions waiting to be filled decreased by 80,000 to 3.25 million, the Labor Department said today in Washington. The number of people hired dropped from the prior month and separations climbed.  Employers added a fewer-than-forecast 103,000 jobs in December, for a total of 1.1 million in all of 2010, the Labor Department reported last week. Faster job growth is needed to bring down the unemployment rate on a sustained basis and spur consumer spending.  “Labor demand still remains at very weak levels,”

No jobs for more than three out of four unemployed workers - This morning the Bureau of Labor Statistics released a discouraging November report from the Job Openings and Labor Turnover Survey (JOLTS), showing that job openings decreased by 80,000 in November, while revisions to earlier data reveal that there were 34,000 fewer job openings in October than previously reported.  The survey also showed other signs of weakness in November, as hires declined by 39,000, layoffs increased by 36,000, and quits decreased by 44,000.  The report underscores the rocky nature of the recovery.  The total number of job openings in November was 3.25 million, while the total number of unemployed workers was 15.0 million (the latter is from the Current Population Survey).  The ratio of unemployed workers to job openings was thus 4.6-to-1 in November, a deterioration from the revised October ratio of 4.5-to-1.  Despite November’s lapse, the job-seeker’s ratio has been generally improving since its peak of 6.3-to-1 in July 2009.  However, at 4.6-to-1 the ratio is more than three times its 2007 average of 1.5-to-1.

Why are jobless claims so high this week - Let me say at the outset I don’t think the US government’s seasonal adjustments are accurate. Nevertheless, I will say this: they are close enough for me, especially when looking at trends instead of absolute levels.  What I’m concerned about is the direction of the numbers more than the level. If the unemployment rate or jobless claims are going up that’s bad, if they are going down, that’s good. As for the actual numbers, jobless claims are about as clean and real time a number as you are going to get. I like this data set. The states tally up how many people filed claims for unemployment insurance and pass this on to the federal government. The US federal government then seasonally-adjusts this number based on a factor that they work out well in advance of the jobless claims report.  For example, the seasonal adjustment factors are already set through 2 April 2011. Between now and then, the US Department of Labor will release an updated seasonal adjustment chart through to the end of 2011.

The Fed's Imaginary Jobs - The Federal Reserve has a so-called "dual mandate" to promote maximum employment and stable prices. In far as they have failed miserably in both areas, various FOMC board members must vigorously defend both the Fed's current policies and ultimately, their very existence. Fed vice chairman Janet Yellen presented the latest defence in Yellen Says Asset-Buying Adds 3 Million Private Jobs  How did the Fed conclude that all these imaginary jobs will be created? It turns out that we've already got 1.8 million of them. Additional Fed purchases of Treasuries will create 1.2 million more jobs by the end of 2012—In her assessment of the economic impact of the purchases, Yellen cited a paper by four Fed economists that relied on the central bank’s main economic forecast model, known as FRB/US.

A Tale of 2 Employment Surveys, at a Glance - The unemployment rate fell sharply last month, to 9.4 percent from 9.8 percent in November, yet employers didn't add that many jobs. So why did the rate fall so much? It's because of the way the government calculates who's employed and who isn't. The government does two employment surveys each month. One is called the payroll survey. It asks companies and government agencies how many people they employ. This survey produces the number of jobs gained or lost during the month. In December, the payroll survey showed a net gain of 103,000 jobs. That was higher than November's 71,000 total but below October's 210,000. The other is called the household survey. Government workers ask households about the employment status of adults living there. Those without jobs are asked whether they're looking for one. If they're not, they're no longer considered part of the work force and aren't counted as unemployed. The household survey produces the unemployment rate each month. The number of unemployed fell by 556,000 to 14.5 million last month, according to the household survey. Slightly more than half, or 297,000, of those people said they had found jobs. That's many more than the 103,000 new jobs that employers said they created.

Spinning Unemployment Figures in a Collapsing Empire - The Bureau of Labor Statistics (BLS) reported Friday that the economy gained only 103,000 new jobs in December--not enough to keep up with population growth--but the rate of unemployment (U.3) fell from 9.8% to 9.4%. If you are confused by the report, you are among the many.   In truth, what fell was not the number of unemployed people but the number of unemployed people who are actively looking for work. Those who have become discouraged and have ceased looking for work are not considered to be in the work force and are not counted as unemployed in the U.3 measure. The unemployment rate fell because discouraged workers increased, not because employment rose.   When statistician John Williams ( adds the long-term discouraged, the US unemployment rate as of December 2010 was 22.4%.  The question to ask yourself is: why does the media focus on the unemployment measure that does not count any discouraged workers?  The answer is that the U.3 measurement only counts 42% of the unemployed and makes the situation appear to be a lot better than it is. Where are the 103,000 new jobs?  As I have reported for years, the jobs are in non-tradable domestic services: waitresses and bar tenders, health care and social assistance (primarily ambulatory health care services), and retail and wholesale trade.

200 Best and Worst Jobs 2011 - The Wall Street Journal - Interactive Graphic…

More on Hurst and FT Alphaville on Structural Unemployment - - I’m going to keep hammering on structural unemployment issues at this blog.  I’m hearing rumors that Davos is going to be entirely about “The New Normal” and I want to be ready if that’s the case.  Structural unemployment is also doing a lot of the work of saying that the economy needs to bleed out the badness and be punished for the good times, a long-standing argument.   There’s definitely a problem with housing and foreclosures, but they only speak to a part of the cyclical crisis we are going through. In response to an editorial we discussed, where Raghu Rajan cited the work of Erik Hurst saying that “structural unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today,” Greg Mankiw runs a clarification from Hurst:

Really unemployed - The Economist - To a great extent, the panel focused on its members' attempts to understand the protracted nature of the bad conditions in labour markets. Robert Hall, an outstanding economist and an entertaining speaker, began by directing attention to a few key measures of lending conditions for small businesses and consumers. He pointed out that at the onset of crisis these measures deteriorated significantly and they have yet to improve all that much. It seemed to him that this had to be connected to the continued high level of unemployment. Mr Hall constructed a model, some of which he presented in the session and some of which came out later in his presidential lecture, in which the crisis gives rise to "financial frictions". Lenders must then be induced to provide additional credit through reductions in the real interest rate. But, he pointed out, interest rates are constrained by the zero lower bound. In his model, it might take a real interest rate of something like -2.5% to clear the economy. But obviously the Fed is constrained once nominal rates hit zero, and so the economy returns to its trend growth rate but never recovers the ground lost during the financial shock. Keep this in mind; we'll return to it in a moment.

When will people move away from pure AD theories of unemployment? - Commerce department figures on Friday showed that total sales in 2010 were up 6.8 per cent from 2009, marking the sharpest such increase in more than a decade..

Industrial output is up by 5.9 per cent year-on-year. Yet the labor market is still "eh."  Here is more, but again note it is wrong to reject the AD factor altogether, though it seems to be becoming less relevant over time.  Arguably AD and AS are interacting in unusual and presumably deleterious ways. I have read too many blog posts attacking a caricatured version of either RBC theory or a narrowly defined notion of "structural unemployment" which requires excess demand for labor in significant parts of the economy.  As Arnold Kling points out, the labor market shock can be asymmetric in its effects. From a different direction, here is Scott Sumner criticizing the recalculation argument.

ZIRP and ZMP - Krugman - From my point of view, the current slump is just about what we should have expected given that we had a nasty financial crisis and continue to have a lot of over-leveraged players in the system. Ken Rogoff once said that the United States is having a “garden-variety severe financial crisis” — indeed, anyone who read Reinhart and Rogoff on the aftermath of crises more or less expected a prolonged period of weak employment. And I’ve been warning about a protracted liquidity trap, in which even a zero interest rate policy (ZIRP) isn’t enough to raise demand sufficiently, for more than a decade. And yet a number of economists seem determined to find some kind of supply-side explanation for low employment. Via Scott Sumner, I see that Tyler Cowen has been suggesting that workers are unemployed because there’s literally nothing they can do — that they have a zero marginal product. I also gather that this is what the Austrians are saying these days. So, is ZMP a plausible alternative to ZIRP?

Markets and Morality -Greg Mankiw has an essay on economic morality that essentially outlines a Just Deserts Theory of morality. Under this conception there is nothing wrong with people getting fabulously wealthy, its only bad when people cheat their way to the top. Greg also brings up an argument that I used to be attached to, that charity is a public good – no one wants to see poor people but we would all prefer that someone else do something about it – and as a public good is rightfully financed by government spending.I’ve moved away from this view. Greg is right that it reflects common intuition. The problem is that this intuition does not survive introspection. It works so long as you don’t think too much about it. As you think more and more you are forced either into something like a consequentialist camp, that is to say that it matters who ends up with what. Or, you are forced into miniarchist camp. That is, that there should be almost no government at all. It’s hard to keep the idea that there should be some public goods if you are not explicitly conditioning your idea of a good society on what society actually exists.

Is winner-take-all bad or good for the middle class? Evidence from baseball - A “winner-take-all” market is one in which the top stars get paid much more than anyone else. It’s an apt description of the American economy in recent decades. Top financiers, CEOs, entertainers, and athletes now routinely earn more than ten million dollars a year, and the share of all income (after taxes) going to the top 1% of households jumped from 8% in 1979 to 17% in 2007. What impact does the rise in the share taken by those at the top have on the incomes of those in the middle? On one view it’s bad: if the additional millions going to the “winners” had instead been spread among those in the middle, the latter would have been better off. Others suggest the impact is good: winner-take-all markets help make the pie bigger than it otherwise would have been, and a larger pie means a larger slice for the middle class in absolute terms, even if that slice has shrunk relative to the slice of those at the top.* Pay in major league baseball is a good test case.

Sometimes Business Isn't Just Business - Maxine Udall - I'm not sure why I'm telling you this story. Maybe because it's a story about how people with very different ideas can be brought together peaceably by commercial exchange, a mere desire to truck and barter with each other, giving value and getting value. Its a story about how they can tolerate someone with ideas that are quite at odds with their own because the market has provided them with neutral ground where they can meet, exchange, and part, better off for the transaction. But it's also a story about how, at some point, something other than gaining and getting may also matter. When one party to the exchange promotes ideas that could undermine the social fabric that makes the exchange possible, is it time to step back and ask ourselves: what are we trading and bartering here? If one party to the exchange promotes ideas that could undermine the institutions and tolerance and moral fabric that make markets and democracy possible, should we be more willing to take our business elsewhere, and sooner?

Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages - In Massachusetts, Kevin Cronan, who lost his $150,000-a-year job as a money manager in early 2009, is now frothing cappuccinos at a Starbucks for $8.85 an hour.  In Wisconsin, Dale Szabo, a former manufacturing manager with two master's degrees, has been searching years for a job comparable to the one he lost in 2003. He's now a school janitor.  They are among the lucky. There are 14.5 million people on the unemployment rolls, including 6.4 million who have been jobless for more than six months. But the decline in their fortunes points to a signature outcome of the long downturn in the labor market. Even at times of high unemployment in the past, wages have been very slow to fall; economists describe them as "sticky." To an extent rarely seen in recessions since the Great Depression, wages for a swath of the labor force this time have taken a sharp and swift fall.

The Amazing Collapse Of The Working Teen- Despite the anemic pace of job creation, December saw a sizable decrease in the headline unemployment rate thanks to a decline in the workforce.  A lot of that discussion focused on folks going into early retirement or giving up the search for jobs, but there's another factor, which is the disappearance of teens in the workforce. Mike O'Rourke of BTIG has a good breakdown of what this looks like: In examining the participation data, the most notable decrease in participation has been among Teens (Chart 2). Teen participation has been in a long term decline since it peaked at 59.3% in 1978. In January 2000 it was 52.3%. In December 2007 when the recession started, it was 41.3%. Today, it is 34.3%. As noted earlier, a lower participation rate usually helps push the unemployment rate lower. During this Recession, teen unemployment hit a record of 27.1% and currently stands at 25.4%. This is remarkably high considering the way the participation rate among teens has collapsed. If the participation level of teens today was the same as it was at the start of the Recession, or 41.4%, the Unemployment Rate among teens would be approximately 45%.

Employment for Young American Men - The graph above shows the employment-population ratio for men since then, broken out by age.  You can see that for all the groups below age 55, employment opportunities fell sharply between 2000 and about 2003, then recovered slightly until 2007 -- but not to the 2000 level.  Then they fall sharply in the great recession and have pretty much barely improved at all since then. The one exception is the age group 55-64 who increased their participation through 2007, but we probably should see this is a sign of societal stress also - less ability for men to retire early. However, the thing I wanted to highlight is the plight of younger men relative to those of us established in the workforce.  In 2000, employment was over 90% for both the 25-34 group and the 35-44 group - peak working years.  However, between then and now it's fallen by about seven percentage points for the 35-44s, but by eleven percentage points for the 25-34s.

In Black America, The Depression Rolls On - The latest snapshot of the American job market, released by the Labor Department on Friday, confirms what most ordinary people already knew without need of a government report: Little is improving quickly or broadly enough to dislodge the anxiety that has taken up long-term residence in many communities. The unemployment rate fell to 9.4 percent in December, from 9.8 percent the month prior. But that had little to do with people actually finding work, and much to do with the jobless simply giving up and halting their searches, dropping out of the statistical pool known as the labor force. A deeper dive past the headline numbers reveals a reality that ought to trigger national alarm but hasn't for the simple reason that it is already embedded in the country we have unfortunately become: the Divided States of America.  Among white people, the unemployment rate dropped in December to 8.5 percent -- hardly acceptable, but manageable were the government spending more to expand a fraying social safety net and generate jobs. For black Americans, the unemployment rate was 15.8 percent.

Tumbling from middle-class security, and struggling to regain it - There is the single mother from Manassas who after losing her job and going on public assistance could no longer afford to pay her mother to watch her children and had to send her mother to child development and CPR classes to qualify for public child-care assistance. There is the laid-off TV repairman who 30 years ago received a degree after studying Greek, Latin and Hebrew and now, facing meager job prospects, regrets having chosen to work with his hands. There is the well-dressed couple who after losing their jobs in the auto industry pulled into a food pantry in Gaithersburg in a gleaming, gas-guzzling four-door truck they had bought for fun a few years ago and now wish they hadn't.  The recession exposed how precarious a hold many middle-class families had on their status. The housing meltdown and credit crunch wiped out nest eggs and the ability to maintain a credit-fueled lifestyle.

Deepening crisis traps America’s have-nots - There is a telling detail in the US retail chain store data for December. Stephen Lewis from Monument Securities points out that luxury outlets saw an 8.1pc rise from a year ago, but discount stores catering to America’s poorer half rose just 1.2pc.  Tiffany’s, Nordstrom, and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35pc, while Porsche’s US sales are up 29pc.  Cartier and Louis Vuitton have helped boost the luxury goods stock index by almost 50pc since October. Yet Best Buy, Target, and Walmart have languished.  Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs. Yet surely Ben Bernanke’s `trickle down’ strategy risks corroding America’s ethic of solidarity long before it does much to help America’s poor.The US is drifting from a financial crisis to a deeper and more insidious social crisis. Self-congratulation by the US authorities that they have this time avoided a repeat of the 1930s is premature.

It's Almost Official — 1 In 6 Americans Live In Poverty -- Back in September, based on the data available to me, I estimated that 1 in 6 Americans live in poverty. The "official" estimate at the time, which was based on an antiquated methodology defined in the 1950s, put the rate at 14.3%, or approximately 1 in 7 Americans.  Now the Census Bureau has published the results of an alternative, more accurate way of measuring who is poor and who is not. The quotes below are from AOL News.The number of poor people in the U.S. is millions higher than previously known, with 1 in 6 Americans — many of them 65 and older — struggling in poverty due to rising medical care and other costs, according to preliminary census figures released Wednesday. At the same time, government aid programs such as tax credits and food stamps kept many people out of poverty, helping to ensure the poverty rate did not balloon even higher during the recession in 2009, President Barack Obama's first year in office. Under a new revised census formula, overall poverty in 2009 stood at 15.7 percent, or 47.8 million people. That's compared to the official 2009 rate of 14.3 percent, or 43.6 million, that was reported by the Census Bureau last September.

Misery With Plenty of Company - Consider the extremes. President Obama is redesigning his administration to make it even friendlier toward big business and the megabanks, which is to say the rich, who flourish no matter what is going on with the economy in this country. (They flourish even when they’re hard at work destroying the economy.) Meanwhile, we hear not a word — not so much as a peep — about the poor, whose ranks are spreading like a wildfire in a drought.  The politicians and the media behave as if the poor don’t exist. But with jobs still absurdly scarce and the bottom falling out of the middle class, the poor are becoming an ever more significant and increasingly desperate segment of the population.  During a conversation I had this week with Peter Edelman, a professor at Georgetown University Law Center and a longtime expert on issues related to poverty, he pointed out that the number of people in that tragically dismal category has grown to more than 17 million. How do you imagine a family of four would live if its annual income was $11,000 or less?

Food Emergency: Millions of Americans Are Heading to Foodbanks for the First Time in Their Lives - The good news is there's no reason anyone should ever starve to death in America. The bad news is more and more working Americans, many earning what were once middle class incomes, are spending their time and scarce money to find their next meal.  "We're seeing a large number of families that have never needed food assistance before," reports Traore.  Here's the surprise: a large portion of the people needing food assistance today are working, and especially among FBSJ's new clients, many are earning incomes nearly twice the poverty lineof $22,055 per year for a family of four (up to 185% of poverty). Who are the hungry and why can't they afford to feed themselves and their families? Increasingly, the shocking answer is this: If you are not financially independent, the odds are good that someday you could be waiting in line to feed yourself and your family.

American Nightmare - Many, if not most, of us who have grown up in this country have been conditioned to believe in the American Dream -- that vision, as James Truslow Adams described it, of "'a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement,' regardless of social class or circumstances of birth." That was before the U.S. (and the rest of the world) got body-slammed by the worst financial crisis this century. Now, a growing number of ordinary Americans, like those the Orlando Sentinel writes about in "Recession Created 'Epidemic' of Homeless Families," are wondering if the dream of a better life has been transformed into the nightmare of seemingly never-ending hard times and the constant struggle to survive:

Involuntary Commitment and the Prison Population - William Galston writes at The New Republic The Tucson Shooter and the Case for Involuntary Commitment: Jared Lee Loughner was mentally ill when he pulled the trigger, there were multiple signs of his descent into delusion over the past year, and no one did very much about it….We need legal reform to shift the balance in favor of protecting the community, especially against those who are armed and deranged. This means two changes in particular. First, those who acquire credible evidence of an individual’s mental disturbance should be required to report it to both law enforcement authorities and the courts…Second, the law should no longer require, as a condition of involuntary incarceration, that seriously disturbed individuals constitute a danger to themselves or others This sounds like a dangerous path. I’ve seen Titicut Follies (which is now available on dvd) and it doesn’t surprise me there was a mass movement to find alternatives to involuntary commitment during the 1960s.  Besides poor facilities and terrible treatment, new historical research is documenting the race and clinical assumptions from earlier in the 20th century that were used to make it harder for African-Americans to be declared ‘mentally-fit and socially-productive’ and thus leave confinement: 

The New Jim Crow - The first time I encountered the idea that our criminal-justice system functions much like a racial caste system, I dismissed the notion. What a difference a decade makes. After years of working on issues of racial profiling, police brutality, and drug-law enforcement in poor communities of color as well as working with former inmates struggling to "re-enter" a society that never seemed to have much use for them, I began to suspect that I was wrong about the criminal-justice system. It was not just another institution infected with racial bias but a different beast entirely. The activists who posted the sign on the telephone pole were not crazy, nor were the smattering of lawyers and advocates around the country who were beginning to connect the dots between our current system of mass incarceration and earlier forms of racial control. Quite belatedly, I came to see that mass incarceration in the United States has, in fact, emerged as a comprehensive and well-disguised system of racialized social control that functions in a manner strikingly similar to Jim Crow.

South Draws U.S. Blacks - The nation's African-American population continued its southward migration over the past decade, shifting a large part of the black middle class from northern states to faster-growing economies of the South. Among 25 big U.S. metro areas with the largest growth in African-American population between 2000 and 2009, 16 were in the South—including Atlanta and Dallas—according to the Census Bureau's American Community Survey. Among the big losers were cities in the North and West, including Detroit, Los Angeles and Cleveland. The biggest gainer was Atlanta, a magnet for black professionals. Its metro area added about 500,000 African-Americans between the 2000 and 2009 period, and more than twice the next-largest numeric gainer, Dallas, according to an analysis of Census data by William H. Frey, a demographer at the Brookings Institution in Washington, D.C. Over the same period, the share of Atlanta's 25-and-over black population that had college degrees increased to 24.6% in 2009 from 21.5% in 2000.

Does a Bad Job Market Lead to More Discrimination? - As I noted in an article today, discrimination charges filed with the Equal Employment Opportunity Commission jumped last year, reaching a record high of 99,922. As you can see, there was also a bump in discrimination claims after the 2001 recession. That increase and the increase last year could largely be explained by cyclical factors: many of the people who once might have been reluctant to accuse a company of prejudice because they feared retaliation have now been laid off and therefore have less to lose from filing a claim.  Additionally, and perhaps more importantly, many people may be claiming discrimination precisely because they are out of a job — that is, they may believe they were improperly targeted for layoff based on their age, sex, race, etc.

State Of The Unions, by James Surowiecki: In the heart of the Great Depression, millions of American workers did something they’d never done before: they joined a union. Seventy-five years later, in the wake of another economic crisis, things couldn’t be more different. ... In the recent midterm elections, voters in several states passed initiatives making it harder for unions to organize. Across the country, governors and mayors wrestling with budget shortfalls are blaming public-sector unions for the problems. And in polls public support for labor has fallen to historic lows.  There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them...: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers

Business Group Prepares Plans to Counter Unions - It has already changed its name once during its two-month existence and one prominent board member, Richard D. Parsons, the chairman of Citigroup, has already resigned, possibly under pressure from public employee unions.  But the powerful real estate moguls, bankers and business executives behind the Committee to Save New York are moving ahead and expect to run their first television commercial early next week supporting Gov. Andrew M. Cuomo’s campaign to oppose tax increases, reduce the size of government and reform Medicaid and public employee pensions.  The governor has already called for a one-year salary freeze for state workers.  Even as the unions representing state employees gird for a possible showdown with Mr. Cuomo, Save New York members spent this week collecting $10 million in pledges for what they describe as an educational campaign that would be a “counterweight” to the expected union campaigns opposing drastic cuts.

When the government sets the price - A simple and common justification for public sector unions is that the government is a monopsonist for many occupations, meaning they are the only employer. Yet when a natural monopoly exists, it is the government we often seek to entrust with the power to set prices at the efficient level, and we assume they will behave as a benevolent dictator.  There are many places where we trust the government to benignly set prices if they are going to fulfill some valuable role. For instance, gas taxes and road tolls. Yet we don’t worry that the government will behave as a monopolist here and set prices inefficiently high. In fact, in these cases quite the opposite occurs. An empirical problem with this argument for public sectors is that there is a clear public sector union wage premium just as there is in the private sector. If wages were being bargained up to market level, then this wouldn’t be the case.

Why Public Sector Union Compensation Matters - Taxpayers, including unionized private sector workers, are becoming increasingly aware of the generous benefits secured by public employees and the way the escalating cost of public employee benefits are compromising business environments across the nation. This political backlash not only threatens the political sustainability of public employees’ compensation schemes, but also risks opening a divide among the labor movement itself as private sector counterparts see the tax implications of public sector largesse as compromising their own employment prospects. Defenders of public employee unions have fought back to combat these perceptions. They make two basic arguments: (1) the problem is not excessive public sector pensions, but rather inadequate retirement benefits for private sector workers; and (2) current strains on state and local budgets are not caused by excessive spending, but rather by a dramatic decline in revenue resulting from the economic crisis caused by Wall Street. These arguments are unpersuasive.

YouTube - Blame the Unions for Everything! (The Alyona Show)

Labor Board to Sue 4 States Over ‘Card Check’ for Unionizing - The National Labor Relations Board announced on Friday that it planned to sue Arizona, South Carolina, South Dakota and Utah in an effort to invalidate recently approved state constitutional amendments that prohibit private sector workers from choosing a union through a process known as card check.  The labor board asserts that the amendments conflict with federal laws and are pre-empted by those laws.  The state amendments were promoted by various conservative groups concerned that Congressional Democrats and President Obama would enact legislation allowing unions to insist on using card check, in which an employer recognizes a union as soon as a majority of workers sign pro-union cards. That method makes it possible for employees to unionize without elections. But Congressional Republicans blocked such legislation.

Unemployment Has Doubled: Ratio Increases by State, Surprisingly Consistent. - Ryan Avent, reporting live from the AEA meeting, mentions a panel where Robert Shimer gives an excellent overview of the labor market (my bold): Rob Shimer, who’s well known for his work on labour markets, offered additional thoughts on the employment situation, beginning by laying out a few key labour market facts. Take any given group within the labour force, and the crisis has essentially generated a doubling of the unemployment rate. Turnover among the unemployed has also been quite low since the initial decline. It hasn’t been a slump in which many different groups rotate through joblessness; instead a lump of labour fell into unemployment and has struggled to return to the work force. That’s a great way to phrase it.  Charlie Eisenhood has looked at this with breakdowns of age and education here and there’s been roughly a doubling in each case. And it isn’t just unemployment. Arjun Jayadev and I looked at this with underemployment, or people working involuntary part-time jobs, and we saw that it doubled in every occupation and in every career. To me this is strong evidence that our current employment problems are primarily cyclical and demand focused.

The effects of state budget cuts on employment and income - Balanced budget requirements lead to substantial pro-cyclicality in state government spending outside of safety-net programs. At the beginnings of recessions, states tend to experience unexpected deficits. While all states ultimately pay these deficits down, differences in the stringency of their balanced budget requirements dictate the pace at which they adjust. States with strict rules enact large rescissions to their budgets during the years in which adverse shocks occur; states with weak rules make up the difference during the following years. We use this variation to identify the impact of mid-year budget cuts on state income and employment. Our baseline estimates imply i) a state-spending multiplier of 1.7 and ii) that avoiding $25,000 in mid-year cuts preserves one job. These cuts are associated with shifts in the timing of government expenditures rather than differences in total spending over the course of the business cycle. Consequently, our results are informative about the potential gains from smoothing the path of state government spending. They imply that states could reduce the amplitude of business-cycle fluctuations by 15% if they completely smoothed their capital spending and service provision outside of safety-net programs.

Some evidence about state government spending multipliers - The findings should give the pain caucus some pause.Daniel Shoag:This paper employs a novel identification strategy to isolate exogenous and unexpected variation in state government spending. State governments manage large defined-benefit pension plans for which they bear the investment risk. Using a newly-collected dataset on the returns and portfolios of these plans, I show that the idiosyncratic component of their returns is a strong predictor of subsequent state government spending. Instrumenting with this ‘windfall’ component of returns, I find that state government spending has a large positive effect on income and employment. Baseline estimates indicate that each dollar of spending raises in-state income by 2.12, and that 35,000 of spending generates one additional job. These effects are not due to in-state investment bias, are concentrated in the non-traded sector, and are larger during times of labor force ‘slack.’ Finally, I consider how these results compare with the predictions of a standard macroeconomic model and outline which features in the model are consistent with the empirical findings.

Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions - We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have diff erential e ffects across regions. We use this variation to estimate an open economy government spending multiplier of approximately 1.5. Standard closed economy estimates of the government spending multiplier are highly sensitive to how strongly monetary policy \leans against the wind." In contrast, our estimates "diff erence out" these eff ects because diff erent regions in a monetary union share a common monetary policy. This allows usto better distinguish between alternative business cycle models. We show that our estimates are consistent with a New Keynesian model with GHH preferences. They are consistent with a small closed-economy multiplier when monetary policy is highly responsive (as in the Volcker- Greenspan era) and a substantially larger closed-economy multiplier when interest rates are less responsive (as at the zero lower bound).

The Fed Has Spoken: No Bailout for Main Street - If the Fed could so easily come up with $12.3 trillion to save the banks, why can't it find a few hundred billion under the mattress to save the states? Obviously, it could, if Congress were inclined to put non-bank lending back into the Fed's job description. Then why isn't that being done? The cynical view is that the states are purposely being kept on the edge of bankruptcy because the banks that hold Congress hostage want the interest income and the control... [Congress] could issue its own debt-free money and spend it on repairing and modernizing our decaying infrastructure, among other needed works... the states could take matters into their own hands and set up their own state-owned banks based on the [Bank of North Dakota]'s model. They could then have their own very low-interest credit lines, just as the Wall Street banks do. Rather than spending or selling off valuable public assets or hoarding them in massive rainy day funds made necessary by the lack of ready credit, states could leverage their assets into a very strong and abundant local credit system, following the accepted business practices of the Wall Street banks themselves.

States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing - Because of the high jobless rate and past fiscal irresponsibility, 30 states have collectively had to borrow more than $40 billion from the federal government just to keep unemployment insurance checks in the mail. A provision in the stimulus bill made those loans interest-free for an extended grace period. But no more. Efforts to include an extension of the grace period in Obama's tax cut extension enacted at the end of last year failed, and the first batch of 14 states will have to start paying interest before the end of this year. Given that state budgets need to be hammered out in advance, that means state legislatures will soon face tough choices as they come back in session.  The amounts due range from California and Michigan, which each face payments of more than $300 million dollars, to Kansas, which will owe about $6 million.  And because of federal rules, states can't use unemployment insurance taxes to make interest payments, which means cash-strapped states will have to take that money from their general budgets, so there will be less money for roads, schools and other priorities.

California’s Brown Unveils $12.5 Billion in Spending Reductions - California Governor Jerry Brown's budget will cut spending by $12.5 billion, including as much as a 10 percent pay reduction for most state employees, aides said. The largest U.S. state by population faces a $25.4 billion budget gap over the next 18 months, Brown said in a statement.  His plan will chop an amount equal to 10 percent of the current year’s $125.3 billion in spending. Cuts include $1.7 billion from Medi-Cal, the state’s version of the Medicaid program for the poor; $1.5 billion from CalWorks, a welfare-to- work program; and a combined $1 billion from the University of California and the California State University systems, which together serve 663,000 students. Additional cuts will be made to prisons and the courts. Spending on kindergarten through 12th-grade education will be spared, Brown said.Voters will be asked to extend increases in sales and income taxes as well as vehicle license fees in a special election in June, Brown said.

Crushing State Budget Cuts Wiping Out Simulative Effects of Tax Deal - Today, Jerry Brown announced his fiscal plan for the next 18 months, and it’s not pretty at all. He’ll make an effort to save current tax increases which are set to expire, reducing the pain somewhat, but you’re still looking at major budget cuts to almost all sectors. If you’re going to deal with the budget honestly, there aren’t many other options on a way forward, at least in the interim. Maybe after a few years of sound budgets you can ask Californians to tax the rich. Saving the current tax increases, which have mostly to do with the regressive sales tax, while hoping to cut some corporate tax breaks at the margins, is maybe the best possible option. In Illinois, they’re skipping the intermediate steps and going right to the taxation. Between California and Illinois, you’re looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren’t just extensions of current law in the tax cut deal.

Bernanke Rejects Bailouts - Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority. "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed." The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies

Governor Brown's Budget Slashes State Spending by $12.5 Billion…The spending plan eliminates an 18-month budget gap estimated at $25.4 billion, comprised of a current year shortfall of $8.2 billion and a budget year shortfall of $17.2 billion. A combination of $26.4 billion in actions is needed in order to have a $1 billion reserve. In addition, the deficit will grow to $26.6 billion if the proposed sale of state office buildings, blocked by court order, does not proceed, requiring $27.6 billion in budget actions in order to have a reserve. Brown’s budget proposes $12.5 billion in spending reductions, $12 billion in revenue extensions and modifications, $1.9 billion in other solutions to close the gap and provide for a $1 billion reserve. Major spending reductions include $1.7 billion to Medi-Cal, $1.5 billion to California’s welfare-to-work program (CalWORKs), $750 million to the Department of Developmental Services, $500 million to the University of California, $500 million to California State University, and $308 million for a 10 percent reduction in take-home pay for state employees not currently covered under collective bargaining agreements. Brown also plans to trim state government operations by $200 million through a variety of actions, including reorganizations, consolidations and other efficiencies.

Jerry Brown's to-do list really begins after shock-and-awe Monday - By all accounts, Gov. Jerry Brown on Monday will roll out a budget with "shock and awe'' cuts and reveal his plan for the most radical restructuring of California government since the passage of tax-slashing Proposition 13 turned the Capitol upside down more than 30 years ago. But Monday will be the easy part. The hard part comes over the next couple of months as Brown tries to sell his vision and build a bipartisan alliance, convincing all sides that the worst thing they can do now is fight to keep the status quo as California's financial train rumbles toward the cliff. So, what's on Jerry Brown's to-do list to save California? There are the obvious biggies: persuading Democrats to swallow massive cuts to treasured social programs to close a $28.1 billion deficit; convincing Republicans to support placing a measure on the June ballot to extend "temporary'' tax hikes; and winning over voters who have already shot down extending those hikes.

California Spending Cut $12 Billion, Debt Sales Pause -- California Governor Jerry Brown said he’ll ask voters to keep tax increases from expiring while he cuts $1 billion from universities and slashes public employee pay as much as 10 percent while trimming $12.5 billion from spending. The budget unveiled today will save another $300 million by not selling bonds in the early months of the year, Finance Director Ana Matosantos said. The largest U.S. state by population, and the biggest municipal-bond issuer, faces a $25.4 billion budget gap over the next 18 months. “We’re going to have to live in a more conservative fashion,” he said. Brown’s plan chops an amount equal to 10 percent of the current year’s $125.3 billion in spending. Cuts include $1.7 billion from Medi-Cal, the state’s version of the Medicaid health-care system for the poor; $1.5 billion from CalWorks, a welfare-to-work program; and a combined $1 billion from the University of California and the California State University systems, which together serve 663,000 students.

LA council panel deadlocks on how to address mounting deficit - The Los Angeles City Council's budget panel deadlocked Monday on how to address the city's mounting deficit, with two council members calling for layoffs of city workers as an alternative to more furloughs. Split on how to proceed, the Budget and Finance Committee asked City Administrative Officer Miguel Santana for more suggestions for addressing the financial crisis.Councilmen Greig Smith and Bernard C. Parks called furloughs a temporary solution and said the city should permanently reduce the workforce. But other committee members said they opposed both layoffs and furloughs and want solutions that would be less painful to the public.

A budget body blow -- latimes - Rhetoric about shared sacrifice often has an ennobling resonance. Its reality can be excruciatingly painful, as Los Angeles residents will discover when they begin to sort through the implications of the austerity budget Gov. Jerry Brown will deliver Monday.In fact, when it comes to the city and county of Los Angeles, the new state budget will deliver not the "pain" Brown keeps reminding us is inevitable, but torment.Take, for example, just three of the proposals local officials confirm they expect to see in Brown's first budget: drastic cuts to Medi-Cal and the CalWORKS welfare-to-work program, and the diversion of so-called low-level offenders from the state prison system to local jails. County Chief Executive William T. Fujioka told me this week that his office has been in talks with Sacramento for a couple of weeks on how to handle the staggering additional costs Los Angeles will be forced to assume. "They're just pushing these problems down to the local level with no real thought about the consequences, and I find that amazing,"

Villaraigosa Threatens Layoffs And Furloughs - With Los Angeles City Council members unable to reach agreement on where to make new budget cuts, Mayor Antonio Villaraigosa on Monday threatened to order a new round of furloughs and employee layoffs.  The council's Budget and Finance Committee was unable to agree on a series of proposals to make up for a potential loss of $53 million in revenue because of the city's inability to put together a lease-sale deal for its parking garages. The city is trying to cope with a $62million shortfall in this year's budget and prepare for another $348 million deficit next year. It will bring to more than $1 billion the amount cut from the budget in the past four years.... As the council reviewed the various options to reduce budgets of individual departments, Councilman Bill Rosendahl asked for a report on how many city workers are paid more than $200,000 a year. He also asked if those making more than that amount would agree to a voluntary pay cut. City Council members are paid $178,000 a year.

Brown Budget May Cost Los Angeles County $2 Billion -- Los Angeles County may face $2 billion in additional costs under the budget proposed by California Governor Jerry Brown, according to a report. The nation’s largest county, with more than 10 million residents, may see state welfare funding cut for more than 37,000 families and a shift of 13,550 felons from state prisons to county jails under the proposed budget, according Ryan Alsop, assistant chief executive officer. The county’s assessment of the proposed spending plan’s effects was released today. “The realignment the governor is proposing is a great big cost-shift,” Alsop said today in a telephone interview. “You can understand why we’re a little bit nervous about what’s happening. The cost-shift without the additional revenue would bankrupt all counties in California.”

Thousands of families to lose welfare benefits in Los Angeles -- A dramatic budget cut by California Governor Jerry Brown would end welfare benefits for 37,000 families in Los Angeles County, authorities said Tuesday. Brown announced a balanced state budget on Monday that slashes state spending by 12.5 billion U.S. dollars and moves forward his plan to realign some government programs, giving cities and counties decision-making authority over certain services and programs. The slash, designed to address California's 28-billion-dollar budget deficit, includes a proposed 1.5-billion-dollar reduction to CalWORKS, the state's welfare-to-work program. As a result, the program will cut funding by 450 million dollars to Los Angeles County and take away benefits for 37,000 county families, according to the county's CEO, William Fujioka.

Restaurants Could Be Food Stamp Option For Some - A slice of the county's food stamp recipients soon may be able to redeem their benefits at area restaurants should a proposal supported by San Diego County Supervisors Bill Horn and Ron Roberts and initiated by a local restaurant association gain favor Tuesday. The number of people receiving food stamps countywide has spiked by 79 percent in two years to 210,000, according November 2010 figures provided by the county. Advocates for the poor have worked closely with the county to reform the program, which has been derided as inaccessible and inefficient.

Governor To Disconnect 48,000 Cellphones In Hands Of State Workers - Alarmed at discovering that the state pays for 96,000 cellphones, Gov. Jerry Brown issued an executive order Monday seeking to cut in half the number of devices being billed to taxpayers. Requiring 48,000 cellphones to be turned in by June 1 will save the state about $20 million a year. “It is difficult for me to believe that 40% of all state employees must be equipped with taxpayer-funded cellphones,” Brown said. “Some state employees, including department and agency executives who are required to be in touch 24 hours a day and seven days a week, may need cellphones, but the current number of phones out there is astounding.”

Fiscal challenges deepen For Md. lawmakers - Maryland’s $1.6 billion shortfall for the next fiscal year is presenting an increasingly difficult challenge for Gov. Martin O’Malley and lawmakers after four years of tough budget conditions. The Maryland General Assembly’s 90-day session begins Wednesday. O’Malley, who was re-elected in November, says the new budget is the most difficult he has ever put together. He says he’s balancing the budget entirely with cuts, and plans to submit his proposal to lawmakers later this month. While the state has contended with bigger shortfalls under O’Malley, the state does not have federal stimulus money this time to help soften the blow.

Rick Perry Faces the Biggest Drop in Texas Revenue Since Oil Bust in 1980s - Governor Rick Perry, after touting Texas’s growth while holding down taxes and spending, faces the biggest two-year budget gap in state history and a challenge some compare to the 1980s, when an oil bust roiled the economy.  Texas’s revenue will fall 2.9 percent to $72.2 billion in the two-year fiscal period that begins Sept. 1 compared with the biennium ending in August, state Comptroller Susan Combs said yesterday in Austin. She said the state also faces a $4.3 billion deficit that must be closed by the end of August. “The budget situation is as bad as it’s ever been,” said Billy Hamilton, a former deputy comptroller and now a municipal- finance consultant in Austin, the state capital. He likened the situation to a period of declining revenue several decades earlier. “The speculative bubble in oil popped in the 1980s, and we’ve just gone through another bubble in real estate.”

Texas Lawmakers Faced with $27 Billion Budget Shortfall - Texas lawmakers will have a revenue shortfall of at least $15 billion for general-purpose spending for the next two-year budget compared to current state spending, according to figures released Monday. Some analysts say the true shortfall could be much higher — closer to $27 billion — if lawmakers intend to maintain spending at current levels and still pay for enrollment growth in public schools and on Medicaid rolls, cost increases and other variables. That figure amounts to almost a third of discretionary state spending in the current budget. The Texas Legislature will begin to grapple with the bleak budget picture when the session opens Tuesday.

Texas May Cut 8000 State Jobs to Avert Tax Rise, Dewhurst Says -- Texas, facing a budget deficit of as much as $27 billion over the next two fiscal years, will propose a budget that cuts 8,000 state positions, according to Lieutenant Governor David Dewhurst. Cutting the workforce will help the state avoid a tax increase, Dewhurst spokeswoman Lauren Thurston said today in a telephone interview. Dewhurst, Governor Rick Perry and Speaker Joe Straus, of the House of Representatives, all said this week that the next state budget wouldn’t raise taxes. "This past election showed people do not want their government, ours or the federal government, to be spending more money than they take in,”The state won’t spend more than $77.3 billion in general- fund revenue projected for 2012-2013, Perry said today in a speech in Austin. Maintaining its current service level, adjusting for inflation and population growth, would cost the state $99 billion for the coming fiscal biennium, according to the Center for Public Policy Priorities in Austin. The group advocates for low-income and middle-income citizens.

Conservative Statehouses Hand Out Corporate Tax Breaks While Raising Taxes On Low-Income Citizens - Just days after calling for unity and “shared sacrifice” in their inaugural speeches, conservative governors, joined by legislators across the county, have proposed new tax cuts for business and top-earners alongside cuts to critical expenditures for low-income working families and tax increases on the working poor. As the Institute on Taxation and Economic Policy writes, in the face of massive budget shortfalls and declining revenue, many states “are poised to enact harmful cuts in existing state taxes that could weaken states’ ability to provide core public services for years to come.” “The threats to state tax fairness and adequacy are mounting by the day,” ITEP noted. Budget proposals in the following states are particularly alarming:

Florida 2012 Budget-Deficit Projection Grows to $3.6 BillionFlorida’s projected 2012 budget deficit is about $100 million more than forecast in December, the state Legislature’s chief economist said.  The $3.6 billion estimate is mostly due to higher projected expenses for Medicaid, the government health-care system for the poor, Amy Baker said today. The projected 2012 deficit, now about 14 percent of the anticipated general-fund budget, was $2.5 billion last September.  “The two big changes were to the general-revenue forecast and to the Medicaid program,”

New Hit to Strapped States - With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.

JPMorgan's Dimon Forecasts More Municipal Bankruptcies - JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market. “There have been six or seven municipal bankruptcies already,” Dimon, 54, said yesterday at his company’s annual health-care conference in San Francisco. “I think unfortunately you will see more.” Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy. Still, the number of filings has declined. Six entities sought protection under Chapter 9 of the U.S. bankruptcy code in 2010 compared with 10 in 2009.

Wisconsin Suffers as Build America Bonds Demise Raises Costs: Muni Credit - Wisconsin, whose 2011 tax revenue is forecast to increase 4.7 percent, is paying two-thirds more to borrow money this week than in an August sale of taxable Build America Bonds as it returns to the tax-exempt market.  Wisconsin is selling $429 million in tax-free debt this week with yields of 3.75 percent on bonds maturing in May 2021, according to data compiled by Bloomberg. Last year, its sale of Build Americas included 10-year securities priced to yield 3.45 percent. Minus the 35 percent federal subsidy on interest costs, Wisconsin paid 2.24 percent, Bloomberg data show.

Illinois Lawmakers Propose 75 Percent Income Tax Hike - Gov. Pat Quinn and the leaders of both houses of the Illinois General Assembly have agreed on raising the state income tax. If the bill passes, the plan would raise the personal income tax rate from the current 3 percent to 5.25 percent. That’s a 75 percent increase. In real dollars, that would mean if you currently owe $1,000 in taxes, next year you would owe $1,750. The increase is for four years. After that, the personal income tax would go down to 3.75 percent. The Democratic leaders in the Illinois General Assembly believe this income tax increase, a corporate tax hike, and a $1-per-pack tax increase on cigarettes would erase the state’s $15 billion budget deficit. The permanent portion of the increase would be used several ways. Some would be devoted to schools and some to repaying an $8.5 billion loan that would be used to pay overdue bills, state Senate President John Cullerton said.

Illinois Governor Flees Capitol Through The Basement After Disastrous Meeting - Illinois Governor Pat Quinn fled the state's Capitol building through the basement after a lengthy day of debating a rescue plan for the troubled state, according to CBS Chicago. Illinois is considering raising the state's income tax by 75% as part of its financial reform package. The reform is key to Illinois balancing its budget and avoiding further debt market stress. The state's current government is attempting to rush through income tax reforms prior to the new assembly being sworn in later this week.

Illinois' deficit reduction scheme - States have generally suffered during this economic crisis much the way most people have--there's been less money coming in as sales receipts slowed during the recession, more services needed as many become homeless, insuranceless and generally more vulnerable during the recession, and bills have continued to pile up. States have a number of options for dealing with the demands.  They can layoff employees and freeze salary increases, taking the brunt of the recession out of the hide of state services and state employees and at the same time likely making the recession worse. Some states have dealt with the problem with the perennial accounting gimmickry.  All  that does is paper over the problem and pass it along to the next budget year. Some states seem to be dealing with the fiscal crises by cutting workers pay and cutting workers.  That is likely merely to make the crisis worse over the long run.  So that leaves thinking about tax increases.   All in all, it seems that reasonable tax increases should be a win-win proposition, even during difficult economic times.  At any rate, that is the decision that Illinois Democrats reached today

State and Local Update: Illinois - The Illinois House passed a massive income-tax increase to help the state dig out of a $13 billion deficit, despite opposition from Republicans and business groups. The measure passed by a vote of 60 to 57 and was sent to the Illinois Senate, where it was expected to pass late Tuesday night or Wednesday morning. A new legislature, with narrower Democratic majorities in both houses, will be sworn in at noon. Among the increases in the bill, the individual income-tax rate would jump to 5%, from 3%. That would cost a family of three making $60,000 about $1,080 more each year in income taxes, according to figures from the Illinois Policy Institute, a nonpartisan free-market think tank. The corporation tax would also rise to 7% from 4.8%.

Illinois lawmakers pass massive tax hikes -  Illinois lawmakers on Wednesday approved major personal and corporate income tax hikes to bring the state's budget back from the financial abyss. The state is facing a $13 billion budget deficit that must be resolved by the end of the fiscal year on June 30. This includes $6 billion in unpaid bills to social service agencies, schools, contractors and others. In addition, the state's pension plan is severely underfunded. To address these shortfalls, the Illinois House and Senate approved:

  • Temporarily raising the personal income tax rate to 5%, from 3%.
  • Temporarily hiking corporate income taxes to 7%, from 4.8%.
  • Imposing a moratorium on new programs with spending growth capped at 2% per year, with the exception of increased school aid of more than $700 million.

Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate - We've released a report today taking an updated look at how just-enacted tax increases in Illinois would have affected their ranking in our 2011 State Business Tax Climate Index. Authored by Tax Foundation Staff Economist Kail Padgitt and myself, the report is Fiscal Fact No. 256, "Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate." As enacted, the Illinois plan raises the individual income tax from 3% to 5%, a two-thirds increase, and raises the corporate income tax from 7.3% to 9.5%, a 30 percent increase. Illinois will thus have the third highest state corporate income tax in the United States and the third highest combined national-local corporate income tax in the industrialized world. The formerly low, one-rate individual income tax compensated for many negative aspects of the state's tax system.

Many Sources Misreporting Illinois Corporate Tax Rate - This week, Illinois raised its corporate income tax from 7.3% to 9.5%. Many media sources have gotten this right, but many (unfortunately including the Associated Press and the Christian Science Monitor) have erroneously reported that the tax changed from a much lower 4.8% to a modest 7.0%. This misreporting comes from counting only one part of the corporate income tax, which officials do because the revenue goes to two different places. Illinois has two components to its corporate income tax: one where revenue goes to the general fund, and one that was enacted to phase out another tax (hence the name, "personal property replacement tax"), with revenues going to local governments. They both tax the same thing and experts treat it as one combined tax. (See Illinois Department of Revenue (PDF, line 2), Federation of Tax Administrators (PDF), the Financial Times, BNA, many media sources, and of course, the Tax Foundation.) That first tax is the 4.8% one that was raised to 7.0%. The second one, the personal property replacement tax, stayed at 2.5%. The combined tax, therefore, went from 7.3% to 9.5%

Illinois Senate Clears the Way to Sell $3.7 Billion in Debt for Pensions - The Illinois Senate, facing the state’s worst fiscal crisis, cleared the way for the state to borrow $3.7 billion for this fiscal year’s payment into underfunded employee pensions.  The bond measure was approved 42-16 in the final hours of the legislative session, moments after the Senate gave final approval to a 67 percent increase in the income-tax rate. Governor Pat Quinn, a Democrat, has said he will sign the bill, which passed the state House of Representatives in May.  Illinois had $64 billion in pension assets to pay estimated liabilities of $126.4 billion to 723,000 retirees and beneficiaries, according to bond documents in June.

Chicago's Downgraded Bond Rating Means Trouble for O'Hare Modernization - Chicago's debt problem is bringing down the lofty modernization plans for O’Hare. Moody's Investors Service issued a warning, saying Chicago’s Aviation Deptartment took too big of a risk on paying its bills. The city’s bond rating has been downgraded. The airlines, and therefore customers, could get stuck paying for higher borrowing costs as a result. Moody’s said the city's decision to postpone payment of interest and principal on construction bonds until 2018 will result in larger payments in the future.

So much for Chicago talk of poaching Oregon business - In the wake of the Measure 66 and 67 tax increases approved by Oregon voters a year ago, Chicago Mayor Richard Daley quickly said he'd be recruiting Oregon businesses to move to his own supposedly more business-friendly city. Wonder what Daley is saying now that Illinois legislators have approved a stunning 66 percent increase in the state's income tax? Under the new bill, the Illinois personal income-tax rate - 5 percent - will still be much lower than Oregon's.  But Illinois has high sales taxes.  In 2008, just as the recession was first hitting, the total state and local tax burden in Illinois $4,346 per capita compared to $3,719 in Oregon, according to the Tax Foundation.  Because Oregon had a lower per capita income, however, Illinois residents paid 9.3 percent of their income in state and local taxes and Oregonians paid 9.4 percent.

State Tax Changes During 2010 - We've released a new Special Report outlining the significant state tax changes during 2010. Due to a combination of improving revenues and growing political opposition to increased state-level taxes and additional federal aid to states, 2010 was a lighter year on state-level tax changes than anticipated. Most of the states that raised taxes in 2010 have aimed the increases at specific groups, such as high-income earners, smok­ers, or out-of-state business transactions. These revenue sources may provide short-term relief but can cause harm to the state economy in the short and long term. The 8-page report covers income tax increases (Oregon), decreases (California-for now at least, Maryland, New Jersey, North Carolina, Ohio, and Rhode Island), sales tax changes (Arizona & Kansas), and trends in click-through nexus/"Amazon" taxes, sales tax holidays, corporate income taxes, cigarette taxes (7 states), soda taxes, gasoline taxes, film tax credits, lotteries, energy taxes, and estate taxes.

Plant will shut after $58m in state aid - Evergreen Solar Inc. will eliminate 800 jobs in Massachusetts and shut its new factory at the former military base in Devens, just two years after it opened the massive facility to great fanfare and with about $58 million in taxpayer subsidies.The company announced yesterday that it will close the plant by the end of March, calling itself a victim of weak demand and competition from cheaper suppliers in China, where the government provides solar companies with generous subsidies.

Report details Oakland Police Department attrition - The Oakland Police Department will confront an old problem in the New Year: how to staff an under-strength department in a city with a $32 million budget deficit. As of December 2010, OPD had 656 officers, 54 fewer than the authorized 723 officers, and well under the thousand officers Police Chief Anthony Batts says he needs to properly police Oakland. That number is expected to shrink even further following the City Council’s statement that the city only has money to pay for 637 officers in 2011.

Paterson mayor proposes laying off 150 cops to close budget gap – Mayor Jeffery Jones proposes laying off 150 police officers, demoting 51 others and shaving three hours off the work week in an attempt to close an unprecedented $54 million deficit. “This is not a smoke-and-mirrors situation where we tell you the sky is falling. It has fallen,” Jones said at a special meeting of the City Council on Tuesday evening. Residents would face a rise of nearly 50 percent in the municipal tax rate if no cuts are made, leading to much public angst over the city’s proposed $251 million spending package

Post-Apocalyptic Detroit - Some cool pictures of abandoned buildings in Detroit.   How do you abandon a public library and leave all the books?  All these buildings appear vandalized.  Could it be a sign of Detroit’s problems that no one bothered to even steal the books?

Bobb's 'draconian' plan: Shut half of DPS schools - The Detroit Public Schools' emergency financial manager has submitted a sweeping plan that would close half of the district’s existing schools, increase high school class sizes to 62 and consolidate administration under the city or the countywide education agency. Robert Bobb's plan to wipe out a $327 million deficit, submitted to the Michigan Department of Education on Monday, also calls for layoffs soon -- the elimination of at least 249 positions this school year on the heels of a teacher shortage. The new plan would put DPS in the black by 2014 and assumes the district will lose another 20,000 students by 2013 – down to 58,570 from about 175,000 in 1999.

Detroit Public Schools Facing Budget Apocalypse - You basically never read anything cheery about Detroit and these education cutbacks are no exception: Detroit Public Schools would close nearly half of its schools in the next two years, and increase high school class sizes to 62 by the following year, under a deficit-reduction plan filed with the state. The plan, part of a monthly update Emergency Financial Manager Robert Bobb gives the Department of Education, was filed late Monday to provide insight into Bobb’s progress in his attempt to slash a $327 million deficit in the district to zero over the next several years. Under it, the district would slim down from 142 schools now to 72 during 2012-13. The terrifying thing is that these don’t even seem like terrible ideas. The city really should be operating fewer school buildings, and though large class sizes aren’t ideal it’s more important for kids to have access to effective teachers than for kids to have low student:teacher ratios. But obviously this is death spiral stuff—the more the city pares back, the more the people with means and opportunity will leave and the worse things will become.

Republican school board in N.C. backed by tea party abolishes integration policyRALEIGH, N.C. The sprawling Wake County School District has long been a rarity. Some of its best, most diverse schools are in the poorest sections of this capital city. And its suburban schools, rather than being exclusive enclaves, include children whose parents cannot afford a house in the neighborhood.  But over the past year, a new majority-Republican school board backed by national tea party conservatives has set the district on a strikingly different course. Pledging to "say no to the social engineers!" it has abolished the policy behind one of the nation's most celebrated integration efforts.  And as the board moves toward a system in which students attend neighborhood schools, some members are embracing the provocative idea that concentrating poor children, who are usually minorities, in a few schools could have merits - logic that critics are blasting as a 21st-century case for segregation.

New Jersey Slashes Bond Offerting 51% After Christie's `Bankrupt' Comments - New Jersey Governor Chris Christie has learned that talking about state insolvency may have a cost.  About 20 minutes after Christie, 48, told a town-hall meeting in Paramus today that health-care costs “will bankrupt” the state, the New Jersey Economic Development Authority cut its tax-exempt school-related bond offering by more than half to $712.3 million.  “It doesn’t help to try and sell a $1 billion deal on the same day the governor is talking about the state going bankrupt due to health-care costs,” 

Obama aims to revise No Child Left Behind - President Obama will mount a fresh attempt this year to rewrite the No Child Left Behind education law, a top administration official said this week, and key congressional Republicans said they are ready to deal. Rep. Duncan Hunter (R-Calif.), chairman of a subcommittee on elementary and secondary education, said there is bipartisan consensus that the 2002 law should be overhauled. "We have a lot of common ground," Hunter said. "We also see a major need. It's time to get it done.". But even though the president is likely to push for a new education law in his upcoming State of the Union address, hurdles abound on Capitol Hill because school reform often splits both parties.

A lesson for America - THE MEAGER growth in employment during December is a reminder that the recession remains painful, especially for the least educated. The new Republican House leaders may have a cost-cutting mandate, but let’s hope that they don’t get penny-wise and pound-foolish when it comes to human capital. America’s economic future depends on our skills, which means that we need a vigorous new version of the flagship federal education program, No Child Left Behind. America’s unemployment teaches a stark lesson about the value of education. Almost three-quarters of adults with college degrees have jobs; fewer than 40 percent of high school dropouts work. The unemployment rate is 15 percent for high school dropouts, 10 percent for college-less people with high school degrees and less than 5 percent for college graduates. Educating America may be the best way to reduce future unemployment. But just throwing money at schools doesn’t improve education. The big idea of No Child Left Behind was to use federal funding intelligently to create incentives for schools to improve.

Campus Notes - UNC estimates more job losses - A 5 percent cut to the UNC system budget - which officials say is a reasonable expectation -  could result in the loss of 900 jobs across the state. Of those, 400 would like be faculty cuts, according to data being presented this morning to the UNC system's Board of Governors. After several years of budget cuts, the system appears ready to reduce its budget again, doing its part to help the state patch a hole in its budget estimated now at more than $3.5 billion. A 10 percent cut would more than double those job eliminations - to 2,000 positions across the UNC system, including 1,000 professor slots. UNC-Chapel Hill has already instituted a permanent 5 percent budget cut effective July 1. In dollars, that's $26 million. And fewer instructors means fewer classes offered. The data also suggests the loss of 2,750 course sections across the UNC system with a 5 percent cut. With a 10 percent cut, 6,400 class sections would get the axe.

Academics urge universities to change culture to value teaching as highly as research - The reward systems at universities heavily favor science, math and engineering research at the expense of teaching, which can and must change. That's the conclusion of UC Irvine biology professor Diane K. O'Dowd and research professors at Harvard University, Yale University, the Massachusetts Institute of Technology, and elsewhere. Writing in the Jan. 14 issue of Science magazine, the authors note that professors have two responsibilities: to generate new knowledge and to educate students. But, they maintain, "although education and lifelong learning skills are of utmost importance," the promotions, awards and recognition given to science professors all emphasize research, while educating students "often carries the derogatory label 'teaching load.'" "The problem is the culture of the university, which values research over everything else in the reward and promotion system,"

Chris Christie Takes On Education Reform: 'The Time To Eliminate Teacher Tenure Is Now' - In New Jersey, Governor Chris Christie is taking a firm stance on education reform, hoping to put his state on track to be the national example of new policies. In his recent State of the State address, Christie explained "perhaps the biggest thing of all for the future of our State -- is education reform." Christie went on to outline a familiar list of reforms -- including closing low performing schools, adding more charter schools and introducing merit pay for teachers -- that have been touted by controversial reformers such as Michelle Rhee, who was in attendance for Christie's speech. The proposals fit into the Republican governor's vision of drastically slashing education costs to help balance the state's budget without increasing taxes. In one of his most contentious announcements, Christie declared he is pushing for the complete abolition of teacher tenure. The governor explained: The time for a national conversation on tenure is long past due. Teaching can no longer be the only profession where you have no rewards for excellence and no consequences for failure to perform.

Christie Calls for New Jersey Pension Overhaul, Education Cuts - New Jersey Governor Chris Christie said he will strive to reduce the costs of government pensions, benefits and education as he seeks to balance the budget without raising taxes. The Republican governor told lawmakers he hopes to contribute to the state’s underfunded pension system and secure passage of his plan to overhaul the retirement plan. Christie also said he’ll seek to control growth of the highest property taxes in the U.S. Christie urged the Democratic-led Legislature to pass the remaining items in his “toolkit” of measures designed to help schools and municipalities stay within his 2 percent cap on annual property-tax increases that took effect this year. Christie may face a deficit next year equivalent to more than a third of his current $29.4 billion budget, the nonpartisan Office of Legislative Services projected in July. This fiscal year, which ends June 30, he closed a record $10.7 billion gap by slashing school and municipal aid and skipping a $3 billion pension payment. Pension Gap New Jersey’s pension-funding gap increased $8.05 billion, or 18 percent, this year to $53.9 billion, from $45.8 billion as of June 2009.

Gingrich seeks bill allowing state bankruptcy to avert bailouts -   Former House Speaker and possible GOP presidential contender Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees. Proponents of the measure — which include Americans for Tax Reform, a Washington lobby group that fights tax increases — said the legislation is desperately needed to clear the way for struggling states to slash costs before they go belly up, and should be regarded as a preemptive move that could preclude the need for massive federal bailouts. “It's in the short-term and long-term interests of government workers and taxpayers to start those reforms now, rather than having to pick up the pieces after a crash landing,” ATR President Grover Nor-quist said in an interview.

Gingrich Touting State Bankruptcy Bill to Gut Pensions -- Yves Smith - There has been an interesting lack of commentary on an effort underway by Newt Gingrich and his allies to enable state governments to declare bankruptcy as a way to slash pension obligations, and given the lack of mention of other creditors, perhaps only pension obligations. The latest sighting was via an article today in Pensions & Investments: Former House Speaker and possible GOP presidential contender Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees… Mr. Gingrich discussed the proposal in a Nov. 11 speech before the Institute for Policy Innovation, an anti-big-government group based in Lewisville, Texas. According to a transcript of the speech on Mr. Gingrich’s website,, he said: “I … hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy, so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, you know, you need to sit down with all your government employee unions and look at their health plans and their pension plans and, frankly, if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it, and I would make the federal bankruptcy law prohibit tax increases as part of the solution, so no bankruptcy judge could impose a tax increase on the people of the states.”….

Dylan Ratigan on State/Local Public Pension Reforms - Dylan Ratigan had an informative segment today on public pension underfunding, with San Diego as a case study in government responses.

Retirement Looms: Time to Get Nervous - The oldest members of the 1946-64 demographic wave known as the Baby Boom turn 65 this month. It's up for debate how much that 79 million-member generation should celebrate, at least when it comes to their finances. In a May 2010 Pew Center survey, 57 percent of baby boomers said their financial situation had deteriorated since the recession began in 2007. That's nine points more than the national average and worse than any other generation surveyed. Boomers, particularly the oldest of the group, are finishing up their working and saving years just after home values dropped, global stock markets tumbled, and the U.S. unemployment rate doubled. It has all been a wake-up call for those who haven't been saving enough for retirement, financial planners say. "It's been an unfortunate reminder that you can't just save a little bit and the market will do the rest for you," Even if the economy hadn't gone south, boomers face challenges their parents often could avoid. Company pensions are increasingly rare, meaning many boomers lack a source of retirement funding that some in previous generations took for granted. 

AmericanDream: For Millions Of Senior Citizens The Only Future They Have To Look Forward To Is One Filled With Debt And Poverty - In America today, millions upon millions of senior citizens are very deep in debt.  In fact, more elderly Americans than ever before are going bankrupt.  Millions of others are living in extreme poverty or are just barely getting by on meager fixed incomes.    Meanwhile, the price of food is going up, the price of gasoline is going up, the cost of heating homes is going up and health insurance premiums are absolutely soaring.  Millions of our senior citizens suddenly find themselves financially squeezed more than they ever have been in their entire lives.  Unfortunately, at the same time all of this is happening, our government officials are realizing that they simply don't have the money to keep the financial promises that they have been making to our retirees.  Sadly, what this all means is that for millions of our senior citizens, the only future they have to look forward to is one filled with debt, poverty and financial pain. One recent survey conducted by CESI Debt Solutions discovered that 56 percent of American retirees still had outstanding debts when they retired. .

Social Security Benefits are Modest — Social Security benefits may be on the chopping block as policymakers wrestle with the nation’s long-term fiscal challenges.  The co-chairs of the President’s fiscal commission, Erskine Bowles and Alan Simpson, proposed a plan to ensure Social Security’s long-term solvency that relies on benefit cuts for two-thirds of its savings over the next 75 years,  A panel convened by the Bipartisan Policy Center proposed a package that relies roughly equally on benefit cuts and tax increases.  The Center for American Progress has offered a plan in which tax increases on employers dominate. [1] In assessing Social Security proposals, policymakers need to keep five key facts in mind:

  1. Social Security benefits are quite modest.
  2. The majority of beneficiaries have little significant income from other sources.
  3. For most seniors, Social Security is the only income they will receive that is guaranteed to last as long as they live and to provide full inflation protection.
  4. Social Security benefits in the United States are low compared with other advanced countries.
  5. Future retirees already face lower benefits than current retirees as a result of a rising Social Security retirement age and escalating Medicare premiums.

A defense of a working program -- Meet the Press David Gregory brings up Social Security in relation to federal debt (this is the push), but Senator Reid responds at least forthrightly. This is noteworthy given the apparent acceptance by politicos that Social Security needs fixing at all. Here is part of the transcript:
MR. GREGORY: Social Security, how does it have to change? What they put on the agenda is raising the retirement age, maybe means testing benefits. Is it time for Social Security to fundamentally change if you're going to deal with the debt problem?
SEN. REID: One of the things that always troubles me is, when we start talking about the debt, the first thing people do is run to Social Security. Social Security is a program that works, and it's going to be--it's fully funded for the next 40 years. Stop picking on Social Security. There are a lot places we can go to...
MR. GREGORY: Senator, you're really saying the arithmetic on Social Security works?
SEN. REID: I'm saying the arithmetic on Social Security works. I have no doubt it does. Social Security is fine.

The Future is Grey, Small and Female - Good MIT talk on how the future is likely to be dominated by the aged and the infirm, especially women living alone once we messed-up men die, and what that means for reengineering society.

Health Reform and Social Security - Krugman - I’ve figured out what the Social Security stuff in the GOP attack on health reform is about: the excise tax on high-value plans is expected to shift some worker compensation away from health insurance toward regular pay — which is taxable, both income and payroll. And the GOP wants to assert that increased payroll tax revenue doesn’t count because, well, something about how Social Security isn’t part of the budget, and the CBO is double-counting. This is just like the attempt to wave away Medicare savings, and it’s equally nonsensical. Social Security and Medicare do have dedicated funding sources, but they are also part of the overall federal budget. Put it this way: if you took the current GOP line, it wouldn’t matter how much Medicare costs — it’s all off-budget, so who cares? So, in terms of this picture: what we can say is that of the four alleged gimmicks, two — Medicare and Social Security — are completely above reproach, and at least $86 billion of the appropriations slice is above reproach...

Christie May Cut Medicaid as $10.5 Billion New Jersey Budget Deficit Looms - New Jersey Governor Chris Christie gives his first State of the State speech tomorrow after saying he may cut Medicaid and employee benefits to eliminate a $10.5 billion budget deficit in the second-wealthiest U.S. state.  Christie, who took office a year ago, said he’ll tell lawmakers in his address that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s. The Medicaid program “is one of the things we’re going to have to look at,” Christie said in a Jan. 4 interview.  The 48-year-old chief executive joined 28 other Republican governors asking President Barack Obama and congressional leaders last week for permission to reduce Medicaid outlays below federally prescribed levels. New Jersey budgeted $3.1 billion for Medicaid in the fiscal year ending June 30 and was scheduled to receive $1.1 billion in federal stimulus funding, according to the Treasury Department.

The Doc Fix - Krugman - I’ve been really amazed to see, both in comments and in correspondence I’ve had with some reporters, attempts to defend the idea that the “doc fix” is part of the cost of the Obama health reform. Let’s walk through this slowly. The reason we keep needing doc fixes is that back in 1997 Congress established a formula for Medicare reimbursements that was, in fact, unworkable. Applying that formula would set reimbursements so low that doctors would drop out, leaving seniors without care. Congress should have fixed the formula once and for all; but nobody wanted to take the budget hit, so instead we’ve had a series of temporary patches. And everyone knows that these patches will continue to be necessary. So what does this have to do with the Obama reform? Nothing. The patches will be necessary if reform stands; they would be equally necessary if Republicans succeeded in repealing the reform. .

The business lobby takes on healthcare reform - What business, big or small, doesn’t like a government bailout? That’s what the Obama healthcare bill is, in oversimplified terms, from the point of view of employers: up until now they’ve been struggling with soaring healthcare costs, and now the government is stepping in to relieve some of that burden. David Wessel finds it necessary today to explain this at some length, thanks to the fact that the US Chamber of Commerce and the National Federation of Independent Business both want to repeal the bill. Wessel explains that the bill will help minimize the implicit subsidies that insured employees pay to the uninsured; will make it much easier for small businesses to shop for healthcare; will end Cobra obligations; and might even slow the pace of healthcare cost inflation. What he doesn’t explain is how the US Chamber of Commerce and the National Federation of Independent Business became party-political hack machines, lobbying for whatever’s good for Republicans politically rather than whatever’s good for businesses on a policy basis.  

Opinions on Arithmetic Differ: Both Sides Have a Number - Paul Krugman has been outdone by someone else who works for the New York Times "Opinions on Shape of Earth Differ; Both Sides Have a Point" was exteme but  "In Battle Over Health Law, Math Cuts Both Ways" is the epitome of a nadir.The key word which Krugman missed is "math". To Krugman math is a set of artificially constructed theoretical systems in which meanings are more than usually precise and answers often have a right answer and a wrong answer. For a true journamalist, math is black magic and any claim in math might be true. It is the perfect setting for he said he said.  I do not blame the headline guy. The article by DAVID M. HERSZENHORN is as appalling as the headline. The article contains plainly false claims on matters of fact. One is clear enough that the New York Times must publish a correction.

It's Hard to Put a Price on Obamacare - The vote on repealing the health care bill looks likely to be delayed for a while, which gives us more time to quarrel over what such a repeal would mean. Not what it will mean, of course--Republicans don't have the votes to get it through the Senate, so this is largely a symbolic move.  But there's still plenty of room to argue about what would happen if they managed to retake the Senate and get it done. Democrats are pointing to the CBO score on repeal, which estimates that repealing the law would cost over $200 billion.  Republicans are pointing out that the score is highly contingent on actually implementing the law as passed--something that even the bill's proponents recognize will be a political challenge. Already the high-risk pools are a disaster, and the provision to require greater use of 1099s is generally agreed to be a bad idea; we haven't even begun to do the hard stuff, like cutting back on services in order to hold down costs.

House Republicans To Take Up Repeal Of ObamaCare 1099 Reporting Rules - Among the most criticized provisions of the Affordable Care Act are the new 1099 reporting requirements, which greatly expand the circumstances under which businesses are required to report transactions to the Internal Revenue Service. By some estimates, the new rules will costs businesses $ 6,000 per year, or more, in additional administrative expenses. A small amount for large businesses, but a potential game changer for small businesses. Both Republicans and Democrats have criticized the rules and tried, unsuccessfully, to repeal them during the last Congress. Now, House Republicans are trying again:

What and where is “waste” in health care?  - Health care spending is confusing. Conventional wisdom is that there is an enormous amount of waste in the system, “anywhere from 30 to 50 percent of medical spending [...] about $1 trillion annually,” according to David Cutler. Victor Fuchs once wrote, “Although many health services definitely improve health, in other cases even the best known techniques may have no effect.” And that was in 1966. In a recent paper published in The Milbank Quarterly, Robert Kaestner and Jeffrey Silber explain that, Fuchs’s [1966] characterization of the contribution of health services to health would now be referred to as an example of “flat-of-the-curve” medicine. [...] The same “flat-of-the-curve” argument was used to characterize medical spending during the 1970s.

What and where is “waste” in health care? (Continued)  - I want to follow up on my earlier post on waste in the health care system. That post questioned the notion (definition) of waste. Though it is likely that the same degree of health could be achieved with less expenditure (one view of waste), that does not mean that the additional spending is without value of another sort. It could very well be that we value that additional spending because it is necessary to fund the wacky health system we’ve chosen (that is, that we apparently, collectively, like) and makes services that provide hope, without actual  health, possible. Even if this is the case, there are still good reasons to be concerned about the level and trend in health spending. One set of reasons has to do with externalities. Your health spending can affect my premiums. If you use more, my premiums are higher than they otherwise would be, regardless of whether what you use is good for your health. The same is true in reverse: my utilization affects your premiums. Naturally, I think my health spending is justified and a whole bunch of yours is wasteful. Stop it!

Health Care Reform Contains Major Expansion Of Access To Mental Health Services -  The health care law that Republicans are targeting for repeal provides significant assistance and options for people with mental illness, an issue that has received increased attention as details emerge about the alleged shooter in Arizona on Saturday. As Igor Volsky of ThinkProgress points out, Rep. Mike Rogers (R-Mich.) similarly told MSNBC Tuesday, "A bad guy is going to get a gun. What we have to do is "intervene earlier in that cycle of violence when they have this kind of mental disability."  Lawmakers looking for a way to boost mental health services might want to start by checking out last year's Patient Protection and Affordable Care Act, which both West and Rogers support repealing. Mental health advocates have hailed the law for its expansion of access.

The Doctor Might See You Now - That's the title of a new paper by Craig Garthwaite of Northwestern.� The abstract is this: In the United States, public health insurance programs cover over 90 million individuals. Changes in the scope of these programs potentially can have large effects on physician behavior. This study finds that following the implementation of the State Children’s Health Insurance program, physicians decreased the number of hours spent with patients, but increased participation in the expanded program. Suggestive evidence is found that this decrease in hours was achieved through shorter office visits. These results are consistent with the predictions from a mixed economy model and provide evidence of the potential effects of recently passed public insurance expansions. In other words, whether you favor ACA or not, the supply side constraints are starting to bite.

The Antibiotics Crisis - "Crisis" is not too strong a word for describing what has happened to antibiotics. As our use of the drugs rises every year in the United States, bacterial resistance has risen right alongside it: there isn't a single known antibiotic to which bacteria have not become resistant. As just one example: staphylococcus aureus, or a staph infection, has become ever harder to treat. Staph bacteria can spread like mildew in a damp basement in hospitals when equipment, clothing, or even hands aren't washed and sterilized properly. (Hospitals are loath to admit it, but this happens in every hospital in the United States -- even in the very best ones.) There was a time, a long time, when staph could be knocked out almost immediately by antibiotics. These days, there's no guarantee that any antibiotic can save you. Every year, more than ninety thousand Americans die from similar infections that have become resistant to antibiotics. That stunning figure is higher than the death toll from AIDS, car accidents and prostate cancer combined.

Airborne Prions Make for 100 Percent Lethal Whiff - When sprayed into the air, prions that cause mad cow and other neurodegenerative diseases may be in one of their most lethal forms. A new study has revealed one short exposure to sprayed prions can be 100 percent lethal in mice. While the discovery doesn’t present any foreseeable public health threat, it comes as a surprise to scientists who study prion-based diseases and calls existing safety rules for laboratories and slaughterhouses into question. Most infectious diseases are spread by bacteria or viruses, which use genes to copy themselves. But prions are a third form of disease discovered in 1982, and they’re made only of misfolded proteins. The molecules resemble regular proteins found in the brain cells and other nervous tissues, but their abnormal shape converts healthy proteins into long fibrils that ultimately kill cells. Like a chain reaction, fibrils create more prions until the host dies from destroyed brain and nervous tissue. All prion infections are 100 percent fatal, and symptoms appear suddenly months or years after infection.

Aluminum: An FDA GRAS Neurotoxin - I did a bit of research on aluminum in food, soil, and water, and found that aluminum is extremely toxic to both man and plant in high doses, and 1730 ppm is a very high amount. Frank Hartman has this to say: “From the earliest days of food regulation, the use of alum (aluminum sulphate) in foods has been condemned. It is universally acknowledged as a poison in all countries. If the Bureau of Chemistry had been permitted to enforce the law … no food product in the country would have any trace of … any aluminum or saccarin. No soft drink would contain caffeine or hebromin; no bleached flour would be in interstate commerce. Our food and drugs would be wholly without adulteration … and the health of our people would be vastly improved and their life greatly extended.” Aluminum has been exempted from tesitng for safety by the FDA under a convoluted logic wherein it is classified as GRAS. (Generally Regarded As Safe.) It has never been tested by the FDA on its safety and there are NO restrictions whatever on the amount or use of aluminum.

Confirmed: Mercury Cancels Out the Health Benefits of Fish Oil - Lately, a shadow has perched itself over the fish oil industry. While no one disputes the benefits of a diet rich in omega fatty acids, Rachel wrote about a number of studies pointing to myths associated with fish oil. Most recently, a new study was released that confirms that any benefits that come from fish oil are cancelled out but excessive mercury in the system.  According to Environmental Health News, methyl mercury is transferred to people who eat the fish, which is especially concerning for pregnant women whose children are exposed while developing in the womb.  The study, published in Environmental Research, said this: "Of the five nutritional components evaluated, only the beneficial effects of DHA – as measured by the children's test scores – were negatively impacted by increased mercury exposure. The nutritional benefits of DHA were significantly reduced and then disappeared altogether at the higher exposures."

World’s first flu-resistant GM chickens ‘created’ (video) UK scientists have created the world's first genetically modified chickens that do not spread bird flu.  Writing in Science journal, the team says their work demonstrates it is possible to create a variety of GM farm animals resistant to viral diseases.  The research team inserted an artificial gene into chickens; this introduces a tiny part of the bird flu virus into chicken cells. These birds become infected but render the virus harmless to other poultry. The team believes that the genetic modification they have introduced is harmless to the chickens and to people who might eat the birds.

German dioxin scare spreads to meat - Germany's poisoned eggs scare has spread to chickens, with investigators now reporting increased levels of cancer-causing dioxin in meat.  Three chickens – out of 15 samples of chicken, turkey and pork sent to the EU Commission – showed a dioxin concentration twice as high as the legal level, it was admitted on Sunday.  The spokesman said the chicken meat had not been sold and that eating it "would not have been harmful in the short term since the contamination levels were so low".  The meat scare follows on from last week's admission that tainted eggs from chickens that ate feed contaminated with dioxins had entered the UK food chain.  Close to 5,000 farms have been shut across Germany and thousands of chickens culled after feed from a chemical company near Hamburg was tainted.

EPA Moves To Ban Pesticide That Leaves Fluoride Residue - After years of pressure from environmental groups, the Environmental Protection Agency is proposing to ban sulfuryl fluoride by 2014. Sulfuryl fluoride is used to fumigate places where food is stored, and the stuff gets sprayed on grains, dried fruit, coffee, cocoa beans and nuts.  The problem with sulfuryl fluoride is that it leaves fluoride behind as it degrades. A little fluoride is good for teeth, but too much causes staining and pitting. Although EPA says the pesticide is responsible for less than 3 percent of fluoride exposure, the government's been on a bit of a tear lately to reduce kids' exposure. It recently proposed reducing fluoride in drinking water.

Food Inflation - When food prices rise in the developed world it is an inconvenience, something to grumble about. But, when food prices rise in the developing world it can make difference between going hungry and getting enough to eat. Food inflation is volatile. Agricultural prices tend to fluctuate because demand and supply are both inelastic and supply can vary due to the weather. However, despite the usual volatility, food prices seem to be showing a strong upward movement, reaching record highs in recent years. For example, in India a booming economy has GDP expanding at 9% a year. Official inflation is around 7%, but, headline food inflation is more than double at 17.8% [1 Indian food inflation at Economist, Jan 6th 2011] The Food and Agricultural Organisation said its food price index rose to 214.7 points in Jan 2001, above the peak of 213.5 set in June 2008. 1

Food Price Break-out - This is interesting.  The FAO index we talked about yesterday has a set of subindexes for different types of food (graphed above - note that 2002-2004 = 100 on the y-axis).  If you study the 2007-2008 food price spike, it was driven most strongly by cereal and oil prices (consistent with the idea that it was, at least in part, biofuel driven).  The cereal/oil complex is high again now, but not nearly as high as in 2008.  What is much higher is meat, and especially sugar, the price of which has gone nuts lately (so to speak). Apparently, the causes are fears over the Australian sugar harvest due to the flooding there, combined with losses in the Florida sugar harvest due to unusually cold weather there in December.  So that part is weather related.

Beyond the Eternal Food Fight -Almost every time global prices surge and the media and public reach out to analysts for meaning, a decades-long food fight resumes. The latest price surge is clearcut, bringing food costs up to or past peaks reached in 2008. With populations and appetites growing, with climate changing, Is this the edge of the cliff or just another bump in a long, climbing road? The combatants:

Corn Surges to 30-Month High After USDA Cuts Supply Estimates -- Corn surged to the highest price in almost 30 months after the U.S. government lowered forecasts for domestic inventories, tightening global food supplies after adverse weather slashed harvests. Wheat also climbed. March-delivery corn rose as much as 1.7 percent to $6.42 a bushel on the Chicago Board of Trade, the highest price for a most-active contract since July 2008. The grain was at $6.3675 at 12:20 p.m. Paris time, adding to yesterday’s 4 percent jump. The U.S. Department of Agriculture cut its estimate of the country’s 2010 corn harvest, forecasting a global production deficit of 20.1 million metric tons, 17 percent more than it expected in December. Corn stocks in the U.S., the world’s largest grower, will fall to 745 million bushels (18.9 million tons) before this year’s harvest, the smallest since 1996, the USDA said

Food Prices Set To Spike In Wake Of Floods - The worst flooding in Queensland in 50 years could push up the nation's fruit and vegetable prices by as much as 20 to 30 per cent, lifting inflation and potentially dampening retail spending. Economists and the country's top supermarket chains said new, torrential flooding and rains across farmlands in southastern Queensland in the past day had damaged crops and cut roads, preventing moving goods to market. Unlike some previous natural disasters, which affected a smaller geographic area and a narrow range of foods, many vegetables are likely to be affected.

Lower corn and soybean output sends prices surging - A surprising drop in the U.S. corn and soybean crop sent grain prices surging to their highest levels in 2 1/2 years Wednesday. The price increases stoked concerns about higher food prices and tighter supplies of feedstock for food and biofuels. Wet weather and abnormally high temperatures contributed to lower U.S. corn production in 2010, according to a report from the U.S. Agriculture Department. The report also showed declines in soybean, wheat and grain sorghum production. March corn futures jumped 4 percent to settle at $6.31 a bushel. Soybean prices jumped 4.3 percent to $14.15 a bushel. The report confirmed traders' fears that historically low stockpiles of grain and oilseeds could leave little buffer in coming months as demand rises with a growing global economy. Prices reached their highest points since the financial crisis of 2008 caused a collapse in global demand for food and fuel.

Crop Prices Soar on Supply Warnings - Evidence of tightening global food supplies grew as the U.S. Agriculture Department cut its estimates for global harvests of key crops and raised some demand forecasts, adding to worries about rising food prices. Prices of corn and soybeans leapt 4% Wednesday and wheat gained 1%, continuing the broad rally in commodity prices that began in June. With yesterday's gains, prices of corn futures contracts are now up 94% from their June lows; soybeans are up 51% and wheat is up 80%. The USDA's revisions reflect the impact of dry weather in South America and floods in Australia, which have compounded supply constraints that first started to emerge in the middle of last year, when a drought in Russia ravaged that country's wheat fields. The agency also cut estimates for U.S. harvests of corn and soybeans.

Farm Belt Gets Some Help From Food Prices -  The continued rise in food prices along with weather problems among global competitors have helped one sector of the U.S. economy that is often overlooked: the Farm Belt. The benefits, however, are not equally distributed, and higher grocery bills threaten to curb U.S. consumer spending on all other items, a headwind for overall U.S. growth. Global food-commodity prices soared in recent months, and more increases are expected to come. The Department of Agriculture recently lowered its estimate of some U.S. crop totals, but for producers, the rise in prices more than makes up for the loss in volume. Exports are another reason for better times. After adjusting for prices, real U.S. agriculture exports increased 8.5% in the first 11 months of 2010, compared with the same 2009 period, according to the Commerce Department’s trade report released Thursday. As a result, the agricultural sector is reaping a bumper crop of income. Farm income has almost doubled over the year ended in November to its highest level since early 2008, according to the Bureau of Economic Analysis.

Food Prices To Soar - Food will become much more expensive in the next decade thanks to a burgeoning middle class around the world, according to a new consumer report from Deloitte Touche Tohmatsu. “Greater consumption leads to a greater strain on resources,” says the Consumer 2020 report, presented this week at the National Retail Federation in New York. “Without sustainable consumption, it will become increasingly difficult to meet the collective expectations and aspirations of the world’s new consumers.”....Last year, U.S. wheat futures prices jumped 47%, corn climbed above 50% and soybeans rose 34%. In addition to bad weather, increased Asian demand is fuelling the spike; it is predicted China will buy 60% of the global trade in soybeans in 2011-2012 twice what it purchased of the commodity just four years ago.

A Global Scare in Food Prices - World food prices are back at levels last seen during the 2008 food crisis, when riots spurred bans on food exports in the most afflicted countries. The question now is whether the price surge of late 2010 will spill into 2011.  The U.N. Food and Agriculture Organization's index of world food prices rose 32 percent in the second half of 2010, topping the peak of June 2008. Low rainfall in Russia, Kazakhstan, Europe, and South America parched crops, while floods in Canada inundated them. China's growth spurred record demand for sugar and soybeans. Excessive rain in India has damaged the onion crop, driving the wholesale price of this staple up 40 percent in the 12 months ended Dec. 18. Developed countries' grain stocks—the reserves that keep consumption steady when harvests disappoint—will probably decline 25 percent in the 2010-11 crop year, according to the FAO.  And 2011?  "Increased global trade coming out of the recession, some increased consumer demand, and higher energy and commodity costs for food production" will boost prices.  Drought in Argentina and Brazil, the next biggest corn and soybean exporters after the U.S., and developing-world growth may push prices up further this year,

World Food Prices Enter 'Danger Territory' To Reach Record High - Soaring prices of sugar, grain and oilseed drove world food prices to a record in December, surpassing the levels of 2008 when the cost of food sparked riots around the world, and prompting warnings of prices being in "danger territory". An index compiled monthly by the United Nations surpassed its previous monthly high – June 2008 – in December to reach the highest level since records began in 1990. Published by the Rome-based Food and Agriculture Organisation (FAO), the index tracks the prices of a basket of cereals, oilseeds, dairy, meat and sugar, and has risen for six consecutive months. "We are entering a danger territory." Sugar and meat prices are at record levels, while cereal prices are back at the levels last seen in 2008, when riots in Haiti killed four people and riots in Cameroon left 40 dead.

France Says Concerned By Surging Global Food Prices (Reuters) - France is worried by sharp rises in global food prices, Agriculture Minister Bruno Le Maire said on Tuesday as he called again for stricter regulation to avoid speculation on commodities leading to sharp market swings. "This is a cause for concern and I think it is urgent to get concrete answers and efficient tools" to avoid market swings, Le Maire told a news conference. European milling wheat futures almost doubled in 2010 after a series of weather events including a severe drought in Russia and floods in Australia slashed global supply. Le Maire called again for tighter regulation on commodity trading. "The fact that wheat prices rise to 140-150 euros from 110-120 euros because there is less production is just the way the market works and this is not an issue," he said. "What we do find problematic on the other hand is that based on this reality a certain number of people come and speculate and push wheat prices to more than 200 euros ($259 per tonne)."

Onions, coconuts and the politics of taste in S.Asia - Food and politics have always been closely intertwined in the developing countries of South Asia, but when national taste buds are at stake the relationship can become especially volatile. A shortage of onions in India, a dearth of coconuts in Sri Lanka and the soaring price of cooking oil in Bangladesh are currently posing a serious challenge to the governments of all three countries. The issue is more cultural than nutritional. Nobody's going to starve in India because of an onion shortage, but their food is either going to taste different or it's going to cost them more to keep it tasting the same - and that makes a lot of people unhappy. Onions are considered an indispensable ingredient of most Indian cooking, providing - together with garlic and ginger - the pungent foundation for a thousand different curries and other dishes. Similarly, the coconut - both its flesh and milk - is what gives Sri Lankan cuisine its unique flavour, tempering spices and enriching sauces.The current "onion crisis" in India has seen prices triple to nearly 80 rupees a kilogramme (88 cents a pound), triggering allegations of hoarding, official incompetence and price-ramping by traders.

Commodities can still shock - The global economy may have come a long way, but in large parts of the world, the past few weeks are a reminder that ordinary life still revolves around a handful of basic goods. And rising food prices can still all too easily bring a government to its knees. Just ask the Indian prime minister, who recently authorised emergency onion imports from Pakistan - after the domestic price of an onion trebled, in just one month. According to the FT, at least two Indian governments have been felled by the rising price of onions in the past. We also have the government of South Korea releasing emergency supplies of cabbage, pork and mackerel, among other things, to keep control of rising inflation. And the Indonesian president launching a national campaign to encourage people to grow their own chillies. As I discovered from taking part in a special segment on the GMT programme this afternoon, in Indonesia, chillies are a very, very big deal. And their price has quintupled in barely a year.

Import Prices in U.S. Rose 1.1% Last Month, Led by Higher Fuel, Food Costs - The cost of goods imported into the U.S. rose in December, led by higher prices for commodities such as fuels and food.  The 1.1 percent increase in the import-price index followed a revised 1.5 percent gain in November, Labor Department figures showed today in Washington. Economists projected a 1.2 percent gain for December, according to the median estimate in a Bloomberg News survey. Import prices climbed 0.3 percent excluding fuel, with little change in the costs of automobiles and consumer goods.  Rising demand from emerging markets like China, along with a weaker dollar, is driving up the cost of commodities. With unemployment stuck above 9 percent, companies are finding limited scope to raise finished goods prices, allowing the Federal Reserve to complete a second round of monetary easing to stimulate the economy.

Large bets fuel commodity bull run - In some parts of the world, inflationary pressure is building: once again, the commodity speculator is centre stage. Prices for corn, soyabeans and wheat have in January returned to highs that only two years ago sparked food riots in more than 30 countries from Haiti to Bangladesh. Brent crude oil, the North Sea benchmark, hit $99 a barrel on Friday, its highest level for 27 months. In America this week, regulators unveiled sweeping rules to keep big traders from wielding too much power over prices, amid fears that another food crisis could jeopardise global economic recovery. US senators warned of a “speculative bubble that threatens to drive up gas and food prices even further”.  Many commodity prices are rising for good reasons. Physical demand is rising strongly, whether for petrol (Chinese car sales rose by a third last year) or for corn (the US ethanol industry will consume 40 per cent of the nation’s crop this year). But investors are stoking the commodities bull run with some big bets. Money flows into commodities have been huge. Barclays Capital estimates $60bn was injected into commodities in 2010. Figures from the Commodity Futures Trading Commission, the US regulator, reveal very bullish bets among money managers such as hedge funds.

US ‘battle for acreage’ will shape key food markets - Guessing which crops will win the annual “battle for acreage”, using government crop statistics and historical price ratios to forecast how much land will sprout corn stalks or soyabean plants, is especially fraught this year. Stocks of corn and soybeans are set to fall to the lowest levels in more than a decade with prices at 30-month highs. Because the US exports half the world’s corn and a third of the world’s soyabeans, changes in acreage, and hence output, have a huge impact on global commodity supplies. Other crops join in the contest. These include cotton, the prices of which are at record highs of more than $1 a pound. But limits on cultivable land will this year make plantings a zero-sum game, increasing one crop only at the expense of others. Rabobank, one of the world’s leading agribusiness lenders, says this year’s battle “will be one of the fiercest in history”. Many farmers have invested in fertiliser and seed and begun selling crops forward on futures markets, making planting plans inflexible.

Immaterial Growth - The other day I referenced this post by Andy Revkin on food prices, in which he quoted some correspondence of mine. Andy had asked whether resource constraints were consistent with continuing economic growth, and what that growth would look like. My off-the-cuff response was, The way I see it, by the way, is that it’s about shifting the mix away from tons of stuff to quality. You have a small electric vehicle (powered by solar-thermal) instead of an S.U.V., but it drives itself most of the time, and has a great built-in entertainment system. You live in an apartment or townhouse instead of a McMansion, but the brain-wave controlled kitchen turns out gourmet meals on demand. And if we do the GDP accounting right, this will show up as economic growth. The point here isn’t that GDP is the sole goal of human existence; it is, rather, that even GDP is a much less mechanical number than many people imagine, that it’s quite possible for measured real GDP to rise even if the physical volume of production doesn’t change much. Alan Greenspan used to give talks about how the GDP was getting lighter; despite the source, he had a point.

Hear the one about the £250,000 fish? -  A bluefin tuna fetched a record 32.49m yen (£254,000) today at the first auction of the year at Tsukiji market in Tokyo, but the fish’s growing popularity across Asia has raised fears it will soon be fished into commercial extinction.  The 342kg tuna easily beat the previous record, set exactly 10 years ago when a 202kg fish fetched 20.2m yen.  Market officials are accustomed to seeing prices rise during the new year auction at Tsukiji, the world’s biggest fish market, but today’s winning bid was unexpected.  The joint bid reflects the growing popularity of bluefin tuna in other parts of Asia, particularly China, and adds to concerns that surging demand means its days could be numbered.

“Bring Us Sugar!” U.S. Inflation And the Rest of the World - Yesterday I set up a Google alert for “inflation,” expecting to turn up the occasional article on monetary policy and such. Instead I got deluged with stories from around the world about how rising prices are causing everything from “political pressure” to food riots. Things that seem pretty minor to Americans — like $3 gas and an extra quarter for a loaf of bread — are major problems for countries where food and fuel are dominant daily expenses.  Based on these reports, today’s inflation is mostly limited to food and energy, with food price spikes being due more to crazy weather than surging demand. So it’s not yet a systemic, generalized, global inflation, and bumper crops in the coming year would ease some of the pressure.  Still, the US is clearly exporting inflation. Because we import much of what we consume, newly created-dollars flow overseas where they pump up prices.

Dennis Gartman: Food Supply Has Just Been Materially Reduced - You probably know about the latest USDA report; it showed America’s grain stockpiles were at their lowest levels in years.  The news sent corn and soybeans to limit up on Wednesday. But do you about what’s happening overseas and how it’s driving prices, too? Australia's unprecedented floods continue to devastate the country leaving an area larger than France and Germany combined under water. And that includes key farmland. As a result, ”The winter wheat crop in Australia has been absolutely destroyed,” explains strategic investor Dennis Gartman and author of The Gartman Letter.  He goes on to say there’s no way to replant in time for this harvest. “There’s now demonstrably less wheat available to the world – because of what’s happened.” That upsets the balance of supply and demand which means prices are likely going higher. “The world needs food and food supply has now been materially reduced,” he says.

The Great Food Crisis of 2011 - As the new year begins, the price of wheat is setting an all-time high in the United Kingdom. Food riots are spreading across Algeria. Russia is importing grain to sustain its cattle herds until spring grazing begins. India is wrestling with an 18-percent annual food inflation rate, sparking protests. China is looking abroad for potentially massive quantities of wheat and corn. The Mexican government is buying corn futures to avoid unmanageable tortilla price rises. And on January 5, the U.N. Food and Agricultural organization announced that its food price index for December hit an all-time high. But whereas in years past, it's been weather that has caused a spike in commodities prices, now it's trends on both sides of the food supply/demand equation that are driving up prices. On the demand side, the culprits are population growth, rising affluence, and the use of grain to fuel cars. On the supply side: soil erosion, aquifer depletion, the loss of cropland to nonfarm uses, the diversion of irrigation water to cities, the plateauing of crop yields in agriculturally advanced countries, and -- due to climate change -- crop-withering heat waves and melting mountain glaciers and ice sheets. These climate-related trends seem destined to take a far greater toll in the future

World moves closer to food price shock - The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months. The price jump comes after the UN’s Food and Agriculture Organisation warned last week that the world could see repetition of the 2008 food crisis if prices rose further. The trend is becoming a major concern in developing countries. While officials are drawing comfort from stable rice prices, key for feeding Asia, they warn that a sustained period of high prices, especially in grains such as wheat, would hit poorer countries. Food price hikes have already led to riots in Algeria and Mozambique. “Stocks of corn and soyabean are at incredibly tight levels ... and the markets are surging to incredibly strong prices,” Chad Hart, agricultural economist at Iowa State University, said.

Food Riots Commence As The Fed’s Loose Money Policy Leads To First Violence Of 2011 We were only partially serious when we predicted that following the just released FAO data confirming food prices have just hit an all time high, we were expecting food riots to ensue imminently. Alas, as all too often happens these days, we were right. 2011 first and certainly not last rioting comes out of Algeria, where Bernanke’s genocidal policies are first to take root. From the Associated Press: “Riots over rising food prices and chronic unemployment spiraled out from Algeria’s capital on Thursday, with youths torching government buildings and shouting “Bring us Sugar!” Police helicopters circled over Algiers, and stores closed early. Security officers blocked off streets in the tense working-class neighborhood of Bab el-Oued, near the capital’s ancient Casbah, and areas outside the city were swept up in the rampages. The U.S. Embassy issued a warning to Americans in Algeria to “remain vigilant” and avoid crowds. .

MSN: Global food chain stretched to the limit - Strained by rising demand and battered by bad weather, the global food supply chain is stretched to the limit, sending prices soaring and sparking concerns about a repeat of food riots last seen three years ago.  Signs of the strain can be found from Australia to Argentina, Canada to Russia. On Thursday, Tunisia's president ordered prices on food staples slashed and indicated he won't run for re-election after deadly riots hit the North African country.  The U.N.'s fear is that the latest run-up in food prices could spark a repeat of the deadly food riots that broke out in 2008 in Haiti, Kenya and Somalia. That price spike was relatively short-lived. But Abbassian said the latest surge in food stuffs may be more sustained.

Biofuels Production and Magic Bullet Thinking - Using marginal lands not suitable for food crops, 50% of the world's liquid fuels can be produced, according to U. of Illinois scientists.  Published in the ACS journal Environmental Science and Technology, the study led by civil and environmental engineering professor Ximing Cai identified land around the globe available to produce grass crops for biofuels, with minimal impact on agriculture or the environment. Under any of the projections, Africa has more than one third, and Africa and South America have more than half of the total land available for biofuel production. Thus, the locations of biofuel production potential and demand are not consistent, given that larger fuel demands exist in the US, Europe, China, and India. The transportation of this fuel between continents will cause additional energy consumption. Of special concern is whether the world could even produce enough biofuel to meet demand without compromising food production.

A Step Toward Car Fuel From Wood Waste - A federal law requires companies that produce gasoline to blend in 250 million gallons of cellulosic ethanol this year, but the Environmental Protection Agency reduced that quota to a more realistic six million gallons.  On Thursday, however, one of the many companies working toward commercial production, the Mascoma Corporation of Lebanon, N.H., said it had reached an agreement with Valero, the nation’s largest independent oil refiner, under which Valero would take the entire output of a commercial plant that Mascoma is to break ground on this year in Kinross, Mich. It is the first such “offtake” agreement in the industry, Mascoma said. The plant is supposed to be running by 2013.

2 Environment Rules Halted in New Mexico -Acting on a campaign promise, New Mexico’s new Republican governor, Susana Martinez, has scuttled a state regulation requiring annual 3 percent cuts in greenhouse gas emissions.  A second environmental rule intended to control the discharge of waste from dairies in southern New Mexico was also dropped before publication. A different state rule that caps greenhouse gas emissions from stationary sources like power plants remains in effect for the time being.  During her campaign, Governor Martinez described the regulation of heat-trapping emissions as burdensome for industry and harmful to the state’s economy. Her swift action upon taking office comes as the newly elected governors of two other southwestern states, Arizona and California, are setting a different tone, firmly advocating greater reliance on clean energy.

GM and Chrysler, owned by the government, lobby the government - General Motors and Chrysler, the bailed-out automakers still partially owned by the government, have joined an industry coalition that this week lobbied against proposed federal rules on fuel efficiency.  The attempt to push back against regulations pursued by environmental groups follows the automakers' efforts last year in which they opposed measures in an auto safety bill, which had been supported by the Obama administration.  The notion of federally owned companies lobbying the government - at times on the opposite side of the architects of their bailout - has drawn repeated criticisms from environmental organizations, safety advocates and watchdog groups. They say the government should have used its influence to block the companies from interfering with legislation that could improve the public welfare, such as environmental controls and safety enhancements.

Mary Blackburn and 46 other congressmen have proposed a law to declare pollutants aren't pollutants ("The term 'air pollutant' shall not include carbon dioxide, water vapor, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride." ) Only a couple of days into the new Congress, Representative Mary Blackburn and at least 46 colleagues have proposed an air-pollution solution that's both simple and ingenious: Pass a law declaring that pollutants aren't pollutants. Blackburn's bill, H.R. 97, states: "The term 'air pollutant' shall not include carbon dioxide, water vapor, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride." If only it were that simple. Unfortunately, sulfur hexaflouoride isn't bound by the whims of Congress. If that particular greenhouse-gas pollutant (with a climate-disruption potential that's 22,800 times that of CO2) wants to destroy our atmosphere, then that's what sulfur hexafluoride is going to do. Blackburn's bill is just one of several in this Congress that aim to stop the Environmental Protection Agency from simply doing its job. Other proposed measures would block efforts to clean our air for two years and take away EPA funding for enforcement of certain clean-air safeguards.

The Lost Years for Alternative Energy? - Oil and gasoline prices, low since 2008, are projected to rise again, rapidly returning our oil addiction to the national spotlight. Analysts say that oil prices are heading toward $100 a barrel, and former Shell Oil chief Carl Larry warns that we could see $5 a gallon gas by 2012. Inevitably, the price increases will inspire calls to reduce our dependence on oil, and Congress will consider some legislation to do just that. But as we try to make progress on oil alternatives, we need to bear in mind the lessons of low gas prices. Otherwise, we are doomed to repeat the same debilitating cycle of energy politics we’ve been trapped in for years. Here’s how that cycle goes: High oil prices make energy alternatives a top political priority, as they did before the 2008 price drop, but the urgency is suddenly forgotten when these prices collapse. That’s not just short-sighted — it’s bad policy. Unless we can finally extend our national attention span beyond the latest price rise, the inevitable 2011 push for alternative energy isn’t going to be any more fruitful than the last few times we tried.

The Hill: Major bank HSBC calls US 'significant outlier' on greenhouse-gas action - One of the world’s largest banks said Thursday there is “positive momentum” in 2011 for climate change-related investments. But the bank says there’s one exception to that rule: the United States. The global research arm of HSBC, the world’s sixth-largest bank, said Thursday in an investment note that the uncertainty that marked climate investments in 2010 will be replaced this year by optimism.  But HSBC warns that the United States is a “significant outlier” in the world’s move toward policies that reduce greenhouse-gas emissions and encourage investment in low-carbon energy technology.

Renewable Energy Standards: Less Effective, More Costly, but Politically Preferred to Cap-and-Trade? - The new Congress is beginning to consider various alternative energy and climate policies in the wake of last year’s collapse in the U.S. Senate of consideration of a meaningful, economy-wide CO2 cap-and-trade scheme.  Among the options receiving attention are various types of renewable portfolio standards, also known as renewable electricity standards or clean energy standards, depending upon their specific design.  These approaches, which focus exclusively on one sector of the economy, would be less effective than a comprehensive cap-and-trade approach, would be more costly per unit of what is achieved, and yet – ironically – appear to be much more attractive to some politicians who strenuously opposed cap-and-trade. In an op-ed which appeared on November 24th in The Huffington Post (click here), Richard Schmalensee and I reflected on this irony.  Rather than summarize (or expand on) our op-ed, I simply re-produce it below as it was published by The Huffington Post, with some hyperlinks added for interested readers.

Major, Bizarre Fish Die-Off Along Lakefront -  A bizarre scene is evolving on the Chicago lakefront, with Canada geese and mallard ducks gulping down dead or dying gizzard shad. A major die-off of what appears to be the 2010 class is happening in Chicago harbors. Thousands, perhaps far more than that, of dead gizzard shad in the 3- to 5-inch range are frozen in the ice of Chicago harbors or floating around in open patches of water.  Canada geese and mallards normally don’t eat fish, but, Greenberg said, “They are opportunistic.”

A Marshall Plan for Nature: How to Protect Endangered Species from Climate Change - If your house were on fire, what would you save? Where would you even start? What if not just your house, but your whole planet was on fire? That is the scenario we face today. Climate change has arrived. No longer clouds gathering in the distance, the firestorm is here now–melting titanic glaciers, drying mighty rivers and setting deserts ablaze. With our new report, It's Getting Hot Out There: The Top 10 Places to Save for Endangered Species in a Warming World, the Endangered Species Coalition and our member groups attempt to answer the question: To save endangered species from climate change, where do we begin?

Globe’s coral reefs suffer second worst bleaching on record during 2010 - Record warm ocean temperatures across much of Earth’s tropical oceans during the summer of 2010 created the second worst year globally for coral-killing bleaching episodes. The warm waters, fueled in part by the El Niño phenomena, caused the most coral bleaching since 1998, when 16 percent of the world’s reefs were killed off. “Clearly, we are on track for this to be the second worst (bleaching) on record,” NOAA coral expert Mark Eakin in an interview last month. “All we’re waiting on now is the body count.” The summer 2010 bleaching episodes were worst in Southeast Asia, where El Niño warming of the tropical ocean waters during the first half of the year was significant. In Indonesia’s Aceh province, 80% of the bleached corals died, and Malaysia closed several popular dive sites after nearly all the coral were damaged by bleaching. However, in the Caribbean’s Virgin Islands, coral bleaching was not as severe as experienced in 2005, according to National Park Service fisheries biologist Jeff Miller.

Floodwater threatens overwhelming damage to Great Barrier Reef - Australia's great Barrier Reef, one of the ecological wonders of the world, may also be severely affected by the Queensland floods. The pristine waters of the vast 1,400-mile reef system, home to thousands of exotic and often endangered marine species, from whales and dolphins, seabirds and tropical fish to tiny coral polyps, are threatened by huge volumes of polluted floodwater flowing out from the coast.  Already the brown flood "plume" has been detected offshore over a huge expanse of sea, stretching more than 1,000 miles from Cooktown in northern Queensland to Grafton, south of Brisbane in northern New South Wales. But it is in the centre of this area – the Barrier Reef's southern sector – that the threat is greatest.

Last Year: The Warmest On Record (Again) - Every January for the past decade, you've heard the same basic news story: It announces that last year was one of the warmest years on the planet since 1880, when record-keeping began in earnest. Well, it's January, and yes, last year was one of the warmest years on record since 1880. In fact, 2010 ties the record with 2005 as the hottest year in the historical record. . "This is the 34th consecutive year with temperatures above the 20th century average." In fact, you need to go back to 1976 to find a year with below-average global temperatures, as measured on thermometers around the world. But what about rain and snow? "Preciptiation is highly variable from place to place, so there were lots of dry areas, lots of wet areas. But when we average those out, it was also the wettest year on record," Arndt said.

Breaking: Both NOAA and NASA data show 2010 tied with 2005 for hottest year on record - 2010 was also the wettest year on record - NASA has just released its analysis of the 2010 temperature data here, which finds: Global surface temperatures in 2010 tied 2005 as the warmest on record…. To measure climate change, scientists look at long-term trends. The temperature trend, including data from 2010, shows the climate has warmed by approximately 0.36°F per decade since the late 1970s. “If the warming trend continues, as is expected, if greenhouse gases continue to increase, the 2010 record will not stand for long,” said James Hansen, the director of GISS. The record temperature in 2010 is particularly noteworthy, because the last half of the year was marked by a transition to strong La Niña conditions, which bring cool sea surface temperatures to the eastern tropical Pacific Ocean. These records are also especially impressive because we’ve been in “the deepest solar minimum in nearly a century.” 

2010 Hottest Year on Record: The Graph That Should Be on the Front Page of Every Newspaper  - Climate change is worsening, fast. The National Climate Data Center of the National Oceanic and Atmospheric Administration has just announced that for the entire planet, 2010 is the hottest year on record, tied with 2005. And the period 2001 to 2010 is the hottest decade on record for the globe. The actual data are here. This graph and this information should be on the front page of every newspaper in the world. Every Congressional representative should see it.

Half of Worlds Small Glaciers Will Be Entirely Melted by 2100 - But There's Good News For The Himalayas - A new study in Nature Geoscience examining glaciers melting due to climate change forecasts tough times for the world's small glaciers, but offers a more hopeful outlook for Himalayan glaciers. The research, the most comprehensive of its kind carried out so far, shows that about half of glaciers under 5 square kilometers in area will disappear entirely by 2100, in the process contributing during that time period the same amount of water to global sea level rise as the melting of ice sheets in Antarctica and Greenland, about 12 centimeters. Glaciers of this size comprise about 40% of the world's total glaciers. Report co-author Valentina Radic, from the University of British Columbia, comments, 'While the overall sea level increase projections in our study are on par with IPCC studies, our results are more detailed and regionally resolved. This allows us to get a better picture of projected regional ice volume change and potential impacts on local water supplies, and changes in glacier size distribution' (Science Codex). As for regional impact of climate change on glaciers, the research projects by 2100 a decline of 50-90% for Europe's glaciers, 45-90% in the Caucasus Mountains, and 60-85% for New Zealand.

Rising Temperatures, Disappearing Coastlines - Interactive - Greenland and Antarctica hold the world's largest reservoirs of fresh water, locked in their giant ice sheets. Global warming may cause large parts of these ices sheets to melt within centuries — changing the shape of coastlines around the world.

Advancing Alaskan Glacier Holds Clues to Global Sea Level Rise - Scientists aim to find out why an Alaska glacier is ignoring all climate signals as it advances to the sea--and what that means for sea levels around the world. Earlier this summer the Jakobshavn shed a 2.7-square-mile chunk of ice – about twice the size of New York's Central Park – after a mild winter that saw no ice form in the surrounding bay.  "What we learned [in Alaska] with tidewater glaciers to some degree we can apply to Greenland and vice versa," said Motyka. Increasingly, it appears rising ocean temperatures are driving tidewater glacier retreats in Greenland and Antarctica. "I would call that the smoking gun," Motyka said. "This could indeed be the oceanic process by which [Jakobshavn] became unstable."

Northern Hemisphere warming rates: More than you may have heard. During the last 50 years, large parts of Europe warmed at 2-3 times the "average" global rate - Winter is the time of year when denials of global warming seem to come from all sides.  It is therefore a useful time to determine just what our current rates of warming are. The very thorough Skeptical Science post, "Assessing global surface temperature reconstructions," put the average global warming trend at 0.14-0.16 °C/decade. This rate is typical of the linear trend of modern temperature records, which in some cases go back to 1880.  And some skeptics take comfort in this rate, claiming that it is nothing to worry about.  But is this rate of change an accurate description of what we are currently seeing? A more in-depth look at surface temperature trends reveals obvious differences in hemispheric warming rates.

Sunrise arrives two days early in Greenland - Scientists claim to have discovered more evidence of global warming after the sun rose two days early in Greenland, apparently because melting glaciers have lowered the horizon.  The polar night usually ends on January 13, but this year residents of Ilulissat, the third largest settlement in Greenland, were surprised to see dawn arrive just before 1pm on January 11 after six weeks of perpetual darkness.  Astronomers have ruled out the possibility of the early dawn being a result of a shift of the earth's axis and Thomas Posch, of the Institute for Astronomy of the University of Vienna, says a change in the horizon is "by far the most obvious explanation".

The sun rises two days early in Greenland, sparking fears that climate change is accelerating - The sun over Greenland has risen two days early, baffling scientists and sparking fears that Arctic icecaps are melting faster than previously thought. Experts say the sun should have risen over the Arctic nation's most westerly town, Ilulissat, yesterday, ending a month-and-a-half of winter darkness. But for the first time in history light began creeping over the horizon at around 1pm on Tuesday - 48 hours ahead of the usual date of 13 January.The mysterious sunrise has confused scientists, although it is believed the most likely explanation is that it is down to the lower height of melting icecaps allowing the sun's light to penetrate through earlier.

Greenland close to unavoidable meltdown - The result of an international scientific paper, based on data and models from the Danish Meteorological Institute, is suggesting that an eventual meltdown of Greenland’s ice-cap is almost unavoidable.  According to the model used in a paper published in the Journal of Hydrometeorology, irrespective of how much CO2 emissions are limited, Greenland will reach a point of no return in 2040 at the latest.  “This is a very worrying result as it shows that melting can go a lot quicker than we normally think,” says one of the report’s co-authors, Jens Hesselbjerg Christensen.  The report, entitled “Greenland Ice Sheet Surface Mass-Balance Modeling in a 131-Yr Perspective, 1950–2080” and prepared by research centres at the University of Alaska Fairbanks, the University of Colorado and the Danish Meteorological Institute says that the ice-cap mass balance: “was close to equilibrium during the relatively cold 1970s and 1980s and lost mass rapidly as the climate warmed in the 1990s and 2000s with no indication of deceleration”.

From The Oil Drum: comments on permafrost and methane - It's very simple science. We know sea floor clathrates are contained by pressure of the water column and pressure. We know the pressure portion is very low on the Siberian shelf because it is so shallow. We thus must conclude temperatures need to be lower to keep it contained, but at least some clathrates are now within 1C of melting, so that lack of pressure likely puts us into he melt zone. We further know pre-industrial CH4 was about .7 ppb and are now at 1.8 ppb. You will note that is a much greater proportional change than 285 ppm to 390 ppm of CO2. Given CH4 also has a very short residence time in the atmosphere, vs. CO2's long residence time, where is it all coming from and why is it overwhelming pre-industtrial levels so? But we also know CH4 levels above and below the water line and in the air above it, and even signifcantly above it, are many times what they should be. The additional detail in that power point should frighten you. It does me.

Science stunner: On our current emissions path, CO2 levels in 2100 will hit levels last seen when the Earth was 29 °F (16 °C) hotter. Paleoclimate data suggests CO2 "may have at least twice the effect on global temperatures than currently projected by computer models" - Paleoclimate data suggests CO2 "may have at least twice the effect on global temperatures than currently projected by computer models" ClimateProgress readers know that the paleoclimate data is considerably more worrisome than the models (see Hansen: ‘Long-term’ climate sensitivity of 6 °C for doubled CO2).  That’s mainly because the vast majority of the models largely ignore key amplifying carbon-cycle feedbacks, such as the methane emissions from melting tundra (see Are Scientists Underestimating Climate Change?). Science has just published an important review and analysis of “real world” paleoclimate data in “Lessons from Earth’s Past” (subs. req’d) by National Center for Atmospheric Research (NCAR) scientist Jeffrey Kiehl.  The NCAR release is here: “Earth’s hot past could be prologue to future climate.” 
Jeffrey Kiehl: if carbon dioxide emissions continue at their current rate through the end of this century, atmospheric concentrations of the greenhouse gas will reach levels that last existed about 30-100 million years ago, when global temperatures averaged about 29 °F (16 °C) above pre-industrial levels - –-The magnitude of climate change during Earth’s deep past suggests that future temperatures may eventually rise far more than projected if society continues its pace of emitting greenhouse gases, a new analysis concludes. The study, by National Center for Atmospheric Research (NCAR) scientist Jeffrey Kiehl, will appear as a “Perspectives” piece in this week’s issue of the journal Science. Building on recent research, the study examines the relationship between global temperatures and high levels of carbon dioxide in the atmosphere tens of millions of years ago. It warns that, if carbon dioxide emissions continue at their current rate through the end of this century, atmospheric concentrations of the greenhouse gas will reach levels that last existed about 30-100 million years ago, when global temperatures averaged about 29 °F (16 °C) above pre-industrial levels.

NOAA: Warming Arctic unlikely to return to how it was— New observations this year about snow, ice and temperatures support the conclusion that the Arctic is unlikely to return to the conditions known in the 20th century — and that's likely to affect the weather in the lower 48 United States. That was this year's key message in the annual update of the National Oceanic and Atmospheric Administration's Arctic report card, released Thursday. The key points, a video and links to scientific reports by 69 scientists from eight countries are available from NOAA online.The report card is one way that scientists share information about trends they're seeing in the Arctic as a result of the region's warming cycle: Higher air temperatures melt snow and ice, leaving the ocean and land darker, and they then absorb more solar energy, causing more heating and melting.

Canadian Study Sees Global Warming for Centuries - Carbon dioxide already emitted into the atmosphere will keep contributing to global warming for centuries, eventually causing a huge Antarctic ice sheet to collapse and lift sea levels, Canadian scientists said on Sunday. Even the complete abandonment of fossil fuels and halt to emissions cannot prevent devastating ocean warming in Antarctica as well as increasing desertification in North Africa, the research finds. Even so, many of the negative consequences in the Northern Hemisphere, such as loss of Arctic sea ice, are reversible. That means global efforts to cut greenhouse gases are not a waste of effort and money, said Shawn Marshall, a University of Calgary geography professor and one of the study's authors. "But there are some parts of the climate that have a lot of inertia and it will take many centuries before they start to reverse,"

Climate Change May Continue for at Least a Millennium - Climate change may be unstoppable for the next millennium. Rising carbon-dioxide levels in the atmosphere will affect the climate for at least another 1,000 years, based on a simulation by researchers at Canada’s University of Victoria and University of Calgary. That will cause the West Antarctic ice sheet to collapse by the year 3000 and raise sea levels by 4 meters (13 feet), it showed. The study, published online in Nature Geoscience, is the first full climate model to make predictions so far into the future, the Calgary university said in a Jan. 9 statement. Researchers studied the length of time needed to reverse climate-change trends if the world stopped using fossil fuels and putting CO2 in the atmosphere as of 2010 and 2100. “Ongoing regional changes in temperature and precipitation are significant following a complete cessation of carbon-dioxide emissions in 2100, despite almost constant global mean temperatures,”

Pentagon Must ‘Buy American,’ Barring Chinese Solar Panels - The military authorization law signed by President Obama on Friday contains a little-noticed “Buy American” provision for the Defense Department purchases of solar panels — a provision that is likely to dismay Chinese officials as President Hu Jintao prepares to visit the United States next week..China has emerged as the world’s dominant producer of solar panels in the last two years. It accounted for at least half the world’s production last year, and its market share is rising rapidly. The United States accounts for $1.6 billion of the world’s $29 billion market for solar panels; market analyses typically have not broken out military sales separately.

Brazil landslides death toll rises - The death toll from some of the deadliest landslides in Brazilian history has continued to rise with at least 482 confirmed victims. Nearly all of those killed were buried alive when avalanches of mud and debris smashed down on to their homes in the early hours of Wednesday. At least 13,000 people have been left homeless by the disaster, which focused on three towns in the mountains north of Rio de Janeiro. "It is a very dramatic moment. The scenes are very powerful, the suffering is very visible and the risk is very serious," Brazil's president, Dilma Rousseff, said after a brief visit to the affected region. Teresópolis, a bucolic tourist town about 60 miles north of Rio, was one of the hardest-hit areas: by tonight, at least 200 deaths had been confirmed. Local authorities were preparing to erect floodlights in the cemetery in order to hold round-the-clock burials. The town's streets filled with pick-up trucks packed with fleeing residents, carrying mattresses, duvets and pets.

Brazil death toll rises as rescuers battle floods (Reuters) – The death toll from massive flooding and landslides in Brazil topped 500 on Friday as renewed rainfall threatened to complicate efforts by rescue teams to reach survivors trapped in isolated areas. In one of the country's worst natural disasters, rivers of mud tore through towns in the mountainous Serrana region outside Rio de Janeiro, leveling houses, throwing cars atop buildings and leaving thousands of people seeking shelter. "The rain did not stop at dawn and is continuing in the morning, which is making the rescue efforts more difficult," said Lieutenant Rubens Placido, a fireman in the hard-hit town of Nova Friburgo. "The number of deaths is going to rise quite a bit. There are still a lot of people buried." The flooding killed at least 529 people, according to local and state authorities, but rescuers are uncovering more victims buried under wrecked homes and toppled buildings. More than 13,500 people have been left homeless.

Jeff Masters: At least 541 dead in Brazilian floods: Brazil's deadliest natural disaster in history - Torrential rains inundated a heavily populated, steep-sloped area about 40 miles north of Rio de Janeiro on Tuesday and Wednesday, triggering flash floods and mudslides that have claimed at least 541 lives. Rainfall amounts of approximately 300 mm (12 inches) fell in just a few hours in the hardest-hit regions, Teresopolis and Nova Friburgo. Many more people are missing, and the death toll is expected to go much higher once rescuers reach remote villages that have been cut off from communications. The death toll makes the January 2011 floods Brazil's worst single-day natural disaster in its history. Brazil suffers hundreds of deaths each year due to flooding and mudslides, but the past 12 months have been particularly devastating. Flooding and landslides near Rio in April last year killed 246 people and did about $13 billion in damage, and at least 85 people perished last January during a similar event.

Queensland Under Water - interactive from november-present - Brisbane Times

Jeff Masters: Deadly flash flood hits Australia, rainfall in Queensland most ever recorded in 111 years, since records began - Flood-weary Queensland, Australia, suffered a new flooding disaster yesterday when freak rains of six inches fell in just 30 minutes near Toowoomba. The resulting flash flood killed nine people and left 59 missing. The flood waters poured into the Brisbane River, causing it to overflow, and significant flooding of low-lying areas in Brisbane, Australia's third largest city with some 2 million people, is expected on Thursday.  As I discussed last week, Australia had its wettest spring (September-November) since records began 111 years ago, with some sections of coastal Queensland receiving over 4 feet (1200 mm) of rain. Rainfall in Queensland and all of eastern Australia in December was the greatest on record, and the year 2010 was the rainiest year on record for Queensland. The ocean waters surrounding Australia were the warmest on record during 2010, and these exceptionally warm waters allowed much higher amounts of water vapor to evaporate into the atmosphere, helping fuel the heavy rains.

Toowoomba and Queensland floods - This astonishing video was shot on Monday as flash flooding hit the Queensland town of Toowoomba after a reported 140mm of rain fell in only 30 minutes. 12 people are confirmed to have been killed in the region, and 90 more are missing according to state premier Anna Bligh. Floodwaters are rising in the state capital Brisbane, with the central business district closed down. Flood levels are expected to top out above the levels reached in 1974 — the previous record holder. I know that Hot Topic‘s readers will join me in wishing the people of Queensland well. This ABC page has a list of relief funds to which you can donate. I can confirm that Skeptical Science’s John Cook is OK, and not expecting any direct impacts. We’ll be talking to him about the floods in the next Climate Show, scheduled for recording next week.

Deadly flash flood hits Australia after six inches of rain fell in just 30 minutes -- Flood-weary Queensland, Australia suffered a new flooding disaster yesterday when freak rains of six inches fell in just 30 minutes near Toowoomba. The resulting flash flood killed nine people and left 59 missing. The flood waters poured into the Brisbane River, causing it to overflow, and significant flooding of low-lying areas in Brisbane, Australia’s third largest city with some 2 million people, is expected on Thursday.Remarkable 5-minute YouTube video showing the sad fate of a row of parked cars when a nearby small stream experiences a flash flood, sweeping away dozens of the cars. A note to the wise: Two minutes into the video, we see a man enter the flash flood to save his car. He is successful, but his actions were extremely risky–most flash flood deaths occur when cars with people inside get swept away. I would not have attempted to save my car in that situation.

Floods threaten Australia's third biggest city - (Reuters) – Residents in Australia's third largest city, Brisbane, sandbagged their homes against rising waters Monday as torrential rain worsened floods that have paralyzed the coal industry in the northeast and now threaten tourism. Four people were killed in and around Toowoomba, a major town west of Brisbane, and others were missing, Queensland state premier Anna Bligh told the Australian Associated Press "Mother Nature has unleashed something shocking out of the Toowoomba region," she said, describing it as an "extraordinary deluge that almost came out of nowhere." The worst floods in 50 years have at times covered an area the size of France and Germany combined in Queensland state. At least six people have been killed while dozens of towns have been isolated or partially submerged. More monsoon rains are expected all week.

Flooded Brisbane 'like a war zone' - The devastating floods that have killed at least 19 people in Queensland have left parts of Brisbane looking "like a war zone" that will require years of expensive reconstruction, the state premier has said. Although the waters that have pummelled Australia's third-largest city this week peaked below the disastrous levels predicted, the torrent has flooded 12,000 homes in the city and left 118,000 buildings without power. Officials have warned there could be further severe flooding in the coming weeks, with two months of the wet season ahead and already overflowing dams needing seven days to fall to normal levels to cope with more heavy rain. The premier, Anna Bligh, described the flood crisis as "the worst natural disaster in our [state] history and possibly in the history of our nation", adding that clean-up and rebuilding costs could reach A$5bn (£3.1bn).

Flood-Powered Currents, Drifting Fridges, Debris Shut Queensland Harbors - Brisbane, Australia’s third-busiest container port, is among export harbors for coal, cotton, explosives and oil products that remain shut by Queensland’s “raging floodwaters.”  Currents swelled by floods and carrying debris that include “everything from pontoons, to boats, to bins and fridges,” forced the closure of the Port of Brisbane on Jan. 11, Karen Weatherburn, a spokeswoman, said by telephone today. Ship movements at the harbor, 24 kilometers (15 miles) from the central business district of Australia’s third-largest city, won’t resume before Jan. 16.  Six weeks of heavy rain and flooding across the state has killed at least 26 people and left a disaster area bigger than Texas and California combined. The port of Gladstone, about 450 kilometers north of Brisbane, will resume coal loading on Jan. 15 after a rail line affected by the deluge was reopened, Chief Executive Officer Leo Zussino said today.

Floods Spread Across Australia as Brisbane Residents Clean Up - Emergency services are evacuating flood-threatened towns in Australia’s Victoria state as Brisbane cleans up after the city’s worst flooding since 1974 inundated more than 20,000 properties.   In Brisbane, the capital of northeastern Queensland state, thousands of volunteers armed with brooms and buckets are helping clear streets and houses of the thick brown mud that deluged the city when the Brisbane River burst its banks earlier this week.  The coal- and sugar-producing state, where at least 27 people have been killed in floods since the end of November, has declared a disaster area bigger than Texas and California combined. The Queensland deluge may cost insurers and reinsurers worldwide as much as $6 billion in what might be Australia’s costliest disaster.  Queensland police revised the number of people missing from the floods to 28 from 53.

Scientists see climate change link to Australian floods… (Reuters) – Climate change has likely intensified the monsoon rains that have triggered record floods in Australia's Queensland state, scientists said on Wednesday, with several months of heavy rain and storms still to come.  But while scientists say a warmer world is predicted to lead to more intense droughts and floods, it wasn't yet possible to say if climate change would trigger stronger La Nina and El Nino weather patterns that can cause weather chaos across the globe. "I think people will end up concluding that at least some of the intensity of the monsoon in Queensland can be attributed to climate change," said Matthew England of the Climate Change Research Center at the University of New South Wales in Sydney. "The waters off Australia are the warmest ever measured and those waters provide moisture to the atmosphere for the Queensland and northern Australia monsoon," he told Reuters.

All the wrong stars aligned for perfect storms - THE strong La Nina pattern taking moisture to north-eastern Australia has been exaggerated by record high ocean temperatures, a combination not seen on this scale since the deadly Brisbane flood of 1974 which claimed at least 14 lives. And while Queensland's already saturated catchments are lashed with heavy rain, south-western Western Australia is experiencing an extreme dry - and bushfires.  But the wild extremes being experienced by the continent were in keeping with scientists' forecasts of more flooding associated with increased heavy rain and more droughts as a result of high temperatures and more evaporation. ''On some measures it's the strongest La Nina in recorded history … [but] we also have record-high ocean temperatures in northern Australia which means more moisture evaporating into the air,'' he said. ''And that means lots of heavy rain.''

Extreme Flooding Around The World Caused by Climate Change, Scientists Say (ABC video) The pictures today from around the world of dramatic rooftop rescues from raging waters, makes it seem as though natural disasters are becoming an everyday occurrence. But they're not all that natural; climate scientists say man-made global warming is the sudden force behind the forces of nature.  In the mountains of southeast Brazil, more than 340 people have died after fierce mudslides swept away homes. At least 50 are still missing and victims continue to search for loved ones. On the other side of the globe, floods in Queensland, Australia have ravaged an area the size of France and Germany combined..  And in Sri Lanka, officials say flooding there has affected more than a million people, and the death toll has risen to 23. Sewage lines and holding tanks have overflowed in the floods, and a spokesperson for the health ministry there said officials are concerned about waterborne diseases like typhoid and diarrhea.  "If left unchecked, climate warming will continue so the things that we're having hints of now, foretastes of now, will come stronger,"

Global warming will cause further extreme weather patterns, climate change chief says - ONE of Julia Gillard's top climate change advisers has warned that global warming may cause more extreme rain events.  Climate change committee member Professor Will Steffen, the executive director of the ANU Climate Change Institute, said there was no direct link between global warming and the tragic flash flooding in Toowoomba which has killed at least nine people in southeast Queensland. But he told The Australian Online that climate change would lead to heavier, more frequent rain. "As the climate warms, there is more water vapour in the atmosphere," he told The Australian Online. "This means that there is a probability that there will more intense rainfall events around the world. There is some evidence that we can see them now. I think the place where the best data is the US."

Qld floods 'linked to climate change'… Climate change has likely intensified the monsoon rains that have triggered record floods in Australia's Queensland state, scientists said, with several months of heavy rain and storms still to come. But while scientists say a warmer world is predicted to lead to more intense droughts and floods, it wasn't yet possible to say if climate change would trigger stronger La Nina and El Nino weather patterns that can cause weather chaos across the globe. "I think people will end up concluding that at least some of the intensity of the monsoon in Queensland can be attributed to climate change," said Matthew England of the Climate Change Research Center at the University of New South Wales in Sydney. "The waters off Australia are the warmest ever measured and those waters provide moisture to the atmosphere for the Queensland and northern Australia monsoon," he told Reuters.

Coal production grinds to a halt because of Queensland floods - COALMINES and rail infrastructure in Queensland continue to shut down as the flooding worsens, prompting US producers to fill the vacuum.  New Hope Corporation is the latest miner to announce it has suspended coal production after its thermal coalmines in southeast Queensland were affected by the adverse weather. The continued heavy rainfall has affected the entire coal chain. QR National announced yesterday that it had stopped rail services to mines west of Brisbane because of the flooding and the closure of the rail line on the Toowoomba Range after a landslide on Monday night. "The network operator, Queensland Rail, has advised that it had been unable to assess the extent of damage to the railway caused by the landslide on the range. However, early indications are that the impact may be significant," QR National said.

Steel Output in India May Drop on Australian Floods -- Tata Steel Ltd., Steel Authority of India Ltd. and local rivals may cut output and raise prices as floods in Australia disrupt coking coal supplies and boost costs, RBS Equities India Ltd. and Macquarie Group Ltd. said. Stoppages in coal shipments from Queensland state under force majeure clauses are likely to create a shortage in the April-to-June quarter, forcing steelmakers to lower production, RBS Equities analyst Rahul Jain said, without giving estimates. Steelmakers may also raise prices to cover cost increases, said Rakesh Arora, an analyst at Macquarie Group Ltd. in Mumbai. The worst floods in 50 years in Australia’s largest coal exporting region is creating a raw material shortage in India, where steel demand is forecast to grow 10 percent in the year to March 31. “There will be a global shortage of coking coal as no ships are moving from Queensland,”

Why coal is the fuel of the future - The idea behind 'clean coal' is that you find ways to minimise or capture the carbon dioxide – the key 'greenhouse gas' – given off when burning coal. Either you burn the coal in such a way that much of the carbon dioxide remains in the ground ('gasification'), or you catch it then bury it ('sequestration') after burning the coal.  But if the problem is that coal is dirty, why can't we just stop using it? Because, as Fallows points out, it's impossible to picture an energy future that doesn't involve coal.  Why not? Because for one thing, it's a lot more geopolitically convenient than oil. The US has the most coal reserves in the world. Russia, China and India are next. Each of those nations is a leading economic and political power. Each has every reason to favour a secure, indigenous energy source over any other.  We're also much further away from 'peak' coal than we are from 'peak' oil. And for another, coal simply provides far more energy than most other sources. Coal-burning plants provide almost half of the electricity consumed in the US. Natural gas is a distant second at around 23%, nuclear is

EPA vetoes Arch Coal Company's West Virginian mountain-top removal permit for its Spruce Mine - Yesterday, the Environmental Protection Agency vetoed the largest mountaintop removal mining permit in the history of West Virginia, and one that has been at the heart of these new coalfield wars for a decade. As usual, Ken Ward of the Charleston Gazette is the go-to guy here: The move is part of an Obama administration crackdown aimed at reducing the effects of mountaintop removal coal-mining on the environment and on coalfield communities in Appalachian — impacts that scientists are increasingly finding to be pervasive and irreversible... ...EPA officials this morning were alerting West Virginia's congressional delegation to their action, and undoubtedly preparing for a huge backlash from the mining industry and its friends among coalfield political leaders. In making its decision to veto the U.S. Army Corps of Engineers' approval of the 2,300-acre mine proposed for the Blair area of Logan County, EPA noted that it reviewed more than 50,000 public comments and held a major public hearing in West Virginia

EPA Blasted as It Revokes Mine's Permit - WSJ - The Environmental Protection Agency, in an unusual move, revoked a key permit for one of the largest proposed mountaintop-removal coal-mining projects in Appalachia, drawing cheers from environmentalists and protests from business groups worried their projects could be next.  The decision to revoke the permit for Arch Coal Inc.'s Spruce Mine No. 1 in West Virginia's rural Logan County marks the first time the EPA has withdrawn a water permit for a mining project that had previously been issued.  The EPA said Thursday it revoked the permit, issued by the Army Corps of Engineers in 2007, because it concluded new scientific research on mountaintop-removal mining since then indicated the potential harm to streams and watershed areas surrounding the Spruce project could be significant.  A spokeswoman for Arch said the company was "shocked and dismayed" by the agency's decision, which it said would block an additional $250 million investment that would create 250 jobs. The company said it would appeal to the courts.

W.Va. Governor Urges State to Embrace Drilling - Acting Gov. Earl Ray Tomblin promised Wednesday night to continue to fight to protect the coal industry and urged state residents to embrace increased natural gas drilling as part of a broader energy production agenda.   Tomblin did not take advantage of his State of the State address to promote his own Department of Environmental Protection's proposal for wholesale changes in the way drilling is regulated. And the acting governor vowed he would "aggressively pursue" a lawsuit to block Obama administration plans to limit mountaintop removal mining.  Tomblin's speech drew strong support from lobbyists for the coal and gas industries, but left environmentalists concerned about the direction he'll take West Virginia

Peak Coal: the Olduvai perspective - Peak Coal. Some folks have begun eagerly researching this topic and writing about its timing, now that talk of Peak Oil is all around. The different outlooks on how and when the peak will occur are disparate, ranging from next year to a time many decades in the future. This post tries to view this debate in a different, wider perspective, and deals with the following issues:

    • Applying the Hubbert Method to Coal;
    • Looking at Ultimate Reserves for Coal;
    • Coal and its place in the Olduvai picture;
    • Implications for stakeholders;

Louisiana officials: Parts of coastline still heavily oiled - video - More than eight months after an oil rig explosion launched the biggest oil disaster in U.S. history, Louisiana officials say they're still finding thick layers of oil along parts of the state's coastline. On Friday, Robert Barham, secretary of Louisiana Department of Wildlife and Fisheries, joined Nungesser on a tour of portion of Louisiana's coastline still heavily oiled by the BP Deepwater Horizon oil spill, according to a statement from the wildlife and fisheries department.  "It has been eight months since the Deepwater Horizon oil rig explosion, and five months since the well was capped. While workers along the coast dedicated themselves to cleaning up our shores there is still so much to be done," Barham said in the statement.

BP, Halliburton Likely to Face Criminal Charges Over Spill…In light of the presidential report on the Gulf oil spill that's due to be released next week, speculation is running rampant that the companies involved -- BP, Halliburton, and Transocean -- could soon be facing criminal charges.  It seems only fair that the companies that caused the largest offshore environmental disaster in US history should be made to face trial, though no individual is likely to do any time as a result. Here's the story, from the Associated PressMonths of investigation by a presidential commission and other panels reinforce the likelihood that companies involved in the Gulf oil spill will be slapped with criminal charges that could add tens of billions of dollars to the huge fines they already face, legal experts said Thursday ...

Norway Oil Output May Drop 6% in 2011, Gas Rise 2.5%, Oil Directorate Says - Norwegian oil production will fall 6 percent this year, its 11th annual decline, as the world’s seventh-largest crude exporter struggles to maintain output after 40 years of pumping from aging North Sea fields.  Production will fall to 98.3 million cubic meters in 2011, or 1.7 million barrels a day, from 104.4 million cubic meters in 2010, the Stavanger-based Norwegian Petroleum Directorate said today. Gas output is expected to rise to 109.1 billion cubic meters from 106.4 billion cubic meters, the agency said.  “The fact that the companies on the Norwegian shelf are not able to achieve a maximum exploitation of our fields poses a challenge,”  “Although our recovery rate is among the best in the world, we are still not satisfied. If we manage to recover just 1 percent more, this would mean revenue in the hundreds of billions for Norway.”

Secrecy By Complexity: Obfuscation in Energy Data, and The Primacy of Crude Oil - The dramatic fall of Mexican oil production, and its largest field Cantarell, is often cited as a signature example of the problems facing Non-OPEC supply. Since the production highs of 2004-2005, Mexican production has lost over 800 kbpd (thousand barrels per day) which is fairly dramatic for a country that was producing around 3.4 mbpd as recently as 5-6 years ago. But as accelerated as these declines have been in Mexico, there’s another oil producing region has seen even quicker declines. The North Sea, which comprises “United Kingdom Offshore, Norway, Denmark, Netherlands Offshore, and Germany Offshore” has just lost 20% of its production in 24 months. Daily production is down 600,000 barrels per day in that period.

BP to Cut Alaskan Oil Production -  The company that operates the Trans Alaska Pipeline told operators on the North Slope to cut crude production by 95%, after discovering an oil leak. Alyeska Pipeline Service Co.'s order was a big blow for BP PLC, the largest oil producer in Alaska. The centerpiece of BP's operations in the state is at Prudhoe Bay, the largest producing oil field in the U.S.  The North Slope of Alaska produces about 630,000 barrels of oil a day—about 9% of total U.S. output. BP accounts for nearly two-thirds of that. The order affects BP and other producers, such as ConocoPhillips. Alyeska is jointly owned by BP, Conoco, Exxon Mobil Corp, Unocal Corp. and Koch Industries. BP spokesman Steve Rinehart called the incident a "significant event."

Alaska pipeline closed, oil prices rise - The Trans Alaska Pipeline was shut for a second day on Sunday because of a leak, with no indication of when it would reopen, sending oil prices higher on fears that a prolonged closure could restrict U.S. supplies. The leak was discovered at the start of the pipeline in Prudhoe Bay early Saturday, forcing oil companies to cut production to 5 percent of their average 630,000 barrels per day. The shutdown of one of the United States’ key oil arteries, which carries about 12 percent of the country’s production, is the latest setback for 33-year old pipeline, which is becoming more expensive to maintain as it ages and handles less than a third of the oil it did at its peak in the 1980s. Closures of the pipeline, although short, have provoked criticism of its operators, particularly major owner BP, whose reputation is already at an all-time low after the Gulf of Mexico blow-out last year, causing the largest-ever U.S. oil spill and attracting renewed government scrutiny of the oil production industry.

Alaska Pipeline Problem Signals Future Oil Shortages - The four-day shutdown of the Trans Alaska Pipeline, which sent a jolt through world energy markets, pushing the price of oil up $4 a barrel in two trading days, could be a sign of things to come, according to officials.  That's because the 33-year-old pipeline could outlive its usefulness, unless new sources of oil are developed in northern Alaska.  The flow of oil through the 800-mile pipeline was partially restored late Tuesday. Officials hope to have it fully restored in a matter of days, with another brief shutdown to install a bypass around a leak at a pumping station that led to the initial shutdown. The pipeline is now running at a rate of around 400,000 barrels per day.  But even at full strength, currently around 650,000 barrels per day, the flow is a fraction of what it once was. At its peak in the late 1980s, the pipeline carried more than 2 million barrels per day. It was designed to carry 1.5 million per day, according to Alyeska Pipeline Service Company, the consortium that owns and operates the line.

Producer Prices in U.S. Increased 1.1% in December on Fuel - Wholesale costs in the U.S. rose in December by the most in 11 months, led by higher prices for commodities such as fuel and food.  The producer price index increased 1.1 percent from November, Labor Department figures showed today in Washington. The so-called core measure, which excludes volatile food and energy costs, climbed 0.2 percent, in line with estimates.  An improving outlook for the world’s largest economy and rising demand in fast-growing emerging markets like China means producers are paying more for raw materials

CNN: Oil prices pushing near $100 a barrel -- Oil has risen to within reach of $100 a barrel for the first time since the 2008 price spike amid mounting optimism that global economic growth will boost demand. But the sharp rise has also heightened concerns about the impact of soaring commodity prices on the global economy, particularly in emerging countries, as it comes on top of high costs for agricultural commodities and metals. The oil surge also comes on the back of supply disruptions such as this week's outage in a pipeline in Alaska and strong investor inflows in commodities. Traders said there was a growing consensus that the Organisation of the Petroleum Exporting Countries was comfortable with prices near at $100 a barrel. In the past, Saudi Arabia, the cartel's de facto leader, had said it would work to keep oil prices at $70-$80. Brent crude, the global benchmark, hit an intraday high of $98.8 a barrel on Wednesday, the highest since September 2008, when oil prices were in the midst of a collapse from their $147-a-barrel record

Brent Nears $100 on Cold Snap; WTI Falls After U.S. Jobless Data -  Brent crude headed toward $100 a barrel, widening the spread with New York oil futures as crude stockpiles remained above their seasonal average and jobless claims increased in the U.S., the world’s largest consumer. Brent traded above $98 a barrel for a second day as wintry weather in Europe and the U.S. boosted demand for heating oil. West Texas Intermediate in New York declined after Labor Department figures showed initial jobless claims increased more than economists estimated last week and an Energy Department report yesterday showed increasing inventories of oil products. “Product prices are at their highest in two years, mainly because of the cold weather, which is making the whole oil market bullish,” “While storage capacity in the U.S. is fully loaded these days, damping demand for WTI, good growth numbers in consuming nations suggest demand will increase, and we could see Brent hitting $100 by mid-next week.” Brent crude for February settlement rose as much as 54 cents, or 0.6 percent, to $98.66 a barrel. Yesterday, the contract climbed to $98.85, the highest price since Oct. 1, 2008, when Brent futures last traded above $100."

When You Cringe At the Pump, It’s A Sign - Bernanke’s printing press seems to be adding about 10 cents a gallon per month to the price of gasoline. Food prices are also rising. The negative feedback mechanism of Fed pumping is running full blast. It is boosting economic activity thanks to government deficit spending but it is primarily stimulating non core food and energy inflation—the kind of inflation that the Fed pays no attention to. Bernanke’s policies are decimating the middle class thanks to soaring prices for necessities, and sending senior citizens to the poorhouse by the millions thanks to zero interest rates. This Fed policy is beyond just stupid. On top of being doomed to massive failure, it is a crime against humanity. While impoverishing the middle class and the elderly, the policy is enriching the oil barons, speculators, and Wall Street financiers. When criminals are rewarded instead of punished what you get is more criminals and more criminal behavior. The system rots until it collapses completely. A house built on fraud cannot long stand

Chicago gas prices soar to highest in country  Chicago ranked No. 1 for high gas prices in a recent survey. According to the Lundberg Survey , the highest gas price in the country, $3.35, was recorded in Chicago, while the national average was just $3.08. On Jan. 8, a leak found in the 800-mile Trans Alaska Pipeline forced owners BP PLC, ConocoPhilips, Exxon Mobil Corp. and Koch Industries Inc. to shut it down indefinitely. The pipeline carries about 15 percent of the crude oil produced in the U.S. Experts also cite increased oil demand from China, and diminished supply from both Alaska and Canada for the high prices.    And a recent equipment fire at Canadian Natural Resources Ltd. is particularly problematic for the Midwest, which gets much of its fuel from Canada, said Chicago energy analyst Phil Flynn.

Gasoline’s Prepping For A Return To $4 A Gallon - When the U.S. Energy Department mentioned in a report this week that retail gasoline prices could top $4 per gallon later this year and diesel prices may rise 14% this year, that should’ve been cause for alarm for consumers who have already seen a steady climb in fuel prices in the last three months.  “Retail gasoline and diesel prices are usually near their lowest point for the year between December and February,” said Brian Milne, refined fuels editor at Telvent DTN. But the run-up in prices started in the fourth quarter, with prices continuing to climb on expectations that “an improving U.S. and world economy will bolster demand for fuel.” See Economic Report on the impact of gasoline prices on consumer sentiment this month.. Regular gasoline reached a record high at $4.11 per gallon on July 17, 2008. As of Wednesday, the national average for regular gas stood at $3.09. That’s up nearly 4% from a month ago and more than 12% above the year-ago average, data showed

Oil shocks and economic recessions  - I've just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper's summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.  The table above itemizes the particular postwar events that are reviewed in detail in my paper. The paper also provides the following summary discussion:

Even The Government Admits Oil Prices Could Trigger The Next Recession - Mr. Trump is not the only one concerned about our ongoing vulnerability to volatile oil prices. More ominously, the Chief Economist of the International Energy Agency (IEA) is warning that rising outlays for imported oil among OECD countries could trip up the global recovery.Faith Birol has reported that the cost of crude imports soared by $200 billion to $790 billion during 2010. This increase, stemming from higher prices and demand, equates to a 0.5% cut in income – a hefty penalty when the developed world is still struggling to regain its footing. Dr. Birol said “Oil prices are entering a dangerous zone for the global economy.” With crude quotes hovering around $90 per barrel again, this threat is taking center stage.  There is no question that oil price rises bring on recessions. A 2006 paper from the U.S. Energy Information Agency said, “most of the major economic downturns in the United States, Europe, and the Asia Pacific region since the 1970s have been preceded by sudden increases in crude oil prices.” The agency goes on to note that the cause and effect was less visible in the last decade, when “average world crude prices…increased by more than $30 per barrel…yet U.S. economic activity has remained robust, growing by approximately 2.8 percent per year from 2001 through 2004.”  They had no idea what lay ahead.

Petroleum-based products are part of life - The real issue that needs to be explored is how much your life is surrounded by products made of petroleum. Oil often goes overseas to manufacturing facilities that realign and reshape the molecules of crude oil to create synthetics and polymers (nylon, polyester, Styrofoam, plastics, etc.) used in the everyday items we need. Even a car, which we often only see in terms of gasoline consumption and MPGs, is designed using plastics and synthetics for the bumpers, interiors, radio units and so on. Entire corporations are being built on oil but not in the conventional sense of ExxonMobil or BP. The technology industry's blossoming success over the past two decades is not just due to its innovative creations. It's due to its ability to realign carbon molecules from crude oil and petroleum into the alkenes and plastics that become the exterior to an Apple iPhone or the silicon-based motherboard of a Dell Inspiron PC

Begich: As The Arctic Melts, Let’s Drill, Baby, Drill - Yesterday, Sen. Mark Begich (D-AK) said that the rapid warming of the Arctic because of oil pollution means that more Arctic drilling should commence. Begich was responding to the presidential oil spill commission’s report, which recommended new drilling around Alaska, subject to stronger standards. The Democratic senator from the state most changed by global warming pollution used the commission’s report to emphasize his desire for more “Arctic development“: As many of us have been saying for years, more resources and research are needed for Arctic development as warming temperatures make far north resources more accessible.

BP disaster Commission co-chair Graham: “Drill baby drill” is a selfish and self-defeating energy strategy - Bob Graham, co-chair of the Presidential Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, has a must-read op-ed in the St. Petersburg Times. After months of expert testimony and analysis, the former governor and Senator from Florida has a blunt message for Americans: This is a wakeup call to the American people. Why are we drilling in deeper and inherently more risky offshore locations? The United States is consuming about 22 percent of the world’s daily extraction of petroleum while it sits on top of less than 1.5 percent of the world’s proved reserves. If we “drill baby drill” in an attempt to go totally independent, and if our thirst for petroleum continues at its current level, the United States will drain its remaining proven domestic oil reserves by 2031.

Big Oil Sings the Same Old Song - The leader of the American Petroleum Institute rashly advocated a speedy return to expanded offshore oil drilling last week even though the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (also known as the commission) will today issue its recommendations for additional safeguards for future offshore oil production.Oil prices are steadily climbing toward $100 per barrel and Big Oil’s congressional allies are poised to use this price spike to reanimate the “drill, baby, drill” war cry to justify expanded drilling off our nation’s coasts without implementing safety measures to reduce prospects for another oil disaster. This rush to drill first, reform later ignores projections that American oil production will increase nearly twice as fast as oil demand over the next 10 years. There is time to make sure future drilling is safer than pre-BP.

US EIA Jan Outlook: Sees Oil Prices At $99 By End-2012 - EIA expects a continued tightening of world oil markets over the next 2 years. World oil consumption grows by an annual average of 1.5 million barrels per day (bbl/d) through 2012 while the growth in supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries averages less than 0.1 million bbl/d each year. Consequently, EIA expects the market will rely on both inventories and significant increases in production of crude oil and non-crude liquids in OPEC member countries to meet world demand growth. While on-shore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high last year, floating oil storage fell sharply in 2010, and EIA expects OECD oil inventories will decline over the forecast period.

Brent crude ends at 27-month high on supply fears (Reuters) - Brent crude oil futures ended at the highest level 27 months on Friday as traders raised supply concerns after recent production disruptions in the North Sea and robust Asian demand.In London, ICE Brent crude for February delivery LCOG1 expired and settled up 62 cents, or 0.63 percent, at $98.68 a barrel, the highest close for a front-month Brent contract since Sept. 26, 2008, when prices ended at $103.54. Brent's premium against the U.S. benchmark West Texas Intermediate rose to $7.14 at the close, from $6.66 on Thursday. In the day's session, the spread between the two grades widened to as much as $8.24, the widest since Feb. 12, 2009, when it hit $8.73.

OPEC Doesn't Need Emergency Meeting as Oil Advances Above $90, Iran Says - OPEC has no reason to call an emergency meeting even as oil climbs above $90 a barrel because the market is well-balanced and doesn’t need further supply, Iran’s OPEC governor said. “Oil at $90 is not an extraordinary situation,” Mohammad Ali Khatibi said by phone from Tehran today. “There are some temporary supply issues, but stocks are high and there is no permanent shortage in supply.”  The Organization of Petroleum Exporting Countries, which produces 40 percent of global oil supply, will meet about a week later than scheduled, on June 7 or 8, to allow energy ministers to attend the Gas Exporting Countries Forum gathering on June 2, Khatibi said.  Surging oil and food prices are fuelling concern among central banks that rising inflation may threaten the global economic recovery.

Peak oilers still blind to economic reality - But the problem is that, as Tom Bowers makes clear in his excellent book Oil, peak oil theory is being factored in to the price of oil by the traders who set the price. In the 1990s, these traders broke the OPEC cartel wide open and pushed oil down to $10 a barrel. Today, they are driving up the price of oil at least in part because they believe in peak oil. It;s no surprise that they should listen to the engineers rather than the economists - they are interested in where the oil is coming from and when, not the end use to which it is put. Yet that decision is having wide-ranging consequences for the rest of us.

Combating Peak Oil with Wind and Smarter Electric Power - We spend a lot of time on this site discussing the risks posed by Peak Oil. It's important to us that you understand the magnitude of our national/global predicament and take appropriate preparations. But in addition to tracking the gathering stormclouds (of which there are many), our info scouting efforts also look for developments with potential to change the situation positively. In the podcast below, Chris and Willett Kempton explore the potential of wind power to reduce the energy pinch threat posed by depleting fossil fuels. Dr. Kempton is an electrical engineering professor at the University of Delaware and director of the Center for Carbon-Free Power Integration. Turns out, while still early in the game, there's action going on in wind and electricity-management that offers real promise.

Norway's $186 Billion Gas Loss to Cement Russian Grip on Supply - Europe may face a shortfall of Norwegian natural gas as soon as 2015 after the country slashed its estimate for undiscovered resources because of a dearth of discoveries from companies such as Royal Dutch Shell Plc.  Europe’s second-largest supplier yesterday cut its estimate for gas yet to be discovered by 31 percent, or 570 billion cubic meters. That’s equal to more than five years of production at current rates and would be valued at about $186 billion based on today’s prices at the U.K’s trading hub.  “This will rack up the pressure on the European Union to develop and secure access to reliable energy,” “The EU will be forced to increase imports from the Middle East and Africa to compensate for and reduce Russia’s domination.”

Chile protests turn deadly as Latin America buckles under rising energy prices -  The world's southernmost city, with a population of 110,000, remained largely paralyzed today by a general strike as local residents and elected officials demand that the national government maintain subsidies on natural gas, which is widely used in the region to power vehicles, heat homes, and provide energy for businesses. The protests are the latest in a wave of anger in Latin America as governments attempt to reconcile budgets with energy prices, which have climbed to levels not seen since the record highs of 2008. Close on Bolivia's heels Just two weeks ago, Bolivian demonstrators took to the streets in the week between Christmas and New Year's to protest against President Evo Morales' plan to reduce subsidies for gasoline and diesel. Mr. Morales ultimately reversed his decision and reinstated subsidies on oil and gas.

Indonesia's oil problem - WERE one told a decade ago that oil prices would quadruple but not seriously hurt growth in emerging economies, it would have seemed fantastic. Yet this is precisely what has happened. As oil prices approach $100 a barrel, economists are wondering why. Jon Anderson at UBS has a note out this week titled, "Why Doesn’t Oil Matter?” with a few ideas. The most interesting one is the smaller role oil plays in energy consumption in emerging economies relative to developed ones. Roughly 40% of primary energy used in developed economies comes from oil, as against 28% in emerging economies. Coal is still pretty much king in developing economies, at 49%, whereas the equivalent figure is 20% in developed economies. But the "emerging" category conceals some radical differences across countries. Indonesia, for instance, is actually more oil-intensive than most developed countries, with oil at 47% of consumption. As a result, oil price increases hit Indonesia hard.

How oil affects the price of peas in China - Susilo Bambang Yudhoyono, the Indonesian president, has launched a national drive to encourage his countrymen to grow their own chilli peppers. The South Korean government has released emergency supplies of cabbage, pork, mackerel, radish and other staples as part of President Lee Myung-bak’s war on inflation. This week, the Indian cabinet met to discuss the soaring price of onions, an issue reputed to have caused the downfall of two previous administrations. As in 2007-08, the topic of food inflation – even food security – has percolated to the very top of the political agenda.  Central banks are caught in a bind. Bank Indonesia, citing concerns that higher interest rates could attract more inflows of hot money, last week left rates unchanged for the 17th month in a row. That has prompted concerns that Indonesia’s monetary-policy horse might be clopping along far behind the inflationary cart.  In China, too, higher food prices are feeding inflation, which scaled 5 per cent in November, well above the official 3 per cent target. One of the unorthodox countermeasures taken by Chinese authorities has been to allow vegetable trucks to travel toll-free on highways – a sort of quantitative easing for carrots and aubergines.

Sudan partition poses challenges for China - The looming partition of Sudan after this week’s independence vote in the south poses challenges for China, which faces dependence for nearly five percent of its oil imports on a new country long suspicious of its ties with Khartoum. A full 80 percent of the oilfields in Sudan, which the state-run China National Petroleum Corporation (CNPC) has pumped billions of dollars into developing, lie in the south.  Beijing’s arms deals with the Khartoum regime and its dogged defence of it in international forums have resulted in the former rebels who are set to lead the new state having much closer relations with Western countries that provided aid during the 1983-2005 civil war and spearheaded efforts to end the conflict

Canada Flips China the Loon Preparing for an Oil Sands Showdown - I recently reminded my readers of China's never-ending quest for energy... The International Energy Agency reported China's energy demand will jump 75% by 2035. Can you blame them for buying stakes in nearly every major oil project on earth? There's one area in particular they've set their sights on: the Canadian oil sands. Their oil sands buying spree is still going strong. The country has funneled more than $8 billion into oil sands investments during the last 15 months. PetroChina snagged a 60% stake in two oil sands projects, costing nearly $2 billion. Hopefully OPEC won't feel too left out... The problem, however, is that China might not get what they're after. Alberta is welcoming oil sands investors with open arms, but Premier Ed Stelmach has made it clear that they won't take over — no matter how much money is thrown at the province.

Copper Deficit May be 600,000 Tons, JPMorgan Says -- The world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario, according to JPMorgan Securities Ltd. Disruptions last year seemed to have wiped out most of mine supply growth,  “As demand further recovers into 2011, supply-side issues will become more influential,” he said. Copper for delivery in three months in London advanced to a record of $9,754 a metric ton on Jan. 4 after rising 30 percent last year as the improving global economy and rising investment demand for commodities prompted buying. The International Copper Study Group is expecting a 435,000-ton global deficit in the refined metal this year. While current prices are sufficient to encourage brownfield and greenfield developments, longstanding issues, including capital availability, relative merit of projects, resource nationalism, and geotechnical issues, remain key impediments for supply increase, said Jansen.

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them) Spot-month position limit levels set at 25% of deliverable supply for a given commodity, with a conditional spot month limit of five times that amount for entities with positions exclusively in cash-settled contracts That's just horrible. For anybody like JPM that has no intent of taking physical delivery, they will be prevented from accumulating a position that is more than 125% of the total deliverable supply.  What sort of a limit is that??  That's like trying to limit the damage from auto accidents by 'limiting' freeway speeds to 'no more than' 175 mph. Also, anybody who might want to actually buy the physical is limited to 25%, so any potential Hunt Bros. need not apply. The outer limits of this game have been exclusively reserved for speculators and manipulators. But it gets worse:

Toyota Tries to Break Reliance on China - The Japanese auto maker believes it is near a breakthrough in developing electric motors for hybrid cars that eliminates the use of rare earth metals, whose prices have risen sharply in the past year as China restricted supply. The minerals are found in the magnets used in the motors. All electric motors rely on magnets to make them work. The new motor Toyota is working on is based on the very common and inexpensive induction motor, found in such devices as kitchen mixers. Induction motors use electromagnets—magnets that only have their magnetic attraction when power is applied to them. But the permanent magnets found in electric-car motors, unlike those that hold up the school lunch menu, are made from neodymium, a rare-earth mineral that is almost entirely mined and refined in China.  As car companies race to improve electric and hybrid vehicles, their reliance on metals like neodymium and lithium—used in batteries found in electric and hybrid cars—is raising a host of new geopolitical issues over access to the minerals. The supply of many of these minerals is controlled by China.

The Chinese Eco-Disaster - When Watts was a child, he was warned: "If everyone in China jumps at exactly the same time, it will shake the earth off its axis and kill us all." Three decades later, he stood in the gray sickly smog of Beijing, wheezing and hacking uncontrollably after a short run, and thought: The Chinese jump has begun. He had traveled 100,000 miles crisscrossing China, from Tibet to the deserts of Inner Mongolia, and everywhere he went, he discovered that the Chinese state had embarked on a massive program of ecological destruction. It has turned whole rivers poisonous to the touch, rendered entire areas cancer-ridden, transformed a fertile area almost twice the size of Britain into desert—and perhaps even triggered the worst earthquake in living memory.

China sets goals to reduce emissions of pollutants - China said Friday it would cut emissions this year by rejecting construction projects that pollute too much and developing new technologies that curb greenhouse gases. The Ministry of Environmental Protection set a target to cut emissions of major pollutants such as sulfur dioxide, ammonia nitrogen and nitrogen oxide by 1.5 percent in 2011 compared to last year, a report on the ministry’s website said. China is the world’s largest polluter, with energy demands growing sharply every year. The consumption boom reflects the country’s transformation from a nation of subsistence farmers to one of workers increasingly trading bicycles for cars and buying energy-hungry home electronics.

China Moves Toward Carbon Emissions Trading to Improve Energy Efficiency and Competitiveness - When professor Chen Hongbo tried to promote carbon trading in China three years ago, he found himself under fire. As developing countries like China aren’t obliged to limit the byproduct of their economic growth, opponents argued vehemently that they saw no need to motivate Chinese industries to either emit less greenhouse gases or pay for their emissions. Today, China is still free of that obligation, but the internal dispute seems to have ended. In its proposed development plan for the next five years, the government has for the first time revealed its interest in building a domestic carbon market.

Real Appreication of Chinese Inflation -The Times' reports on inflation in China:..consumer prices were 5.1 percent higher in November than a year earlier, according to official government data. And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high.“Four percent, China can bear it — beyond 5 percent, people will complain a lot,” said Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation here.Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter. The central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi’s appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets — while also protecting the jobs of tens of millions of Chinese workers in export factories.

Is Inflation About to Burst the Chinese Bubble? - Yves Smith - We’ve commented before on the near-impossibilty of teasing decent inflation estimates out of China. Despite that, we were early to comment that inflation was getting out of control. From a joint post with Marshall Auerback in February: The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.  Peter Tasker, in a Financial Times comment, argues that rising wages pose a fundamental challenge to China’s strategy: The tendency of businesses and economies is to push successful models to their breaking point. We’ve over-relied on consumer debt and a cancerous growth of the financial sector; China has become unduly dependent on exports and investment. And each nation is fighting tooth and nail to stick with its old habits, precisely because the elites who’ve benefited from these strategies still wield considerable clout. So change is likely to come about only via disruption.

Rising wages will burst China’s bubble- Who has survived the global credit crisis in the best shape?. The snap verdict that China is the big winner and the US and rest of the old Group of Seven big losers is already looking questionable. True, China has continued to register turbo-charged growth while many of the debt-laden economies of the west have struggled. No surprise, then, that a tsunami of financial capital has surged eastwards, or that European politicians are scrabbling for trade deals, despite China’s extraordinarily aggressive posture over the Nobel peace prize and other diplomatic issues. The financial markets, however, have taken a rather different view. The Shanghai market is at less than half its all-time high, significantly underperforming the other three members of the Bric group.  The message is clear. The China story that has been sold so skilfully all over the world is simply another version of the “new era” thinking that has characterised every investment mania from the South Sea bubble to the dotcom frenzy.

China Lawmaker Says Yuan Appreciation Won't Help Ease Inflation - A senior Chinese lawmaker on Saturday said he opposed yuan appreciation and said the rise in the yuan's value won't help the country to curb inflation.  "China should keep the yuan stable, and the yuan shouldn't appreciate," He Keng, deputy director of the financial and economic-affairs committee of the National People's Congress, told a forum in Beijing.  He also said it isn't bad for a country to hold a large amount of foreign-exchange reserves. His comments are in stark contrast to the universal opinion held by economists and U.S. politicians that a fast rise in the yuan will help China to curb the country's burgeoning inflation.

Does QE2 Promote Global Economic Rebalancing? - Ryan Avent writes: Chinese inflation is running consistently higher than American inflation, which is scarcely above 1%. That translates into rapid real appreciation despite the slow movement in the nominal exchange rate. And that should produce a decline in Sino-American imbalances, which seems to be emerging. Ryan Avent can correct me if I am wrong, but I suspect some of that run up in Chinese inflation is the result of QE2.  Chinese monetary authorities are forced to create more yuans to buy up the new QE2 dollars in order to maintain the crawling yuan-dollar peg.  The actual and expected increase in yuan, in turn, is contributing to the rise in China's inflation rate. In short, China is importing the Fed's QE2-driven monetary policy.  If this real appreciation actually leads to meaningful rebalancing in the global economy, then QE2 may be what ends Bretton Woods 2.

Reserves Set for $2.8 Trillion Mean Tightening - People’s Bank of China Governor Zhou Xiaochuan ordered lenders to increase funds on deposit at the authority six times in 2010, as the yuan’s interest-rate advantage over the dollar attracted capital that stoked inflation. The yuan may gain the most among currencies in the so-called BRIC nations, rising 5.4 percent by year-end, compared with a 0.8 percent drop for Brazil’s real, a 0.3 percent increase for Russia’s ruble and 5 percent advance for India’s rupee, according to Bloomberg surveys of strategists. “We will probably see a round of pretty intense tightening in the first half,”. “The yuan’s appreciation in 2011, particularly in the first half, should be faster than last year.” The reserves, which exceeded $1 trillion in 2006 and $2 trillion in 2009, will reach $3 trillion by June 30, Premier Wen Jiabao is seeking to sustain the economy’s growth to create millions of jobs each year, while preventing rising prices for homes and food from fueling social unrest

China Owns Lots of Paper - Bloomberg details: China’s foreign-exchange reserves climbed 18.7 percent to a world-record $2.85 trillion at the end of 2010 from a year earlier and domestic lending exceeded the government’s full-year target. The currency holdings, reported by the central bank on its website today, were bigger than the $2.76 trillion median estimate in a Bloomberg News survey of nine economists.  How fast have reserves been built? 26.4% annualized since 1978 (reserves crossed $2 trillion in 2009 and $1 trillion in 2006). This level of growth will be mathematically impossible to continue at some point (in my view sooner than later). The current $2.85 trillion is a whopping 20% of US GDP and 5% of World GDP, but if growth were to continue at this pace it would grow to 50% of US GDP by 2015 and 125% by 2020 (assuming the US grows at a 5% / year nominal pace). So what is much more likely in my opinion? In the years to come perhaps a slower growing China, a much stronger Chinese currency, or a less export driven / more internal demand driven China... or perhaps all three.

China’s lending quota? - This year to everyone’s surprise the PBoC failed to announce 2011’s lending quota.  Instead it announced a series of new polices aimed at monitoring the banks.  According to an article in Thursday’s People’s Daily: The People’s Bank of China (PBOC), the country’s central bank, will check credit and capital levels of commercial banks each month to determine the reserve requirements for individual lenders, viewed as a measure to strengthen control over banks’ monthly credit. “The key point of the differentiated reserve requirements lies in how important the individual financial institution is to the overall economy. Apart from systematic importance, its capital adequacy rate, operational stability and other factors will also be taken into account,” the source said. There is a lot of debate about what all this means.  In part, of course, it is aimed at the CBRC, with whom the PBoC has been rumored to be conducting a so-far losing turf battle over control of the banking system.  By putting into place a complex monitoring system, then, the PBoC may be trying to reclaim priority in setting commercial bank policy and to keep the banks from gaming the system.

China has $1.5 trillion in hidden debt: Lawmaker - Billions of dollars of debt racked up by local Chinese governments during their investment sprees are likely to sour as the projects they finance near completion, Yin Zhongqing, a prominent Chinese lawmaker, said this week. In an interview with Reuters Insider, Yin said local governments had incurred at least 10 trillion yuan ($1.5 trillion) of "hidden" debt, which they have concealed by creating thousands of investment vehicles that serve as borrowers. Yin said it is not yet clear which loans will sour because they do not have to be repaid until the projects are completed. "The large amount of debt that local governments took on since the end of 2008 to battle the impact of the global financial crisis will become a heavy burden for our development going forward," said Yin, who is a member of the finance and economic affairs committee in China's parliament.

China Reports Smaller Trade Surplus Before Obama Meeting - China reported a less-than-forecast $13.1 billion trade surplus for December, bolstering the nation’s bargaining position ahead of a Jan. 19 meeting where U.S. President Barack Obama may press for more gains in the yuan. The gap compared with the $20.8 billion median estimate of 20 economists surveyed by Bloomberg News and November’s $22.9 billion. Exports rose 17.9 percent to $154.2 billion from a year earlier and imports climbed 25.6 percent to $141.1 billion, the customs bureau said on its website today. Today’s figures support China’s case that the nation is moving towards balanced trade and contributing to global economic rebalancing by ramping up domestic consumption. The full-year gap narrowed 6 percent to $183.1 billion even as trade bounced back from the financial crisis with both exports and imports rising to records in December.

China’s December Trade Rises, but Growth Weakens - China's December exports rose by double digits, possibly fueling tension with Washington ahead of Chinese President Hu Jintao's U.S. visit next week. Exports rose 17.9 percent, producing a $13.1 billion trade surplus, though growth was down from November's 34.9 percent surge, customs data showed Monday. Imports gained 25.6 percent over a year earlier, down from the previous month's 37.7 percent growth but reflecting China's relatively strong economic growth. December exports of $154.1 billion might be the highest monthly level ever for China, which overtook Germany in 2009 as the world's biggest exporter, according to Cohen. Imports were $141 billion. The trade surplus was the third-lowest monthly level in 2010 and down sharply from November's $22.9 billion.

China Trade Surplus for December 2010 - You think the United States government produces imaginary numbers for economic reports? Try China. Consider the heat on the U.S. trade deficit, jobs, currency manipulation and China. Now we have a trade report from China claiming their surplus was cut almost in half in a month. China’s trade surplus was 40% smaller than expected in December, as export growth softened while imports expanded faster than expected, potentially easing some of the trade tensions between China and the U.S. ahead of a state visit by Chinese President Hu Jintao’s later this month. Figures released by the General Administration of Customs on Monday showed a surplus for the month of $13.08 billion, down from $22.9 billion in November.  How misleading! The keyword is expected. The reality is China's trade surplus dropped 7% for all of 2010. Below are the numbers to pay attention to. Can you imagine the word slow used in the same breath if these were United States trade deficit monthly percentage changes?

That's yuan way to adjust - AHEAD of a looming Sino-American summit, it's once again time for newspapers to allocate ink to coverage of the spat over the value of China's currency. Tim Geithner (who, bless him, once got in trouble for saying that the dollar needed to decline) declared today that the yuan is "substantially undervalued" and needs to strengthen. But he later elaborated: “This is a pace of about 6 percent a year in nominal terms, but significantly faster in real terms because inflation in China is much higher than in the United States,” Geithner said. Taking inflation into account, the yuan is rising at a rate of about 10 percent a year, “so if that appreciation was sustained over time, it would make a very substantial difference,” he said in response to a question after the speech. Yes, China continues to manipulate its currency. This much is clear from the latest data on Chinese reserve accumulation.

The Doctrine of Immaculate Transfer - Paul KrugmanDave Altig at the Atlanta Fed weighs in on Martin Feldstein’s much-quoted paper arguing that the United States and China will soon reduce or eliminate their current account imbalances. I think it’s worth saying a bit more about this, because there’s a common fallacy here  The fallacy comes in when you say, “Well, given that it’s all about spending imbalances, exchange rate policy has nothing to do with it.” Anyway, imagine for simplicity that America and China are the only two countries in the world. And imagine that as consumer habits change, American spending falls by $400 billion while Chinese spending rises by $400 billion. Trade imbalance gone, right?No, it’s not that easy. If US residents cut spending by $400 billion, most of that reduction — say 75 percent — will come in reduced spending on US-produced goods and services (even that Chinese pair of pajamas you buy at WalMart has a lot of US value-added in distribution and retailing.) So that’s $300 billion in reduced demand for US output.

China and Intellectual Property Theft - China has been holding down the value of its currency, the renminbi, for years, making Chinese exports to the United States cheaper and American exports to China more expensive. The renminbi’s recent rise has been too modest to change the situation, and Mr. Hu’s state visit is sure to highlight the real tensions between the countries.  Yet the focus on the currency has nonetheless become excessive. The truth is that the exchange rate is not the main problem for American companies hoping to sell more products in China and, in the process, create more jobs in this country. The exchange rate does not need to be the focus of next week’s meetings.  For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.  No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Geithner's China Concerns - Timothy F. Geithner, the Treasury secretary, gave a speech on China Wednesday  morning that did not contain news but was somewhat feistier in tone than the Obama administration has been in the past. This approach — respectful yet blunt — strikes me as more promising than the deferential stance the administration has sometimes adopted before. Excerpts from the speech follow:

Geithner Urges New Start for U.S.-China Relations - Treasury Secretary Timothy F. Geithner on Wednesday suggested a fresh start in relations between the United States and China, aimed at mutually beneficial economic growth.  In a speech at Johns Hopkins University, one week before the state visit of China’s president, Hu Jintao, Mr. Geithner said the two countries would benefit by being more than rivals.  “We have a great deal invested in each other’s success,” Mr. Geithner said.  His main points — that China should reduce the government’s control of the economy, lower barriers to imports from the United States, crack down on the pilfering of American technology and stop holding down the value of its currency — were nothing new.

Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences - You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.

Trade Deficit declined slightly in November - The Department of Commerce reports: [T]otal November exports of $159.6 billion and imports of $198.0 billion resulted in a goods and services deficit of $38.3 billion, down from $38.4 billion in October, revised. November exports were $1.2 billion more than October exports of $158.4 billion. November imports were $1.1 billion more than October imports of $196.8 billion.  The first graph shows the monthly U.S. exports and imports in dollars through November 2010. Imports have been mostly flat since May, and exports have started increasing again after the mid-year slowdown. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

A surplus, but for oil and China - EARLIER this week we learned that China's trade surplus fell sharply in November, to just $13.1 billion. A look at the latest American data would indicate that trade between the two big economies didn't have that much to do with the tumbling Chinese surplus. America's trade deficit fell just a tiny bit in the month of November, from $38.4 billion to $38.3 billion. Both exports and imports rose a bit, but exports rose more, and a slight increase in America's goods deficit was offset by a bigger rise in the services surplus. That goods deficit now stands at $51 billion, and it overwhelmingly represents two factors. The first is trade with China. America's deficit in goods trade with China rose slightly in November, as growth in imports from China barely outpaced growth in exports to China (which hit another all-time high). Of the $51 billion monthly deficit, about $26 billion of that is attributable to China. Another big chunk, about $20 billion, represents America's petroleum deficit.

Bigger Trade Deficits Coming? - Joseph Gagnon, a former Federal Reserve economist now at the Peterson Institute, contends in a new paper that the world’s financial imbalances — such as China’s trade surplus and the United States’ trade deficit — will probably return to record levels in coming years. He argues that the imbalances have narrowed recently only because of the recession (which, for example, has reduced American demand for Chinese exports). Mr. Gagnon suggests that the countries with trade deficits, like the United States, keep interest rates very low and start getting serious about reducing their long-term deficit. He suggests China attack rising inflation by letting the renminbi rise and, over the long term, taking steps to put more money in the hands of consumers and enacting policies that would let households save less than they now are.  Excerpts from the paper

How to gracefully step aside - RECENTLY, the data and graphic wizards here at The Economist put together a tool enabling readers to determine when China will overtake America as the world's largest economy: Given reasonable assumptions, China will pull ahead within the next ten years. if you play around with the interactive, you'll find that this isn't particularly sensitive to changes in the variables. If you double expected American growth from 2.5% per year to 5% per year, you push the key date back from 2019 to...2022. If you then slow China's growth to 5% annually, you delay il sorpasso to 2028. Absent a total disaster in China, the transition will take place, and that right soon.

China Overtakes US as Biggest Economy When Measured by Purchasing Power - China overtook the U.S. last year as the world’s biggest economy when measured in terms of purchasing power, according to Arvind Subramanian, senior fellow at the Peterson Institute for International Economics in Washington.  The size of China’s economy in 2010 was $14.8 trillion, compared with the U.S.’s $14.6 trillion, when accounting for the countries’ differing costs of living, Subramanian wrote in a note published yesterday, a week before President Hu Jintao visits Washington. So-called purchasing power parity calculates gross domestic product using exchange rates that adjusts for price differences of the same goods between nations.  Growth in the world’s most populous nation has averaged 10.3 percent a year over the past decade, nearly six times faster than the U.S. China was the biggest auto market for the second year running, created the world’s fastest supercomputer and was ranked the biggest user of energy in 2010.

Flunk Barry Eichengreen on World's Top Exporter - As a stickler for accuracy, I must bring up one of my favourite recurring threads about the United States' continuing status as the world's largest exporter. It's a bit startling to see renowned academic Barry Eichengreen making a schoolboy howler. I'm just beginning to read what appears to be a most interesting take on the US dollar's enduring position as the world's preeminent currency in his new book Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (hackneyed title and misstatement of simple fact that's the subject of this brief post aside). Anyway, on p.3 he writes: But what made sense then [postwar United States having its currency dominate the international monetary system] makes less sense now, when both China and Germany export more than the United States. Again, this is perfectly true if we're only talking about merchandise exports, AKA stuff. However, in today's increasingly service-based world economy wherein advanced countries like the US have well over half of their output accounted for by services, isn't it likely that such countries would export services as well? So, for the umpteenth time, the US remains the world's top exporter when both goods and services (alike accountancy and consultancy) are included.

Chiang Mai shields Asia from worst of currency war -The Asean+3 Macroeconomic Research Office (Amro) does not sound like a revolutionary organisation. But it may turn out to be a big step towards insulating Asia from what Guido Mantega, the Brazilian finance minister, has labelled a global currency war. That description looks overblown in Asia, where the global financial crisis has been relatively kind to exporters. Big exporters were hit when global trade collapsed in the second half of 2008. But Asia’s V-shaped recovery has helped them to report improved recent results, along with a host of smaller companies. Nevertheless, there have been significant foreign exchange tensions in the region as governments responded to a toxic combination of the weak US dollar, Chinese reluctance to let the renminbi rise and inflows of hot money from the west attracted by higher interest rates. Conscious of their dependence on exports, governments from Bangkok to Tokyo have sought to limit exchange rate appreciation by intervening in the markets. Some have also experimented with limited capital controls in a parallel attempt to head off the flow of hot money.So far, the tensions have not boiled over in public squabbles. However, conditions for Asian exporters are likely to become harder this year as the recovery in export demand flattens out. A tougher business climate will inevitably refocus governments’ attention on currencies, seen as a major element of competitiveness.

BBC: Brazil Finance Minister Mantega warns of trade war - Brazil has warned that the world is on course for a trade war because of what it says is currency manipulation by China, the US and others. Finance minister Guido Mantega said Brazil was preparing moves to prevent further appreciation of its currency.  He said his government would raise the issue at the World Trade Organization and the G20 group of rich and developing countries.  Mr Mantega was speaking in an interview with the Financial Times newspaper.  "This is a currency war which is turning into a trade war," Mr Mantega said in his first major interview since Dilma Rousseff took office as Brazil's new president on 1 January. He said Brazil's trade with the US had slipped from an annual surplus of about $15bn (£9.6bn) to a deficit of $6bn because of US efforts to revive its economy through loose monetary policy. "The exchange rate is one of the main drivers of economic policy, more so even than productivity," he said.

Brazil Warns Trade War Looming- Brazil has warned that the world is on course for a full-blown “trade war” as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. “This is a currency war that is turning into a trade war,” Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil’s new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.

Brazil FinMin: From Currency War to Trade War - If nothing else, you gotta love this guy for his military-industrial complex of sorts where economic misunderstandings forever threaten to take us to the brink of all-out conflict. A few months ago, Brazilian Finance Minister Guido Mantega had the international press corps by the ear after his statement that the world was engaged in "international currency war." Perhaps tired of that phrase and desiring attention once again, he's now moved on from that shtick in proclaiming that we are on the brink of outright "trade war." Being more of an equal opportunity complainer this time around, Mantega now identifies not just the US but also China as being currency manipulators. I'm somewhat surprised that he would so vocally single out another important emerging economy, but hey, maybe things are really becoming dire in Brazil when it now runs a current account deficit with the United States, of all countries:

Tensions rise in currency wars. - If the world’s shell-shocked investors thought that 2011 might see an outbreak of peace in the currency wars, they were sadly mistaken. Not only did Brazil last week take more action to stem the rise in the real but Chile, one of the most free-market of emerging economies, has also unveiled a campaign of intervention against its currency. With a sense that the battles against destabilising capital inflows are here to stay has come a determination to set new rules of engagement on controlling them. But given the uncertainty and political explosiveness around the issue, any such venture faces a tough future. The International Monetary Fund last week revealed an attempt to put itself at the centre of the debate, releasing a study arguing for global rules to constrain governments’ use of capital controls. But observers doubt that it will broker a deal soon. “The IMF has made a pre-emptive grab for power without a clear idea of what it is asking for,” The case for global rules is that one country’s actions can spill over to others. Last year’s rash of direct currency market intervention to slow speculative capital inflows, for example, proved self-perpetuating as country after country rushed to stop its own exchange rate being the only one to rise.

FTAlphaville: Casualties of the currency war -  That’s a Nomura chart showing the Brazilian government as the biggest ‘loser’ of the currency war. You know the war we’re talking about: Brazil was the first and loudest to declare it in 2010. Oops. As Nomura remind, that war’s been about emerging markets trying to prevent capital inflows from putting a rocket under a) inflation b) their currencies, now that US quantitative easing has restarted a worldwide hunt for yield. It’s taken central bank policies to an odd, ‘post-modern’ place compared to the traditional tools they use. The problem that we can now thank Brazil for discovering is that it’s become difficult to manage a) and b) simultaneously, especially with generally surging commodity prices worldwide. The chart above brings together changes in inflation before and after quantitative easing was signalled, changes in inflation forecasts, both nominal and real exchange rate changes, and changes in central bank policy rate forecasts and one-year swap rates.

Exchange Rate Modelling at AEA - Or, at least one session's worth of recent thinking on the topic. This session was notable for bringing together papers that focused on the inability of our empirical models to explain satisfactorily movements in key bilateral exchange rates. One overarching theme was that parameter variability was something to take seriously, and not necessarily as a nuisance. From On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals:

Inflation on the Rise in Latin America - Consumer prices are rising at a quick pace in the some of the largest economies in Latin America, complicating the task of governments that want to maintain high growth rates without sparking inflation. On Friday, Brazil announced that consumer prices in 2010 had increased faster than the government’s targeted levels, mainly driven by higher food costs. The news is likely to weigh on the new administration of President Dilma Rousseff, who has vowed to maintain policies that have led to the country’s economic boom of the past decade in which millions of Brazilians improved their living standards. In Mexico, the region’s second largest economy, consumer prices data also released Friday showed a higher than expected rise in December, pushing inflation for the full year to 4.4%, up from 2009 when the economy suffered a deep recession. Peru, another fast growing economy, is also taking measures to fight inflation. The country’s Central Bank on Thursday decided to take a preventive step, increasing its reference interest rate citing dynamic domestic demand, “in a scenario of increases in the international prices for food and energy.”

Brazil Inflation Puts Pressure On Government - Brazil’s consumer prices ripped past the government’s target last year, confirming that one of new President Dilma Rousseff’s most urgent battles is fighting inflation. Consumer inflation, as measured by Brazil’s official IPCA, reached 5.91% in 2010, the country’s statistics agency IBGE said Friday. The pressure came mainly from food, whose prices soared 10.39% last year. The 2010 figure was slightly above the 5.90% average forecast of 100 analysts and economists in the Brazilian Central Bank’s weekly survey Jan. 3, and notably higher than the 4.31% pace in 2009. It was the highest since 2004, when inflation hit 7.6%. Brazil’s government has stuck zealously to 4.5% inflation target for 2010. The Central Bank’s new head, Alexandre Tombini, said Thursday the government plans to continue to pursue an annual 4.5% target for 2011, while analysts already expect 5.32%.

`Huge' Chile Inflation Concerns Prompt Switch to Rate Increase Predictions - Economists are abandoning forecasts for Chile to end seven months of interest-rate increases after the central bank’s $12 billion plan to weaken the peso sent inflation expectations soaring to a two-year high.  Policy makers will raise rates to 3.5 percent at their meeting today, according to the median forecast of 21 economists surveyed by Bloomberg. On Jan. 10, the median prediction was that the central bank would keep borrowing costs unchanged.  Investors increased bets on inflation expectations, as measured by Chile’s swaps market, to the highest since 2008.

India's annual inflation accelerates past 8% - India's inflation rose again to 8.43 percent in December, data showed Friday, as the government announced steps to curb food prices amid mounting public anger over the cost of living. The wholesale price index, used as the main measure for inflation in India, accelerated to 8.43 percent in December from 7.48 percent in November, raising the prospect of another interest rate hike later this month. The figures will further worry the left-leaning Congress-led government, which has been buffeted by several high-profile corruption scandals and is looking to dampen frustration over spiralling food prices. Onions have been front-page news for the last month after prices more than tripled from their normal level due to unseasonable rains that spoiled crops late last year. Food inflation of 16.9 percent over 12 months was at "unacceptable levels," Finance Minister Pranab Mukherjee said on Friday.

Japanese workers take pay cuts to stay employed - Bloomberg reported that "Japanese workers´ willingness to accept wage cuts to safeguard their jobs is lowering prices and deepening deflation". This assertion was attributed to Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. Yamada also asserted that "Japan´s jobless rate would be around 10 percent, compared with the current 5.1 percent, if companies had fired workers rather than cut pay since Japan fell into a recession in 2008. " The monthly average wage in Japan has fallen to 315,294 yen, the lowest level since the government started tracking the data in 1990. Assuming an exchange rate of 90 yen to the dollar, that is roughly $3,500 per month, or $42,000 per year. Presumably Japan's employers are reducing labor cost to offset the effects of a stronger yen versus the dollar and price competition from Chinese goods on profitability.

What happens if Japan runs a trade deficit - Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus. Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is. Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky."

Five Steps Forward in 2011 - The worst of the financial/economic crisis seems to be over. But continued high growth in emerging markets depends on avoiding a second major downturn in the advanced economies, which continue to absorb a large (though declining) share of their exports. Slow growth is manageable. Negative growth is not.Thus, for the emerging economies, advanced countries downside risks and the spillover effects of their recovery policies are the key areas of concern. In several advanced countries, including the US, growth and employment prospects are starting to diverge widely, endangering social cohesion and economic openness. This situation is largely the result of predictable post-crisis economic dynamics, as firms and households in advanced countries repair their balance sheets. But it also reflects non-cooperative policy choices. Indeed, attempts to coordinate economic policy across the G-20, which accounts for 85% of global GDP, fell short of what was hoped for in 2010. So what would a coordinated set of global economic policies look like?

New Rules for the Global Economy - Dani Rodrik - Suppose that the world’s leading policymakers were to meet again in Bretton Woods, New Hamp­shire, to design a new global economic order. They would natu­rally be preoccupied with today’s problems: the eurozone crisis, global recovery, financial regulation, international macroeconomic imbal­ances, and so on. But addressing these issues would require the assembled leaders to rise above them and consider the soundness of global economic arrangements overall. Here are seven commonsense principles of global economic governance that they might agree on.

The risks of raising interest rates too quickly - Martin Wolf - To tighten or not to tighten, that is the question. It is one on which the current UK discussion risks becoming more than a bit hysterical. Yes, inflation is well above target. Yes, the Bank of England failed to forecast this. Yet these facts are neither a necessary nor a sufficient argument for tightening policy. Famously, monetary policy works with long and variable lags. No sane monetary policy – that is, no policy that seeks to avoid the certainty of futile slumps – could prevent an overshoot of the target over the next few months or even over the next year. These are just bygones. All anyone can do over bygones is weep. The question, however, is whether this overshooting might continue. The answer? Probably not. We can, in short, see no sign of an incipient wage-price spiral. Nor does one seem imminent. Expectations implicit in gaps between yields on conventional and index-linked government bonds are volatile. But they are currently at about 3 per cent. This is slightly below their average of the past six years.

Moody’s clashes with EU on advance warnings - Moody’s, one of the three big credit rating agencies, is mounting strong opposition to potential European Union proposals which would give countries several days’ advance warning when sovereign debt ratings were being issued. It has also hit out at the idea that credit rating agencies should make their full research reports available to investors free of charge when dealing with sovereign debt ratings, claiming that this could “discourage CRAs from investing in the intellectual capital required to produce credible ratings or market commentary” and lead to less research. In its response to a Brussels consultation paper which floated these suggestions late last year, Moody’s claims that giving special treatment for sovereign debt ratings would undermine market integrity. “It is critical ... that the global investor community does not view sovereign issuers as having an unmanageable influence over the rating process,” the agency said in a formal response, which was delivered to the commission last week but only made public on Monday.

The decoupling of Europe - - Rebecca Wilder - I decided to look at Eurozone unemployment rates to pass the miserable time. According to the Friday Eurostat press releaseThe euro area1 (EA16) seasonally-adjusted unemployment rate was 10.1% in November 2010, unchanged compared with October4. It was 9.9% in November 2009. The EU271 unemployment rate was 9.6% in November 2010, unchanged compared with October4. It was 9.4% in November 2009. The Eurozone started growing again in Q3 2009. But since then, the regional labor forces show a sharp divergence in resource utilization, as measured by the unemployment rates: the weak (Periphery) from the strong (core). Here's how it looked in 2007 before the Eurozone entered recession.The 2007 unemployment rates were quite similar in levels, where the differences in unemployment rates across the Eurozone are defined primarily by structural, rather than cyclical, factors. Here's how it looks now, where the weakness in resource utilization due to cyclical factors is hitting the Periphery hard compared to the core countries, especially Germany.

No happy new year for the eurozone - European crises respect the holiday season. The acute bond market crisis came to a halt mid-December, and resumed last week.  At the December summit, the European Union missed a historic chance to get on top of this crisis. We will do whatever it takes, they swore, and went home. Nobody believed them, but the panic did not start until last week, when bond yields rose, and the euro slumped. Of all the metrics of market panic, perhaps the most telling was the rise in the Markit iTraxx SovX Western Europe Index. This is a basket of mostly eurozone sovereign credit default swaps, which rose, for the first time, above the level of a similar index for central and east Europe. Just pause for a second and consider the momentous shift that has taken place: western Europe is now considered a higher risk than central and east Europe.It is wrong to think of this as a crisis of small countries in the eurozone’s distant periphery. It is a crisis of the core eurozone as well, and it is spreading fast. Last week Belgium got on to the radar screen of international investors, when sovereign credit default swaps reached new records after the umpteenth attempt to form a Belgian government failed.

Portugal's Test of Debt Market Looms This Week - The euro zone's debt crisis is entering a new phase after a brief Christmas lull as Portugal struggles to persuade investors to buy its bonds and other European governments step up pressure on the country to seek an international bailout. Portugal hopes to raise new funds in a bond auction on Wednesday ... European Union governments including Germany and France have for weeks been urging Portugal to apply for rescue loans from the joint EU-International Monetary Fund bailout facility ... the EU's deliberations over Portugal haven't reached the intensity seen ahead of the Greek and Irish rescues ... That could change quickly, however, should Portugal's borrowing costs continue to rise. Euro-zone finance ministers are set to meet Jan. 17, by which time the market's appetite for Portuguese debt should be clear.

EMU Debt Crisis Edges Ever Closer To The Core - The eurozone's debt crisis is once again in danger of spiralling out of control after yields on Portuguese debt spiked to a post-EMU high and contagion hit Spain and Belgium. The European Central Bank (ECB) intervened heavily in the markets, buying Greek, Irish and Portuguese bonds to drive down yields again, but has yet to broaden its emergency purchases to a fresh set of countries. Germany's Bundesbank is vehemently opposed to policy "creep" that involves the ECB in fiscal rescues by the backdoor.  The bank's refusal to be drawn further has left Belgium fending for itself as an escalating constitutional crisis pushes yields on its 10-year bonds to a post-euro record of 4.27pc. The country has not had a government since Flemish separatists emerged as the biggest party in elections seven months ago.

EU warns governments to do more to fight crisis - The European Union fired a warning shot Wednesday, telling governments they need to do more if they want to finally rid themselves of the financial crisis and get their economies growing again. The EU's executive Commission urged states to boost the existing euro440 billion ($571 billion) bailout fund for countries that run into financial trouble, cut public spending, and roll back benefits to make their economies more competitive. After debt market turmoil caused Greece and Ireland to require bailouts, Portugal is now being engulfed despite a successful bond sale. The fear is the crisis will spread to larger nations and cost Europe years of economic growth. "In 2011, we need to get our act together. We need to break the vicious circle of unsustainable debt, disruption in the financial markets and low economic growth in some Member States,"

Belgium’s King to Tackle Political Deadlock as Debt Woes Mount - Belgium’s king will make a fresh bid to end the 211-day post-election deadlock that has left the country without a full-time government and fanned concern that Europe’s debt crisis will widen. Belgium’s 10-year borrowing costs jumped to an almost two-year high last week, prompting business leaders to demand an immediate coalition deal between feuding parties in the Dutch- speaking north and French-speaking south. “Financial markets will be merciless if the country doesn’t extricate itself from this unprecedented hell as soon as possible,”For the first time, investors view western European government bonds as riskier than emerging- market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.

The crisis has reached Belgium - King Albert II has asked the caretaker government of Yves Leterme to draw up an austerity budget, as bond crisis spreads to Belgium; FT Alphaville says Belgium could be a bigger problem than Spain as investors had not priced in the risks in Belgium; Der Standard wonders whether Belgium could reduce reliance on foreign creditors through tax incentives to hold domestic bonds; Belgian and Italian bond spreads rose significantly yesterday amid further signs of crisis contagion; Pressure on Portugal to take up EFSF loan mounted yesterday, but the country’s political establishment remains in denial; ECB significantly stepped up interventions in Portuguese bond market leading to a slight relaxation of bond yields; the credit default swaps of several large European banks, mostly Spanish and German, shot up yesterday; Sarkozy was getting nowhere in his talks with Obama about international monetary system reform; the Financial Times, meanwhile says it is time to end the special status of senior bondholders, and to become more resolute in overcoming the crisis. [more]

Belgium, pressured by markets, awaits help from king…— Belgium's fate hung on a fresh bid Tuesday by King Albert II to find a way out of a marathon political crisis leaving the seat of the European Union open to attack from financial markets. Belgium's borrowing costs soared to record heights early Tuesday after feuding politicians from the Dutch-speaking north and French-speaking south failed to strike a highly-awaited government coalition deal last week. Now 212 days without a government, a post-war European record as of last weekend, the country's court-appointed political mediator, Johan Vande Lanotte, meets Albert II later Tuesday for talks slated to deliver a fresh way forward.

PIGS? With Belgian Breakup, Perhaps PIGS-FW - Here's something that may have been overlooked in all the current brouhaha over troubled eurozone peripheral economies Portugal, Ireland, Greece, and Spain. With two bailed out (Greece and Ireland) and one allegedly being forced to feed at the trough (Portugal), there may be another in dire straits. You see, longstanding differences between the Fleming (Dutch) and Walloon (French) sides of Belgium's--how should I describe it--conurbation have been pronounced as of late, with neither side able to establish a majority in an impasse which threatens to surpass the crusader paradise of Iraq for the longest period on record after general elections without a government of 234 days. Such political strife is causing yields on Belgian sovereign debt to begin mirroring the fate of its unfortunate neighbours. The telltale signs are there, including pricier credit default swaps. From Bloomberg:

Greece borrowing rates hit new record  — Greek bond yields have hit another record high, exceeding benchmarch German bond rates by 10 percentage points for the first time. Monday's record occurred on the eve of a euro1.5 billion ($1.96 billion) auction of 6-month treasury bills, considered an important test of market sentiment. Greece has said it wants to return to bond markets this year, but the interest gap, or spread, on 10-year bonds compared with the German issue reached a worrying 1,001.1 basis points amid renewed worries about some EU nations' struggle to handle debt loads.

Foreigners Shun Europe’s Bonds, and Debt Piles Up -  Greece. Ireland. And now, it seems, Portugal. While the circumstances that have driven these debt-ridden members of the euro zone to the brink differ, they share one common characteristic: all three countries aggressively tapped their domestic banking systems for more debt long after they had been shut out of international bond markets.  With its 10-year debt trading near the record high of 7 percent reached last week, Portugal will try on Wednesday to sustain what many have come to see as nothing more than a form of bond market charades. It will try to raise up to 1.25 billion euros ($1.62 billion) in long-term financing — debt that is expected to come largely from the country’s already depleted banking system.  For Portugal, as it was for Greece and Ireland before their bailouts, borrowing at such high rates from lower-quality lenders may demonstrate its economic sovereignty. But to an increasingly skeptical marketplace, borrowing on such terms reflects nothing more than the country’s unwillingness to accept the harsh reality of its fiscal condition. .

Germany May Soften Objections to Fund Increase as Bonds Drop (Bloomberg) -- Germany may soften its opposition to expanding the region’s 750 billion-euro ($966 billion) rescue facility as Belgium’s political deadlock sent borrowing costs surging and the European Central Bank bought Portuguese bonds. The cost of insuring against default on European sovereign debt climbed to records and European stocks fell amid concern Portugal is next in line for a bailout. Portuguese securities reversed declines after three traders with knowledge of the deals said the ECB purchased the government’s bonds. With European governments including Portugal and Spain due to borrow at least $43 billion this week, attention is shifting to whether Europe is doing enough to stem the crisis. For the first time, investors view western European government bonds as riskier than emerging-market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.

ECB intervenes as debt crisis deepens - The European Central Bank intervened to prop up the eurozone bond markets on Monday as political leaders and bankers warned the debt crisis was deepening amid fears Portugal was edging closer to an international bail-out. Although European Union officials denied they were talking about a bail-out for Portugal, the ECB had to buy the country’s government bonds to stop the market selling off steeply before important debt auctions in Lisbon on Wednesday.Investor attention is also turning towards Belgium, which has the third highest public debt-to-GDP ratio in the eurozone. The king of Belgium asked the country’s caretaker prime minister to draw up a tighter budget for 2011 than the one already agreed with the EU to ease market concerns over his country’s debt. “The crisis is reaching another key phase with debt auctions this week. It seems unlikely that Portugal can avoid a bail-out.”

Germany and France want Portugal to accept aid: report (Reuters) - Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading to other countries, German magazine Der Spiegel reported on Saturday. Without citing its sources, the magazine said government experts from both European heavyweights were concerned Lisbon will soon not be able to finance its debt at reasonable rates, after its borrowing costs rose at the end of last year. Berlin and Paris also want euro zone countries to publicly commit to do whatever it takes to protect the bloc's single currency, including topping up a 750 billion euro ($968 billion) rescue fund if necessary. Portugal is viewed by many economists as the peripheral euro zone country that is most likely to follow Ireland and Greece to seek an international bailout as it grapples to cut its debts and borrowing costs. It holds its first bond auction of the year next week.

Portugal and the EFSF: déjà vu all over again - Reuters reports that discussions have started for Portugal to seek emergency aid; size of the package is estimated to be between €50bn and €100bn; EU source say the real test of the system is not Portgual, but Spain; Socrates says no need for EFSF funds, as government was reducing deficit faster than planned; Porguguese opposition leader says Socrates needs to resign if he takes the money; Spain is nervous about its first bond issue of the year this week; Handelsblatt reports that Germany may be ready to expand EFSF ceiling; on Friday, bonds spreads rose across the eurozone, and euro is now at $1.29; Goldman Sachs is optimistic about EU growth; a group of economists at the American Economic Association’s annual meeting say eurozone is condemned to a decade of low growth; Wolfgang Münchau says eurozone crisis may soon be spreading to Belgium; Nicolas Sarkozy seeks US backing for a revision of the global monetary system; Willem Buiter, meanwhile, presents an extensive plan to sort out the eurozone’s crisis, involving a boost of the EFSF and an E-bond. [more]

Portugal Is Lashing Out At The EU Over Bailout Demands And Failure To Stabilize Euro: Last weekend leaders in France and Germany applied pressure (via the media) to Portugal in order to get it to accept an early bailout. The premise is, once again, nip this in the bud and prevent the contagion. Portugal (like every other PIIG before it) isn't buying it, and it's FinMin is lashing out at Europe. According to Reuters, Fernando Teixeira told a radio station that the country did not need a bailout, is getting its house in order, althewhile accusing European leaders of not doing enough to stabilize the euro. In the end, Teixeira's right. It's not about Portugal or Spain or Ireland or anyone else accepting a bailout. It's about France and Germany transferring money on a permanent basis to their weaker neighbors. Otherwise the whole system doesn't work.

ECB gives Portugal temporary lifeline, traders say - The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance program, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.  The Reuters report drew official denials from German Chancellor Angela Merkel on down, but economists and market analysts said it was only a question of time before Lisbon too would need a rescue.

ECB Throws Portugal a Temporary Lifeline - The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area. The interest rate premium on Portuguese sovereign debt fell on Monday after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market. "They're buying five-years and 10-years in Portugal, whatever people are offering really,"

Portugal? O Nao! - Krugman - It’s looking as if Portugal is the next eurodomino. I was hoping not — mainly, of course, for the sake of the Portuguese, but also selfishly, because it’s by far the blurriest of the troubled peripheral countries. What I mean by that is that the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn’t all that bad fiscally — debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn’t have surging house prices. There was a lot of private-sector borrowing, but it’s not that easy to explain exactly why. What’s clear, however, is that at this point Portugal faces adjustment problems similar to those of Spain, and possibly worse. Prices and labor costs are out of line with the rest of the eurozone; getting them back in line will require painful internal devaluation, aka deflation; and given the high levels of private debt, deflation will have nasty side effects.

Portugal Debt Woes Grow As Economy Now Seen Shrinking In 2011 - Portugal’s prime minister Jose Socrates insists his country doesn’t need a bailout and is cutting its debt faster than promised. However, his comments fall on deaf ears as the country's central bank now expects the country to fall back into recession next year. In its latest quarterly update, the Banco de Portugal says it thinks the economy will shrink 1.3% in 2011 as the far-reaching spending cuts announced by the government begin to take their toll. In the previous bulletin it said the economy would not grow this year.

Portugal: The next chapter - The Portuguese government almost certainly has the ECB to thank for being able to borrow 10 year debt from the markets this morning at an interest rate of around 6.7%. But even with this auction, most now consider it a question of when, not if, Lisbon will join the list of eurozone governments turning to Europe and the IMF for emergency support. Today's much anticipated auction will come as a relief. But Portugal's government needs to borrow around 20bn euros from the markets this year - a big chunk of it in the first few months. It is not plausible to anyone that they will finance that debt at an interest rate even close to 7%.By my (very rough) reckoning, its long-term cost of borrowing needs to move below 6%, for it to have a chance of stabilising the stock of government debt relative to GDP within the next few years.

Portugal Aid, Buybacks, Debt Rules Weighed in EU Plan - European governments are considering aid for Portugal, debt buybacks, lower interest rates on rescue loans and guarantees against excessive debt as part of a package to quell the financial crisis, according to four people with direct knowledge of the talks.The plan, which may include a loan to Portugal of about 60 billion euros ($78 billion) and purchases of outstanding Greek debt, would mark an attempt to contain a crisis that has frustrated unprecedented efforts by policy makers to calm markets and raised questions about the health of the 17-nation euro economy. Euro-area finance ministers will discuss elements of the package next week, though the debate is so sensitive in Germany that decisions may wait until a scheduled summit of political leaders on Feb. 4, said the people, who declined to be named because the deliberations are private.

Wildlife Wednesday – The Portu-Goose! - The investors jacking up the markets at 6am this morning understand very little about the relevance of Portugal’s sale of $1.62Bn in bonds. While the auction was a "success" with longer bonds going off at 6.7% that’s WITH intervention by China and Japan on an auction amount that either one of them could have tipped the cab driver on the ride over from the airport and not missed it. This is like going to your rich uncle for a used car loan because the bank wants 12% and your uncle says "sure I will help you out but you will owe me big time and I will make my brother’s life miserable because I have to give his kid money and I’ll never let him forget it" and then he hands you a contract to pay him back at 11.5%. Actually, Portugal didn’t even get that much of a "family discount," The last bond auction of 2010 went off at 6.8% and the fear was that the rates would go over 7% but let’s not do cartwheels over 6.7%. :

Pyrrhic Bond Auctions - Krugman - I’m with Calculated Risk here: it says something about the sheer desperation of the European situation that Portugal’s ability to sell 10-year bonds at an interest rate of “only” 6.7 percent is considered a success. If you think about the debt dynamics here — the burden of growing interest payments on an economy that is likely to face years of grinding debt deflation — an interest rate that high is little short of ruinous. But it is, indeed, not as bad as people were expecting last week; hence, success. A few more successes and the European periphery will be destroyed.

How does it feel to be slightly less insolvent? - PAUL KRUGMAN isn't really wrong hereit says something about the sheer desperation of the European situation that Portugal’s ability to sell 10-year bonds at an interest rate of “only” 6.7 percent is considered a success. A few more successes and the European periphery will be destroyed. Countries on the European periphery will be facing bond markets a number of times in coming days, and so there was a real concern that a terrible performance here by Portugal would mean a big jump in spreads and the need for another big intervention. Potentially, it could have forced Europe to make a lot of momentous decisions at once and amid a crisis atmosphere. Instead, the auction yielded a slight improvement in Portuguese yields. That means that Europe's leaders don't find themselves facing a seriously abbreviated timetable, but neither have they been let off the hook by bond markets.

Portugal making private placement of bonds (Reuters) - Portugal is in the process of making a private placement of bonds to diversify its investor base, the finance ministry said on Friday without giving any details of the operation. "I can confirm that an operation is taking place but we will make no comment about the buyer," a spokeswoman at the finance ministry told Reuters when asked about market talk that China could be buying Portuguese bonds. Portugal is viewed by many economists as the peripheral euro zone country that is most likely to follow Ireland and Greece to seek an international bailout as it grapples to cut its debts and borrowing costs.

Rumour of €80bn Bail-Out To Squeeze Portugese Bonds - Portuguese bond yields are expected to come under further pressure today, after the country's president was forced to deny the need for a €80bn (£66bn) bail-out. Aníbal Cavaco Silva, the Portuguese president, said he had no intention of asking the International Monetary Fund (IMF) or Europe for financial help.  The comments came after Germany's Der Spiegel magazine and senior eurozone sources claimed that Germany and France will push Portugal to tap the rescue fund set up for European countries facing debt problems.  Mr Cavaco Silva told Portugal's Público newspaper that he was "surprised" a German magazine is publishing news of such importance to a European Union member state without the issue being discussed by the EU authorities.

Portuguese Bond Sale May Make Bailout `Inevitable' - Portuguese yields may be rising to levels that force the nation to follow Greece and Ireland in requesting a bailout from the European Union and the International Monetary Fund to avert default. The nation plans a 10-year sale tomorrow, the first bond auction by any of the euro region’s most indebted countries this year. Its existing 10-year debt has yielded more than 7 percent in 10 of the past 62 days, according to Bloomberg data. Greece needed a rescue within 17 days of its 10-year yield breaching 7 percent on April 6, while Ireland lasted less than a month after it cracked that level in October

Europe must look beyond Portugal - Eurozone leaders must ensure that 2011 does not become a repeat – only worse – of 2010. The imminent flashpoint is Portugal. Long mentioned in the same breath as Greece and Ireland – which have both accepted rescue packages from the European Union and the International Monetary Fund – Portugal has now taken their place as the most exposed eurozone state still reliant on market funding. The yield on 10-year Portuguese sovereign debt remains near euro-era highs, above 7 per cent. There are rumours of German pressure – denied by Berlin and Lisbon alike – for Portugal to take money from the European financial stability facility. Pre-emptive action must also begin to guide the eurozone’s broader strategy. It would not be before time. Leaders have signalled that beyond Portugal, a red line is drawn: the market will not be allowed to threaten Spain. In a just world, there should be slight cause for worry. Madrid is making progress to bring its deficit under control. But the bond market acts on fear, and is capable of driving itself into a panic. Europe’s defence of Spain, should it come to that, is shrouded in silence.

Italy: Public debt reaches record level in November - Italy's public debt rose to a record 1.869 trillion euros in November from 1.867 trillion euros in October, the Bank of Italy said. The figure is equivalent to almost 120% of gross domestic product. Italy sold 3 billion euros of five-year bond at a yield of 3.67 percent, the Treasury said on Thursday. That was the highest yield for the securities since a January 2009 auction and more than the 3.24 percent the last time the debt was sold on 12 November 2010.  Italy's November public debt was equivalent to 31,165 euros for person living in the country and 89,440 euros for every one of its families, Italian consumer groups Adusbef and Federconsumatori noted.

Italy Sells Five-Year Debt at Highest Yield in Two Years, Demand Steady - Italy sold five-year bonds at the highest yield in two years as the European debt crisis boosted borrowing costs. The securities rose in the secondary market.  Italy sold 3 billion euros ($3.9 billion) of the securities at a yield of 3.67 percent, the Treasury said today. That was the highest for a benchmark 5-year bond at auction since January 2009 and more than the 3.24 percent the last time the debt was sold on Nov. 12. The Treasury also placed 3 billion euros of bonds due 2026 to yield 5.06 percent, more than the 4.81 percent at the previous auction.

Italy 'Unfairly Punished' as EU Debt Crisis Proxy - Italy, whose 10-year bond yields are near their highest in two years, may be a safer investment than its peers as the nation’s banks dodge the woes plaguing lenders in the euro region’s most indebted nations. "Italian bonds are unfairly punished," . "It doesn’t have the same structural problems that other peripheral countries have, and yet they are sold off because they are seen as a proxy to those bonds. From that perspective, their yields are attractive." Italy, which has the euro region’s second-largest debt burden, has fared better than its neighbors since Greece’s near- default last year drove up borrowing costs. Unlike Spain and Ireland, Italy’s economic growth wasn’t fueled by a housing and borrowing boom, and its banks haven’t had government bailouts. The country’s 10-year bonds yield 4.8 percent, after jumping by a percentage point in the past three months. Investors lost 0.7 percent, including reinvested interest, on Italian debt last year. That beat Greek securities, which lost 20 percent, as well as the bonds of Portugal, Ireland and Spain.

Can China save the euro? - China's Vice Premier Li Keqiang has been on a shopping spree in Europe – not for fine French wine or the latest Italian fashions, but for greater influence. Just as Europe is desperate for a new source of ready cash, Li has offered up some of China's vast hoard of reserves to support the struggling euro zone through its debt crisis. In Madrid last week, Li pledged to buy more Spanish government bonds, saying that China “has confidence and great interest in the Spanish market.” With its bonds continuing to weaken, and its borrowing costs continuing to rise, Spain needs all of the customers it can find. (The two countries also signed $7.3 billion in business deals.) Then Li went on to Berlin, where he pledged in a speech that China would continue to support Europe and its monetary union. Li's comments follow similar statements made by Premier Wen Jiabao during the latter's visit to Greece in October. Wen, too, promised to aid Europe through the crisis by buying Greek debt.  Clearly, Beijing has the money. Analysts estimate that China's currency reserves likely came close to $2.8 trillion at the end of 2010 – almost triple the size of Europe's entire bailout fund for weak sovereigns, cobbled together in May. And there are logical reasons why Beijing would want to use some of that war chest to help Europe. But like all of the previous efforts to resolve Europe's problems, the notion that China can or will significantly alleviate the debt crisis is likely just another mirage.

Europe Fears Motives Of Chinese Super-Creditor  - Herman Van Rompuy, Europe's president, said during a visit to Downing Street that the Chinese may have "political" thoughts in the back of their minds for coming to Europe's help, and gave a strong hint that they are also engaging in currency manipulation.  "When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate," he said.  Mr Van Rompuy nevertheless welcomed the latest purchases of bonds from the eurozone periphery as a valuable gesture of support. "They invested even in some weak countries, so they are very confident in the solvency of some countries," he said. China has emerged as the transforming force in the eurozone debt crisis over recent days, pledging to use part of its €2.87 trillion (£1.82 trillion) reserves to safeguard global stability. The question is whether the Communist regime is hoping to extract strategic concessions in exchange.

Japan Joins China in Assisting Debt-Crisis-Hit Europe - Japan plans to buy bonds issued by Europe’s financial-aid funds, its finance minister said, joining China in assisting the region as it battles against a debt crisis that prompted bailouts of Ireland and Greece. “There is a plan for the euro zone to jointly issue a large amount of bonds late this month to raise funds to assist Ireland,” Finance Minister Yoshihiko Noda said. “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20 percent.” The euro gained against the yen as the statements of support showed that the country with the world’s second-largest foreign-exchange reserves, after China, may help stem the risk of the crisis spreading. Japan will use its foreign-exchange reserves to buy more than a fifth of bonds to be issued later in January by the European Financial Stability Facility, Noda said. Japan’s reserves total $1.096 trillion, the government said today. That compared with China’s $2.648 trillion, according to data compiled by Bloomberg.

Japanese Pledge Eases Tension In European Markets - Japan's pledge to support Europe's bailout efforts helped ease the pressure on markets Tuesday ahead of a Portuguese bond auction that may show whether the highly indebted nation needs a bailout soon. The news from Japan gave investors much-needed relief as they face a string of crucial European government debt sales. Portugal plans a bond auction of a little over euro1.2 billion ($1.55 billion) Wednesday, followed by bigger issues Thursday from Spain and Italy. Earlier short-term bill auctions from Greece and Italy went through fairly smoothly..... Minister Yoshihiko Noda announced Tuesday that his country is "considering buying more than 20 percent of bonds" issued by Europe's bailout fund to pay for Ireland's rescue.

Strong Demand at European Debt Auctions - Spain, Italy and Hungary all carried out successful bond auctions Thursday, as investors showed strong demand for the bonds following Portugal's better-than-expected bond auction on Wednesday.But the results failed to dispel worries about debt levels in the euro zone's fiscally frail countries, as investors focused on the higher yield Spain had to pay and the potential for weaker demand at the next round of bond sales.  Both Spain and Italy sold the maximum intended amounts they had planned, with Spain selling €3 billion ($3.94 billion) of a five-year bond and Italy selling €6 billion in five- and 11-year bonds. Spain's Treasury sold the bonds at an average yield of 4.542%, up from 3.576% at the previous auction Nov. 4 ... Italy sold its five-year bond at a yield of 3.67%, up from 3.24% on Nov. 12, while the yield on the longer bond rose to 5.06% from 4.81%.

European Banks Addicted to ECB Lending - The European Central Bank’s addicted bank problem continued through December, according to the latest lending figures from national central banks. Irish banks borrowed 132 billion euros from ECB facilities as of the end of December, a 4.4-billion-euro drop from November, according to figures Friday from Ireland’s central bank. Irish banks still account for almost one-quarter of all ECB lending even though the economy accounts for less than 2% of euro zone GDP. But that small drop was offset by a 6.4-billion-euro rise in the “other assets” component of Ireland’s central bank balance sheet, to 51.1 billion euros. That category includes emergency loans made to commercial banks directly from the Irish central bank, and not the ECB. Banks can post lower-quality collateral for these loans, but there’s a catch: the full ECB has to approve use of this facility at each governing council meeting.

And now for the inevitable: finance ministers to discuss raising of EFSF ceiling - Ecofin/eurogroup to discuss the future of the EFSF next week; Olli Rehn is calling for an increase in the funding ceiling of the EFSF and other backstops; European Commission may propose a pooling of sovereign debt issues; sovereign bond spreads eased ahead of today’s Portuguese bond auction; Michel Barnier is proposing a new round of bank stress tests; Nouriel Roubini says it is absurd for the EU to focus on 2013; Otmar Issing warns against political union through the backdoor of a monetary union; King Albert II of Belgium asked the political mediator to launch a new attempt at banging heads together; the French Socialists have a agreed a schedule for their primaries, as all eyes are on DSK; the Bank of Portugal expects the economy to shrink by 1.3% this year; Germany plans to raise the ceiling of its bank levy; Wolfgang Munchau says the eurozone crisis will not end until debt is restructured; FT Deutschland’s Das Kapital, meanwhile, says the eurozone crisis may be bad, but the US debt crisis is worse. [more]

Barroso Urges Broadening of Euro Zone Bailout Fund - As Portugal gained some breathing room Wednesday with strong demand for its bonds, European officials pushed for a longer-term solution to the euro-zone debt crisis, setting a deadline of less than a month to agree on expanding the size and reach of the bailout fund.  The bailout fund’s “financing capacity must be reinforced and the scope of its activities widened,” José Manuel Barroso, the commission president, told a news conference. He said it was “perfectly possible” to come to a decision by Feb. 4, when European Union leaders are scheduled to meet. European officials say Mr. Barroso sees an opportunity, after Portugal’s relatively successful bond sale, to end a cycle in which the 17 euro zone countries have been forced into crisis management, bailing out first Greece then Ireland under duress from bond traders.

Portugal Aid, Buybacks, Debt Rules Weighed in EU Plan - European governments are considering aid for Portugal, debt buybacks, lower interest rates on rescue loans and guarantees against excessive debt as part of a package to quell the financial crisis, according to four people with direct knowledge of the talks. The plan, which may include a loan to Portugal of about 60 billion euros ($78 billion) and purchases of outstanding Greek debt, would mark an attempt to contain a crisis that has frustrated unprecedented efforts by policy makers to calm markets and raised questions about the health of the 17-nation euro economy. Euro-area finance ministers will discuss elements of the package next week, though the debate is so sensitive in Germany that decisions may wait until a scheduled summit of political leaders on Feb. 4, said the people, who declined to be named because the deliberations are private.

Eurozone promises comprehensive medium-term anti-crisis plan - It always takes a little bit of market panic to bounce Europe’s complacent leaders into action; EU’s finance minister promise to work out a strategy within two months that will almost include an EFSF with a wider remit and a higher ceiling; Barroso says decision possible at next EU summit on Feb. 4; Merkel said fund size sufficient, but Germany was ready to do whatever is necessary; Portuguese bond auction success, with 10-year bond at 6.71%; euro recovers after Portguese bond auction, and peripheral bond spreads narrow; FT Deutschland says support for a higher EFSF ceiling comes at a wrong time; Brussels plans one-off bank levy; Andrea Enria, an Italian central bank, is to head the new European Banking Authority; the head of the Italian Treasury says Italy is not Spain; Sarkozy is contemplating the scrapping of the wealth tax; Ireland seeks private insurance against banking losses [more]

France and Germany veto increase in EU rescue fund - Jose Barroso, head of the European Commission, called on EU leaders to boost the firepower of the EU's €440bn (£366bn) bail-out fund and beef up its role, allowing it to intervene with pre-emptive bond purchases to help states under threat.  "It is important for the markets to know that Eurozone leaders are committed to do whatever is necessary," he said, hoping for action as soon as early February.  He also proposed a "new phase of European integration" with far-reaching oversight of the budgets, pensions, labour markets, and trade flows of EU states to prevent a recurrence of the imbalances that led to the EMU debt crisis.  The response in Paris and Berlin was chilly. "We think the fund is big enough," said Francois Baroin, France's budget minister. German Chancellor Angela Merkel said the bail-out mechanism was "nowhere near exhaustion", adding curtly that she did not wish to debate the matter "any further".

EFSF reform to go ahead - Germany accepts the need for an increased lending ceiling of the EFSF and a wider remit; but Germany insists on a wider package that might include a tougher stability pact; one of the options considered in Berlin is not a rise in the lending ceiling, but a rise in the guarantees; Schäuble says a decision could be taken in March; Trichet sends a tough message on inflation, but holds off on signalling higher interest rates; Stark is already talking about second-round effects; financial markets reacted with near euphoria to the Portuguese bond auction success; bond spreads narrow further, and the euro rises; Paul Krugman says Europe must be pretty desperate to celebrate an insolvency-inducing 6.7% interest rats for Portugal; Portugal has been shifting its funding towards direct placements, and shorter maturities; Spanish government plans new capital injection for Caixas; Sarkozy says the Irish cannot expected further European help unless they raise their corporation tax rate; he is also sending further mixed messages on fiscal reform; Hermann van Rompuy, meanwhile, says he does not want to upset the Chinese over the exchange rate: it is too delicate a subject. [more]

France says EU pondering larger bailout fund (Reuters) - Germany faced mounting pressure from its euro zone partners on Friday to boost a rescue fund for troubled member states after French Economy Minister Christine Lagarde said governments were considering expanding it. In a sign of significant differences within the currency bloc in the runup to a meeting of its finance ministers next week, Chancellor Angela Merkel's spokesman said the fund set up in May was big enough and sources told Reuters that Berlin was determined to resist increasing it unless the crisis worsened. Lagarde told a news conference: "The increase in the European Financial Stability Facility (EFSF) is one option which we are looking at, of course." In response, the German government reiterated that it saw no need to commit more funds to the 440 billion euro ($590 billion) facility, which has so far been tapped only by Ireland.

'Europe Has to Stop Appearing Like a Headless Chicken' - There was a small glimmer of hope amidst Europe's economic gloom this week as first Portugal and then Spain managed to sell bonds at lower than expected interest rates. Yet uncertainty over the extent of the euro zone's debt crisis and division within the currency union's leadership about how to address it means that investors are still nervous.  Europe has failed to forge a common stance on whether or not its massive rescue fund needs to be increased, despite the fact that so far only Ireland has availed itself of the loans. While Brussels wants to expand the mandate and lending capacity of the fund, European Union leaders, particularly in Berlin and Paris, are balking at contributing even more to bailing out struggling euro-zone partners.

Europe Failed to Clear 'Skepticism' on Debt Crisis, IMF Says - Europe has yet to allay investor “skepticism” about the sustainability of the region’s debt, and any spread of the crisis would cloud global economic prospects, the International Monetary Fund’s number three official said. “At least for now it looks like the spillover from the European sovereign crisis to areas outside of the region will be limited,” Naoyuki Shinohara, deputy managing director at the IMF, said in an interview in Tokyo yesterday. “However, if the European sovereign debt problems were to become bigger, we need to keep in mind that that could bring about considerable downside risks.”

Euro looks set to win the race to the bottom - Rogoff - Currency movements are notoriously difficult to explain, much less predict. Even so, 2010 was an exceptionally tough year. Foreign exchange participants were forced to divine idiosyncratic and conflicting policymaker preferences, to interpret rare events such as Europe’s sovereign debt woes, and to understand obscure policy instruments such as quantitative easing. But other less concrete factors, such as Europe’s bogus bank stress tests and investor unease with the Fed’s quantitative easing, seemed to play a larger role. Whenever the favoured market explanation of a big exchange rate movement is “the Chinese are buying”, one has to wonder whether exchange rates have any anchor in long-term macroeconomic fundamentals. Entering 2011, our currency crystal ball doesn’t seem to be getting any clearer. US budget policy is deliciously contradictory, cutting taxes while promising to balance the budget later, dramatically expanding entitlements while vowing to rein them in later. And because the dollar is so popular, the US is being sure to print lots of them. The basic strategy is to hope that fiscal tightening in the periphery combined with generous liquidity relief from the core will solve all ills. The only problem is that the populations of Greece, Ireland, Portugal and perhaps Spain, cannot be asked to suffer recession indefinitely so that foreign creditors can be repaid

Euro Looks Set to Win Race to Currency Bottom, Rogoff Says - The euro may “win the race to the bottom” of currency values this year as policy makers struggle to stem the region’s sovereign debt crisis, former International Monetary Fund chief economist Kenneth Rogoff said.  The euro area “has a high chance of a medium-sized meltdown,” Rogoff wrote in an article in the Financial Times published today. In the U.S., there is a “small chance of a large catastrophe.”  Comparing the challenges faced by policy makers globally, Rogoff said his money “is still on the euro” to “hugely” underperform this year.  “I am cautiously optimistic that Europe will find a way to manage its country bankruptcies, but there are no elegant solutions, and the possibility of political paralysis at just the wrong time is significant,” he said.

The Road to Economic Crisis Is Paved With Euros - Krugman - Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation.  The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable.

Satyajit Das: European Death Spiral – Mission Unaccomplished - In early 2010, drawing on the military leadership of President George W. Bush, European leaders declared the economic equivalent of “mission accomplished”. A bailout – whoops support! – package of Euro 750 billion had shocked and awed speculators into submission. Like the Bush pronouncement, the European prognosis provided premature. The return of European sovereign debt problems in late 2010, culminating in the bailout of Ireland highlighted the deep seated and perhaps intractable problems of some over indebted European nations.

Satyajit Das: European Death Spiral – Communicable Diseases - European politicians and central bankers have provided useful geographical clarifications. Prior to succumbing to the inevitable, the Ireland told everyone that they were not Greece. Portugal is now telling everyone that it is not Greece or Ireland. Spain insists that it is not Greece, Ireland or Portugal. Italy says it is not in the “PIGS”. Belgium insists it was no “B” in “PIGS” or “PIIGS”. EU pressure on Ireland to accept external “help” was to safeguard financial stability in the Euro area, as much as rescue Ireland. However, contagion is proving difficult to prevent. Greece had a bloated public sector and an uncompetitive economy sustained by low Euro interest rates. Ireland suffered from excessive dependence on the financial sector, poor lending, a property bubble and an increasingly generous welfare state. Portugal has slow growth, anaemic productivity, large budget deficits and poor domestic savings. Spain has low productivity, high unemployment, an inflexible labour market and a banking system with large exposures to property and European sovereigns. Italy has low growth, poor productivity and a close association with the other peripheral European economies. . The Italian banking system is relatively healthy but exposed to European sovereign debt. Belgium is really two ethnic groups that share a king and high levels of debt (about Euro 470 billion, 100% of GDP).

Satyajit Das: European Death Spiral – End Games - Politics now increasingly dominates the economics. Commenting about the EU bailout of Ireland, the Irish Times referred to the Easter Rising against British rule asking: “was what the men of 1916 died for a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side”. An Irish radio show played the new Irish national anthem to the tune of the German anthem. In Greece, the severe cutbacks in government spending have resulted in strikes and violent protests on the streets of Athens. Faced with cutbacks in living standards, Europeans are fighting back. In many countries, governments, often unstable coalitions, are struggling to pass legislation, implementing necessary spending cuts or tax increases. In Ireland, the opposition parties have promised to re-negotiate the bailout package if elected at an election due early in 2011. In Germany, the paymaster and strength behind the EU, Europe’s biggest tabloid Bild asked “First the Greeks, then the Irish, then…will we end up having to pay for everyone in Europe?”

Fiscal Crises, Governance Failures Risk Disrupting Global Economy - Lax fiscal policies, volatile energy and food prices and growing pension liabilities have emerged as the most probable risks to disrupt the global economy and risk triggering sovereign debt defaults, the World Economic Forum said in a report Wednesday.  As European countries such as Greece, Ireland and Portugal are struggling with inflated debt levels, insurance and risk experts, who helped compile the report, warn that structural changes across the Western world are necessary to avoid a deepening of the financial crisis. Governance failures would otherwise risk hurting the world's economy, they say.  "Current fiscal policies are unsustainable in most industrialized economies," "In the absence of far-reaching structural corrections, there will be a high risk of sovereign defaults." 

Portugal, Ireland Lead Rise in Sovereign Debt Risk to Records -- Portugal and Ireland led a surge in the cost of insuring against default on European sovereign debt to record levels on concern government funding costs are becoming unsustainable.Credit-default swaps on Portugal jumped 11 basis points to a peak of 549, according to CMA. Ireland soared 26.5 basis points to an all-time high 682 and Belgium was 7 higher at a 255. That helped push the Markit iTraxx SovX Western Europe to a record 223 basis points. Investors are bracing for debt sales this week from Portugal, Spain and Italy. Portuguese bonds fell today amid mounting speculation the nation will have to tap the European Union’s 750 billion-euro ($966 billion) rescue facility if its yields remain above 7 percent.

Buiter: There are no absolutely safe sovereigns - These are the conclusions that Citigroup’s Chief Economist Willem Buiter and his team have drawn regarding the ongoing sovereign debt crisis.  Their full analysis is well worth reading and is embedded below.

    • There are no absolutely safe sovereigns — ‘rates analysis’ has to be done simultaneously with ‘credit analysis’ for all sovereigns, including the G3.
    • There are likely to be several sovereign debt restructurings in the euro area  (EA) in the next few years. Liquidity support should not stop this; only  permanent bail-outs would.
    • The sovereign debt crises of the euro area periphery interact with banking sector weaknesses throughout the EU. Both need to be addressed for a lasting  solution.
    • Ireland’s financial support package will buy time, but does not address the  fundamental insolvency issues of the consolidated sovereign and banking system.
    • Portugal is likely to access the EFSF soon.
    • The current size of the liquidity facilities looks insufficient to prevent speculative attacks or even to fund Spain completely for three years.

Global Risk and Reward in 2011 - Nouriel Roubini - The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.  On the downside, one of the most important risks is further financial contagion in Europe if the eurozone’s problems spread – as seems likely – to Portugal, Spain, and Belgium. Spain now seems too big to fail yet too big to be bailed out. The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation.  In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later, with China, in particular, risking a hard landing.

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