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

Saturday, March 26, 2011

week ending Mar 26

Federal Reserve Balance Sheet Rises To $2.605 Trillion - The Fed's asset holdings in the week ended March 23 climbed to $2.605 trillion, from $2.587 trillion a week earlier, it said in a weekly report released Thursday. It was the seventh consecutive week in which assets were above $2.5 trillion. The Fed's holdings of U.S. Treasury securities rose to $1.305 trillion on Wednesday from $1.280 trillion the previous week.  Meanwhile, Thursday's report showed total borrowing from the Fed's discount window fell to $19.51 billion Wednesday, from $19.95 billion a week earlier. Borrowing by commercial banks rose to $7 million Wednesday from $4 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts were unchanged at $3.410 trillion. U.S. Treasurys held in custody on behalf of foreign official accounts also remained the same, at $2.648 trillion for the second straight week.  Holdings of agency securities, meanwhile, fell to $761.60 billion from the previous week's $762.03 billion.

Fed Assets Rise to Record $2.61 Trillion on Treasury Purchases - The Federal Reserve’s total assets rose by $18.3 billion to $2.61 trillion, the eighth consecutive record-setting week, 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 $24.9 billion to $1.31 trillion as of yesterday. The Fed’s holdings of mortgage-backed securities fell by $255 million to $943.8 billion and federal agency debt fell by $7.5 billion to $132.5 billion, according to a weekly release by the central bank today.  The central bank has purchased $465.4 billion in Treasuries since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt.The Fed said the M2 money supply fell by $25.2 billion in the week ended March 14. That left M2 growing at an annual rate of 4.2 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target. For the latest reporting week, M1 fell by $3.2 billion, and over the past 52 weeks, M1 rose by 9.6 percent

A Look Inside the Fed’s Balance Sheet - interactive - Assets on the Fed’s balance sheet expanded to around $2.584 trillion in the latest week from $2.566 trillion a week earlier. Nearly all the additions came from $25 billion in Treasury purchases.  Though the overall size of the balance sheet is continuing to increase, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds nearly $1 trillion in MBS, but now owns more Treasurys — over $1.305 trillion. Meanwhile, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended last March, and continues to fall due primarily to voluntary prepayments as the market improves and other financing options become more attractive. Liquidity swaps with foreign central banks have fallen back to zero after jumping last spring in response to European sovereign debt concerns. Direct-bank lending has fallen to the tens of millions of dollars. The Fed still holds some $64 billion in assets related to the rescue of Bear Stearns and AIG, though that level dropped substantially earlier this year when AIG closed its recapitalization plan and repaid credit extended to it. See a full-size version. Click on chart in large version to sort by asset class.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 24, 2011

Federal Reserve reports record profit - The Federal Reserve turned a record $81.7 billion profit in 2010, up 53 percent from 2009, the central bank reported Tuesday. The vast majority of the Fed's profit — $79.3 billion — will be turned over to the Treasury Department, with the rest being paid out to member banks in dividends. A substantial chunk of that profit came from increased interest income from the $1 trillion in mortgage-backed securities the Fed purchased during the financial crisis to help stabilize the housing market. The Fed made $24.4 billion more in interest on those holdings in 2010. The central bank also made $3.5 billion in interest from its increased holdings in Treasury bonds, as it buys up Treasury debt in an effort to boost private lending.  While the Fed is still reaping profits from its intervention into the financial system during the crisis, it is beginning to wind down other areas where it had stepped in. Loans given to insurance giant American International Group, Inc. (AIG) declined slightly in 2010 to $20.6 billion, from $21.3 billion in 2009. As a result, the Fed made roughly $1 billion less in interest on those loans. In addition, the Fed nearly halved its investment in the Term Asset-Backed Securities Loan Facility, which shrank to $24.9 billion from $48.2 billion in 2009.

Fed reports massive profits - As Americans continued to suffer a declining economy, high unemployment, and rising prices, the US Federal Reserve raked in a record $81.7 billion profit in 2010 – a 53 percent increase for 2009. The Fed’s intervention into the US financial crisis has paid off well for the bank. It is reaping profits for bailing out failing banks and buying US government debt, and then charging interest on top of it.  Annual financial statements for the system showed the bank increased its overall asset holdings by $193 billion in 2010, reaching a total of $2.428 trillion to date. The Fed’s push for quantitative easing, while it may not have currently corrected the US markets, certainly increased the bank’s own revenue stream. Analysts say the increase was driven heavily by the Fed’s purchase of billions of dollars in Treasury bonds.  The bank’s holdings in US Treasury securities rose by nearly $261 billion in 2010, reaching a total of $1.06 trillion.

Fed Projects Profit Will Decline - The Federal Reserve reported yesterday a record profit of $81.74 billion for 2010. According to projections from the New York Fed that may increase this year, but will begin to fall over the next few years. The bulk of the Fed’s profit, which was significantly boosted in 2010 by the expansion of its balance sheet and the concentration of its holdings in long-term securities, comes from its open market operations. Over the course of the next few years the New York Fed expects that net income to drop from current levels as the Fed seeks to reduce its portfolio of holdings to precrisis levels and increases the interest it pays banks on the reserves they hold at the central bank. Net income also could drop if the Fed is selling its holdings as longer-term interest rates increase, which would reduce the market value of the assets the central bank holds. (See a chart of the assets held by the Fed) The New York Fed estimated what its profit would look like amid higher rates and a reduced balance sheet. Both of those scenarios would be an indication the economy is recovering. To calculate a reduction in the size of the balance sheet, economists used projections in a San Francisco Fed paper. That assumes that the balance sheet will expand through June 2011 as the Fed completes its latest round of bond purchases, known as QE2, but won’t start to decline until mid-2012 — eventually falling by $80 billion a quarter over four years.

Fed to Send $79 Billion to Treasury - The Federal Reserve‘s net income surged 53% to $81.74 billion last year from 2009 mainly due to higher earnings from securities the central bank bought to counter the financial crisis, according to final audited results released Tuesday.Almost all of that income — $79.27 billion — will be sent back to the U.S. Treasury. The record transfer marks a 68% increase from the $47.43 billion the Fed sent back to Treasury in 2009. The figures were slightly higher than preliminary results published in January. To fight the financial crisis, the Fed bought securities whose value had collapsed due to fear and uncertainty in markets and set up emergency lending programs for banks and firms, thus boosting its balance sheet. The central bank came under attack for taking too many risk with taxpayers money and putting itself in a position to suffer losses. However, so far the Fed’s crisis-lending programs have brought profits. The 2010 income rise was mainly a result of $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to help stabilize the housing market. As of last week, the Fed held a similar amount of such securities. (See a chart of the Fed’s balance sheet)

Fed’s Fisher Opposes Extension of QE2 - U.S. Federal Reserve Bank of Dallas President Richard Fisher said he opposes any extension of the Fed’s asset purchase program after June, saying inflationary pressures are building “world-wide.” “No further accommodation is needed after June,” Fisher said in a speech at Goethe University in Frankfurt. “We can no longer press on the monetary pedal.” Last week, the Fed voted to maintain its key lending target near zero and maintain its planned $600 billion in Treasury purchases through June. Fisher has been skeptical of the program, dubbed QE2, saying two weeks ago: “I remain doubtful enough as to its efficacy that if at any time between now and June, it should prove demonstrably counterproductive, I will vote to curtail or perhaps discontinue it.” Fisher said Tuesday that, had he been on the Fed’s vote-setting council last year, he would have voted against QE2.

NY Fed Launches New Operations to Ensure Readiness to Shrink Balance Sheet -- The Federal Reserve Bank of New York announced Wednesday it would launch a new round of small reserve repo operations on Thursday that will move toward including its newly expanded list of primary dealers and money funds. The New York Fed said the reverse repo operations aren’t intended to signal any shift in the Fed’s monetary policy stance. The reverse repos are designed to drain reserves from the system by temporarily selling to Fed counterparties securities like Treasury, mortgage and agency debt. “Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve,” the New York Fed said in a statement. “These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future,” the bank said.The New York Fed noted these “small-scale, real-value” operations would use “all eligible collateral types.”

What Goes Up... It’s no secret that the Federal Reserve’s balance sheet has exploded in recent years, courtesy of the blowback from the financial crisis of late-2008 and the Great Recession. That includes holding more Treasuries. But not all Treasuries are equal when it comes to maturities on the books at the central bank. Most of the ballooning portfolio of government-held debt is in medium-term Treasuries with maturities of 5-to-10-year maturities, according to Fed data. Some of this (all of this?) will flow back into the private sector with QE2’s scheduled unwinding later this year. Barring any glitches, the market’s on track to see a fair amount medium-term Treasuries on sale this year.

Mauldin: The End of QE2  - What happens when the Fed is finished with QE2? I have been letting that filter into my thinking lately as I look at the economic landscape and the data we have seen the past few weeks. Correlation is not causation, as I often say, but all we can do is look back at what happened last time and speculate about the future. You come with me at your own risk! The Fed committed to buying $600 billion of Treasuries between the beginning of QE2 in November and the end of June. June is 3 months away. What will happen when that buying goes away? The hope when QE2 kicked off was that it would be enough to get the economy rolling, so that further stimulus would not be deemed necessary. We’ll survey how that is working out, with a quick look at some recent data, and then we go back and see what happened the last time the Fed stopped quantitative easing.

Richard Alford: Fed Policy, Market Failures and Irony - US Policymakers and elected officials are again debating the most appropriate policy mandate for the Fed. The two principle contenders are the dual mandate (inflation and unemployment) and the inflation-only mandate. The proponents of these two mandates present them as “optimal” or at least superior to any alternatives. However, the inflation of the late 1970s and the economic and financial dislocations that followed the recent asset price bubbles demonstrate that policy driven by Phillips Curve considerations alone can contribute to less-than-satisfactory outcomes. Nonetheless, economists and policymakers appear to be unable to divorce themselves from the Phillips curve mentality, which posits that there is a tradeoff between inflation and unemployment.  During the oil shocks of the 1970s, the Fed attempted to insulate the real economy and the labor market from the repeated OPEC-induced negative supply shocks. This effort resulted in a serious acceleration in the rate of inflation and behaviors of inflation and unemployment that were inconsistent with the Phillips Curve hypothesis. The return path to price stability ran through a costly double-dip recession.  The experience of the 1970s ended the use of the Phillips Curve as a guide to policy. The “natural rate of unemployment hypothesis” replaced the Phillips Curve in economists’ tool kits.

Indirect rant about Yglesias and Bernanke - Kevin Drum decided to quote Matthew Yglesias, so I left my usual tirade in his comments section. Yglesias simply assumes that a "more expansionary" monetary policy would have lead to lower unemployment. Now he is debating Paul Krugman who claims that such a policy is not feasible (it would require the ability to precommit to making inflation high when unemployment is low and there is no way anyone can convince anyone that he will do that). In fact during the long period in which Yglesias has been criticizing Bernanke, the Fed instituted QE2. This is not a huge intervention compared to other interventions by the Fed under Bernanke, but it is a much huger expansion of high powered money than any ever under any previous chairman. It had no measurable effect on anything. Yglesias just refuses to consider the possibility that monetary policy might be less effective when the Federal funds rate is essentially zero than when it is over 10%. He doesn't argue that there is something more which would have worked.He just assumes that he understands monetary policy better than Paul Krugman.

Raise Rates to Boost the Economy - The chairman of the Federal Reserve is stuck between a rock and a hard place—well, more like a house and a gas tank. How to escape? Mr. Bernanke, raise interest rates now. It's all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000? Some banks will sputter, and maybe even fail, even the big boys. But they've already had two years since the end-of-the-world sell-off in March 2009 to get their acts together, and many can now pay dividends. Hopefully the FDIC is ready to dive in and remove the remaining toxic mortgage assets of any failing banks, along with their managements, and then refloat the institutions. But along with a likely lower stock market and failing banks will be several positive effects that will finally kick-start the economy. Oil and wheat and commodities will see a 20%-30% drop in price as speculators run for the hills. This will be a de facto tax cut for consumers. Hiring should restart when businesses see normal short-term rates, most likely 2%.

The Wall Street Journal's silly Orwellian economy fix -The Wall Street Journal has an early April Fool's entry -- an opinion piece by former hedge fund manager Andy Kessler arguing that the Federal Reserve should raise interest rates to boost the economy. The key paragraphs: It's all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000? Some banks will sputter, and maybe even fail, even the big boys. But they've already had two years since the end-of-the-world sell-off in March 2009 to get their acts together... Mark Thoma is pithy in his scorn: "The key to recovery begins with a Fed induced stock market crash, followed by failing banks -- perhaps even systemically important ones?" Yep, that's certainly "counterintuitive." Even with nascent signs of recovery in labor markets, consumer confidence is shaky and concern about the health of the economy high. But Kessler thinks that the sight of a few big banks going down in tandem with a plummeting stock market will change that dynamic for the better! That seems rash.

Fed Must Release Loan Data as High Court Rejects Appeal - The Federal Reserve will disclose details of emergency loans it made to banks in 2008, after the U.S. Supreme Court rejected an industry appeal that aimed to shield the records from public view.  The justices today left intact a court order that gives the Fed five days to release the records, sought by Bloomberg News’s parent company, Bloomberg LP. The Clearing House Association LLC, a group of the nation’s largest commercial banks, had asked the Supreme Court to intervene.  “The board will fully comply with the court’s decision and is preparing to make the information available,” said David Skidmore, a spokesman for the Fed.  The order marks the first time a court has forced the Fed to reveal the names of banks that borrowed from its oldest lending program, the 98-year-old discount window. The disclosures, together with details of six bailout programs released by the central bank in December under a congressional mandate, would give taxpayers insight into the Fed’s unprecedented $3.5 trillion effort to stem the 2008 financial panic.

Fed’s Court-Ordered Disclosure Shows Americans’ ‘Right to Know’ — A Supreme Court order that forces unprecedented disclosures from the Federal Reserve ended a two- year legal battle that helped shape the public’s perceptions of the U.S. central bank. The high court yesterday let stand a lower-court ruling compelling the Fed to reveal the names of banks that borrowed money at the so-called discount window during the credit crisis. The records were requested by Bloomberg LP, the parent company of Bloomberg News. In July, Congress passed the Dodd-Frank law, which mandated the release of other Fed bailout details. Fed Chairman Ben S. Bernanke “now must finally understand that this money doesn’t belong to the Federal Reserve, it belongs to the American people and the American people have a right to know how their taxpayer dollars are being put at risk,” said Senator Bernard Sanders, a Vermont Independent who wrote Fed transparency provisions in Dodd-Frank.

Morgan Stanley’s Deep Secret Now Is Revealed - Here’s a little secret the Federal Reserve Board doesn’t want you to know. On Sept. 24, 2008, while financial markets were collapsing, Morgan Stanley borrowed $3.5 billion through the Fed’s oldest lending program, the 98-year- old discount window.  The Fed has long claimed that releasing this type of data could trigger bank runs, public hysteria, death spirals at financial institutions large and small, and other horrible outcomes. Yet I’ve got a hunch Morgan Stanley somehow will survive this revelation. Mass panic will not ensue. The world will not end.  This is the kind of information the late Bloomberg News reporter Mark Pittman was seeking when he filed a Freedom of Information Act request with the Fed in May 2008, nine months after the financial crisis began. Among other things, he asked for documents showing which banks had borrowed money under the Fed’s emergency-lending programs and the details of those loans.  The Fed blew off his request.

Matt Stoller: The Federal Reserve’s Wheezy Independence Takes Another Hit - You might have noted a few days ago that the Supreme Court ruled against Federal Reserve secrecy.  The case had to do with a lawsuit by Bloomberg’s Mark Pittman demanding access to emergency loan documents relating to the Fed’s bailout of Bear Stearns.  As the case traveled up the court system, major banks joined the Fed’s attempt to shield the information from public scrutiny.  Eventually, the Fed dropped the suit, but the banks didn’t give up. A few days ago, the Supreme Court refused to hear the case, letting a lower court decision in favor of Pittman stand.  The Fed will now be releasing Bear Stearns-related emergency lending documents in a few days. It’s a historic case.  You wouldn’t know that, however, by the response from Wall Street. “I didn’t even know it was happening,” a senior bank executive said by phone this week when asked about concern over the pending release. There are no crisis meetings to discuss how to manage public reaction to release of the information, he said. This is a far cry from the intense opposition to Fed transparency just last year from both Treasury and Wall Street.  The big banks, in the form of one of their trade groups known as the Clearinghouse Association, were crying wolf as late as 2010.

NY Fed Economists Enter Blogosphere - Economists at the New York Fed are getting into the blogging game. The economists at the central bank’s most important regional branch will now be translating the frequently highly technical research its large staff of analysts produces into terms the public can understand.In moving into the arena, the New York Fed follows the path blazed by economists at the Atlanta Fed, who have also used the breezy and colloquial format afforded by blogging. The Atlanta Fed is well known for its surprisingly candid commentary on the data of the day. Other regional Feds banks have launched features on their websites to allow staffers to comment on data and other economic issues. Meanwhile, the San Francisco Fed has been a weekly publisher of easy-to-understand research reports, many of which are streamlined versions of weightier efforts. The New York Fed has had its own version these releases, its new Liberty Street blog is an extension of that. “We have created this blog to augment our existing publications by providing a way for our economists to engage with the public about economic issues quickly and frequently,”

Glasnost! - Ben Bernanke will be meeting the press, the Fed announced: Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions. In 2011, the Chairman's press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve's website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings. . The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding. 

Another step to enhance Fed transparency - Atlanta Fed's macroblog - As most of you probably know, the Federal Reserve announced yesterday that:"Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions."The announcement, I think, makes the intent of these press conferences abundantly clear:"The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding." Communications, accountability, and credibility are being tested at the moment, as aptly described in a New York Times op-ed from former Fed Governor Larry Meyer (no registration required if you link via Real Time Economics):

 US monetary policy and the saving glut - At the Paris G20 meeting on 18 February 2011 , Federal Reserve Chairman Ben Bernanke squarely laid the blame for the financial crisis and ensuing economic crisis on global imbalances, or the so-called global saving glut (for a review of the arguments see Suominen 2010). What the Chairman failed to mention is that the Fed’s easy monetary policy in the early 2000s played a crucial role in bringing about the global saving glut. Is the global saving glut to blame for global imbalances? This column argues that the role played by loose monetary policy from the US Federal Reserve should not be overlooked. The prolonged decline in long-term interest rates in the mid-2000s is largely to blame for the housing boom in the US.

Earthquakes and Central Banks -- Sebastian Mallaby had an important op-ed in Tuesday’s Financial Times. In it, he notes that earthquakes have the potential to cause terrible financial damage, as well as terrible loss of life:  The April 1906 earthquake in San Francisco is a case in point. The damage amounted to about 1.5 percent of U.S. gross domestic product; to meet the flood of claims, insurers shipped gold from New York to San Francisco and Wall Street was emptied of liquidity. Borrowers could no longer get credit. New York City failed to find takers for a bond issue and nearly defaulted, while bank runs threatened several large trust companies, the forerunners of today’s investment banks. The trusts scrambled to raise money by dumping stock portfolios, and unemployment jumped from under 3 percent to more than 8 percent.   Relative to national output, the Japanese disaster may end up being two or even three times costlier than the San Francisco quake. However, thanks to monetary activism, Japan’s payment system has kept on functioning, even though the stock market has oscillated viciously. One of the ironies of independent central banks is that they tend to be most important when they’re least popular — in the midst and the aftermath of financial crises. In past 10 days, though, the Bank of Japan has probably prevented a financial crisis, rather than merely responded to one.

End The Fed? And Replace It With... ??? - The celebrated investor Jim Rogers thinks we should abolish the Federal Reserve. Asked in an interview yesterday what he'd do as Fed chairman, he replied: "I'd shut it down." Rogers is a long-time critic of the central bank, and so his view is old news. He also has lots of company. Perhaps the most prominent and powerful critic is Rep. Ron Paul, head of the House subcommittee that oversees the Fed and author of End the Fed. Attacking the Fed is an old sport, dating to the bank's founding in 1913. Inspiring the legion of critics over the years is the simple fact that the central bank is far from perfect. As an institution run by humans, policy errors are inevitable. But closing the Fed, for all its populist appeal these days, wouldn't solve much, if anything because something would need to take its place. Wouldn't a successor institution suffer from all the problems that bedevil the Fed? What's that? You have a solution to insure the delivery of superior monetary policy decisions? Really? Why don't we apply those cures to the Fed?

Ron Paul's Money Illusion (Sequel) - As I promised to do here, I am posting a sequel to my original column: Ron Paul's Money Illusion. I want to thank everyone who took the time to comment and criticize the views expressed there because it has led to me to sharpen my thinking on the matter. I doubt that what I have to say here will sway opinion one way or the other, but I at least hope that the nature of my criticism will be more clearly understood.  The purpose of my original post was to critique a statement I've heard Fed critics repeat ad nauseam. The statement can be found in Paul's book End the Fed (p. 25): One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy. I think that the first part of this statement is true, so I do not wish to dispute this fact. On the other hand, I think that one might reasonably ask whether this fact alone should be a source of great consternation (especially in the presence of other, more pressing, policy concerns). As for the final sentence in the quote above, well, I think it is just plain false. Now let me explain why I think all this.

Bubble Spotting. by Robert J. Shiller - It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion.. And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.  But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.Of course, farmland is much less important than other speculative assets. For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market. And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970’s. But, farmland, at least in certain places, seems to have the most contagious “new era” story right now. It was recently booming, up 74% in real terms in the US in the decade ending with its price peak, in 2008. And the highly contagious global-warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further.

The Fed and Inflation -The most recent updates on Fed policy are in Bernanke's March 1 testimony to Congress, and in this week's FOMC statement. One important piece of news from the FOMC statement is that the "extended period" language remains. As well, the FOMC voted to keep its QE2 program of long-maturity Treasury purchases intact. There will be essentially only one more opportunity for the FOMC to meet (April 26-27) before the QE2 program ends (the June 21-22 meeting is essentially irrelevant for the program), so the net purchase of $600 billion in long Treasuries by the Fed during the period of early November 2010 to June 2011 seems assured. In Bernanke's Congressional testimony, he makes the case that inflation, and forecasts of inflation, are low:  FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013. Thus, the consensus projection of the FOMC is that the inflation rate should continue to be below the Fed's 2% implicit (explicit?) target, even two years out, in spite of an extended period with the interest rate on reserves at 0.25%, and the large expansion in the size of the Fed's balance sheet. Here I'm inferring that "extended" could mean as much as two years.

Fed Wins Deflation Battle But Faces Tough Task On Inflation Investors - The Federal Reserve seems to have nipped a deflation scare in the bud, but the challenge now is how to reassure the financial markets that it can keep inflation under control, some of the biggest investors and dealers in inflation-linked bonds said.The Fed and other central banks are facing a tricky balancing act because of the threat to global growth from the devastating earthquake and ensuing nuclear power crisis in Japan and an inflation threat as oil prices climb on conflict in North Africa and the Middle East. "The Fed cannot have both low inflation and strong growth going forward," . "The latest developments in Japan, Middle East and North Africa are on the margin stagflationary which means lower growth and higher inflation. This makes [the] Fed's job harder."These events have increased the uncertainties on the global economy still showing uneven recovery from the financial crisis. Higher oil prices complicate the economic outlook. They add to global inflation pressure, but they also could act as a tax on consumer spending, posing a threat to growth.

Fed’s Plosser: Monetary Policy Creates Inflation - Federal Reserve Bank of Philadelphia

President Charles Plosser warned Friday of the risks of keeping monetary policy too easy in the face of an energy price shock. “What creates inflation is monetary policy at the end of the day,” Plosser said. Citing the jump in energy prices, Plosser said “the reason oil prices worry me is that there will be more pressure to keep monetary policy easier for longer” as some fear these price gains will hold back growth by reducing households’ spending power. “That response is a response that will in my view” create inflation, and “we need to lean against that,” the policy maker said.Plosser was responding to audience questions in New York at an event held by central bank critics the Shadow Open Market Committee and e21. In his formal remarks, Plosser, a voting member this year of the interest rate-setting Federal Open Market Committee, warned the Fed may soon have to start tightening monetary policy, and he outlined his preferred way that will come to pass.

Why Does the Fed Want More Inflation? -That is the question posed by my brother-in-law in response to yesterday’s post.  Here are my answers:

  • 1. The Fed wants a higher rate of GDP growth, and it believes this requires higher inflation. Without getting too wonky, the idea is that increased expectations of inflation will make consumers and firms spend more, and this boost to the demand for goods and services will expand the economy.
  • 2. The Fed wants to live in a world where interest rates are sufficiently above zero that it has room to cut interest rates, should need arise.
  • 3. The Fed believes that when the measured inflation rate is X%, the true inflation rate is actually (X-2)% due to something known as CPI bias.  The notion here is that conventional measures of inflation overstate true inflation by failing to account for new goods and quality improvements.
  • 4. The Fed believes that the economy works just about as well – perhaps even better – with a steady inflation rate of 2-4% as with a steady inflation rate of 0%; that is, the key objective should be a stable rate, not necessarily the lowest possible rate.

Fed Critics Worry About Risks Inflation Will Break Out - The policies now being pursued by the Federal Reserve are risking a break out in inflation the central bank will most likely be too slow to counter, economists argued in papers presented at a conference in New York by the central bank critics, the Shadow Open Market Committee.The economists said that a combination of central banks misunderstanding the operations of financial institutions and the pursuit of the wrong policies now is at the root of their worry. “The Fed is likely to be caught behind the curve” as the economy improves. It wouldn’t be the first time: “during the Depression, Fed officials misunderstood high bank reserves as indicative of easy credit, and consequently failed to loosen policy in 1931-1933.” The academic worried if the Fed again misjudges the connection between banks and the economy “they are likely to make major monetary policy errors, this time in the direction of permitting an unwelcome acceleration of inflation.” For Calomiris, the central problem is the Fed’s massive expansion of its balance sheet, from around $800 billion before the crisis to around $2.5 trillion today. Shrinking these holdings or controlling them via a set of untested new tools is a worry, as is the inflationary potential of huge amounts of bank reserves created by the Fed

Will Central Banks Accommodate the Oil Price Shock? - Inflation rates are rising in the world's major economies. The consumer price index rose by half a percent in the United States in February, equivalent to an annual rate of 6.2 percent. Consumer prices rose at a 4.4 percent annual rate in the UK and a 2.4 percent rate in the euro area. All three central banks have explicit or implicit inflation targets of 2 percent or less. In all three economies, rising oil prices accounted for a big part of the increase of inflation. That fact poses a dilemma for monetary policy. Should central banks tighten monetary policy to counteract the effects of oil price increases and prevent general inflation? Or should they instead accommodate oil price increases with easy monetary policy, in order to maintain growth of output and employment? Two problems make the choice a difficult one. The first problem is that nothing central bankers can do will prevent an increase in world oil prices from harming an oil-importing economy.  The second problem is that central banks have little direct control over the real economy, as manifested in variables like real GDP and employment. By and large, monetary policy can only control the growth of nominal GDP.

Living With Rising Oil - The rise in the oil price will also boost inflation with roughly a $US10 a barrel rise adding 0.5% to inflation in the US and Australia and 0.7% to inflation in Asia. What would central banks focus on - inflation or growth? The European Central Bank is more likely to focus on headline inflation and so raise interest rates as it is threatening to do. However, the US Federal Reserve is likely to see a fuel inspired boost to inflation as temporary and would probably give more weight to weaker growth. At this stage it's too early to get overly worried given that it's quite possible that significant tensions in the Middle East and North Africa will be confined to current countries. Just as the much feared nuclear meltdown didn't happen a week ago, a worst case oil price surge may be avoided.

Worrying About Inflation - Wharton professor Jeremy Siegel worries about mounting inflation pressures. Last week, he said in a TV interview with Bloomberg that the Fed should consider raising rates soon. Siegel’s hardly alone in calling for the Fed to act, but so far there are few signals from the market for expecting a hike in interest rates in the near term. Fed fund futures are priced this morning on the expectation that the current zero-to-25-basis-point policy range will prevail for the foreseeable future. The January 2012 contract, for instance, is priced for Fed funds at roughly 30 basis points as we write.  The Treasury market doesn't seem worried about inflation either. The market's inflation forecast, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, was a modest 2.44% yesterday.  Federal Reserve Bank of Cleveland President Sandra Pianalto said in a speech today that she thinks inflation will remain moderate: What about the rise in commodity prices that has Jeremy Siegel worried? Pianalto says the associated inflation risk is "transitory": For the moment, at least, the market seems to agree.

Higher Inflation Expectations Are Spreading - The Federal Reserve expects higher price pressures to be “transitory.” But other economic players aren’t so sure.A new survey of finance professionals done by J.P. Morgan shows core inflation expectations are rising around the world.In the U.S. specifically, the mean response is that core inflation, as measured by the consumer price index excluding food and energy, will be running 1.8% a year from now. That is up from 1.4% when the survey was last done in November and up from February’s actual reading of 1.1%. The survey polled about 750 respondents, with about 40% from North America.The report notes the recent jump in oil prices and the longer-running increase in commodity prices may be skewing responses. But the report notes core inflation rates have already been rising in the U.S. and the U.K. The complication for the outlook is that investors think higher headline inflation will hang around in the medium term, defined as two to five years from now. When asked about medium-term inflation, the mean answer called for a 2.9% U.S. inflation rate.

The Dominoes Are Lining Up, Again - I have thought many times in the past year or so that the markets were really lining up for a fall in a way that would put market prices in line with reality.  The Fed has printed boatloads of money and the government has proven that it is willing to recklessly jeopardize the nation's balance sheet in ways that I though were impossible politically or financially.  I have yet to see any of the major problems get resolved though and as of yet the same dominoes that were beginning to fall in 2008/2009 are still largely in a state of criticality today.  My thesis continues to be based on the idea that we cannot solve a debt crisis by borrowing more money.  Deflation is a cancer and the cancer will continue to eat away at the system until the debts get resolved.

Fed Watch: Intervention Thoughts - It is worth pointing out some interesting reporting regarding last week’s G7 intervention. I think this summary via the Wall Street Journal is basically correct: The Group of Seven’s coordinated efforts Friday to weaken the value of the Japanese yen are likely designed more to temper panicked markets than targeting a specific currency level, economists say…. “This is a short-term measure that has more the goal of stabilization and averting a short-run panic than taking a view about how global imbalances might evolve and what the right value of the yen is against other currencies,” I have a hard time reading anything more than the obvious into the G7 intervention. In response to the earthquake and subsequent tsunami the Yen was appreciating rapidly in what appeared to be a disruptive fashion. The Japanese authorities would have acted on their own sooner or later, but secured the backing of their G7 partners to provide evidence that efforts to stabilize the Yen should not be confused with attempts to direct the value of the Yen to achieve a trade advantage. It will work as a break on speculative activity, but will have limited impact, if any, on any long-run, fundamental forces driving the value of the currency. To fight the latter requires a committed, repeated effort on the part of the Ministry of Finance, something that at the moment does not appear to be on the table.

Chicago Fed: Economic Growth Near Average in February - This is a composite index based on a number of economic releases. From the Chicago Fed: Economic Growth Near Average in February:The Chicago Fed National Activity Index ticked down to –0.04 in February from –0.01 in January. Three of the four broad categories of indicators that make up the index made positive contributions in February, but for the second consecutive month they were offset by continued weakness in the consumption and housing category. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

National Economic Update - Dallas Fed - The outlook for U.S. economic growth has shifted from optimistically strong to cautiously remaining above trend. Recent data have continued to be relatively robust, with various measures of manufacturing, expenditure, exports, capital spending and labor suggesting solid underlying growth. However, as with a large ship buffeted by competing forces, emerging cross-currents complicate navigating the challenges posed by existing headwinds. The U.S. economy may suffer a modest drag to growth this year and next from geopolitical unrest in the Middle East and North Africa (MENA) and from the ongoing natural disaster and nuclear calamities in Japan, which tend to weigh on business sentiment.

Q4 Real GDP Growth revised up to 3.1% - From the BEA: Gross Domestic Product, 4th quarter 2010 (third estimate) Real GDP growth was revised up to 3.1% in Q4 2010, up from the 2nd estimate of 2.8%. The upward revision came mostly from changes in private inventories; in the 3rd estimate, changes in private inventories subtracted 3.42 percentage points from growth, compared to 3.7 percentage points in the previous estimate. This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue. The dashed line is the median growth rate of 3.05%. The last quarter was around trend growth - disappointing with all the slack in the economy.

Fourth Quarter GDP Revised Up To 3.1 Percent - The economy grew more quickly than previously estimated in the fourth quarter as businesses maintained fairly solid spending and restocked shelves to meet rising demand, while corporate profits increased 3.3 percent, a government report showed on Friday. Gross domestic product growth was revised up to an annualized rate of 3.1 percent, the Commerce Department said in its final estimate, close to its initial estimate of 3.2 percent published two months ago and up from its tally of 2.8 percent made in February. Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.0 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.9 percent, while corporate profits grew 20.4 percent, the most since 2004.

What is going on with GDP? - I'M STARTING to worry about the economy again.Last fall, I became bullish on the American outlook, concluding that deleveraging had slowed enough for consumption to accelerate. By December, with Congress and President Obama agreeing to massive new tax stimulus, the consensus also turned bullish, forecasting growth of 3.5% to 4% this year. The darned economy refuses to cooperate. This morning, we learned that new home sales hit an all-time low. But it’s not just housing that has disappointed; the overall economy is oddly lacking in vigor. Macroeconomic Advisers today loweredput their tracking estimate of first quarter GDP growth at to a 2.5% annual pace. It has been slipping steadily; at the end of February January, it had been 4.1%.  Macroeconomic Advisers tells me: It is puzzling how the year has started off so sluggishly. Part of it is weather, which I don’t think we had fully incorporated into our tracking estimates early this year. But this is only worth about ½ percentage point. The balance is simply unexpected (and, in our view, temporary) weakness. If this is how growth looks in the quarter when the new stimulus took effect, how will it look later this year?

GDP view cut after durable-goods report - Bank of America Merrill Lynch, Macroeconomic Advisers and Morgan Stanley each cut their first-quarter GDP view, with Macroeconomic Advisers' estimates falling two-tenths to 2.3%, Morgan Stanley's falling two-tenths to 2.5% and BofA's estimates falling three-tenths to 2.2%, following the data on durable-goods orders released by the Commerce Department this morning. "Core orders and shipments were very weak for February, but inventories advanced faster than expected, partially offsetting the weakness in orders and shipments," the economists at Macroeconomic Advisers said. (Updates to include the Bank of America reduction.)

Real Gross Domestic Income still below pre-recession peak - According to the Bureau of Economic Analysis (BEA), real GDP is now slightly above the pre-recession peak. Real GDP (in 2005 dollars) was at $13,380.7 billion in Q4, just 0.13% above the $13,363.5 billion in Q4 2007. However real Gross Domestic Income (GDI) is still 0.25% below the pre-recession peak. For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. The following graph is constructed as a percent of the peak for both GDP/GDI. This shows when GDP/GDI has bottomed - and when GDP/GDI has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. This graph is for real GDP (blue) and real GDI (red) through Q4 2010. This shows real GDP is back to the pre-recession peak. However real Gross Domestic Income (GDI) is still slightly below the pre-recession peak as of Q4 2010. So it now appears that the U.S. economy will reach the pre-recession peak in Q1 2011.

One damn thing after another - YESTERDAY, my colleague expressed some concern about the disappointing way the first quarter has unfolded.This morning, we learned that new home sales hit an all-time low. But it’s not just housing that has disappointed; the overall economy is oddly lacking in vigor. Macroeconomic Advisers today...put their tracking estimate of first quarter GDP growth at a 2.5% annual pace. It has been slipping steadily; at the end of...January, it had been 4.1%. The disappointments continue. Today we learn that in Februrary orders for durable goods unexpectedly declined. Some measures of consumer confidence have been slipping. And Macroeconomic Advisers has dropped their tracking estimate again, to 2.3%. I certainly don't feel as positive about the economy as I did back in early February, when all the data points were surprising to the upside. But I'm not particularly surprised by this shift. Commodity prices were already rising early in the year, in a manner that was likely to check growth somewhat. When Middle Eastern unrest increased and oil prices moved higher still, it was clear that this would have a negative impact. Fiscal and monetary tightening around the world has been a little more aggressive than might have been expected. And obviously in recent weeks, the world has been dealing with the shock of the disaster in Japan.

U.S. Growth Expectations Neglect Weak Consumer Sector - Consensus on U.S. growth this year is around 3.5%, and many economists and analysts expect the same growth rate, or a bit higher, in the years thereafter. But where will this expected growth come from? This is the bright side of the medallion. There is, unfortunately, another side, which makes it really questionable how the U.S. could possibly attain a growth rate of 3.5% or higher for the coming years. There are several points that need to be made. First, the deleveraging process is far from over. In fact, It didn’t even begin.  Second, Congress isn’t debating whether fiscal policy has to be tightened -- but by how much. The pressure for a more prudent fiscal policy will increase even more as Japan shows how important it is to have a financial buffer to accommodate a natural disaster or (another) financial crisis. Fiscal tightening is a huge swing from the fiscal stimulus position the U.S. economy currently enjoys."

Aftershocks and the U.S. Economy - Zandi - The U.S. economy can’t seem to catch a break. Just as the recovery was set to hit its stride, new threats emerged: Unrest in the Middle East has caused oil prices to surge, and Japan’s unfolding natural disaster has hung a cloud of uncertainty over financial markets. While the economy has enough going for it to weather these problems reasonably well, it could suffer a significant setback if anything else goes wrong. Few things are worse for the U.S. economy than high energy prices. As more consumer cash is spent on gasoline, less is available for everything else. High energy prices act as a tax increase, and a particularly pernicious one at that: While your tax dollars pay for useful services such as education and roads, money spent on gasoline goes primarily to foreign oil producers, doing little economic good at home. The increase in the gasoline “tax” to date has been substantial. Even if prices don’t rise beyond their current level — around $3.50 a gallon — U.S. consumers will spend an extra $60 billion on gas this year. This is equivalent to about half the savings from this year’s temporary reduction in the payroll tax, which was passed when lawmakers agreed to extend the Bush-era tax cuts last year. Higher gasoline prices are particularly hard on low- and middle-income households, which spend a relatively large share of their budgets on energy.

Stock Market In A State Of Denial - During the denial phase the majority of investors are still in a bullish frame of mind after seeing continual profits in their account and having seen the market bounce back from prior corrections. They look upon the decline as merely another buying opportunity and think that stocks are cheap. In addition the fundamentals during this period are still perceived as positive and any negative news is downplayed. Second, we don't regard the negative news as necessarily temporary, and only the tragic Japanese earthquake is truly exogenous. The European sovereign debt problem is a spillover from the massive 2008 credit crisis, and is not going to be resolved anytime soon. When the crisis initially emerged in Greece it was reasonably clear that the problems could spread to Ireland, Portugal and Spain, and, so far, has continued along that path. The Mid-East, North African crisis was always of a matter of "when" rather than "if" and was a recognized risk. It is not going away soon. China is engaged in the high-wire act of attempting to rein in inflation without causing a recession, a feat that historically has had a low chance of success. It is also far too early to dismiss the Japanese earthquake as a passing phenomenon. We still don't know how this will all play out. With high levels of radiation in the water and farmland of the affected area, we don't know if this will become a "dead zone" for years to come. We have also heard about the possibility of significant global supply disruptions and reduced output that could presage lower demand and scarcities.

Is Lack of Investment Holding Back the Recovery? - Over at his site, Dave Schuler, noted the rise in uncertainty for the past 12 years. Dave concludes his post thusly,Uncertainty has its own costs. When you’re uncertain about the future you’re less likely to take risks. An employee may decide not to take that new job. A consumer may decide not to make that additional purchase. That manager may decide to hold onto cash to see what happens next rather than expanding his business. I’ve also been reading several posts by Robert Higgs on regime uncertainty and its potential effect to slow an economic recovery (here, here and here). Coupled with all the stories of firms sitting on large piles of cash (here, here and here). I’ve also looked at the BEA’s numbers on total GDP, Personal Consumption Expenditures and investment, and the picture is one of where GDP and PCE have recovered to the point where they exceed their levels prior to the recession, but investment spending is still lagging considerably below its pre-recession levels. So, I’m wondering is the anemic economic growth at this point and time really a function of lack of consumer spending or is the weak investment spending the real culprit?

Fed's Fisher: U.S. debt situation at tipping point (Reuters) - The U.S. debt situation is at a "tipping point," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures. "If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when," Fisher said in a speech at the University of Frankfurt. Fisher, seen by economists as one of the most hawkish policymakers within the Fed, said that although debt-cutting measures would be painful, he expected the U.S. to take the necessary actions. "The short-term negotiations are very important. I look at this as a tipping point." He said the U.S. economy was now growing under its own steam, but voiced his concerns about building global inflation pressures and said it was now time for the central bank to stop pumping out extra support.

Fed makes record $79.3B payment to U.S. Treasury - The Federal Reserve1 is paying a record $79.3 billion to U.S. Treasury after the central bank earned a record amount of money last year from programs aimed at boosting the economy. The Fed says its payment to the Treasury Department2 for 2010 is 67% higher than the $47.4 billion it paid in 2009, the previous record. The central bank earned a record $81.7 billion last year from its massive holdings of securities, which were purchased to help stabilize the financial system and pull the economy out of the recession. Part of those earnings go toward funding the Fed, which receives no appropriations from Congress. Any money left over is turned over to the U.S. Treasury.

Treasury to Sell MBS Portfolio - The Treasury Department plans to start selling off a $142 billion portfolio of mortgage-backed securities it purchased during the financial crisis, signaling an end to a program put in place to help stabilize the housing market. The Treasury said the securities can be sold with "minimal impact" on mortgage rates. Officials say they will halt the program if markets appear unsettled.The mortgage market initially reacted negatively to the news Monday. Prices fell for mortgage-backed securities that would most likely be affected by Treasury sales, particularly 30-year agency securities with coupons of 4.5% to 5.5%, which make up the bulk of the Treasury's portfolio.By early afternoon, the selling had almost entirely reversed, and mortgage prices and interest rates were roughly unchanged on the day.  "The key driver of mortgage rates will continue to be the outlook for economic growth and not the modest selling that Treasury is undertaking,"

US Treasury: Treasury to Begin Orderly Wind Down of Its $142 Billion -Today, the U.S. Department of the Treasury announced that it will begin the orderly wind down of its remaining portfolio of $142 billion in agency-guaranteed mortgage-backed securities (MBS). Starting this month, Treasury plans to sell up to $10 billion in agency-guaranteed MBS per month, subject to market conditions. “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort,” said Mary J. Miller, Assistant Secretary for Financial Markets. “We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market.” Treasury acquired its portfolio of agency-guaranteed MBS under authority provided to it by Congress under the Housing and Economic Recovery Act of 2008. The market for agency-guaranteed MBS has notably improved since the time Treasury purchased these securities in 2008 and 2009.  Based on current market prices, Treasury expects to make a profit for taxpayers on this investment.

Who Will Buy Our Treasuries? - I believe zerohedge was the first to report that PIMCO's Bill Gross, the Bond King, recently dumped his U.S. treasuries holdings—all of them. And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero...The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion...In his most recent newsletter, Gross describes who holds our bonds. What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns.

Deficits and the Printing Press - Paul Krugman - Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.  I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right. Suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation.  Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates. So then what? The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money.  So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year. Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.

The Road to Fiscal Crisis - Simon Johnson - It has become fashionable among Washington insiders – Democrats and Republicans alike – to throw up their hands and say: We ultimately face a major budget crisis in the United States, particularly as rising health-care costs increase the fiscal burden of entitlements like Medicare and Medicaid. But then the same people typically smile and point out that investors from other parts of the world still want to lend the US vast amounts of money, keeping long-term interest rates low and allowing the country to run big deficits for the foreseeable future. This view is seriously flawed. It implies that the US can kick the can down the road as long as the dollar remains the world’s preeminent reserve currency, and America offers the best safe haven for skittish capital owners. By 2015, according to this logic, politicians will have done nothing to raise taxes and very little to cut expenditure, so the US will still have a budget deficit of around $1 trillion, and will finance a substantial portion of it by selling government bonds to foreigners. By 2050, there will undoubtedly be a fiscal problem – but, again, there is plenty of time to ignore it.

Ex-White House Economists Urge Action on Deficit - Ten former leaders of the President’s Council of Economic Advisers have written an op-ed column, appearing Thursday on Politico, urging Congress and President Obama to stop bickering and take up the proposals offered by a bipartisan deficit commission.The commentary is signed by economists from both Republican and Democratic administrations. These former economic advisers lament the fact that a comprehensive deficit-reduction proposal issued last December — by a presidential commission led by Erskine Bowles and Alan Simpson — has been largely ignored. The proposal contained a mix of changes to both sides of the federal ledger, including entitlement cuts and tax increases. Lately Congress has instead focused on cuts to the 2011 fiscal year deficit. In the commentary, the former White House advisers acknowledge that they do not necessarily each endorse every individual piece of the presidential commission’s proposal, but say they believe that the overall package should still be “the starting point of an active legislative process that involves intense negotiations between both parties.”

Former top economist: Economic inaction ‘shameful’ -  President Obama’s former top economic advisor sharply criticized the federal government for failing to take more aggressive action against unemployment. I frankly don’t understand why policy makers aren’t more worried about the suffering of real families. I think there are tools we have tools we have that we can use, and I think it’s shameful that we’re not using them. “We need to realize that there is still a lot of devastation out there,” Romer said, calling the 8.9% unemployment rate "an absolute crisis." If I have a complaint about policy these days, it’s that we’re not doing enough. That goes all the way up to the Federal Reserve, [which] could be taking more aggressive action. It goes to the Congress and the Administration – there are fiscal policy actions they could be taking. And don’t tell me you can’t [take those actions] because of the deificit because I think there are fiscally responsible ways. Romer suggested that extending the payroll tax break to the employer side of the payroll tax could spur the economy; she suggested that Congress simultaneously pass a comprehensive, long-term plan for reducing the deficit

Breaking News: Christina Romer is Scott Sumner in Disguise! - He’s always taking hiatuses from blogging, and claiming to be “travelling”. Now I know that he has been leading a double life. From Romer’s interview with Ezra Klein: I’m teaching a course this semester on macro policy from the Depression to today. One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we’re not going to raise the rate until X date. Those would be two concrete things that wouldn’t be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target. All kidding aside, this is policy advice gold. I can broadly agree with all that Romer is saying in the whole thing. I’m not gung-ho about using fiscal policy and expecting it to “work” in the sense that it raises NGDP to a level which is consistent with returning to trend quickly, however I don’t see anything wrong with smoothing the edges of recession by helping people through the tough time using fiscal policy

Former CEA Chairs and the Unsustainable Budget Deficit – Thoma - I was going to let this go, but since one of the members of this list sent an email promoting it, let me offer a few comments: Unsustainable budget threatens U.S., by 10 ex-chairs of the president's Council of Economic Advisers, There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention. ..The time to stand up to the budget busting was when it happened, and when members of the list had the power to affect policy, not many years later in an article at Politico. Many on the list were either part of the decision making team in the 2000s that opened the hole in the budget, or supported what the team did. I suppose it's possible to argue things were different in 2000 -- there was a wide expectation that budget surpluses would be the "problem" at that time. But if the forecasts by members of the list were so bad then -- and they were -- why should we listen now? The long-run budget problem does need to be addressed, but the standing of some on the list to make this claim can certainly be called into question.

Straight Talk with John Rubino: The Damage Is Already Done - "This week's Straight Talk contributor is John Rubino, publisher of, a popular hub for news impacting the economy. John is the author of several well-received books foretelling (years in advance) the collapse of the housing market and the decline of the US dollar. Before starting his website, John was a featured columnist with, Individual Investor, and a number of other influential financial publications. His perspective on Wall Street and the currency markets is shaped by his past roles as a Eurodollar trader, equity analyst and junk bond analyst in the 1980s.

64 senators sign letter to Obama seeking broad budget talks - 64 U.S. senators Friday--32 from each party--signed a letter asking President Barack Obama to negotiate a budget package that includes possible changes in taxes, discretionary spending and entitlements such as Medicare and Social Security. "By approaching these negotiations comprehensively, with a strong signal of support from you, we believe that we can achieve consensus on these important fiscal issues.  This would send a powerful message to Americans that Washington can work together to tackle this critical issue," the senators said. The effort is being led by Sens. Michael Bennet, D-Colo., and Mike Johanns, R-Neb. Currently, the White House is talking with top staff from the offices of Senate Majority Leader Harry Reid, D-Nev., and House Speaker John Boehner, R-Ohio, about a plan for spending in fiscal 2011, the current fiscal year. In addition, six U.S. senators, three from each party, have been talking for weeks about longer-range ideas. The letter would suggest they will have strong support. Among the other signers:

A Voodoo Baseline Won’t Reduce the Deficit - As Congress continues the struggle to tame federal deficit spending, some argue that tax hikes and defense cuts are necessary and inevitable. For example, a recent brief from the Concord Coalition on the prospects for the House Majority’s coming budget resolution for fiscal year 2012 makes the case that conservatives will be hard pressed to reduce the deficit without raising taxes or cutting national defense. The Concord Coalition looks at various deficit-cutting strategies that conservatives in the House might embrace and compares the results to those of the President’s own budget proposal. But the President’s budget is scored according to the assumptions the White House chooses to make. Heritage budget expert Brian Riedl points out that the budget “hides multiple new policies and assumptions within the baseline itself.” These include $800 billion in new taxes from assuming the 2001 and 2003 tax cuts expire partially, $118 billion in additional Pell Grants, and $1.7 trillion in additional phantom revenue from unrealistic economic assumptions.

A $2 Trillion Make-Up Call - Following up on my post from last Friday on CBO’s analysis of the President’s budget, let me explain that the Obama Administration’s seemingly low-ball estimates of deficits under their own proposals isn’t so much a case of (very) “dynamic scoring” as a sort of “make-up call.” I thought I’d provide some apples-to-apples numbers to help see what’s going on.  Recall that CBO scores the ten-year deficit under the President’s proposals at $9.470 trillion, while OMB (the Administration) says it would be only $7.205 trillion–a more than $2.2 trillion difference.  It turns out that most of this difference is due to the Administration’s much rosier assumptions about the pre-policy baseline and the level of revenues that would be collected under current law.  The CBO and OMB estimates of the cost of the President’s tax proposals (or more accurately, the net revenue loss under the President’s budget compared with current law) are actually very similar. So here are the relevant numbers, all for the ten-year period of fiscal years 2012-21.

On the Need to Grow Up (About the Budget Deficit) - I’ve had a couple columns in the Christian Science Monitor over the past month, both making the basic point that the fiscal woes we’re in have a lot to do with our failure to behave like grown-ups when it comes to recognizing and admitting our own roles in the problem and doing something to be part of the solution even when it isn’t all our own fault. This week’s column suggests kindergartners could do a better job at cutting the deficit.  The CSM editors added that flourish/slight exaggeration, but I actually think older grade schoolers could do a better job–particularly those fortunate enough to be exposed to some economic concepts such as “opportunity cost” and “budget constraints” (the notion of scarce resources) in their social studies curriculum.  And of course, older grade schoolers have also mastered basic addition.My prior print-edition CSM column came out about a month ago and elaborated on a point I first made up on the fly at an Urban Institute event (mentioned on my blog here): the federal government’s “spending spree” is really like a shopping mall phenomenon in “intergenerational reverse”–that is, we expect our kids and grandkids to put all our own benefit and tax cut goodies on their “credit card,” and we give them nothing of decent value in return.  Not fair.

The Republican's Big Lies About Jobs - House Majority Leader Eric Cantor was in town yesterday (specifically, at Stanford’s Hoover Institute where he could surround himself with sympathetic Republicans) to tell this whopper: “Cutting the federal deficit will create jobs.”It’s not true. Cutting the deficit will creates fewer jobs. Less government spending reduces overall demand. This is particularly worrisome when, as now, consumers and businesses are still holding back. Fewer government workers have paychecks to buy stuff from other Americans, some of whom in turn will lose their jobs without enough customers. But truth doesn’t seem to matter. Republicans figure if their big lies are repeated often enough, people will start to believe them. Unless, that is, those big lies are repudiated – and big truths are told in their place.What worries me almost as much as the Republican’s repeated big lies about jobs is the silence of President Obama and Democratic leaders in the face of them. Here are some other whoppers being repeated daily:“Cutting taxes on the rich creates jobs.” Nope. Trickle-down economics has been tried for thirty years and hasn’t worked. “Cutting corporate income taxes creates jobs.” Baloney.

Republicans Are Losing Ground on the Deficit, But Obama’s Not Gaining - As the budget debate moves into a crucial phase, far fewer Americans say that Republicans in Congress have the better approach to the budget deficit than did so in November, shortly after the GOP’s sweeping election victories. The GOP has lost ground on the deficit among political independents and, surprisingly, among key elements of the Republican base, including Tea Party supporters. However, the public is no more supportive of Barack Obama’s approach to the budget deficit than it was in November. Rather, there has been a sharp rise in the percentage saying there is not much difference between Obama’s approach and that of congressional Republicans – 52% say that now, up from just 33% in November.

GOP Is Blowing It by Pandering to Tea Party - Republicans in Congress have reached a crossroads – they must decide if they are a governing party or one so beholden to its ideological fringe that it is incapable of doing the basic work of a legislative body. How the party answers that question will determine not only the direction of policy on key issues and Republican prospects for reelection next year, but who will be president in 2013. It is obvious that the Tea Party phenomenon has rocked Republican politics; pushing an already conservative party much further to the right and bringing into it a vast number of new members who are highly energized and deeply ideological, but very inexperienced at politics and not very knowledgeable about how Congress operates on a day-to-day basis. This has proven deeply frustrating to many veteran Republican legislators.

The Tea Party and Me: A Very True Story - I had been invited by tea party favorite Rep. Michelle Bachmann (R-MN) to speak on the debt ceiling because of a column I had written on the subject on January 11 in Roll Call. From a federal budget debate perspective, here’s what I heard at the meeting. First, after talking with a number of the members of Congress who attended, it was clear that at least some GOP representatives who are tea party supporters were going to vote against extending the CR the next day. Several told me that their leadership’s unwillingness to cut off funding for health care reform was a big problem for them because they were assuming that once it was taken off the table, cutting off funding would never come back.  Second, the tea party folks – both members of Congress and others – do not trust House Speaker John Boehner (R-OH) or Majority Leader Eric Cantor (R-VA) not to sell out their agenda. Third, as I’ve been saying for a while, compromise is not an option.

Time Management and the Budget Debate - In a guest column at CNN Money, I suggest that Washington is suffering from time-management issues in its approach to the budget. America faces trillions of dollars in deficits in coming years. But Congress has been reduced to funding the government three weeks at a time so it can fight over mere billions. Why is Congress spending so much time and effort on so little money? Are those billions bigger than they appear because cuts today will carry forward into further cuts tomorrow? Is today’s skirmishing part of a larger political strategy to rein in our deficits? Maybe. But I think good old-fashioned human psychology is a bigger factor. Congress faces the same time-management challenge that plagues me and, I suspect, you. The urgent crowds out the important.

A Modest Proposal for Ending Debt Limit Gridlock: Feed the Children, Don't Eat Them - Washington's deficit hysteria has morphed into gridlock over expansion of federal government debt limits. It is as if that stupid “debt clock” on Times Square had run out of electrons to keep the numbers racing ever higher. As we all know, the debt clock is actually tracking the growth of nongovernment net financial wealth—so if Washington really were able to stop the clock, it would also prevent private sector net financial wealth from growing. I presume that this is well-understood even inside the Washington Beltway, hence, the debate has more to do with politics than anything else. Still, it might be worthwhile to see how we can untie Uncle Sam's purse strings while living with current debt limits. It is actually a relatively easy thing to do, requiring only a modest change of procedure.First we need to see how things usually work.

Guns and butter: About that deficit - The Economist - MARK THOMA has an appropriately succint post up today which reads in its entirety: We have enough money to pay for military action in Libya, but not for job creation? It's hard not to be cynical about government policymaking, and this is why. Forget about fiscal stimulus for the moment. At present, both Republicans and Democrats are committed to cutting the government's budget in the current fiscal year. These cuts will almost certainly threaten programmes with positive economic returns; job retraining programmes are on the chopping block, for instance. Certainly few party leaders are seriously discussing new spending on programmes with positive economic returns. America has substantial infrastructure needs—current spending is inadequate to simply maintain critical infrastructure at its current state of repair—and yet the odds of passing a new transportation law to replace the one that was scheduled to expire in 2009 but which has since been extended repeatedly, well, they're close to zero. Why? No one can agree on a way to fund new infrastructure spending.

Cost of military campaign could wipe out spending cuts - U.S. military operations in Libya could wipe out a significant chunk of the budget cuts won by congressional Republicans in recent weeks, defense analysts say.  GOP leaders have trumpeted enacted spending reductions that amount to more than $285 million per day since the beginning of March.  But defense analysts say the Pentagon could be burning through more than $100 million per day in Libya, putting those budget savings at risk.  In separate briefings on Monday, the Defense Department and the White House said they do not yet have a projected price tag for the military action that began on Saturday. Defense officials said they are still “collecting” and analyzing early costs.

Joe Stiglitz on how to correctly budget for a war - In 2008, Nobel prize-winning economist Joe Stiglitz, alongside economist Linda Bilmes, published the ‘The Three Trillion Dollar War: The True Cost of the Iraq Conflict.’ The book — which Stiglitz summarized in a 2008 speech (pdf) — argued that the way we account for war tends to vastly underestimate the actual cost of conflict because it misses everything but the direct, short-term expenditures made on troops and munitions. As we begin our intervention in Libya — an intervention for which we’ve seen little-to-nothing in the way of cost estimates — it seemed a good time to return to Stiglitz’s original arguments about how to budget for war, and why it’s important to do so. A lightly edited transcript of our discussion follows.

The Trouble with This Picture of the “Spending Problem” - The GAO just released its update of their long-term fiscal outlook report.  The figure above shows federal spending (the bars) and revenue (the line) under GAO’s “alternative” scenario, which is closely related to the Concord Coalition’s “plausible baseline” which assumes–more pessimistically but probably more realistically than current law–that most of the expiring tax cuts are extended and that discretionary spending grows at the same rate as the economy (GDP) rather than only with inflation. My immediate interest in putting up the chart above from the GAO report is that many people like to point to this picture (or very similar pictures) as evidence that the current deficit and longer-term fiscal gap is a “spending (only) problem” and not a revenue problem.  The revenue line doesn’t droop after all, even in this worse-if-not-worst case scenario where current deficit-financed tax cuts are permanently extended.  And the spending bar just keeps on growing.

A Big But - But – and it is a big but – despite the fact that government occasionally steps on my toes, I am pretty certain that the mixed economy is here to stay, and that effective government is therefore as important to modern life as is a proper appreciation of the superiority of markets to other forms of organization for the provision of most goods and services. That’s why the latest issue of The Economist leaves me shaking my head. On the cover is Japan, and in the main leader a plea for national governments to continue working on nuclear power, acknowledging tacitly, at least, the growing problem of greenhouse gases. In a sidebar article there’s a sensible prescription for running a safe nuclear power industry – “trustworthy and transparent regulation, a clear distinction between operators and regulators, and well-enforced building codes,”  But then, there, smack in the middle of the magazine is a twenty-page special report, “Taming Leviathan: How to slim the state will become the great political issue of our times.” It turns out that The Economist thinks that the growth of government is the central problem of our time – not suboptimal industrial organization (think military/health-care/financial/agricultural-industrial complexes) and regulatory capture, of the sort that produced the crisis in Japan and the near meltdown in financial markets three years ago.

It's not about the multiplier - HOW you feel about fiscal stimulus generally comes down to how big you think the multiplier is. Does a dollar of stimulus produce two dollars of GDP, one dollar, or none? Stimulus sceptics generally assign a lower number to the multiplier. Conservatives usually assign a lower multiple to government spending than to tax cuts. An extreme example would be that of House Republicans who argue that their proposed cuts to spending this year will actually raise employment, implying a negative multiplier for government spending. That claim has been backed by John Taylor. I find it hard to believe that the multiplier is zero, much less negative, in an economy sporting interest rates jammed up against zero and a reserve currency. But rather than rehash that debate, let’s take a look at an intriguing new case being made against stimulus via government spending. Proponents of this case agree the government spending multiplier is positive, but maintain that the thing that is being multiplied, GDP, is the wrong policy target. Policymakers should be concerned with welfare, not GDP, and those aren’t the same thing. If government spends the money badly, it might not raise anyone’s welfare.

The preponed government spending multiplier may exceed one - From very casual observation, I get the sense that a lot of extra government spending in the last couple of years was to build stuff that would have been built anyway. They just built it a bit earlier. It was preponed government spending. Am I right?Anyway, I'm going to assume I'm right, because it makes a really neat macroeconomic thought-experiment, as well as being possibly relevant to fiscal policy. I'm going to make two more assumptions to keep the thought-experiment as clean as possible.

  • 1. The real rate of interest on government bonds is zero for the interval between the preponed expenditure and when it would have been spent otherwise. Roughly plausible.
  • 2. The stuff the government builds is mothballed at zero cost until the time it would have been built otherwise. They dig the hole, but don't do anything with it until they need it. They repair the bridge a couple of years earlier than it needed repairing. They build the bridge, but it doesn't go anywhere until they connect it up a couple of years later. Maybe a bit unrealistic, but it makes the thought-experiment cleaner.

What happened to stimulus vs. austerity? - For two years American policymakers battled.  Those on the left argued that America’s top economic policy priority was addressing an extremely weak short-term economic picture, and that fiscal stimulus was the solution. Those on the right argued that fiscal stimulus wouldn’t work or wasn’t worth it. They argued that addressing America’s long-term fiscal problem was at least as important as our weak short-term economy. Government fiscal austerity, they argued, was the best way to increase expectations of future economic growth, which would drive a faster short-term recovery. President Obama initiated this debate in early 2009 by proposing almost $800 B of fiscal stimulus. Two years later, in his 2011 State of the Union address, the President pivoted. America must focus on the long run, he now argued. But rather than joining the growing policy consensus that we must address our government’s fiscal problem, the President argued that America’s principal economic challenge is wage competition from China and India.

Why the Stimulus Failed to Boost Infrastructure in the US: A Comparison With China - The data are now clear. Despite its large size, the 2009 U.S. stimulus package failed to increase government infrastructure spending or other government purchases as its promoters had claimed it would. The large federal stimulus grants sent to state and local governments for infrastructure spending were mainly used to reduce borrowing and thus did not result in an increase in purchases. Here is a summary of my research with John Cogan. The explanation is that local governments in effect acted as many American households did: when they received the stimulus money, they saved it rather than purchased goods and services. This is what permanent income theory would predict. It is also what previous empirical studies of the 1970s stimulus packages found. To better understand this explanation one can look at other countries, and in particular at China’s recent stimulus package. This week I went to China and explored the question.

The Austerity Delusion, by Paul Krugman - Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating; any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.

Krugman Is Wrong: The United States Could Not End Up Like Greece - Dean Baker - I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments: "But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt." Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece. Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. Unless Greece leaves the euro, it must pay the rate of interest demanded by private investors or meet the conditions imposed by the European Union/IMF as part of a bailout. However, because the United States has its own currency it would always have the option to buy its own debt. The Federal Reserve Board could in principle buy an unlimited amount of debt simply by printing more money. This could lead to a serious problem with inflation, but it would not put us in the Greek situation of having to go hat in hand before the bond vigilantes.

Democrats Split on Social Security - Democrats have broken ranks over a move to consider Social Security changes—including possibly raising the retirement age—to ensure its long-term fiscal health in combination with an effort to reach a deficit-reduction package. The idea of putting Social Security into play has triggered a firestorm of opposition from several corners of the Democratic party. Senate Majority Leader Harry Reid (D., Nev.) and Sen. Chuck Schumer (D., N.Y.), two of the Senate's most powerful lawmakers, have said revisions to Social Security shouldn't be attached to a deficit-reduction plan. They argue the program's benefits are covered by giant trust funds that have no impact on the deficit.

White House To Remain Mum In Social Security Fight -- Until Congress Comes Up With a Plan - The White House will not prominently inject itself into congressional negotiations on Social Security reform until after key legislators in both the House and Senate unveil their plans to reduce projected long-term deficits, according to administration officials. That won't please Republican leaders on Capitol Hill, who have attacked Obama for remaining silent in this debate. And these 64 Senate Republicans and Democrats won't be too happy either. But it's part of a broader political and policy strategy the administration is employing to keep Obama's powder dry while Republicans struggle to reduce deficits without increasing revenues in any meaningful way. The White House's reticence has been characterized by some as a symptom of a rift between Obama's economic and political advisers. Some, like Treasury Secretary Timothy Geithner, do in fact believe that a bipartisan deal on Social Security would result in real economic benefits, while others argue that Obama shouldn't embrace any plan that substantially cuts benefits at all.

GOP offers bill cutting pensions for new federal employees… New legislation introduced in the Senate would slash pensions for all federal employees hired starting 2013, invoking the argument that benefits for government workers are too generous and are a large contributor to budget deficits. The "Public-Private Employee Retirement Parity Act," offered Thursday by Sen. Richard Burr (R-NC) and co-sponsored by Sen. Tom Coburn (R-OK), would eliminate all pensions under the Federal Employees Retirement System (FERS) but keep the Thrift Savings Plan in tact. The bill would also apply to members of Congress."Right now, federal government workers receive far more generous retirement benefits than private sector employees," Burr said. "The cost to taxpayers of these benefits is unsustainable and we simply cannot afford it. We cannot ask taxpayers to continue to foot the bill for public employee benefits that are far more generous than their own." Coburn added in a statement that the FERS pensions program "serves to foster political careerism and should have been frozen years ago," and fretted that "federal workers generally earn up to 20 percent more than their private sector counterparts."

Grover Norquist Vetoes Both Deficit Reduction and Tax Reform, by Bruce Bartlett: According to a report in The Hill newspaper, Americans for Tax Reform president Grover Norquist has received assurances from Republican leaders in Congress that under no circumstances will they vote for any tax increase, either as part of deficit reduction or tax reform. Apparently, the only permissible deficit reduction is spending cuts and the only permissible tax reform is tax cuts. Given that Grover has succeeded in getting all but a small handful of Republicans to sign his no-new-taxes pledge, he essentially controls tax policy by being the sole arbiter of what constitutes a violation of the pledge and what does not. And given the power of the Tea Party to upset incumbent Republicans in primaries when they are viewed as insufficiently loyal to its agenda, it would take a very confident and courageous Republican to risk being accused of violating Grover's pledge whether he or she signed it or not, since it would guarantee primary opposition from a well financed Tea Party candidate -- the Club for Growth will see to that.

The GOP Choice: Smaller Government or Lower Deficits - You’ve got to give Grover Norquist credit. Unlike most everyone else in Washington, at least he says what he believes. In a remarkably candid interview with Ezra Klein at The Washington Post, the head of the anti-tax lobby Americans for Tax Reform beautifully described the challenge faced by Republican lawmakers today. When the GOP was out of power, it could easily paper over a profound internal disagreement: Should Republicans be the party of small government and low taxes, or the party of fiscal prudence? At first glance, these principles sound like the same thing. But they are not. And how a deeply divided GOP chooses between them says everything about the likelihood of both deficit reduction and tax reform any time soon, to say nothing about the party’s political future.

Cherry Picking, Flawed Assumptions Mar GOP Report on Health Reform Costs - I explained earlier this month that a recent report from some congressional Republicans grossly exaggerates state Medicaid costs under health reform.  Now, in a new analysis, I examine the report’s problems in more detail. The non-partisan Congressional Budget Office has found that health reform’s Medicaid expansion is a good deal for states.  Medicaid and the Children’s Health Insurance Program will cover an estimated 18 million more low-income adults and children than they do today, most of whom are now uninsured.  The federal government will pay 92 percent of the cost of this expansion through 2021.  The cost to states over this period will be $60 billion — just 2.6 percent more than what they would have spent on Medicaid without health reform. So how could the recent Republican report, authored by Senator Orrin Hatch (R-UT) and Rep. Fred Upton (R-MI), claim that states’ cost will be $118 billion through 2023?  By cherry-picking worst-case scenarios from various studies, many of them severely flawed.  The report does not try to standardize, or even assess the reliability or plausibility, of the various state estimates.  And whenever a range of estimates is available, the report uses the estimate at the top of the range without even mentioning that lower estimates exist.

Revisions to CBO’s Estimates of the Cost of Last Year’s Major Health Care Legislation - CBO Director's Blog - Last Friday CBO released its preliminary analysis of the President’s budget for 2012. That analysis included an update to CBO’s baseline budget projections, which largely reflect the assumption that current tax and spending laws will remain unchanged. As we explained in Friday’s analysis, updating baseline projections of federal spending on health care programs does not automatically result in a complete reestimate of the budgetary impact of last year’s major health care legislation—the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010—under the assumptions of the new baseline. However, the costs or savings from some aspects of that legislation can be separately identified in the baseline projections. In particular, the provisions related to expanding health insurance coverage were projected to increase the deficit between 2012 and 2021 by $1.04 trillion, on net, in CBO’s January baseline; they are now projected to increase the deficit by $1.13 trillion over that period.

Alternative Approaches to Funding Highways - CBO Director's Blog - About 25 percent of the nation’s highways, which carry about 85 percent of all road traffic, are paid for in part by the federal government. Federal spending on highways comes primarily from taxes on gasoline and diesel fuel, but those and other taxes paid by highway users do not yield enough revenue to support either current federal spending on highways or the higher levels of spending that have been proposed by some observers. Although raising fuel taxes would increase revenue, those taxes alone cannot provide a strong incentive for highway users to take into account all of the costs their road use imposes on others. A CBO study, prepared at the request of the Senate Budget Committee, examines broad alternatives for federal funding of highways, focusing on fuel taxes and on other taxes that could be assessed on the basis of the number of miles that vehicles travel.

TPC Looks at the Obama Budget and Taxes - Remember President Obama’s 2012 budget—the fiscal framework he released in February. You’d be forgiven if you’ve forgotten. After all, Washington can’t seem to stop squabbling over what to do about the budget for this fiscal year, now almost half over. Still, once Congress finally crawls out of the muck of 2011, Obama’s budget will be the focus of much of the upcoming debate over taxes and spending. The Tax Policy Center has just analyzed the tax provisions of the Obama budget. We have found, not surprisingly, that he’s proposing significant tax increases for high-earners and little or no change for the other 95 percent of taxpayers.        Keep in mind that analyzing Obama’s proposal is maddeningly complicated by the “compared to what” problem. There are three baselines floating around. There is “current law” that assumes all the 2001-2003 tax cuts and the Alternative Minimum Tax patch expire as scheduled at the end of 2012.. Then, there is “current policy” that assumes this year’s tax law will continue indefinitely. Finally, the White House uses a third baseline that assumes, among other things, that the Bush-era tax cuts are extended for most households, but not for the highest-earners. Just to make matters even more difficult, the baseline Obama uses in his 2012 budget is not the same one he has used for the past two years.

Gas tax increase or budget gimmick? -- On page 188 of the President’s budget, in Table S-8, we see a section titled “Reauthorize Surface Transportation.”  That section includes $235 B of spending over the next decade.  It also includes a line labeled “Bipartisan financing for Transportation Trust Fund,” and shows a ten-year total deficit effect of –$328 B.Because of this enormous “Bipartisan financing for Transportation Trust Fund” policy proposal that would reduce the budget deficit, the President’s budget is able to show increased spending for roads, bridges, trains, and airports, yet also reduce the deficit.What, then, is the President’s proposed “Bipartisan financing for Transportation Trust Fund” proposal?CBO apparently figured out that the deficit reduction consisted of higher revenues, but the Administration did not provide any more detail. So CBO didn’t give them credit for the –$328 B.

GOP Admits Speculation Is Increasing Oil Prices, Moves To Gut Speculation Watchdog Anyway - The Commodity Futures Trading Commission (CFTC) — which is charged with policing the country’s futures markets — said last week that speculation on energy futures, including oil, is at an all-time high. The Dodd-Frank financial reform law gave the CFTC the ability to issue limits on oil speculation, but agency missed the deadline for implementing the new rules, partly due to reluctance from conservative members of the CFTC board. But even if the CFTC were stepping up, budget cuts favored by House Republicans would render market oversight vastly more difficult. H.R. 1, the House Republican-approved spending plan for the remainder of 2011, cuts the CFTC budget by nearly one-third, which would force the agency to lay off nearly 30 percent of its staff. CFTC Chairman Gary Gensler has said that if the GOP budget cuts were implemented, “We would not be able to police…or ensure transparent markets in futures or swaps.” And Republicans are forging ahead with these budget cuts even though they agree that oil speculation is increasing prices:

Senate Dems decry plans to gut oil speculation police - In a letter sent to Republican congressional leadership on Tuesday, 48 Senate Democrats criticized the large Republican cuts to the Commodity Futures Trading Commission and clean energy investment in a time when oil market speculation is at record levels.  The House continuing resolution for the 2011 fiscal year (H.R. 1) “will condemn our country to continued reliance on foreign oil and allow market manipulation that could lead to gas prices rising unchecked,” they said: As you know, H.R. 1 would reduce funding for the Commodity Futures Trading Commission (CFTC) by one-third. The CFTC serves as an important “cop on the beat,” working to protect American consumers by cracking down on manipulation and other market abuses that can drive up oil prices. Yet your spending plan would shrink the CFTC budget back to 2008 levels, when Americans were blindsided by both record high gas prices and a financial crisis that cost us millions of jobs. According to CFTC Chairman Gary Gensler, these cuts would cause “significant curtailment of staff and resources.” At a time where gas prices are rising and squeezing American families, we have a responsibility to provide our watchdogs the resources they need to fulfill their important oversight and regulatory responsibilities.

Promise on Taxes Sparks GOP Rift - A few prominent GOP lawmakers believe they will have to raise some tax revenue if they are to bring Democrats along on a bipartisan compromise to address the U.S.'s long-term fiscal problems. Many Democrats want higher taxes to cover at least part of future budget gaps. That has led to clashes between Republican lawmakers and a Washington advocacy group, Americans for Tax Reform, the self-appointed keeper of the party's anti-tax flame. Grover Norquist, the group's president, said he has "sent up a flare" against placing trust in Democrats, given how bipartisan agreements, including the one struck by then-President Bush in 1990, eventually unraveled. Those tax increases took effect as scheduled, but Democrats didn't always deliver on promised spending cuts, Mr. Norquist said.  Tom Coburn (R., Okla.), one lawmaker targeted by Mr. Norquist's group, is having none of it. "These fights ... help raise money for interest groups, but they don't do anything for solving problems,"

No Country Leans on Upper-Income Households as Much as U.S. - During my recent testimony before the Senate Budget Committee (found here), I cited an OECD statistic that the U.S. has the most progressive income tax system among industrialized nations.[1]  This prompted one Senator to point out that if the richest 10% of taxpayers earn the most of any OECD country, shouldn't it make sense that they bear the largest tax burden of any country?   The answer can be found in the OECD table below. This table shows the share of taxes paid by the richest 10 percent of households, the share of all market income earned by that group, and the ratio of what that 10 percent of households pays in taxes versus what they earn as a share of the nation's income.

How Ronald Reagan and Alan Greenspan Pulled off the Greatest Fraud Ever Perpetrated against the American People  - David Leonhardt’s article,  “Yes, 47% of Households Owe No Taxes. Look Closer,” in Tuesday’s New York Times was excellent, but it just scratches the tip of the iceberg of how the rich have gained at the expense of the working class during the past three decades.  When Ronald Reagan became President in 1981, he abandoned the traditional economic policies, under which the United States had operated for the previous 40 years, and launched the nation in a dangerous new direction.  As Newsweek magazine put it in its March 2, 1981 issue, “Reagan thus gambled the future — his own, his party’s, and in some measure the nation’s—on a perilous and largely untested new course called supply-side economics.” Essentially, Reagan switched the federal government from what he critically called, a “tax and spend” policy, to a “borrow and spend” policy, where the government continued its heavy spending, but used borrowed money instead of tax revenue to pay the bills.  The results were catastrophic.  Although it had taken the United States more than 200 years to accumulate the first $1 trillion of national debt, it took only five years under Reagan to add the second one trillion dollars to the debt.  By the end of the 12 years of the Reagan-Bush administrations, the national debt had quadrupled to $4 trillion!

The Sufferings of the Millionaires, and the Sufferings of the Millions  - This is rich (so to speak): Despite the stock market’s positive performance over the past couple of years, the Fidelity survey found that 42 percent of millionaires still do not feel wealthy, compared to 46 percent, who said they didn’t feel wealthy in 2009.  In fact, among those who classified themselves as not feeling wealthy, the investable asset level needed to begin to feel wealthy is $7.5 million. Of the 58 percent of millionaires who say they feel wealthy — up slightly from 54 percent in 2009 — they began to feel so at $1.75 million in investable assets, which is consistent with 2009 and up from $1.5 million in 2008. Yeah, that whole $1.5 million just isn’t enough any more. Just ask the folks in Minnesota for whom having $20 in their pockets is proof of . . . something nefarious. I’m not sure what, but the GOP is sure that it’s something bad.  But if the Millionaires hung out with these disreputable folks in Minnesota, I’m sure they’d feel better about their mere $1.5 million.

Schakowsky Proposes Higher Tax Rates for Very High Earners - Rep. Jan Schakowsky (D-IL), most recently a member of the President's Deficit Commission, has introduced legislation to impose higher income tax rates on very high earners. The new rates under her proposal would be:

Income Bracket Marginal Income Tax Rate
>$1 million 45%
>$10 million 46%
>$20 million 47%
>$100 million 48%
>$1 billion 49%

Such huge rates on high incomes raises less than one might expect: $78 billion, compared to $956 billion for the rest of the income tax as a whole this year. Coupled with state income taxes, the marginal tax rate for these individuals would mostly be over 50%. More partnerships and limited liability corporations, many of which are taxed at the individual income tax rate, would end up paying rates higher than they would under the uncompetitively high-rate corporate income tax. As the reaction to the Deficit Commission's report suggests, many on the left of the political spectrum measure tax code progressivity solely by what the top rates are. The fact that myriad deductions and credits go primarily to high-income earners, making the top rate a bit less important for those who can figure out how to game the tax code, doesn't seem to factor into the equation.

Top Republican: Cut taxes by 10% … for the rich - Congressman Dave Camp (R-MI), the chairman of the House Ways and Means Committee, said he hopes to cut the tax rate for the richest individuals and corporations to 25 percent to help spur job growth. The top U.S. tax rate has been 35 percent for both individuals and corporations since 2001, when President George W. Bush pushed for tax cuts. The previous rate, which President Barack Obama has proposed the US returns to, was 39.6 percent. "There is no doubt that today’s tax code is too complex, too costly and takes too much time to comply with," Rep. Camp, who heads the House committee charged with writing tax legislation, said in a statement. "Add to that the unpleasant reality that America will soon have the highest corporate tax rate in the world, and it is no wonder that the current economic recovery has been far more muted than in past recoveries."

Rich Get Richer With New Congress - A flock of tea party-infused Republicans has certainly changed the political dynamic there, and exultant GOP leaders are claiming that they are now the voice of "The People." But most people won't find themselves represented by this change, much less see it as progress. That's because the newcomers in Congress, whether Republican or Democrat, tend to live high up the economic ladder, way out of touch with the people they're representing. Indeed, 40 percent of newly elected house members are millionaires, as are 60 percent of new senators.Their wealth and financial ties might help explain the rush by the new Republican House majority to coddle these very same corporate powers. From gutting EPA's anti-pollution restrictions on Big Oil to undoing the restraints on Wall Street greed, they're pushing for a return to the same laissez-fairyland ideology of the past 20 years that got our country in massive messes.Conrad Builds a Case Against Tax Subsidies - Interesting to see Senate Budget Committee Chairman Kent Conrad (D-ND) working hard to build a case for trimming the $1 trillion in tax breaks that infect the revenue code. Yesterday, as part of that effort, he brought in a broad range of tax experts to testify before his panel. They agreed that many of these preferences (aka tax expenditures) must go—although they were hardly on the same page when it came to which ones or what to do with the money. In the normal course of events, the budget committee has little to say about tax preferences, although as a member of the Finance Committee, which does have jurisdiction, Conrad is not without influence. And he seems much more enthusiastic about tackling the politically thorny deductions, credits, and exclusions than Finance panel chairman Max Baucus (D-MT). Besides, Conrad may figure that a framework for tax reform will be written in high-level talks between the White House and Congress—a process he’d clearly like to influence.

GE, Leader in Tax Evasion, Pays Virtually No Tax Yet Got Bailed Out in Crisis -- Yves Smith - The New York Times reports tonight on what a great job General Electric does in tax evasion avoidance, reaping a tax credit of $3.2 billion on $5.1 billion of reported US profits. And while GE is a particularly egregious example by virtue of having the most sophisticated tax operation in the US, it illustrates a more general point. The idea that US corporations are heavily or even meaningfully taxed is a canard (and this is true at the small end of the spectrum too). While nominal tax rates may appear to take a serious bite out of corporate earnings, a myriad of loopholes and income-shifting schemes allows companies to slip the taxman’s leash.  And before some of you contend that this line of thinking is somehow anti-capitalist, consider the reaction of President Reagan when learning of GE’s skills in tax dodging: President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes. “I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan,  The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

Rantings of an Ex-Maestro - Paul Krugman - Some people have asked me for reactions to this piece by Alan Greenspan (pdf) on how Obama’s activism is preventing economic recovery. Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible.

Fail Bigger Cheaper: A Three Word Manifesto - Try this thought experiment: Maybe America's Great Stagnation isn't happening because we're failing — maybe it's happening because we're not. To illustrate, consider the most straightforward example: Wall Street megabanks were propped up and lavishly resurrected, and your grandkids will likely still be paying the price — because they were too big to fail. But if you look closely, you might see those dynamics just about everywhere. Detroit, of course, received a de facto bailout, too, but that's the tip of the iceberg: when you stop and think about it, the economy's rife with subsidies, hidden and overt, to largely industrial-age stuff (the McMansions that were subsidized by Fannie and Freddie, the oil that's subsidized by whomever's going to clean up the sky should there be anyone left to do so, the McBurgers whose water, beef, and obesity are all loaded not just with calories, but with tons of agro-subsidies). And that's just the economy. What about the polity — Congress? Rarely have more constituents been more disappointed with their so-called representatives — but the whole lumbering institution's too entrenched and cronified to fail.

US banks face fresh scrutiny on lending - US banks could be forced to disclose when they give clients below-market rates on loans as a part of their efforts to secure further business, under rules being considered by accounting regulators. The proposed change could lay bare cases in which larger lenders use their balance sheet to secure lucrative investment banking business.  This has been a long-standing bone of contention between universal banks, such as JPMorgan and Citigroup, and former securities firms, such as Goldman Sachs and Morgan Stanley.The law prohibits banks from “tying” the availability or terms of credit to the purchase of other products and services. However, banks can respond to requests from customers. A borrower may, for example, make clear that decisions on future underwriting or advisory business will be influenced by lending terms, in a bid to secure favourable terms.The Financial Accounting Standards Board is set to reconsider proposals on how loans and credit facilities are first recorded on a bank’s books early next month, said people familiar with the matter.

Capital controls: A meta-analysis approach - Capital controls are back on the table. But the existing literature offers conflicting and sometimes confusing insights. This column provides a meta-analysis of 37 empirical studies with the aim of exposing some common ground. It finds that capital controls on inflows make monetary policy more independent, alter the composition of capital flows, reduce real-exchange-rate pressures, but they do not reduce the volume of net flows.

Quelle Surprise! Geithner Gutting Dodd Frank via Intent to Exempt Foreign Exchange - Yves Smith - I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism. Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation: Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.  We need to be clear: Dodd Frank was never intended to cover the cash (spot) foreign exchange market, which is where the bulk of the $4 trillion of FX trading takes place. There is an open question as to whether simple forwards, which are not exchange traded and hence not typically margined, would be considered to be “standardized” derivatives and hence moved to an exchange. Not that I sympathize with the Treasury’s position, but requiring forwards and other simple FX derivatives to be exchange trades would lead dealers to try to shift activity to London.

Satyajit Das: Controlling Sovereign CDS Trading – The Dysfunctional Debate - In an opinion piece entitled “Hedging bans risk pushing up debt costs” published on 9 March 2011 in the Financial Times, Conrad Voldstad, the chief executive of the International Swaps and Derivatives Association (”ISDA”) and formerly a senior derivatives banker with JP Morgan and Merrill Lynch, made the case against the EU ban on “naked” credit default swap (”CDS”) contracts on sovereigns.Just as “patriotism is the last refuge of a scoundrel”, arguments citing market efficiency and the benefits of speculation seem to be the first resort of dealers. The familiar case was that prohibition was unnecessary, would decrease liquidity, increase borrowing costs and create greater uncertainty for European firms. The arguments are self-serving and do not present a balanced view of the issues.The EU rule does not impede genuine hedging. If an investor owns sovereign securities or a firm has receivables that rely on the sovereign directly or indirectly, then purchasing protection using a CDS is permitted.The article cites an EU study that found that the sovereign CDS market was small relative to the size of underlying bond markets and had negligible effect on credit spreads. Given this evidence, it is puzzling why banning these contracts would somehow affect pricing.

Q&A: Rep. Capito Takes On Dodd-Frank, Elizabeth Warren - As newly empowered U.S. House Republicans take aim at key Obama administration policies, Rep. Shelley Moore Capito, the new chief of the House Financial Services subcommittee on financial institutions and consumer credit, is proving to be a major player. The West Virginia Republican, who has more than 100 credit unions and community banks in her district, has her eye on a wide range of policies worrying financial firms. And she’s already started to move in on the Dodd-Frank financial overhaul, hoping to reshape or eliminate parts of the sweeping package that was vigorously opposed by Republicans and banks. Rep. Capito spoke to Dow Jones Newswires’ Maya Jackson Randall, the following is an edited transcript of their conversation:

The War on Warren, by Paul Krugman - Last week, at a House hearing on financial institutions and consumer credit, Republicans lined up to grill and attack Elizabeth Warren, the law professor and bankruptcy expert who is in charge of setting up the new Consumer Financial Protection Bureau. Ostensibly, they believed that Ms. Warren had overstepped her legal authority by helping state attorneys general put together a proposed settlement with mortgage servicers, who are charged with a number of abuses. But the accusations made no sense. Since when is it illegal for a federal official to talk with state officials, giving them the benefit of her expertise? Anyway, everyone knew that the real purpose of the attack on Ms. Warren was to ensure that neither she nor anyone with similar views ends up actually protecting consumers.  And Republicans were clearly also hoping that if they threw enough mud, some of it would stick. For people like Ms. Warren — people who warned that we were heading for a debt crisis before it happened — threaten, by their very existence, attempts by conservatives to sustain their antiregulation dogma. Such people must therefore be demonized, using whatever tools are at hand.

The Elizabeth Warren Rorschach Test - Yves Smith - The spectacle of a bunch of Republican Congressmen spending over two hours pillorying Elizabeth Warren, following weeks of death of a thousand unkind and generally offbase cuts coverage in the Wall Street Journal has led a lot of folks from what passes for the left, and even not so left, to ride in to her defense. A partial list includes Paul Krugman, Simon Johnson, Joe Nocera, Mike Konczal, and Adam Levitin.  The last time I can recall the Journal becoming quite so unhinged about an individual was over Eliot Spitzer. And since Warren seems pretty unlikely to be found to have similar personal failings, the specter of the right throwing what look to be ineffective punches at her makes for a peculiar spectacle. What is the real aim behind this drama? The reactions to Warren, both on the right and left, are becoming unhinged from reality. She has assumed iconic status as a lone mediagenic figure in the officialdom who reliably speaks out for the average person, a Joan of Arc for the little guy. And she drives the right crazy because she plays their game better than they do. She sticks to simple, compelling soundbites and images without the benefit of Roger Ailes and Madison Avenue packaging, and she speaks to an even broader constituency, Americans done wrong by the banks, than they target. No wonder they want to burn her at the stake.  But the shadow she is casting is much larger than her current and prospective power. And as we have indicated, the policy she has allowed to become associated with her name, namely, the mortgage fraud settlement, does not serve her or the public at large well.

Elizabeth Warren Is Not Jesus – Krugman - Yves Smith, while rightly denouncing the right-wing attack on Elizabeth Warren, seems almost equally perturbed by the ardor of her defenders. But I think she misunderstands the nature of that defense. Certainly in my case, while I like and admire Warren, I’m under no illusions that all will be right with the world if Warren does, in fact, become head of the Consumer Financial Protection Board. For one thing, consumer protection is at best a piece of financial reform, and arguably not the most important piece. And Warren is just a good person, not a saint; she’s trying to work within the political limits of the possible, which means that much of what she does falls well short of what we’d like to see done. But in a way that’s the point: if a basically moderate, reasonable, well-intentioned person with such a good track record can be demonized, there is truly no hope for reform. And yes, defending Warren is an opportunity to fight the anti-reformers on relatively favorable ground: she’s so obviously not a power-mad radical that the venom of the attacks makes the right look as unhinged as it really is.

Frank: White House Not Tough Enough to Push for Warren on CFPB - Krugman sees this fight as an opportunity for the White House to redefine their position vis-a-vis the banks, and the need for strong financial reform. But that assumes they want that redefinition. I see no reason to believe that this is desired inside the Treasury Department, for example. This blind item seems right to me, though it’s the New York Post so take it with a grain of salt: “Geithner has privately told others that he isn’t happy with Warren’s involvement in the (mortgage settlement) talks either, according to sources familiar with the matter.” So while I generally agree with Barney Frank here, it only makes sense if you think that Warren and the White House economic team are aligned in their beliefs. Rep. Barney Frank (Mass.), who co-authored the law creating the Consumer Financial Protection Bureau, said that if she were nominated, Warren might not be confirmed to head the agency. While Frank argued that’s a fight worth having, he cautioned that the president might disagree.  I think the president is too unwilling to make the kind of fights that don’t necessarily win. And I’m not sure she couldn’t be [confirmed],”

Ignoramitocracy - Krugman - Harold Pollack points out that everything I said about Elizabeth Warren applies, with even more force, to Donald Berwick, a highly qualified technocrat who can’t even get a confirmation hearing on his nomination to run Medicare and Medicaid. And then there is, of course, Peter Diamond, an economist’s economist with a sterling reputation, who is being blocked at the Fed. Part of what’s going on here is simply opposition for the sake of opposition. But as Pollack says, the underlying problem is that anyone with actual expertise and any kind of public profile — in short, anyone who is actually qualified to hold a position — is bound to have said something, somewhere that can be taken out of context to make him or her sound like Pol Pot. Berwick has spoken in favor of evaluating medical effectiveness and has had kind words for the British National Health Service, so he wants to kill grandma and Sovietize America. So what lies down this road? A world in which key positions can only be filled by complete hacks, preferably interns from the Heritage Foundation with no relevant experience but unquestioned loyalty.

Backgrounder: Behind the Battle Over Hidden Debit Card Fees…A provision within the financial reform bill that would regulate debit card transaction fees could be postponed by a year or two following fierce objections from banks. Specifically, banks large and small are objecting to a Fed proposal to limit what are known as interchange fees — the fees they collect from merchants every time a customer uses a bank-issued debit card to make a purchase. Lawmakers in both houses of Congress last week drafted legislation to postpone writing new debit interchange rules for one to two years. According to Dodd-Frank, the rules were supposed to be finalized by April 21 and to go into effect by July 21. Consumer groups have decried the delay, saying it would postpone much-needed reform to a system that is “uncompetitive, non-transparent and harmful to consumers [1]” [PDF]. At the same time, these groups voiced concerns that if interchange reform passes, banks will levy other charges on consumers — something many banks have warned they may do. Given the controversy, we’re taking a closer look at how interchange works and what’s at stake for banks, for businesses and for consumers.

Banks Find Allies in Debit-Fee Fight - No effort to roll back last year's Dodd-Frank financial-overhaul law has progressed further than the banking industry's campaign to delay new fee limits on debit-card transactions. The draft version of the rule would prohibit large banks from charging merchants more than 12 cents each time a customer pays with a debit card, down from the current average of 44 cents. The banks, which stand to lose billions in revenue if the rule takes effect, have been aided in their effort by a collection of strange bedfellows who have raised concerns that the rule could have unintended consequences, harming consumers and even small banks, which are exempted from the rule. Ben Bernanke, chairman of the Federal Reserve, which drafted the proposed rule, and Federal Deposit Insurance Corp. Chairman Sheila Bair have expressed concerns.

Why we need regulatory cops on the beat – and why they make bankers cringe - One of the paradoxes of effective financial regulation is that the best way to help bankers and banks is to virtually never think in terms of helping banks and bankers. Financial regulators' primary task is to detect, put out of business, and deter accounting control frauds. Those are the frauds that cause catastrophic individual failures, hyper-inflate financial bubbles, and produce our recurrent, intensifying financial crises. Accounting control frauds also produce “echo” epidemics in other professions (e.g., auditors, appraisers, and credit rating agencies) and industries, e.g., loan brokers. Fraud begets fraud and it can make fraud endemic in entire lines of business such as liar's loans. The senior officers of investment and commercial banks spread these frauds through an industry and to other industries and professions by deliberately creating “Gresham's” dynamics. In this context, the dynamic refers to situations in which bad ethics drives good ethics out of the market.

Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG Shortly Before AIG Pitches Sweetheart Repurchase to NY Fed - Yves Smith - The corruption in high places is getting more and more brazen with every passing day. The only thing that separates the US from conventional banana republic status is that no one leaves keys to new luxury cars on the desks of officials to secure their cooperation. It’s just not enough of an inducement to get anyone to take action. Masaccio at FireDogLake was suitably outraged at this spectacle of a regulator getting a job with the biggest lobbying group in the industry he regulates…..and staying in his current oversight role: The Washington Post reports that David H. Stevens will be taking over as head of the Mortgage Bankers Association. Stevens currently serves as Assistant Secretary for Housing in the Department of Housing and Urban Development, and as the Commissioner of the Federal Housing Administration. He has a conflict of interest so deep that he should be fired at once… Now we have another example of unseemly revolving door behavior, this with an even more direct connection between a former official’s old purview and his current role, this time involving AIG and its biggest sugar daddy, the New York Fed.

More on the Lack of Criminal Prosecutions: Was the SEC Deterred by a Widely Overlooked Ruling? - Yves Smith - Bloomberg’s Jonathan Weil, who is normally an effective critic of bank chichanery and weak regulatory oversight, may have missed the mark on a key issue in an article last week, “Moral for CEOs Is Choose Your Fraud Carefully“. In it, he criticizes the SEC for failing to attack accounting fraud:It seems the Securities and Exchange Commission won’t be doing anything to challenge that pretense, either, and that this may be by design. The SEC for years has been bending over backward to avoid accusing major financial institutions of cooking their books, even when it’s obvious they did. So much for upholding financial integrity. Weil cites a series of object lessons where the SEC has not gone after financial firms executives for accounting fraud.  Weil charges them with “see no accounting evil”. Let’s be clear: I’m no fan of the SEC’s actions in the wake of the crisis. The regulator has been kept resource starved. Under Arthur Levitt (hardly the most aggressive of SEC chiefs) any effort at enforcement led to threats from Congress of budget cuts (Joe Lieberman was particularly aggressive). Chris Cox was put in charge, as far as I can tell, to make sure the agency did at little as possible. So the SEC only knows how to do insider trading cases, and on any other type of action, it seeks to get a settlement, when a trial in some cases might have more value as a deterrent

Financial markets and professional cycling - Luig Zingales writes a very interesting article about some of the new scandals in financial markets (the insider-trading trial of Raj Rajaratnam). ... From the article you can see that there is a sense of disbelief about what is happening: "It is so difficult to imagine that successful executives would jeopardize their careers and reputations in this way that many of us probably hope that the accusations turn out to be without merit."This quote reminds me of a recent one by Alan Greenspan regarding the behavior of financial institutions prior to the crisis (from October 2008):  "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity – myself especially – are in a state of shocked disbelief."Despite his disbelief, Zingales admits that there is some recent evidence that supports the idea that personal networks can be a source of excess returns in financial markets. But he remains positive when he looks at the industry as a whole: "After ten weeks of a trial like this, it will be easy for the public to conclude that all hedge funds are crooked, and that the system is rigged against the outsiders. Fortunately, this is not the case. While there are certainly some rotten apples in the hedge-fund industry, the majority of traders behave properly, and their legitimate research contributes to making the market more efficient." This debate reminds me of what has happened in the sport of professional cycling... In recent years, there have been a large number of cases of professional cyclists testing positive for performance-enhancing drugs.

Barclays probed over Libor manipulation claims - According to the Financial Times, investigators are trying to determine whether the bank contravened 'Chinese Wall' rules to exploit Libor. Central to the investigation is whether too much information was shared between the bank's treasury arm and its traders.  The paper also claims investigators are trying to establish whether there was any improper influence on Barclays' submissions to the daily survey that is used to set the rates at which banks borrow from each other. Barclays, along with Citigroup, Bank of America and UBS have received subpoenas in a joint investigation by US and UK regulators into the fixing of the Libor rate between 2006 and 2008.  UBS is so far the only bank to comment, confirming the Securities Exchange Commission, Commodity Futures Trading Commission and the Department for Justice had all been in contact over the allegations.

Bloomberg: All Clear Sounded as Markets Shrug Off Multiple Black Swans -Global markets are signaling that sustained economic growth will more than make up for Japan’s worst disaster since World War II, rising commodity prices and uprisings throughout the Middle East and North Africa.  Interest-rate derivatives, bond sales by the riskiest borrowers and rebounding benchmark stock indexes all show increasing confidence in the economy. New York-based JPMorgan Chase & Co. is putting up $20 billion of its own money in a short-term loan to finance AT&T Inc. (T)’s $39 billion bid for Deutsche Telecom AG’s T-Mobile business.  Manufacturing strength from the U.S. to Germany and China is giving economists more confidence that the recovery from the worst financial crisis since the Great Depression will continue. Goldman Sachs Group Inc. forecasts a global expansion of 4.8 percent this year, while JPMorgan calls for 4.4 percent. The average over the past two decades is 3.4 percent.

Buffett banks another $3.7 billion from Goldman Sachs investment in the depths of economic crisis - Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) has made about $3.7 billion, including paper profits, from its $5 billion investment in Goldman Sachs Group Inc. (GS) at the depths of the financial crisis in 2008. Goldman Sachs today said it will pay $5.65 billion to redeem preferred stock it sold to Berkshire. The price includes the original investment, plus a 10 percent premium and first- quarter dividend. Berkshire still holds warrants to buy $5 billion of the New York-based bank’s common stock with a strike price of $115 per share, which have generated a paper profit of more than $1.9 billion, data compiled by Bloomberg show.

Like The Phoenix, U.S. Finance Profits Soar - Not too long ago, during the depths of the global crisis, the finance industry was on the brink of collapse. How times have changed. Friday’s revisions to U.S. gross domestic product contained news on fourth-quarter profits. Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector. During the darkest days of the financial crisis  the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data. Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries. After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Fed to Bank of America: No Bigger Dividends - The Fed has rejected Bank of America's bid to modestly increase its dividend.  The problem isn't the loss of the dividend itself, of course--even major investors aren't really going to miss a cent a share.  Rather, the problem is what this herald's for Bank of America's financial condition.  Other banks have been allowed to increase their dividends, which suggests that the Fed thinks BofA is still unusually weak.   The only bright spot I've seen suggested--and it's not really all that cheering--is that the Fed may be feeling more freedom to turn down requests like this.  For a long time, the Fed has been doing an elaborate dance where it tries to simultaneously rein in the banks, and shore up the weakest ones, without ever signalling the market which ones are in the deepest trouble.  Such a signal, it's feared, could touch off renewed convulsions in the markets.

The Fed’s 1-cent-a-share dividend cap -- Antony Currie wants a bit more clarity on why the Federal Reserve seems to be happy with Bank of America paying a dividend of 1 cent per quarter, but unhappy with a dividend of 5 cents per quarter. My feeling is that the Fed’s logic wasn’t nearly that granular. There are basically three states that a bank can be in: it can pay no dividends at all; it can pay the minimum possible token dividend of 1 cent per quarter; or it can pay out a full and generous dividend. The Fed, in the wake of its latest stress tests, has determined that both Citigroup and Bank of America belong in the middle group. They can pay one cent a share, but no more — and in Citi’s case, they can only pay that much after doing a 1-for-10 reverse stock split and bringing the share price up above $40. Paying a dividend is important from a symbolic perspective. It signals that the bank isn’t worried about insolvency, and it forces the bank to pay all dividends on preferred shares in full. If banks are paying dividends, that helps shore up confidence in the banking sector. If banks aren’t paying dividends, that keeps investors worried about what problems might lurk under the surface.

Dividends Lost - Four groups of people were directly affected by the Federal Reserve’s decision late last week to allow major banks to increase their dividends and to buy back shares. Bankers, bank shareholders and government officials were somewhere between happy and delighted.  Taxpayers, the fourth group, should be much more worried (see this cautionary letter to The Financial Times by top finance academics). You might think that the people who run banks have an incentive to keep equity at a high level, providing a cushion against future losses and effectively protecting creditors. And banking did operate in this fashion back when government was much smaller and effectively unable to save large financial institutions. But that was in the 19th century – when banks had capital levels in the range of 30 to 50 percent (and functioned fine). In the 20th century, the equity in banking has tended to decline relative to debt. This is what people mean when they say leverage has gone up. A thinly capitalized bank is like buying a house with very little money down and a mortgage for 98 percent of the purchase price (and such levels of leverage, of up to 50 to 1, were common in the run-up to 2008).

Banks Hit for Credit Union Ills - In one of the broadest accusations that Wall Street helped cripple financial institutions during the crisis, the National Credit Union Administration, or NCUA, has threatened to sue several investment banks unless they refund over $50 billion of mortgage-backed securities sold to the five institutions, called wholesale credit unions.The NCUA is accusing Goldman Sachs Group Inc., Bank of America Corp.'s Merrill Lynch unit, Citigroup Inc. and J.P. Morgan Chase & Co. of misrepresenting the risks of the bonds to wholesale credit unions, which loaded up on the bonds in their role of investing on behalf of retail credit unions, according to people familiar with the situation.Regulators seized the five wholesale credit unions in 2009 and 2010, inheriting a pile of battered bonds now worth only about $25 billion, or half of their face value. The wholesale credit unions, also known as corporate credit unions, are at the heart of the nation's credit-union system. They not only invest customer deposits but also provide services such as check clearing for nearly 8,000 "retail" credit unions—member-owned cooperatives that act somewhat like banks for firefighters, teachers and other workers who have something in common.

Unofficial Problem Bank list increases to 985 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Mar 25, 2011. Changes and comments from surferdude808:  The Unofficial Problem Bank List continued to climb as the FDIC released its actions for February 2011. This week, there were eight additions and five removals, which leaves the list with 985 institutions with assets of $431.1 billion.

Moody's: Commercial Real Estate Prices declined 1.2% in January - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 1.2% in January. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales and there are a large percentage of distressed sales - and that can impact prices and make the index very volatile. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.  CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are down 4.3% from a year ago and down about 43% from the peak in 2007.

Fannie and Freddie Hiding Over $100 Billion of Losses? - Yves Smith - Bank expert Chris Whalen has a little bombshell in his current newsletter. It’s so obvious that it should not only have occurred to me but pretty much everyone on the real estate beat. And that begs the question why no one has even mentioned it.  One of the actors in the subprime/Alt A market was private mortgage insurers. For those of you lucky enough to be unfamiliar with this concept, PMI is insurance paid for by the borrower for the benefit of the lender. It is used to insure the property value on highly levered transactions. Lenders were quite happy to lend up to 80% of appraised value based on semi-decent income; it was considered unlikely before the crisis that home values would fall all that much in a specific geography even in a recession. But for the amount in excess of 80%, the lender wanted extra protection. In steps the PMI insurer. Given the prevalence of PMI insurance, their thin capitalization, and the big wipeout in home values, they should be as dead as the monolines. But they aren’t. That’s because they are engaging in insurance fraud, namely, refusing to pay out legitimate claims.  And perversely, as Whalen tells us, they are getting quite a bit of help from Fannie and Freddie not making claim at all. Why not? Well, if the GSEs did put in claims, the PMIs would quickly go bust and Fannie and Freddie would report losses. So the failure to put in claims is yet another variant of “extend and pretend”. But in this case, there’s good reason to believe the numbers are very large:

Are Fannie and Freddie Giving Banks Yet Another Bailout by Not Pursuing PMI Claims? -- Yves Smith  The further you look at the banking mess, the more the same problems keeps staring back: too many losses, not anywhere enough equity or reserves, and a lot of tap dancing by the officialdom to pretend otherwise.  We wrote yesterday, thanks to some sleuthing by Chris Whalen, that Fannie and Freddie might be sitting on north of $100 billion of unreported losses. If they started realizing those losses, one of the first parties that would take a hit would be the private mortgage insurers, since on high loan to value loans (over 80% of appraised value), they were in the business of guaranteeing the loan balance in excess of 80%. So while the failure of the GSEs to act is no doubt part of the extend and pretend shell game, it serves to keep PMIs that would otherwise be as dead as certain notorious parrots alive. Adam Levitin points to a second and far more important set of beneficiaries from the GSE’s failure to take action on their defaulted loans: the TBTF banks:

Freddie Mac eliminates option to foreclosure in the name of MERS - From Freddie Mac Bulletin: Eliminating the option to foreclose in the name of Mortgage Electronic Registration Systems Inc. (MERS) We have updated the Guide to eliminate the option for the foreclosure counsel or trustee to conduct a foreclosure in the name of MERS. Effective for Mortgages registered with MERS that are referred to foreclosure on or after April 1, 2011, Servicers must prepare an assignment of the Security Instrument from MERS to the Servicer and instruct the foreclosure counsel or trustee to foreclose in the Servicer’s name and take title in Freddie Mac's name. As required in Section 66.17, Foreclosing in the Servicer’s Name, Servicers must record the prepared assignment where required by State law. State mandated recording fees are not reimbursable by Freddie Mac, are not considered part of the Freddie Mac allowable attorney fees and must not be billed to the Borrower.

Slapping Team Obama: Several Democratic AGs to Withdraw from Proposed Mortgage Fraud Settlement - Yves Smith - The so-called mortgage settlement looks to be coming apart at the seams. That does not mean there will not be a deal of some sort. Remember, a hallmark of the Obama administration is to do things simply to have more “achievements” to discuss. But not only, as has been rumored for some time, are a number of Republican attorneys general saying they will not join in the settlement, so are some Democrats as well.  It’s important to recognize that Democratic withdrawals are a far bigger problem for Obama than the Republicans. Given that a number of AGs signed up at the last minute, and some of the Republicans were not even on board with the concept of a mortgage settlement, defections among the GOP participants can be depicted as partisanship. By contrast, repudiation by Democrats, particularly Democrats that have garnered some attention in the national press by taking mortgage abuses seriously, is much harder for the Administration to explain away. And as David Dayen at Firedoglake reports, if enough AGs defect, the settlement becomes a dead letter: to become the official position of the National Association of Attorneys General, at least 38-41 of the AGs would have to sign on. And even that has no binding force to supersede state law. As we anticipated, the AGs are unhappy about how the negotiations have been conducted (they have been kept in the dark and are now being railroaded) and the failure to have any serious investigations. Per Dayen, they are also concerned, as we are, that the banks will be given a broad release:

BarCap ranks mortgage servicers on loss-mitigation speed - Barclays Capital analysts ranked the largest mortgage servicers on how fast they move loans through the loss-mitigation process and ultimately through modification or foreclosure. While delinquencies have leveled off in recent months, roughly 6.9 million mortgages are more than 30-days delinquent or in foreclosure as of January, according to Lender Processing Services data. The decisions servicers must make once these loans hit delinquency have increased in both importance and scrutiny, especially when issues arose last year about servicers' foreclosure practices. BarCap came up with three key decision points, and ranked servicers on the speed at which they acted.First, is when the borrower initially becomes delinquent.  The next decision point is the speed at which servicers liquidate a property either through short sale or REO after foreclosure. Finally, BarCap ranked servicers on how fast they advance interest, schedule principal taxes, and insurance on the delinquent loan.

Paul Jackson’s “Follow the Money” Shows Housing Wire Deep Financial Ties to Mortgage Market Bad Actors -- Yves Smith - David Dayen, in a pointed article titled, “The Corruption of the Financial Press: A Look at Housing Wire” documents how that mortgage “news” site has extensive business and financial connections with firms and individuals at the frontlines of dubious mortgage industry practices and has repeatedly gone to bat for its biggest advertiser even in the face of criminal investigations.  Housing Wire’s proprietor, Paul Jackson, made this inquiry fair game in a recent post, “Follow the money: Interpreting U.S. Bank v. Congress” in which he took aim at the Alabama attorneys who tried defending a client against what they contended was a wrongful foreclosure, using the untested strategy we had mentioned on this blog, the so-called New York trust theory. The court rejected the case on narrow grounds (the suit was fighting the ejectment, a stage after the foreclosure; any precedent on ejectment actions will have limited applicability in Alabama and none in other states). But Jackson went further than arguing the issues of the case or the importance of the decision. Based on no evidence, he denigrated the attorneys involved, claiming they must have big money backers (and we separately dispatched his spurious charges): With the benefit of Dayen’s sleuthing, Jackson’s post is revealed as a classic case of projection, in which someone attributes to others the very sort of behavior he engages in.

Collective Bargaining for Homeowners: Heroism or Terrorism? My Exclusive Interview with Steven Lerner - Dylan Ratigan - Last night, I interviewed the man at the center of a new swirling controversy. Stephen Lerner, a veteran union organizer, wants collective bargaining for homeowners that owe money to the big banks. And this week, he was caught on tape talking about a “mortgage strike” against the big banks. He suggested that a large number of homeowners stop paying their mortgage until the banks agree to negotiate and modify loans. Glenn Beck pounced on the recording. And so did Congress. Rep. Jason Chaffetz, a Republican Congressman from Utah, sent a letter to Attorney General Eric Holder wrote to the Department of Justice that Lerner’s threats “clearly constitute domestic terrorism”, and asked for an investigation. I interviewed Lerner, to get his side of the story – his first interview since being attacked by Beck. Lerner talked about the mortgage strike idea, the big banks, the Tea Party and Glenn Beck’s attack, and being accused of terrorism.

Beware the Predatory Pro Se Borrower! -- Yves Smith -  Pro se defendants are generally lost souls in the court system. They typically get up, flail around before a frustrated judge, and lose. So the idea that they could rise to the level of being threatening enough to be “predatory” seems like more than a bit of an oxymoron. But this document depicts these usually hapless defendants as a danger: LockeLordBissell on Dealing With ProSe Defendants ...As we learn, the big reason that these clueless defendants have come to annoy plaintiff firms like LockeLordBissell is that  Pro se cases are expensive to defend because the plaintiff’s lack of familiarity with the legal process often creates more work for the defendant I’m a little surprised at that; perhaps enough judges have patience in dealing with pro se clients that the time spent in court is protracted. But irrespective of the cause, the outcome is that these pro se clients mess up foreclosure mill economics by behaving in non-standard and time-consuming ways; hence they need to be dealt with.  There are some revealing, as well as amusing threads in this presentation. The authors make strong declarations about the motives of borrowers that range from incomplete to biased. For instance, it notes a meaningful uptick in the number of pro se defendants. It blames this development on “negative press….emboldening borrowers to pursue legal action”. It bizarrely makes them sound like the instigators when they are responding to legal action taken against them. And it further contends that many are unwilling to hire attorneys, when the more obvious explanation is they can’t afford counsel and there aren’t enough Legal Aid lawyers to go around.

In Prison for Taking a Liar Loan - Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?  No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.  “The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement.  Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars.  Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned.  Otherwise, he walked.

Foreclosure crisis: Common ground between investors and homeowners - Talcott Franklin wants homeowners in distress to know they have more in common with the big institutional investors who hold their mortgages than they might imagine.  Both would benefit if the servicers who act as middlemen offered loan modifications, even forgiving principal, rather than foreclose. And both would like to see the banks that created explosive mortgage-backed securities take more responsibility for their role in the housing collapse. In the past, these investors would have had little recourse. They didn't own enough of the securitized package — the huge bundles of home loans they invested in — to push for payback. They also had no way to identify their co-investors. But last year Franklin, an expert in securitization and former partner at Patton Boggs, made this pitch: Hire me to pursue your collective interests. Today Franklin's unusual "clearinghouse" represents about one-third of all subprime investors, who hold more than $500 billion in 6,700 deals. And Franklin, 45, is trying to use this clout to apply heat to the financial institutions that devised these investments.

Implosion of Foreclosure Mill Leaves 100,000 Cases in Limbo - Yves Smith - Florida, as the ground zero of the foreclosure crisis, is arguably further along in seeing how some of the uglier aspects of this mess will work themselves out. The foreclosure mill abuses were so bad that even a not terribly venturesome AG, Bill McCollum, went after them, and his Republican successor, Pam Bondi, is reported to be keen to keep the heat up on mortgage arena miscreants.  As the cases against the big foreclosure mills have moved forward, clients have exited, and that is generally a death knell for a law practice. The imminent closure of the biggest player in Florida, the Law Offices of David Stern, is leaving a lot of cases in the lurch. From the Palm Beach Post Money:The status of nearly 9,000 Palm Beach County foreclosure cases is in question following attorney David J. Stern’s announcement that he is closing his foreclosure shop at the end of the month and dropping the files.Statewide, as many as 100,000 cases need to be officially withdrawn from by Stern attorneys, but with a decimated staff, Stern told judges in a March 4 letter that he simply doesn’t have the manpower to file the correct paperwork….Hundreds of employees were subsequently laid off, leaving the transfer of foreclosure files to new firms in disarray…

State courts declare financial emergency, seek help - A dramatic drop in mortgage foreclosures being filed in Florida has plunged the state's courts into a financial emergency that could jeopardize operations in every courtroom. Supreme Court Chief Justice Charles T. Canady, in letters to Gov. Rick Scott and legislative budget leaders, has asked to borrow $72.3 million from other state funds to keep courts operating through the current budget year that ends June 30. The problem arises just as lawmakers work to fill a $3.7 billion deficit in next year's budget and amid some of the worst relations ever between the three branches of state government.  The revenue shortage surfaced last month as court budget estimators took a look at mortgage foreclosure filings, which started dropping in late 2010 because of a moratorium that several lenders imposed on themselves. The state collects filing fees for each foreclosure claim that vary from $400 to $1,905, depending on the amount involved, and the numbers have dropped by close to 20,000 each month.

Mortgage Delinquencies Keep Falling - The number of mortgages in delinquency continues to fall and has shrunk by nearly one-fifth over the past year, according to new figures released today by Lender Processing Services (LPS). The rate of delinquent mortgages has declined by 18.2 percent over the past year, according to the mortgage and data tracking firm, including a monthly decline of 1.2 percent in February. The figures include mortgages at least 30 days past due but not yet in foreclosure. Overall, 8.80 percent of all outstanding mortgages are delinquent, according to the firm, for a total of nearly 4.7 million mortgages. Another 2.2 million are currently in foreclosure, or 4.15 percent of all mortgages.  Even as delinquencies have fallen, the number of mortgages in foreclosure has increased over the past year, up 7.4 percent from February 2010. The total did fall off slightly last month, however, decreasing 0.2 percent from January.

Shifting the Focus From “Strategic Default” to “Prudent Walkaway” - A "strategic default" currently means walking away from an underwater home even though the owner could afford to pay the mortgage. However, this represents far less than half of walkaways. The vast majority of foreclosures happen to people who cannot afford to pay the mortgage. Portrayals of strategic default in 2009 were typically of homeowners who "used their home as an ATM," or "deadbeats." . One of the earliest semi-positive stories was in the Wall St. Journal, titled "American Dream 2: Default, Then Rent." This article described a couple who had defaulted, cut their housing costs from nearly $4,000/month to just over $2,000/month, and were living in a bigger house with "a swimming pool with three waterfalls."These are not the people I meet in the course of interviewing and writing about surviving tough times. The people I meet are laid off, or from two incomes down to one, or on their way to medical bankruptcy. They cannot imagine a swimming pool, much less a waterfall -- they just have bills they can't pay, one of which is the mortgage. Some are slow in adjusting to the "new normal," and still eat out regularly, but others have already cut back to eating out four times a year. Their home may be underwater -- or they may have equity. Often it doesn't matter, when the bottom line is that they have to choose between the mortgage and medical insurance -- because losing medical insurance in America is potentially lethal.

US Banks Asked To Offer Cash Incentives For Defaulters To Leave Homes - FT - The five largest U.S. mortgage service providers were asked to consider paying delinquent borrowers as much as $21,000 each to get them to leave their homes, the Financial Times reported Friday, citing unnamed sources. The settlement is part of a broader plans by the U.S. government to end the foreclosure crisis, the FT said on its website. The meeting was chaired by the FDIC, and the biggest service providers, led by Bank of America (BAC) were asked to consider a 'cash-for-keys' program to encourage defaulters to leave their homes. Banks would pay borrowers who are more than 90 days behind on mortgage payments up to $1,000 to seek financial advice and up to $20,000 as a 'fresh start', the FT said.

Existing-home sales fall 9.6% in February -  Sales of previously owned homes dropped 9.6% in February and prices fell to their lowest level since 2002, reflecting a continued slump in the U.S. real estate market.  The National Association of Realtors on Monday said sales of existing homes dropped to a annual rate of 4.88 million from an upwardly revised 5.4 million in January. The data is seasonally adjusted.  Economists surveyed by MarketWatch expected sales to drop to a rate of 5.1 million. Sales of new and used homes have been down in the dumps since a housing market bubble burst after the onset of the 2007-2009 recession. A high unemployment rate, combined with stricter lending standards, have made it harder for Americans to buy homes despite low interest rates.

U.S. February Existing Home Sales Fall to 4.88 Million Rate - Sales of U.S. previously owned homes dropped more than forecast in February and the median purchase price declined to the lowest since the same month in 2002, indicating the housing market is struggling to recover. Purchases decreased 9.6 percent to a 4.88 million annual rate, less than the 5.13 million median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. The median price declined 5.2 percent from a year earlier, and 39 percent of the sales were distressed properties.  Foreclosures are adding to the glut of distressed properties and pressuring prices, leaving some Americans with bigger mortgages than their homes are worth as joblessness hovers near 9 percent. The figures underscore the Federal Reserve’s view that the housing market “continues to be depressed” even as the rest of the economy improves. “The demand for housing just isn’t there,”

February Existing-Home Sales Decline following Sustained Gains - Existing-home sales fell in February following three straight monthly increases, according to the National Association of REALTORS®. Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 9.6 percent to a seasonally adjusted annual rate of 4.88 million in February from an upwardly revised 5.40 million in January, and are 2.8 percent below the 5.02 million pace in February 2010. Lawrence Yun NAR chief economist, expects an uneven recovery. “Housing affordability conditions have been at record levels and the economy has been improving, but home sales are being constrained by the twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers,” he said. “This tug and pull is causing a gradual but uneven recovery. Existing-home sales remain 26.4 percent above the cyclical low last July.” A parallel NAR practitioner survey2 shows first-time buyers purchased 34 percent of homes in February, up from 29 percent in January; they were 42 percent in February 2010.

Existing home sales dive, prices near 9-year low - Sales of previously owned U.S. homes plunged in February and prices hit their lowest level in nearly nine years, implying a housing market recovery was still a long way off. The National Association of Realtors said on Monday sales fell 9.6 percent month over month to an annual rate of 4.88 million units, snapping three straight months of gains. The percentage decline was the largest since July. The weak sales were the latest evidence of the malaise in the housing sector and confirmed it would remain outside the strengthening and broadening economic recovery. "The housing market is still very depressed and a major drag on the economy, especially household net worth," said Chris Christopher, a senior economist at IHS Global Insight in Lexington, Massachusetts. Economists had expected a decline of only 4 percent to a 5.15 million-unit pace. The actual drop was greater than even the most pessimistic forecast in a Reuters survey of 53 economists.

February Existing Home Sales: 4.88 million SAAR, 8.6 months of supply - The NAR reports: February Existing-Home Sales Decline. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in February 2011 (4.88 million SAAR) were 9.6% lower than last month, and were 2.8% lower than February 2010.  The second graph shows nationwide inventory for existing homes.According to the NAR, inventory increased to 3.49 million in February from 3.37 million in January.  Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall and winter. Inventory will probably increase significantly over the next several months. The last graph shows the 'months of supply' metric. Months of supply increased to 8.6 months in February up from 7.5 months in January. The months of supply will probably increase over the next few months as inventory increases. This is higher than normal.

Existing Home Inventory decreases 1.2% Year over Year -Earlier the NAR released the existing home sales data for February; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.  Although inventory increased from January to February (as usual), inventory decreased 1.2% YoY in February. This is a small YoY decrease and follows six consecutive month of year-over-year increases in inventory. Inventory should increase over the next few months (the normal seasonal pattern), and the YoY change is something to watch closely this year. Inventory is already very high, and further YoY increases in inventory would put more downward pressure on house prices.  The second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns in January and February are for 2011. Sales NSA were about the same level as the last three years. February is usually the second weakest month of the year for existing home sales (close to January). The real key is what happens in the spring and summer - and March sales and inventory will give a clearer picture of existing home sales activity.

New Home Sales Tumble In February - Existing home sales retreated again last month, falling by nearly 17% in February on an annualized basis, the Census Bureau reports. That’s the biggest monthly fall since last May. Although all regions of the country suffered declines, the heavily populated Northeast section of the U.S. posted the steepest drop with a 57% tumble.  The positive spin is that it’s merely the weather mucking up the trend. A variation on this view is that the housing market may not be poised for recovery, but it’s not headed for a new downturn either. "We do not believe the housing sector is on the verge of renewed contraction,"  "Rather, we continue to expect the recovery in housing to be disappointingly and frustratingly slow." The question is whether the distinction is meaningful in terms of the economic cycle. It’s a subject worth thinking about when you consider the positive role that housing’s played in every previous recovery cycle since 1970. Sales of new single-family homes began rebounding during every recession of the last four decades. In each case, by the time growth was established and the recession was over (based on NBER cycle dates), new home sales had more or less climbed back to levels posted when the contraction began.

Sales of new U.S. homes tumble 16.9% to record low — Sales of new single-family homes collapsed in February, the Commerce Department reported Wednesday, as a combination of high unemployment, tumbling prices and a glut of cheaper alternatives brought activity to a near-standstill. New-home sales fell 16.9% to a seasonally adjusted annual rate of 250,000 in February, though January’s figures were revised higher to 301,000 from 284,000. Compared to February 2010, sales collapsed by 28%.  Every region but the West saw record lows, and in the Northeast, sales dropped by 50% compared to year-earlier levels. Read “Dismal home-sales data tell us nothing new.”“The housing market has literally collapsed,” . “We’re stuck, it’s not going to revive in the spring and may not in the summer.”

New Home Sales Fall to Record Low in February - (4 charts) The Census Bureau reports New Home Sales in February were at a seasonally adjusted annual rate (SAAR) of 250 thousand. This was down from a revised 301 thousand in January. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. And a long term graph for New Home Months of Supply:Months of supply increased to 8.9 in February from 7.4 months in January. The all time record was 12.1 months of supply in January 2009. This is very high (less than 6 months supply is normal). On inventory, according to the Census Bureau"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.This graph shows the three categories of inventory starting in 1973. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In February 2010 (red column), 19 thousand new homes were sold (NSA). This is a new record low for the month of February. The previous record low for February was 27 thousand in 2010. The high was 109 thousand in 2005.

U.S. New-Home Sales Unexpectedly Decline to Record-Low 250,000 Annual Pace - Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003, adding to evidence the industry is floundering. Sales decreased 16.9 percent to a 250,000 annual pace, figures from the Commerce Department showed today in Washington. Economists surveyed by Bloomberg News projected a gain to a 290,000 rate, according to the median estimate. The median price fell 8.9 percent from the same month in 2010. Builders are struggling to compete with existing homes as foreclosures add to the overhang of unsold properties and drive down values. The figures underscore the Federal Reserve’s view that the housing market “continues to be depressed” even as the rest of the economy improves. “We’ve got this tug of war going on where we’ve got this very weak housing sector and a manufacturing sector that’s doing fine

Home Sales: Distressing Gap - Another update ... this graph shows existing home sales (left axis) and new home sales (right axis) through February. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales). The gap is due mostly to the flood of distressed sales. This has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.  Note: it is important to note that existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Housing Becoming Policymakers’ White Whale - Just when housing-watchers thought the industry couldn’t get any worse, it did. February turned out to be one of the weakest months ever for the U.S. housing sector. Starts, permits, and sales of existing homes all plunged in the month. The latest downbeat news was Wednesday’s report of a 16.9% freefall in new-home sales. Those sales are at their lowest since records began in 1963 — despite the fact that the U.S. population is 122 million residents larger than 48 years ago.Housing has been a large beneficiary of government-stimulus efforts. Yet, the sector remains an intractable foe for policymakers. While the U.S. economy can grow without housing, a recovering housing sector would shift growth to a higher pace that would boost labor markets and lift confidence. In the U.S., oversupply complicates housing dynamics. As mortgage lenders provided loans to too many unqualified buyers, builders constructed too many homes during the boom years of the early 2000s.

Housing Market: Here's an Amazing Statistic - Earlier this week we have had data from both existing home sales and new home sales. Both have been abysmal.... and I'm not speaking in hyperbole. As I often say, focus on existing home sales because it is generally around 90% of the market - but currently up to 95% since new homes are simply so uncompetitive with so much distressed inventory on the market. That said, in one story I read on the new home sales figures yesterday an amazing statistic:Sales are now just half the pace of 1963 -- even though there are 120 million more people in the United States now. Again that speaks to new home sales, rather than the more important existing home sales but still astounding.
1963 population: 190M
Today: 310M
1963 new home sales: 560K
Current pace 2011: 250K

Census 2010 Housing Vacancy Data - The Census Buraeu has released data for 42 states so far. These states account for about 83% of the U.S. housing stock based on the 2000 and 1990 Census data. All of the data will be released by April 1st. Here is a table of the data released so far - total housing units, Occupied and Vacant - for each state, plus the vacancy rate for 2010, 2000 and 1990. The data is sortable by column. We can use this data to estimate the number of excess vacant housing units as of April 1, 2010 by comparing to earlier vacancy rates. I'll be posting some analysis soon (here is a spreadsheet of the 2010, 2000 and 1990 data too).

Census 2010 Housing Occupancy and Vacancy Data - The Census Bureau has released data for 42 states so far. These states account for about 83% of the U.S. housing stock based on the 2000 and 1990 Census data. Here is a table of the data released so far - total housing units, Occupied and Vacant - for each state, plus the vacancy rate for 2010, 2000 and 1990. The data is sortable by column. Here is a spreadsheet of the 2010, 2000 and 1990 for those who want to look at the data. Once all of the data is released, I'll post some more analysis. This data is useful in estimating the number of excess vacant units, the absorption rate by state, demolitions and more.  The following table shows the increase in percentage points in the vacancy rate by state. This table compares to the 2000 Census and also an average of the 1990 and 2000 Census. (sorted by highest percentage point increase from 2000). The data for the remaining 8 states and D.C. will be released by April 1st. The "excess units" uses the change in vacancy rate times the total number of housing units.

Lawler: On Census Housing Stock/Household Data - CalculatedRisk is one of the few entities (people?) besides me who is tracking the release of Census 2010 housing stock data (total, occupied, and vacant) that have been released so far, and yesterday it put up a spreadsheet showing state data from Census 2010, Census 2000, and Census 1990. It is available here. As of this morning Census had released data for 42 states for 2010. A word of caution (as I’ve noted before): the “official” Census data from both 2000 and 1990 appear to “undercount overall housing units, with the “undercount” being larger for vacant homes than for occupied homes. As a result, overall (or gross) vacancy rates are understated in the “official” Census data – though by how much is a subject of debate among analysts.  For both Census 1990 and Census 2000, Census analysts conducted a “Housing Units Coverage Study,” which uses data from the “Accuracy and Coverage Evaluation” (A.C.E.) to estimate the “accuracy” of the Census housing counts. The 2000 HUCS was released in February, 2003, and is available here (PDF). As with estimated population over/under counts, Census has not used these “post-Census” studies to change the “official” Census figures.

Census 2010: Housing Occupancy State data released - Here is a spreadsheet for the 50 states (and D.C.) including the 2000 and 1990 Census data. Note: Adjusted data is using this analysis . The highest vacancy rates were for Maine (22.8%) and Vermont (20.5%), but we have to be careful using this data - those states always have a high vacancy rate on April 1st because of all the vacation homes. So we need to compare to previous Census data to try to estimate the excess number of vacant houses. In future releases, the Census Bureau will release more housing data: "Later reports from the 2010 Census will show the vacancy status for all vacant housing units and will also show whether occupied units were owned or rented." That data will help estimate the number of excess vacant housing units. The table below is a summary (and raised questions about the data). It will be a few years before analysis is published on the accuracy of the Census housing data, but Census 2010 was probably more complete than the earlier data (that has been the trend).

Are There Too Many Houses in America? - A popular conjecture is that too many homes were built during the boom and part of our current economic difficulties are centered around finding new employment for construction workers that are no longer needed. I wanted to take a crack at the really long term data. It was bit tricky getting what seemed like good recent data on total housing but I have housing starts going back to 1959. I compared that against the increase in population since 1959.The graph below is the increase in the population since 1959 versus the number of new homes built since 1959. There is a slight bulge in total homes built relative to the population in the mid 2000s but it looks as if virtually all of that has been undone in the later half. Here is a closer up look at the last two decades Another way to look at it is the ratio between total population increase and total housing increase.  From the 70s through the late 80s there was an increase of just over 1.5 people per new home. This doesn’t count the number of homes that were bulldozed so the population per home is likely higher.

Are There Too Many Houses in America Part II -A simple narrative might be that easy lending lead to both an increase in the number of homes and the price of homes. Easy lending has gone a way and the number of homes has collapsed to roughly trend.  However, the price of homes is stubbornly high and thus it is more difficult to obtain a house now, leading to lots of vacant homes and multiple families sharing the same home at the very same time that other homes are vacant. This is a possible example of sticky prices leading to inefficient outcomes in material terms. Homes without families at the same time that there are families without their own home.

Four States Consider Legislation Barring Distressed Sales as Comparables - Four states – Illinois, Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of “distressed sales,” such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal. The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that has been sold at a foreclosure sale as a comparable. Similar to the Missouri proposal, the Illinois legislation would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.” The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under “duress or unusual circumstances, such as a foreclosure or short sale."If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparables sales as are available.” Further, the standard cannot be voided by a state or local government.

America's Property Market: On A Losing Streak -  THE many dubious distinctions of Las Vegas, add one more: foreclosure capital of America. According to RealtyTrac, a property-listings firm, one in every ten homes in the city was in some stage of foreclosure last year, almost five times the national rate. In North Las Vegas, a poorer suburb, the figure was one in five. These statistics would be even grislier were it not for lenders’ inability or reluctance to eject all those who are in default at onceThe signs of the crash are everywhere in Las Vegas. The city’s outer suburbs are eerily quiet, thanks to the preponderance of unsold and foreclosed homes. There are few lights in any windows, and few cars on the roads. Banners and boards advertising hugely discounted housing flap and rattle mournfully in the desert wind. In North Las Vegas every second house on some streets carries a “For Rent” sign, offering rates of as little as $150 a month. One or two houses on each street have been boarded up and abandoned. Even on the city’s famous “strip” of cavernous casinos and high-rise hotels, the razzle-dazzle is marred by the grey concrete hulks of abandoned building projects.

Housing is dead; it can’t hurt the economy – Housing is dead. There is no doubt about that. Housing is as dead as a door nail.  Someday, the housing market will live again. Carpenters, plumbers, painters and electricians will build houses again, which will be sold to young families who want to own a part of the American dream. However, that someday is still years away. Some people will tell you that housing isn’t quite dead, that it’s a zombie that has the power to destroy the economy yet again. For example, here’s what economist Beth Ann Bovino of Standard & Poor’s says about the big drop in new-home sales in February: “If we see this extended into basically the spring season, then we’re going to see a real hit to the economy.” Read “Dismal home-sales data tell us nothing new.”  Don’t believe it.  Housing is just too small to do any real damage to the economy any more.

Real vs Nominal Housing Prices: United States 1890-2010 - A $10,000 house in 1890 would be worth almost the same in real dollars in 2010 but more than $350,000 in nominal dollars in 2010. Which matters to the home seller, real or nominal prices? If a seller is holding a mortgage then the question is: Can I sell for more or less than I owe? Since that loan amount is not adjusted for inflation then the nominal value is more importent both the seller and the mortgage holder. It is when nominal prices fall that banks have trouble with high rates of mortgage defaults. But if you are looking at the long-term value of real estate as an investment (compared to stocks or bonds) then you need to take into account the real growth.

Phase Shift: The Next Leg Down in House Prices - Way back in August 2006, near the top of the housing bubble, I suggested a two-part scenario for the housing bust: it would take eight more years to play out, and the declines would occur in sharp downlegs following a phase-shift model.  Phase Transitions, Symmetry and Post-Bubble Declines Here is the chart I presented at that time as a possible time model. A few months later, literally at the top of the housing bubble in early 2007, I suggested that a mere 4% of homeowners defaulting could trigger a collapse of the entire U.S. housing market. That is pretty much exactly what happened, for when the 4% who couldn't pay their subprime mortgages folded, they took down an exquisitely corrupt and vulnerable banking sector and the FIRE (finance, insurance, real estate) economy which had come to depend on it.

27 Amazing Statistics About The Real Estate Crash That Never Seems To End - The real estate crash that never seems to end appears to be getting even worse.  Home prices continue to go down, the number of underwater mortgages is soaring and the number of foreclosures set an all-time record in 2010.  The peak of the housing market was in 2005 and the subprime mortgage crisis erupted in 2008.  Shouldn't things be getting better by now?  How many years is this real estate crash going to go on for?  Home builders and those that work in the construction industry are deeply suffering because new home sales continue to hover around record lows.  Mortgage professionals are having a really hard time because very few people are seeking home loans and many of those that are seeking loans cannot get approved.  Real estate agents all over the country are pulling their hair out in frustration and large numbers of them have left the industry completely.  The United States has never had such a prolonged real estate slump in the post-World War 2 era.  Unfortunately, there are a whole lot of indications that the real estate crash is going to get even worse. The rapidly rising price of oil, the horrific crisis in Japan and instability in the Middle East all threaten to plunge the world into another major economic downturn.  That is really bad news for the real estate industry.  Already there are not nearly enough jobs for everyone in the United States and without good jobs American workers simply cannot buy homes.

AmericanProspect: Is the Grass Really Greener in Rural America? - It's certainly true that the political system could do more to support urban life. President Barack Obama has taken steps to do this, establishing the White House Office of Urban Affairs. But on the whole, it's wrong to conflate farm subsidies with subsidies for rural life because we aren't supporting rural life at all.  A 2008 USDA report found that over the previous year, the population of rural areas increased at a measly rate of 0.4 percent, compared with a growth in metro-area populations of 1.1 percent, and attributed the difference mostly to people moving into cities. Most rural counties actually saw a population decline. Unemployment has skyrocketed. Children in rural areas are more likely to live in poverty, more likely to die, and more likely to be held back a grade. Rural areas receive more government support in the form of farm subsidies and income support like Social Security, but that's largely due to their aging and more disabled populations. In general, rural communities receive less money per capita to support community services like law enforcement and higher education.

Price dynamics - A dominant class of economic theories is built on the assumption that prices respond only sluggishly to new economic conditions. It's an interesting challenge to try to reconcile that premise with what we see in the data. A number of research papers have now tried to describe the actual high-frequency dynamics of the prices of individual grocery items as reflected in scanner data. One of my favorites is a new paper by Yale professor Judith Chevalier and University of Chicago professor Anil Kashyap. Here's a diagram from their paper of what one sees, for example, in the weekly price of an 18-ounce jar of Peter Pan Creamy Peanut Butter at a supermarket in northwest Chicago.That doesn't look to me like a price that's frozen regardless of economic conditions. Instead, one can count on periodic deep price discounts. The timing and magnitude of these is a bit hard to predict, and there's the curious feature that, after a brief sale, the price usually goes back to exactly where it was before the sale.

The Cost of Food and Energy across Consumers -  Spending on food and energy is 44.1% of after-tax income for households in the lowest 20 percent of the income distribution: Cleveland Fed - graphs - Rising food and energy prices have been getting considerable attention recently. The latest report from the Bureau of Labor Statistics (BLS) shows that both of these components of the CPI outpaced the average for the index. Energy rose by 2.1 percent (7.3 percent year-over-year), which is consistent with its longer trend over the past six months. Curiously, given the focus it has received, the rise in food prices has been much more modest, just 0.5 percent (1.8 percent year-over-year). In particular, “food at home,” which excludes changes in the price of dining out, rose by only two-tenths of a percent more than overall food prices (0.3 percent more year-over-year). In fact, food at home is up only 2.7 percent from its lowest point in the past two years. Meanwhile, the CPI rose 0.4 percent in January, implying a 1.6 percent annual increase in the broad measure of prices.

Consumer Sentiment declines in March - The final March Reuters / University of Michigan consumer sentiment index declined to 67.5 from the preliminary March reading of 68.2 - and down from 77.5 in February. This is the lowest level since November 2009. This was below the consensus forecast of 68.0.  In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. With higher gasoline prices and the scary world news, a low reading isn't that surprising.

U.S. Consumer Sentiment Fell More Than Forecast in March - The Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 67.5, the lowest level since November 2009, from 77.5 in February, the group said today. The median forecast of 67 economists surveyed by Bloomberg News projected a reading of 68. Gasoline prices hovering near the highest levels since October 2008 are straining the finances of American households, whose spending makes up about 70 percent of the world’s largest economy. While unemployment has fallen for three months, Japan’s earthquake crisis led to a plunge in stock values, at one point wiping out all of 2011’s gains. The decline in sentiment was foreshadowed by other gauges. The Bloomberg Consumer Comfort Index dropped last week to the lowest level since August as consumers’ assessment of the economy dimmed. The confidence gauge, which tends to inversely track fuel prices, slid to minus 48.9 in the week to March 20 from the prior week’s minus 48.5.CRB Index of Industrial Raw Materials - The CRB: Index of Industrial Raw Materials hit a new cyclical high yesterday. Daily CRB: index of industrial raw materials. This does not include energy and/or foodstuffs. It is an outstanding leading-concurrent indicator of oil prices and world economic growth.

Durable Goods Unexpectedly Fall In February - Orders for durable goods, a leading indicator of economic activity, fell 0.9% last month on a seasonally adjusted basis, the Census Bureau reports. The decrease follows a strong 3.6% gain in January. Economists were expecting a gain. Monthly data is volatile, however, and so it’s not clear if there’s something more ominous afoot. For deeper perspective, let's review the rolling 12-month change and put it in context with other economic indicators. From that vantage, the downshifting in new orders doesn't look all that surprising. The annual pace of durable goods orders recently appeared to be running at an unsustainably high level, as the chart below suggests. Accordingly, the odds of trimming the proverbial sails have been higher than normal lately, and so perhaps we're merely witnessing gravity reasserting its pull.

Japan Quake Could Have Big Impact on U.S. Output - Investors counting on robust manufacturing data for March may be in for an unpleasant surprise next month. When the March data come out in mid-April it will likely mark the second month in a row of declining U.S. industrial output and could mark the start of a worrying trend. Industrial output slipped 0.1% in February. Why will this decline likely happen? It’s because the after-effects of the March earthquake in Japan are disrupting automobile manufacturing in North America in a hefty way. This matters because, despite popular belief, automobile manufacturing still is a meaningful part of the industrial sector. Here’s how it’s playing out: Japan still is a major supplier of parts to U.S.-based car factories. It isn’t just Japanese car brands, like Toyota and Honda, which both announced they would temporarily halt production at some plants in the U.S. General Motors has been impacted by the problem, notably furloughing workers in New York state and Louisiana. It doesn’t take a supply disruption of many car parts to mean that a auto maker has to halt output for an entire plant, at least temporarily.

Toyota: Quake to affect US - Toyota Motor Corp. says it is likely to experience production interruptions at its North American factories because of the disruption in supplies of auto parts coming from quake-ravaged Japan.  Toyota's automaking operations in Japan have been halted since March 14 as it reviews the condition of suppliers providing the 20,000 or more components that make up vehicles.  Auto engineers scouring the northeastern region have found many facilities that were damaged and others that were destroyed, and most automakers haven't completed their assessments. Disruptions in the supply chain have led most Japanese automakers to halt domestic vehicle output, while General Motors Co. and others have announced temporary stoppages because of parts shortages.  Toyota's U.S. manufacturing subsidiary in Erlanger, Ky., told its U.S. employees, plant workers and dealers Wednesday that some production interruptions in North America were likely. The automaker said it could not predict which sites would be affected or for how long. Most of the components used in Toyota's North American assembly operations come from some 500 suppliers in the region.

Libya war, Japan disaster putting brakes on auto industry‎ - There are about 15,000 parts in most cars, but the absence of just one can wreak havoc.  That's especially true when it comes to microprocessors, which control everything from an engine's fuel mix to the car's global positioning system.About one in every five microprocessors is made in Japan, and many are made at plants that were severely damaged in the March 11 earthquake and tsunami. So just as U.S. auto sales gather steam, the unexpected war in Libya, surging gas prices and now production cuts triggered by the earthquake have thrown uncertainty into automakers' rosy 2011 outlook. Automakers could lose production of up to 5 million vehicles in the next four months, Michael Robinet, an industry forecaster for IHS Automotive, said Thursday.The impact already has hit the U.S. General Motors idled an assembly plant in Shreveport, La., and cut engine production in Tonawanda, N.Y. Ford canceled overtime shifts last week at three truck plants. Factories outside Japan, Robinet said, could lose production of about 252,000 vehicles per day starting in two weeks if there isn't a major restoration of electricity.

Toyota and Ford to stop making cars in certain colors - Automakers may run low on certain paint colors because of a shortage of a pigment produced in an area close to the damaged Fukushima-Daiichi nuclear power plant in northeastern Japan. Ford Motor Co. has alerted dealers to stop ordering vehicles in tuxedo black and three shades of red. Toyota Motor Corp. and Chrysler Group LLC also are among automakers that will be affected by the pigment shortage. The German pigment manufacturer Merck Group confirmed that the Japanese plant that makes a pigment called Xirallic had halted production because it was in the exclusion zone around the damaged nuclear power complex. It has leaked radiation after sustaining flooding from the tsunami unleashed by the quake. Gangolf Schrimpf, a spokesman for Merck, said that once engineers can get inside the plant, the company believes production can be restarted in four to eight weeks.

Ford to dealers: No more black, red paint - Ford Motor is telling dealers not to order cars in "tuxedo black" or three shades of red. Reason: the pigment may be unavailable because of the Japanese earthquake and tsunami crisis, Bloomberg News reports.The colors in question are found on the Ford F-150 and Super Duty pickups, the Explorer, Expedition and Lincoln Navigator sport-utility vehicles and the Taurus, Focus and Lincoln MKS sedans, Todd Nissen, a spokesman, said in an interview with Bloomberg.CNBC, via the Christian Science Monitor, reported that the red shades include "royal red," "red candy" and "red fire." It explains: The pigment to make the paint look metallic is made in Japan and production of that pigment has been halted because of disruptions resulting from earthquake. The pigment is called Xirallic. Ford is not the only customer that uses this pigment. It is widely used in the auto industry. The pigment is also used in transportation equipment, cosmetics, ceramics, plastics, printing inks and media, packaging material, electronic goods as well as construction materials.

Panic buying raises prices on Prius, Fit - Americans have begun snapping up Toyota Prius, Honda Fit and other fuel-efficient models made only in Japan almost the way shoppers denude bread and milk shelves in a supermarket when a storm is predicted. The intensity first spurred by rising gas prices has been amplified by predicted shortages of many models as the Japanese auto industry remains disrupted by the March 11 earthquake and its aftermath. "We've gone from 60 (Priuses) in stock to 16" over the last two months, . A dozen are coming, "but we are told they are going to dwindle" quickly after that. Indicating the shortages may not be brief, Honda has told dealers it's not taking orders for any vehicles made in Japan in May. March and April orders already were delayed.

Daily demand and supply: Earthquake shakes up the car market* - If you're in the market for a new car, but especially if you're looking at a fuel-efficient Japanese model, experts say you're better off buying now because prices will only get higher in coming weeks as the effects of the earthquake in Japan and the unrest in Libya and the Middle East start to be felt. Up to now, Japan's earthquake has had little effect on prices of Japanese cars here. For the most part, dealers already had cars on their lots with more coming on ships and trucks. Besides, most "Japanese" cars sold in the U.S. are made in North America. But in the coming weeks, factory shut-downs and other disruptions in Japan could make it difficult to find some Japanese-built cars. The problems could even affect inventories of American cars, since some components may be produced in Japan. via Decreased supply of Japanese cars increases the price of Japanese cars.  Increased prices of Japanese cars increases the demand for substitutes--like American cars--thereby increasing the price of subsititutes.  Increased cost of producing cars that use Japanese parts--which is really most cars including many 'American' cars (gasp!)--due to a decrease in the supply of Japanese parts, increases the price of all cars.  Increased demand for fuel efficient cars due to higher expected gas prices will increase the price of fuel efficient cars. 

Supply Shortages Stall Auto Makers - General Motors Co. will stop some work at two European factories and is mulling production cuts in South Korea, amid growing uncertainty over how its plants around the world will be affected by the crisis in Japan. A shortage of Japanese-built electronic parts will force GM to close a plant in Zaragoza, Spain, on Monday and cancel shifts at a factory in Eisenach, Germany, on Monday and Tuesday, the company said Friday. Both factories build the Corsa small car. Meanwhile, the company's South Korean unit said it is considering cutting production to deal with a potential shortage.The moves, a day after GM said it would shut a plant in Louisiana due to part supplies, came as GM Chief Executive Dan Akerson acknowledged uncertainty over the extent the impact the disaster in Japan could have on GM's global operations. GM is "working carefully to ascertain the level of impact on our supply chain and over the next week or two we will have a better sense of what happened in Japan as well as globally,"

Electronic Manufacturer Supply Chain Hit by Japan Earthquake-Tsunami‎ - The unprecedented earthquake and tsunami in Japan has not only resulted in the tragic loss of thousands of human lives and triggered a possible nuclear disaster, it has also affected the electronic manufacturer supply chain in the U.S. and abroad. pan is the worlds’ third largest economy, behind China and the U.S. Vital supplier parts and equipment for major industries such as computers, electronics and automobiles come from Japan. The disastrous earthquake and tsunami has created a problem for brands that depend on manufacturing facilities in Japan. Most of the damage is northeast of Tokyo near the quake’s epicenter, although Japan’s manufacturing core extends further south. However, the country has continued to endure aftershocks, electrical blackouts and disruptions in transportation.Many manufacturing plants have been closed all over Japan with uncertainty as to restart dates.. The supply chain for parts made in Japan will continue to wane as Japan struggles to deal with this unprecedented disaster.

Sony | Japan Disasters Could Hit Consumer Electronics Hard… Sales of consumer-electronics items, including television sets, DVD players, cameras, personal computers, and video-game players are likely to be impacted by the devastating Japanese earthquake and tsunami, Advertising Age observed today (Thursday). The trade publication observed that while the final assembly of those products takes place in other Asian countries, the components are made in Japan. With Sony, Nintendo, Panasonic, Canon, Nikon and other Japanese-based electronics companies forced to shut down plans, parts shortages are likely to increase prices of many items and produce product scarcity even into the holiday season, AdAge observed. Earlier this week research group iSuppli reported that two Japanese plants that account for 25 percent of the global supply of silicon wafers had been forced to suspend operations. Moreover, two other companies that account for 70 percent of the worldwide supply of the main raw material used to make printed circuit boards have also temporarily shut down.

Japan crisis could prompt Ind. autoworker layoffs  -Shortages of auto parts from earthquake-stricken Japan could lead to layoffs at some Indiana factories in the coming weeks.  Business analysts don't expect large cutbacks, but anticipate that some Indiana plants that employ about 50,000 autoworkers will use short workweeks, scattered short-term layoffs and slower line speeds to keep workers busy during the downturn.  "I'm not sure it's going to be a major event. It's not clear yet," said economist Thomas Klier of the Federal Reserve Bank of Chicago told The Indianapolis Star. "We still don't know what the extent of the damage actually is in Japan." Trying to determine which plants might be affected by the tumult in Japan is made difficult by the global supply chain that has developed in recent years. Subaru, Toyota and Honda assemble vehicles in Indiana, but the supply system runs to almost every major automaker.

Bracing for the pinch on auto parts from Japan - The disaster in Japan already is affecting the U.S. auto industry. Two key questions now are, how much and for how long?  Toyota's 13 factories in the United States, Canada and Mexico have been told to expect shortages of parts made in Japan, and U.S. makers that use Japanese parts also are expecting supply disruptions. And that could mean a temporary drop in inventoriesfor some high-demand vehicles in Texas showrooms. "The biggest unknown in the industry is the parts supply chain," said Jesse Toprak, vice president of industry trends at, a new car pricing site.  Parts shortages could reduce global auto production by about 30 percent, according to a study released Thursday by forecasting firm IHS Automotive, the trade publication Automotive News reported.

ATA Truck Tonnage Index declined in February - From the American Trucking Association: ATA Truck Tonnage Index Fell 2.9% in February The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 2.9% in February after increasing a revised 3.5% in January 2011. ... In January, the SA index equaled 116.6. During December 2010 and January 2011, the SA tonnage index jumped a total of 6.1%. ATA Chief Economist Bob Costello said that the winter storms in February probably played a role in the latest reduction and that he wasn’t concerned about the decrease.  This graph from the ATA shows the Truck Tonnage Index since Jan 2007.  This decline followed two sharp increases, so it isn't that concerning. The largest concern for truckers is oil prices, not freight levels - and high oil prices are a key risk for the economy, especially with gasoline prices hitting $4 per gallon in some areas.

Continuing the Conversation on Free Trade - Public discussions on foreign trade sometimes convey the impression that China and the rest of the world make everything, as the United States sits idly by, importing their stuff and going to hell in a handbasket, to use the vernacular.  The chart below demonstrates that this is simply not so. Goods and services produced here still represent the great bulk of gross domestic product in the United States.  Our gross domestic product consists of:

    • 1. spending by American consumers on goods and services produced in the United States and abroad (70.8 percent of G.D.P.)
    • 2. government spending in the United States, at all levels, on goods and services produced in the United States(20.6 percent)
    • 3. spending by American companies on equipment, structures and inventories and by American households on residential construction, lumped together as gross private investment (11.3 percent)
    • 4. American exports – that is, spending by foreigners on goods and services produced in the United States (11.2 percent)
    • 5. From which we then subtract imports – that is, spending by Americans on foreign-produced goods and services (13.9 percent).

How Can America Create Wealth If Our Industrial Base Is Destroyed? - Any economy that constantly consumes far more wealth than it produces is eventually going to be in for a very hard fall.  Many point to relatively stable GDP numbers as evidence that the U.S. economy is doing okay, but the truth is that we have had to borrow increasingly massive amounts of money to keep GDP numbers up at that level.  The U.S. government is going to run an all-time record deficit of about 1.65 trillion dollars this year and average household debt in the United States has now reached a level of 136% of average household income.  But borrowing endless amounts of money and consuming massive amounts of wealth with that borrowed money is a road that leads to economic oblivion.  The only way to have a healthy economy in the long run is to create wealth.  But how can America create wealth if our industrial base is being absolutely destroyed?  According to Forbes, the United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001.  Hundreds of formerly thriving industries in the United States are being totally wiped out. 

Recession Caused Sharp Decline in Start-Ups -The recession caused a sharp decline in new business start-ups, intensifying job market losses and potentially putting future economic growth at risk. The Census Bureau on Wednesday said that 403,765 new firms were started in the 12 months ended March 2009, down 17.3% from a year earlier and the fewest on records that begin in 1977. New businesses are an important source of new jobs — without them, there would be no job growth at all. Indeed, the new Census data show that one of the reasons that the job market declines were so severe in the recession was the dearth of start-ups. Firms less than a year old employed 2.3 million people in March 2009 whereas as a year earlier start-ups employed 3 million people. In past recessions, start-ups didn’t take nearly as large a hit as they did in the downturn that began at the end of 2007, notes John Haltiwanger, a University of Maryland economist who has worked extensively with the Census start-up data. Even in the deep recession that ended in late 1982, start-up activity held up fairly well. “Start-ups weren’t immune, but the guys in the garages were going to try to do what they were going to do no matter what,”

A Decade of Labor Market Pain - In February 2001, nonfarm payrolls hit their business cycle peak of 132.5 million. Ten years later, the latest data pegs February 2011 payrolls at 130.5 million, a 1.5% decline. To put this in perspective, the ten-year period of the Great Depression, 1929-39 saw a 2.3% decline in nonfarm employment, roughly the same magnitude. But even that 1.5% understates the extent of the pain for most of the workforce. I divide the economy into two parts. On the one side are the combined public and quasi-public sectors, and on the other side is the rest of the economy. Public, of course, refers to government employees. ‘Quasi-public’, a term I just invented, includes the nominal private-sector education, healthcare, and social assistance industries. I call them ’quasi-public’ because these industries depend very heavily on government funding. For example, social assistance includes ‘child and youth services’ and ‘services for the elderly and disabled’, which are often provided under government contract. The chart below shows employment growth in the public/quasi-public sector, compared to employment growth in the rest of the economy, with February 2001 set to 100. We can see that public/quasi-public employment rose steadily over the past ten years, and is now up 16%. By comparison, the rest of the private sector is down 8% in jobs over the past 10 years.

CBO’s Labor Force Projections Through 2021 - CBO Director's Blog - Each year CBO examines many developments that could have short- or longer-term consequences for the budget and the economy. During the decades to come, one such development is expected to be a slower rate of growth of the labor force relative to the average growth rate of the past few decades. That slowdown is anticipated to occur primarily because of the aging and retirement of large numbers of baby boomers and because women’s participation in the labor force has leveled off since the late 1990s after having risen substantially throughout the three decades before that. A background paper released today describes the methods CBO uses to project such trends through 2021. The labor force has increased by about 0.8 percent per year, on average, over the past decade. That rate of growth is less than the annual rate of 1.2 percent in the 1990s and much lower than the 2.1 percent rate exhibited over the three decades before that (see figure below). Although the U.S. population has grown by about 1.1 percent per year over the past 10 years, the labor force participation rate (the percentage of the civilian noninstitutional population age 16 years or older who are either working or actively seeking work) has declined, reversing a long-term upward trend.

The Unemployment Rate and Compensation Growth - Last week I took a look at the way that higher labor productivity has not translated into higher worker compensation, particularly during the 1980s and 2000s. This is at odds with classical labor market theory, which suggests that as workers become more productive, their increasing value to firms should cause their wages to be bid higher so that their compensation rises accordingly. There are a number of possible explanations for the divergence between productivity and compensation, and for how this may play into the broader phenomenon of stagnant wages for average workers. Part of the explanation is that an increasing share of worker compensation takes the form of benefits rather than wages and salaries. As shown in the chart below, fully one-fourth of worker compensation in 2010 took the form of benefits. (Source: BEA personal income data.)

More Americans Dropping Out of the Labor Force - I’ve written before about the very low share of Americans who are in the labor force right now. In February, for example, just 64.2 percent of adults were either in a job or actively looking for one, representing the lowest participation rate in 25 years. This milestone has largely been attributed to the sour job market, which has discouraged many people from even looking for jobs. But to some extent the low participation rate may reflect more permanent changes to the work force. A new report from the Congressional Budget Office, for example, projects that the participation rate will continue to fall in the years ahead: The report observes that the participation rate peaked at about 67 percent during the late 1990s and in 2000, since that’s when baby boomers were in their prime working-age years of 25 to 54. Women had also been entering the labor force at a rapid clip. But since then the share of women who choose to work has fallen. In fact, it’s now at the lowest level in nearly 20 years. Meanwhile baby boomers are reaching retirement age and dropping out of the labor force. Additionally, the share of people under age 25 who are working or looking for work has also fallen:

It's not structural unemployment, it's the corporate saving glut - Rebecca Wilder - Mark Thoma rightly points out the hypocrisy of the deficit hawks' intent to cut spending while approving military spending in the same sentence. Ryan Avent furthers the dicussion by stating that Washington has used the 'dire fiscal' rhetoric to sell short-term cuts that were unwarranted, given that the fiscal problems are structural in nature. Me, I'd argue that the fiscal deficit is simply the consequence of corporate America's excess saving: the corporate saving glut - no I didn't mean the 'global saving glut'. Furthermore, the corporate saving glut is manifesting itself into the labor market, creating high and persistent unemployment. Some economists are wrongly referring to this as higher structural unemployment.Exhibit 1: The 3-sector financial balance model demonstrates that elevated excess private saving (firms and households) keeps the government deficit in the red. For a discussion of the 3-sector financial balances, see Scott Fullwiler and Rob Parenteau; and I've written on this as well.The excess saving rate for the public sector, external sector, and household sector is constructed using the Federal Reserve's Flow of Funds accounts as: (Gross Saving - Gross Investment)/GDP. The excess corporate saving rate is the residual of the Current Account (external saving) net of government and household excess saving. If the corporate excess saving rate is positive, then investment spending falls short of asset purchases (financial or tangible).

College Grad Hiring Suggests Unemployment Issues Are Cyclical - The fate of job-seeking college graduates indicates the economy’s high levels of unemployment are cyclical in nature, giving hope continued growth and stimulative policy should help bring down the nation’s unemployment rate. New research from the Federal Reserve Bank of San Francisco zeroed in on new college graduates because they are assumed to be free of the things that would tie many workers down. Young, mobile and educated, these workers can chase jobs in a way others can’t.So the jobless rate of these workers can go some distance toward explaining why the unemployment rate remains so high, and answer whether elevated joblessness is structural, the result of disconnections between the kind of workers that are available and what jobs exist. Structural unemployment is harder to fix and is largely beyond the remedy of monetary policy. To the extent it does exist, it blunts the economy’s ability to grow. “Similarities in the experiences of recent college graduates in the labor market during the two recessions and recoveries are evidence that high unemployment rates in the current downturn and recovery are also mainly cyclical,”

The Unemployment Problem is Mainly Cyclical, Not Structural - Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available. However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along. So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.

A Note on the Slowness of Recovery... - Between 1950 and 1990--back in the old days of Federal Reserve inflation-fighting recessions--the unemployment rate in the United States would on average close 32.4% of the gap between its initial value and its natural rate over the course of a year. If the United States unemployment rate had started to follow such a path after its fall 2009 peak, we would now have an unemployment rate of 8.3% instead of 8.9%.But there is the unfortunate fact that none of the United States net reduction in the unemployment rate over the past year comes from increases in the employment-to-population ratio, and all of it comes from decreases in labor force participation. Perhaps we should not be pleased that the United States unemployment rate has fallen from 10.1% to 8.9% over the course of the past year and a half while the employment-to-population ratio has remained stuck at 58.4%. Perhaps we would rather have people who could and who at full employment would have jobs in the labor force, unemployed, and actively looking for work rather than out of the labor force completely.

The unemployment puzzle--or at least one of them - Atlanta Fed's macroblog - Brad DeLong looks at the frustratingly slow progress in U.S. labor markets and offers an intriguing hypothesis about the changing nature of American recessions and recovery cycles. First, some relevant framing facts: Between 1950 and 1990—back in the old days of Federal Reserve inflation-fighting recessions—the unemployment rate in the United States would on average close 32.4% of the gap between its initial value and its natural rate over the course of a year. If the United States unemployment rate had started to follow such a path after its fall 2009 peak, we would now have an unemployment rate of 8.3% instead of 8.9%.   The reference to "the old days of Federal Reserve inflation-fighting" is the key to DeLong’s story of how recent recessions, and their aftermath, differ from most of our postwar experience:  I am sympathetic to this view as the dynamics of employment recoveries do seem much different in the post-1990 era than in the pre-1990 era. To provide yet another example, on average it took 10 months to recover all the jobs lost during the recessions of the period between 1950 and 1989. In contrast, it took 23 months to recover the jobs lost following the 1990–91 recession and 38 months following the 2001 recession. Right now we are 20 months from the official end of our most recent contraction and still almost 5.5 percent below the pre-recession employment peak. (A stark graphical reminder from Calculated Risk is featured at Economics Roundtable.)

The False Panacea of Labor-Market Flexibility - Asked during an interview in September 2007 whether European governments should liberalize their countries’ labor codes, former United States Federal Reserve Chairman Alan Greenspan responded that Europe’s labor-protection laws significantly inhibited economic performance and resulted in chronically high unemployment across the continent. In the United States, people are fired more easily than in any other country, and the unemployment rate at the time was among the lowest in the world.But it’s no longer September 2007, and US unemployment stands at 9.4%, not 4.5%. And, according to Greenspan’s successor, Ben Bernanke, there is no reason to assume that the unemployment rate will approach 5% – generally considered to be the natural rate of unemployment – any time soon. According to Blinder, 42-56 million US jobs – about one-third of all public- and private-sector jobs in the country – are vulnerable for offshoring. Blinder also predicted that the flexible, fluid US labor market would adapt better and faster to globalization than European labor markets would.If anything, we are only in the early stages of that revolution, and the outcome remains uncertain. But a preliminary comparison between Europe’s largest economy, Germany, and the US suggests that the former is better equipped to hold its own in the age of globalization.

The Stigmatization of the Unemployed -Yves Smith - One thing I have never understood in America is the way that people who lose their jobs become pariahs in the job market. We’ve now had a spate of commentary on the fact that official unemployment figures are looking a tad less dreadful by dint of the fact that increasing numbers of the long term unemployed have dropped out of the job market entirely. Even the conservative Washington Post woke up last week, Rip Van Winkle like, to take note of the growing number of long-term unemployed. Bizarrely, or perhaps as a fit illustration of the spirit of the day, the article was titled: “Hidden workforce challenges domestic economic recovery.” In other words, they are Bad People because if the economy ever picks up, they might come out of the woodwork and start looking for jobs! Many pundits, such as Paul Krugman in his latest New York Times op-ed, have decried the lack of anything remotely resembling adequate responses to the unemployment problem, particularly that of the long-term unemployed. Ronald Reagan, hero of the right, was concerned when unemployment rose over 8% and took a series of corrective measures, including the Plaza Accord, which was a G-5 currency intervention to drive up the value of the yen. So why do we have a nominally Democratic president sitting on his hands in the face of much worse unemployment?

Older Workers More Likely to Be Employed Than Teens - In the past, Grandma and Grandpa tended to retire to a life of leisure in their sixties, while teenagers were expected to work. As recently as 2000, boys ages 16 and 17 were far more likely to hold paying jobs than their grandparents ages 65 to 69. But just a decade later, that picture has turned upside down: Grandpa is twice as likely to be working as Junior. Based on new research by the Center for Labor Market Studies at Northeastern University, Boston, 34% of senior men ages 60 to 69 hold paying jobs, compared with fewer than 15% of teenage males age 16 and 17. In the year 2000, the comparable employment numbers were 29% for senior men, and 34% for boys in their mid-teens. While the picture is similar for females, adolescent girls are employed at a higher rate, of 16.9%, compared with 25.3% for women in their late 60s, says Andrew Sum, an economics professor at Northeastern and director of the center. In 2000, 35% of girls ages 16 and 17 were working, compared with just 19% of their grandmothers.

Baby Boomers and the Labor Force - Retiring Baby Boomers are expected to leave the labor force over the next decade, but they may also be working later in life. The Congressional Budget Office released a report today, projecting labor force participation through 2021. Labor force participation peaked in the late 1990s at around 67% as Baby Boomers reached peak working age and the entrance of women into the work force plateaued. It have been dropping since, with the decline exacerbated substantially by the recession as people dropped out of the labor force. The participation rate stood at 64.2% in February, down from 66% in December 2007 when the recession began. The CBO expects it to decline to 63% by 2021. (See an interactive graphic that compares participation rates for different demographic groups.) The recession has taken a toll on participation rates for nearly every group, with one exception — older workers. More people 55 and over are staying in the labor force, and the participation rates for older workers are the only ones that rose in recent years.

Work of Depressions Watch - Krugman - Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.In some ways I think framing the discussion in terms of “structural unemployment” isn’t helpful. It may be better to say that a number of influential people want us to believe that Great Recession is serving some useful purpose — that the economy is “recalculating”, that it’s getting carpenters out of Nevada to jobs where they’re needed, etc.. It’s the same idea that Schumpeter pushed in the now-infamous passage in which he opposed any attempt to mitigate the Great Depression, even through monetary policy:

Worse Is Better - Krugman - Wow. The GOP prescription for higher employment is actually quite spectacular — it’s a thing of many levels, an ignorance wrapped in a fallacy. The idea is this: we’ll lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment. So, for this to work you first have to have a downward-sloping demand for labor as a function of the nominal wage rate. There’s no reason to believe that’s the case: in a liquidity trap, falling wages probably reduce the demand for labor, because they worsen the burden of debt. And even if you somehow bypass this objection, the argument is still nonsense: it says that by reducing demand, you cut the price, which increases demand, which means that you end up selling more than before. Um, no — that’s the kind of answer that, in Econ 101, has you suggesting that the student get special tutoring.

The Frustrations of the Educated and Unemployed - NYTimes - About one-fourth of Egyptian workers under 25 are unemployed, a statistic that is often cited as a reason for the revolution there. In the United States, the Bureau of Labor Statistics reported in January an official unemployment rate of 21 percent for workers ages 16 to 24. My generation was taught that all we needed to succeed was an education and hard work. Tell that to my friend from high school who studied Chinese and international relations at a top-tier college. He had the misfortune to graduate in the class of 2009, and could find paid work only as a lifeguard and a personal trainer.  Unpaid internships at research institutes led to nothing.  After more than a year he moved back in with his parents. Millions of college graduates in rich nations could tell similar stories. In Italy, Portugal and Spain, about one-fourth of college graduates under the age of 25 are unemployed. In the United States, the official unemployment rate for this group is 11.2 percent, but for college graduates 25 and over it is only 4.5 percent.

The NYT GIves Voice to the Educated Ignorant Young - Let's see, who is doing well in today's economy? Maybe the bankers at Goldman Sachs and J.P. Morgan with their below market bailout money and too big to fail subsidies? Maybe the defense industry with its huge mark-ups and no bid contracts? How about the drug companies who get handed hundreds of billions of dollars each year from government provided patent monopolies? No, today's educated young are worried about being victimized by high living seniors who get Social Security and Medicare benefits. At least that is what Matthew C. Klein tells us in an oped column in the NYT. The column bemoans the fact that the author and his highly educated friends see poor job prospects on the horizon. While there is much to complain about, if he really believes that the problem is generically people older than himself, rather than specifically the people who are a lot richer than himself, he has not gotten a very good education.

GM, Ford, Chrysler May Seek to Put More Autoworker Pay at Risk - U.S. automakers may seek to start providing as much as 15 percent of union workers’ compensation in performance bonuses and lump-sum payments, emulating how their Japanese counterparts and salaried employees are paid.  General Motors Co. (GM), Ford Motor Co. (F) and Chrysler Group LLC may try to avoid granting annual raises to their 107,000 hourly employees as they negotiate new contracts with the United Auto Workers this year, said Sean McAlinden, chief economist for the Center for Automotive Research. Instead, the companies may offer bonuses totaling as much as $10,000 a year that would partially depend on meeting productivity and quality goals. UAW President Bob King, who convenes the union’s bargaining convention in Detroit tomorrow, has said he is open to new forms of profit sharing. If workers agree to put more of their pay at risk, it could mark the biggest shift in compensation practices since former UAW President Walter Reuther won wage guarantees for laid-off autoworkers in the 1950s.

Is Ford CEO Alan Mulally Overpaid? - United Auto Workers President Bob King is not happy with the $54.5 million compensation package Ford Motors CEO Alan Mulally is receiving for his performance at the company. Is this level of pay justified? One argument in favor of high CEO pay is that is creates the correct incentives for upper management. If pay depends upon performance of the firm, and there is a lot riding on performance, then the CEO will do everything possible to ensure the firm does well. But theory does not always translate into practice, and high CEO pay may cause performance to get worse rather than better. A recent paper by Lucian Bebchuk, Martijn Cremers and Urs Peyer found that the pay slice of CEOs has been increasing over time, and CEOs receive a larger fraction of the total pay of the top four executives than they did in the past. However:

  • Firms with a higher CEO pay slice generate lower value for their investors. Relative to their industry peers, such firms have lower market capitalization for a given book value.
  • Firms with a high CEO pay slice are associated with lower profitability.

Kill Public-Employee Unions; Erase the Middle Class - It's not like we didn't see it coming. At the very start of this year, January 2, The New York Times warned us of the coming battle with a front-page story, "Public Workers Facing Outrage in Budget Crisis." The Economist, in its January 8 issue, gave us, "The battle ahead: confronting the public-sector unions." And the January Time Magazine, "Public Employees Become Public Enemy No. 1." So, nobody should have been surprised when public employees became enemy No. 1 in Wisconsin, whose governor and Republican-dominated Legislature are pressing a bill that would eviscerate most of the unions representing that state's employees.  Oklahoma, Tennessee and Ohio are likewise all considering legislation to ban various types of collective bargaining, and in Indiana, almost every Democratic member of the state's House of Representative recently boycotted a legislative session to stop a bill that would weaken collective bargaining. Why, exactly, has the governor of the Badger State made destroying public-sector unions his No. 1 goal? Why are similar efforts being made in numerous other states? Why target public-sector workers and their unions? What put this on the top of the hard right's agenda?

The Fear Fairy - Some people think the solution to unemployment is more unemployment: Prosperity through lower wages?, by Ezra Klein: Tim Fernholz and Jim Tankersley took the time to read a report that Speaker John Boehner’s office distributed as evidence that sharp deficit reduction can lead to rapid economic expansion. The plan, it seems, is to create a bunch of unemployed public workers who’ll create more competition for the few open jobs in the private sector and thus drive wages down for everybody: The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector? ... So it's not the confidence fairy, but rather the fear fairy that is supposed to stimulate the economy? Yeah, that'll work because -- you know -- there's not enough people looking for jobs now. Yet another economic rationale invented by Republicans to support ideological preferences.

The state of working America’s wealth, 2011 - The deflation of the housing bubble which started in 2006 pushed the U.S. economy into recession by the end of 2007. As house prices fell and already low equity (due to second mortgages) vanished, foreclosures and “upside down” mortgages, in which homeowners owe more on their mortgages than their homes are worth, became a vicious cycle. Given the reliance of typical families on housing as a source of wealth, the housing debacle has devastated the net worth of millions of American households. The Main Street–Wall Street divide remains as big as ever in the aftermath. This brief takes a historical view of wealth and its components, and places a special emphasis on the bursting of the housing bubble, which thus far has resulted in $6 trillion of lost wealth; an additional $2 trillion is expected.  Like wages and income, overall wealth is central to a family’s standard of living. Wealth—particularly liquid assets such as savings and checking account balances and direct holding of stocks and bonds—can help families cope with financial emergencies that arise due to unemployment or illness. Wealth also makes it easier for families to invest in education and training, start a small business, or fund retirement. Read Briefing Paper

Top 5% holds more than half of the country’s wealth - The distribution of wealth in the United States is even more unequal than the distribution of wages and income. The Figure, from EPI’s new paper, The State of Working America’s Wealth. shows how wealth is divided among American households. It merges survey data on household wealth with changes in aggregate asset prices to estimate how wealth has been affected by the bursting of the housing bubble and the Great Recession. It shows that in 2009, the top 5% of wealth holders claimed 63.5% of the country’s wealth. The bottom 80%, by contrast, held just 12.8% of the country’s wealth.

The New Robber Barons: All Politicians "In the Hands of the Super Wealthy," Sachs Says - The cataclysm in Japan pushed it off the front page, but last Friday was a landmark day in America as Wisconsin Gov. Scott Walker signed into law a controversial bill restricting the collective bargaining rights of public sector unions. There's been a lot of talk, here and elsewhere, about whether the standoff in Wisconsin was about pure economics or partisan politics. (See: Wisconsin Lt. Gov: This Is About Balancing the Budget, Not Political Payback) "It's pretty clear there's an agenda nationwide: Republican governors backed by the Koch Brothers [and] extreme right wing money want to crush the unions," says Columbia Professor Jeffrey Sachs. "The public is against it, but public opinion doesn't count much in this country these days." But Sachs says the "real story" is much bigger than Wisconsin: It's about stagnant wages of public and private sector workers alike, and the increasing and increasingly pernicious role of big money in politics.  The following statistics speak to Sachs' first point:

New Civil War erupts, led by super rich, GOP - Yes, “there’s class warfare, all right,” warns Warren Buffett. “But it’s my class, the rich class, that’s making war, and we’re winning.” Yes, the rich are making war against us. And yes, they are winning. Why? Because so many are fighting this new American Civil War between the rich and the rest.  Not just the 16 new GOP governors in Wisconsin, Michigan, Ohio, Florida, and across America fighting for new powers. Others include: Chamber of Commerce billionaires, Koch brothers, Forbes 400, Karl Rove’s American Crossroads, Grover Norquist’s Americans for Tax Reform — which now has 97% of House Republicans and 85% of the GOP Senators signed on his “no new taxes” pledge — the Tea Party and Reaganomics ideologues. Wake up America. You are under attack. Stop kidding yourself. We are at war. In fact, we have been fighting this Civil War for a generation, since Ronald Reagan was elected in 1981. Recently Buffett renewed the battle cry: The “rich class” is winning this war. Except most Americans still don’t realize they’re losing, don’t see the prize at stake.

Our Two-Tiered "Recovery" - Tech Ticker's Aaron Task and Henry Blodget interviewed investment consultant Gary Shilling yesterday. Shilling's thesis will not strike readers of DOTE as controversial: the rich are doing just fine—thank you very much!—but the rest of us poor schmucks have been left holding the bag. Henry points out America's enormous wealth & income inequality, which is (at least) as bad as it was in the late 1920s before the stock market crash and the Great Depression. He then asks Shilling how does this get resolved? In other words, how do we acheive a more equitable distribution of the income which would make America's once great Middle Class viable again. Shilling can't foresee any socioeconomic shift which might bring that about. This blog is not called Decline of The Empire for nothing. When I explained why American has two economies in The "Economy" — America's Great Lie, I was describing a permanent condition. It's not as if we've had a "recovery" in which wealthy investors in the markets thrive while everyone else languishes. It's not as if we're waiting for the "recovery" to catch up to the rest of us. That's just some trickle-down economics nonsense. In short, that story is propaganda.

Rising Wealth Inequality: Should We Care? - Room for Debate - NYTimes - Many studies have shown that income inequality is rising. In several different types of communities, median family income is lower now than 30 years ago. Yet an intriguing survey by Michael Norton and Dan Ariely found that Americans believe wealth distribution to be far more equal than it actually is and, if given a choice, they would select an even more equitable scenario. Why do Americans seem relatively unperturbed about growing income inequality? Is it a lack of awareness, or are there other factors? Read the Discussion »" Debaters: Living Beyond Your Means Michael I. Norton; The Lottery Mentality Chrystia Freeland; Keeping Envy Local Tyler Cowen;  The Gender Complication Frances McCall Rosenbluth; A Volatile Mix of Attitudes Lars Osberg; Americans Aren't Naive Leslie McCall; Anger Is Growing Dante Chinni; We Feel Rich Enough Scott Winship; Why Rock the Boat? Lisa Keister

Social Class And Attitudes About Inequality - To see the problem, suppose that your family’s history has led you to believe that individual effort matters very little for success.  Then you have little incentive to work hard and you will be relatively unsuccessful.  You will notice that some people are successful but you will attribute that to the luck of their social class. (However it easily could be that you are wrong and their success is due to their hard work.) Indeed even in your own family history you will record some episodes of upward mobility, but because your family doesn’t work hard you rightly attribute that to luck too.  In a world with such inequality and where effort matters little you see a strong moral justification for redistribution and little incentive cost. On the other hand if your family has learned, and teaches you, that effort matters you will optimally work hard.  You will be more successful than average and you will attribute this to your hard work.  (It easily could be that you are wrong and in fact the source of your success is just your social class.) You will see that other families are less successful on average and as a result you see the same moral reason for redistribution, but you think that effort matters and, understanding how redistribution reduces the incentive to work hard, you favor less redistribution than the median voter.

Anger Over Wealth Inequality Is Growing - The journalism project I lead, Patchwork Nation, uses demographic and economic data to break the nation’s 3,141 counties into 12 types of communities, from wealthy suburban areas to small-town service centers. We recently looked at median family incomes in 1980 and 2010 in those communities, and the findings were troubling. Seven of the 12 county types actually had a lower median family income in 2010 than they did 30 years before in inflation-adjusted dollars. Not only had they not kept up, they’d fallen behind. So wealth inequality is real, but where’s the outrage? Until this latest recession, many Americans papered over the issue. They ran up credit card debt. They took equity out of their homes. In short, they found ways to at least keep up appearances. They got comfortable living beyond their means. Those times are gone and, as a result, we’re starting to see some anger manifesting itself in different ways..

Buried Provision in House GOP Bill Would Cut Off Food Stamps to Entire Families if One Member Strikes - All around the country, right-wing legislators are asking middle class Americans to pay for budget deficits caused mainly by a recession caused by Wall Street; they are attacking workers’ collective bargaining rights, which has provoked a huge Main Street Movement to fight back.Now, a group of House Republicans is launching a new stealth attack against union workers. GOP Reps. Jim Jordan (OH), Tim Scott (SC), Scott Garrett (NJ), Dan Burton (IN), and Louie Gohmert (TX) have introduced H.R. 1135, which states that it is designed to “provide information on total spending on means-tested welfare programs, to provide additional work requirements, and to provide an overall spending limit on means-tested welfare programs.” Much of the bill is based upon verifying that those who receive food stamps benefits are meeting the federal requirements for doing so. However, one section buried deep within the bill adds a startling new requirement. The bill, if passed, would actually cut off all food stamp benefits to any family where one adult member is engaging in a strike against an employer:

Union Busters - Republican House members propose legislation that says going on strike makes a worker's family -- kids and all -- ineligible for food stamps:A New Plan to Stop Strikes Before They Start, by Steve Benen: Most of the union-busting schemes we've seen in recent months have come at the state level, but Zaid Jilani flags one at the federal level that hasn't generated much attention at all.GOP Reps. Jim Jordan (OH), Tim Scott (SC), Scott Garrett (NJ), Dan Burton (IN), and Louie Gohmert (TX) have introduced H.R. 1135...Much of the bill is based upon verifying that those who receive food stamps benefits are meeting the federal requirements for doing so. However, one section buried deep within the bill adds a startling new requirement. The bill, if passed, would actually cut off all food stamp benefits to any family where one adult member is engaging in a strike against an employer. Update: I am notified via Twitter that there is a bill to remove *current* restrictions on federal, state, or local government employees that has been proposed by Democrat Joe Baca:

Losing Our Way - So here we are pouring shiploads of cash into yet another war, this time in Libya, while simultaneously demolishing school budgets, closing libraries, laying off teachers and police officers, and generally letting the bottom fall out of the quality of life here at home. Welcome to America in the second decade of the 21st century. An army of long-term unemployed workers is spread across the land, the human fallout from the Great Recession and long years of misguided economic policies. Optimism is in short supply. The few jobs now being created too often pay a pittance, not nearly enough to pry open the doors to a middle-class standard of living. . Limitless greed, unrestrained corporate power and a ferocious addiction to foreign oil have led us to an era of perpetual war and economic decline. Young people today are staring at a future in which they will be less well off than their elders, a reversal of fortune that should send a shudder through everyone. . When the most powerful country ever to inhabit the earth finds it so easy to plunge into the horror of warfare but almost impossible to find adequate work for its people or to properly educate its young, it has lost its way entirely.

Farm exports and farm labor - A quarter of the fresh fruit produced in the United States and almost a tenth of the fresh vegetables are exported.  In 2008, U.S. agricultural exports of $115 billion exceeded agricultural imports of $80 billion, generating a $35 billion farm trade surplus. Between 1989 and 2009, the value of U.S. agricultural exports rose 2.5 times, while exports of highvalue agricultural products, including fruits and vegetables, more than tripled. However, over the same 20-year period, average hourly earnings for U.S. farmworkers only increased $1.52, from $8.55 to $10.07 (in 2009 dollars). The workers who are helping to produce these labor-intensive commodities are not seeing much benefit from rising exports. How would the competitiveness of U.S. fruit and vegetable exports be impacted if farmworker wages rose? And how would this affect the pocketbooks of U.S. consumers? By examining the links between U.S. farmworker wages and fruit and vegetable exports, this briefing paper answers these questions. Read Briefing Paper

State Unemployment Rates generally unchanged in February - The BLS reported earlier today that state unemployment rates were generally unchanged in February. A few states showed strong increases in employment led by California. The LA Times reported: California adds nearly 100,000 jobs in February Other states with significant increases were Pennsylvania (+23,700), Floridaand Texas (+22,700 each), Illinois (+17,600), North Carolina (+17,400), South Carolina (+16,400), Massachusetts (+15,400), Georgia (+14,900) and Oregon (+9,800). Unfortunately a number of states saw significant declines in employment too; Kansas (-12,800), Missouri (-10,100) and Washington (-8,500). From the BLS: Regional and State Employment and Unemployment Summary The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. The auto states - led by Michigan - seem to have seen the most improvement (blue area). Four states are still at the recession maximum (no improvement): Colorado (new high for 2nd month in a row), Idaho, Louisiana, and New Mexico.

Most U.S. States Post Unemployment Decline - Regional and state unemployment rates were little changed in February, the Labor Department reported Friday.Twenty-seven states and the District of Columbia recorded unemployment rate decreases, while seven states registered rate increases and 16 states had no change, the agency said.The report comes a day after Labor released weekly figures showing that the number of U.S. workers filing new claims for unemployment benefits continued to trend below 400,000, widely considered the point at which the economy is gaining more jobs than it’s shedding. Strong hiring in February pushed the overall unemployment rate down to 8.9%, the lowest level in nearly two years, as employers added 192,000 jobs to nonfarm payrolls. In Friday’s report, Labor said that California had the largest increase in employment last month, gaining 96,500 jobs. However, the unemployment rate in the state was among the highest of all the states, at 12.2%. See the full interactive graphic.

State has borrowed $1.56 billion for unemployment benefits - It doesn't have an effect on the budget mess in Madison, but Wisconsin has another money problem on its hands. And it's a big one. In the aftermath of the recession, Wisconsin has borrowed $1.56 billion from the federal government to keep unemployment checks coming, figures from the state Department of Workforce Development show. The money owed has no impact on Gov. Scott Walker's biennial budget or his efforts to balance the books, Businesses pay into the program through unemployment taxes. In good times, the program has plenty of money for jobless pay. And as the economy improves, businesses that pay into the system could reduce the deficit. But the deficit also could result in changes in contributions or a reduction in unemployment benefits. "There's a box around this program," "That is to say, employers pay for it. Period. End of discussion. There is no state general program revenue. And there is no money that is taken out of it for other purposes."

Texas budget could cost 600000 jobs  (CNNMoney) -- Texas could see more than 600,000 jobs disappear if lawmakers adopt the $83.8 billion budget that will go before the state House late next week, according to a state agency. Harsh spending cuts in the budget could cost more than 263,500 private sector jobs and 343,000 government positions over the next two years, according to estimates released Wednesday by the Legislative Budget Board, a bipartisan committee. This projection, which is based on mathematical calculations, runs counter to the pro-job push underway by Gov. Rick Perry and Republican lawmakers.The budget slashes spending by nearly $23 billion, or 12.3%. The drop reflects the loss of federal stimulus money, but it also includes a $4.5 billion cut in state spending. Education, social service agencies and public health providers would see major funding decreases. Democrats immediately pounced on the report, using it to argue that lawmakers should tap the state's rainy day fund and take other steps to save the jobs.

California employers could be hit with big tax bill for jobless benefits, auditor warns - California employers could face an annual payroll tax increase of as much as $6 billion if California's unemployment insurance program fails to repay a federal government loan that has kept benefits flowing. The warning came in a critical state audit of the California Employment Development Department, which distributed $22.9 billion in unemployment benefits last year. The report concludes that for a decade, the EDD "has consistently failed to perform" at a level the U.S. Labor Department "considers acceptable regarding its timely delivery of unemployment benefits," State Auditor Elaine M. Howle wrote in a letter to the governor and legislators. The unemployment insurance fund, insolvent since January 2009, relies on federal loans to pay jobless benefits. The debt is expected to hit $13.4 billion by the end of this year unless state lawmakers and the governor agree to raise payroll taxes, cut benefits or do some combination of both. An interest bill of $362 million is due in September.

The Price of Taxing the Rich - Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them. Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

Michigan first to act as states weigh reductions in unemployment benefits - Michigan moved Thursday to significantly cut its unemployment program, becoming the first of what could be a flurry of debt-laden states 1to reduce aid even as high jobless rates persist. The Michigan measure reduces the maximum period a person can receive state unemployment benefits from 26 to 20 weeks, the lowest in the nation, officials said. Gov. Rick Snyder (R)2 indicated Thursday that he would sign the bill. The state’s economic troubles, aggravated by the recession and its shrinking manufacturing base, have turned Michigan into a bellwether of bust. Its unemployment rate stands at 10.7 percent — one of the worst in the country. The move comes as other Republican-dominated legislatures, including in Florida and Arkansas, are weighing similar efforts to restrict payments to the jobless, and states such as Wisconsin3, Ohio and Indiana are implementing far-reaching, controversial plans to close budget gaps.

Interpreting the Midwest Economy Index - On March 31, 2011, the Chicago Fed will begin releasing on a monthly basis an index designed to measure growth in nonfarm business activity in the Seventh Federal Reserve District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin. This monthly index, called the Midwest Economy Index (MEI), will serve as a regional counterpart to the Chicago Fed’s National Activity Index (CFNAI), available here, and allow for a comparison of national and regional growth trends.  This blog serves as a source of background information on the MEI, detailing its construction and interpretation. In the future, this information will be available at The MEI is a weighted average of 128 state and regional indicators encompassing the entirety of the five states in the Seventh Federal Reserve District. It measures growth in nonfarm business activity from four broad sectors of the Midwest economy: 1) manufacturing, 2) construction and mining, 3) services, and 4) consumer spending.

States push harder for online sales tax collection -- Tax-free shopping is under threat for many online shoppers as states facing widening budget gaps increasingly pressure Inc. and other Internet retailers to start collecting sales taxes from their residents. Billions of dollars are at stake as a growing number of states look for ways to generate more revenue without violating a 1992 U.S. Supreme Court ruling that prohibits a state from forcing businesses to collect sales taxes unless the business has a physical presence, such as a store, in that state. States are trying to get around that restriction by passing laws that broaden the definition of a physical presence. Retailers are resisting being deputized as tax collectors. Until recently, the Supreme Court ruling has meant that Wal-Mart Stores Inc., based in Bentonville, Ark., would collect taxes from shoppers in all states with sales taxes, whether those shoppers buy items on or off the Web, because it has stores nationwide.

Internet sales and state sales - Most people will likely have read that is a fierce fighter of any obligation to collect state sales taxes on its retail sales.  There's a website now devoted to debunking the various reasons provides for not collecting sales taxes.  See (offering a bundle of reasons for why Amazon's refusal to collect sales taxes don't make sense).  In Texas, where Amazon has one of its huge warehouses, it is at battle with the state, which claims that the warehouse is sufficient nexus to require the company to collect state sales tax on its sales. Amazon's response?  It plans to dump the warehouse and dump plans for building another one.  In other states, like Illinois, legislatures are considering legislation that will require the company to collect sales tax whenever it has affiliates that run its advertising and create access points for it in the state.  Amazon says it will just dump the affiliates, and run its online sales solely through its own website.  See Kopytoff, Amazon Pressured on Sales Tax, New York Times. So what's the right answer here?  It seems to me that the Supreme Court needs to update its understanding of nexus for constitutional purposes to take into account the significant changes in the way we interact based on the new context created by a wireless world.

Monday Map: State Gasoline Tax Rates - Today's Monday Map shows total state gasoline tax rates.  This includes the base excise tax, plus an assortment of other taxes and fees that affect the price of gasoline. Click to view the full size version.

Lowering Sin Taxes to Attract Those Lucrative Sinners - We’ve written before about how strapped states have increased or levied new sin taxes — taxes on things like cigarettes, alcohol and strip clubs — to bring in more revenue. While most tax increases are, as you might expect, quite unpopular, sin taxes can be a little easier to squeak through because they  discourage behaviors deemed to be socially pernicious. If they’re too effective at discouraging “sinful” behaviors, though, they can undermine their original revenue-raising goals. As a result, some states are now reversing course and lowering such taxes to draw more “sinners” across their borders:— As some states look to tobacco tax increases to plug budget holes, a few are bucking the national trend and instead are considering dropping the rate to increase cigarette sales.In New Hampshire, supporters argue that reducing the tax by a dime would help the state compete with Maine, Vermont and Massachusetts, while opponents say it would still lose millions of dollars even if sales improved.

Crime Rates Are Plummeting — And No One Knows Why - Los Angeles' violent-crime rates are four times lower now than they were 1992. The interesting thing is, nobody can really explain why. As of December 25, last year, only 293 homicides were reported in LA, along with 781 rapes, 10,734 robberies, and 9,129 aggravated assaults. In 1992, that blood-soaked year of the Rodney King Riots, Los Angeles saw 1,092 murders, 1,861 rapes, 39,222 robberies, and 47,736 aggravated assaults.  These figures echo a nationwide trend. "Crime Rate at 20-Year Low Level," reads a February 24 headline in the Frederick, Maryland News Post. "Major Crime at 39-Year Low in Elgin," the Chicago Tribune crowed on February 22. "Fresno's Murder Rate Is Drastically Down in 2011," announced that California's town's ABC-TV affiliate on February 23. Such headlines are typical these days. Crime's down. What's up? Theories abound. But in the din of the applause, some of these theories and claims cancel each other out.

A Boom Behind Bars - The private prison system runs parallel to the U.S. prisons and currently accounts for nearly 10 percent of U.S. state and federal inmates, according to the Bureau of Justice Statistics. Those numbers rise and fall in response to specific policies, and CCA has been accused of lobbying for policies that would fill its cells—such as the increase in enforcement of regulations like the one that snagged Cardenas. Tougher policies have been good for CCA. Since the company started winning immigrant detention contracts in 2000, its stock has rebounded from about a dollar to $23.33, attracting investors such as William Ackman's Pershing Square Capital Management, which is now its largest shareholder.  CCA has current contracts with ICE and other federal clients, as well as 19 state prison systems. Its largest competitor, the Geo Group (GEO), is slightly smaller, and together they account for more than $3 billion in gross revenues annually. The next-largest player, MTC, is privately held and does not disclose numbers, but the industry as a whole grosses just under $5 billion per year.

US Demographics Shifting Rapidly -- This should calm down the debates over immigration:The Hispanic population surged 43% in the last decade and Hispanics now make up more than 16% of the nation's population, according to just-released Census figures. The near doubling of Hispanics' share of the population, represents a larger surge than demographers initially had expected and underscores the growing importance of the nation's fastest-growing ethnic group in national -- and local -- politics. Meanwhile, the white population is down to 64%.

Governors Are Proposing Further Deep Cuts in Services, Likely Harming Their Economies - All of the 48 states releasing initial budget proposals for fiscal year 2012 (which begins July 1 in most states) have done so, and for the fourth year in a row, these budgets propose deep cuts in education, health care, and other important public services — in many cases, deeper than previous cuts. [1]  These cuts will delay the nation’s economic recovery and undermine efforts to create jobs.  While nearly every state has cut spending in the past few years, some additional cuts are inevitable for 2012:  because of the lingering effects of the long and deep recession, tax collections in most states remain well below pre-recession levels and lag far behind the growing cost of maintaining existing services.  But the cutbacks in services that many governors have proposed appear to be greater than necessary.  Many of the governors proposing very deep cuts are failing to utilize other important tools in their budget-balancing toolkit, such as utilizing reserves or raising new revenue to replace some of the revenue lost to the recession. Some governors are even adding to the cutbacks needed by reducing corporate taxes or other taxes – an ineffective strategy for improving economic growth that likely will do more harm than good.

Scott Walker: Bad for Wisconsin Business - Scott Walker did not run primarily on a platform of killing public employee unions and becoming a conservative darling. His slogan during the Wisconsin gubernatorial campaign was “Wisconsin is open for business.” He put a premium on attracting new businesses to the state. It just so happens that his method of bringing in new business aligns with longstanding conservative projects of deregulation and union-bashing. But how do they perform on their own terms? Simply put, is Wisconsin now “open for business?”No. Right from the beginning, Walker’s cancellation of a high speed rail link between Madison and Milwaukee sent a rail car business out of Milwaukee, abandoning a large factory. The removal of collective bargaining rights from public employees may lead to a serious catastrophe for the state’s forestry industry, as they are likely to lose their third-party “certified market” status. Now, his policies have sent other businesses throughout the state scurrying. In fact, since Walker has been sworn in, 19 plants have closed down for a variety of reasons.

Maine Governor LePage Orders Removal of Labor Mural from Dept. of Labor, Sparking Outcry - Gov. Paul LePage has ordered the removal of a 36-foot mural depicting Maine's labor history from the lobby of the Department of Labor. Worker advocates described the move as a 'mean-spirited' provocation amid the administration's high-tension standoff with unions. Acting labor chief Laura Boyett emailed staff Tuesday about the mural's pending removal, as well as another administration directive to rename several department conference rooms that carry the names of pro-labor icons such as Cesar Chavez. According to LePage spokesman Dan Demeritt, the administration felt the mural and the conference room monikers showed 'one-sided decor' not in keeping with the department's pro-business goals.

Unions Angered By Move To End Collective Bargaining - Public employee unions are vowing a fight to the end following late-night action taken Tuesday in Concord to attach a union-busting proposal to the budget bill.  If the measure passed by the House Finance Committee is approved, it would strip collective bargaining rights if contracts are allowed to expire. Unions are calling the measure an unprecedented attack on public workers. They said it would strip roughly 70,000 teachers, firefighters, police, and state and city workers of collective bargaining rights should their current contracts expire -- essentially making them employees at will.  "The last thing you do is treat your employees this way," said Diana Lacey, president of the State Employees Association. The SEA contract is set to expire in June. Lacey called the amendment "Wisconsin on steroids" and took a shot at Republican House Speaker Bill O'Brien.

States Pass Budget Pain to Cities - The state budget squeeze is fast becoming a city budget squeeze, as struggling states around the nation plan deep cuts in aid to cities and local governments that will almost certainly result in more service cuts, layoffs and local tax increases.  The cuts are widespread. Ohio plans to slash aid1 to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor, John R. Kasich2. Nebraska passed a law this month eliminating direct state aid3 to Omaha and other municipalities. The governors of Wisconsin4 and Michigan5 have called for sending less money to Milwaukee, Detroit and other local governments.  And it is not only Republicans who are cutting aid to cities: Gov. Andrew M. Cuomo6 of New York, a Democrat, decided not to restore $302 million in aid to New York City7 that was cut last year, while Gov. Deval Patrick8 of Massachusetts, another Democrat, has called for cutting local aid9 to Boston and other cities by some $65 million.  Some mayors said the proposed cuts could force them to raise local property taxes, even as many homeowners complain that they are already overtaxed. Many are combing through their budgets, looking to wring out more savings where they can. Libraries may close. Garbage collection could be curtailed. Potholes might linger a bit longer. Some warned that they could be forced to lay off more city workers, including police officers and firefighters.

Detroit Population Down 25 Percent, Census Finds - Laying bare the country’s most startling example of modern urban collapse, census data on Tuesday showed that Detroit’s population had plunged by 25 percent over the last decade. It was dramatic testimony to the crumbling industrial base of the Midwest, black flight to the suburbs and the tenuous future of what was once a thriving metropolis. It was the largest percentage drop in history for any American city with more than 100,000 residents, apart from the unique situation of New Orleans, where the population dropped by 29 percent after Hurricane Katrina in 2005, said Andrew A. Beveridge, a sociologist at Queens College. The number of people who vanished from Detroit — 237,500 — was bigger than the 140,000 who left New Orleans.

Detroit population drops to lowest level in 100 years - Detroit's population dropped 25 percent over the last decade to its lowest level in a century, according to Census figures released on Tuesday. The city's population fell to 713,777 last year from 951,270 in 2000 when the last census was taken as the region suffered from a struggling automotive industry, plant closures and job losses. In the same period, the state of Michigan's population dropped 0.6 percent to 9.88 million. Detroit's 2010 population compares to 1.85 million people living in the "Motor City" in 1950 and was the lowest total since the 1910 Census showed a population of 285,704. Even before news of the steep population loss, Detroit's shaky finances were a major concern in the $2.9 trillion municipal bond market, where the city's bonds are rated in the junk category. The city was cited in a recent Reuters poll as a potential candidate for rarely used municipal bankruptcy.

Detroit debt crisis may grow - Already shouldering a $155-million deficit, the City of Detroit could spiral further into debt if Mayor Dave Bing isn't successful in challenging U.S. census results that show the city lost a staggering 25% of its population. The population drop, from 951,000 in 2000 to 713,000 in 2010, means the city stands to lose hundreds of millions of dollars a year at a time when state revenue sharing and property and income taxes continue to nosedive, pension and health care costs are on the rise and the economy is sputtering. The federal government, for example, gives cities about $1,200 for each resident to finance roads, hospitals, police and health care for lower-income residents, among other services.

PHOTOS: Haunting Images Of Detroit's Decline

Can the Motor City come back? - ONE of this week's big American news stories was the release of new Census data for the state of Michigan, which revealed that the city of Detroit underwent a stunning population decline between 2000 and 2010. Detroit shrank by 25% during the decade, and its population fell to its lowest level since 1910—before the era of Big Three dominance. The city seems to be locked in a death spiral. But could there be a light on the horizon? Bloomberg reports: With a burgeoning number of technology job openings to fill, they’re scouring Internet companies for workers, wining and dining applicants, and seeking promising students at schools such as Stanford University.“We have a whole slew of job postings out there currently,”. “We’re just on a growth binge.”Expertise in cloud computing, mobile software applications and energy management are in demand in the Motor City as automakers replace car stereos with Internet radio and gasoline engines with motors powered by lithium-ion batteries.

New York City May Need $600 Million in Additional Budget Cuts, Page Says - New York City may need to cut spending by $600 million more because the state Legislature is unlikely to approve aid and other measures anticipated in a preliminary financial plan, Budget Director Mark Page said.  Page said Mayor Michael Bloomberg, whose $65.6 billion budget eliminated a $2.4 billion deficit partly by cutting 6,166 of 75,000 teacher positions, may have to slash another 2 percent from schools and uniformed services, and 4 percent from other agencies. The budget also calls for closing 20 firefighting companies.  The budget director, who traveled to Albany, the state capital, last week to lobby for more aid, told the City Council Finance Committee today that he “didn’t come back feeling good” about the meeting.  New York’s revenue, like that of other U.S. cities this year, has run below 2008 levels while costs of pensions, health care and operations continue to rise, making 2011 “the toughest year yet for local governments,” Moody’s said.

Advisory NYS finance board warns NYC must brace for deeper service cuts in years to come — The state Financial Control Board warned Thursday that this year's proposed cuts to New York City services are just the beginning, and residents should expect deeper reductions in the coming years. In its report on Mayor Michael Bloomberg's proposed budget, the board said that unless the city curbs rising capital debt and growing pension and healthcare costs, it can expect deep reductions for years to come."If people are complaining about the cuts the mayor's already made ... they're just going to get worse and worse," said board Executive Director Jeffrey Sommer. "The economy will not recover at a speed fast enough to close these gaps on its own."This year's proposal calls for closing budget shortfalls by laying off thousands of city teachers and other workers, shuttering some fire companies and reducing library hours, among other measures. Sommer suggested the mayor would need to make $1 billion more in new cuts in the budget he proposes next year

Rural Oregon counties face bankruptcy without state help - Rural counties desperate to keep their jails open and sheriff's patrols on the road if a federal timber-related subsidy goes away are hoping the Legislature will come to the rescue with a stopgap funding plan. But lawmakers have no idea where the money would come from, given the state's budget crisis, and the best counties can expect may be loans instead of grants. "With our budget situation, I guarantee you there isn't any money," said Rep. Wayne Krieger, R-Gold Beach, co-chairman of the House Judiciary Committee. With prospects uncertain for renewing the millions of dollars in federal payments to counties that were initially designated to make up for diminished logging revenues, a few rural counties in Oregon are scrambling to stave off bankruptcy and with it the prospects that the lights could go out in their sheriff's offices and jails. Curry and Josephine counties are generally considered closest to the brink.

Fuzzy Privatization Math - Governor Chris Christie’s New Jersey Privatization Task Force reported that more than $210 million would be saved by privatizing work that had traditionally been performed by government workers. The report even set out specific figures for some of the cost savings it identified, while others said savings were “TBD” – “To Be Decided”. Who crunched the numbers to show that private contractors would do a better job or at least the same job for less money than public employees? The Privatization Task Force Report says that no one did. On page 14 the report says it did no analysis “due not only to the fact that the actual cost of a privatized alternative will often not be known until the end of a full fledged competitive bidding process, but also because New Jersey state government agencies have difficulty calculating with precision the full cost of functions currently performed at the state level.” So, the sunny claims of big savings for the people of New Jersey are a guestimate, at best. and “To Be Decided” is the most accurate statement in the report.

Judge: New Jersey School Cuts Unconstitutional - A judge has found that New Jersey Gov. Chris Christie's $1 billion in school aid cuts last year left the state unable to meet its obligation to provide all children with a "thorough and efficient" education.  In a report issued Tuesday, Superior Court Judge Peter Doyne found that Christie's cuts hit high-risk districts the hardest. The state Supreme Court will now consider his finding and whether to act on it.  The Supreme Court has ruled repeatedly that the state needs to do more to improve schools in New Jersey's poorest districts. Last year, Christie cut state funding for all districts,including the needy ones, saying the state government couldn't balance its budget otherwise.  An education advocacy group sued, saying the cuts deprivedstudents of the quality education mandated by the state constitution.

Christie's budget cuts left N.J. schools unable to provide 'thorough and efficient' education  - Gov. Chris Christie's deep cuts to state school aid last year left New Jersey's schools unable to provide a "thorough and efficient" education to the state's nearly 1.4 million school children, a Superior Court judge found today. Judge Peter Doyne, who was appointed as special master in the long-running Abbott vs. Burke school funding case, today issued an opinion that also found the reductions "fell more heavily upon our high risk districts and the children educated within those districts." "Despite spending levels that meet or exceed virtually every state in the country, and that saw a significant increase in spending levels from 2000 to 2008, our 'at risk' children are now moving further from proficiency," he said. The Abbott vs. Burke case landed back in court after the Education Law Center, a Newark-based school advocacy group, filed a motion charging that Christie's aid cuts violated the state's school funding formula. Christie slashed state aid by $820 million last year, and Doyne found that altogether, the state would have needed twice that much — $1.6 billion — to fully fund the School Funding Reform Act formula.

Hundreds of Layoffs at Montgomery Public Schools - Hundreds of employees will be laid off from Montgomery Public Schools at the end of the school year.  The Montgomery Co. school board approved the layoffs of 270 non-tenured personnel. Most of those being laid off are teachers.  Spokesman Tom Salter says there are fewer teachers being let go this year compared to last year.  The cuts started in the central office, and then worked toward classrooms.

Tentative schools budget includes 2500 layoffs, pay cuts, larger classes - The mood was somber as Jeff Weiler, chief financial officer for the Clark County School District, finished a presentation Thursday night at a School Board meeting. Sitting in front of a standing-room-only crowd, Weiler served as the bearer of bad news: As part of a tentative 2012 budget, $411 million would be cut from the district and nearly 2,500 employees would lose their jobs.The tentative budget includes a 7.8 percent reduction in salaries for all employees, a 25 percent cut in funding for textbooks and supplies, a 20 percent cut in administrative department budgets, an increase in health insurance costs for employees and an increase in class sizes by three to seven students.

150 Michigan school systems on verge of going broke  More than 150 school districts and charter schools in Michigan are teetering on the edge of going broke, a situation that is likely to get worse under Gov. Rick Snyder's proposed cuts of $470 per pupil. These are the districts that have so little set aside in rainy day funds that Snyder's cuts -- coupled with a huge increase in retirement costs this summer -- could put them in a deficit, joining the 43 districts and charters already there. It's a situation that has mobilized school leaders -- testifying in Lansing, writing lawmakers and sending letters to parents. They say that after years of closing schools, laying off staff and slashing programs, there's little left to cut.

Separate and Unequal - Educators know that it is very difficult to get consistently good results in schools characterized by high concentrations of poverty. The best teachers tend to avoid such schools. Expectations regarding student achievement are frequently much lower, and there are lower levels of parental involvement. These, of course, are the very schools in which so many black and Hispanic children are enrolled.  Breaking up these toxic concentrations of poverty would seem to be a logical and worthy goal. Long years of evidence show that poor kids of all ethnic backgrounds do better academically when they go to school with their more affluent — that is, middle class — peers. But when the poor kids are black or Hispanic, that means racial and ethnic integration in the schools. Despite all the babble about a postracial America, that has been off the table for a long time.  More than a half-century after the landmark Brown v. Board of Education school desegregation ruling, we are still trying as a country to validate and justify the discredited concept of separate but equal schools. Schools are no longer legally segregated, but because of residential patterns, housing discrimination, economic disparities and long-held custom, they most emphatically are in reality.

Massive enrollment cuts at CSU expected = The nation’s largest university – California State University – is shrinking as state funding is cut. CSU trustees on Tuesday heard a series of proposals to cope with a cut of $500 million in state support – or possibly as much as $1 billion if some taxes set to expire June 30 are not extended. The state budget proposed by Gov. Jerry Brown calls for the $500 million in cuts to CSU, but the university says it will actually need to address a $550 million total gap in funding once $50 million in mandatory costs, including increased energy and employee health premiums, have been factored in.  The $500 million cut reduces CSU's state funding by 18 percent from last year and equates to funding for over 85,000 students across the state, it says.  Extensions of taxes are still snagged in the state Legislature where Republicans have refused to support the governor’s call to put the issue to a vote of the people in June.  A $1 billion reduction in state funding would drop CSU's state support below 1996-97 levels ($1.81 billion) when the 23-campus system served 100,000 fewer students.

Fresno State to turn away 600 as CSUs ordered to make cuts - The California State University system plans to enroll about 10,000 fewer students as part of its response to anticipated cuts in state funding, school officials said Tuesday. That includes about 600 fewer students at the Fresno campus. At the CSU Board of Trustees meeting in Long Beach, administrators outlined strategies for the 23-campus system to cope with the $500 million, or 18 percent, cut proposed in Gov. Jerry Brown's state budget plan. The system received about $2.8 billion in state funding for the current fiscal year. In addition to the enrollment cuts, the 23 campuses are being asked to reduce their budgets by a total of $281 million, officials said. Those cuts could lead to fewer course sections and fewer faculty and staff.John Welty, Fresno State president, said the university already has frozen 90 positions, reduced travel expenditures and frozen major equipment purchases.The 600-student decrease would be in addition to cuts that have already been made.

Educating College Graduates So They Can be Unemployed - A new Federal Reserve Bank of San Francisco paper, Recent College Graduates and the Labor Market argues that unemployment is particularly bad for those just graduating from college. It explains how this puts pressure on structural or “recalculating” arguments of unemployment:The current labor market outcomes of recent college graduates closely mirror those observed during the 2001 recession and the subsequent jobless recovery. This is important because recent college graduates are not subject to the kinds of structural factors that have been posited as the main sources of weakness in the overall labor market. Unemployment rates during the 2001 recession are widely recognized as cyclical in nature. Similarities in the experiences of recent college graduates in the labor market during the two recessions and recoveries are evidence that high unemployment rates in the current downturn and recovery are also mainly cyclical.  Roosevelt Institute intern Charlie Eisenhood and I were working on a similar paper. Looks like it’s getting absorbed into another project. I’m going to dump Eisenhood’s summary of the long-term effects of graduating into a recession that we had in draft form to help supplement this argument, because it can’t be said enough.

The Dark Side of Choice in Higher Education - Last week, writing on the Op-Ed page of The New York Times, Susan Engel described a small-scale experiment giving high school students greater choice and flexibility over their education. In what was christened the Independent Project, eight students in western Massachusetts designed their own “school within a school,” in which they wrote and then followed their own curriculum. The project was meant to counter the traditional, highly structured high school experience, which, Ms. Engel argued, “doesn’t just fail to prepare teenagers for graduation or for college academics; it fails to prepare them, in a profound way, for adult life.”The essay caught my eye because a growing contingent in higher education has begun to worry about just the opposite concern: that college students may have too much choice and flexibility.  So while Ms. Engel suggests that high schools ought to provide more of the freedoms of college, others are suggesting that perhaps colleges ought to provide more of the structure of high school.

Illinois teacher pension system nearly $40 billion in the hole - But an intense legal debate continues over whether changes can be made to the future benefits of employees in the state's plans before Jan. 1. "I think it's pretty clear constitutionally that you cannot affect benefits of active members," said Dan Montgomery, president of the Illinois Federation of Teachers. "We think it is sort of a shame that people are possibly going to put forth (changes in pension) laws that seem clearly unconstitutional." Tyrone Fahner, a former Illinois attorney general and president of the Civic Committee of The Commercial Club of Chicago, said he's "absolutely convinced" that some pension changes would not violate the constitution. His group, which has been pushing pension reforms for several years, helped House Republican Leader Tom Cross write legislation that would require government employees in the state's five pension plans to choose from three types of benefits, including a 401(k)-style plan common in the private sector. If employees opted to stay in their current plan, they'd have to pay more into it — an estimated 28 percent of salary.

In State Pensions, Share the Risks - Robert Shiller - NOT so very long ago, most Americans lived on farms, with three generations under one roof: grandparents, parents and children.  In good times, all three generations consumed a lot. In bad times, all three consumed less. The risks were spread among the extended family. This is risk management at its most basic level.   Let’s apply modern financial thinking to the old-time farm. Rather than sharing, families could set up traditional pension plans like the ones now established for state government employees. In this situation, the extended family would guarantee some of their working adults a fixed income when they retired. If farming families followed our thinking, they would pledge some set percentage of what people had consumed during their last three working years — say, 60 percent. These “payments” would be indexed to inflation, assuming that inflation was a concern in those days.  Down on the farm, however, they would probably laugh at this notion. That’s because, when hard times come — as they always do — the children and working adults would have to cut back in order to pay the full “pensions” of the old. In a sense, this is what is happening to us now, as the slack economy increases our tax burdens to support state pensioners.

A Liberal Plan for Social Security - Writing today on the op-ed page of The Washington Post, Robert Pozen makes the case that liberals should support changes to Social Security. Mr. Pozen is a Democrat, though not necessarily a liberal one; he is a financial executive who served on President George W. Bush’s Social Security commission and in Mitt Romney’s administration in Massachusetts. But his argument is worth considering, whether you’re liberal or conservative.  First, he points out that Social Security is less progressive than it seems. Low-wage workers may receive more in annual benefits than they pay into the system. But they also don’t live as long as higher-wage workers, which reduces their lifetime benefits. Mr. Pozen suggests that a reform of Social Security could and should make it more progressive than it is today. That notion is likely to be more appealing to liberals than the notion that Social Security is is running out of money, which many question.

Liberals on Social Security Reform - Dean Baker and Matt Yglesias both take exception to Robert Pozen’s plan for Social Security changes, which he says liberals should embrace. Mr. Baker objects on economic grounds and Mr. Yglesias on political grounds. First, Mr. YglesiasOpponents of touching Social Security don’t believe that restoring projected actuarial balance will in fact settle the issue… [T]hey think it will merely generate more headroom for income tax cuts. If that’s true, then there’s nothing to be gained by tinkering with Social Security in the current congress.  And in a different post, he writes: Republicans say that it makes taxes too high and the deficit too large, but they’ve yet to produce a lower-tax/lower-deficit alternative for us to compare it to. Until they do, I don’t really see what there is to talk about.  The second point strikes me as the crucial one. Several writers, including Jonathan Chait and Jules Kaplan, have pointed out that doing nothing — allowing all the Bush tax cuts to expire, as current law would let happen in 2012 — would do more to reduce the deficit than either the Obama plan or any of the vague Republican plans.

Insolvency Looms as States Drain U.S. Disability Fund - Puerto Rico has emerged in recent years as one of the easiest places in the U.S. to get payments from the Social Security Disability Insurance program, created during the Eisenhower administration to help people who can't work because of a health problem. In 2010, 63% of applicants there won approval, four percentage points higher than New Jersey and Wyoming, the most-generous U.S. states. In fact, nine of the top 10 U.S. zip codes for disabled workers receiving benefits can be found on Puerto Rico. The SSDI is set to soon become the first big federal benefit program to run out of cash—and one of the main reasons is U.S. states and territories have a large say in who qualifies for the federally funded program. Without changes, the Social Security retirement fund can survive intact through about 2040 and Medicare through 2029. The disability fund, however, will run dry in four to seven years without federal intervention, government auditors say. In addition to the uneven selection process, SSDI has been pushed to the brink of insolvency by the sour economy. A huge wave of applicants joined the program over the past decade, boosting it from 6.6 million beneficiaries in 2000 to 10.2 million in 2010. New recipients have come from across the country, with an 85% increase in Texas over 10 years and a 69% increase in New Hampshire.

Poor Minnesotans to be Barred from Carrying Cash - Are there no workhouses? Are there no poorhouses? Clearly, the GOP neighbors of Wisconsin’s Scott Walker intend to outdo him for meanness and humiliation. Republican legislators in Minnesota have introduced a bill to criminalize carrying cash for anyone on public assistance.– Minnesota Republicans are pushing legislation that would make it a crime for people on public assistance to have more $20 in cash in their pockets any given month. This represents a change from their initial proposal, which banned them from having any money at all. This is what today’s GOPs mean by compromise: they introduce a totally punitive and rights-violating measure, then sweeten it ever so slightly when public outrage ramps up. House File 171 would make it so that families on MFIP – and disabled single adults on General Assistance and Minnesota Supplemental Aid – could not have their cash grants in cash or put into a checking account. Rather, they could only use a state-issued debit card at special terminals in certain businesses that are set up to accept the card.

Minnesota GOPers Want to Criminalize Poor People Carrying Money - Well, not all poor people -- only those receiving public assistance! Minnesota Republicans are pushing legislation that would make it a crime for people on public assistance to have more $20 in cash in their pockets any given month. This represents a change from their initial proposal, which banned them from having any money at all. On March 15, Angel Buechner of the Welfare Rights Committee testified in front of the House Health and Human Services Reform Committee on House File 171. Buechner told committee members, “We would like to address the provision that makes it illegal for MFIP [one of Minnesota’s welfare programs] families to withdraw cash from the cash portion of the MFIP grant - and in fact, appears to make it illegal for MFIP families to have any type of money at all in their pockets. How do you expect people to take care of business like paying bills such as lights, gas, water, trash and phone?” House File 171 would make it so that families on MFIP - and disabled single adults on General Assistance and Minnesota Supplemental Aid - could not have their cash grants in cash or put into a checking account. Rather, they could only use a state-issued debit card at special terminals in certain businesses that are set up to accept the card.

Ag Committee Supports Cuts to Food Assistance, Not Farm Subsidies - The House Agriculture Committee endorsed a letter this week to Budget Chairman Paul Ryan arguing that the Supplemental Nutrition Assistance Program, which helps low-income Americans purchase food, would make a better target for cuts than automatic subsidies to farms. The move comes as food prices are rising -- the Department of Agriculture expects overall food prices to rise 3 percent to 4 percent this year -- making it harder for the beneficiaries of SNAP to stretch their existing benefits, even as farmers profit from the tightening market. Critics across the political spectrum have called agricultural subsidies wasteful and unnecessary, and they question the logic of maintaining them as lawmakers hunt for budget cuts."Conspicuously missing from the list of mandatory spending cuts the Agriculture Committee has made or is proposing to make are commodity subsidies, and specifically the $4.9 billion in direct payments that are automatically paid out each year regardless of whether a person farms,” said Jake Caldwell, the director of agricultural policy at the left-leaning Center for American Progress. “It is shortsighted of the Committee to suggest cuts to SNAP, particularly as food prices are on the rise, Americans are spending more than 10 percent of their household budget on food, and more people are enrolled in the food stamp program than ever before."

States rush to settle Medicaid bills - State governments are rushing to pay billions of dollars of medical bills before special federal assistance for Medicaid expires July 1. The hurry-up-and-pay effort will put an extra $1 billion or more into the pockets of financially struggling states — and increase the federal deficit by a similar amount."States are paying bills as fast as they can," . "It's kind of the opposite of what states traditionally do." To beat deadlines for reduced federal aid, states are writing checks swiftly, paying off backlogs of bills and asking hospitals and doctors to send in bills as fast as they can. The federal stimulus law and a later extension provided states an extra $80 billion in 2009 and 2010 for Medicaid, the nation's health care program for the poor. This was done by reducing the state's share of the program from a national average of 40% to 28%. This bargain rate declines slightly April 1 and expires completely July 1. That means the average state responsibility on a $1,000 Medicaid bill will rise from $280 today to $400 July 1 — a 43% increase.

Illinois governor eyes short-term Medicaid borrowing - With a plan to sell $8.75 billion of bonds to pay bills stalled in the Illinois General Assembly, Governor Pat Quinn is pursuing a smaller, short-term borrowing for Medicaid-related debts. Kelly Kraft, a Quinn spokeswoman, said on Wednesday the governor is seeking about $2 billion in borrowing authority from the legislature to ease a backlog of unpaid expenses related to Medicaid and gain extra matching funds from the government. "The Quinn administration feels strongly that we should not leave hundreds of millions of dollars in enhanced federal Medicaid match on the table, and is working with legislators on a plan to restructure approximately a billion dollars immediately to take advantage of the enhanced rate prior to its expiration," she said.

Proposed medicaid cuts worry hospitals - Hospitals would have to reassess the services they offer patients. Small rural hospitals would be at risk of closing. Some physicians likely would just walk away from seeing TennCare recipients. The governor's proposal to reduce overall spending to the state's expanded Medicaid program in fiscal 2011 by $860 million has presented hospitals with one of the toughest situations they have ever faced, health care officials say. "No one is crying wolf here," said Jerry Askew, senior vice president of external relations for Mercy Health Partners. "You lose money on every TennCare patient that crosses the threshold already. Trying to absorb more cuts is just not feasible. The proposed TennCare reductions, which would begin July 1, are on top of cuts proposed but not implemented in the current fiscal year because they were partially offset by federal stimulus money.

SC Medicaid agency to ask for $125 million bailout - South Carolina's financial oversight board is being asked for a $125 million bailout of the state's Medicaid programs. The Budget and Control Board meets Tuesday and its agenda includes dealing with a deficit at the Department of Health and Human Services. The board in February approved a $100 million bailout that provided enough money to continue payments until April for doctors, hospitals and nursing homes serving Medicaid patients. The Medicaid deficit would be covered by state surplus cash or reserves at the end of the fiscal year in June.

Budget Board OKs $100M SC Medicaid Agency Bailout - South Carolina's Budget and Control Board has approved another $100 million in deficit spending for the state's Medicaid program. The board last month approved $100 million of a projected $225 million deficit at the state Department of Health and Human Services, which runs the Medicaid program in the state. After the vote last month, members of the Budget and Control Board told HHS director Tony Keck to look for ways to save money in the program and try to eliminate some of the remaining $125 million deficit. When he returned to the board Tuesday morning, he said he's limited by state and federal law in what kinds of cuts he can make. State law currently prevents HHS from cutting payments to doctors and hospitals that provide Medicaid services. Keck is asking lawmakers to give him that flexibility.

Kentucky's Beshear Seeks Fix for 'Devastating' Cuts in Medicaid - Governor Steve Beshear of Kentucky has given lawmakers less than two weeks to approve his plan to come up with $165 million for Medicaid or he’ll cut payments, which he said may devastate the state’s health-care system. The first-term Democrat who took office in January 2008 faces a local variation on a problem vexing governors across the U.S.: when Kentucky lawmakers approved an $18 billion biennial budget last year, they overestimated federal Medicaid funding. That created a $165 million hole that balloons to $600 million this year with the loss of U.S. matching aid. To fill the gap, Beshear wants to tap next year’s Medicaid budget, which is fully funded, and private-sector-style managed care to cut costs. The state has notified doctors that absent the transfer, it will be forced to cut their payments by 35 percent. As a result, care for poor pregnant women, diabetes programs and therapy for coal miners suffering black lung disease may be ended, said Janie Miller, secretary of the Cabinet for Health and Family Services, and according to the state’s health-care association.

State health plan faces higher costs, fewer benefits — Most of North Carolina's state workers, teachers and retirees would pay more for health insurance but get fewer benefits under a half-billion-dollar change being considered by lawmakers. Legislation unveiled today also would scrap a provision that pushed cigarette smokers and those who were very obese into less-generous coverage until they quit puffing or lost weight. The state health insurance plan bailout would cost $515 million, with most of that coming from reduced benefits and higher costs for its 663,000 members. The measure would, for the first time, force all active state employees and those retirees in a more-generous plan to pay monthly premiums of between $11 and $22 a month. Lawmakers pumped $675 million into the plan two years ago but rising costs have contributed to budget gaps.

Death By a Single GOP Cut? - In the past year, California has experienced the worst whooping cough outbreak in more than 50 years, an epidemic that has killed 10 infants and resulted in 6,400 reported cases. But even as the state's public health officials have struggled to curb the disease, Republicans in Congress have proposed slashing millions in federal funding for immunization programs. Public health advocates warn that these cuts threaten efforts across the country to prevent and contain infectious and sometimes fatal diseases. And they add that lower vaccination rates could eventually result in more outbreaks that endanger public health at a major cost to taxpayers. The House GOP's 2011 budget would chop $156 million from the Centers for Disease Control's funding for immunization and respiratory diseases. The GOP reductions are likely to hit the CDC's support for state and local immunization programs, the agency's ability to evaluate which vaccines are working, and its work to educate the public about recommended vaccines for children, teenagers, and other susceptible populations. The CDC especially focuses on serving lower-income families who receive vaccines at state and local health offices and community health clinics, rather than a private doctor's office.

A Deal to be Done on Medicare and Health Reform - Could Congress replace the current Medicare system with a voucher program, as former Clinton budget director Alice Rivlin and House Budget Committee chairman Paul Ryan (R-WI) among others have suggested? It could if Republicans allow the 2010 health law to take effect and Democrats can bring themselves to stop defending a deeply flawed Medicare program.   In such a voucher system (sometimes called premium support), traditional Medicare would disappear. Instead, government would give seniors a subsidy they could use to buy private insurance. But such a plan could never succeed without a robust individual insurance market. Get past all the nasty partisan rhetoric and it is pretty clear: The 2010 law—the Affordable Care Act—creates exactly the foundation for that market.  

Five Things You Might Have Forgotten About Health Reform - One year ago today, President Obama signed the historic Affordable Care Act — i.e., health reform.  Since most of the recent public attention to health reform has concerned efforts in Congress or the courts to undermine the new law, it’s worth recalling what the law will actually do.

  1. Dramatically reduce the number of uninsured Americans.
  2. Protect people with serious illnesses or other conditions.
  3. Make coverage more affordable for individuals and families.
  4. Make coverage more affordable for small businesses.
  5. Begin to slow health care costs across the economy.

America's Superiority Complex - Krugman - Aaron Carroll has a very good takedown of an op-ed article by Senator Ron Johnson, who basically exploits his infant daughter’s medical experience to make an incoherent attack on the Affordable Care Act. His daughter received excellent treatment, and he asserts that she wouldn’t have received that kind of treatment under universal health insurance, because …. well, he doesn’t explain. Along the way he commits some of the classic howlers, like the one about how you can see how bad single-payer insurance is by the fact that Americans don’t have to wait as long as Canadians for hip replacements, which in Canada are paid for by the government, while in America they’re mainly paid for by … Medicare. But what struck me about the whole piece was the assumption that modern medicine in general is something only we lucky free-market Americans have, while in Europe they’re still using leeches or something. In other words, it’s part of the superiority complex you often encounter in U.S. politics; people just know that we’re the best, and won’t believe you when you tell them that actually they have the Internet, cell phones, and antibiotics in Europe too.

New Report Dispenses Myth Of ‘Job Destroying’ Health Law - Republicans in the House successfully passed the “Repealing the Job Destroying Health Care Law Act” — health care repeal — in January, but have always had a hard time explaining how the law destroyed jobs beyond a few well chosen (and poll tested) buzz words. “What we believe is that Obamacare has been a job killer,” This argument never made a whole lot of sense (partly because HHS has gone out of its way to accommodate business concerns and grant them waivers from some requirements) and now a new report from the Urban Institute’s John Holahan and Bowen Garrett concludes that the law will “not have a noticeable effect on net levels of employment” for three reasons:

    • - First, the overall economic effects of the law are simply too small relative to the overall size of the economy to have much of an effect on employment.
    • - Second, there are many offsetting effects.
    • - Third, the new law will not affect most firms, either because they already provide health insurance meeting the new federal standards, or they are exempt from the new requirements

Health Care thoughts: Obamacare Suffers Serious Set Back - The Community Living Assistance Services and Support (aka C.L.A.S.S.) is a lesser discussed but important feature of Obamacare (PPACA).The Act requires the feds to set up a quasi-insurance self-funding mechanism for long-term care services (for more details see my write up at ISSUU/healthcarethinktank.During testimony in February before the Senate Finance Committee DHHS Secretary Kathleen Sebelius admitted that as designed by Congress C.L.A.S.S. is not financially sustainable.The battle now is whether or not Sebelius can 1) fix the Act via regulatory changes or 2) Congress must redesign the Act.In the latest volley the Congressional Research Services says the regulatory powers are NOT broad enough for Sebelius to effectively rewrite the statute via regulation. A bigger question remains for many of us, “can this program ever be financially sustainable?”

The Future of the CLASS Act and Long-Term Care - The Community Living Services and Supports (CLASS) Act is an extraordinary case study in both budget and health care politics, and in the toxic political environment in which those of us in Washington live. And it puts a critical question into stark focus:  Exactly how do we, as a society, want to provide for the care of people with disabilities or those in frail old age.   CLASS is a national, voluntary long-term care insurance program that was buried deep within the 2010 Affordable Care Act.  The big idea behind CLASS was to take a small step towards turning long-term care services and supports from a program funded largely by Medicaid into a self-funded insurance system.  Unfortunately, this extremely important reform was very poorly designed.     Overheated rhetoric aside, critics have two substantive objections to CLASS.  They are offended that, under the conventions of budget accounting, CLASS premiums are counted as revenues that “pay for” health reform. And they fear that if the program fails as self-funded insurance, it eventually will be bailed out with general tax revenues.   HHS Secretary Kathleen Sebelius acknowledges the program’s flaws. And she is claiming broad authority to attempt to fix an unworkable design. Unfortunately, she is in a race against time. The question is: Can she fix CLASS before Congress kills it?

The Real Death Panel: If ‘Obamacare’ Repealed, Some Patients Can’t Go Back - If the health care reform law were to disappear tomorrow, Dallas Wiens would be in trouble.  At 25, Wiens was too old to be a beneficiary on his parent's health insurance policy, until the health care reform law raised the maximum age to 26. Without that coverage, Weins wouldn't have been able to afford the expensive immunosuppressant drugs that he must take for the rest of his life to prevent his body from rejecting his new face. Patients have to demonstrate that they will be able to afford the anti-rejection drugs to qualify for a transplant. If the health care reform law were to be wiped off the books before Wiens turns 26, he'd have to figure out, quickly, how to get those drugs by other means. Wiens almost certainly won't run into trouble. According to the Associated Press he'll turn 26 in a few weeks, and transfer off his father's insurance on to Medicare, which covers seniors 65 and older, people with disabilities, and those suffering from a handful of specific life-threatening illnesses.

Incentives Don’t Work - I listened to a Fresh Air interview Atul Gawande, based on a New Yorker article discussing how some doctors and even some health care payor organizations are trying to reduce health care costs for the most expensive people while improving outcomes. In Camden, New Jersey, one doctor found that one percent of people generate thirty percent of health care costs. One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.

Drugs, the US solution for all the pain - Just a little something that came across my desk. As you read it, think about the concept: War on Drugs. “In the United States, the therapeutic use of opioids has exploded as witnessed by the increased sales of hydrocodone by 280% from 1997 to 2007, while at the same time methadone usage increased 1,293% and oxycodone increased 866% (5). In addition, the estimated number of prescriptions filled for controlled substances increased from 222 million in 1994 to 354 million in 2003 (5). Consequently, the milligram per person use of therapeutic opioids in the United States increased from 73.59 milligrams in 1997 to 329.23 milligrams in 2006, an increase of 347% (5). And, while hydrocodone is the most commonly used opioid in the United States, based on milligrams per person, oxycodone is the most commonly used drug with methadone use rapidly increasing the most... Consequently, Americans, constituting only 4.6% of the world’s population, have been consuming 80% of the global opioid supply, and 99% of the global hydrocodone supply, as well as two-thirds of the world’s illegal drugs (4-6,26-29).”Read the whole study. There is a lot of info regarding the particular drugs. For instance, one researcher found that they had no effect on one's ability to drive. Though another found there were cognitive issues. So, are they or are they not getting high?

Costs of DNA Sequencing Falling Fast – Look At These Graphs! - You may know that the cost to sequence a human genome is dropping, but you probably have no idea how fast that price is coming down. The National Human Genome Research Institute, part of the US National Institute of Health, has compiled extensive data on the costs of sequencing DNA over the past decade and used that information to create two truly jaw-dropping graphs. NHGRI’s research shows that not only are sequencing costs plummeting, they are outstripping the exponential curves of Moore’s Law. By a big margin. You have to see this information to really understand the changes that have occurred. Check out the original NHGRI graphs below. With costs falling so quickly we will soon be able to afford to produce a monumental flood of DNA data. The question is, will we know what to do with it once it arrives?

How Free Is Your Will? - Scientists from UCLA and Harvard have taken an audacious step ... challenging conventional notions of free will. Fried and his colleagues implanted electrodes in twelve patients, recording from a total of 1019 neurons. They adopted an experimental procedure that Benjamin Libet, a pioneer of research on free will at the University of California, San Francisco, developed almost thirty years ago: They had their patients look at a hand sweeping around a clock-face, asked them to press a button whenever they wanted to, and then had them indicate where the hand had been pointing when they decided to press the button. This provides a precise time for an action (the push) as well as the decision to act. With these data the experimenters can then look for neurons whose activity correlated with the will to act. [A]bout a quarter of these neurons began to change their activity before the time patients declared as the moment they felt the urge to press the button. The change began as long as a second and a half before the decision..., this activity was robust enough that the researchers could predict with over 80 percent accuracy not only whether a movement had occurred, but when the decision to make it happened.

Tougher Sentencing For Pharma Fraud? - Two months ago, the US Sentencing Commission issued a proposal to amend the sentencing guidelines that would impose tougher punishments for anyone convicted of so-called strict liability offenses under the Food, Drug & Cosmetic Act (look here). In legal lingo, the difference is between between following the 2B guidelines for fraud instead of the current 2N guidelines used for misdemeanors. Pharma execs, take note. This matters because the FDA wants to use the ‘Park Doctrine’ to pursue wrongdoers. This means execs can be prosecuted and convicted of FDC violations even though an exec did not participate in the crime or know about the crime. And so, as the FDA Law blog notes, any change to sentencing guidelines can have a “dramatic impact” on execs regulated by the FDA.

'Radiation is good for you,' says Ann Coulter as she weighs in on Japan's nuclear crisis  - Conservative maverick Ann Coulter has poured scorn on growing fears over the fallout from Japan’s nuclear crisis by claiming that ‘radiation is good for you.’  With her bizarre outburst, Coulter became the latest celebrity to cause a stir over controversial remarks on the disaster in Japan. The right wing commentator was attempting to quell concern that a radiation plume was due to hit America’s West Coast today after travelling 5,000 miles across the Pacific Ocean from the damaged reactor at Fukishima.  "There is a growing body of evidence that radiation in excess of what the government says are the minimum amounts we should be exposed to are actually good for you and reduce cases of cancer,’ she told Fox News TV host Bill O’Reilly.

Lawrence Solomon: Reactor victims will benefit, studies show - The real-life studies of Hiroshima and Nagasaki survivors indicate that radiation affects the human body much as arsenic, sodium and many other substances do — they are beneficial in small doses, but can be harmful in overdoses. Yet the conventional scientific wisdom rejects these studies, and a multitude of other real-life studies, in favour of what is known as the Linear No-Threshold Assumption. Under this assumption, all exposure to radiation, no matter how small, is harmful in direct proportion to the dose. It is called an assumption because there is no proof of its validity. In fact, the scientists who espouse it freely admit that no proof for their assumption can ever be had because the risk is too small to measure statistically. In the absence of proof, they say, the only safe course is to assume danger.

A Glowing Report on Radiation - With the terrible earthquake and resulting tsunami that have devastated Japan, the only good news is that anyone exposed to excess radiation from the nuclear power plants is now probably much less likely to get cancer. This only seems counterintuitive because of media hysteria for the past 20 years trying to convince Americans that radiation at any dose is bad. There is, however, burgeoning evidence that excess radiation operates as a sort of cancer vaccine. As The New York Times science section reported in 2001, an increasing number of scientists believe that at some level -- much higher than the minimums set by the U.S. government -- radiation is good for you. "They theorize," the Times said, that "these doses protect against cancer by activating cells' natural defense mechanisms."

Wheat prices climb after Russia cuts crop forecast - Wheat prices rose Friday after Russia cut its forecast for this year’s harvest, renewing concerns that global supplies will tighten. Deputy Prime Minister Viktor Zubkov said the forecast called for 84 million to 85 million tons of wheat to be harvested this year, compared to an earlier estimate of 85 million to 87 million tons. Russia was one of the world’s largest wheat exporters until last year when its crop was damaged by a drought that prompted an export ban. Zubkov said the ban remains in effect. In the U.S. dry conditions have created problems for the winter wheat crop in the Great Plains.While global wheat supplies are ample, stockpiles remain tight in the United States. Traders are speculating that global supplies may grow smaller, which could cause prices to rise.

GM maize trials done on the sly: Nitish Kumar - NEW DELHI: Bihar chief minister Nitish Kumar has accused the multinational seed corporation Monsanto, the environment ministry's Genetic Engineering Approval Committee and Indian Council for Agriculture Research of conniving to begin trials of GM Maize in his state even before it had got clearance from the environment ministry and without informing the state government either. In a letter written to environment minister Jairam Ramesh, Kumar said the trials by Monsanto on ICAR sites in Bihar began surreptitiously some days before GEAC even accorded it the mandatory clearance to begin testing the Bt Maize varieties.

A Comparison of the Effects of Three GM Corn Varieties on Mammalian Health - We present for the first time a comparative analysis of blood and organ system data from trials with rats fed three main commercialized genetically modified (GM) maize (NK 603, MON 810, MON 863), which are present in food and feed in the world. NK 603 has been modified to be tolerant to the broad spectrum herbicide Roundup and thus contains residues of this formulation. MON 810 and MON 863 are engineered to synthesize two different Bt toxins used as insecticides. Approximately 60 different biochemical parameters were classified per organ and measured in serum and urine after 5 and 14 weeks of feeding. GM maize-fed rats were compared first to their respective isogenic or parental non-GM equivalent control groups. This was followed by comparison to six reference groups, which had consumed various other non-GM maize varieties. We applied nonparametric methods, including multiple pairwise comparisons with a False Discovery Rate approach. Principal Component Analysis allowed the investigation of scattering of different factors (sex, weeks of feeding, diet, dose and group). Our analysis clearly reveals for the 3 GMOs new side effects linked with GM maize consumption, which were sex- and often dose-dependent. Effects were mostly associated with the kidney and liver, the dietary detoxifying organs, although different between the 3 GMOs. Other effects were also noticed in the heart, adrenal glands, spleen and haematopoietic system. We conclude that these data highlight signs of hepatorenal toxicity, possibly due to the new pesticides specific to each GM corn. In addition, unintended direct or indirect metabolic consequences of the genetic modification cannot be excluded.

Heat Damages Colombia Coffee, Raising Prices - But in the last few years, coffee yields have plummeted here and in many of Latin America’s other premier coffee regions as a result of rising temperatures and more intense and unpredictable rains, phenomena that many scientists link partly to global warming5.  Coffee plants require the right mix of temperature, rainfall and spells of dryness for beans to ripen properly and maintain their taste. Coffee pests thrive in the warmer, wetter weather.  Bean production at the Garzóns’ farm is therefore down 70 percent from five years ago, leaving the family little money for clothing for toddlers and “thinking twice” about sending older children to college, said Mr. Garzon’s 44-year-old son, Albeiro, interviewed in a yellow stucco house decorated with coffee posters and madonnas.  The shortage of high-end Arabica coffee beans is also being felt in New York supermarkets and Paris cafes, as customers blink at escalating prices. Purveyors fear that the Arabica coffee supply from Colombia may never rebound — that the world might, in effect, hit “peak coffee.”

Why Rising Food and Energy Prices Are Not a Worry - ANY American who has shopped for groceries or pumped gasoline in the last few months knows that prices for food and energy have been soaring. Demand from fast-growing Asian economies is one major contributor to price increases; the turmoil in the Middle East is another. All of this has made some economists and lawmakers in the United States nervous. They fear that higher prices for commodities will translate into higher prices for all goods and services and that the Federal Reserve, by ignoring commodity prices, has become lax on inflation.  While the anxiety is understandable, the fears are misplaced. They result from a profound misunderstanding about whether food and energy prices today help predict overall inflation tomorrow.

Are Speculators to Blame for High Food Commodity Prices? No, and this Explains Why.-  In this post, I have the good fortune of having permission to use the writing of two Ag/Economic experts on the subjects of:

  • why people think that speculators drive food commodities
  • why speculators, in actuality, do not drive food commodity prices

When I (reluctantly) listed "speculation" in a list of reasons for higher food prices sometime back, I had three friends who are a lot smarter than I am each give me a gentle and polite nudge suggesting that this was not the case. The first friend who challenged me on this subject linked a Paul Krugman post and told me I should read the Sanders and Irwin paper which Krugman referenced below his post. Imagine my surprise when the third person who contacted me was Irwin himself, whom Krugman cited. I was humbled to have Scott a reader here, but also delighted to have his expertise for consultation.To present the explanation, I have chosen the writing of Nevil Speer PhD, University of Western Kentucky. He explains it as clearly and simply as I have seen in writing to date. Then, following his article, I have added some critical material given to me from Scott Irwin to help complete the understanding.

More on that commodities vs global demand chart - FT Alphaville - We posted this chart from the San Fran Fed (via Mark Thoma) in yesterday’s further reading list, but it’s worth a second look: More than anything, this reminds us of the “missing chart” that we stole from John Kemp and wrote about a little while back: (The first chart only shows the performance of non-energy commodities, but oil prices in recent years have followed a similar trend — rising through 2007 and plummeting when global growth came to a halt, then climbing again when growth resumed.)Kemp’s point was simple: if you argue, based on the inflection point in the graph, that QE2 had some of its intended effects on inflation expectations and on certain asset markets, then you should also acknowledge the policy fed through to higher commodity prices. Well, we’ve made this argument and we think he’s got a point. So how to reconcile the two charts?

"Global Commodity Prices Track World Demand" -- Fed Views, by Reuben Glick, SF Fed: ...Global commodity prices have followed global economic activity as measured by world industrial production. Commodity prices fell during the recent recession and rose with the recovery, which increased demand for raw materials, particularly from developing countries such as China. In fact, increased demand from developing countries accounts for most of the increased world demand for commodities such as oil, wheat, and corn over the past decade. In the case of corn, a substantial amount of increased demand also reflects its use in ethanol production.

Commodity prices in pictures - A few graphs I found interesting. Via Mark Thoma,  this graph shows that commodity prices have closely tracked world industrial production. . And this graphic makes clear that energy and food are the principal factors behind the increase in the CPI over the last 12 months. Thoma also reminds us that although the richest 20% of Americans spend about 4% of their income on energy and another 4% on food, the poorest quintile spend 20.6% on energy and 23.5% on food. I've also figured out how to use active GasBuddy widgets to display some of their useful graphs. These should update automatically, so if you come back to this site at some later date, you'll see the current figures as of that date. You can also click on the images below to adjust the parameters.

Number of the Week: Food Inflation Foments Political Unrest - 100%:

The increase in antigovernment protests associated with a 10% rise in global food prices Despotic leaders, entrenched inequality and new forms of communication have all played their roles in the political turmoil now shaking the Middle East. But new research by economists at the International Monetary Fund points to another potential contributor: global food prices. Looking at food prices and instances of political unrest from 1970 through 2007, the economists find a significant relationship between the two in low-income countries, a group that includes Tunisia, Egypt, Sudan and Yemen. To be exact, a 10% increase in international food prices corresponds to an added 0.5 antigovernment protests over the following year in the low-income world — a twofold increase from the annual average. Given the recent trend in food prices, leaders of low-income countries — a group that also includes China — might have reason for concern. In February, global food prices were up 61% from their most recent low point in December 2008, according to the IMF.

Biofuels versus Animal Feed - In this post, I want to compare the amount of global cereal production going to biofuels, with the amount going to animal feed (the animals in turn are mainly eaten by humans as meat, dairy products, etc).  I found the data through 2007 at the FAO here.  The restriction to 2007 is a bit unfortunate, as that was only part way through the recent big expansion of biofuels.  Here's the data on that through 2009: So just bear in mind as you look at these next graphs that biofuel production has expanded by about 2/3 again since 2007.  Anyway, to the FAO estimates for total cereal production and feed consumption, I added my estimates from the other day of total cereal equivalent of biofuels, and I got this graph:Firstly, note that total global cereal production was a little over 2 billion tonnes in 2007 (a number worth remembering in the same way that we know global fuel production is somewhere in the range 85-90mbd).  The biofuel wedge is small, but rapidly growing.  By comparison, the amount of cereal going to feed is much larger, but growing more slowly

Int’l experts to gauge world’s water woes - Over 500 water experts and lawmakers will gather at the rapidly shrinking Dead Sea next week to discuss ways to manage scarce water resources. International water utility representatives, experts and academicians will convene at the sixth International Water Association Specialist (IWA) Conference on Efficient Use and Management of Water (Efficient 2011) on March 29, officials announced on Monday.  During the five-day event, experts will explore the impacts of drought, climate change and water loss among other global water challenges, Ministry of Water and Irrigation Secretary General Maysoon Zu’bi said during a press conference yesterday to announce the conference. “Exploring new water resources, such as desalination, is costly, therefore; applying water demand management delays the need for such new resources,” Zu’bi told reporters.

Will 7 Billion People Make Us Smarten Up About Water? A Look at Technology, Supplies, and Politics - This year, we're going to hit a human population of 7 billion. Yet already 1.1 billion people lack access to safe drinking water, 2.6 billion people lack adequate sanitation, and 1.8 million people die every year from waterborne diarrhoeal diseases. Those are not encouraging numbers as the counter ticks up. Population is four times more important than climate change when it comes to water shortages. We are already seeing the effects of shortages around the world, particularly in India and China where populations soar alongside economic growth, as well as in Africa where technologies lag behind. But even in the US, one third of our counties are at high risk for water shortages, if they aren't experiencing them already -- some experts argue we already passed peak water in the US years ago. Where do we stand with our water supplies today, and what needs to change to ensure a future with clean water for everyone?  We're taking a look at the technology, infrastructure and cultural changes that influence our water supplies.

The Twin Elephants in the Room - In the next forty years the populations of already-water short Arab nations are going to increase dramatically, and at the same time their people will be aspiring to catch up with the living standards of today's developed countries. For example, Egypt, with 80 million people today, is projected to grow to some 138 million by 2050. Per capita income in Egypt is now about $5,500, compared with about $47,000 in the United States and $30,000 in the European Union. The aspiration gap is even more stunning for sub-Saharan Africa, which is projected to explode from 870 million people to 1.8 billion in the next 40 years. Per capita income there is now $2,000, and less than a third of the population has access to a toilet. That gap will doubtless widen further as the poor suffer disproportionately from climate disruption, the spread of toxic chemicals, and an extinction episode unmatched in 65 million years, threatening the natural services upon which people are utterly dependent. Given the additional need to invest in completely re-engineering the planet's energy-mobilizing and water-handling infrastructure and rising pressure on resources, even maintaining today's standards of living in both rich and poor nations will be increasingly difficult.

Livestock Can Turn Deserts Into Thriving Ecosystems - (video) One of the most exciting aspects of the Information Age we live in is that we are collecting and systematizing hundreds, if not thousands of years of data and putting it all together.  This allows for technological innovations that may not seem glamorous or exciting, since they don’t involve shiny surfaces and loud noises, but are actually far more important. Case in point, here’s an excerpt from a fascinating talk by Allan Savory, who explains how desertification can actually be reversed by the proper management of livestock: I think that this is a fantastic example of what I like to call “high-tech low tech” — the application of new data and ways of thinking to old technologies in order to solve problems.  Humans have been herding animals for thousands of years, but by applying our understanding of ecology, we can use herd animals to reverse environmental damage — and actually keep more animals, to boot! If you’re interested in the whole talk, you can find it here.

Japan faces fresh food safety crisis - Japan faces a further crisis with concern escalating about radioactive contamination of its food and water, even as the fight to stabilise the earthquake-stricken Fukushima Daiichi nuclear plant appears to be making progress.  Tests found levels of radioactive iodine up to seven times the legal limit in samples of raw milk, spinach and two leaf vegetables as far away from the nuclear plant as Chiba prefecture, to the east of Tokyo.  The results mean Japan faces a food safety scare on top of the earthquake, tsunami and nuclear crisis. The government halted shipments of raw milk from Fukushima prefecture and spinach from Ibaraki prefecture. It will decide tomorrow whether to widen the freeze. Officials admitted that some food with radioactivity above the safety limit might be on shop shelves. Tests also showed slightly elevated radioactivity in Tokyo’s drinking water although the measurement was still 100 times below the legal safety limit. Experts and the Japanese government said the levels of radioactivity recorded in milk and spinach did not pose an immediate threat to human health. “I have never let my children drink much milk but at the current level of concentration I would have no hesitation in letting them consume spinach and tap water,” said Tetsuro Fukuyama, the deputy chief cabinet secretary

WHO spokesman: Japan food safety situation "serious" (Reuters) - The World Health Organization said on Monday that the detection of radiation in food after an earthquake damaged a Japanese nuclear plant was a more serious problem than it had first expected. "Quite clearly it's a serious situation," Peter Cordingley, Manila-based spokesman for WHO's regional office for the Western Pacific, told Reuters in a telephone interview. "It's a lot more serious than anybody thought in the early days when we thought that this kind of problem can be limited to 20 to 30 kilometers," he said. Cases of contaminated vegetables, dust, milk and water are already stoking regional anxieties despite Japanese officials' assurances the levels are not dangerous. Japan's government has prohibited the sale of raw milk from Fukushima prefecture and spinach from another nearby area. It said more restrictions on food may be announced later on Monday.

The simple economics of alternative fuels - Simple model of energy:  As the price of energy source A rises, source B becomes cheaper, relatively.  As the price of A rises, the likeihood of switching to B rises...  Backers of alternative fuels see a silver lining in rising pump prices. With gas and diesel prices climbing past $3 and $4 a gallon, respectively, cities, companies and environmentalists are once again talking about compressed natural gas, or CNG, as a smart that. Unless there is a big up front (fixed) cost to transitioning... Although powering vehicles with natural gas has advantages - an average price of $1.70 per gasoline gallon equivalent and 60 percent lower carbon emissions - making the switch to CNG is expensive because there is no fueling infrastructure comparable to gas stations. that.  With a big up front infrastructure cost, the lowest hanging fruit for the transition will be fleet vehicles that refuel centrally.

USDA funds research on crops and climate change - The federal government is investing $60 million in three major studies on the effects of climate change on crops and forests to help ensure farmers and foresters can continue producing food and timber while trying to limit the impact of a changing environment. The three studies take a new approach to crop and climate research by bringing together researchers from a wide variety of fields and encouraging them to find solutions appropriate to specific geographic areas. One study will focus on Midwestern corn, another on wheat in the Northwest and a third on Southern pine forests. Shifting weather patterns already have had a big effect on U.S. agriculture, and the country needs to prepare for even greater changes. And since the changes are expected to vary from region to region, he said different areas will need different solutions. Some areas may gain longer growing seasons or suffer more frequent floods, while others may experience more droughts or shorter growing seasons.

NOAA says GOP’s proposed satellite funding cuts could halve accuracy of precipitation forecasts - The National Ocean and Atmospheric Association released new data yesterday showing precisely how the loss of environmental monitoring satellites would affect our ability to forecast extreme weather events.  NOAA used the example of the “Snowmageddon” storm that dumped massive precipitation from the Gulf of Mexico to New England on February 5-6, 2010. We here at CAPAF and Climate Progress have been keeping close tabs on House Republicans’ efforts to make the country more vulnerable to extreme weather events. If Congress refuses to fund new environmental monitoring satellites to replace aging spacecraft that could fail at any time, it will undoubtedly expose Americans to increased risk from storms, floods, blizzards, and hurricanes. Meanwhile, more and more science is emerging that strengthens the link between unprecedented weather phenomena and human-caused global climate change. The GOP-controlled Congress took steps to eliminate $700 million in funding for NOAA’s satellite program in its bill to fund the federal government for the remainder of the fiscal year (until October 2011). Though that bill is still being negotiated, the three-week continuing resolution that keeps the government open until April 8 also contained cuts to NOAA’s vital satellites.

Republican-Controlled Committee Legislates That Climate Change Does Not Exist - House Republicans on the Energy and Commerce Committee demonstrated their commitment to science denial Wednesday by unanimously voting down three separate amendments offered by Democrats to reaffirm basic facts about climate science. They then unanimously voted to pass the Upton-Inhofe bill to repeal the Environmental Protection Agency's scientific endangerment finding on greenhouse pollution. Let's be clear. Congress should not attempt to make scientific decisions. The role of Congress is to take the best science and use it to make the best possible policy. The three amendments rejected unanimously by committee Republicans each lays out a fairly basic statement about generally accepted climate science.

First North Pole Ozone Hole Forming? - Spawned by strangely cold temperatures, "beautiful" clouds helped strip the Arctic atmosphere of most of its protective ozone this winter, new research shows. The resulting zone of low-ozone air could drift as far south as New York, according to experts who warn of increased skin-cancer risk. The stratosphere's global blanket of ozone—about 12 miles (20 kilometers) above Earth—blocks most of the sun's high-frequency ultraviolet (UV) rays from hitting Earth's surface, largely preventing sunburn and skin cancer. But a continuing high-altitude freeze over the Arctic may have already reduced ozone to half its normal concentrations—and "an end is not in sight," said research leader Markus Rex, a physicist for the Alfred Wegener Institute for Polar and Marine Research in Bremerhaven, Germany. Preliminary data from 30 ozone-monitoring stations throughout the Arctic show the degree of ozone loss was larger this winter than ever before, Rex said. Before spring is out, "we may even get the first Arctic ozone hole ... which would be a dramatic development—one which would make it into coming history books," he said.

Arctic on the verge of record ozone loss. Unusually low temperatures in the Arctic ozone layer have recently initiated massive ozone depletion. Half of the ozone depleted over last few weeks! -- Unusually low temperatures in the Arctic ozone layer have recently initiated massive ozone depletion. The Arctic appears to be heading for a record loss of this trace gas that protects the Earth's surface against ultraviolet radiation from the sun. This result has been found by measurements carried out by an international network of over 30 ozone sounding stations spread all over the Arctic and Subarctic and coordinated by the Potsdam Research Unit of the Alfred Wegener Institute for Polar and Marine Research in the Helmholtz Association (AWI) in Germany. "Our measurements show that at the relevant altitudes about half of the ozone that was present above the Arctic has been destroyed over the past weeks," says AWI researcher Markus Rex, describing the current situation. "Since the conditions leading to this unusually rapid ozone depletion continue to prevail, we expect further depletion to occur." The changes observed at present may also have an impact outside the thinly populated Arctic. Air masses exposed to ozone loss above the Arctic tend to drift southwards later. Hence, due to reduced UV protection by the severely thinned ozone layer, episodes of high UV intensity may also occur in middle latitudes. "Special attention should thus be devoted to sufficient UV protection in spring this year," recommends Rex.

NSIDC: Annual maximum Arctic sea ice extent reached, “tied for the lowest in the satellite record.”  - On Monday, the National Snow and Ice Data Center announced the maximum, “the largest sea ice extent during a given year.”  It “marks the end of the growth period for sea ice, and the start of the melt season.” This isn’t a big surprise since the Arctic has seen the lowest December, January, and February (tied with 2005) sea ice extent in satellite record.  The more important three-dimensional metric of ice volume also continues its long-term decline (see Navy’s oceanographer tells Congress, “the volume of ice as of last September has never been lower…in the last several thousand years”) Here’s more from NSIDC, plus their plot of sea ice extent:

Popular climate economics model needs major overhaul - True or false: Risks of a climate catastrophe can be ignored, even as temperatures rise? The economic impact of climate change is no greater than the increased cost of air conditioning in a warmer future? The ideal temperature for agriculture could be 17oC above historical levels? All true, according to the increasingly popular FUND model of climate economics. It is one of three models used by the federal government’s Interagency Working Group to estimate the “social cost of carbon” – that is, the monetary value of the long-term damages done by greenhouse gas emissions. According to FUND, as used by the Working Group, the social cost of carbon is a mere $6 per ton of CO2. That translates into $0.06 per gallon of gasoline. Do you believe that a tax of $0.06 per gallon at the gas pump (and equivalent taxes on other fossil fuels) would solve the climate problem and pay for all future climate damages? I didn’t believe it, either. But the FUND model is growing in acceptance as a standard for evaluation of climate economics. To explain the model’s apparent dismissal of potential harm, I undertook a study of the inner workings of FUND (with the help of an expert in the relevant software language) for E3 Network. Having looked under the hood, I’d say the model needs to be towed back to the shop for a major overhaul.

Cap and trade vs carbon tax in the potential California carbon market - Ironically, the cap-and-trade program has been temporarily halted due to a lawsuit brought forth by other environmental groups, concerned that the CARB did not sufficiently consider alternatives to a C&T program such as a direct carbon tax:The groups contend that a cap-and-trade program would allow refineries, power plants and other big facilities in poor neighborhoods to avoid cutting emissions of both greenhouse gases and traditional air pollutants.“This decision is good for low-income communities like Wilmington, Carson and Richmond,” said Bill Gallegos, executive director of Communities for a Better Environment. “It means that oil refineries, which emit enormous amounts of greenhouse gases and contribute to big health problems, cannot simply keep polluting by purchasing pollution credits, or doing out of state projects.” This logic is odd, as even under a cap-and-trade program, oil refineries won’t simply disappear. It’s possible that they might be required to reduce their own pollution rather than buying permits, but this speaks mainly to the design of the cap-and-trade program. A small carbon tax would likely have the same effect, and if the design of the cap-and-trade program is any hint, it would be difficult to pass a significant carbon tax.

Can geoengineering put the freeze on global warming? - Each brings its own set of risks, but in a world fretting about the consequences of global warming, are these ideas whose time has come? With 2010 tying as the world's warmest year on record and efforts to slow greenhouse gas emissions looking stymied, calls are rising for research into engineering our way out of global warming - everything from launching solar shade spacecraft to genetically engineering green deserts. An international consortium of 12 universities and research institutes recently, for example, announced plans to pioneer large-scale "ocean fertilization" experiments aimed at using the sea to pull more greenhouse gases out of the sky. Once the domain of scientists' off-hours schemes scrawled on cocktail napkins, such geoengineering is getting a serious look in the political realm.

Playing God With The Environment - Geoengineering to mitigate global warming is making a comeback according to— Scientists call it "geoengineering," but in plain speak, it means things like this: blasting tons of sulfate particles into the sky to reflect sunlight away from Earth; filling the ocean with iron filings to grow plankton that will suck up carbon; even dimming sunlight with space shades. Each brings its own set of risks, but in a world fretting about the consequences of global warming, are these ideas whose time has come?With 2010 tying as the world's warmest year on record and efforts to slow greenhouse gas emissions looking stymied, calls are rising for research into engineering our way out of global warming - everything from launching solar shade spacecraft to genetically engineering green deserts. An international consortium of 12 universities and research institutes recently, for example, announced plans to pioneer large-scale "ocean fertilization" experiments aimed at using the sea to pull more greenhouse gases out of the sky.

Scientists' Research Warns Humanity May be Facing 'Vortex of Death' - The connection was initially discovered by noted Russian scientist Alexander Chizhevsky during 1915: solar storms trigger conflict, wars and death. A vortex of death. Chizhevsky found after intense research that the rise and fall of solar activity—interacting with the earth's magnetic field—causes mass changes in human's perspective's, moods, emotions and behavioral patterns. All are affected by sunspots and solar flares. Building upon the Russian scholar's research, Wheeler applied a numerically weighted ranking system during the 1930s to separate wars and even individual battles assessing them on length and severity. He then correlated the impressive data he'd amassed with the 11-year sunspot cycle.The results were revealing…and horrifying. When the 11-year solar cycle peaked, so did human unrest, uprisings, rebellions, revolutions and all-out wars between nations. It was almost as if the intense magnetic upswing directly affected the human brain and drove Mankind into deadly emotional tantrums and frenzied killing sprees.

Proposal aims to scrap 2007 energy law - RALEIGH Barely three years have passed since the state overhauled its energy policy to require electric utilities to meet energy demand through renewable resources and energy efficiency programs. Now a legislative proposal introduced Wednesday would scrap the 2007 energy law, known as Senate Bill 3. Republican state Rep. George Cleveland's bill calls for the immediate repeal of the bill, which requires power companies to meet 12.5 percent of customer electricity demand through renewables and conservation by 2021. The repeal of SB3 has been advocated by the conservative John Locke Foundation. The Raleigh nonprofit says the law artificially drives up electricity prices and panders to environmental extremists. "SB3 primarily serves as a way to mandate a guaranteed market for renewable energy providers, because otherwise people would avoid their cost-prohibitive and unreliable electricity," the organization says on its website.Power companies, initially skeptical of alternative energy, are now committed to the legislation. "We do not support (repealing) it," Progress Energy spokesman Mike Hughes said. "We've made some investments to be in compliance ... and these investments are long-term."

Wind, solar becoming cost competitive: Chu - Clean sources of energy such as wind and solar will be no more expensive than oil and gas projects by the end of the decade, US Energy Secretary Steven Chu said Wednesday. President Barack Obama’s administration has been encouraging companies to invest in green growth, calling it a new source of jobs and fearing that other nations — led by China — are stealing the march.“Before maybe the end of this decade, I see wind and solar being cost-competitive without subsidy with new fossil fuel,” “So the country and the companies who develop those renewable energy and resources that become cost competitive without subsidy all of a sudden have a world market. And, boy, we can’t lose that world market,” he said.

Global Wind Trends - The Global Wind Energy Council has a 2010 market report which provides global statistics on wind power installations.  You can see from the graph above that the pace of installations slowed globally in 2010.  They place the blame for this primarily on the delayed effects of the financial crisis: The expectations for wind power market growth in 2010 were mixed, as the low level of orders seen during the financial crisis worked their way through the system. The results of this were felt much more strongly in 2010 than in the previous year, and the overall annual market shrunk by 7% to 35.8 GW, down from 38.6 GW in 2009. The new capacity added in 2010 represents investments worth EUR 47.3 billion (USD 65 billion).The regional pattern shows that North America was the region with by far the largest collapse, but European wind development was also slightly down in 2010: This was partially offset by very large developments in Asia, especially China.

Wind power surges forward around the globe - Lester Brown- Measured by share of electricity supplied by wind, Denmark is the leading nation at 21 percent. Three north German states now get 40 percent or more of their electricity from wind. For Germany as a whole, the figure is 8 percent — and climbing. And in the state of Iowa, enough wind turbines came online in the last few years to produce up to 20 percent of that state’s electricity.In terms of sheer volume, the United States leads the world with 35,000 megawatts of wind generating capacity, followed by China and Germany with 26,000 megawatts each. Texas, long the leading U.S. oil-producing state, is now also the nation’s leading generator of electricity from wind. It has 9,700 megawatts of wind generating capacity online, 370 megawatts more under construction, and a huge amount under development. If all of the wind farms projected for 2025 are completed, Texas will have 38,000 megawatts of wind generating capacity — the equivalent of 38 coal-fired power plants. This would satisfy roughly 90 percent of the current residential electricity needs of the state’s 25 million people.

Germany’s solar panels produce more power than Japan’s entire Fukushima complex - Germany is the world leader in installed solar photovoltaic panels — and they also just shut down seven of their oldest nuclear reactors. Coincidence? Maaaaybe … Anyway, it’s worth noting that just today, total power output of Germany’s installed solar PV panels hit 12.1 GW — greater than the total power output (10 GW) of Japan’s entire 6-reactor nuclear power plant. Now before the trolls come out, let me just note that 12.1 GW is max power (the output whose name you’d love to touch). The panels generated that much at one instant in time — when the sun was at its apex — but of course solar power production varies with the weather and the time of day. To find out how much energy those panels generated today in total, you’d have to calculate the area under that curve in the lower right hand corner

An Australian plan for 100% renewable energy by 2050 - We recently examined how Australia can meet 100% of its electricity needs from renewable sources by 2020.  Here we will examine how that goal can be scaled up for the rest of the world. Energy consulting firm Ecofys produced a report detailing how we can meet nearly 100% of global energy needs with renewable sources by 2050.  Approximately half of the goal is met through increased energy efficiency to first reduce energy demands, and the other half is achieved by switching to renewable energy sources for electricity production (Figure 1).To achieve the goal of 100% renewable energy production, Ecofys foresees that global energy demand in 2050 will be 15% lower than in 2005, despite a growing population and continued economic development in countries like India and China.

Could the Recent Pacific Megaquakes Trigger a West Coast Temblor? - The best gauge of quake risk in the northeastern Pacific is the region's seismic history. Whereas scientific instruments designed to document quakes have been around barely more than a century, the interval between major quakes is much longer than that. Thus, scientists turn to the geologic record to determine the recurrence interval of ancient quakes by carbon-dating organic material in sheets of tsunami debris washed far inland or in the layered remnants of submarine landslides smothering the floors of undersea canyons. The most hazardous swath of the northeastern Pacific lies along the Cascadia subduction zone (CSZ), a tectonic interface that parallels the coast and poses a seismic threat to cities such as Victoria, British Columbia; Portland, Ore.; and Eureka, Calif. At that subduction zone, the tiny Juan de Fuca plate slides eastward beneath the massive North American plate between 30 and 40 millimeters each year—an interface that, with minor exceptions, has apparently been locked for centuries. "This subduction zone stands out as the big elephant in the corner," Goldfinger says. "It sits quiet for hundreds of years, and then goes off all at once."

Japan Earthquake: Two Weeks Later - photos

Fukushima Images (Photobucket)

Is There Any Cure For Our Outsized Fear Of Nuclear Catastophe…Pro-nuclear advocates love to grumble that people are disproportionately, even irrationally, afraid of nuclear power. There’s certainly something to that complaint. According to a 1992 study by James Flynn, a researcher at Decision Research, the public in the United States and Canada seems to dread nuclear accidents more than any other type of disaster—even though the industry has amassed a commendable safety record. In Japan, it took an earthquake of apocalyptic force to cause serious problems at the Fukushima reactor. And, while the risk of calamity will never be zero, nuke fans note that other energy-related tragedies don’t get the same frenzied media coverage, whether it’s a deadly explosion at a natural-gas plant or the 13,200 Americans killed by coal pollution each year.This outsized panic about nuclear was on full display after the Three Mile Island accident in Pennsylvania back in 1979. No one died, and epidemiological studies later found that what radioactive gas had escaped had no discernible effect on cancer rates. Yet the incident provoked widespread alarm about nuclear power—no doubt aided by the release, just 12 days earlier, of The China Syndrome, a Jane Fonda film about a potential reactor meltdown. What’s more, when a waterfront chemical facility blew up in New Jersey just two years later—sending a toxic cloud wafting toward Staten Island—the outcry was hushed in comparison.

AP IMPACT: US spent-fuel storage sites are packed (AP) -The nuclear crisis in Japan has laid bare an ever-growing problem for the United States — the enormous amounts of still-hot radioactive waste accumulating at commercial nuclear reactors in more than 30 states.The U.S. has 71,862 tons of the waste, according to state-by-state numbers obtained by The Associated Press. But the nation has no place to permanently store the material, which stays dangerous for tens of thousands of years. Plans to store nuclear waste at Nevada's Yucca Mountain have been abandoned, but even if a facility had been built there, America already has more waste than it could have handled. Three-quarters of the waste sits in water-filled cooling pools like those at the Fukushima Dai-ichi nuclear complex in Japan, outside the thick concrete-and-steel barriers meant to guard against a radioactive release from a nuclear reactor. The rest of the spent fuel from commercial U.S. reactors has been put into dry cask storage, but regulators only envision those as a solution for about a century and the waste would eventually have to be deposited into a Yucca-like facility. Meanwhile, the industry's collective pile of waste is growing by about 2,200 tons a year; experts say some of the pools in the United States contain four times the amount of spent fuel that they were designed to handle.

Is this the end of the nuclear revival? - ''Nuclear power could make a significant contribution to the global electricity supply. Or it could be phased out - especially if there is another accidental or a terrorist-caused Chernobyl-scale release of radioactivity.'' -International Panel on Fissile Materials ''This is definitely in the Chernobyl league now. If the reactors go, that's bad, of course. But the real concern at this point is if those … spent-fuel pools catch fire. There are many Chernobyls' worth of radioactive material in there.'' -Frank von Hippel, Princeton University nuclear physicist THESE are confronting, confounding days for the nuclear industry's true believers. Physicists, technicians and the unlikeliest of bedfellows - atomic industry profiteers and green disciples of nuclear's clean-energy credentials - began the week espousing faith in the rigour of modern safety systems; emphasising the superior health record of nuclear processes over the heavy casualties routinely associated with the coal industry; and dousing super-heated media and anti-nuclear commentary with buckets of cool, technical, rational analysis.But then the news from Japan's devastated Fukushima nuclear reactors just kept getting worse.

How the "Peaceful Atom" Became a Serial Killer - When nuclear reactors blow, the first thing that melts down is the truth. Just as in the Chernobyl catastrophe almost 25 years ago when Soviet authorities denied the extent of radiation and downplayed the dire situation that was spiraling out of control, Japanese authorities spent the first week of the Fukushima crisis issuing conflicting and confusing reports. We were told that radiation levels were up, then down, then up, but nobody aside from those Japanese bureaucrats could verify the levels and few trusted their accuracy. The situation is under control, they told us, but workers are being evacuated. There is no danger of contamination, but stay inside and seal your doors. The bureaucratization of horror into bland and reassuring pronouncements was to be expected, especially from an industry where misinformation is the rule. Although you might suppose that the nuclear industry’s outstanding characteristic would be its expertise, since it’s loaded with junior Einsteins who grasp the math and physics required to master the most awesomely sophisticated technology humans have ever created, think again. Based on the record, it’s most outstanding characteristic is a fundamental dishonesty. I learned that the hard way as a grassroots activist organizing opposition to a scheme hatched by a consortium of nuclear utilities to park thousands of tons of highly radioactive fuel rods, like the ones now burning at Fukushima, in my Utah backyard.

The Future of Nukes in America - The Oyster Creek nuclear plant in New Jersey was opened when the Beatles were still together, and since 1969 its single 645 MW boiling water reactor has provided enough energy to power 600,000 homes. But the oldest nuclear plant will be going out of commission a little early-last year owner Exelon Energy announced that it would close Oyster Creek in 2019, 10 years ahead of schedule. The reason: the aging plant cost too much to keep running safely.Most of the attention since the Fukushima Daiichi nuclear disaster has focused on the troubled future of the American atomic sector. But the U.S. nuclear industry was already facing a very old problem: its aging fleet of reactors. Nuclear plants were built with a 40-year license, with the option to theoretically expand to 60 or even 80 years. Half the country's 104 reactors are at least 30 years old, and reaching middle age. So far 62 of those of those plants have been granted 20-year extensions, with 20 still pending. But the oldest plants-like the one in Fukushima-tend to have fewer safety measures. If regulators crack down, operators-like Exelon with Oyster Creek-could decide it's not worth the cost and shut down the plants

Inside America’s Most Dangerous Nuclear Plant - These are desperate days for Entergy, the big Arkansas-based power conglomerate that owns the frail Indian Point nuclear plant, located on the east bank of the Hudson River outside Buchanan, New York—just twenty-two miles from Manhattan.  First, a scathing report issued in 2005 by a nuclear engineer fingered Indian Point as one of the five worst nuclear plants in the United States, and predicted that its emergency cooling system “is virtually certain to fail.” This disclosure was hotly followed by the release of a study conducted by the Los Alamos National Laboratory for the Nuclear Regulatory Commission that ominously concluded that the chances of a reactor meltdown increased by a factor of nearly 100 at Indian Point, because the plant’s drainage pits (also known as containment sumps) are “almost certain” to be blocked with debris during an accident. “The NRC has known about the containment sump problem at Indian Point since September 1996,” said  “The NRC cannot take more than a decade to fix a safety problem that places millions of Americans at undue risk.”

Calculating calamity: Japan's nuclear accident and the "antifragile" alternative - Famed student of risk and probability and author of The Black Swan Nassim Nicholas Taleb tells us that in 2003 Japan's nuclear safety agency set as a goal that fatalities resulting from radiation exposure to civilians living near any nuclear installation in Japan should be no more than one every million years. Eight years after that goal was adopted, it looks like it will be exceeded and perhaps by quite a bit, especially now that radiation is showing up in food and water near the stricken Fukushima Dai-ichi plant.Furthermore, he notes, models used to calculate such risk tend to underestimate small probabilities. What's worse, the consequences are almost always wildly underestimated as well. Beyond this, if people are told that a harmful event has a small chance of happening, say, 1 in a 1,000, they tend to dismiss it, even if that event might have severe consequences. This is because they don't understand that risk is the product of probability times severity. But, the point Taleb makes is that the people of Japan did not know they were subjecting themselves to this severe a risk. If they had, they might have prepared for it or they might have even rejected nuclear power altogether in favor of other energy sources.

Nuclear Meltdowns 101 - I am no nuclear expert, and that is probably a good thing. I did do a lot of reading about Chernobyl back when it happened. And now I am, as I was then, and as I am sure many of you are, getting really fed up with incomplete, inaccurate, misleading and generally unsatisfactory explanations that are being offered for what is going on at Fukushima. Either information is not available, or it is a flood of largely irrelevant technical minutia designed to thrill nuclear nerds but bound to bamboozle rather than inform the general reader. And so, for the sake of all the other people who aren't nuclear experts and have no ambition of ever becoming one, here's what I have been able to piece together.

Fear is potent risk of Japanese nuclear crisis - When it comes to the nuclear power disaster unfolding in Japan, there is far more to fear than fear itself. But fear is one of the biggest — and could turn out to be the most potent — dangers. Although radiation escaping from a nuclear power plant catastrophe can increase the risk of many cancers and other health problems, stress, anxiety and fear ended up in many ways being much greater long-term threats to health and well-being after Chernobyl, Three Mile Island and other nuclear accidents, experts said Monday.  “The psychological effects were the biggest health effects of all — by far,” said Fred Mettler, a University of New Mexico professor emeritus and one of the world’s leading authorities on radiation, who studied Chernobyl1 for the World Health Organization. “In the end, that’s really what affected the most people.” Fears of contamination and anxiety about the health of those exposed and their children led to significantly elevated rates of suicidal thinking and anxiety disorders, and rates of post-traumatic stress disorder and depression about doubled, Mettler and others said.

Some critics of Japanese storage system see a worse-than-Chernobyl scenario ahead - With attention focused on tons of radioactive spent fuel that may have ignited, some experts say the Japanese will be lucky if the stricken Fukushima plant creates a disaster only the size of Chernobyl in 1986. These spent fuel rods are now being blamed for the radioactive releases over Japan. While the reactor cores are encased in bulky containment vessels, spent fuel is separated from the environment only by the water in the pools, said former nuclear engineer David Lochbaum of the Union of Concerned Scientists. That those spent fuel rods were even kept at the Japanese plant is controversial. Some used rods remain hot enough to ignite their metal coatings and release dangerous plumes of radioactive gases and dust. Critics such as Lochbaum argue this storage system, which is widely used in the United States, poses an unnecessary hazard. Indeed, most of the 62,500 metric tons of spent fuel in the United States is stored in similar pools on site at power plants

Contamination at nuclear plant for decades - LOCAL contamination from Japan's quake-damaged Fukushima nuclear power plant will be a problem that will last "for decades and decades", France's Nuclear Safety Authority (ASN) said yesterday. Releases of radioactivity from the plant "are now significant and continuing", the head of the agency, Andre-Claude Lacoste, told a press conference. "We have to assume that Japan will have a long-term issue of managing the impacts," he said. "It's a problem that Japan will have to deal with for decades and decades to come." The releases stem in part from deliberate venting of steam and gas, which also contain radioactive particles, to ease pressure in overheating reactor vessels, he said.Another source is "leaks" of as-yet unknown origin, he said."Ground deposits of radioactive particles (around the plant) are significant," "The Japanese authorities have not drawn up, or communicated, a map of these deposits, and it is not vain thinking to believe that this (contaminated) zone extends beyond 20 kilometres," he said, referring to the zone within which local inhabitants have been evacuated. "Given the weather, it is likely that contaminations have occurred beyond that, up to 100 kilometres or so."

Lessons From Chernobyl for Japan - The death of a nuclear reactor has a beginning; the world is watching this unfold now on the coast of Japan. But it doesn’t have an end.  While some radioactive elements in nuclear fuel decay quickly, cesium’s half-life is 30 years and strontium’s is 29 years. Scientists estimate that it takes 10 to 13 half-lives before life and economic activity can return to an area. That means that the contaminated area — designated by Ukraine’s Parliament as 15,000 square miles, around the size of Switzerland — will be affected for more than 300 years. All last week, workers frantically tried to cool the six reactors at the Fukushima Daiichi plant 140 miles north of Tokyo. But one had to look at Ukraine to understand the sheer tedium and exhaustion of dealing with the aftermath of a meltdown. It is a problem that does not exist on a human time frame.  To visit Chernobyl today is to feel time passing.

Japan's Hydra-Headed Disaster: The Fallout - The immediate tragedy may be Japan’s; but it also throws up longer-term questions that will eventually affect people all the way round the globe. Stockmarkets stumbled on fears about the impact on the world’s third-biggest economy. Japan’s central bank seems to have stilled talk of financial panic with huge injections of liquidity. Early estimates of the total damage are somewhat higher than the $100 billion that Kobe cost, but not enough to wreck a rich country. Disruption to electricity supplies will damage growth, and some Asian supply chains are already facing problems; but new infrastructure spending will offset some of the earthquake’s drag on growth. Those calculations could change dramatically if the nuclear crisis worsens. As The Economist went to press, helicopters were dropping water to douse overheating nuclear fuel stored at the Fukushima Dai-ichi plant, where there have been explosions, fires and releases of radiation greater, it seems, than the Japanese authorities had admitted. The country’s nuclear industry has a long history of cover-ups and incompetence, and—notwithstanding the heroism of individual workers—the handling of the crisis by TEPCO, the nuclear plant’s operator, is sadly in line with its past performance.

The Insidious Effects of Japan's Disaster - While the world's attention has been focused on the physical destruction wrought by the Japanese earthquake and tsunami, the desperate attempts to contain the fallout from the shattered Fukushima Daiichi plant, and the daunting problems that Japan faces in rebuilding its infrastructure, few have truly illustrated how long-lasting and widespread the radiation's effects may be. There has also been little mention of how large radiological events affect economies of countries outside the immediate fallout zone. The world's most significant nuclear accident occurred 25 years ago at Chernobyl, Ukraine. Although its effects are now well-documented, many forget how thoroughly the damage was covered up at the time. To avoid panic, the Soviet authorities grossly downplayed the risks to those living near the plant, as well as those who lived hundreds, and even thousands, of miles away. In the months that followed, high levels of radiation were detected as far away as Scotland!

Nuclear power: Too hot to handle - Ever since the earthquake and tsunami struck the eastern seaboard of Japan last Friday, the eyes of the world have been on the Fukushima Daiichi power station. For the nuclear industry, there are reasons to watch that go beyond simple human sympathy.Already the harrowing scenes from the site are provoking a widespread re-examination of nuclear safety that will, at the very least, lead to significant delays in new investments, an inevitable rise in cost and probably more rapid closures of existing plants. China, the world’s biggest builder of nuclear reactors, on Wednesday froze applications for new plants pending a review of safety Unless the stricken reactors are brought quickly under control, the industry could enter another two-decade global freeze like the one that followed the Chernobyl disaster in 1986. The consequences would include faster long-term growth in demand for fossil fuels, particularly natural gas, leading to tighter supplies and higher prices. It would also mean a further rise in the emissions of greenhouse gases created by burning those fuels – and further undermine climate policies around the world.

NY Times: “It Could Happen Here” - While new plants are unlikely to be built in the United States over the next 25 years, nuclear power provides 20 percent of our electrical power and is climate friendly. We therefore must make existing reactors safer, develop a new generation of safer designs and prevent nuclear power from facilitating nuclear proliferation. As tragic as the Fukushima disaster has been, it has provided a rare opportunity to advance those goals.Nuclear physicist Frank von Hippel has a good op-ed today, which the NYT gave the provocative headline, “It Could Happen Here.”  The Princeton professor is co-chairman of the International Panel on Fissile Materials. From 1993 to 1994 he was responsible for national security issues in the White House Office of Science and Technology Policy. Here’s more:

Safe Nuclear Does Exist, And China Is Leading The Way With Thorium - A few weeks before the tsunami struck Fukushima’s uranium reactors and shattered public faith in nuclear power, China revealed that it was launching a rival technology to build a safer, cleaner, and ultimately cheaper network of reactors based on thorium. This passed unnoticed –except by a small of band of thorium enthusiasts – but it may mark the passage of strategic leadership in energy policy from an inert and status-quo West to a rising technological power willing to break the mould.  If China’s dash for thorium power succeeds, it will vastly alter the global energy landscape and may avert a calamitous conflict over resources as Asia’s industrial revolutions clash head-on with the West’s entrenched consumption.  China’s Academy of Sciences said it had chosen a “thorium-based molten salt reactor system”. The liquid fuel idea was pioneered by US physicists at Oak Ridge National Lab in the 1960s, but the US has long since dropped the ball. Further evidence of Barack `Obama’s “Sputnik moment”, you could say.  Chinese scientists claim that hazardous waste will be a thousand times less than with uranium. The system is inherently less prone to disaster.

OilPrice: Thorium: The Future of Nuclear Energy? - A controversial REE processing plant is to be built by the Australian based mining company Lynas in Malaysia where it is argued that environmental protection laws are less rigorous than in Australia. The plant is predicted to produce one third of global demand for REEs in two years, hence breaking the Chinese monopoly. It is intended to bury the thorium in concrete, but a better option would be to use the material as a nuclear fuel in place of uranium the price of which has recently risen above $100/pound, in coincidence with the price of crude oil which is now also above $100/barrel. Now thorium cannot be used directly as a fuel but must first be bombarded with neutrons and "bred" into uranium-233 as the nuclear fuel using slow neutrons, thus avoiding the liquid sodium coolant of uranium-plutonium breeder reactors, and which has the following additional advantages. (1) Plutonium and uranium could still be consumed in a thorium reactor, but without the need to manufacture more” plutonium. (2) While uranium-235 and plutonium-239 can be shielded to avoid detection in a suitcase to use that cliche, uranium-233 could not, because it is always contaminated with uranium-232, a strong gamma-ray emitter, which is far less easily concealed as a bomb.

The nuclear world: interactive map - On Energy Source: an interactive map with the location and details of every reactor in the world

Japan battles crippled nuclear plant, radiation fears grow (Reuters) - Rising temperatures around the core of one of the reactors at Japan's quake-crippled nuclear plant sparked new concern on Tuesday and more water was needed to cool it down, the plant's operator said.""He gave no more details, but a TEPCO executive vice president, Sakae Muto, said the core of reactor No.1 was now a worry with its temperature at 380-390 Celsius (715-735 Fahrenheit)."We need to strive to bring that down a bit," Muto told a news conference, adding that the reactor was built to run at a temperature of 302 C (575 F). "Injecting more water is one option (to cool it)," he said.Asked if the situation at the problem reactors was getting worse, he said: "We need more time. It's too early to say that they are sufficiently stable.""

Special Report: Japanese Reactor Situation is Likely Far Worse Than Admitted  - cmartenson - I know that I have been almost exclusively focused on the Fukushima situation even as the Middle East is erupting and the West has declared war on another small, oil-rich country. I wish I had time to analyze both situations with equal attention. Since I don't, I'm focusing more on the situation in Japan, which I see is still the more dire of the two. Analysis of another 'shaky-cam' video released yesterday reveals what appears to be a startling hot-spot in the rubble of Reactor #1, which we will examine below.The Fukushima nuclear situation is the most drastic nuclear event of our lifetimes, and could easily surpass Chernobyl in terms of its impacts on the world economy, to say nothing of the people living near and downwind of the reactors. While I am quite concerned about the timing, strategy, and intent that lies behind this sudden support for the Libyan rebels (Wag The Dog, anyone?), it is clear to me that what happens in Japan next has a greater chance of impacting most of the rest of the world, to say nothing of Japan itself.

Japan Commission Estimates Elevated Radiation Outside 30-Km Radius In some parts of cities and towns more than 30 kilometers northwest and south of Tokyo Electric Power Co.'s (9501.TO) Fukushima Daiichi nuclear power station, people may have been exposed to a total of more than 100,000 microsieverts of radioactive iodine since the beginning of the nuclear disaster following the March 11 earthquake and tsunami in Japan, the estimate showed.
The allowable annual radiation exposure for workers in radiation operation and police and firefighters in disaster prevention is 50,000 microsieverts, and the limit in case of an emergency operation is at 100,000 microsieverts, according to Ministry of Education, Culture, Sports, Science and Technology.

Nuclear Plant Contaminates Sea After Damage to Fuel Rods - Radiation leaked into the sea from Japan’s crippled nuclear plant, raising concern that seafood may become tainted, while the site’s operator moved closer to restoring power to critical cooling pumps.  Five kinds of radioactive materials released by damaged fuel rods were detected in the sea, Tokyo Electric Power Co. said on its website. Levels of Iodine-131, which increases the risk of thyroid cancer, were 127 times higher than normal in a sample of seawater, the company said.  “You could swim in the water with these levels of Iodine-131, and there shouldn’t be a problem,” said Don Higson, a Sydney-based fellow at the Australian Radiation Protection Society. “The only risk might be if people eat seafood with these materials inside it and this will be something the authorities will be paying careful attention to.”

Tokyo Warns on Water Supply as Radiation Hampers Nuclear Cleanup - Tokyo residents should avoid giving tap water to infants after radioactive iodine was found in the city’s supply at levels twice the allowable limit for infants, the metropolitan government said.  Iodine-131 was detected at 210 becquerel per kilogram at the Kanamachi purification plant in Tokyo’s Katsushika district, compared with a limit of 100 becquerel per kilogram for infants, the water department said in a statement today. The recommended limit for adults is 300.  Children are susceptible to radiation poisoning from iodine, which can accumulate in the thyroid and cause cancer, according to the World Health Organization. The announcement sent beverage-maker stocks surging in Tokyo trading and caused panic-buying of bottled water in supermarkets.  “To implement full-scale preparations, please don’t use tap water when you make powder milk,” Chief Cabinet Secretary Yukio Edano told a news conference in Tokyo. “We will consider measures with Tokyo’s water bureau so that families with infants won’t have problems. It’s OK to use water for daily life.”

Tokyo tap water tests two times above radioactive limits for infants  - A spike in radiation levels in Tokyo tap water spurred new fears about food safety Wednesday as rising black smoke forced another evacuation of workers trying to stabilize Japan's radiation-leaking nuclear plant.  Radiation has seeped into vegetables, raw milk, the water supply and seawater since a magnitude-9 quake and killer tsunami crippled the Fukushima Dai-ichi power plant nearly two weeks ago. Broccoli was added to a list of tainted vegetables, and U.S. and Hong Kong officials announced a block on Japanese dairy and some produce from the region.

Tokyo Says Radiation in Water Puts Infants at Risk - Radioactive iodine detected in the capital’s water supply spurred a warning for infants on Wednesday as the government issued a stark new estimate about the costs of rebuilding from the earthquake and tsunami that slammed into the northeast of the country this month. Ei Yoshida, head of water purification for the Tokyo water department, said at a televised news conference that infants in Tokyo and surrounding areas should not drink tap water. He said iodine-131 had been detected in water samples at a level of 210 becquerels per liter. The recommended limit for infants is 100 becquerels per liter. For adults, the recommended limit is 300 becquerels. The Health Ministry said in a statement that it was unlikely that there would be negative consequences to infants who did drink the water, but said it should be avoided if possible and that it should not be used to make infant formula. The warning applies to the 23 wards of Tokyo, as well as the towns of Mitaka, Tama, Musashino, Machida and Inagi to the west of the city.

As Radiation Now 400 Times Normal 40 km From Fukushima, A Closer Look At The Three Most Dangerous Radioactive Isotopes - With much confusion over just which radioactive isotopes are considered dangerous following the Fukushima explosions, Reuters has compiled a handy overview of the key actors: iodine-131, caesium-134 and caesium-137. For the time being only the far more inert and shorter half-life elements such as Xenon have been dispersed globally, while the more dangerous isotopes have been relatively localized, and their dispersion is limited to wind direction.  Furthermore, metrics such as halflife are relatively irrelevant for now since the release of radiation continues mostly unabated thereby producing a constant source of freshly radioactive substances. This is all the more validated by the just released NHK data indicating a surge in radioactivity as far away as 40 kms from the plant: "Japan's science ministry says radiation exceeding 400 times the normal level was detected in soil about 40 kilometers from the troubled Fukushima Daiichi nuclear power plant. The ministry surveyed radioactive substances in soil about 5 centimeters below the surface at roadsides on Monday. The ministry found 43,000 becquerels of radioactive iodine-131 per kilogram of soil, and 4,700 becquerels of radioactive cesium-137 per kilogram about 40 kilometers west-northwest of the plant. Gunma University Professor Keigo Endo says radiation released by the iodine is 430 times the level normally detected in soil in Japan and that released by the cesium is 47 times the norm."

Extremely high radiation found in soil 40 km from Fukushima - Japanese authorities have detected a concentration of a radioactive substance 1,600 times higher than normal in soil at a village, 40 kilometers away from the troubled nuclear power plant in Fukushima Prefecture. The disaster task force in Fukushima composed of the central and local governments surveyed radioactive substances in soil about 5 centimeters below the surface at 6 locations around the plant from last Friday through Tuesday. The results announced on Wednesday show that 163,000 becquerels of radioactive cesium-137 per kilogram of soil has been detected in Iitate Village, about 40 kilometers northwest of the plant. Gakushuin University Professor Yasuyuki Muramatsu, an expert on radiation in the environment, says that normal levels of radioactive cesium-137 in soil are around 100 becquerels at most. The professor says he was surprised at the extremely high reading, which is 1,630 times higher than normal levels. He warns that since radioactive cesium remains in the environment for about 30 years it could affect agricultural products for a long time. He is calling on the government to collect detailed data and come up with ways to deal with the situation.

Extremely high radiation found in soil - Japanese authorities have detected a concentration of a radioactive substance 1,600 times higher than normal in soil at a village, 40 kilometers away from the troubled nuclear power plant in Fukushima Prefecture. The disaster task force in Fukushima composed of the central and local governments surveyed radioactive substances in soil about 5 centimeters below the surface at 6 locations around the plant from last Friday through Tuesday. The results announced on Wednesday show that 163,000 becquerels of radioactive cesium-137 per kilogram of soil has been detected in Iitate Village, about 40 kilometers northwest of the plant. Gakushuin University Professor Yasuyuki Muramatsu, an expert on radiation in the environment, says that normal levels of radioactive cesium-137 in soil are around 100 becquerels at most. The professor says he was surprised at the extremely high reading, which is 1,630 times higher than normal levels.

Radioactive Iodine In Fukushima Seawater Highest Ever, Reactors 5 And 6 Now Leaking Too - Fukushima continues to worsen as Iodine 131 levels in the seawater hits the highest since the start of the crisis. "According to Tokyo Electric Power Co., radioactive iodine-131 146.9 times higher than the legal concentration limit was detected Wednesday morning in a seawater sample taken around 330 meters south of the plant, near the drain outlets of its troubled four reactors. The level briefly fell to 29.8 times the limit on Tuesday morning from 126.7 times on Monday, but rose to its highest so far in the survey begun this week apparently due to rain and water sprayed at spent fuel pools from outside that caused radioactive materials to seep into the sea, it said." What's far worse, reactors 5 and 6 which have been supposed to be ok, are also leaking: "The firm also said it found both iodine-131 and cesium-137 in a sample taken from near the drain outlets of the plant's No. 5 and No. 6 reactors that stabilized Sunday in so-called ''cold shutdown.'' The bad news is not only in immediate proximity to Fukushima: "Iodine-131 19.1 times higher than the limit was also detected Wednesday afternoon in a sample taken some 16 kilometers south of the nuclear power station, up from 16.7 times on Tuesday."

Japan fears food contamination as battle to cool nuclear plant continues --Abnormal radiation levels reported in tap water, vegetables and milk with concerns that fish may also be affected 22 Mar 2011 The operation to cool the reactors at the Fukushima Daiichi nuclear power plant has suffered a minor setback after smoke and vapour was seen rising from two reactors, as anxiety grew over the safety of food produced in the area. Days after authorities reported abnormal levels of radiation in milk, some vegetables and tap water, the plant's operator, Tokyo Electric Power [Tepco] said high levels of radioactivity had been found in seawater near the facility, raising fears that seafood has also been contaminated.

 Fukushima radioactive fallout nears Chernobyl levels - Japan's damaged nuclear plant in Fukushima has been emitting radioactive iodine and caesium at levels approaching those seen in the aftermath of the Chernobyl accident in 1986. Austrian researchers have used a worldwide network of radiation detectors – designed to spot clandestine nuclear bomb tests – to show that iodine-131 is being released at daily levels 73 per cent of those seen after the 1986 disaster. The daily amount of caesium-137 released from Fukushima Daiichi is around 60 per cent of the amount released from Chernobyl. The difference between this accident and Chernobyl, they say, is that at Chernobyl a huge fire released large amounts of many radioactive materials, including fuel particles, in smoke. At Fukushima Daiichi, only the volatile elements, such as iodine and caesium, are bubbling off the damaged fuel. But these substances could nevertheless pose a significant health risk outside the plant.

Reactor Core May Be Breached at Damaged Fukushima Power Plant - Japan’s nuclear regulator said one reactor core at the quake-damaged Fukushima Dai-Ichi power plant may be cracked and leaking radiation. "It’s very possible that there has been some kind of leak at the No. 3 reactor,"  While radioactive water at the unit most likely escaped from the reactor core, it also could have originated from spent fuel pools stored atop the reactor, he said. Repair work at the site of the worst nuclear disaster since Chernobyl in 1986 has been plagued by explosions, fires and leaks of toxic material. Workers using fire engines have streamed almost 4,000 tons of water on the No. 3 reactor, five times more than on any of the other five units, according to the government. Tokyo Electric Power Co., the plant operator, said it found eight different radioactive materials in the water of the turbine building basement, where the men were attempting to connect a power cable. The materials are made through a process of fission, and include cobalt and molybdenum-99, a spokesman for the power utility said.

Workers exposed to 10,000 times safe radiation: Japan - Japan said on Friday that workers who suffered burns while trying to cool a crippled reactor were exposed to radiation levels 10,000 times higher than expected, adding evidence that the crucial containment vessel for nuclear fuel had been ruptured. That could mean a serious reversal after days of apparently steady progress in containing radiation leaks after a killer earthquake and tsunami tore through the Fukushima complex north of Tokyo two weeks ago. More than 700 engineers have been working in shifts around the clock to stabilize the six-reactor Fukushima complex but they pulled out of some parts when three workers replacing a cable at the No. 3 reactor were exposed to high contamination on Thursday, officials said. Two were taken to hospital with possible radiation burns after radioactive water seeped over their boots. "The contaminated water had 10,000 times the amount of radiation as would be found in water circulating from a normally operating reactor," Officials have previously said that small explosions at the reactor could have damaged it, but the high seepage of radiation could imply worse damage than previously believed.

Japan expands nuclear plant's evacuation zone --Residents within 18 miles of the hobbled Fukushima plant are urged to leave; the previous limit had been 12 miles. 25 Mar 2011 Japan's government Friday urged residents living within 18 miles of the stricken Fukushima nuclear power plant to voluntarily evacuate to avoid further hardship and suggested that officials could order the zone cleared. Residents living within 12 miles of the plant have been evacuated, yet those living between 12 and 18 miles of the facility have been told it is safe to remain as long as they stay indoors."It has become increasingly difficult for goods to arrive, and life has become harder," Chief Cabinet Secretary Yukio Edano said at a news conference. He called upon local governments in the zone near the plant to encourage people to leave. It was not immediately clear how many people remained within 18 miles of the plant.

GoogleEarth Based 3D Map Of Real-Time Radioactivity Distribution In Japan; Projected Global Radioactivity Dispersion - Confirming that in a time of instantaneous crowdsourced information distribution and analysis, any attempt by a government to institute an information blackout of any nature is doomed to failure, is the following amazing Google Earth-based 3D interactive map of Geiger readings from Japan. And if that is not enough, the Pachube community has released an extensive selection of crowd-sourced realtime radiation monitoring tools and widgets, focusing on as many Japanese territories as possible. Shortly we are confident all geographical holes will be filled, and every square mile of the affected territories will be mapped out surpassed the government's "Under Survey" blackout attempts.Make sure to have the GoogleEarth API set up in advance of checking out the plugin.

Yellow Rain Falls In Tokyo? Pollen Excuse Exact Same As Chernobyl Yellow Rain Lie - While the Japanese government continues to say that the yellow rain seen in Japan was simply “pollen,” many have been reminded of a very similar occurrence after the Chernobyl nuclear disaster.Almost on que, the Japan Meteorological Agency has confirmed the rain to be pollen after receiving hundreds of calls from concerned citizens. The ‘‘yellow rain’’ seen Wednesday in the Kanto region surrounding Tokyo was caused by pollen, not radioactive materials as many residents had worried, the Japan Meteorological Agency said Thursday, reported the Japan Times. That’s right, according to so called experts, enough pollen to cause hundreds to report their findings, rained down on Tokyo at the same time as a devastating nuclear disaster has released high levels of radiation at least 20km from the nuclear plant. This explanation has reminded many of the yellow rain that hit after the Chernobyl disaster.

Irradiated Zone: Don’t Go There! - "Not as bad as Chernobyl"? It might be better to describe the situation at Japan's Fukushima nuclear plant as "remarkably unlike Chernobyl" in rural Ukraine, where, almost 25 years ago, a single uncontained nuclear reactor with a graphite core blew.  We now contemplate the possibility of multiple reactors accompanied by multiple containment pools for what is euphemistically called "spent" fuel (when it isn't "spent" at all) -- at least 11,195 such rods, 1760 metric tons of them -- self-destructing in a highly industrialized country smaller than California with the third largest economy on the planet. In a situation we've never faced before, to talk about "safety" and offer "reassurance" should ring oddly indeed.Don't misunderstand, I'm no scientist and have no scientific basis for assessing what's going to happen in Japan, but after days reading the news copiously and watching endless TV reports, I do know a cultural taboo when I see one. In case you hadn't noticed, while each morning's screaming headlines contain terrible words -- "dire," "catastrophic," "ever worsening," "racing against the clock" -- along with terrifying descriptions and ever-extending timelines for the crisis, few (not even, it seems, most anti-nuclear writers and groups) can bring themselves to speculate publicly about what might actually happen, no less ask the single scariest question: What's the worst that might happen?

Nuclear Power Runs Amok - The worst case. These three words have been at the back of everyone’s mind ever since the Fukushima reactors began malfunctioning after being swamped by a tsunami. Remarkably, these reactors have been at the front of few experts’ mouths. Many experts have shied away from describing worst-case outcomes, which are terrifying to contemplate and risky to mention. The risk isn’t just panicking the public. Crying wolf can threaten one’s expert status. The bias toward calm, cool expression has been on full display in this crisis. The Japanese are particularly good at the stiff upper lip. The authorities have serially indicated that exploding reactor housing is not a big problem, that released radioactive steam is not a big problem, that the significant cracks in containment vessels are not a big problem, that burning spent fuel ponds are not a big problem, and that the contamination of food and water is not a big problem. To top off all this, Tokyo Electric Power Co.’s president, Masataka Shimizu, made a formal apology "for causing such a great concern and nuisance." Earth to Shimizu: This isn’t just a nuisance. What’s already occurred is horrible enough, what with death and severe injury to plant workers and the contamination of local milk, spinach, beans, and, presumably, fish. But the worst-case scenario at Fukushima is far beyond this. It entails six reactors melting down and all 4,277 tons of spent fuel stored at the plant burning out of control. And this at a site just 150 miles from Tokyo’s 14 million inhabitants, whose water is already showing traces of radiation.

The Other Global Toxic Cloud: China's Pollution - As San Franciscans load up on potassium iodide pills against drifting fallout from the Japanese nuclear reactor catastrophe -- unnecessarily, health authorities insist -- the April issue of Discover calls attention to a more serious menace: mercury and other pollutants from Chinese manufacturing and power generation: Prevailing winds across the Pacific are pushing thousands of tons of other contaminants--including mercury, sulfates, ozone, black carbon, and desert dust--over the ocean each year. Some of this atmospheric junk settles into the cold waters of the North Pacific, but much of it eventually merges with the global air pollution pool that circumnavigates the planet.These contaminants are implicated in a long list of health problems, including neurodegenerative disease, cancer, emphysema, and perhaps even pandemics like avian flu. And when wind and weather conditions are right, they reach North America within days. Dust, ozone, and carbon can accumulate in valleys and basins, and mercury can be pulled to earth through atmospheric sinks that deposit it across large swaths of land.

Fossil fuels are far deadlier than nuclear power - IN THE wake of the nuclear crisis in Japan, Germany has temporarily shut down seven of its reactors and China, which is building more nuclear power plants than the rest of the world combined, has suspended approval for all new facilities. But this reaction may be more motivated by politics than by fear of a catastrophic death toll. It may be little consolation to those living around Fukushima, but nuclear power kills far fewer people than other energy sources, according to a review by the International Energy Agency (IAE). "There is no question," says Joseph Romm, an energy expert at the Center for American Progress in Washington DC. "Nothing is worse than fossil fuels for killing people." A 2002 review by the IAE put together existing studies to compare fatalities per unit of power produced for several leading energy sources. The agency examined the life cycle of each fuel from extraction to post-use and included deaths from accidents as well as long-term exposure to emissions or radiation. Nuclear came out best, and coal was the deadliest energy source.

The Black Death - Relative to watts produced, coal kills 4,000 times more people than nuclear power. Our pervasive sense that nuclear is more dangerous, when the opposite is so clearly true, comes at least in part from a cognitive bias called the "availability heuristic" -- memorable events that are easier to think of, like nuclear disasters, tend to seem more common.  Counterweight your availability heuristic by reading up on Alexis Madrigal's list of 25 energy-related disasters from the last year. Most are coal mine accidents and refinery explosions, and the vast majority of the deaths should be filed in that big box on the right.

Obama administration announces massive coal mining expansion Interior Secretary Ken Salazar announced yesterday an enormous expansion in coal mining that threatens to increase U.S. climate pollution by an amount equivalent to more than half of what the United States currently emits in a year. A statement from Wild Earth Guardians, Sierra Club, and Defenders of Wildlife put the announcement in perspective: Salazar’s announcement is a stark contrast to his call for clean energy. Interior, for example, touted that in 2010, 4,000 megawatts of renewable energy development were authorized. And in today’s press conference, Secretary Salazar announced Interior’s intent to authorize more than 12,000 megawatts of renewable energy by the end of next year ... Yet in opening the door for 2.35 billion tons of coal mining, Salazar’s announcement effectively enables more than 300,000 megawatts of coal-fired energy -- 30 times more dirty energy development than renewable energy. In other words, despite his administration's rhetorical embrace of clean energy, Obama is effectively using modest wind and solar investments as cover for a broader embrace of dirty fuels. It's the same strategy BP, Chevron, and other major polluters use: tout modest environmental investments in multi-million dollar PR campaigns, while putting the real money into fossil fuel development.

Why are Obama and Salazar pushing a massive expansion of coal production? - On Tuesday, Interior Secretary Ken Salazar announced plans to auction off 758 million tons of coal in Wyoming over the next few months.  Then on Friday, the Bureau of Land Management explained they will be selling off another 1.6 billion tons of coal at a future date. Salazar claims coal could play a role in the “clean energy future,” but that isn’t true, of course — except in an alternative universe where CO2 has a high and rising price and carbon capture and storage pans out — neither of which seems likely even if Obama weren’t now indifferent to serious climate action. Carbon dioxide released into the atmosphere from coal combustion lasts a long, long, long time (see Fossil CO2 impacts will outlast Stonehenge and nuclear waste).  And that’s a major reason unrestricted burning of coal is just bad for humans (see Life-cycle study: Accounting for total harm from coal would add “close to 17.8¢/kWh of electricity generated” and A stunning year in climate science reveals that human civilization is on the precipice).

Arkansas 'Fracking' Site Closures Extended As Earthquake Link Studied - Two natural gas exploration companies agreed Thursday to extend the shutdowns of two injection wells in Arkansas as researchers continue to study whether the operations are linked to a recent increase in earthquake activity, a state commission said. Chesapeake Energy and Clarita Operating asked to postpone a hearing on the shutdowns before the Arkansas Oil and Gas Commission until April 26, said Shane Khoury, deputy director and general counsel for the commission. The companies had been expected to present testimony to the commission on March 29, after the panel ordered the temporary shutdowns of the wells on March 4. The two injection wells are used to dispose of waste fluid from natural gas production. Khoury has said preliminary studies showed evidence potentially linking injection activities with more than 1,000 mostly minor quakes in the region during the past six months.

Pressures mount for higher US gas prices - The US Environmental Protection Agency has determined that to protect the public from toxic power plant emissions, the 44 per cent of coal power plants not equipped with advanced pollution controls will either have to install them, or shut down, by 2015. The proposed “utility MACT” rule that lays out the new standards for mercury, acid gases, and other emissions landed with a 900-plus page thud last week. Engineers, lawyers, and economists are still parsing through the effect on each coal facility.The coal industry, along with coal-fired generation owners, are outraged by the new standards, and the gas industry and environmentalists are pleased.  The EPA, and the enviros, believe that most coal plants will get the needed controls, and that the retired capacity can be readily replaced with conservation, renewables, and gas-fired generation. Yes, but how much gas will be required, and what will be the price demanded by producers? Certainly higher than it would have been a month ago. Gas prices are likely to increase much faster, and sooner, than they would have without the Japanese nuclear disaster. This has implications for a wide range of investments, not to mention public policy. The smart thing to do would be to recognise the effects of the coming nuclear pause, and plan accordingly

Drilling down on natural gas fracking concerns - The potential and peril of hydraulic fracturing - A widely used oil-and-gas drilling technique, hydraulic fracturing, is spreading rapidly to develop vast reserves of natural gas trapped in deep underground shale formations. Hydraulic fracking, however, is coming under more rigorous oversight by the press and state and federal agencies because of its contribution to air and water pollution. This attention is welcome, both to ensure that health and safety will be protected if gas is to be more widely used as a cleaner replacement for coal in electric plants and foreign oil as a transportation fuel. We must also more accurately measure carbon dioxide and other pollution from the combustion of gas compared to coal and oil.This issue brief explores the ecological and economic issues of “fracking,” as it is increasingly coming to be known in the areas of the country where natural gas is tapped due to the technology. Cutting to the chase, our conclusion is this—hydraulic fracturing needs to be done carefully and be well-monitored, with particular attention paid to the full scope of carbon dioxide released into our atmosphere to gauge accurately the consequences of global warming due to the expanded use of natural gas.

Natural Gas and Clean Water (NY Times editorial) Hydraulic fracturing involves blasting water, sand and chemicals into underground rock formations to unlock the gas they contain. The technique has been around for many years and has been used, mostly without incident, in hundreds of thousands of natural gas wells. But the risks have multiplied as the wells are drilled deeper and stretched vertically and horizontally to get at remote deposits. A single well can cough up a million gallons of wastewater laced with carcinogens like benzene and radioactive elements like radium. The technique has become especially controversial in Pennsylvania, the epicenter of a big push for natural gas locked in the Marcellus Shale, a formation stretching from West Virginia to upstate New York. Ian Urbina’s recent series in The Times found that conventional wastewater treatment plants in Pennsylvania could not prevent radioactive contaminants from entering rivers that provide drinking water for millions of people. The series also identified many instances of poor regulation.

Oil Spill Reported Near Deepwater Drilling Site in Gulf -  The Coast Guard is investigating reports of a potentially large oil slick in the Gulf of Mexico not far from the Deepwater Horizon site. According to a knowledgeable source, the slick was sighted by a helicopter pilot on Friday and is about 100 miles long. A fishing boat captain said he went through the slick yesterday and it was strong enough to make his eyes burn. According to the Times Picayune, the Coast Guard has confirmed they are investigating a potentially large 100 mile slick about 30 miles offshore. They are going to a site near the Matterhorn well site about 20 miles north of the BP Deepwater Horizon site, according to the paper. The Matterhorn field includes includes a deepwater drilling platform owned by W&T Technology.

Possible New Oil Spill 100 By 10 Miles Reported in Gulf Of Mexico - Black Swan Clusterflock +1. As if earthquakes, tsunamis, nuclear meltdowns and war was not enough, the Examiner now discloses that a replay of the BP oil spill could be in the making, sending WTI to the (super)moon, the economy collapsing, and Ben Bernanke starting the printer in advance of QE 666. To wit: "The U.S. Coast Guard is currently investigating reports of a potentially massive oil sheen about 20 miles away from the site of the Deepwater Horizon oil rig explosion last April." There are no definitive reports yet, but we should now for sure within hours, if the Keppel FELS built TLP is indeed the culprit: "According to Paul Barnard, operations controller for the USCG in Louisiana, a helicopter crew has been dispatched to the site of the Matterhorn SeaStar oil rig, owned by W&T Offshore, Inc." And if preliminary reports are correct, BP will have been the appetizer: "Multiple reports have come in of a sheen nearly 100 miles long and 10 miles wide originating near the site." If confirmed, Obama can kiss tomorrow's Rio golf outing goodbye.

Mysterious oil slick rattles nerves in Gulf - Days after observers spotted a massive oil slick in the Gulf of Mexico, no one in a position of power seems to yet know where it's coming from. So far, official reports are sketchy and contradictory, as New Orleans Time-Picayune reporter Mark Schleifstein notes in reviewing a statement from the U.S. Coast Guard:"At this point, the dark substance is believed to be caused by a tremendous amount of sediment being carried down the Mississippi River due to high water, possibly further agitated by dredging operations," the Coast Guard release said.A spokesman for the Army Corps of Engineers, however, said none of the three dredges operating near the mouth of the Mississippi River has reported any oil in the material they're removing from the river bottom to keep the channel deep enough for ocean-going ships. But as Louisiana officials and the Coast Guard conduct tests to determine the source, an all-too-familiar scene is developing over a 30-mile stretch of coast: Oil and oil byproducts such as tarballs have come rolling in. And teams of workers are rolling out a containment boom—the fencelike structures designed to keep oil from washing ashore—as oil-skimming vessels try to intercept the oil on the water's surface. And where the oil has landed, cleanup crews are scouring up the petroleum mess.

Louisiana’s new oil plague sounds tasty, is terrifying - Remember tar balls? Those were just an appetizer. The scary new oil formations washing up on Louisiana's beaches sound like you'd get them at Whole Foods -- "emulsified oil," "oil mousse." Um, yum? This comes right on the heels of the government approving deepwater exploration plans for the first time since last year's disaster. Sure, I guess we're ready to start deepwater drilling again! What's the worst that could happen? Emulsified oil? I'll put it on my arugula! If "oil mousse" doesn't strike you as tasty enough, what about penguin toast? Okay, maybe that is not a real food, but plenty of penguins could be toast in the South Atlantic, where a shipwreck leaking 1,500 tons of heavy crude is threatening half the world's population of rockhopper penguins.  In the words of Louisiana local politician Billy Nungesser, "this is BULLSH*T." He didn't say the asterisk, though.

There's No Such Thing as Ethical Oil (or Nuclear Power) - After the BP oil spill in the Gulf of Mexico and now the nuclear meltdown at the Fukushima reactors in Japan, it should be clear that oil and nuclear power are not benign forces in our world. Both are toxic, dirty, and insecure forms of energy. It is thus astonishing that the Canadian energy industry proposes combining the two.  The boreal forest of northern Alberta sits atop one of the largest fossil fuel deposits in the world: the Athabasca bituminous sands. Energy insiders call it oil sands, while environmentalists prefer tar sands—each side seeing what it wants. At room temperature, raw bitumen has the consistency of asphalt and won't flow through a pipeline without being diluted or upgraded into synthetic crude oil. Underground, the bitumen exists in a mixture with sand and clay, and there are two techniques for extracting it. Surface mines have been the predominant method since commercial production began in the 1960s. At the Suncor Energy mine, for example, the native forests, topsoil, and muskeg bog were cleared, and 50 meters of "overburden" earth was removed to expose a tar sand deposit itself about 50 meters thick. The bitumen is mined 24 hours per day with massive electric shovels that fill dump trucks three stories tall.

Proposed U.S.-Canada oil pipeline fuels debate - Because the pipeline crosses a U.S. border, it needs a permit from the State Department, which pleased the project's critics last week by announcing it would further study the environmental impact. The department said it plans to issue a draft of that review next month and make a final decision by year's end. "The nation's energy security does play a role in the decision-making process," The privately funded project, known as Keystone XL, would expand an existing 2,154-mile pipeline that runs from Hardisty, Alberta, to Steele City, Neb., and then east to Patoka, Ill. The expansion would snake southeast through Montana, South Dakota, Nebraska, Kansas, Oklahoma to oil refineries near Houston. TransCanada, a Calgary-based company, would use it to move oil or tar sands. This crude, mixed with sand, is mined or drilled deep beneath the subarctic forests of western Canada where herds of wild caribou roam. Environmental groups, including the Sierra Club, say the production of tar sands destroys boreal or northern forests, emits higher levels of greenhouse gases than drilling for conventional oil, won't solve U.S. energy needs and could cause toxic pipeline accidents.

Drilling Down on Oil – The Great Energy Challenge - Oil prices are on the rise again, and generous people that we are, Americans are making sure we share our pain with our elected leaders. Rising oil prices lead to rising stress levels and an increasing reports of insanity on Capitol Hill.The latest, of course, is the insistence that the Administration and Congressional Democrats are responsible for rising oil prices and that they should do something to stop it. Like increasing oil exploration and drilling in the Gulf of Mexico, the Arctic National Wildlife Refuge, and any other place that might have dead dinosaurs hiding beneath it. Let’s review a few key oil facts: Oil tankers move across the oceans delivering oil to consumers not based on wind or currents, but on who is willing to pay the most. If you want to move oil prices in any one place, you must move them in all places simultaneously. The only way to reduce prices for U.S. consumers is either to get the rest of the world to lower the price they’re offering, or add enough supply to make a dent in global oil demand.Although we consume roughly 25% of global oil, the U.S. only sits on roughly 2% of global oil reserves. We simply don’t own enough oil to change market fundamentals.

OPEC Oil Production in January -- Looking Grim  - Alright. Not all of the JODI numbers totaling oil production for January, 2011 are in yet, but the OPEC numbers are.  Those numbers are not good. JODI indicates that OPEC's production dropped from 30,342,000 barrels of crude oil in December, 2010 to 27,926,000 barrels in January, 2011 -- a fall of roughly 8% in one month.  Now, the good news is that OPEC's December production numbers were apparently revised in the last month, showing a slight improvement over their November numbers, instead of a slight decline. The very, very bad news is that, even taking into account Saudi Arabia's reduction in exports, official OPEC production figures in December -- you remember, the month when the 90% of global production surveyed by JODI dropped 14% overall -- only declined by 2% (now revised). In other words, that dramatic drop of 14% must have resulted from production falling off elsewhere (mostly, it appears, in APEC).

Analyst: Rising Oil Prices 'Primary Threat' To U.S. Economy As Libyan Violence Mounts - As international military forces strike Libya, oil prices are again rising, reviving concerns that expensive energy could impede economic recovery in the United States. U.S. consumers and businesses got a brief reprieve this month as oil prices eased off two-and-a-half-year highs. But escalating violence in Libya and rising tensions among the Middle East's oil-producing powers have raised fresh fears of a supply disruption. With investors nervous, benchmark crude prices are again rising, threatening a broader recovery that had barely begun to gather momentum. 'A spike in energy prices to $125 or $150 a barrel is the primary threat to the recovery at this point, now that it appears the situation in Japan has settled down somewhat,' said Gus Faucher, director of macroeconomics at Moody's Analytics. 'This could play out over a period of weeks and months.

Analysts see gas headed back to $4 a gallon - The average gas price may reach $4 a gallon by Thursday in San Diego County, and Riverside-San Bernardino counties won't be far behind, gasoline analysts said.The average price Monday for a gallon of regular unleaded was $3.955 in Riverside and San Bernardino counties and $3.977 in San Diego County, according to AAA. Both prices exceeded the price of gas at this point in 2008, when gas prices peaked in June at $4.63.In reviewing the wholesale price of refined gasoline, Charles Langley, analyst for the Utility Consumers' Action Network, said four dollars was imminent."If I average out the brand name prices, like Chevron or Shell, I get 6 cents (increase per gallon)," Langley said. "If I average out places that sell to unbranded independents, I get 8 cents." Gas prices started the year high, as world demand for fuel exceeded supply in late 2010, according to the International Energy Agency, a nonprofit in Paris.

Gas, food prices double whammy for rural families - In Helena, Jackie Merenz loads her beat-up SUV with juice boxes, graham crackers and apple sauce she bought at Walmart for her 6-year-old daughter's birthday party. The 60-mile round trip she makes twice a week for groceries hits her wallet hard - the food stamps don't go far, gas prices are skyrocketing and to top it off, her husband had to stop working after getting injured. Living out in Montana's Big Sky Country often means driving long distances for the basic necessities, and people on tight budgets like Garcia, 49, and Merenz, 26, have long been creative in making ends meet.But with food prices up nearly 4 percent last month - the biggest leap in 36 years - and the national average for a gallon of gas at a whopping $3.57, this economic double-whammy is stretching family budgets to the breaking point. "It took me $50 to fill up my car yesterday. And it will be gone in three days, probably," Merenz said. "We already live in HUD housing, we're already on Medicaid, we already have food stamps - and we still struggle."

Higher oil prices hamper fuel-dependent businesses - Airlines, cruise ship companies and other businesses that buy a lot of fuel say the sharp rise in oil prices will be a major drag on revenue this year. Delta Air Lines President Ed Bastian said Tuesday that fuel costs will rise by about $600 million in March alone. The nation's No. 2 airline hasn't been able to raise fares fast enough to keep up with the surge in jet fuel, which will cost between $3.13 and $3.18 per gallon in the second half of the year. Cruise ship operator Carnival Corp. cut its earnings forecast for this year from previous estimates it made in December, in part because of higher fuel costs. Americans are buying less fuel than they did last year, according to a MasterCard SpendingPulse report. The SpendingPulse report said that gasoline consumption fell 1 percent last week and has dropped on a year-over-year basis for the third straight week. Motorists are pulling back as pump prices follow oil sharply higher. Retail gasoline prices increased 37.9 cents per gallon in the past month, forcing U.S. motorists to spend roughly $143 million more per day at the pump, according to the Oil Price Information Service.

TheOilDrum: WSJ, Financial Times Raise Issue of Oil Prices Causing Recession - The idea that high oil prices cause recessions shouldn’t be any surprise to those who have been following my writings, those of Dave Murphy, or those of Jeff Rubin. Last month, though, the Wall Street Journal finally decided to mention the idea to its readers, in an article called “Rising Oil Prices Raise the Specter Of a Double Dip“. The quote they highlight as a “call out” is When consumers spend more at the pump, they often cut back on discretionary purchases. The WSJ shows this graph, linking oil price hikes to recessions:  A Financial Times blog by Gavyn Davies says something very similarEach of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by OPEC or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil.  In this post, I explain what the WSJ and Financial Times articles are missing regarding the connection between oil and the economy. I also explain how the inability of oil prices to rise very far suggests that the downslope may be considerably steeper than most models based only on the Hubbert curve would predict.

China's oil demand not a burden on global supply - China's rising oil needs will not bear on the global supply, instead it will help to promote essential investments in the oil sector to boost efficiency and capacity, Saudi Aramco president said Monday. Khalid A. Al-Falih, president of Saudi Arabia's state-run oil giant, was speaking at the China Development Forum 2011 held in Beijing. He said it's unfair to single out the impact of China's demand on world oil markets."I believe increased Chinese demand offsets declining consumption in the OECD nations, and is essential to encouraging necessary investment in exploration as well as oil production, refining and transportation capacity, which ultimately benefits all petroleum consumers,"

The Japanese Fuel Crisis - One consequence of the Japanese earthquake and tsunami that is not receiving as much press as the ongoing struggle to cool the damaged reactors, but which continues to influence more people, is the lack of fuel. Nine of the Japanese refineries were damaged and put out of action, and this dropped the amount of fuel being refined from 4,500,000 bd down to 3,100,000 bd. (Note that the Guardian report I quoted earlier was off by a factor of ten.) The lack of fuel for transportation affects not only those in the disaster area, but also those away from it, since food and fuel itself depend on transport to move it to customers around the country. There are several different aspects to the problem; first the oil has to come ashore. With ports closed and unable to re-open for possibly months, shipments from the Middle East, which supplies 80% of Japan’s need, have now been curtailed until the situation becomes clearer. Within the country, the Japanese Government has released around 8 million barrels of oil from their strategic reserve. It is also shipping 250,000 barrels of refined product to the area affected by sea (though this runs into the issue of how to get into the ports and distribution network). At Chiba some of the port has been able to re-open but not the terminal that fed to the Cosmo refinery (since that had burned).

Japan fuel demand to surge amid nuclear crisis - Japan's nuclear crisis could reverberate through global energy markets for years to come, pushing up prices as suppliers look to take advantage of a surge in demand for non-nuclear fuels from the world's third-largest economy. The 9.0-magnitude earthquake and tsunami that likely killed more than 18,000 people earlier this month shut down 11 of Japan's 54 nuclear power plants _ a source that provided 30 percent of the country's power. That means producers of natural gas, coal and oil _ particularly in Asia _ will be called on to help fuel conventional sources of power generation in Japan.  "We're likely to see prices for both coal and natural gas increasing in the short and longer term." Analysts expect regional energy exporters such as Indonesia, Malaysia, Australia and Vietnam to benefit most from Japan's sudden thirst for fuel as the country tries to overcome its power crunch. Ending rolling blackouts and shortages will be crucial to Japan's economic recovery and restoring normal production at manufacturers like Toyota Motor Corp. and Panasonic Corp.

Oil Markets Cope with Libya and Japan Crises  Oil markets work well when they are allowed to. Major unexpected disruptions to energy infrastructure over the last month, first in Libya, then after the tragic and devastating earthquake in Japan, have shown this, according to analysis by leading energy price reporting agency Argus.  Price signals encouraged Saudi Arabia to boost production and partly offset the loss of more than 1.2mn b/d of light sweet Libyan crude exports because of civil war. Roughly 200,000 b/d of extra Saudi loadings are going west this month compared with January, according to consultancy Oil Movements. Price signals quickly encouraged Mediterranean refiners to cut runs or bring forward maintenance to limit demand. The 11,000MW of nuclear generation capacity shut in by the earthquake and tsunami that hit Japan on 11 March will be largely replaced by oil-fired generation in the short term. Low-sulphur fuel oil and crude are burned in peaking generation in Japan, called on when demand hits the highest points in summer and winter. Utilities used less than 25pc of their oil-fired generation capacity last year.

Monbiot: We won't trouble Saudi's tyrants with calls to reform while we crave their oil -Did you hear it? The clamour from western governments for democracy in Saudi Arabia? The howls of outrage from the White House and No 10 about the shootings on Thursday, the suppression of protests on Friday, the arrival of Saudi troops in Bahrain on Monday? No? Nor did I.Did we miss it, or do they believe that change is less necessary in Saudi Arabia than it is in Libya? If so, on what grounds? The democracy index published by the Economist Intelligence Unit places Libya 158th out of 167, and Saudi Arabia 160th. At least in Libya, for all the cruelties of that regime, women are not officially treated as lepers were in medieval Europe.Last week, while explaining why protests in the kingdom is unnecessary, the foreign minister, Prince Saud Al-Faisal, charmingly promised to "cut off the fingers of those who try to interfere in our internal matters". In other parts of the world this threat would have been figurative; he probably meant it. If mass protests have not yet materialised in Saudi Arabia, it's because the monarchy maintains a regime of terror, enforced with the help of torture, mutilation and execution.

OPEC Says Perfectly Happy With $120 Oil, Does Not Think It Will Impair Growth - Even as gas continues to creep ever higher, removing substantial marginal purchasing capacity from the US consumer, a topic beaten to death previously, the oil exporting cartel remembers that in a world strapped for energy, oil prices can and will be quite sticky. Which is why now that OPEC has had its refreshed taste for $120 brent after a three year hiatus, it will most certainly not let the price of crude drop into double digit territory absent another massive deflationary shock a la the fall of 2008. To wit, OPEC has just announced that $120 oil is an acceptable level and will 'not hinder global growth.' Funny - if one pulls OPEC press releases from the summer of 2008, the cartel used verbatim words to describe $150 oil, and its impact on the world economy. Then again, as Dallas Fed's Fisher pointed out earlier today, commodities are now exposed to the same excess liquidity bubble that took crude to its all time highs. We expect nothing less this time around, especially now that for some inexplicable reason, the world believes that the Fukushima situation is contained and thus the 'demand destruction' part of the equation can fall out.

Oil: Where is the spare capacity? - This morning's note from UBS' Andy Lees addresses something about which I am sceptical regarding the escalating Libyan conflict: global spare oil capacity. I am in the same camp with Jeremy Grantham. Call it peak resources, peak oil, the end of cheap oil, whatever – the fact is there is a finite amount of natural resources on the planet and we are consuming an inordinate amount of it. At some point, the demand for these resources will outstrip the affordable supply. This naturally induces a parabolic move in price due to inelastic demand – and that's when the Easter island question presents itself: With a dwindling supply of natural resources available,

  • Do we have the foresight to plan ahead and reduce reliance on these dwindling resources?
  • Do we see a 'nationalistic' response and resource grab that increases political tension and brings in the spectre of military confrontation?
  • Or do we see a class struggle of the energy have-nots against the energy haves?

Peak Oil Production May Already Be Here - Five years ago, many oil experts saw trouble looming. In 10 years or so, they said, oil producers outside the Organization of the Petroleum Exporting Countries (OPEC) would likely be unable to pump oil any faster and OPEC would gain an even stronger hand among the world's oil producers. Five years on, it appears those experts may have been unduly optimistic—non-OPEC oil production may have been peaking as they spoke. Despite a near tripling of world oil prices, non-OPEC production, which accounts for 60% of world output, hasn't increased significantly since 2004. And many of those same experts, as well as some major oil companies, don't see it increasing again—ever.

Oil Will Be Gone in 50 Years: HSBC - There could be less than 49 years of oil supplies left, even if demand were to remain flat according to HSBC’s senior global economist Karen Ward. "Energy resources are scarce," Ward said in a research note. "Even if demand doesn’t increase, there could be as little as 49 years of oil left." "Gas is less of a constraint, but transporting it and using it to meet transport demand is a major issue," she said. "Coal is the most abundant with 176 years left, but this is the worst carbon culprit."  If supplies were not constrained, the world would see a 110 percent jump in demand by 2050, equivalent to 190 million barrels a day, to fuel growth in the emerging world, Ward said. But unless someone finds major new reserves this will not be possible and other sources of energy will need to be found. "Energy security – defined in this instance as domestic energy production per head of population – will be an increasing concern," she said. "Diversifying to natural gas to ease the pressure on the oil market won’t overcome it since its supply is as geographically dense as oil."

What happens if we run out of oil? -After church on Sunday, I purchased the lowest grade gasoline I could find in Denver for $3.36 per gallon for my four-cylinder car. It ripped a hole in my wallet! However, in Los Angeles, car owners pay a whopping $3.86 for a gallon of gas. Diesel costs $4.17 per gallon in California.In London, according to my British contact David Hepper, English citizens have paid an equivalent of $8.00 per gallon for the past several years. While Americans burn 20 million barrels of oil daily, the human race burns a mind-numbing 84 million barrels of oil every single day of the year. While you and I may complain that gasoline costs too much and it’s not back down to the .19 cents a gallon that I paid as a high school kid, what will happen when gasoline reaches $10.00 per gallon and higher? After that, what happens when it runs out?

How to Plan for Peak Oil on a Limited Budget - Preparing for peak oil can be relatively easy, since the preparation is 75% mental, 15% physical, and 10% fiscal. Don’t be flabbergasted at what to do. Quit asking should I buy solar? Should I buy an axe? Should I buy a gun? The answers are no, no, and no.  This feeling of a need to buy stuff is in fact the very reason why we have this predicament. We over-consume. The preparation problem is not addressed by buying more stuff; it’s addressed by mentally and physically getting used to the idea of getting by on less stuff. The more you learn, the less you need to carry on your back. To illustrate the absurdity of buying stuff, what would you buy? It’s impossible to know what to buy, because the event of peak oil is unknown in both time and scope. Preparing for peak oil is not like preparing for a hurricane which we know will hit sometime next week, so we will buy wood to board up the doors, some extra batteries, and maybe get out of town for awhile. Peak oil will not be some isolated calamity that you somehow survive and wake up the next morning and count your blessings. Preparing for peak oil is all about preparing yourself mentally and physically for a complete and permanent change in lifestyle. It is first realizing that there will be no one to come to your rescue the next morning - there will only be you and those around you, and the realization that the next morning will be more of the same, maybe worse than the day before. It’s the realization that you will have to learn to get by using less.

The Limits of Incantation - Since I started talking about the end of the industrial age in this blog, not quite five years ago, a fair number of my readers have had some difficulty imagining what industrial decline would look like in practice. That’s been a hard question to answer, not least because the notion that the only possible futures are progress or catastrophe has been repeated so often that it’s become integral to most contemporary worldviews. Still, events have taken care of the matter. Readers of this blog who still want to know what the decline of an industrial civilization looks like need only take a good look at the latest news. I could pull out any number of examples from the ongoing flurry of current affairs, but the ones that come readiest to hand are also the ones on most people’s minds these days. The cascading series of disasters in Japan is first on the list, of course. Poised unsteadily on a set of volcanic islands in one of the world’s most tectonically active areas, the Japanese have been hammered by massive earthquakes and tsunamis at regular intervals since before the dawn of recorded historyThis time, though, the ordinary convulsions of the earth and sea intersected with an aging and brittle technostructure in ways that are amplifying the damage. Exhibit A, of course, is the Fukushima Daiichi nuclear power plant.

Japan, at a halt - BANYAN delivers a sobering report from Japan: As seen during 17-hour drives to and from the tsunami-hit north-east of Japan this week, the country appears to have ground to a halt, hit by a mystifying shortage of fuel. Added to rolling power cuts, I predict the consequences for this quarter's growth will be severe. From Tokyo northwards, drivers turn off their engines and park in single file for hours, waiting for their 20-litre rations. Tokyo's police report that the theft of petrol has become widespread, with at least 40 cases of illegal siphoning from car parks around the capital. Petrol-pump attendants along the route north say that the shortages are due to the supplies having been diverted to the stricken coast. But in Miyagi prefecture, scene of much of the devastation, the petrol queues are even longer—miles longer, literally. Drivers wait all day to get to the pump. Worse, the fuel shortage means that supermarkets, convenience stores and other businesses are shut, unable to get fresh products. In evacuation centres for tsunami victims, so-called “food refugees” are joining the queue for a bowl of hot soup—these are people whose homes are still intact, but who have run out of food nonetheless.

Japan’s crime networks, among 1st with relief supplies -Tons of relief goods have been delivered to victims of Japan's catastrophic earthquake and tsunami from a dark corner of society: the "yakuza" organized crime networks. Yakuza groups have been sending trucks from the Tokyo and Kobe regions to deliver food, water, blankets and toiletries to evacuation centers in northeast Japan, the area devastated by the March 11 earthquake and tsunami which have left at least 27,000 dead and missing. Yakuza are better known for making money from extortion, gambling, pornography and prostitution, as well as for the often-elaborate tattoos covering much of their bodies. But disasters bring out another side of yakuza, who move swiftly and quietly to provide aid to those most in need. As with the devastating 1995 Kobe earthquake, government workers were slow in reaching afflicted areas, and the 300,000 or so survivors, so yakuza groups stepped in quickly, and in many cases, were first on the ground.

Surely there is nothing "funny" about what is going on in Japan - As Japanese officials continue to toil away in what we all hope will be a successful bid to avert a worst case scenario nuclear meltdown even while thousands of Japanese still remain missing and unaccounted for, financial market participants across the globe have been struggling with themselves to answer one and the same question: just how serious are the economic consequences of all this devastation likely to be? The short term local consequences are evidently likely to be quite severe. Given that large parts of the country have been (and continue to be) without electricity, that factories have been flooded and part of productive capacity permanently destroyed etc, etc, GDP is bound to plummet quite substantially as output drops and takes time to recover. At the global level the short term consequences are hard to evaluate. That there will be dislocation to extended supply chains is obvious, the Japanese may well buy less luxury goods, while on the other hand becoming more dependent on imported energy, a development which could well affect oil prices. In terms of global demand, it is important to remember that Japan is a significant net exporter, so in theory one country exporting less should simply leave room for others to step in and fill the gap. But things aren’t as simple as that, and global trade inter-linkages mean that local shocks can easily be amplified in a way that conventional economic models find hard to capture.

Land Of The Setting Sun - The linear thinkers that dominate the mainstream media and the halls of power in Washington D.C. are assessing the series of disasters in Japan without connecting the dots of history. Their ideological desire to convince people that things will go back to normal in short order flies in the face of the facts. It makes me wonder whether these supposed thought leaders lack true intelligence or whether their ideological biases convince them to lie. At the end of the day it comes down to wealth, power and control. If those in power were to tell the truth about the true consequences of demographics, debt, disasters, and devaluation, their subjects would revolt and toss them out. Before the multiple disasters struck Japan last week, the sun was already setting on this empire. The recent tragic events will accelerate that descent.   Japan can still borrow for 10 years at 1%. Despite the highest government debt as a percentage of GDP on the planet at 225%, Japan has not felt the wrath of the bond vigilantes. Not only did the Yen not fall out of bed, but it soared to a post-war high against the USD last week after the earthquake/tsunami. Investors drove the value of the yen higher, anticipating a huge rebuilding program in Japan. Japanese financial institutions would need to convert foreign assets into yen to pay for damage claims and construction expenses, a process that would strengthen the currency.

Japan's debt default line could be felt in countries a world away - How Japan pays the bill for recovery will have knock-on effects in Portugal, Ireland, Greece, Spain…Many analysts expect Japan's economy to be expanding strongly by the end of the year, even if it slides into recession in the next few months. But Japan's recovery will be complicated by the question of how it will manage to pay the bill.Japan already has a debt-to-GDP ratio of more than 200%, dwarfing the 85% at which Britain's will peak in the next few years. Conventional wisdom has long been that, despite its two-decades-long stagnation, Japan could afford to keep financing this outlandish debt burden because domestic investors – the wealthy "Mrs Watanabes" of City folklore – could be convinced to keep investing their savings in Japanese bonds. But you can only keep borrowing from the future for so long, and with an ageing, indeed shrinking population, eventually the maths won't add up.

A Crisis That Markets Can’t Grasp - The Tokyo Electric Power Company built its Fukushima Daiichi nuclear power plant, nearly 40 years ago, to withstand a powerful earthquake — but not one as big as the 9.0-magnitude quake that struck on March 11. Or the tsunami that followed. Now, the terrible “ifs” accumulate, as Japanese engineers work to bring the station’s reactors under control. The ultimate price, in human life, may not be known for years.  The details of this catastrophe were unforeseeable, leading some to conclude this was a black swan event — something so wildly unexpected, so enormous in its impact, that it seems to defy our understanding and expose the fragility of our knowledge of the world. How could anyone have predicted this?  Many have compared the events unfolding in Japan with 9/11, Hurricane Katrina1, the financial collapse of 2008 and 2009, the BP oil spill2, and the uprisings in the Arab world — in that all have shown the limits of the collective wisdom of the marketplace. For a moment, all the swans seemed black. And those swans seemed blacker still when viewed through the lens of today’s hyperkinetic global markets.

Disaster could cost Japan $235 billion: WBank — Japan's massive earthquake and tsunami could cost its economy up to $235 billion, or 4.0 percent of output, and reconstruction may take five years, the World Bank said Monday. "If history is any guide, real GDP growth will be negatively affected through mid-2011," the World Bank said in its latest East Asia and Pacific Economic Update report. But growth should pick up in subsequent quarters "as reconstruction efforts, which could last five years, accelerate", it added.The lower end of the World Bank's estimate of the twin disasters' impact was $122 billion, equivalent to 2.5 percent of gross domestic product (GDP). Since the natural disasters struck on March 11, Japan has also had to grapple with a nuclear power plant crisis in Fukushima, but the World Bank did not mention the atomic issue in its assessment of the economic damage.

Threats to Japan ratings increasing: Moody's - Moody's Investors Service said in a report Monday that larger-than-expected outlays by the Japanese government to help pay for reconstruction efforts could accelerate a fiscal crisis in the nation's sovereign-debt market, even as it saw no immediate risk to the nation's creditworthiness. "Financing the recovery efforts with additional government borrowing would delay any return to a path of fiscal consolidation, and may bring forward a tipping point where investors in Japan's government bonds (JGBs) lose confidence in the government's ability to rein in its debt," Moody's said in the report. The ratings agency said if things go worse than expected, Japan's economy might not rebound as expected in the second half, which could add to the fiscal cost of recovery and hamper efforts to balance its primary budget by 2020. It also said it considered the risk of sudden loss of confidence in Japan's sovereign debt market "remote."

Japanese disaster now world's costliest - Japan's government said the cost of the earthquake and tsunami that devastated the northeast could reach $309-billion (U.S.), making it the world's costliest natural disaster on record.  The extensive damage to housing, roads, utilities and businesses across seven prefectures (states) has resulted in losses of between ¥16-trillion and ¥25-trillion ($198-billion and $309-billion), according to a Cabinet Office estimate Wednesday. That could drag the economic growth rate down by 0.5 per cent this year.  The losses figure is considerably higher than other estimates. The World Bank on Monday said damage might reach $235-billion. Investment bank Goldman Sachs had estimated quake damage of as much as $200-billion.  If the government's projection proves correct, it would top the overall losses from Hurricane Katrina. The 2005 megastorm that ravaged New Orleans and the surrounding region cost $125-billion, according to the Insurance Information Institute.  Japan's estimate does not include the impact of power shortages triggered by damage to a nuclear power plant, so the final figure could be even higher. It also leaves out potential global repercussions.

Japan Cash at Central Bank to Hits Record on Crisis Steps - Japan’s central bank pumped a record amount of funds into the financial system since March 11 to calm markets and soften the economic impact of the earthquake and tsunami. Lenders’ deposits with the central bank will jump an estimated 146 percent to an all-time high of 43.6 trillion yen ($539 billion) today, from 17.7 trillion yen the day before the temblor struck, the Bank of Japan said in a release in Tokyo. Policy makers have added emergency cash every business day as they battle Japan’s worst postwar disaster, backed by the Group of Seven nations’ coordinated intervention to weaken the yen. Liquidity exceeded the 36.4 trillion yen record set in March 2004, when the central bank was implementing so-called quantitative easing measures to counter deflation. “The BOJ is firmly sticking to its promise of pumping a massive amount of cash into the banking system,” said Toshiaki Terada, a researcher at Totan Research Co., a money-market brokerage in Tokyo. “Even though Japan’s money market is already flooded with cash, there is still the risk that cash demand from lenders will suddenly surge.”

Atomic Cleanup Cost Goes to Japan's Taxpayers, May Spur Liability Shift - Japan’s taxpayer, not the nuclear industry or insurers, will cover most of the cleanup cost from the worst accident since Chernobyl, a financial rescue that may spur moves by nations to make companies assume more liability. Tokyo Electric Power Co., in its 13th day fighting to avert a meltdown at its Fukushima plant 220 kilometers (135 miles) north of Tokyo, at most is required to cover third-party damages of 120 billion yen ($2.1 billion) under Japanese law. Should the government declare the magnitude-9 earthquake and tsunami that flooded its reactors an “exceptional” act of God, the utility may be off the hook in paying compensation that may be demanded by injured workers, farmers and shareholders. While nations including the U.S., Germany, India and China ordered plant safety checks after the March 11 accident, some governments may seek to transfer more financial responsibility to plant operators, which worldwide plan to build or relicense more than 100 reactors, according to researchers who follow the nuclear industry.

G7 yen-selling intervention estimated at $6.5 billion - (Reuters) - The Group of Seven (G7) countries may have sold a total of around 530 billion yen ($6.5 billion) on Friday as they intervened in forex markets to weaken the currency, data from the Bank of Japan showed on Tuesday. The amount is far smaller than market talk that they could have sold around 2 trillion yen, though some analysts said the figure was not a surprise. "My impression is that the dollar rose smoothly in light trading volume on Friday," said Osamu Takashima, chief FX analyst at Citibank Japan. "In September, when Japan unilaterally intervened, there was heavy dollar selling to counter intervention. Compared to that, trading volume looked smaller this time."The BOJ's projection for Wednesday's money markets showed there would be 830 billion yen in payments to banks from the public sector. That is 530 billion yen more than the about 300 billion yen of payments from the government that money brokers had been expecting ahead of intervention.

Prepare For Lengthy Power Shortage  - In summer, however, air conditioners will be turned on en masse, increasing the daily demand for power to 60 million kilowatts in an average year. TEPCO hopes to restore its power plants by then, including another thermal facility that was damaged in the quake. But it is expected to secure only about 50 million kilowatts through restoration work, so the problem remains of how to make up for the shortfall.  The government is studying the possibility of limiting the total amount of power that can be used by businesses, a measure previously implemented during the 1970s oil crises. Reviving the system, designed to regulate how much each company can consume, is inevitable.This method was effective at the time of the crises because the industrial sector accounted for a high percentage of the total power consumed at that time. Now that the amount of power in general use has increased, however, the benefits of this approach will be limited.

Japan faces prolonged energy crunch - Disaster-struck Japan is bracing for months of energy shortages that could curb factory production and force households and workers to sweat out the humid summer with little or no air conditioning. The world's number three economy, which endures 20 percent of all major earthquakes, generates about 30 percent of its power from nuclear plants. The record 9.0-magnitude tremor and monster wave which battered Japan's northeast coast on March 11 prompted 11 of Japan's 55 nuclear reactors to automatically shut down and triggered a major crisis at a plant in Fukushima. The nuclear problems are causing "serious constraints on the supply of electricity", so managed blackouts are likely to continue "at least over the summer," The six reactors at the Tokyo Electric Power Co. (TEPCO) Fukushima Daiichi (No. 1) plant -- three of which were operating when the quake struck -- are unlikely to ever be used again

How will Japan's economy fare after the disaster? - But the end of panic also reminds us all that quite apart from the nuclear situation, Japan has suffered an unprecedented calamity—perhaps the costliest disaster in fifty years. Thousands of lives have been lost and power issues continue to plague the country. What will this disaster mean for Japan's economy? We put that question to the experts at Economics by invitation, and the responses have been fascinating...and sobering. Here, for example, is Richard Koo: Although it has been frequently overlooked, Japan has been running ever larger trade surpluses against Taiwan, Korea and China (including Hong Kong). The fact that this has been the case even with a strong yen means that manufacturers in those countries have little choice but to obtain materials and components made by Japanese producers. This means that supply disruptions from these Japanese producers will affect production in plants all over Asia.. Although there have been no meaningful macroeconomic statistics since the quake, it is known that nearly 30% of Tokyo Electric’s ability to supply electricity has been damaged by the quake, tsunami and subsequent problems at its nuclear power plants. Tokyo Electric accounts for 32% of total electric supply in Japan.

Power outages could hamper Japanese recovery: IMF‎ - Restoring power and government reconstruction spending are crucial to Japan's economy resuming growth, the IMF said Thursday, after Tokyo put the rebuilding cost of the March 11 earthquake at $309 billion. International Monetary Fund officials said they expected a short-term slowdown, but growth would "rebound" to pre-quake levels and more. But the potential of sustained power shortages due to the Fukushima Daiichi plant emergency, the shutdowns of other nuclear plants and the radiation threat complicate recovery prospects, they said."The uncertainties from the nuclear situation and the power interruptions could weigh on the recovery by disrupting production across the country, and by weighing on corporate and household sentiment," said Ken Kang, the IMF's Asia Pacific division chief. Kang cited Japanese government figures that the damage to the country's capital stock, its economically productive assets, was about double the scope of damage done by the 1995 Kobe earthquake.

Stress Test for the Global Supply Chain - Day in and day out, the global flow of goods routinely adapts to all kinds of glitches and setbacks. A supply breakdown in one factory in one country, for example, is quickly replaced by added shipments from suppliers elsewhere in the network. Sometimes, the problems span whole regions and require emergency action for days or weeks. When a volcano erupted in Iceland last spring, spewing ash across northern Europe and grounding air travel, supply-chain wizards were put to a test, juggling production and shipments worldwide to keep supplies flowing.  But the disaster in Japan, experts say, presents a first-of-its-kind challenge, even if much remains uncertain.  Japan is the world’s third-largest economy, and a vital supplier of parts and equipment for major industries like computers, electronics and automobiles. The worst of the damage was northeast of Tokyo, near the quake’s epicenter, though Japan’s manufacturing heartland is farther south. But greater problems will emerge if rolling electrical blackouts and transportation disruptions across the country continue for long. 

Made in Japan: What Is Country Exporting? - The crisis in Japan triggered by the March 11 earthquake hasn’t just disrupted domestic production, but also poses problems to trading partners that rely on Japanese goods. (See an interactive graphic showing Japan’s exports.) Japan is the world’s fourth-largest exporter and most of the products it sends overseas are machinery and transportation equipment, which include everything from heavy industrial machinery and semiconductors to refrigerators and cars. The country accounts for about 14% of world exports of automotive products. According to data from the Ministry of Finance, Japan exported some $469.64 billion of machinery and transportation equipment in 2010. Japan also is a key supplier of advanced components to Asian nations that specialize in the final assembly phase of manufacturing. China depends on Japan for 13% of its imports, largely capital goods such as machine tools and electronic parts for manufacturing. Filed under miscellaneous goods are such products as clothing, toys and jewelry, but a large portion of the category — $23.98 billion of the $44.89 billion total in 2010 – consists of precision instruments, particularly scientific, optical instruments.

Toyota, Sony Disruptions May Last Weeks After Japan Earthquake - Toyota Motor Corp. and Sony Corp., two of Japan’s biggest manufacturers, are facing worst-case scenarios of long-term production shortfalls as scores of plants remain closed and workers are idled in the aftermath of the March 11 earthquake and tsunami.  “The current situation is still difficult,” . The company has shut eight plants in Miyagi, Ibaraki and Fukushima prefectures, and workers are inspecting equipment and facilities, he said. Toyota has said it will keep 21 auto and components plants closed until March 22.  Sony and Toyota’s efforts to resume production are complicated by the need for hundreds of different components to build TVs and cars from a variety of different suppliers that may have suffered plant damage in the earthquake and tsunami. Japan is also facing electricity shortages because a nuclear- power plant was crippled by the temblor.  “This will be played out not in days, but in weeks,” . “Nothing on this scale has really occurred before.”

Shockwaves reverberate from mobiles to jewellery -Nokia on Monday became the latest company to warn of disruption to its supply chain, highlighting Japan’s role in producing crucial components for a rangeof global manufacturing industries. The Finnish mobile phone maker, which sources about 12 per cent of its components in Japan, said the disaster was likely to affect its manufacturing and supply schedules. “Nokia expects some disruption to the ability . . . to supply a number of products due to the currently anticipated industry-wide shortage of relevant components and raw materials sourced from Japan,” the company said. The Japanese disaster has exposed the risks associated with modern global supply chains, in which companies rely on just-in-time deliveries from a network of global suppliers with little surplus inventory to cushion them from any disruption. Technology manufacturers are particularly exposed to Japan because of its importance as a supplier of semiconductors and other critical components in products such as mobile phones and computers. Several big Japanese technology companies, including Panasonic, Hitachi, Nikon, NEC and Sony, have reported disruption either from earthquake damage or power shortages since the disaster. Ericsson, the Swedish network equipment maker, and Sony Ericsson, its mobile phone joint venture with Sony, are among other non-Japan-based companies which have so far warned of supply chain problems.

TI Updates Damage to Japan Fabs - After a preliminary assessment, Texas Instruments said its manufacturing site in Miho, Japan, about 40 miles northwest of Tokyo, suffered substantial damage during last Friday's 8.9 magnitude earthquake. The company estimates it will reinstate production in stages, beginning with several lines in May and returning the factory to full production in mid-July, which translates to full shipment capability in September. This schedule could be delayed if the region's power grid is unstable or if further complications prevent the re-start of equipment.

Japan quake damage seen hitting silicon wafer supply - Supplies of silicon wafers used to make semiconductor chips could start to run short in May, following the suspension of operations at two major plants hit by the March 11 earthquake that devastated large areas of northern Japan. But several analysts say tightness in the market will likely be short-lived, given excess capacity and high inventories before the disaster. Japan's Shin-Etsu Chemical , the world's largest maker of the chip substrate, has been forced to halt manufacturing at its largest wafer plant, and has given no time frame for restarting it. MEMC of the United States has also stopped a large plant north of Tokyo affected by the tremor, with no date set for resuming production. The companies do not reveal production capacity, making it hard to judge the impact, but analysts estimate that together the two sites account for 20 to 30 percent of total global supply of 300 mm wafers, the current standard.

Two Weeks After Japan Earthquake, IT Industry Faces Hurdles -Texas Instruments' plant in Miho, northeast of Tokyo, is one of the factories that was hard hit. The plant, which produced chips and DLP devices for projectors, suffered "substantial damage" and it won't be until May when partial production resumes. Full production is not due until mid-July, and that could be further delayed by power problems, the company said. Toshiba estimates production at its mobile phone display factory in Saitama, north of Tokyo, will be stopped for a month because of damage sustained in the earthquake. Further north in Miyagi prefecture, a number of factories near the quake-hit city of Sendai suffered high levels of damage. A Sony plant responsible for magnetic tape and Blu-ray Discs was inundated with water when a tsunami washed through the town of Tagajyo and is one of six Sony plants currently idle. Two Nikon plants were severely damaged and won't be back online until at least the end of March. And Fujitsu's major chip plant in Aizu Wakamatsu is still closed with no estimate of when production will begin again.

Effect of Japan Quake on Semiconductor Industry Still Unclear  - Japan's semiconductor industries have far-reaching effects, say two new reports, both of which suggest the impact of the recent disasters are still not fully known.The semiconductor industry in Japan continues to remains a question mark for industries affected by production slowdowns resulting from the 9.0-magnitude earthquake and the tsunami that hit the country March 11. Nearly 25 percent of the world's semiconductor production capacity is in Japan, and more than 60 percent of the silicon wafers that semiconductor chips are created from are made in Japan, according to a March 24 report from Objective Analysis. Vendors, not wanting to spook investors, have been slow to release information about their facilities. But for now, the two variables undeniably in need of stability are people and industry, said Tom Starnes, author of the Objective Analysis report.

Automakers Still Reeling From Japan Quake - The earthquake and tsunami in Japan are still disrupting the auto industry worldwide, and it could be harder to find that car you want as a result. Toyota (TM) says it will probably idle a truck plant in Texas because it can't get enough parts, according to Reuters. "It is likely that we will see some nonproduction days coming," a spokesman said. "At this point, we are still not sure of when those might hit or, if they do it, what the duration may be." The entire sector is feeling aftershocks from the tragedy. Even American automakers are not immune, as they import parts from Japan. General Motors (GM) temporarily stopped production at a plant in Louisiana and laid off more than 50 workers at a plant in New York. But the Japanese automakers are the hardest hit, with recovery efforts hampered by widespread power outages.  Post continues after video about Toyota and Honda production:

Toyota and Ford to stop making cars in certain colors - Automakers may run low on certain paint colors because of a shortage of a pigment produced in an area close to the damaged Fukushima-Daiichi nuclear power plant in northeastern Japan. Ford Motor Co. has alerted dealers to stop ordering vehicles in tuxedo black and three shades of red. Toyota Motor Corp. and Chrysler Group LLC also are among automakers that will be affected by the pigment shortage. The German pigment manufacturer Merck Group confirmed that the Japanese plant that makes a pigment called Xirallic had halted production because it was in the exclusion zone around the damaged nuclear power complex. It has leaked radiation after sustaining flooding from the tsunami unleashed by the quake. Gangolf Schrimpf, a spokesman for Merck, said that once engineers can get inside the plant, the company believes production can be restarted in four to eight weeks.

Automakers May Lose 600000 Vehicles as Quake Hits Parts, Paint‎ -- Global automakers may lose production of 600,000 vehicles by the end of the month as the earthquake in Japan halts assembly lines and work at suppliers including the maker of a paint pigment. About 320,000 vehicles may have been lost worldwide as of March 24, and manufacturing at plants in North America may be affected when parts supplies start running out as soon as early April, said Michael Robinet, vice president of Lexington, Massachusetts-based IHS Automotive.“The next surge of shutdowns comes when the pipeline of parts that were already built dries up,” Robinet said yesterday in a telephone interview. “The rate of lost production will accelerate once North American plants join in.” Toyota Motor Corp., the world’s largest automaker, said it has lost output of 140,000 vehicles, and Honda Motor Co. has lost 46,600 cars and trucks and 5,000 motorcycles. Mitsubishi Motors Corp.’s was lowered by 15,000. Ford Motor Co. hasn’t lost any output, said Todd Nissen, a spokesman.

Global auto output may fall 30 percent due to quake‎ - (Reuters) - A shortage of auto parts stemming from Japan's earthquake may cut global vehicle output by 30 percent within six weeks in a worst-case scenario, research firm IHS Automotive said on Thursday. This translates to a drop of as many as 100,000 vehicles per day, IHS analyst Michael Robinet said, adding there could be more North American plant shutdowns in the meantime. "We're already feeling the impact in Japan,"  "North America, Europe, China: those three areas for sure will feel some impact." Last week, General Motors Co (GM.N) idled its pick-up truck plant in Shreveport, Louisiana. Toyota Motor Co is likely to idle its own pickup truck plant south of San Antonio.The delivery of parts from transmissions to electronics to semiconductors is being hampered by the Japanese earthquake and subsequent infrastructure problems. About 13 percent of the global auto industry output has been lost now because of parts shortages, Robinet said.The slowdowns could grow even more severe by the third week of April. To cope, automakers will likely funnel parts to their higher margin vehicles or new product launches.

Japan: The Business Aftershocks‎ - On the demand side, the country accounts for nearly 9% of the world's economic output and has been an important entry point in Asia for companies from banks to retailers. The destruction disrupted sales, dislocated employees and will likely produce lingering caution among consumers. But it is the supply side that has been the biggest source of surprises. Economists who thought they had a handle on the likely impact found, on closer inspection, that Japan was an important source of all manner of advanced components used heavily in Asia and elsewhere to assemble final goods. The world's automakers, for instance, had trouble coping with the shutdown of a Hitachi Ltd. factory north of Tokyo that makes airflow sensors used to measure the amount of air coming into engines.  Hitachi makes 60% of the world's supply. This week, in a modern "for lack of a nail" story, General Motors Co. was forced to shut a plant in Louisiana, and Peugeot-Citroen had to cut back production at most of its European plants. Japan makes 60% of the world's silicon wafers—the building blocks of computer chips. The shutdown of two factories by the earthquake took out a quarter of the world's supply. Credit Suisse says the country also makes 90% of a substance called BT resin used to make printed circuit boards.

Crises in Japan Ripple Across the Global Economy - In the wake of Japan’s cascading disasters, signs of economic loss can be found in many corners of the globe, from Sendai, on the battered Japanese coast, to Paris to Marion, Ark.  Container ships sit in the Pacific or at docks in Japan, wary of unloading tons of pork and steak because of that nation’s fractured electric grid. Any break in the “cold chain” of refrigeration can spoil meat.  LVMH Moët Hennessy Louis Vuitton, the luxury goods maker based in Paris, shut more than 50 of its stores in Tokyo and northern Japan. And Volvo, the Swedish carmaker, was working with a 10-day supply left of Japanese-built navigation and climate control systems. “It’s hour-by-hour work to get a grip on the situation,” The uncertain economic picture has mirrored the churning developments in Japan as it tries to recover from the devastating earthquake and tsunami that struck it 10 days ago. On Sunday, even as workers made some progress in stabilizing the situation at the crippled Fukushima Daiichi nuclear plant, the government said there were new signs of radioactive contamination in some agricultural produce and livestock.

Global Supply Lines at Risk as Shipping Lines Shun Japan - The economic disruptions from Japan’s crisis have cascaded into another, crucial link in the global supply chain: cargo shipping.  Fearing the potential impact on crews, cargo and vessels worth tens of millions of dollars, some of the world’s biggest container shipping lines have restricted or barred their ships from calling on ports in Tokyo Bay over concerns about radiation from the damaged Fukushima Daiichi nuclear power plant.  Meantime, ports in China are starting to require strict radiation checks on ships arriving from Japan. And in California on Friday, the first ship to reach the Port of Long Beach since Japan’s earthquake was boarded and scanned for radiation by Coast Guard and federal customs officials before being allowed to dock.  Big Japanese ports much farther south of Tokyo, like Osaka and Kobe, are still loading and unloading cargo. But the Tokyo Bay ports of Tokyo and Yokohama are normally Japan’s two busiest, representing as much as 40 percent of the nation’s foreign container cargo. If other shipping companies join those already avoiding the Tokyo area, as radiation contamination spreads from Fukushima Daiichi 140 miles north, the delays in getting goods in and out of Japan would only grow worse.

Shocks and Trends in an Era of Production Fragmentation - Yesterday's NYT article, Crises in Japan Ripple Across the Global Economy noted:In the wake of Japan's cascading disasters, signs of economic loss can be found in many corners of the globe, from Sendai, on the battered Japanese coast, to Paris to Marion, Ark. ...Volvo, the Swedish carmaker, was working with a 10-day supply left of Japanese-built navigation and climate control systems. At this juncture, it's useful to categorize the various effects emanating from this shock to the Japanese economy (the article actually covers oil and sovereign debt shocks as well). First, there is the aggregate demand shock, as Japanese spending either falls or rises over time; there is a composition of spending effect, as spending shifts, perhaps toward investment and away from consumption. Both of these have some implications for US (and rest of world) exports. Second, there are supply side/trade effects, highlighted by the article. That is, Japan is a provider of some key inputs into the production of electronic goods.

Live Chat: WSJ’s David Wessel on the Global Impact of the Japanese Disaster The triple hit Japan has taken – earthquake, tsunami and nuclear crisis – has stressed one of the world’s largest economies.  Supply chains have been severed in many industries —25% of world capacity to make silicon chips is down—and demand from Japan’s consumers and businesses is depressed.  How will these repercussions play out?  How can governments minimize the harm? Wall Street Journal economics editor David Wessel will analyze the situation in a live chat with readers on Friday, March 25 at 1:30 p.m. ET.  Phil Izzo, editor of the Real Time Economics blog, will moderate. Ask your questions now.

Understanding Japan’s Disasters by Mohamed A. El-Erian -As we all struggle to comprehend the economic and financial impact of Japan’s calamity, it is tempting to seek historical analogies for guidance. Indeed, many have been quick to cite the aftermath of the terrible 1995 Kobe earthquake. Five factors suggest that Japan faces a uniquely difficult and uncertain set of challenges. First, the economic damage from Japan’s three calamities (a horrifying earthquake, a devastating tsunami, and a nuclear crisis) may well be double that of Kobe. And, unlike Kobe, these calamities did affect Tokyo — indirectly, fortunately — where some 40% of Japan’s industrial production is located. Second, Japan’s public finances are weaker than in 1995, and demographic factors are less favorable… Third, benchmark interest rates are already near zero, and have been for a while… Fourth, the addition of destabilizing nuclear uncertainty to the terrible impact of the natural disasters amplifies the reconstruction challenges… Finally, Japan’s external environment today is more challenging. During the post-Kobe reconstruction period, world demand was buoyant and global productivity surged, owing to China’s gathering boom, America’s information-technology and communications revolution, and political and economic convergence in Europe

Japan Quake May Cut Global Growth 0.5 Point to 3.8%, Morgan Stanley Says - Japan’s worst disaster since World War II likely won’t “derail” worldwide economic growth, as the crisis cuts global expansion this year by 0.5 percentage point to 3.8 percent, according to Morgan Stanley.  With initial conditions for the global economy relatively favorable going into the shock, and policy makers likely to provide more support if needed, the overall impact on world growth should be modest,” Morgan Stanley said. “Spillover to the rest of world should be relatively limited.”  The crisis may affect the other economies via goods and services trade, capital flows, financial system contagion and commodity prices, Morgan Stanley said. The decline in Japan’s gross domestic product may lead to about half, or 0.25 percentage point, of the estimated cut to 2011 global economic growth, while the rest of the reduction reflects “negative spillovers.”

Will Japan's quake change global manufacturing forever? - The earthquake, tsunami and nuclear crisis that hit Japan have woken up the world's business community to the precariousness of the global supply chain. Japan is a major manufacturer of all kinds of stuff that goes into other stuff, like car parts and chips, and the disruption of production in Japan in the wake of the natural catastrophe has ricocheted around the globe. . A recent report by Moody's noted that the Japan quake “will curtail the entire technology supply chain.” Japan, the report points out as an example, controls 90% of the world's production of something called bismaleimide-triazine resin, which ends up in chips and circuit boards. Manufacturers have already suffered shutdowns, and continued disruption could create problems across the entire electronics industry. Here's Moody's:We believe the current impact is manageable, as semiconductor companies are now living on the existing channel inventory at both the supplier and manufacturer levels, which ranges from 1.5 to two months. However, a prolonged supply suspension will be problematic, affecting the entire chip-making industry…This, in turn, will affect global shipments of electronic products such as handsets, flat-screen televisions, and PCs, negatively impacting branded consumer electronics companies.

TEPCO: Why It Will Survive The Nuclear Crisis - The Fukushima nuclear crisis has led to a plunge in shares of parent company TEPCO and a huge widening in its credit default swaps. Yet despite the panic, TEPCO will probably survive roughly intact. A piece from BNP Paribas credit analyst Mana Nakazora essentially lays out the argument that the company has adequate financial reserves, and is, to put it bluntly, too big to fail, in the eyes of the Japanese government, which just today confirmed that it's not giving up its nuclear ambitions. The first point to consider is that Japanese utilities are among the highest rated utilities in the world, thanks to their being deeply enmeshed with the government. This chart shows how well they rank. As you can see, Japanese utilities are nicely bunched at the front of the class.

China Suspends New Nuclear Power Plans - Japan's nuclear crisis reverberated in atomic power-friendly countries Wednesday, with China saying it would hold off on approving new nuclear plants and French lawmakers questioning top energy executives about the safety of their reactors. Some governments have put their nuclear future on hold, at least for now, as concerns grow even among pro-nuclear governments about reactor safety around the world. Japanese emergency workers are desperately struggling to cool overheating reactors after a series of explosions and amid leaking radiation from a nuclear plant crippled after last week's earthquake and tsunami. China's Cabinet said Wednesday the government will suspend approvals for nuclear power stations to allow for a revision in safety standards. The State Council said in a statement following a meeting Wednesday that it has ordered the relevant departments to conduct safety checks at existing plants and at those that are under construction.

China rare earth prices explode as export volumes collapse - China's exports of rare earth metals burst through the $100,000-per-tonne mark for the first time in February, up almost ninefold from a year before, while the volume of trade stayed far below historical averages. China's squeeze on rare earths, which are used in a wide range of hardware including precision-guided weapons, hybrid car batteries and iPads, has forced prices up dramatically since July last year, when each tonne fetched a mere $14,405 on average. The apparent price rises have averaged $10,000 per tonne per month but accelerated in February, galloping ahead by $34,000 per tonne, according to Reuters calculations based on data from China's Customs office.

Iron ore in the crosshairs - I’m not terribly comfortable with this state of affairs, but it is what it is and having that to go on, it’s very important that I remain skeptical of my own conclusions. In that vein, my thoughts on China have evolved thus over the past six months:

  • In October last year I quoted Michael Pettis to argue that if China was forced to raise the yuan as part of global rebalancing, then the likely consequence was a huge offsetting surge in Chinese credit to keep growth going. I argued this would be mistaken as an Australian golden age but end badly because the Chinese banks would be hobbled with bad debt.
  • Then in December, I realised I was behind the curve and argued that the global rebalancing had actually begun in the GFC, that China had already played the credit deluge card and was setting up for its final burst of growth before a long slowdown.
  • Then in January this year I accelerated along the same curve again and argued that China was making a mistake using monetary policy rather than raising the value of the yuan to fight the inflationary burst that emerged following its credit binge. To my mind, this risked a blowoff cycle, in which hot money flows chased interest rates higher until the entire edifice collapsed in a classic inflationary bust.

China’s missing M2 - Have you seen China’s missing M2 monetary measure? The thing seems to have gone missing, at least in its old form, from its past two iterations. According to the latest data from the People’s Bank of China, M2 growth slowed to 17.2 per cent in January and 15.7 per cent in February, year-on-year. Anyway, Standard Chartered’s Wei Li and Stephen Green think they’ve spotted it:This is not just an academic question. M2 growth is the main monetary policy target of the People’s Bank of China (PBoC) – and this year the target was set at 16%. If we are already below the annual target, does this mean the PBoC can relax monetary policy now?We do not think so, as we believe the major cause of the sharp decline in M2 growth has been a significant statistical revision of the accounting standards for deposits and loans. As a result of this, CNY 810bn of outstanding deposits and loans have been lost, and this has affected the base on which M2 is calculated.

China PBOC's Yi urges caution on interest rate rises - China is facing strong inflationary pressure, but will tread cautiously in raising interest rates, said Yi Gang, a deputy governor with the People's Bank of China. Yi told a business conference in Hong Kong on Wednesday that he was confident the government would be able to keep annual average consumer price inflation to 4 percent this year. "We will see high (inflation) numbers in the first half of the year because of the base effect. Inflation in the second half will be lower," Yi said. "So for the whole year, we will be able to meet the 4 percent goal." Chinese inflation topped expectations at 4.9 percent in the year to February, near its fastest level in more than two years, and looks set to accelerate further in coming months as the economy races ahead and prices of food and commodities such as oil remain high.

China to count local debt in national budget: minister -China plans to include local government finances in its national budget, Finance Minister Xie Xuren said on Tuesday, the latest step in efforts to get to grips with local debt that some analysts see as a risk to economic stability.  Xie did not provide further details or announce a time frame for the change.  China's official debt was about 17 percent of gross domestic product at the end of last year, putting it at the low end of debt loads in developing and developed countries. But that does not include hidden debt at the local-government level, which estimates suggest have reached as high as 10 trillion yuan ($1.52 trillion), or another 25 percent of GDP.  Since acknowledging the problem of local debt last year, China has been trying to cast more light on local government finances, asking banks to fully disclose how much they have lent to provinces and cities.

China Is Not a Bubble: It's the Hindenburg - In the United States and Europe, citizens understand what happened, and why the housing market came crashing down: Runaway prices, fueled by extremely low rates, and a lack of banking oversight. But as far as China is concerned, and apart from the usual articles about inflation, interest rates, and bank reserve increases, clarity about the underlying factors is not easy to achieve. Bloomberg reported recently that “China ordered banks to set aside more cash for the third time this year, judging that inflation remains a bigger threat to the world’s second-largest economy than Japan’s earthquake and nuclear crisis,” and thus far the two words that keep being mentioned by China’s Premier Wen Jiabao are “social instability” — and that is the core of the issue that has the government scrambling on all fronts.

Is loan growth in China slowing? - Most of this week’s very long newsletter focused on the NPC meeting in Beijing, the proposals to boost consumption (which I think will greatly disappoint), and the release of data by the National Bureau of statistics.  Last week, for example, new lending numbers were released, and if it hadn’t been for rumors all the previous week that they would come it at RMB500-600 billion I think we would have all been surprised by how low they were.  Here is the relevant article in Xinhua:The People’s Bank of China (PBOC), the country’s central bank, said Monday that new yuan-denominated loans stood at 535.6 billion yuan (81.52 billion U.S. dollars) in February. The figure was 192.9 billion yuan less than February last year, said the PBOC in a statement on its website.  By the end of February, the balance of outstanding yuan-denominated loans stood at 48.89 trillion yuan, up 17.7 percent from a year earlier. The rise was 9.5 percentage points lower than the rise a year earlier. As I discussed last week, total new lending has represented a rapidly declining share of the total lending the PBoC now monitors, so we don’t really know how much new credit the banks extended in February.  The table below was released two weeks ago by the PBoC (I have summarized it), and it shows what has been happening:

Predicting China's inevitable slowdown -China's rapid growth has been going on for 30 years, but it can't go on forever. This is one of the most basic facts in macroeconomics, confirmed by every single observation and supported by every single theory at our command. When a developing country's per-capita income approaches that of the richest countries, it cannot grow much faster than the richest countries. The question is, when? How rich will China get before it stops posting blistering growth rates? Answers vary widely Economist Barry Eichengreen, for example, claims that the big slowdown is coming in just three years: I have a slight problem with Eichengreen's math here. He claims that slowdowns happen around a per capita GDP of $16,500 in 2005 dollars. China's per capita GDP in 2010 was about $7,500 in purchasing power parity terms (at market exchange rates, it was less than 2/3 of that). In 2005 dollars, it was about $6,500 (subtract 14% for inflation). Assuming a continued 10% rate of growth, as Eichengreen does, I calculate that China will pass the $16,500 mark in 2020, not 2014 as Eichengreen states.

China PBOC: See Risk Of "Competitive Devaluation" By Developed Countries - China's central bank said Friday it sees a risk of "competitive devaluations" by developed countries with high unemployment rates, as well as a risk that the euro-zone debt crisis will spread further this year.  At the same time, there are still relatively large risks of inflation and asset bubbles in emerging markets, the People's Bank of China's Shanghai headquarters said in its annual report on international financial markets. The U.S. dollar is likely to trend weaker overall this year, although continued euro-zone sovereign debt risks and "regional political risks" may result in periodic strength for the U.S. unit, the PBOC said. The PBOC said it expects global commodity prices to remain high in 2011, especially oil and grain prices.

"Renminbi Going Global" - That's the title of a new working paper by Xiaoli Chen (Shandong University) and Yin-Wong Cheung (UCSC). Readers might recognize Cheung as a co-author with G. Ma and R. McCauley on a 2010 BIS paper, discussed in this May 2010 Econbrowser post, and just published in Pacific Economic Review. For anybody who is interested in the latest developments in the Chinese government's attempts to internationalize the Renminbi, this is essential reading. From the summary of the paper.The paper evaluates the international status of the Chinese currency, the renminbi (RMB), by examining its use in the global market.  The evidence suggests that the use of the RMB overseas, especially in trade financing and in the off-shore market, has increased rapidly in recent years. However, compared with the size of the Chinese economy, the current scale of the use of the RMB is quite small.  It is fair to say that China has taken small first steps that prepare for full convertibility and the internationalization of the Chinese currency RMB. . While attaining a fully fledged international RMB is still a distant goal, China and its currency have great potential to play a more positive role in the global economy.

How China and India will pay your bills - I wrote an essay in this week's magazine on how China and India will come to create jobs for Americans, Europeans, and just about everyone else, not “steal” them, as they are often accused of doing. I know at first reading, such an idea might sound completely ridiculous. China is sucking up manufacturing jobs from around the world. Indian engineers and IT specialists are battling it out with U.S. college grads for jobs in software development and R&D. With wages so much lower in China and India than in the U.S. and the rest of the developed world, how can the average American, Brit or Japanese ever hope to get a job offer? My argument, however, is that the wealthier China and India become, the more and more jobs they will create globally. That will happen in two key ways. First, Chinese and Indian consumers and companies will become increasingly influential spenders in the world economy, providing new sources of demand and thus jobs. Secondly, Indian and Chinese companies will become ever greater investors around the world as they expand their operations globally, creating jobs wherever they go. I expand on this further in the magazine story, but I wanted to add a few extra thoughts here on how China and India will influence job markets, especially in advanced economies.

Huge Plunge In Taiwanese Exports Shocks Analysts, And Spells Trouble For The Entire Region - Some potentially ominous news out of Taiwan last night. Waverly Advisors has the call: Taiwanese export orders for February, released last night, registered a sequential decline in growth to 5.35% Y/Y versus 13.47% in January and consensus forecasts ranging from Just under 13% to 13.7%. This is the softest growth rate for orders registered since October 2009 (see chart above) with currency appreciation, holiday interruptions and weak orders from Japan bearing partial responsibility. As we noted last month however, the continuing moderation of consumer electronics as a portion of the mix, coupled with a significantly moderating percentage orders accounted for by China and Hong Kong (the total rate of growth in orders from China/HK declined to 2.7% for the month from 7.22% in January) suggests that wholesale buyers on the mainland are anticipating softening retail demand in the near-term as inflationary concerns and corresponding cooling measures are factored.

Another year of living dangerously - The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them? Japan’s share of world output has been shrinking for decades, but at 9% it remains large enough for the hit to the country’s growth to subtract noticeably from global output. Then there are the ripple effects on the rest of the world. Japan is a large—in some cases the sole—supplier of intermediate goods to the world’s electronics and automotive industries, from the hardened glass on Apple’s iPad to gearboxes in Volkswagens. Many makers of such parts have had to slow or halt shipments because of damaged roads, power cuts or the loss of components from their own suppliers. The effects have spread well beyond Japan, causing shutdowns from South Korea to Spain. Still, the history of such disasters is that much of that lost production is eventually recovered and reconstruction delivers a fillip to subsequent growth.

Always a good time to tighten - ON MARCH 3, European Central Bank president Jean-Claude Trichet made clear that the ECB would soon be raising interest rates to head off headline inflation rates above 2%. A lot has happened since March 3. Are ECB officials sure they want to go ahead with this rate increase? They are:ECB Executive Board member Gertrude Tumpel-Gugerell and Governing Council member Yves Mersch both said today that “strong vigilance” is necessary to keep a lid on inflation, a phrase the central bank uses to signal a rate increase is imminent. ECB President Jean-Claude Trichet also told the European Parliament he has “nothing to add” to his March 3 remarks, when he said policy makers may raise the benchmark rate from a record low of 1 percent at their next meeting in April. European tightening was a bad idea when Mr Trichet suggested it back on March 3. Since then, all we've had is a substantial blow to the world's third largest economy and a new war in the Middle East. The euro is at its highest level since the beginning of 2010—before the onset of a serious debt crisis that has yet to be resolved. This seems like a very reckless move given the fact that euro-zone inflation is showing no signs of roaring out of control.

IMF: Top Five Borrowers - By Outstanding Balance As of March 17, 2011 - (In millions of SDRs)
Greece: 12,736
Romania: 10,569
Ukraine: 9,250
Pakistan: 5,233
Ireland: 5,012

‘Phantom giants’ will not save the eurozone - One of the unforgettable characters in a famous German children’s book is a phantom giant. Seen from afar, he looks like a giant. But the closer you get, the smaller he becomes. Whenever I hear about European Council resolutions, I am reminded of that. Each of the Council’s eurozone debt crisis resolution strategies has looked impressive. The agreement reached on March 11 not only appeared comprehensive, it also came as a surprise. Unfortunately, when you look more closely, as I did last week, it begins to look smaller. By the end of the week, it had crumbled.  The most blatant phantom giant is the European stability mechanism, which will be the permanent crisis mechanism from 2013. When it was announced that the ESM would be allowed to buy bonds in primary markets, this looked like a big German concession. I was even fooled for a short while. It turns out that the primary market claim is a scam. The ESM will not be in a position, for example, to support Portugal in the next few months, when the country needs to roll over large chunks of debt. If Portugal cannot refinance itself, it will have no choice but to accept a standard programme of credit support under the current rescue umbrella.

Another eurozone marathon week - Eurozone finance ministers will today try to get closer to an agreement on the capital structure of the European Stability Mechanism, ahead of this week’s European Council that will add the final touches to the political agreement on March 11. The finance ministers are also hoping to find ways to raise the lending ceiling of the European Financial Stability Facility (EFSF), the current mechanism, by means of higher guarantees. The Wall Street Journal Real Time Brussels blog has a good overview of the current play of the discussions. Didier Reynders, for example, proposes only a tiny tranche of capital, €18bn, versus the €80bn others are suggesting.  Otmar Issing severely criticizes the likely outcome of this week’s EU summit on the Euro governance reform and rescue rules for troubled Euro member states. Talking to Der Spiegel he warns of “potential transfers, for which there will be practically no limits to the top”. This would be the opposite of the principle according to which the strong would help the weak. “This is not solidarity, but the perversion of it”, he says. Issing laments that according to the new rules a country like Germany that is abiding to the rules will have to rescue the Irish despite the fact the GDP per capita is higher in Dublin than in Berlin. “If we go down this route permanently we will get a hostile attitude towards Europe in the German population of which I am very much afraid”.

EU agrees €700 billion fund to protect euro zone - EU finance ministers agreed yesterday (21 March) to boost a permanent stability fund, which from mid-2013 will hold €700 billion to shield eurozone countries from future debt crises.An extraordinary ministerial meeting yesterday hammered out the technicalities of the new permanent fund, called the European Stability Mechanism (ESM), which will effectively be able to lend up to €500 billion to distressed euro area members.The fund will be operational as from mid-2013 and will replace the existing temporary facility – the European Financial Stability Facility (EFSF) – put in place to bail out Ireland and Greece. By June 2011, ministers will have to decide how to increase the effective lending capacity of the EFSF from its current €250 billion to €440 billion, as pledged by eurozone leaders on 11 March.

Final deal on ESM is done - Except for an agreement on Ireland, the deal is now essentially done. The ESM will have the following essential characteristics.:

  • It will be established by International Treaty.
  • Lending capacity will be €500bn. The EFSF will be folded into the ESM by 2013.
  • Paid-in capital will be €80bn, of which €40bn will be paid in 2013, the rest in equal tranches over three further years.
  • Callable capital will be €620bn, raising total capital to €700bn. The reason for the gap between total capital and borrowing ceiling is the cash buffer to ensure an AAA-rating.
  • ESM to charge mark-up of 200bp for loans of up to three years, and a further 100bp for longer-term loans.
  • Deal accommodates concerns by several east and central European countries who had threatened to block it because of the way their ECB share in the programme is calculated. Countries with a GDP-per-head of less than 75% of the eurozone average receive a “discount”, which raises, for example, Germany’s share to 27%.
  • Primary bond market purchases will be possible in principle, but linked to full EU/IMF programme.
  • Governing board of ESM will consist of eurozone finance ministers, and qualified observers, including the president of the ECB.
  • This is according to El Pais (which we have not seen elsewhere). All decisions, including decision to lend, on conditionality, changes to the lending capacity, and instruments will be taken by QMV, of 80% of the votes. (Did Germany not previously insist on a national veto when it comes to the original lending decision? Merkel really made a big thing about this.)

EU finance ministers agree on capital, ESM loan pricing (Reuters) - The euro zone's permanent bailout fund, the European Stability Mechanism, will be backed by paid-in and callable capital and offer loans more cheaply than the temporary facility does now, a euro zone source said. The ESM, which will have an effective lending capacity of 500 billion euros, will be backed by 80 billion euros of paid-in capital and 620 billion euros of callable capital, without any guarantees, the source said. It will offer loans at funding costs plus 200 basis points for loans up to three years and plus another 100 basis points for loans longer than three years.There will be no service charge.The current bailout fund, the European Financial Stability Facility (EFSF), offers loans with a margin of 300 basis points for up to three years and 400 basis points over three years plus a one-off fee of 50 basis points.

Does One-Size-Fits-All Cause Bubbles? - In a recent article in the WSJ, David Wessel sees a major “contradiction” and “two fundamental tensions” in the euro zone that cause trouble. The contradiction is that Germany wants hard borrowing standards for bail-out countries but also guarantees that no government can default. It is a conundrum how governments want to find a balance here, I agree with this. However, I want to address a fundamental tension he raises. He argues that one-size-fits-all causes bubbles in some countries: “Germany and France are so big (48% of euro-zone output) that if the ECB sets rates just right for the whole currency bloc—and that is its job—then rates tend to be about right for Germany and France, but not for all others. .. For Germany and France, ECB rates have been right on the mark. For Greece, Spain and especially Ireland, rates were too low for much of the 2000s. Cheap money fuelled binges and bubbles. And now, given unemployment and banking crises, rates there look too high—even before the ECB raises them.”

Europe's industrial new orders: 3 very different stories - Rebecca Wilder - Spain vs. Germany vs. UK: production trends showing holes in some growth stories. Eurostat reports new orders for January: In January 2011 compared with December 2010, the euro area1 (EA17) industrial new orders index2 rose by 0.1%. In December 20103 the index grew by 2.7%. In the EU271, new orders increased by 0.2% in January 2011, after a rise of 2.9% in December 20103. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders increased by 1.6% in the euro area and by 1.9% in the EU27. This was a disappointing report, as Bloomberg consensus was expecting a 1% monthly gain. The Eurostat press release reports new orders by country and production type only(capital, consumer, intermediate, durable, and nondurable). However, I look at the origination of orders by region: domestic, non-domestic extra-euro (which is the same as non-domestic for the Euro area as a whole), and non-domestic intra-euro. The idea is, that with ubiquitous fiscal austerity, Euro area countries rely on external demand for growth. So here's my question: how's Spain to survive? (more after the jump)

Europe's Banks Would Need $355 Billion in S&P Stress Scenario - Europe’s banking system would need as much as 250 billion euros ($355 billion) of new capital if faced with a “sharp” increase in yields and a “severe” economic contraction, Standard & Poor’s said in a report.  The ratings company imagines three stages happening from 2011 to 2015, including soaring yields triggered by an interest- rate shock, restricted market access for weaker sovereigns and a “very severe” downturn in the economies of Greece, Ireland, Portugal and Spain. Under this scenario, stress in Italy would be “substantial,” while in France, Germany, the U.K. and the rest of the European Union it would be “moderate,” according to S&P.  Of S&P’s sample of 99 financial institutions covering 70 percent of Europe’s banking system, 22 would need new capital at a total cost of about 161 billion euros, according to the report. Extending that to the full European banking system would cost 200 billion euros to 250 billion euros, or about 2 percent of economic output of those lenders’ jurisdictions, S&P said.

Merkel humiliates Schäuble by reopening discussions on ESM - In a humiliation for Wolfgang Schäuble, Angela Merkel wants to reopen talks on Euro finance minister’s ESM agreement, Frankfurter Allgemeine Zeitung reports. Merkel aims to extend Germany’s payment of its €22bn share of paid in capital to the ESM (which means that the ESM will be undercapitalised, and may not qualify for a triple-A rating). As the agreement stands now Germany would have to pay €11bn in 2013 and the remainder in three equal tranches over three years. Merkel now insists the whole sum should be paid in five equal tranches over five years. The reason for her request is her coalition’s plan to reduce taxes before the next elections in 2013. This would be impossible if Germany had to pay a double digit billion contribution to the ESM that same year. Merkel’s coalition partner FDP would not vote for such a deal, FDP veteran parliamentarian and Bundestag vice president Hermann Otto Solms yesterday warned. Also Solms reiterated his stance that the ESM must not limit Bundestag’s budgetary prerogatives, which would mean that the Bundestag would have to agree explicitly each time the ESM hands out a rescue loan to a Euro country.

ESM / EFSF: An Inverted Capital Structure - I’ve been meaning to write about this for quite some time, but it’s been really hard to have the time to sit down and do it. I’ve let perfect be the enemy of good and so here I’ll try to lay out a rough sketch of what I think are some of the possible risks of the EFSF / ESM. From Reuters: The euro zone’s permanent bailout fund, the European Stability Mechanism … which will have an effective lending capacity of 500 billion euros, will be backed by 80 billion euros of paid-in capital and 620 billion euros of callable capital … It will offer loans at funding costs plus 200 basis points for loans up to three years and plus another 100 basis points for loans longer than three years. What you are seeing here is what Michael Pettis described as an "inverted" capital structure in his excellent book, The Volatility Machine. What that means is that there is positive correlation between the need for funds, the cost of funds and the credit quality of the facility. This is problematic because it could cause reflexive price action in the bonds of the aid recipients, lowering the value of the EFSF holdings and furthermore deteriorating its perceived credit quality. This is also sometimes referred to as "wrong-way risk" when talking about CCPs. In other words, "the risk that different risk factors be correlated in the most harmful direction." AKA a vicious cycle.

Greece for Sale: Want to Buy a State Railroad? - Greece is selling everything that’s not nailed down to help pay off the country’s groaning debt pile. Deal Journal colleague Alkman Granitsas is reporting that Greece will unveil plans to private state-owned assets with a target value of €15 billion by 2013 and €50 billion by 2015. Greece is looking to privatize everything from the national railroad company to regional airports and the national lottery system, Granitsas said. The planned deals are a big deal for Greece, which essentially has been frozen out of capital markets after the country’s massive bailout from the European Union and the IMF. Greece is faced with a public debt crisis that has freaked out investors around the world and set off a spate of downgrades from the debt-rating agencies. Greece is even trying to sell “diaspora bonds” to people of Greek descent who want to invest in the mother land.

Borrowing costs rise for Ireland, Greece and Portugal - MARKETS DELIVERED a cold response to an agreement by EU finance ministers to set up a permanent bailout fund as Irish, Greek and Portuguese borrowing costs rose and investors fretted about a threatened rate rise.Ten-year Portuguese bond yields jumped 0.13 percentage points to 7.49 per cent as its Socialist-led minority government struggled to avert collapse. Euro zone sources have expressed concern that any caretaker administration might not have legal powers to seek emergency financial aid if, as is widely expected, the country cannot avert the threat of an EU-IMF bailout. Hawkish comments by European Central Bank (ECB) executive board member Jürgen Stark suggested that the nuclear and tsunami emergencies in Japan will not sway the bank from a likely rate increase next month.“For me, the situation in the euro area, with the ongoing economic growth and ongoing threat to price stability, in the short term has not changed,” he told Japanese paper Nikkei.

So . . . what about European debt? - I agree with Robert Samuelson. The European debt problem is big.Europe must do something. Greece and Ireland are already in receivership. Private investors won't buy their bonds at reasonable rates. There are worries about Portugal and Spain; Moody's recently downgraded both, though Spain's rating is still high. The trouble is that the sponsors of the bailout fund are themselves big debtors. In 2010, Italy's debt burden (the ratio of its government debt to its economy, or gross domestic product) was 131 percent, reports the Organization for Economic Cooperation and Development; that exceeded Spain's debt ratio of 72 percent. Debt ratios were high even for France (92 percent) and Germany (80 percent). Hans-Jörg Rudloff, the head of the Management Board Barclays Capital, concludes that the EU's fix is this:

  • Half of the social benefits have to go 
  • People have to work more, longer hours, longer years.
  • Otherwise, it is impossible to continue to fund the present system of today.

Irish Notes, Portuguese Bonds Drop as Debt Crisis Deepens Ahead of Summit - Irish two-year notes slumped, leading the bonds of the region’s most-indebted nations lower, on concern a permanent solution to the fiscal crisis will elude European Union leaders meeting at a summit starting tomorrow. The declines drove the yield on the security to more than 10 percent for the second consecutive day, while the spread investors demand to hold Irish 10-year bonds instead of German bunds climbed to a record. Portuguese bonds slid before Prime Minister Jose Socrates faced a vote today against his deficit- cutting plan, which may spur early elections and the need for an EU bailout. “It’s death by a thousand cuts,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “We’re waiting for Portugal. There isn’t actually a solution to the problem. Yields remain at unsustainable levels, technically forcing insolvency.” The yield on the two-year Irish note surged 30 basis points to 10.17 percent as of 4:46 p.m. in London and earlier reached 10.70 percent. The yield has climbed from 9.09 percent at the end of last week. The 10-year yield advanced 21 basis points to 10.05 percent, widening the spread over bunds by 24 basis points to 681 basis points.

Call for test cases to claim ‘reckless lending’ compo - The Irish Property Council (IPC) has confirmed it is seeking individuals badly damaged by 100% mortgages, "reckless lending" and "a lack of regulation" as part of a planned case seeking mass compensation.  Notices due to be published in newspapers tomorrow will argue that people’s lives have been ruined by the system that created the Celtic Tiger-era property bubble.  As a result, the IPC — which mainly represents small-scale builders, developers and property investors — will ask some of those affected to put their names forward as part of a test case seeking to force compensation from the state and the banking sector.  "The destruction of the property market has been caused by the reckless lending of our banks, lack of regulation by our government and the disregard of prudent advice on fiscal policy by the Government in power," the notice will read.  "Property owners in negative equity are being ruthlessly scapegoated through the courts without any responsibility for the catastrophe falling on the banks, Government, Financial Regulator or Department of Finance.

Italy-Libya: destined for divorce? - Italy is the one European country, which is bound to suffer most from the unfolding conflict in Libya. By alienating Gaddafi’s regime, it loses an important market and faces energy shortages, while inflow of refugees becomes a burden for Rome. Italy and Libya's bilateral relations are prodigious. Italy is the North African country's most important commercial partner in Europe and the world. Italy is also Libya's largest exporter, accounting for some 17.5 percent of the Arab country's imports, which were worth a staggering 12 billion euros last year alone. At the same time, oil-rich Libya satisfies approximately 10 percent of Italy's energy demands, thanks to the Greenstream pipeline, which travels under the sea connecting Libya and Sicily.

Belgian Federal State Can’t Afford More Transfers, Tijd Reports -- Belgium’s federal government may need to cut spending or raise taxes by 50 percent after transferring 10 billion euros ($14 billion) of revenue to the nation’s regions, De Tijd reported, citing a planning bureau report. Belgium’s regional governments will have to take over part of the national debt or agree to finance as much as 40 percent of additional spending powers without transfers from federal coffers to keep Belgian government finances from spiraling out of control, the newspaper said. Without transfers to the regions, the federal entity will have to rein in expenditure or raise taxes by 36 percent by 2015, according to De Tijd, which cited calculations from the federal planning bureau.

Portuguese Parliament Rejects Government’s Deficit Plan - Portuguese lawmakers rejected Prime Minister Jose Socrates’s deficit-cutting plan, threatening to topple his government and increasing the chance of an international bailout. Following parliament’s vote against proposed spending reductions and tax increases, Socrates was set to meet President Anibal Cavaco Silva at the presidential palace in Lisbon and then address the nation, heightening speculation he’ll call early elections. The Social Democrats, the biggest opposition group in parliament, contested the new austerity measures. The party has still said it supports Portugal’s plan to reduce its budget gap and meet deficit targets.“With bond yields stubbornly high and heavy debt redemptions due over the next few months, it appears all but inevitable that Portugal will be forced to follow Greece and Ireland in accepting financial support,” economists Emilie Gay, Roger Bootle and Jonathan Loynes of Capital Economics Ltd. wrote in a note yesterday

Portugal gov't nears collapse amid debt crisis - Just as Portugal appeared to have dodged a bailout like those taken by Greece and Ireland, a domestic political spat was set Monday to worsen its financial troubles and possibly spoil Europe's efforts to put the sovereign debt crisis behind it. Portugal's main opposition parties told the beleaguered minority government they won't budge from their refusal to endorse a new set of austerity measures designed to ease a huge debt burden that is crippling the economy. The new steps are likely to be rejected in a parliamentary vote expected Wednesday and the timing could not be worse. A defeat in the vote, Prime Minister Jose Socrates warned, would trigger his government's resignation, consigning Portugal to at least two months of political limbo just as officials were hoping to boost investor confidence in the country's future.

Portugal braces for government collapse over debt vote - Portugal's government is on the verge of collapse after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout. The expected defeat of the minority government's latest spending plans in a parliamentary vote Wednesday will likely force its resignation and could stall national and European efforts to deal with the continent's protracted debt crisis. The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal. Last year, both Greece and Ireland had to accept multibillion dollar rescue packages after markets lost faith in their governments' efforts to deal with their debt burdens.

Portugal PM Jose Socrates resigns after budget rejected - Portuguese Prime Minister Jose Socrates has resigned after parliament rejected an austerity budget. The defeat is likely to trigger a bailout similar to the rescue packages Greece and the Republic of Ireland had to accept last year. All five opposition parties voted against the austerity measures, which included spending cuts and tax rises.  Mr Socrates had earlier said he would no longer be able to run the country if the budget was not adopted.

Socrates quits, no deal on EFSF, no deal on Irish rates, anger over Merkel – another fine mess - Another fine mess in the European Council. We earlier sent you a briefing on the summit. There will be no deal on the EFSF until June, and no deal on Irish interest rates. There is fury about Merkel’s wish to reopen the ESM debate. And Portugal is about to come under the EFSF after last night’s resignation of Socrates.  Portugal ‘s government is the second government to fall as a result of the debt crisis. José Socrates resigned Wednesday night after parliament rejected his government’s latest package austerity measures. The opposition bloc, from the radical right to left, approved five draft resolutions against the government plan.  Finance minister Fernando Teixeira dos Santos, said in his speech that after the rejection that Portugal risks to need foreign aid from the EFSF and IMF, El Pais reports.  Xavier Vidal-Folch is El Pais argues that it is not only Portugal to blame for the crisis and its political division. The agony began when the Irish bank debt exploded last September. Since then the European Union has been slow to adopt a comprehensive crisis package and no agreement has been reached with respect to the EFSF.  This uncertainty has harmed Portugal.

Portugal in crisis after prime minister resigns over austerity measures -  Portuguese prime minister José Sócrates has said he has submitted his resignation to the president after parliament rejected his minority Socialist government's latest austerity measures.The loss of the vote "has taken away from the government all conditions to govern," Sócrates said. It brings the country closer to needing a bailout. Sócrates is said he tendered his resignation to President Aníbal Cavaco Silva tonight, leaving the country in a political limbo that would place further pressure on Portugal's record-level bond yields. Sócrates had said before the vote that he would resign if the measures to cut spending and increase taxes – designed to see off a bailout similar to those taken by Greece and Ireland – were rejected. The measures had aroused the fury of trade unions, and railway engineers walked off the job in the morning, causing widespread travel disruption.

Portugal Yield Soars to 12-Year High as Socrates Quits; Irish Bonds Tumble - Portuguese notes tumbled, leading declines in Europe, as the resignation of Prime Minister Jose Socrates stoked concern the government is moving closer to seeking a bailout.  Two-year Portuguese yields reached the highest since 1999 amid concern the country may struggle to repay about 9 billion euros ($12.7 billion) of debt due by June. Portuguese bonds stayed lower after Fitch Ratings cut the nation’s long-term foreign and local currency rating to A- from A+. Greek bonds declined, while German bunds were little changed. The resignation is “another nail in the coffin in terms of a bailout package,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This may be another underlying burdening factor. It doesn’t seem to be the case that you can say that the possibility of default is off the table.”

Portugal in crisis, unlikely to seek bailout at summit - The resignation of Portugal's prime minister will dominate a summit of EU leaders on the European economy on Thursday and Friday, with pressure intense on Lisbon to seek a bailout package. Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government's latest austerity measures aimed at avoiding EU financial assistance. But he said he would still attend the two-day summit in a caretaker capacity. Socrates remains adamantly opposed to requesting EU/IMF aid and has made it clear he intends to hold that line, at least until a new Portuguese government is formed in the weeks ahead. That leaves Portugal in limbo, but the likelihood remains that a bailout will have to be taken in the end.

Portugal edges toward bailout after govt quits — Portugal's financial collapse appeared inevitable on Thursday, as markets took the government's resignation as proof the debt-heavy country will lose its year-long battle to avoid an international bailout. Investors pushed the interest rate on Portugal's 10-year bonds to a euro-era record of 7.71 percent — a level that is unsustainable and could force the country to ask for a rescue like Greece and Ireland did last year. The government quit late Wednesday after opposition parties rejected its latest debt-reduction plan, generating a new bout of market jitters over the country's future. It is unclear how soon Portugal could take a bailout, as experts say it is unlikely that an interim government will have the constitutional authority to accept a bailout on the country's behalf. Elections would not be possible before the end of May, leaving months of unwelcome — and costly — uncertainty ahead. The upheaval in Portugal was a setback for European leaders who are trying to reassure markets about the soundness of the 17-nation eurozone.

Austerity Debate Fells Portugal’s Premier - Another European government fell victim to the politics of austerity on Wednesday when the prime minister of Portugal resigned after opposition parties rejected his last-ditch attempt to push through a package of spending cuts and tax increases. The failure of Prime Minister José Sócrates to complete a fourth round of painful financial measures within a year led to the government’s collapse and pushed the nation closer to a bailout from Europe and the International Monetary Fund1.  Because its financing in the bond markets has become so costly, Portugal is expected to become the third country in the euro zone to be forced to accept public funds, following Greece and Ireland. It is a blunt reminder that last year’s debt crisis has not gone away. Ireland’s government also collapsed after its tough austerity measures failed to persuade investors to provide it financing at affordable rates. The euro slid against the dollar after the announcement on Wednesday. European leaders were preparing to meet at the end of the week to discuss bolstering their rescue fund and the possible prospect of further bailouts.

Calculating the size of a Portugal rescue - More on the topic du jour, Portugal. Harvinder Sian at RBS has taken a stab at estimating the size of a bailout if (as many commentators now expect) the country does approach the IMF and the European Financial Stability Facility (EFSF). Of course, it’s by no means clear that will happen.Indeed, its not even clear if the resignation of Portuguese prime minister José Sócrates will trigger an election. The chances are it will, but we won’t know for sure until the president, Aníbal Cavaco Silva, meets the political parties on Friday. However, that doesn’t stop us or Sian from making a rescue estimate:There is still a great deal of uncertainty on the bailout cost total given that asset disposals by banks (and the degree of ECB balance sheet usage) are key in any calculations. We estimate the total loan package size is in the order of €80bn, or 47% of GDP.

Portugal Said to Need as Much as $99 Billion in Bailout - A bailout for Portugal may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said as a credit-rating cut threatened to deepen the nation’s debt woes.  Preliminary calculations put the cost of a lifeline between 50 billion euros and 70 billion euros, said the officials who declined to be named because the issue is confidential. Portugal continued to rule out a rescue, a day after the parliament’s rejection of budget cuts led Prime Minister Jose Socrates to offer to quit.  A downgrade by Fitch Ratings dealt a further blow today, as European Union leaders called on Socrates and the opposition parties to unite behind belt-tightening measures that might spare Portugal from becoming the third euro country to tap emergency aid.

Portugal Said to Need as Much as $99 Billion in Bailout - Portugal's public deficit for 2010, which the government has put at 6.9% of GDP, is likely to be higher than 8%, the Portuguese daily Diario Economico reported Wednesday. The paper said that the European Union's statistical agency, Eurostat, is questioning the Portuguese government's 2010 accounts and is in talks with Portugal's statistics institute INE to rectify the figures. At the center of Eurostat's doubts are costs for public transport companies and for Banco Portugues de Negocios, which was nationalized. The newspaper noted that the deficit would surpass 8%, despite the transfer to the government last year of Portugal Telecom's pension fund, which was expected to help balance the books.  The government is expected to acknowledge that it did not meet its deficit objective in the first year of its program, the paper said.

Portuguese vote stokes Europe debt concerns - “Portugal is essentially doomed,” said Jacob Kirkegaard, an analyst at the Peterson Institute for International Economics who has followed the European debt crisis. “They cannot finance themselves.” Portugal’s economy is small, and it does not have the extensive banking system or other global ties that would make its crisis an immediate cause for broader concern. But the resolution of Portugal’s problems will be important in determining whether the euro area puts a lingering debt crisis behind it and adds to the world recovery with a stronger outlook for growth, or whether it remains under a cloud of possible sovereign default. More significant European economies such as Spain, Belgium and Italy also have high levels of public debt. Although analysts say it is unlikely that any will need international help, the situation is volatile. Spanish banks have about $100 billion at risk in Portugal, the type of transnational “exposure” that could allow problems in Portugal to spill beyond its borders.

Portugal edges towards 'inevitable' bailout from EU partners - Ireland's borrowing costs rose dramatically today in rumour-driven markets as speculation mounted that Portugal was also edging towards a bailout from its European partners. Troubled Allied Irish Banks was forced to officially denounce widespread rumours that it was set to miss a crucial repayment on one of its bonds, due on Wednesday, after the difference between Ireland's and Germany's borrowing costs exploded to record levels on talk that a default was imminent.While investors were concerned about the plight of Ireland, Portugal was also being battered ahead of a key vote on an austerity budget on Wednesday, which the prime minister José Sócrates is expected to lose. Sócrates is expected to call a snap general election if the main opposition Social Democrats carry through their threat to oppose the budget. The move could force the country further down the route of a bailout – first trodden by Greece last spring and then by Ireland at the end of last year.

S&P cuts Portugal credit rating, warns of further downgrade - Standard & Poor's downgraded Portugal's credit ratings by two notches to BBB on Friday and warned it could cut it again by one notch as early as next week depending on the final shape of the euro zone bailout fund.  S&P, which followed a two-notch cut by Fitch on Thursday, said the collapse of Portugal's government has increased political uncertainty, hurting market confidence and potentially raising refinancing risk.  Whether there will be another downgrade hinges on the design of the bailout fund, or European Stability Mechanism (ESM), the S&P said.  "Based on current information and expectations, we could lower the ratings on Portugal again by one notch once the details of the ESM are officially announced," S&P said in a statement. "Such a rating action could take place as early as next week."

Portugal bailout could top $100 billion - Portugal may need in excess of $100 billion to keep functioning while it restructures its economy in coming years, a top European official said Thursday, as European leaders began to come to grips with the latest crisis in their region. European Union heads of state gathered in Brussels for a two-day summit intended to focus on new efforts at bolstering the European economy, but it will likely be dominated by Portugal’s possible need of an emergency bailout. Though the country has not asked for help, it faces pressing financial needs beginning next month at a time when investors are demanding record interest rates to buy the country’s bonds. The collapse of Portugal’s minority government on Wednesday led to a seeming consensus among analysts that a request for help was soon to come, and on Thursday, European officials appeared to be tallying the cost.

Some Weigh Restructuring Portugal’s Debt - As Europe struggles to come to grips with its debt crisis, which has deepened with the collapse of Portugal’s government after it pushed for yet another round of budget cuts, three numbers stand out: 12.4, 9.8 and 7.8. Those are the interest rates currently paid on 10-year government bonds for Greece, Ireland and Portugal. That they remain so high — compared with just 3.24 percent on German bonds — shows that investors remain unconvinced that Europe’s haphazard strategy for bailing out troubled, highly indebted countries has succeeded a year after it began. As heads of state huddled in Brussels on Thursday, with a possible rescue of Portugal on their minds after similar bailouts of Greece and Ireland, the question remained: would Europe accept a resolution it has long resisted — forcing investors to take a loss on their bond holdings to keep the crisis from spreading? A bailout of Portugal — perhaps to the tune of 80 billion euros ($113 billion) — remains the most likely if not the safest possibility, because it could prove to be another stop-gap measure that might not keep the crisis from spreading.

Some European countries are in the habit of going bankrupt - Mr Socrates’s failure to force his austerity package through the Portuguese parliament marks a crucial turning point. It is the moment when the peripheral eurozone countries refuse to take orders any more from the centre. Effectively, Portugal has adopted blackmail as an economic strategy – and very effective it is, too. The country is ready to be bailed out of its chronic financial mess, but only on its own terms. Otherwise it has a deadly card to play. It has the option of going bankrupt, an act of naked malice which would set in motion a second round of the banking crisis which began in 2007. The consequences of this would be terrible: the break-up of the euro, mass unemployment, financial collapse, social despair. The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators. The reasons are shaming. One significant factor is the financial and economic illiteracy of political journalists and foreign correspondents. Too many are ill-equipped to look behind the bland statements made by European chancellors or to interpret the deliberately misleading balance sheets of major European banks.

Portugal's Education Lesson - Another reason not to take to the education naysayers too seriously, via Charles Forelle in today’s Wall Street Journal:  Portugal is the poorest country in Western Europe. It is also the least educated, and that has emerged as a painful liability in its gathering economic crisis. … The state of Portuguese education says a lot about why a rescue is likely to be needed, and why one would be costly and difficult. Put simply, Portugal must generate enough long-term economic growth to pay off its large debts. An unskilled work force makes that hard. … There is substantial evidence from elsewhere that education confers broad economic benefits. Ireland was one of the E.U.’s poorest countries a generation ago. But it threw E.U. subsidy money into technical education and remade itself as a destination for high-tech labor, made doubly attractive by low corporate taxes. Ireland is now, even after a brutal banking crisis, among the richest nations in Europe. …

S&P Cuts Sovereign Credit Rating of Portugal - From S&P via Reuters: Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Republic of Portugal today to 'BBB' from 'A-' (the 'A-2' short-term sovereign credit rating is unchanged). The long- and short-term ratings on Portugal remain on CreditWatch with negative implications. We believe that this rating action could have a negative impact on the creditworthiness of the five Portuguese banks, and two related subsidiaries, that we rate ... No surprise ... a bailout seems imminent. Also from the WSJ: Portugal's Woes Turn Spotlight on Spain Portugal's admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone's debt crisis: Is Spain next? The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.

Spanish Banks Hit by Moody's - The Spanish banking sector was downgraded by Moody's Investors Service Inc., heaping further pressure on Iberian banks following the collapse of Portugal's minority government overnight. Iberian bank shares are expected to drop after the market opens Thursday, following a downgrade of the Spanish sector by Moody's Investors Service Inc. and the collapse of Portugal's minority government overnight. Moody's said its downgrade comes after a similar move on Spain's sovereign debt earlier this month, and reflects heightened financial pressures on Spain's sovereign credit and that of "many" weak banks, and decline of the systemic importance of smaller banks amid quick consolidation in the sector, and the expectation of a weaker support environment for banks across Europe.

Ireland's borrowing costs hit record high as GDP falls - Investor jitters over the health of the Irish economy sent yields on the country's 10-year bonds to 10.21% yesterday – the highest since the creation of the single currency – after the former Celtic Tiger recorded its third straight year of recession. Raising fresh fears about the health of Ireland's heavily indebted banks, Dublin released official data showing that gross domestic product fell by 1.6% in the final three months of 2010 and by 1% in the year as a whole. Irish GDP has contracted by 12% in the three years starting in 2008, one of deepest contractions of any industrialised country after the financial crisis led to the collapse of its housing bubble and took its banks to the brink of insolvency. Ireland's gross national product – which provides a better measure of the country's domestic economy because it excludes the largely expatriated profits of 950 foreign companies – fell by 2.1% last year, following a 10.9% drop in 2009.

Irish bond yields remain close to 10% - UNCERTAINTY ABOUT domestic bank funding and nerves over Portugal’s progression towards a bailout weighed on Irish bonds again yesterday, with yields sticking at 10 per cent or above and liquidity thinning. Nerves are raw in the wake of the resignation of Portugal’s prime minister José Socrates, whose departure has raised fears that the European Union is heading for its third bailout in less than two years. Two-year Portuguese yields reached the highest level recorded since 1999, amid concern the country may not be able to repay about €9 billion in debt due in June. A further blow came with a downgrade from ratings agency Fitch, which has cut its long-term foreign and local currency rating from A+ to A-.

Irish Banks May Need 27.5 Billion Euros More Aid, Analysts Say - Ireland’s government may have to inject an additional 27.5 billion euros ($39 billion) into the country’s banks after a third round of stress tests next week, according to a survey of analysts and economists.  That will exhaust about 80 percent of the 35 billion-euro fund set up last year in Ireland’s international bailout to shore up the country’s lenders, according to the median estimate of 10 analysts and economists surveyed by Bloomberg News.  Ireland, which has injected 46.3 billion euros into its banks over the past two years, will on March 31 publish the results of the tests, which examine how banks would manage bad loans and losses from forced asset sales. Matthew Elderfield, the country’s top financial regulator, pledged this week the assessment would be more “conservative” and transparent than the last two rounds. Irish banks still are still dependent on emergency central bank funding after their loan losses exceeded the estimates of previous stress tests.

Buying time is expensive -- EUROPE: Portugal moved closer to external aid after Prime Minister Jose Socrates’s offer to resign left his government in limbo on the eve of today’s European Union summit to address the region’s debt crisis. Two-year Portuguese bond yields reached the highest since 1999. German Chancellor Angela Merkel praised Socrates today for putting “far-reaching” austerity measures to parliament, which rejected the package last night. The vote prompted him to tender his resignation and moved the nation closer to following Greece and Ireland in requiring a bailout.The bail-out's likely size would be between €50 billion and €70 billion euros. The excerpt above mentions that Greece and Ireland have already gone down this road. At present, their bond yields are higher than Portugal's.It seems clear that Greece is insolvent, and Ireland probably is too. Portugal is more of a bordernline case, but it's becoming less do by the day. Angela Merkel is demanding austerity in exchange for a bail-out; well, the government just revised down expectations for the economy this year. It now says that Portugal's economy may shrink by 0.9% in 2011, where before it was expected to grow at a 0.2% pace. Austerity will likely slow the economy further, reducing Portugal's ability to pay its debts. And remember, the European Central Bank is about to raise interest rates.

Euro falls vs. dollar after Portugal debt plan out -- The euro fell further against the dollar after Portugal's opposition lawmakers shot down a government austerity plan. The euro recently bought $1.408, compared to $1.403 earlier. Portugal, considered the next domino to drop in Europe after bailouts for Greece and Ireland, faces a political crisis and the potential resignation of Prime Minister Jose Socrates. Socrates is scheduled to speak to the nation later Wednesday, and has said he wouldn't be able to run the country without the plan.

Eurozone bonds face boycott by investors -Investors warned they could boycott peripheral eurozone bond markets as reform of the region’s bail-out fund sparked fears of a sovereign default in Europe. Irish three-year bond yields leapt close to a full percentage point at one point on Tuesday, while the cost of borrowing for Portugal and Greece also shot up on worries that one of these countries would have to restructure their bonds. European finance ministers finally drew up plans to make investors share the burden of potential sovereign defaults beyond the summer of 2013 in a deal hammered out on Monday night. Concerns centre on the preferred creditor status given to European Stability Mechanism, the permanent eurozone rescue fund, which takes up the reins from the temporary fund, in the middle of 2013.  Investors warn that this will mean they will be the last in the queue for the recovery of money in the event of a default. One fund manager said: “We will definitely not buy peripheral bonds now, not with the uncertainty this has created.”“This agreement will not do anything further to encourage investors to buy peripheral bonds.

Massive protests over austerity, reforms before EU begins summit - Amid massive trade union demonstrations against bloc governments’ economic reform plans and austerity measures, the leaders of the European Union on Thursday began their summit in Brussels. Defending their measures and painful economic reforms, the leaders said they are "indispensable" for countries’ growth and will increase their job prospects. Meanwhile, 20,000 protesters blocked roads in Brussels, forcing police to use water cannons and tear gas to stop them from reaching the EU headquarters. European Council President Herman Van Rompuy called a press conference to ease protesters’ anger and said that they were taking seriously the concerns of protestors. "But what we do is not about dismantling social protection. It is about making sure that our economies are competitive enough to create jobs and sustain the standard of living for all our citizens," Van Rompuy said

How Tight Have ECB Policies Been in Real Terms? - Readers may have seen two charts that are part of a column by David Wessel published last week. For five European countries, they compare actual interest rates with those prescribed by a standard policy rule. Wessel’s charts provide some interesting evidence that European Central Bank monetary policy has been either too loose or too tight most of the time for several currently ailing European economies, given these countries’ inflation rates and gaps between actual and potential output.  The charts support the article’s theme, which is that severe economic problems in some Eurozone countries result in part from the “one-size-fits-all” interest rate policies of the ECB. Along the same lines, here is a chart of short-term “real interest rates” faced by business borrowers in a group of European countries, mostly in the euro area. I have used data on interest rates for a common type of bank loan, adjusting each month’s observation to reflect the same month’s measured consumer price inflation, so that the resulting “real rates” take into account inflation’s effects on the burden of loan payments. Of course, this is only one of many possible methods one could use to approximate real interest rates.  To construct a true real rate data series, one would need to know borrowers’ forecasts of the inflation rate, which is an impossible requirement in ordinary circumstances. Hence, these series and others like them usually need to be taken with a grain of salt.

A fudge on the ESM – but will it keep the AAA rating and the €500bn effective lending capacity_The summit’s main conclusion was too late for the newspapers, which focused on the fallout and implications from the resignation of Jose Socrates as Portugal’s prime minister.  The main result of the summit was reached shortly before midnight, when EU leaders reached agreement on the ESM after long negotiations. But the agreement raises more questions than it provides answers. Angela Merkel got what she wanted – no upfront payment of the ESM’s €80bn in paid-in capital, plus a five-year phase-in. The FT reports that Silvio Berlusconi opposed it, but they got him to agree it after fudging a line about a compensating commitment of other countries. Italy had feared that as a result of the payment delay, its own contribution and guarantees would have to rise.  (But if the sum of everybody commitment is de facto lower than before, then surely the ESM cannot simultaneously have triple-A status and an effective lending capacity of €500bn. We will focus on this point in future analysis. From the way this deal is presented, we believe that this is a de facto smaller umbrella.)  The EU leaders sold their delay to raise the lending ceiling of the EFSF until June – to get passed the elections in Finland –as a political decision. The original plan had been to present a comprehensive crisis resolution package at this summit – with no further delays.  The situation of Portugal and Ireland overshadowed the summit. Portuguese ten-year spreads continued to rise yesterday, to 4.623pp.

Euro's Collapse Is Not Unthinkable: Warren Buffett - Warren Buffett told CNBC Thursday that the collapse of the euro zone's single currency is far from "unthinkable." "I know some people think it's unthinkable...I don't think it's unthinkable," Buffett said in an interview.  Still, Buffett said he believes there will be "huge efforts" put forth to preserve the euro. In the meantime, struggling peripheral countries like Portugal must find a way to resolve fiscal crises.  "You can't have three or four or five countries that are in effect free-riding on the other countries. That won't work over time-they have to get their fiscal houses in reasonable harmony," he said.  The widely-watched investor spoke as yields on Portuguese bonds soared to new highs and markets remained alert for a potential European Union bailout of the troubled nation. Late Wednesday, Portugal's prime minister stepped down after the country's parliament rejected a fiscal austerity plan proposed by his government.

ECB Close To Liquidity Deal For Troubled Banks - Source (Reuters) - The European Central Bank is putting the finishing touches on a new facility that will give troubled euro zone banks liquidity over a longer time frame, throwing a lifeline to Ireland's ailing banks. A euro zone central banking source told Reuters on Saturday that the plan will initially be "tailor made for Irish banks" and was likely to be announced next week to dovetail with the results of fresh stress tests on the country's lenders. "This will replace the ELA (Emergency Liquidity Assistance) that is currently being provided by the Irish central bank," the source said speaking on the condition of anonymity. "It will probably be similar to the SMP (ECB bond buy programme) in the sense there will be no fixed time frame on it; if you had put a 5- or 10-year deadline on it these people may have been tempted to ignore the problem until the end date was approaching." He added that although it would initially be tailored for Irish banks, it would subsequently be available euro zone wide.

IMF Said to Be Discussing Activation of $583 Billion Crisis Lending Pool - The International Monetary Fund is working on activating its crisis lending pool, a move aimed at showing it has enough liquidity to help bail out countries in need and stabilize the global economy, two IMF officials said.  Countries that contribute to the pool, with new members including China and India, are seeking an agreement on how much of the credit line’s $583 billion should be made available and for how long, according to one official, who spoke on condition of anonymity because the talks are not public.  The talks are taking place as Europe’s debt crisis deepens, with the resignation of Portugal’s Prime Minister Jose Socrates stoking concern the government is moving closer to seeking a bailout. The activation of the so-called New Arrangement to Borrow would leave the IMF, which has helped rescue countries including Greece and Ukraine over the past two years, with ample resources if more European countries need help.

IMF Prepares For "Threat To International Monetary System" - Little did we know that our conclusion "something big must be coming" would prove spot on just a month later after Greece, then Ireland, then Portgual, and soon Spain, Italy, Belgium, and pretty much all other European countries would topple like dominoes tethered together by a flawed monetary regime. Well, based on news from Dow Jones we can now safely predict the following: "something bigger must be coming." As if the IMF's trillions in open lending facilities (many of which have recently been adjusted to uncapped) were not enough, we now learn that the world lender of last resort (which in theory is the Fed, but apparently Bernanke has been getting a little shy lately so is offsetting his direct lending directives to secondary organizations like the IMF, leaving the Fed with only USD liquidity swaps) is about to activate a "Special Funding Pool" - Dow Jones explains: "The International Monetary Fund is expected to soon activate a special funding pool that will boost the fund's ability to prevent or resolve economic crises, two people familiar with the situation said Thursday. One of the people said the activation of the funding--which can only be made by a special request from the IMF managing director to the board--was in anticipation of an expected wave of new IMF programs, including the possible expansion of the Greek bailout package." Wonderful. Global financial cataclysm rinse repeat all over again...

Portugal bailout 'could cost UK £3bn' - City experts fear Portugal will be soon be forced to apply for a bailout package worth up to €70bn (£60bn), following the Lisbon government's failure to push through its austerity measures on Wednesday. Portugal is teetering on the brink of becoming the third member of the eurozone to seek assistance from the EU – and as with Greece and Ireland the International Monetary Fund would probably also be involved.Prime minister José Sócrates's resignation on Wednesday night has left the country in political limbo, and piled extra pressure on European leaders who are gathering at a summit in Brussels on Thursday. "The resignation of the Portuguese prime minister adds a political crisis to a fiscal crisis, and brings a bailout a step closer," said Kevin Dunning at the Economist Intelligence Unit.

Challenge to Irish corporation tax from UK - THE REPUBLIC OF Ireland’s low corporation tax is set to be challenged by Northern Ireland, according to new plans due to be unveiled today. UK Chancellor George Osborne told the House of Commons in his 2011 budget speech yesterday that the treasury would today publish a paper on how the UK can help Northern Ireland’s private sector to grow, the Irish Independent reports. Osborne announced that corporation tax will come down to 23 per cent across the UK by 2014. The current corporation tax rate is 28 per cent in the UK, and 12.5 per cent in Ireland. The move is being taken in a step to boost the Northern Ireland economy and enable the North to attract more multinational companies. But the news could be seen as a blow to Enda Kenny’s government, as the Taoiseach engages in talks with other EU leaders in Brussels about reforms to the EU’s taxation system.

Mr Osborne's squeeze - British households aren't the only ones being squeezed by rising inflation. Today's batch of public finance and inflation numbers remind us that the unusual combination of low growth and above target inflation are bad news for the chancellor as well. CPI inflation jumped up again in February, to 4.4%. It is overstating it to call it a "shock" number, as some City commentators have. But it is somewhat above market expectations - and above the Bank of England's central projection in the Inflation Report forecast published only last month.The numbers also break a number of records. For example, the 2.8% annual rise in clothing prices and the 3.4% rise in the "core" measure of inflation (excluding energy, food and alcohol and tobacco), are each the highest they have been since the series began in 1997. The broader RPI measure, at a stunning 5.5%, is the highest since summer 1991.  Events in the world economy - and mixed indications about the state of the UK's recovery - mean that many City forecasters are now talking down the possibility of a rate rise from the Bank of England in May. For what it's worth, the betting is now that it will come in the summer.

Budget 2011: George Osborne puts fuel in the tank, but potholes lie ahead  George Osborne made a surprise raid on the oil companies as he attempted to ease the burden on motorists in a Budget designed to revive the struggling economy by boosting private enterprise.  The Chancellor announced a £2 billion-a-year windfall levy on North Sea oil to fund an immediate cut in fuel duty of 1p per litre. He also postponed a 5p rise in fuel duty due next month and introduced a fuel price stabiliser to keep costs at the pumps down.  Elsewhere, Mr Osborne announced a staged 3p cut in corporation tax, a £326 tax cut for 23 million low to middle earners and a fund to help first-time house buyers,

Moody's, Fitch warn weaker growth could hit the UK's AAA rating - The official forecast for UK growth was cut sharply yesterday prompting warnings from credit ratings agencies Fitch and Moody's that weaker growth or persistently high inflation could jeopardise the UK's prized triple AAA rating.  Alongside the Budget the Office for  Budget Responsibility cut its growth forecast for this year to 1.7% from 2.1% and the 2012 growth forecast to 2.5% from 2.6%. For now, both credit agencies are happy with chancellor George Osborne's plans to cut the country's debt pile. But the pair warned that if the economic recovery remains weak or inflation remains as high as it is now that could hit government revenues and increase spending, making it more difficult for the coalition to hit its targets.

The Effects of Austerity in the UK - The Conservative government in the UK has just released an update on its budget plans for the next several years. Ryan Avent comments: Still Cutting YESTERDAY, we learned that British Chancellor George Osborne has a harder task ahead of him than he'd been envisioning. Inflation continues to come in ahead of forecasts; that's no surprise. But it also seems that the government is borrowing more than it had planned to, largely because tax revenues have come in lower than expected. That probably has something to do with the weakening British economy. Last year the Cameron government announced that it would pursue an austerity drive in an effort to reduce the budget deficit, cutting government spending and increasing taxes by about £9bn in 2010, £41bn in 2011, and £66bn (about 4% of forecast GDP) in 2012. Because of this sharp and determined fiscal contraction, it forecast that the budget deficit would fall from about 10% of GDP in 2010 to around 3.5% of GDP in 2013.That turns out to have been a bit optimistic. Unsurprisingly, raising taxes and cutting government spending by a couple of percentage points of GDP over the past year has contributed to a recent sharp slowdown in the British economy, as shown below.

Stay tuned for a massive rise in the UK unemployment rate - I am working on our textbook today and writing a chapter about one of my favourite topics – the Phillips curve – which describes a relationship between some measure of inflation (wage, price) and some measure of excess supply of labour (usually the unemployment rate). I wrote my PhD about the Phillips curve developing models which demonstrated the inadequacy of the mainstream macroeconomics take on the subject. Today I read a strange tale in the UK Guardian – ONS inflation slip-up leaves millions out of pocket – which has some relevance to the chapter I am working on at present. The point is that if you believe the mainstream neo-liberal economic theories that are forced onto students in our universities around the world then you might expect a massive drop in the UK unemployment rate right now. Why? Read on.

Squeeze on cost of living will be worst since 1920s - The typical British household's annual income is £365 a year, or 1.6 per cent, lower than it would have been without the recession – with the very wealthiest households down by £2,230, a 3.8 per cent shortfall for them. Research commissioned by the BBC from the Institute For Fiscal Studies also reveals that the poorest tenth of the population saw their real incomes fall by 2.1 per cent compared with where they might have been in more normal times, a drop of £182 a year.  No group is better off, although some have, so far, seen some positive contribution to their incomes from changes to taxes and benefits, although those are still outweighed by the losses they have suffered in the rest of their incomes. These falls are classified as loss of employment and working hours; reduction in savings incomes as the Bank of England radically slashed interest rates; and a serious erosion in the purchasing power of wages and salaries as inflation has outstripped them, especially in the private sector.

Britain's £200bn Time Bomb Of Debt Interest - One of the effects of relatively high inflation is to ease the burden of debt by reducing its real value. For a highly indebted nation such as Britain, inflation therefore seems to make sense as an economic strategy.  With no control over their own monetary policy, the Portuguese and other fiscally-challenged eurozone nations don't have that luxury. Without inflation to do the work for them, the austerity required to get public debt under control becomes that much greater, which is one of the reasons why Portugal will soon be following Greece and Ireland into seeking a bail-out. Britain, by contrast, gets a relatively pain-free way out of the mire.  That's the conventional wisdom, anyway, but it is also largely rubbish. Wednesday's analysis of the public finances by the Office for Budget Responsibility provides further evidence of why elevated inflation can never be economically benign.

THE UK PROVES IT: Krugman And Keynes Were Right! - The economic situation in the United Kingdom is going from bad to worse.  Not only is the economy back in recession, inflation is heating up.  This raises the specter of the dreaded "stagflation" that crippled the US economy in the 1970s. Why is the UK so much worse off than the US? Yahoo's economics editor, Daniel Gross, thinks it's because the UK has pursued the wrong strategy as it struggles to rein in budget deficits and recover from the global economic crisis. Unlike the US, where rampant "stimulus" spending and deficits continue apace, the UK opted for "austerity." The country sharply cut its spending and raised taxes, in an attempt to get its fiscal house in order. Unfortunately, this immediately plunged the economy back into recession. The US, meanwhile, kept its foot on the gas, racking up massive deficits and debts but also stimulating solid if unspectacular economic growth. The US economy, therefore, continues to grow.  And at least for now, inflation is under control. So... does this mean that John Maynard Keynes and Paul Krugman, two "Keynesians" who advocate vast government stimulus as a way out of recessions, were right?  And that "austerians" like Niall Ferguson, who warn of the impending collapse of the United States under a mountain of debt, were wrong? According to Dan, it's too soon to tell.  But if the UK-USA comparison suggests that the Keynesian approach is looking pretty good right now.