week ending May 28

Fed balance sheet hits another record size- The Federal Reserve's balance sheet expanded to a record size in the latest week, as the central bank bought more bonds in an effort to support the economy, Fed data released on Thursday showed. The balance sheet expanded to $2.759 trillion in the week ended May 25 from $2.742 trillion the prior week. The central bank's holding of U.S. government securities grew to $1.519 trillion on Wednesday from last week's $1.495 trillion total. The central bank has signaled it will complete QE2 at the end of June, but will continue to reinvest proceeds from the bonds as they mature. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) fell to $917.86 billion, from $923.58 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system declined to $119.09 billion from $120.76 billion a week earlier. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $11 million a day in the week ended Wednesday, compared with an average daily rate of $3 million last week.

US Fed Total Discount Window Borrowings Wed $14.27 Bln‎ - The U.S. Federal Reserve's balance sheet kept growing last week as the central bank continued its efforts to stimulate the economy by buying Treasury securities.  The Fed's asset holdings in the week ended May 25 increased to $2.779 trillion from $2.762 trillion a week earlier, it said in a weekly report released Thursday. Holdings of U.S. Treasury securities rose to $1.519 trillion on Wednesday from $1.495 trillion the previous week.  Thursday's report also showed total borrowing from the Fed's discount window slid to $14.27 billion from $14.98 billion a week earlier. Borrowing by commercial banks edged up, but remained low. It rose to $7 million Wednesday, from $5 million a week earlier.  U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, fell to $3.429 trillion from $3.449 trillion.  U.S. Treasurys held in custody on behalf of foreign official accounts dropped to $2.685 trillion from $2.704 trillion in the prior week.  Holdings of agency securities slid to $743.42 billion from the previous week's $745.01 billion.

Foreign central banks' U.S. debt holdings fall: Fed - Foreign central banks' overall holdings of U.S. marketable securities at the Federal Reserve fell in the latest week, data from the U.S. central bank showed on Thursday. The Fed said its holdings of U.S. securities kept for overseas central banks fell $20.272 billion in the week ended May 26 to stand at $3.429 trillion. The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt declined by $18.683 billion to stand at $2.704 trillion. Foreign institutions' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae and Freddie Mac, fell by $1.588 billion to stand at $743.419 billion. Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries. China and Japan are the biggest two foreign holders of Treasuries.

Second Biggest Weekly Drop Ever In Treasurys Held In The Fed's Custodial Account As Foreigners Dump - There was one truly interesting observation in this week's Fed balance sheet update: not that the actual balance sheet hit a new all time record (which it did at $2.779 trillion), or that the Fed added another $24 billion in Treasurys to its balance sheet, or that total reserves hit a new all time record, increasing by $53 billion to $1.59 trillion. No. The biggest surprise was that in the just ended week, Treasury securities held in custodial accounts at the Fed, considered by some the best real-time representation of foreign holdings of US Treasurys, dropped by the largest amount in 4 years. From a total of $2.704 trillion, USTs held in custodial accounts declined by $18.7 billion to $2.685 billion. This is the second largest decline in history, only topped by the $22.1 billion in the week of August 15, 2007 which is the week that followed the great quant crash of 2007 that wiped out, among others, Goldman Alpha. This observation is in stark contrast to the recent record strength of bond issuance, after both the 5 and 7 Years auctions posted record Bid to Cover investor interest. .

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 26, 2011

 Beating a Dead QE2 - I thought I had suffered through enough of these types of stories over the past six months to last me a lifetime, but apparently not. And yet... some masochistic streak in me forces me to read it: QE2 was a bust: Economic data is worse than before — It‘s cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke’s huge financial stimulus package, known as “Quantitative Easing 2,” actually worked as planned?  QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy “moving in the right direction.” But an analysis of the real numbers tells a very different story. I've only snipped the first two paragraphs from this story, but that much is enough to contain two fundamental and oft-repeated errors which I've resisted commenting about in the past, but can resist no longer. Correction #1. You can't tell if QE2 worked by simply looking at actual economic data. Why? Because you need to compare it to something.  Correction #2. QE2 didn't cost anything. Nothing. Nada. All that happened was that the Fed bought a bunch of long-term assets. The money didn't disappear. The Fed still has that $600 billion; it's just in the form of long-term bonds now.

Fed's Kocherlakota: Raise Rates Modestly By Year's End‎ --A top Federal Reserve official Wednesday repeated his call for the central bank to modestly raise key rates if the U.S. economy continues along its expected path. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said if forecasts of rising inflation and an improving employment sector come to pass, it's time for the Fed to tighten some of its easy-money policies. Core inflation should be 1.5% by the end of the year, Kocherlakota said. "The Fed would then be closer to its price stability mandate--and so should ease the pressure on the monetary gas pedal," he said to the Rochester, Minn., Chamber of Commerce. Kocherlakota said if the core personal consumption expenditures price index, which strips out food and energy costs, "rises to 1.5% over the course of 2011, the FOMC should raise the fed-funds rate by around 50 basis points." If the Fed did this, it would be raising rates off of their de facto 0% range, and such an increase "would still leave the Fed in a highly accommodative stance."

OECD Urges Fed to Raise Rates to 1% This Year - The Federal Reserve should start raising interest rates in the second half of the year to ensure a smooth transition in the U.S. economy as the recovery gains traction, the Organization for Economic Cooperation and Development said Wednesday. In its semi-annual economic outlook, the OECD said gradually tightening credit soon after the Fed completes its government bond purchases in June would reduce the need for steeper–and potentially disruptive–increases in interest rates later. Alan Detmeister, economist from the Paris-based organization’s U.S. desk, said raising rates to 1.0% in the second part of the year would still leave “significant monetary stimulus” to help bring down a U.S. unemployment rate which the OECD sees staying stubbornly high.

OECD Urges Federal Reserve To Raise Interest Rates To 1% In 2H - The Federal Reserve should start raising interest rates in the second half of the year to ensure a smooth transition in the U.S. economy as the recovery gains traction, the Organization for Economic Cooperation and Development said Wednesday.  In its semi-annual economic outlook, the OECD said gradually tightening credit soon after the Fed completes its government bond purchases in June would reduce the need for steeper--and potentially disruptive--increases in interest rates later.  Alan Detmeister, economist from the Paris-based organization's U.S. desk, said raising rates to 1.0% in the second part of the year would still leave "significant monetary stimulus" to help bring down a U.S. unemployment rate which the OECD sees staying stubbornly high.

Next Steps For The Fed - Conventional wisdom continues to believe that soon enough, as has been paraded by the various Fed presidents, the Fed will commence various tightening steps, commencing with the termination of reinvestments of various maturing securities holdings, a process that would lead to gyrations in the IOER (and thus the IOER-GC spread which as has been discussed recently has gone negative due to the FDIC assessment fee). Following the reinvestment decision, the Fed would next proceed to drain excess reserves using various operations such as reverse repos, term deposits, and SFBs (a process which many doubt would success when the total amount of excess reserves is set to hit $1.6 trillion shortly). The last step in the Fed's balance sheet renormalization would be to proceed with outright asset sales of its $2.6 trillion in Treasury and agency holdings (as for those billions in Other Assets, nobody knows). Barclays' Joseph Abate does a great summary of the pitfalls attendant each and every step in the process:

Say goodbye to QE2, but not Fed easing - Goodbyes are never easy, and the end of quantitative easing is no exception. This is particularly true given how successful the Federal Reserve’s program has been at boosting investor confidence and driving up both equity and commodity prices.But there remains much debate about whether the coming end to QE2 will be an easy separation, cause financial markets to stall, or perhaps unravel completely. The Fed’s bond purchases in the first half of 2011 will have absorbed all of the net supply of Treasuries during that period. After the program expires, the rest of the world will need to purchase US$105-billion worth of net issuance in the first month just to keep pace with supply. In the second half of 2011, they will have to take down nearly a half a trillion dollars in Treasuries. The market is already concerned about peaking economic indicators and falling growth forecasts, while seasonal factors typically lead to weaker stock markets during the summer. Meanwhile, the U.S. Treasury market faces the possibility that the Japanese will repatriate funds to finance post-earthquake reconstruction, at the same time as the United States faces a massive debt-load and political challenges impeding deficit reduction.

Fed's Bullard Sees Fed 'Take Back' Accommodation Perhaps 2H 2011 - If the U.S. economy grows as he expects, Bullard said the Federal Reserve should be in a position to "take back" some of its stimulative policies during the second half of this year.  "We're close to the high tide for [the Fed's] easy-money policy," said Bullard.  At the end of next month, the Fed is scheduled to complete its current round of quantitative easing, purchasing $600 billion in bonds since November to help keep down long-term interest rates.  Bullard reiterated that the Fed is entering a "pause" in policy to allow for "more time to assess the strength of the economy."  Bullard anticipates a six-to-nine-month lag before the Fed might change to a tighter monetary policy even if employment is improving at a very slow pace.

Fed's Dudley: Bernanke Put High Bar On QE3 Adoption - Federal Reserve Bank of New York President William Dudley on Thursday said people shouldn't be concerned that massive levels of Fed-created bank reserves will cause an inflation surge down the road. "I don't think people should be concerned" about the reserves now parked on the Fed's balance sheet, the policymaker said. "We are going to make sure" they aren't the source of rising prices and, to ensure that, "we will exit in a timely way," he explained.  The permanent voting member of the interest-rate setting Federal Open Market Committee also noted that Chairman Ben Bernanke had put a high bar on extending what is currently a $600 billion bond-buying program that is set to end this summer.

Green Shoots, Exit Strategy, No QE3 - It is not clear whether the American financial community has the ability to observe and conclude that the US Federal Reserve is adrift and relies upon deception as policy in revealing its directions. Its position is to hold steady, inflate to oblivion, support financial markets in heavy volume secretly, and lie about leaving its trapped policy corner. The USFed is a propaganda machine that deals with ruses as a substitute for transparent policy discussion in the public forum. Two years ago the ruse disseminated widely was the Green Shoots of an economic recovery that had no basis at all. The scorched earth showed more evidence of ruin than fresh business creation, at a time when the grotesque insolvency was spreading like a disease throughout the entire US financial system. On one hand the USFed was busy operating numerous credit and liquidity facilities in order to prevent systemic seizure, busily redeeming the Wall Street toxic bonds at the highest possible prices. On the other hand they were talking about Green Shoots, as insolvency spread across the big banks to the household equity. They lost their credibility in the process. They have lost it completely after two full years of 0% rates, the ultimate in central bank shame.

Bernanke Will Be Forced To Do QE3 - The Fed is serious about freezing its balance sheet starting in June. They will continue to buy Treasurys as issues mature and are replaced. But, as Shostak points out, the momentum of money growth will slow down and that is the key to understanding what will then happen. If Treasury rates do not take off, then my assumption about domestic and foreign demand for Treasurys will be correct. If they do take off, it will be an indication of a shrinking money supply as Shostak points out which will lead to economic stagnation or even a market bust. On the other hand, I don’t believe the Fed will play “chicken” during an election year, and when things turn ugly they will announce QE3 and that will kick the can down the inflationary road. QE3 may be the last installment of this monetary madness.

QE3 Has Already Started - Most analysts have missed the fact that QE3 has already started in earnest. Of course, it would have been easy to miss.The new QE3 is the “RISK OFF” trade. QE2 ended up pouring $600 billion into stocks, commodities, oil, gold, and silver. Since April 29, the prospect of slowing economic growth has prompted this hot money to take flight and bail from these assets classes. Think of it as the same $600 billion stampeding into risky markets, doing a 180, and then stampeding right back out against. Where is all this money going? Into the Treasury bond market. We have in fact been in new bull market for bonds since February, taking the yield on the ten year Treasury down from 4.10% to 3.10%. If the current “RISK OFF” trade continues, or even accelerates, we could see ten year yields down to 2.0%-2.5% by the end of the summer.

Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01% - Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public. The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent. “This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”

New York Fed to postpone Maiden Lane sales: sources - Wall Street bond dealers are reporting that the Federal Reserve of New York is postponing regularly scheduled sales of its Maiden Lane II portfolio until after the July 4 holiday. The sales will continue sporadically until then, the sources tell HousingWire. The Fed reportedly held a conference call Monday to inform dealers that the sales will not happen this week, or the next. The next expected bid list will become available on June 6, they said. And that may be the only sale in the month. The central bank until now offered Maiden Lane II weekly, but is under no obligation to adhere to a calender of issuance, according to the dispositions segment of Maiden Lane II. The Fed clarifies on its website that it will strategize the disposition of Maiden Lane II in a way that maintains the "ability to generate maximum sale proceeds for the public." Maiden Lane II is one of several residential mortgage securitization platforms created by the Fed to clear toxic assets assumed in the government bailout of American International Group

Causation From Base Money To The Multiplier: The QE2 Evidence – Taylor - During the panic in the fall of 2008 some interpreted the explosion of the Fed's balance sheet and the monetary base (MB)—currency plus reserves of banks at the Fed—as an appropriate monetary policy response to a shift in the demand for the monetary base. That monetary policy should try to accomodate such shifts in demand is a classic monetary principle. Evidence offered in support of that interpretation was the sharp drop in the money multiplier (m)—the ratio of money (M) to the monetary base (m = M/MB). The claim was that the Fed offset the decline in the multiplier (m) by increasing MB, thus leaving the money supply (M = m times MB) comparatively unaffected by the drop in m. Indeed there is a striking negative correlation between the multiplier and the monetary base during the late 2008 and 2009 period, as shown in this graph. However, I argued in a Business Economics article at the time that this striking correlation had another interpretation. It was due to a reverse causation: the increase in the monetary base caused the multiplier to decline as banks simply absorbed the inflow of reserves.

The Federal Reserve Shipyard: GDP and Quantitative Easing‎ - The familiar reviews of output and consumption started turning over in my head again. Thoughts about inflation and deflation started bouncing around as well, which ultimately led me to think about the Fed, quantitative easing, and GDP. But what measure to look at? With the Fed doing everything it can to freeze the yield curve in carbonite, there’s little value in looking at interest rates. You can look at the Fed’s balance sheet with its myriad of colors and chunks carved out for this security purchase here and that Treasury purchase there, but what we want is essentially the net effect of it all. At the end of the day, what does all that Fed balance sheet stuff buy us? So I took a look at the St. Louis Fed’s Adjusted Monetary Base and compared it to GDP: There’s definitely an effect, but it’s on a lag. What I see is that the Fed’s initial round of easing (i.e. QE1 and its backstop of AIG) ultimately translated into an initial doubling of the monetary base. That, in turn, took GDP off its negative trajectory and started the turn upward. It forms a rather nice U-shape, doesn’t it?

Former Fed Official: Policy Hurt by High Oil Prices - The effectiveness of the Federal Reserve‘s controversial policy of buying government bonds to boost the U.S. economy is being hurt by the high oil prices it helped bring about, a former senior official at the U.S. central bank warned Wednesday. Vincent Reinhart, who headed the Fed’s monetary-affairs department until 2007, is set to tell a House hearing that quantitative easing, or QE, played a role in the rise and volatility in oil prices seen over the past nine months, which differs from the mainstream view at the central bank. “The Fed gambled that the benefits of the stimulus of QE to financial markets would offset the adverse effects of oil price developments. Whether that gamble pays off is yet to be proven,” Reinhart will tell the Committee on Oversight and Government Reform. Ever since the Fed launched its second round of bond purchases in November–a $600-billion program that ends in June–it has been repeatedly attacked by Republicans, who blame it for the sharp rise in gasoline and food prices. But it is unusual for a former official at the Fed Board to criticize it. Defending the policy several times, Fed Chairman Ben Bernanke has said high oil prices are outside of his control and are the result of strong demand from fast-growing economies like China and supply disruptions due to unrest in oil-rich countries in the Middle East and North Africa.

Fed's Duke says costly gasoline crimping consumers (Reuters) - U.S. consumers, already hard hit by a sharp collapse in home prices, are facing renewed challenges from higher gasoline costs, Federal Reserve Governor Elizabeth Duke said on Tuesday. In remarks focused primarily on financial literacy, Duke offered some flavor of her views on the economy. Her tone was not very optimistic, suggesting she is unlikely to begin pressing for interest rate hikes any time soon. "Family incomes have not kept pace with rising costs, and many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage," Duke said in the remarks, which were prepared for delivery at a conference sponsored by the Boston Fed. Weaker house prices and the resulting difficulties in selling a home have made it harder for Americans to move in search of work, she said, thus further reducing demand for home ownership.

Fed's Bullard Says Demand May Push Up Oil Faster Than Prices for Consumers - Federal Reserve Bank of St. Louis President James Bullard said demand from emerging markets may push up oil prices faster than other goods, making unsuitable a Fed focus on price indexes excluding energy and food.  “It is at least a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades,” Bullard said today. “If that scenario unfolds, then ignoring energy prices in a price index may systematically understate inflation for many years.”  A focus on overall price indexes can bolster the Fed’s credibility, which may decline if policy makers seem out of touch with households struggling to pay more for food and energy, Bullard said. Oil advanced 2 percent at 3:25 p.m. in New York after Goldman Sachs Group Inc. said it’s turning “more bullish” on raw materials.  The Fed may keep its main interest rate, monetary policy language and the size of its balance sheet the same after completing $600 billion in purchases of U.S. Treasury securities next month, Bullard said, reiterating comments this month.

Fed Watch: The War on Inflation - This is a simple description of a wage-price spiral, something that was a real threat at the time as massive resources were being directed at the war effort. Some members of the Federal Reserve appear to believe this threat is as real today as it was then. Mark Thoma directs us to the Wall Street Journal, where Kathleen Madigan reads the FOMC minutes and concludes: Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute… The strategy makes sense from an economics’ standpoint; but it carries risks on both the political and growth fronts. The extreme end of these fears can be found in Kansas City Federal Reserve President Thomas Hoenig’s recent Washington Post interview: WP: One place where there’s not any inflation is in wages. Can you really have an inflation problem without wages rising? TH: Not initially. But people are losing real purchasing power, and that changes how they’re going to negotiate. People want this lost purchasing power back in time. In negotiating, they’ll say, “Prices have been rising, we deserve more.” Any significant wage gains does not appear in the aggregate data. And note Hoenig’s distress that some firms are looking to play catch-up. I think you could interpret this as Hoenig desiring to see a downward level shift in trend wages. Hoenig expects the recession should result in a permanently lower level of standard of living than would have been the case otherwise.

Household Inflation Expectations and the Price of Oil: It's Déjà Vu All Over Again - FRBSF - The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years, a period of volatile food and energy prices.

Fed Research: Inflation Expectations Overly Sensitive to Food, Energy Prices - The April Federal Open Market Committee minutes show Federal Reserve officials are looking at inflation expectations to drive policy decisions. As long as inflation expect- ations are “stable,” then the Fed will hold off any action on inflation. Inflation expect- ations, however, have jumped this year. The early-May Thomson Reuters/University of Michigan consumer survey shows households think inflation will be running 4.4% a year from now. That’s up from a 3.0% pace expected at end-2010 and up from the April consumer price index’s actual yearly gain of 3.2%. Why aren’t policymakers more concerned? They may think consumers are just wrong about where inflation is headed. That’s at least one conclusion of research reported Monday by the Fed Bank of San Francisco.

Bullard: Fed Should De-Emphasize Core Inflation - The Federal Reserve should look beyond measures of so-called "core inflation" in order to assess the true impact of rising prices on American households, a top official at the Federal Reserve said Tuesday. James Bullard, President of the Federal Reserve Bank of St. Louis, argued the FOMC "should de-emphasize core inflation in order to reconnect with households and businesses that experience important price changes every day." The Fed currently prefers the rate of core consumer prices, stripping out volatile food and energy costs, as its primary inflation gauge. In perhaps the biggest attack on the Fed favoring core inflation over headline inflation in forming policy, Bullard insisted "the 'core' concept has little theoretical or statistical backing and is very arbitrary." "Headline inflation is the ultimate objective of monetary policy with respect to prices," Bullard said, noting that these are the prices that households actually pay.

Is The Core Inflation Concept Rotten? - St. Louis Fed President James Bullard recently attacked the concept of core inflation, which excludes volatile food and energy prices. The "core is rotten," he argued in a speech last week. "One popular argument for focusing on core inflation is that core inflation is a good predictor of future headline inflation," he said. "I think this is wrongheaded, as well as wrong." It’s fair to be skeptical of core inflation as a flawless predictor of future headline inflation. Nothing rises to that standard. It’s also prudent to recognize that there’s more than one way to measure core inflation. But to reject the idea entirely is going too far because it requires dismissing several decades of research and the historical record. Bullard obviously disagrees, as do other analysts, but such opinion is hardly airtight. Still, it’s easy to see why there's so much fuss about core vs. headline inflation. After all, the man on the street must routinely pay for food and energy and so the idea that inflation should be measured without these essential commodities sounds crazy.

Discretion versus Rules - Paul Krugman ponders which measure of inflation would be the best for central bankers to use when setting policy. Should it be headline inflation? Core inflation? Wage inflation? Some "supercore" measure of inflation?  As I have done my own pondering on the subject, I keep coming back to the thought that really, none of those measures is adequate by themselves. Sometimes you need to pay attention to wage inflation, but sometimes you don't. Sometimes you need to worry about the headline rate, but sometimes you don't. In my view, it's the job of a good central banker to assemble lots of different types of data, develop a complete picture of the economy composed of many brushstrokes, and set policy accordingly. In other words, I think that there's a good argument to be made for modifying the rules-based approach to monetary policy-making most central banks have tended toward over the past 10 or 15 years in favor of a more discretionary approach.

Inflation Notes - Krugman - Three short items: First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments. Second, Adam Posen of the Bank of England explains why the BoE should not raise rates: The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – and that is also just what the UK has. I agree, and so does Martin Wolf, whom I saw yesterday. We’ll see if the BoE has the intestinal fortitude to stand up to conventional madness. Finally, the invisible bond vigilantes are intensifying their invisible attack: 10-years down to 3.06 percent, and the TIPS spread falling.

Inflation and Debt (Wonkish) - Krugman - As I mentioned in an earlier post, the latest OECD Economic Outlook is a remarkable document — and I mean that in the worst way. I’ve already pointed to the report’s insistence that we must raise interest rates, because foofa grrzt bumble shazam — OK, that’s not quite what the report says, but it makes at least as much sense as the justification the report does offer. More broadly, what the report does is to encapsulate in a particularly pure form the can’t-do spirit that has gripped much of the world’s policy elite (and which I’ve heard a lot of over the past two days). In his remarks presenting the report, the OECD’s head admits that high unemployment is a terrible problem, which risks inflicting permanent damage; but he goes on to say that The room for macroeconomic policies to address these complex challenges is largely exhausted; therefore, we have to “go structural”.  How do we know that the room for macroeconomic policies is exhausted? Why should we “go structural” if the problems are mostly not structural (and unemployment definitely isn’t structural to any large extent)?Well, it’s just that can’t-do spirit.

A Billion Prices Now - The government continues to track inflation, for instance, by gathering price data much as it did in the nineteen-fifties: it surveys consumers by phone to see where they buy, surveys businesses to see how much they charge, checks out shopping malls to price goods. This leaves out consumers who have only cell phones, and it probably overstates inflation by not fully accounting for things like the impact of big-box stores. The larger problem, though, is the time it takes: the Consumer Price Index’s figures don’t come out until a month after the fact. In turbulent times, that’s too slow.  A new venture called the Billion Prices Project may help change that. The B.P.P., which was designed by the M.I.T. economists Alberto Cavallo and Roberto Rigobon, gathers price data not via survey but, rather, by continuously scouring the Web for prices of online goods around the world. (In the U.S., it collects more than half a million prices daily—five times the number that the government looks at.) Using this information, Cavallo and Rigobon have succeeded in building what amounts to the first real-time inflation index. The B.P.P. tells us what’s happening now, not what was happening a month ago.

Fed Bankers Cautious About Economic Outlook -Minutes - Most Federal Reserve regional banks, cautious about the economic outlook amid rising commodity prices, last month voted to hold steady the low discount rate. Ten of the Fed's 12 district banks voted to keep the discount rate unchanged at 0.75%, according to minutes released Tuesday. Directors from the Kansas City and Dallas Fed called for an increase in the rate to 1%. The discount rate is charged to banks on short-term emergency loans. The Fed has kept interest rates low for a long time to spur the economy's recovery from the deep recession that ended nearly two years ago. Rising prices for energy and other commodities have fed fears for both the economy and inflation. The minutes showed some bankers reported increases in consumer and business spending. But officials were cautious about the economic outlook, with some pointing out unemployment in the U.S. is higher than desired. The housing sector also remains weak.

Fed's Kocherlakota Trims Forecast for Growth, Urges Tightening‎ - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota trimmed his forecast for U.S. economic growth and raised his outlook for unemployment slightly while calling for a tightening of monetary policy this year. Unemployment will be "close to 8.5 percent" at year's end, Kocherlakota said in a speech in Rochester, Minnesota, an estimate contrasting with "between 8 percent and 8.5 percent" in a May 11 speech. Economic growth will be "around 3 percent," compared with "between 3 percent and 3.5 percent." "Given the depth of the recession that we experienced, this rate of growth is disappointing," Kocherlakota said. Central bank officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasuries by the end of June. They are also considering a strategy for how to remove stimulus, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed last week.

European debt turmoil could weigh on U.S.-Fed's Bullard (Reuters) -  Turmoil over sovereign debt problems in Europe could weigh on the U.S. economic recovery, St. Louis Federal Reserve President James Bullard said on Monday.    "I am concerned about the situation in Europe," Bullard told reporters after a speech. "Prolonged financial market turmoil could be a negative for the U.S."     Financial markets piled pressure on heavily indebted euro zone countries on Monday and global stock markets fell as investors worried about heightened risks in Spain and Greece and ratings agencies stoked new concerns over Italy and Belgium.    Italy, which has the euro zone's biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor's decision on Saturday to cut its outlook to "negative" from "stable".     Uncertainty in Europe is one reason why U.S. longer-term bond yields have dropped, Bullard said, as investors move into less risky assets.     Discussing monetary policy, Bullard said not to expect action for a while after the Federal Reserve ends its $600 billion bond buying program in June.    "Past behavior of the (Fed) indicates that the committee sometimes puts policy on hold,".

Chicago Fed: Economic activity weakened in April - From the Chicago Fed: Index shows economic activity weakened in April Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010. The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. Production-related indicators made a contribution of –0.16 to the index in April, down sharply from +0.31 in March. Manufacturing production decreased 0.4 percent in April after rising for nine consecutive months, and manufacturing capacity utilization declined to 74.4 percent in April from 74.8 percent in March.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed index drops to lowest reading since August‎ - The Chicago Federal Reserve Bank of Chicago's measure of the nation's economic activity sunk in April to its lowest reading since August 2010. The index, led by a decline in manufacturing production for the first time in nine months, fell to -0.45 in April, from 0.32 in March.  However, the Chicago Fed noted that Japan's earthquake was partly to blame. Parts shortages meant declines in automobile and parts production. A negative value for the index signals below-average economic growth. Of the 85 indicators that make up the index, 37 of them made positive contributions.

The Economic Outlook as of May 2011 - DeLong - I wish I could say that we will have a rapid recovery to a normal employment-population ratio, and that there will be enormous pent-up demand for housing that will fuel a construction boom when that normal employment-population ratio is reattained. I can say that we built an extra $150 billion x four years times--because it is a triangle--1/2 = $300 billion extra of construction spending over 2003 to 2006 that left us overbuilt relative to trend. And I could say that there is now 1.2 trillion of construction spending below trend during the bust--of underbuilding--that’s going to be a $2 trillion gap of underbuilding before we get back to normal. When incomes and employment patterns return to normal and people get sick of living with their in-laws (and their in-laws get sick of living with them), Americans are going to want to buy those extra $2 trillion worth of houses.

Here Comes Another GDP Downgrade - Another shoe drops: Worse-than-expected durable-goods orders in April pushed Macroeconomic Advisers to cut their forecast for second-quarter GDP growth to 2.8% from 3.2%. Macro Advisers was one of the first outfits to recognize that first-quarter growth would be much worse than the street expected. Now they’ve joined J.P. Morgan in forecasting roughly below-trend economic growth for the second straight quarter. Most everybody else seems to be sticking with their forecasts of growth of 3% or more in the quarter. Goldman has already cut its forecast and may not feel too comfy cutting it twice in the same day. But these forecasts are getting shakier by the day, as the slowdown case gathers steam.

Q1 real GDP growth unrevised at 1.8% annualized rate - From the BEA: Gross Domestic Product, First Quarter 2011 (second estimate) This was below the consensus forecast of an upward revision to 2.1%, and the details were weaker. Overall GDP growth was unrevised in the second estimate, although Personal Consumption Expenditures (PCE) growth was revised down, mostly offset by an increase in the "Change in private inventories". (see table at bottom for changes in contribution to GDP). The following 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 current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) - and very weak for a recovery, especially with all the slack in the system. The following table shows the changes from the advance release (this is the Contributions to Percent Change in Real Gross Domestic Product).

US Q1 Real GDP Remains +1.8%, Consumption Rev Lower - The U.S. Q1 real GDP revision printed +1.8%, the same growth rate in the original estimate, as a downward revision to consumption offset higher inventories and business structures, and net exports cut less.  Real final sales tanked to +0.6% in the latest revision (was +0.8% previously), their worst showing since Q3:2009. Final sales slowed as inflation jumped and as Federal spending fell an unrevised 7.9%.  A lowered consumption number after revision reflects slower sales of motor vehicles and fuels & lubricants, as well as less spent on electricity & gas services. Both were due to high energy prices that appeared in source data collected with a lag by the Energy Department.  The other revisions were from additional Commerce Department source data and were included in monthly reports. Better structures, inventories and trade data had analysts believing that Q1 GDP could be revised higher

Q1 GDP up unrevised 1.8%, well below expectations - The U.S. economy expanded at a 1.8% annual rate in the first quarter, the same growth rate as estimated a month ago, the Commerce Department reported Thursday. The first quarter growth rate was much weaker than expected. Economists were predicting a revision to a 2.2% rate. The major surprise was a downward estimate to consumer spending, to a 2.2% annual rate from the initial estimate of a 2.7% rate. Offsetting this weakness was an expected faster pace of inventory accumulation. The core personal consumption expenditure price index rose a revised 1.4%, compared with the initial estimate of a 1.5% gain. In its first estimate, the government said Q1 corporate profits before tax increased $113.8 billion or 6.3% to $1.91 trillion

GDP - a disappointing report - Rebecca Wilder - Yesterday I addressed the weak high-frequency indicators, specifically with respect to leading indicators of investment spending on equipment and software (durable goods). I argued that Q2 has not started off well, given that the real core orders for capital goods are down compared to the January to March average. The BEA reported that Q1 2011 growth was 1.8% on a seasonally-adjusted and annualized basis, which is unrevised from the first release but the composition of spending changed somewhat. On the margin, Q1 2011 looks a bit less stellar (if you can call 1.8% annualized growth 'stellar') with consumption growth being revised downward to 2.2% over the quarter (previously 2.7%). Below is an illustration of the Q1 2011 contributions to GDP growth before 8:30am (1.75%) and after 8:30am (1.84%).I think that the story is pretty simple: higher gasoline prices is even worse for consumption than initially anticipated, and inventory accumulation remains a large driver of economic performance. It's still way to early to predict what the entirety of 2011 will bring - the IMF forecasts 2.8% annual growth - but the bar's rising on the quarterly growth trajectory to attain that level of growth. I suspect that forecasts will be revised downward.

The New GDP Data Is Bad. The Hidden Data Behind It Is Worse - This morning the Bureau of Economic Analysis (BEA) released its latest estimates of GDP. And there’s bad news, hidden in the details. Most analysts are focused on the fact that GDP growth in the first quarter of this year was unrevised, remaining at 1.8%. But they’re focused on the wrong number. National accounting aficionados know that hidden beneath the headline number is an alternative estimate of GDP. This alternative is often called GDP(I), because it is based on income data, rather than spending data. And GDP(I) is actually a more reliable estimate. Unfortunately, this more accurate indicator tells us that GDP grew by only 1.2%. That’s bad news. In fact, this alternative indicator says that GDP is still below its level from late 2006. And the latest survey of macroeconomists by The Wall Street Journal shows little good news on the horizon. GDP is expected to grow by only 3.2% in 2012. While that sounds like a healthy clip, remember that Okun’s Law tells us growth needs to exceed 3% before the unemployment rate will decline.

BBC: US economic slowdown is confirmed - US growth slowed in the first three months of 2011 to an annualised rate of 1.8%, which is a 0.4% quarterly rise, the Commerce Department has confirmed. This compares with an annualised growth rate of 3.1% in the final three months of 2010. The slowdown was blamed on corporate profits unexpectedly contracting for the first time in more than two years. Many analysts had been expecting the growth figure to be revised upwards to about 2%. US GDP is expressed as an annualised rate, or annual pace, which shows what the three months' economic activity would mean if it carried on for a year. Growth in consumer spending, which accounts for more than two-thirds of US GDP, was revised down from 2.7% to 2.2%. That was balanced by an upward revision to the amount of money businesses were spending on restocking, which was increased from $43.8bn (£26.8bn) to $52.2bn. "There is no doubt the economy has slowed. We will call the first half of 2011 as a soft patch," said Robert Dye at PNC Financial Services in Pittsburgh.

Real GDI and Personal Income less Transfer Payments still below pre-recession levels - There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q1 GDI yesterday as part of the second estimate for Q1 GDP. Recent research suggests that GDI is often more accurate than GDP. For a discussion on GDI, see “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:  The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

US Economy Damaged More Than Thought by Japan Quake - The Japanese earthquake and tsunami in March appears to have damaged the US economy much more than expected and could set back hopes for a robust recovery. A series of analysts have recently cut their second-quarter gross domestic product projections, based in large part on impact that the Japan disaster is having on the automotive industry. Factory shutdowns and ensuing problems with getting parts have slowed vehicle production, a move likely to drive up prices, increase unemployment and slow consumer spending, according to recent projections from economists at Goldman Sachs and Deutsche Bank. Japan is having an impact across a swath of the economy, but is being felt most acutely on vulnerable Detroit automakers, whose business was just beginning to recover when the disaster hit March 11.

When the economy reaches stall speed - Nalewaik notes first that the 4 quarters prior to recessions were usually characterized by slower real GDP growth than is typically observed in an economic expansion. He then estimates Markov-switching models in which there may be an intermediate phase the economy moves into before or after an economic recession. This approach allows for a variety of possible outcomes. For example, it could capture a phase of rapid GDP growth in the first few quarters of a recovery, as proposed by Sichel (1994). However, Nalewaik usually finds evidence of a "stall" phase that the economy enters before going into a full-blown recession. For example, real GDP might be expected to grow at only a +1 to +2 percent annual growth rate per quarter while in the stall phase, before falling outright at a -1 to -2 percent rate during a recession. Unemployment in the stall phase might be expected to increase by 0.1% per quarter, before rising at 0.6% per quarter once the recession proper begins. The graph below shows the inferred probability that the economy was in the stall phase and the recession phase as inferred from unemployment dynamics.

Third Depression Watch - Krugman - Last year I warned that we seemed to be heading into the “Third Depression” — by which I meant a prolonged period of economic weakness: Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses. We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.  Brad DeLong points us to Macro Advisers, which has now downgraded its estimates for second-quarter growth. As Brad says, these estimates now suggest that we have now gone through a year and a half of “recovery” that has failed to make any progress toward closing the gap between what the economy should be producing and what it’s actually producing.  And nobody in power cares!

Some Economists Expect Recovery Later This Year -  The economy has been showing clear signs of slowing, but the soft patch may be temporary, and some economists look for a pick-up during the summer. Supply chain disruptions form the Japanese earthquake and tsunami have had a direct effect on manufacturing and the auto industry in particular. Additionally, the spike in oil and gasoline prices has hit consumer and business spending. "We can put our finger on the problems, and they're temporary, I think," said Mark Zandi of Moody's. "Oil prices were a blow. You can see that in the consumer spending numbers in Q1, and prices are coming back down." Goldman Sachs economists  said the ripple effect from supply chain issues were a big part of the reason for the [slow down, however] "That doesn't explain all the weakness relative to our original forecast. There are other things going on, the most obvious of which is oil prices," "If oil is coming back down you certainly wouldn't want to be cutting your growth forecast for the second half of the year," he said.

Will the Economy Return To the Old Normal? - There's been some pushback against the statement I made in this post that the economy would *eventually* return to the trend rate of growth it has displayed since at least 1870. This is a debate, in part, about whether the economy returns to trend after a shock, i.e. whether shocks are permanent or temporary. It is also a debate about the nature of the trend itself, i.e. whether the trend rate of economic growth is a smooth process that can be approximated by a trend line (with demand shocks responsible for most of the variation around the trend), or if the trend is a variable series subject to both permanent and temporary shocks (so that a substantial part of the variation in output over time comes from the trend itself, i.e. from supply-shocks -- an extreme version of this view asserts that all variation in output can be attributed to supply-shocks).

Here's to hoping: wage, salary, and income gains - Rebecca Wilder - There are reasons to expect the second half of the year to be be stronger than the first. Here are two: (1) the rebound in industrial activity following supply chain disruptions, and (2) possible impetus to investment spending coming from the depreciation allowance that expires this year. These factors, though, are just dressing up what may be weak underlying demand. Why? Because without significant jobs growth, it's unclear that we'll see the wage, salary, and income generation needed for a healthy continuation of the deleveraging cycle. On the bright side, the Q1 2011 Gross Domestic Income, GDI, report does show a smart rebound in wage and salary accruals. The problem is, that corporate profit growth, which generally leads wage and salary accruals growth, is slowing. (GDI is the income side of the BEA's GDP release and you can download the data here.) The chart illustrates annual domestic profit and wage/salary growth spanning 1981 Q1 to 2011 Q1. The series are deflated by the GDP price index. Real domestic profit growth has been robust, peaking at 65% Yr/Yr in Q4 2009 and decelerating to 7% in Q1 2011.

Does This Ease Your Worries?: US GDP from 1870-2008: As you can see from this picture, historically we've always recovered from recessions. Eventually. But as you can also see from the Great Depression, recovery has not always been immediate -- the source of Keynes famous "In the long-run we're all dead." I am confident that we'll return to trend this time as well, the question is how long it will take us to get there. At this point -- with the worrisome signs in recent data -- it's not looking to be anywhere near as fast as we'd like (source): The graph only goes through 2008. Here's a picture of more recent data (note the dates Lucas uses at the top of the graph to date the recession):

As the Economy Wavers, Is Washington Paying Attention? -The latest economic numbers have not been good. Jobless claims rose¹ last week, the Labor Department said on Thursday. Another report² showed that economic growth at the start of the year was no faster than the Commerce Department initially reported — “a real surprise,” said Ian Shepherdson of High Frequency Economics.  Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.  An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.  Are any policy makers paying attention?

Slow Recoveries -- Stefan Karlsson disagrees with my argument that the current very slow recovery in the US is quite satisfactory for the owners of corporations. His criticism centers on the fact that recessions are bad for companies because they result in underutilized capacity and thus depress margins. And I agree. It's quite true that companies don't like recessions (which is exactly what I wrote in my previous post on this subject). However, my point was that the owners of corporations do benefit from slow, relatively jobless recoveries, such as we saw after the recessions of 1991 and 2001, and what we're now seeing after the Great Recession of 2008-09.  Think of it this way. There are two countervailing effects at work during the business cycle: the size of the pie is changing, and the way that pie is divided between workers and firms is changing. A recession makes the pie smaller, but a high unemployment rate means that firms get to keep a larger share of that smaller pie. My argument is that there may be times when an increase in the size of the slice going to firms more than makes up for the fact that the pie isn't growing very fast. So let's look at the data.

Adventures in Balance Sheet Recessions - Suppose in 2008 the US government just credited 200 Million adult American citizens with $100K and floated $20 Trillion in debt to cover it.  A few questions

1. Could the US have floated $20T in debt. On one level the US can float as much debt as it wants so long as the Fed is targeting the Fed Funds rate. So the question is: would this lead to hyper-inflation?I don’t know. I doubt it but it depends on how much would have gone to immediate spending versus paying down debt/savings.
2. Lets say 90% went to savings/paying down debt. Then that’s an immediate fiscal stimulus of $2 Trillion. Not bad and certainly not hyper-inflationary.
3. Lets say that $18 Trillion went to savings/paying down debt. That is enough to get America of the balance sheet crisis caused by the crisis. We lost about $18 Trillion in wealth, top to bottom.

Charlatans and Cranks - Krugman - Politico writes that In this Republican primary season, no economic or monetary policy is too unorthodox for an electorate hungry for change.  There’s not much new in the story, but it does remind us that Tim Pawlenty — who is supposed to be a non-crazy– has declared his opposition to fiat currencies — i.e., demanded a return to the gold standard (although he may not know that that’s what it means).  What Politico doesn’t include, but should, is the lemming-like rush to endorse the Ryan plan, which, although Very Serious, is also complete crank economics, with its insistence — in the teeth of all the evidence — that privatizing Medicare can somehow provide adequate health care at much lower cost. And then there’s the recent rise of default denialism — hey, let’s signal to everyone that we’re a banana republic, what harm can it do? In the first edition of his textbook, Greg Mankiw famously derided Reagan’s supply-side advisers as charlatans and cranks. It’s pretty clear that when Mankiw wrote that he imagined that this was only a phase, that the GOP would return to more sensible policies. In fact, however, the party is sinking ever further into deep voodoo.

Was Dominique Strauss-Kahn Trying to Torpedo the Dollar? - It's all about perception management. The media is trying to dig up as much dirt as they can on Dominique Strauss-Kahn so they can hang the man before he ever sees the inside of a courthouse. Whoever wants to nail IMF chief Dominique Strauss-Kahn has really pulled out all the stops.  Their agents have been rummaging through diaries, hotel registries, phone records, yearbooks, yada, yada, yada. The UK Telegraph even paid a visit to a high-priced DC knocking shop to get a little dirt from Madame Botox; whatever it takes to make a randy banker look like the South Hill rapist. And they're doing a pretty good job, too. The cops have made sure that the "Great Seducer" always appears handcuffed and dressed in a "pervie" raincoat with 3-days stubble before they parade him in front of the media.  On Wednesday--more grist for the mill--they released his mug-shot, an unflattering, deadpan photo that makes him look like Jack-the-Ripper. Was that the intention?

Needed: Plain Talk About the Dollar, by Christina Romer - AT a recent news conference, Ben S. Bernanke¹, the Federal Reserve² chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.  Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.  Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.

Strong Dollar Policy - Ezra Klein quotes Christina Romer on the dollar At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while. This is more or less the economic-y answer; the one I learned sitting on the intellectual knee of the good and the great.  Yet, I have come to doubt it recently. There will be a couple of strand of thought here. As usual you are getting undigested musings and analysis. First, as Michael Pettis points out – if a strong currency is so good, how come so many countries are reluctant to receive this bounty. Second, all of sorts of things that the public feels are “bad” come from a strong dollar.

Debt Ceiling Jeopardizes Dollar’s Reserve Status - U.S. Treasury Secretary Geithner has warned that delays in extending the U.S. debt ceiling may cause irreparable harm. While borrowing costs for the U.S. government have not yet risen, irreparable harm may have already been done to the U.S. dollar and its status as a reserve currency. Ironically, it’s not a plunging, but a rallying bond market that is a symptom of the problem. Let us explain. First, no one really knows how the markets will behave should the U.S. delay servicing its debt. Most observers believe that a) the Treasury has a big bag of tricks to continue servicing the debt; and b) politicians will play a game of chicken, but eventually do what they always do: agree to spend more money. Some have even suggested that a derailment of the bond market may not be the worst outcome, as it forces action on the deficit now rather than later, arguing that in the long-run, this would be a positive development. That said, we don’t know how the bond market will react; but we do know that policy makers are playing with fire, and when you play with fire, you may get burned.

U.S. dollar could 'collapse': UN - The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline. In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s. This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners. “As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.

US Backs Egyptian Bond Issuance, Gives New $1 Billion Issue "Sovereign Guarantee" - Just because the US is having so much success convincing the world its debt is money good (but don't anyone dare count the $6+ trillion in GSE debt to the total US debt), the good old US of A has now decided to backstop the debt of... Egypt. Bloomberg reports: 'Egypt plans to raise $1 billion by selling Eurobonds this year to diversify borrowing and finance a widening budget deficit after its economy was rocked by the worst political crisis in 30 years. The five-year bonds will be backed by a U.S. “sovereign guarantee,” Finance Minister Samir Radwan said by telephone from Cairo today...President Barack Obama promised last week $2 billion in loan guarantees and debt forgiveness.' And when it comes to Uncle Sam giving his assurances to the developing world, size does not matter: 'The size is not significant but the backing from the U.S. will help raise the money at a relatively inexpensive cost.' Uh, should Congress perhaps have something to say about the fact that America is now somehow the guarantor of recently revolutionary African countries? Because if, heaven forbid, should the extremely stable and economically viable, but otherwise revolutionary Egyptian country suffer default and bondholders demand to be made whole, guess out of whose pocket the deficiency claims will have to be funded

VTB CEO Says U.S. 'Nearly Bankrupt' as Instability Lingers-- Andrei Kostin, chief executive officer of VTB Group, Russia's second-biggest bank, said global instability and the risk of the U.S. defaulting on its debt continue to roil the financial industry, stifling credit flows. "The constant threat of a financial crisis, defaults hangs over the financial banking sector, and on the whole, the overall situation on the global market remains very complicated," Kostin said at a conference in St. Petersburg today. "We see that the United States is nearly bankrupt." Standard & Poor's last month lowered the outlook on the U.S.'s AAA rating to "negative" and said the government risks losing its top rating unless policy makers agree on a plan by 2013 to reduce deficits and the national debt.

Government Reaches Debt Limit, Borrows Against Federal Pension Funds - Treasury Department officials have begun to borrow against federal pension funds to meet the government's financial obligations because the country is expected on Monday to reach the limit of its borrowing authority from other sources under the $14.3 trillion debt ceiling. In a letter to congressional leaders Monday, Treasury Secretary Timothy Geithner said he is suspending new investments in both the Civil Service Retirement and Disability Fund (CSRDF) and the Thrift Savings Plan G Fund, which is invested in federal securities. In addition, the department will redeem some of the investments held by the CSRDF, Geithner wrote. "Federal retirees and employees will be unaffected by these actions," Geithner said. By law, both funds must be made whole once lawmakers agree to increase the debt limit. The Federal Retirement Thrift Investment Board also Monday stressed that TSP investors will not be harmed. Under a 1987 law, the government is required to repay suspended G Fund investments, including interest, once the debt ceiling is raised and the government can resume borrowing.

U.S. debt default could freeze repo market → When Treasury Secretary Tim Geithner says a U.S. default on its debt “would inflict catastrophic, far-reaching damage on our Nation’s economy,” one of his key worries is the repurchase market. That’s because if repo lenders would no longer accept U.S. Treasuries as collateral for repo loans, the $10 trillion-a-day plumbing for the U.S. and European financial markets, and the market where the Federal Reserve daily conducts monetary policy, could freeze again as it did in 2008. “Those assets (U.S. Treasury securities) may be used as collateral for borrowings, the fuel on which the global markets run. A disruption of this process, even for a day, would have repercussions far into the future,” wrote Randall Forsyth May 18 in Barron’s, in a story headlined “Collateral damage: The true cost of a U.S. default.” Roughly two-thirds of repurchase agreements are collateralized with U.S. Treasury securities, based on the activity of the 20 biggest dealers. These dealers, thought to represent about half the market, had $2.8 trillion in repos outstanding May 11, the most recent day that information is available, and $1.9 trillion of those contracts had Treasuries as collateral, according to dealer reports to the Federal Reserve Bank of New York.

Debt Arithmetic (Wonkish) - Krugman - The whole tone of current discussion about deficits is one of urgency: deficits must be brought down now now now or crisis looms. Where is this coming from? Not from the arithmetic. The way the story is often told, deficits mean higher debt, which means higher interest payments, which can mean a spiral into bankruptcy. And qualitatively that’s not wrong. If you put numbers to it, however, for countries that are not facing huge risk premia, the spiral is very, very slow. Here’s a sample calculation. The latest IMF Fiscal Monitor predicts that general government in the US — that’s federal, state and local combined — will run a deficit of 7.5 percent of GDP next year, and that net debt will be 75 percent of GDP. . Suppose that we have 4 percent nominal GDP growth, which is actually low by historical standards. This shaves 3 percentage points off the rise in the debt/GDP ratio. So a year later, given those numbers, debt rises by 4.5 percentage points of GDP.

Boehner, The Debt Ceiling, And The Young Guns Of August - The notion that House Republicans might risk financial chaos by flirting with a failure to raise the debt ceiling strikes many people, including people who buy Treasury bonds, as too irrational to happen. But leaders can act irrationally, and it's worth thinking about the kinds of circumstances that cause them to do so.When Saddam Hussein ruled Iraq, he had a devious scheme for rooting out potential dissidents. I thought of that when I read Michael Leahy's story about John Boehner and his testy relations with Eric Cantor and other more conservative House Republicans. It's an excellent piece, substantiating the widespread rumors that Boehner and Cantor don't like each other.Indeed, while in no way would I draw any moral or psychological parallel between Boehner and Saddam Hussein, a certain similarity can be discerned in Boehner's tenuous hold on the House leadership. Boehner in the piece comes across as surrounded by internal rivals, and clings to power based on the tenuous support of rank-and-file Republicans whose actual loyalty he has difficulty ascertaining.

Geithner: Deal with $1 trillion in cuts realistic - A budget deal between the White House and Congress with more than $1 trillion in cuts over the next decade is a realistic prospect, said Treasury Secretary Timothy Geithner on Wednesday. Geithner said the deal would include a mix of targets for deficits with a debt cap and an enforcement mechanism that also includes a "substantial down-payment so people can see and feel the reforms are going to happen," Geithner said during a question-and-answer session sponsored by Politico. "You are seeing a fair amount of pragmatism" on all sides, Geithner said. Geithner also said he was convinced Congress would ultimately raise the debt ceiling and said he did not think markets would pay any attention to a test vote scheduled in the House of Representatives next week on a measure to raise the debt ceiling without spending cuts.

Biden talks seen last hope for debt ceiling deal - A deal to lift the U.S. debt limit may hinge on negotiations led by Vice President Joe Biden, which still have a long way to go to close the gap between deeply divided Democrats and Republicans. Biden has increasingly been playing the role of emissary for the White House to Capitol Hill on the budget battle that threatens to lead the United States to the verge of default. Republicans are demanding deep spending cuts in return for raising the $14.3 trillion U.S. borrowing ceiling, which needs to happen by early August. Biden will gather together senior lawmakers from both parties on Tuesday afternoon for a third set of talks to hammer out a compromise on reducing budget deficits.

Biden: Revenues needed as part of debt limit bill - Vice President Joe Biden said Tuesday that new revenues need to be part of any agreement with Republicans on legislation to raise the limit on how much money the government can borrow to continue to meet its obligations. "I've made it clear today ... revenues have to be in the deal," Biden told reporters after meeting with GOP negotiators. The vice president's pronouncement puts the Obama administration at odds with Republicans, who insist revenue increases are off the table. "Tax increases are not going to be something that we'll support," said Majority Leader Eric Canter of Virginia, who's representing House Republicans in the talks. But he concurred that "progress is being made." Biden wasn't specific about what new revenues the White House wants as part of any agreement, and he didn't call for any tax increases.

White House: 'Weeks' until deal on debt limit - On the eve of another round of deficit reduction talks, the White House¹ budget director said he envisions “quite a few weeks of conversation” between congressional leaders and Vice President Joe Biden² until an agreement can be reached.    Office of Management and Budget Director Jacob Lew said Monday evening he is "optimistic" a deal can be brokered that will lead to a successful vote in Congress to raise the nation’s nearly $14.3-trillion debt limit.“I can’t argue it will be pretty,” Lew said during a talk at the Economic Club of Washington.  Biden will convene a third week of budget negotiations with congressional leaders Tuesday afternoon as Republicans³ seek a deficit-reduction package in exchange for their votes to raise the nation’s legal borrowing limit by an Aug. 2 deadline. Lew is part of the talks. Failure to raise the debt ceiling would result in the nation’s first-ever default on obligations.

U.S. Debt Limit Agreement May Take Until August, Ryan Says -- A congressional agreement to increase the U.S. debt limit and reduce federal spending may take until August, the Republican chairman of the U.S. House Budget Committee said. "I think there will be a deal. It will probably take a while," Representative Paul Ryan, a Wisconsin Republican, said on NBC's "Meet the Press" program. "We have to August." The U.S. Treasury Department has said Congress must raise the $14.3 trillion debt ceiling by Aug. 2 to avoid the government defaulting on its loans. "Nobody wants default to happen, but at the same time we don't want to rubber stamp just a debt-limit increase that shows we're not getting our situation under control," Ryan said. Ryan defended a Republican budget plan that would cut spending by more than $6 trillion over a decade and privatize Medicare. The proposal would replace the traditional Medicare health-care system for the elderly with subsidies to buy private insurance starting with people who turn 65 in 2022.

Barney Frank: U.S. government default likely - U.S. Rep. Barney Frank (D-Newton) says America might have to default on its bills for the first time ever because Democrats and Republicans can’t agree to raise the government’s $14.3 trillion debt ceiling. “I’m pessimistic about anything reasonable (winning congressional approval) in the near term,” Frank, the ranking Democrat on the House Financial Services Committee, told the New England Council in a Boston speech today. “It may be that we’re going to have to see some failure to raise the debt limit and some temporary hiatus in our ability to pay our bills (for lawmakers to act).” The U.S. government officially hit its congressionally mandated debt ceiling on Monday when the nation’s red ink reached $14.3 trillion. Uncle Sam only avoided defaulting on his debts because U.S. Treasury Secretary Timothy Geithner used accounting tricks to keep the government solvent until Aug. 2. But unless Congress raises the debt ceiling by then, the government will run out of money to pay its bills — including principal and interest on Treasury bonds.

McConnell: No debt limit increase without Medicare cuts – Senate Republican leader Mitch McConnell (KY) told reporters Friday that he will refuse to support a debt limit increase if Medicare cuts aren't attached to the legislation.  "To get my vote, for me, it's going to take short term [cuts, via spending caps]... Both medium and long-term, entitlements.," McConnell said, as quoted by TPM. "Medicare will be part of the solution." Asked point blank whether he would vote against increasing the debt limit if Medicare isn't also cut, he responded, "Correct." McConnell didn't say whether he would filibuster such a bill, which may leave some room for it to pass without his support. The minority leader rejected the notion that Republicans may back off the House-passed GOP plan to replace the program with a subsidies system, after losing an election in a heavily Republican New York district this week that was centered on Medicare.

How Will the Debt Limit “Game of Chicken” End? - It appears that Republicans are determined to hold the nation’s credit rating hostage to their demand that federal spending be slashed before allowing the debt limit to rise. Rep. Paul Ryan, chairman of the House Budget Committee, is already warning Wall Street that a “technical default” is likely; that is, some bondholders may not get their interest payments precisely on schedule. The Treasury continues to warn that a financial apocalypse will occur if the debt limit isn’t raised soon, but Republicans pooh-pooh such concerns as political grandstanding. They maintain that as long as the Treasury has sufficient cash flow to pay interest on the debt, then Treasury can simply put off paying its other bills for a while and default will be avoided. They point to a 1985 opinion by the U.S. General Accounting Office (now known as the Government Accountability Office), which says that the Treasury is not obligated to pay its bills in the order in which they are received and can prioritize payments. Following is the opinion, which had been requested by the chairman of the Senate Finance Committee.

The Debt Ceiling Rapture: Is This The Real End Of The World? - It obviously would have been a terrible event for the human race if the world had ended Saturday as some had prophesied, but it might not have been all that bad from a federal budget perspective. Not only would the hand wringing over the debt ceiling have been immediately rendered trivial, the Rapture actually could have had a positive impact on the situation if the big overseas owners of Treasuries had all been called to heaven. That would have allowed the debt they owned to be written off and dropped the United States so far below its existing ceiling that it would have been quite some time — closer to decades rather than years — before legislation to raise the government’s borrowing limit would have been needed again. The irony is that the next date for which a disaster of sorts is predicted has to do with the federal debt ceiling itself. According to the Treasury Department, after using all of the previous tried-and-true techniques available, the government’s cash flow will reach a crisis situation around Aug. 2. That’s the date at which the government will have to decide who will get paid on time and who could face a catastrophe because they will have to wait, perhaps for some time.

Not A Surprise: GOP Plans Vote On Debt Ceiling Bill Next Week - As I posted several weeks ago, with polls showing that 70 percent or so of Americans don't want the federal debt ceiling to be raised, congressional leaders had to give their members a chance to oppose an increase so that they had a vote on the record to show their constituents.  I said, many representatives and senators were going to have to show they were against it before they ultimatey voted for it.That's why it was anything but surprising when, as reported in Roll Call,  House Republicans announced yesterday that they would bring a "clean" debt ceiling to the House floor next week.  Ways and Means Committee Chairman Dave Camp (R-MI), whose committee has to draft the bill,  also said he would -- surprise, surprise -- vote against the bill.

Vote on Debt Is Planned but Criticized as a Stunt - House Republicans said Tuesday that they would allow a vote next week on an increase in the federal debt ceiling¹ with no strings attached, in order to see it defeated and show Democrats that no increase in federal borrowing authority can be enacted without significant spending cuts. At the same time, Vice President Joseph R. Biden Jr.² said bipartisan talks among Congressional leaders over a fiscal package that could clear the way for an increase in the debt ceiling were now focused on getting at least $1 trillion in savings, though he said new revenue would have to be part of any bargain.  “I think we’re in position where we’ll be able to get well above $1 trillion pretty quick,” Mr. Biden told reporters after an afternoon session with lawmakers.

Geithner Dismisses Debt-Ceiling Debate as Political Theater - U.S. Treasury Secretary Timothy Geithner Wednesday dismissed as political theater a House vote on the debt ceiling that is expected to fail, and said Congress would ultimately raise the limit this summer. “Right now this is all theater. Beneath the theater you are starting to see people work together,”  The U.S. hit its debt limit May 16, and Treasury officials expect to exhaust the federal government’s capacity to borrow by Aug. 2. Geithner has warned of an economic catastrophe if the U.S. defaults, though Wednesday he said such an outcome “unthinkable.” Republican leaders said Tuesday they are planning a House vote next week on a standalone bill to raise the federal borrowing limit by $2.4 trillion, with the expectation it would fail. GOP leaders hope to show that a debt-limit increase can’t pass the Republican-controlled House unless it is linked to a plan to reduce the federal budget deficit. The ceiling, set by Congress, is $14.294 trillion.

 David Stockman: "Both Parties And The White House Are Advocating A US Default" - Reagan's budget director was again on Bloomberg TV explaining the reality of the situation to Matt Miller for the nth time (by now even a 2 year old will understand the cul-de-sac facing the US), although presenting a new spin on the situation, namely that we have gotten to a point where both parties are implicitly pushing for a US default, while though their inability to reach a political compromise, blaming each other for this inevitable outcome. 'The real problem is the de facto policy of both parties is default. When the Republicans say no tax increases, they're saying we want the U.S. government to default. Because there isn't enough political will in this country to solve the problem even halfway on spending cuts. When the Democrats say you can't touch Social Security, when you have Obama sponsoring a war budget for defense that is even bigger than Bush, then I say the policy of the White House is default as well...That is the question that really needs to be understood better and appraised by the bond market. Both parties are advocating default even as they point the finger at each other.'

$35 Billion In 2 Year Treasurys Price As Primary Dealers Take Down Half, More Retirement Funds Squeezed To Make Room Under Ceiling - The fact that the US is at the debt ceiling, and every incremental dollar of debt issued has to be met with a comparable underfunding in retirement funds is not bothering the SecTres (at least until August 2 at which point all mechanisms to delay the ceiling breach expire). Which is why today's auction of 2 Year paper passed with barely a glitch: $35 billion (CUSIP QZ6) priced at 0.56% (89.7% allotted at high), the lowest yield since December 2010. The Bid To Cover was a sizable jump to recent auctions, coming at 3.46, nearly half a turn higher than last auction's 3.06, and higher than the LTM average of 3.38. Not surprisingly, at 31.29% Indirect interest was the lowest since January, as foreign central banks and investors are dealing with tightening concerns of their own, meaning the bulk of the auction went to Primary Dealers (half) and the balance to Direct Dealers, who took down a 2011 high of 19.15%. The direct bidder hit rate was a surprisingly solid 32.22%. Nonetheless, with the WI trading almost on top of the auction High Yield, there were no surprise in the short-end of the bond market, where investors once again are forced to look ever further right for any yield, as short-term rates have plunged to lows last seen just when the equity market was about to flip over"

Default Swaps Trading on US Debt Doubles on Government Deficit Wrangling - Trading of credit-default swaps insuring U.S. Treasuries has doubled as the government struggles to agree on plans to cut its budget deficit and raise the $14.3 trillion national debt limit.  A total of 819 contracts covering a net notional $4 billion of debt were outstanding as of May 20, up from 449 contracts covering $2 billion a year ago, according to the Depository Trust & Clearing Corp. Average daily trading volume surged to $490 million last week from $10 million the week before, making the U.S. the fourth most active among 1,000 contracts tracked by DTCC, up from 633rd.  President Barack Obama’s administration is under pressure to resolve a standoff with Republicans over ways to reduce the deficit, or the federal government may lose its AAA credit rating, Standard & Poor’s said last month. Governments around the world are wrestling with deficit crises, with the European Union having had to rescue Greece, Ireland and Portugal.

CHART OF THE DAY: Have You Seen The Spike In U.S. CDS? - It certainly looks like the chatter about a US "Technical Default" is making some folks nervous. While yields remain at rock-bottom prices, there's been a noticeable uptick in 1-year CDS on US debt, notes Markit. As evidence that there's something unique to the US going on, that spike is not mirrored in the UK. Not only that, volumes on the US have surged as well. Politicians would be wise to pay attention.

US default ‘more likely than in Indonesia’ - It sounds dotty to suggest the US is at imminent risk of default. A country that has rarely been able to borrow so cheaply, that issues debt in its own currency and has just demonstrated that it can print as much money as it likes need never miss a coupon payment. Yet in the past fortnight traders have come to the conclusion that America might breach its own constitutional clause that its debt “shall not be questioned”. According to Markit, the cost of one-year US credit default swaps, which insure against default, almost tripled in six trading days. According to this – far from perfect – measure, the US is now more likely to default than Indonesia or Slovenia in the next 12 months. America’s dysfunctional politics is starting to infect the markets. To blame are congressmen who, like House Speaker John Boehner, argue it would be less damaging to default than to raise the debt limit without dealing with the deficit. Traders had assumed this was political brinkmanship as usual until Mr Boehner was publicly supported by Stanley Druckenmiller, an eminent former hedge fund manager. He told the Wall Street Journal earlier this month that a few days of missed payments would be worth it to force the White House to accept cuts. The danger is that a technical default does nothing to bring Democrats round, and there is no sign that Republicans are willing to accept tax rises, also needed if the budget is to balance. Rather than a short sharp political manoeuvre, default could drag on – and become a total disaster

Poll: More Americans fear higher national debt than default - The debate over whether to raise the legal limit on government borrowing has riveted Americans, with a large majority worried about the potential consequences regardless of whether Congress votes to allow the national debt to keep increasing. But when pressed to name their biggest concern, nearly half of respondents say they are alarmed by the prospect that the debt could grow beyond its current limit of $14.3 trillion, according to a new Washington Post-Pew Research Center poll. Only 35 percent say they are more worried about the risk of default and economic destabilization if Congress does not raise the debt limit.  The poll vividly illustrates the dilemma facing lawmakers as they approach an Aug. 2 deadline on the debt ceiling. While congressional leaders in both parties have acknowledged that the Treasury needs to keep borrowing to pay the government’s bills, lawmakers are likely to face voters’ wrath if they can’t prove that they are also working to rein in the spiraling debt.

Americans Don't Understand the Debt Limit Debate - You have to hand it to the American public, and yes, even to elected officials, for making the national debt a top-line issue in the national dialogue. It’s become increasingly difficult, in an era of Lindsay Lohan travails and royal weddings, to get people to focus on something as deadly serious and unexciting as the debt. But as a Washington Post-Pew Research Center poll shows, people may not necessarily grasp the concept of the debt. Of those polled, 48 percent said they were more worried about the impact of raising the debt limit than they were about the consequences of not raising the debt limit. Just 35 percent said they were more nervous about the impact of default. [See a slide show of 6 consequences if the debt ceiling isn't raised.]  Raising the debt ceiling understandably makes some people concerned that we are merely continuing down the same, fiscally irresponsible path. But default could send the markets and the overall economy into chaos.

Government Deficits: The Good, the Bad, and the Ugly - The first thing to recognize is that deficits are not always bad. When the economy goes into recession, deficit spending through tax cuts or the purchase of goods and services by the government can stop the downward spiral and help to turn the economy back around. Thus, deficits can help us to stabilize the economy. In addition, as the economy improves due to the deficit spending the outlook for businesses also improves, and this can lead to increased investment, an effect known as crowding in.  The main worry about deficits is crowding out. Crowding in was just described – it occurs when deficits cause output to go up and business confidence is increased. Crowding out comes about when deficit spending raises interest rates. There is a limited amount of funds available for investment, and when government competes with the private sector for a share of these funds to finance its deficit spending, it drives the cost of these funds – interest rates – higher. The worst outcome would be for the deficit to get so bad that the government chooses to default on debt payments (which could also lead to some other currency, or a basket of currencies, replacing the dollar as the vehicle and reserve currency).

CBO’s Estimates of ARRA’s Impact on Employment and Economic Output for the First Quarter of 2011 - CBO Director's Blog - Looking at recorded spending to date along with estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies and drawing on various mathematical models that represent the workings of the economy. Because those sources indicate a wide range of possible effects, CBO provides high and low estimates of the likely impact, aiming to encompass most economists’ views about the effects of different policies. On that basis, CBO estimates that ARRA’s policies had the following effects in the first quarter of calendar year 2011:

• They raised real (inflation-adjusted) gross domestic product by between 1.1 percent and 3.1 percent,
• Lowered the unemployment rate by between 0.6 percentage points and 1.8 percentage points,
• Increased the number of people employed by between 1.2 million and 3.3 million, and
• Increased the number of full-time-equivalent (FTE) jobs by 1.6 million to 4.6 million compared with what would have occurred otherwise.

CBO Says Stimulus Boosted Growth, Will Add More to Deficit - The economic stimulus package passed by Congress in 2009 raised gross domestic product, created jobs and helped lower the country’s unemployment rate this year, but also increased budget deficits by $830 billion over a 10-year span, the Congressional Budget Office said Wednesday. The Obama administration and Congressional Democrats said the American Recovery and Reinvestment Act, passed while the U.S. struggled to emerge from a severe recession, would save or create 3.5 million jobs while cutting taxes, investing in roads, bridges and other infrastructure, extending unemployment benefits and expanding aid to states. Republicans opposed the program, citing high costs and questioning the projected impact on the economy. The CBO report out Wednesday said the plan increased the number of people employed by between 1.2 million and 3.3 million, and lowered the unemployment rate by between 0.6 and 1.8 percentage points in the first quarter of 2011.

Republican leaders say budget cuts would aid economic growth immediately - As Republican leaders urge a steep and swift reduction in government spending, they are making an un­or­tho­dox argument: that these cuts would strengthen economic growth not only in the distant future but almost immediately. That view is at odds with many of the nonpartisan groups that analyze the economy. Research departments of leading banks and agencies such as the Federal Reserve¹ and the Congressional Budget Office warn that deep cuts would come at the cost of weaker growth and fewer new jobs in the months ahead, as less public money is pumped into the economy. “There’s another myth I need to address,” House Speaker John A. Boehner (R-Ohio) said in a speech this month,² “and that is the myth that addressing our debt challenges requires ‘pain.’ ”

Cut and Grow? I Say No. - Neil Irwin’s WaPo piece this AM provides a useful review of the different ways economists and politicians are thinking about the short-term impact of spending cuts on growth and jobs. I’ve been pretty aghast to hear claims that large cuts would immediately generate job growth when the opposite is almost surely the case.   You can make this a lot more complicated, but when you’re as far below capacity as we are—when so many people are unemployed, e.g.—it’s really quite simple arithmetic.  Government spending feeds right into GDP growth and cuts subtract from it. Now, when you’re at full capacity, it’s different.  At that point you’re pouring water into a glass that’s already full so you’re just wasting water.  But with GDP growth just around trend (positive but not all that strong) factories with capacity to spare, and 20+ million un- or underemployed, there’s space in the glass.  In fact, if you look at the GDP or employment accounts, it’s clear that state spending contractions are a real drag on growth and jobs right now.  If I ran the country and had my druthers and wasn’t constrained by today’s budget politics (yes, that’s a lot of ‘ifs’), I’d do another round state fiscal relief.

Following Up From This AM - This morning I mentioned the drag that state and local fiscal contractions are having on jobs and growth and threatened to post some graphs.  Coming up for air now, so here they are. In normal times, spending and investing by state and local governments adds to growth.  But in recent quarters, they’ve either added little or subtracted from GDP growth.  There may be some improvement coming on that front, at least based on increased state tax revenues in some states, but local governments will be dealing with weak property tax collections for awhile, yet another spillover from the housing bubble.  State and local employment growth has been an even more consistently negative, losing ground while overall employment is up.  Outside the state and local sector, employment’s up 2.1 million jobs since January 2010.  But states and towns have given up 300,000 jobs, with local education down 144,000.

The Budget Needs to Leave Room for Emergencies - Matt Yglesias makes a very good point: The other thing, of course, is that "stuff happens." Nobody sitting down in 1925 to write a 25-year budget forecast would have made the funds available to win World War II. It's nice to think that you have a plan that leaves headroom to engage in some deficit spending if it turns out a meteor is going to strike the earth, orJack Layton is the leading edge of a Viltrumite invasion.  I have made the point before that Americans increasingly seem to think about the budget the way that chronic overspenders think about their purchases: It's of course totally true that we could raise taxes to support Social Security at current benefit levels. This is, in fact, true of almost any government program you can name. And if we only had one government program, that would be helpful. But we have a whole group of government programs, and only so much money to spend.

Comparing Two Approaches Toward Deficit Reduction - Economic growth is the single best cure for budget deficits. When the economy does well, tax revenues rise and the deficit falls. A major cause of the budget deficit in the US is the economic downturn. (The other principal culprit is the tax cuts of 2001 and 2003.) And as the economy recovers, the deficit will fall substantially on its own accord, just as it did during the recoveries of the 1980s and 1990s. To illustrate my point, let's go back to Austerityland. Recall that GDP in Austerityland was $100/year and the budget deficit was $10/year, or an unacceptably high 10% of GDP. Let's also assume an initial debt/GDP ratio of 60%. Suppose that the Austerity Party proposes addressing the budget deficit problem by cutting $5 from government spending in their first year in office and another $5 in their second year in office. (They incorrectly believe that cutting $10 over two years will be sufficient to erase the $10/yr budget deficit.) Now suppose that there is a rival party: the Growth Party. (Maybe we could call them "The G Party"?) They propose addressing the budget deficit problem through patience.  Instead, just keep government spending constant for a few years, so that spending is gradually brought more in line with tax revenues but a sharp fiscal contraction is avoided.

Economic Soft Patch Creates Political Problems - Washington politicians are discovering what has been evident to consumers and economy watchers. The U.S. economy is barely growing, and hiring isn’t strong enough to bring down the jobless rate. According to a story in The Washington Post, both the Democrats and Republicans are discussing ideas to boost business activity and hiring. The 2011 economy was supposed to be helped by the cut in the withholding of Social Security taxes. But that extra money simply shifted out of Washington’s coffers and into the pockets of oil producers. The economy is losing momentum. Jobless claims have been above 400,000 mark for seven weeks. Pending home sales — a measure of future home buying — plunged 11.6% in April. And consumers have had to shift more of their money to buying gasoline and food, leaving other spending barely rising. Yet politicians have to square current talk of more government help with their past comments about the need to cut government spending.

What happens if Congress goes home - You should really read Brad DeLong’s survey of the economy, circa 2011. An excerpt: It is a fact that if congress simply goes home — doesn’t do anything for the next 10 years except keep the federal government on autopilot, or if it does do things if it pays for whatever increases in spending it enacts by raising taxes and pays for whatever tax cuts it enacts by cutting spending — that we do not have a long run deficit problem. If congress goes home for ten years our program spending is matched to our tax revenues, which means a declining debt burden because the growth rate of the economy is larger than the interest rate on our debt. Our belief that we have a long-run deficit problem is based upon the belief that congress will pass laws that increase spending and that cut taxes--that it will repeal the Independent Payment Authorization Board’s authority to try to make Medicare more efficient, that it will repeal the Affordable Care Act’s tax on high-cost health plans. Given that the fear is based on a belief that some future congress will bust the budget, it is hard to see how we can address this fear through any possible piece of legislation today--for no congress can bind its successors.

Six Think Tanks Tackle the Budget Deficit - Today, at the request of the Peterson Foundation, an ideologically diverse group of six think tanks proposed their long-term solutions to the federal deficit problem. Not surprisingly, they disagreed on most details. But the project reflected surprising consensus (though hardly unanimity) on a some big issues. Most important, four of the six aimed to hold federal spending two decades from now at around 23 percent or 24 percent of Gross Domestic Product. Similarly, four projected federal tax revenues at roughly the same level. This suggests a significant increase in taxes over today (and over the House-passed budget) and a big drop in deficits.  The groups represented views from the political right (the Heritage Foundation and the American Enterprise Institute), the left, (the Economic Policy Institute and the Center for American Progress), and the middle (the Bipartisan Policy Center). The sixth group, the Roosevelt Institute Campus Network, was chosen to represent the views of young people. The Tax Policy Center served as a “scorekeeper” for the tax proposals, but the plans themselves are the work of the individual think tanks and not TPC.

Charts: Comparing Plans to Cut the Deficit - This week’s Capital column looks at six different plans to cut the federal deficit from a half-dozen groups across the political spectrum. The following charts show how the plans stack up and reveal that the debate over how to reduce the deficit is truly a philosophical one about the size of government.

Plans to Cut Deficit Reveal Varying Visions - Billionaire Pete Peterson's anti-deficit campaign has energy, staff and money—lots of it. So when his foundation wanted organizations of different political leanings to subject their deficit-reduction plans to scrutiny by veteran budget analysts, it offered each $200,000.  Not surprisingly, six groups volunteered. The results, unveiled at a Peter G. Peterson Foundationconclave Wednesday, are revealing—though not entirely encouraging in the foundation's quest for the elusive common ground.  The assignment was straightforward: Devise a plan that achieves fiscal sustainability, by your own definition (and, thus, targets vary.) Be specific enough so former Congressional Budget Office analysts can score it 10 and 25 years out.  Contenders ranged from left (Economic Policy Institute, Roosevelt Campus Network) to right (American Enterprise Institute, Heritage Foundation) with a couple in between (the Democrats' Center for American Progress and a Bipartisan Policy Center plan crafted by retired deficit warriors Republican Pete Domenici and Democrat Alice Rivlin.) A tip for spectators: Heritage is a proxy for House Budget Chairman Paul Ryan (R., Wisc.), CAP for President Barack Obama and BPC for the Bowles-Simpson fiscal commission.

The Deficit Debate Isn’t Just About the Deficit (At Least, It Shouldn’t Be) - Washington is a town where bad math (Lower taxes! Better benefits! Forever!) makes good politics. Maybe that's why the audience at Wednesday's fiscal summit hosted by the Peter G. Peterson Foundation thrilled to former President Bill Clinton's simple three-word mantra for the deficit debate: "Arithmetic still matters."  But if today's summit -- which featured six competing budget plans from liberal, moderate and conservative thinks -- carried any lesson, it's that the arithmetic of balanced budgets isn't what we're debating when we talk about the deficit. Ultimately we're debating values, not math. Here's why. In the chart to the left, I've quickly graphed the six organizations' solutions to budget reform by 2035. The Y-axis represents spending and revenue as a percent of GDP. What do you see? I see that that each think tank passed the arithmetic test. They all held deficits below CBO projections. But the plans couldn't look more different. Heritage closed the deficit by holding spending and taxes below their historical average. The Economic Policy Institute did it by raising spending and taxes to their historical highs.  The deficit is an arithmetic problem -- a balancing of pluses and minuses. But it's a values debate -- a moral tug-of-war over the kind of government we want for the next 20 years.

Pentagon Wants 80 to 100 Long Range, Nuclear-Capable Bombers That Can Operate With or Without a Pilot in the Cockpit  -  The plane would be the first long-range bomber built in the U.S. since the last of the 21 bat-winged B-2 stealth bombers by Northrop Grumman Corp. rolled off the assembly lines at Plant 42 more than a decade ago. The Air Force owns the 5,800-acre industrial park and leases space to aerospace contractors. Now on the Pentagon wish list is a proposed fleet of 80 to 100 nuclear-capable bombers that could operate with or without a pilot in the cockpit. Pentagon weapons acquisition chief Ashton Carter met separately with representatives of Northrop, Boeing Co. and Lockheed Martin Corp., Pentagon spokeswoman Cheryl Irwin said. These companies are expected to vie for the estimated $55-billion contract that is expected to provide jobs and decades of work for Southern California’s aerospace industry.

The $1 Trillion Fighter-Jet Fleet - A new Pentagon forecast showing the total cost of owning and operating a fleet of F-35 Joint Strike Fighters topping $1 trillion over more than 50 years has caused a case of sticker shock in Washington. And that price tag doesn't even include the $385 billion the Defense Department will spend to purchase 2,500 of the stealthy planes through 2035. During a Senate hearing this month, Sen. John McCain (R., Ariz.) called the $1 trillion figure "jaw-dropping," particularly when compared with the costs of operating other aircraft.  "I appreciate this estimate is still early and subject to change, but we need to know that the program is going to bring that number down," he said.

When the Pentagon is captured by its vendors - Companies from General Motors to Coca-Cola have long had a complex relationship with their suppliers — it’s important for those vendors to do well, but at the same time no one likes getting ripped off to the point at which the vendors are doing spectacularly well and the big organization doing the buying is seeing its expenses rise dramatically year after year. Unless, of course, you’re the Pentagon: The Pentagon is very encouraged by Wall Street’s response to aerospace companies and arms makers, even as U.S. defense spending flattens, the top U.S. weapons buyer said on Tuesday. “We are monitoring the health of our industry as it is seen by the financial community,” said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. “And the information there is very encouraging to us. The median stock price for the industry’s to 20 aerospace and defense contractors is about 92.5 percent of their 52-week trading highs, he said.

US lawmakers pass $690 billion Pentagon bill — The US House of Representatives passed a $690 billion Pentagon budget Thursday that bars American ground forces in Libya and limits the Obama administration's powers on handling Guantanamo detainees. Lawmakers voted 322-96 in favor of the budget plan which met the Defense Department's request for $119 billion to fund the wars in Iraq and Afghanistan. It also placed restrictions on President Barack Obama's authority to reduce the US nuclear weapons stockpile under the new START treaty with Russia, prompting a White House veto threat earlier this week. Shortly before passing the bill, which must now be reconciled with a Senate version, the House narrowly defeated by 215-204 an amendment demanding an accelerated timetable for withdrawal from Afghanistan.

Just Because Rep. Paul Ryan Keeps Saying It… -  - Doesn’t make it any less egregiously wrong. When I introduced this blog a week ago, I said that one reason for it was to help people sort out some of the extremely misleading assertions partisans are making these days. Rep Paul Ryan seems intent on keeping me very busy.  On Meet the Press today, he repeated this little chestnut he’s been tossing around lately regarding the R’s treatment of Medicare in the budget plan he authored: “Our plan is to give seniors the power to deny business to inefficient providers…their plan [Affordable Care Act] is to give government the power to deny care to seniors.” Just a few little words…but there’s so much wrong with this—the logic is so upside down—it’s hard to know where to start.  I’ll go after the first part here and leave the second part—‘their plan’—for later.

Sharing Costs Is No Way to Fix Medicare - Many Republican policy makers appear conflicted about the budget plan put forward by the House Budget Committee chairman, Representative Paul Ryan of Wisconsin. They are torn because they like its substance, but believe it is bad politics, especially among elderly voters. In truth, the substance is not particularly appealing either.  At the heart of the Ryan plan is a shift within Medicare toward consumer-directed health care -– which in turn is predicated on increasing beneficiaries’ "skin in the game" to make the health system more efficient.  While more consumer cost-sharing would help reduce unnecessary care, the plan would not live up to its billing in cutting health costs for America. According to the nonpartisan Congressional Budget Office, it would do the opposite. That’s right: The CBO found that the Ryan Medicare proposal would substantially increase total health-care spending.

Video - Dem Congressman On Ryan Plan: People Will Be Dumped Out Of Nursing Homes 'We've had no proposal from the Republicans except in their budget they wanted to take Medicare away from future seniors by making it a block grant, and they wanted to cut the Medicaid program which cuts a big hole in the safety net for the poor to get their health care needs which means people in nursing homes would be dumped out of those nursing homes,' Rep. Henry Waxman (D-CA) said on the House floor today.

What’s Left of the Ryan Plan? - Jennifer Steinhauer in the Times reports that some Republicans are running away from the Ryan Plan (you know, the one that changes Medicare from a health insurance plan to an underfunded subsidy), while others are trying to figure out if they should support in order to gain Tea Party votes. As policy, of course, it never had a chance to pass the Senate or of being signed by President Obama (and every Republican staffer Politico could find agrees), so it was pure political theater from the start. As Paul Krugman points out, the goal may have been to win over the pundits — a group that is vastly more concerned with the deficit than ordinary voters — but even that failed. (They got Jacob Weisberg, but he backpedaled furiously, and they got David Brooks, which was mainly amusing because then we got to watch Krugman trying to observe intra-Times decorum by not going after Brooks by name). Now Republicans are wondering if the loss of a Congressional seat in a conservative New York district was Ryan’s fault. But while I’d like to think that the nation is recovering its senses, at least on what Republicans mean for Medicare, I’m not optimistic.

The GOP's Real Budget Hatchet Man - Two weeks ago, Rep. Hal Rogers (R-Ky.), chairman of the House Appropriations Committee, made the GOP's next big move to slash spending for social programs. In a little-noticed proposal, Rogers detailed how the GOP wants to inflict the pain of more than $1 trillion in unspecified discretionary spending cuts contained in Ryan's 2012 budget, which passed the House in April. Rogers has now divided up the cuts into 12 different areas, each of which will be considered as its own spending bill. Under his proposal, the poor and the working class will be hardest-hit. On Tuesday, Rogers kicked off the GOP's budget-cutting party in the House, deciding which programs should pay the price. Rogers has focused on capping labor, health, and education spending at $139 billion—$18 billion less than the 2011 budget and $41 billion below what President Obama proposed in his own 2012 budget. Big cuts to transportation and housing are another top priority for the GOP—which, per Rogers' proposal, wants to slash spending by $7.7 billion from the 2011 budget and $27 billion from the president's budget. By contrast, there's only one area where Republicans want to increase outlays: defense spending, where they propose a $17 billion hike in 2012.

Budget Disinformation, Part 1 Million - Krugman - I’m late in getting to Glenn Hubbard’s debt column, but it still needs further bashing. Here’s what Hubbard says about the Obama administration: Ruling out long-term entitlement spending restraint, Mr Obama has argued that fiscal sustainability can be accomplished by raising marginal tax rates on households earning more than $250,000 per year.  This is what it technically known as a “lie”. Has Obama ruled out entitlement spending restraint? Here’s his health policy head, explaining the plan:shared fiscal responsibility includes reforms that would save at least an additional $200 billion for Medicare over the next decade. You can be skeptical about whether this plan will work — but it’s just a lie to say that Obama is “ruling out” spending restraint; and it’s equally false to say that he’s relying on tax hikes to do the whole job. Then, of course, there’s the howler: describing Paul Ryan’s plan as “well-crafted”. It is, on the contrary, ideology aside, a piece of junk on simple technical grounds — and obviously so.

$106 Billion Of Improper Refundable Tax Credit Payments!!! - That's a lot of money even in Washington.  At 10:30 a.m. tomorrow, the House Ways and Means Oversight Subcommittee will hear from IRS, Treasury, and GAO witnesses.  It will be webcast live here.  The Earned Income Tax Credit, which I formulated in 1975, is the perennial leader of improper tax payments, running $16.9 billion in FY10 according to this GAO report.  That's out of $56.2 billion of total cost for the EITC as estimated by the Joint Committee on Taxation here.  Some of that $16.9 billion is fraud, and some isn't.  The EITC is complicated, and many poor people walk into the offices of tax preparers early every year to claim it without understanding all the ins and outs of the law. The preparers do the best they can with inadequate documentation, but still, a 30% error rate is not good.  The basic purpose of the EITC, to reward the poor for work by offsetting a large portion of their payroll tax payments, is a good one first proposed by Milton Friedman and pushed into law by Presidents Nixon and Ford.  When the poor work, they draw less in benefit payments.  That same GAO report shows much more is lost in improper Medicare and Medicaid payments.

Tax Rates and Economic Growth Over Ten Year Time Horizons, plus Why a Flat Tax Would Result in Much Slower Economic Growth - Last week I had a post looking at the the real GDP growth maximizing income tax rate using both top marginal income tax rates and and "average marginal" "all-in" tax rates for all taxpayers (including those who paid nothing) computed by Barro & Sahasakul. The post noted that the optimal top marginal rate was in the neighborhood of 64%, a finding that corresponds with many other posts I've written on the topic. The post also noted that the Barro-Sahasakul rates were not as useful at explaining economic growth as the top marginal income tax rates.  David Altig of the Atlanta Fed commented on the piece here, but he essentially had one very gently delivered criticism and one follow-up comment. The criticism is that my post did not consider long run effects - for each year, it looked at how the tax rate that year would affect growth in real GDP from that year to the next. The comment was that the post's results did not correspond with results of a paper he published.

Bush-Era Tax Cuts Projected As Largest Contributor To Public Debt [CHART] -If the Bush-era tax cuts are renewed next year, that policy will by 2019 be the single largest contributor to the nation's public debt -- "the sum of annual budget deficits, minus annual surpluses" -- according to new analysis from the non-partisan Center for Budget and Policy Priorities. These tax breaks for the nation's top earners, combined with the cost of fighting wars in Iraq and Afghanistan, will account for nearly half the public debt in 2019, measured as a percentage of economic output, the CBPP's analysis shows. Even the cost of the economic downturn, combined with the cost of the legislation passed to stem the damage, won't be as burdensome as the weight of the Bush-era tax cuts, the chart below suggests. See if you can find the debt associated with the Trouble Asset Relief Program and the rescue of Fannie and Freddie:

Tax Base Broadening a Part of Everyone’s Deficit Reduction Plan–Even Paul Ryan’s - On Wednesday I attended the Peter G. Peterson Foundation’s “Fiscal Summit”–what felt like the fiscal policy world’s version of the Oscars, complete with stars like Bill Clinton, Paul Ryan, and two-thirds of the cast formerly known as the “Gang of Six” (now five), and even video presentations of the deficit-reduction proposals from six think tanks that felt amazingly similar to the clips from the Best Picture nominees. President Clinton set the tone by encouraging an emphasis on the positive.  Instead of painting doomsday scenarios about what would happen if we don’t get our act together and reduce the deficit, he said we ought to emphasize what we have to gain from fiscal responsibility–you know, just little things like a strong economy and a more secure future for our kids and grandkids. And in terms of the variety of proposals from the variety of participating think tanks, both the Wall Street Journal’s David Wessel, and the Tax Policy Center’s Howard Gleckman point out that while there are deep philosophical differences between the most liberal (Economic Policy Institute) and most conservative (Heritage Foundation) groups in terms of their view of the optimal size of government, they still all came up with mathematically consistent proposals that would actually reduce the deficit. 

Misconceptions and Realities About Who Pays Taxes - A recent finding by Congress’ Joint Committee on Taxation that 51 percent of households owed no federal income tax in 2009 [1] is being used to advance the argument that low- and moderate-income families do not pay sufficient taxes. Apart from the fact that most of those who make this argument also call for maintaining or increasing all of the tax cuts of recent years for people at the top of the income scale, the 51 percent figure, its significance, and its policy implications are widely misunderstood.

• The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect.
• The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay .
• This percentage would be even lower if federal excise taxes on gasoline and other items were taken into account.
• Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.
• Moreover, low-income households as a whole do, in fact, pay federal taxes.
• When all federal, state, and local taxes are taken into account,the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent. [6]

The Case for Higher Taxes - Alan Greenspan, the former chairman of the Federal Reserve, opined on “Meet the Press” last month that to cope with the growing federal deficit the United States should go back to the federal income tax rates of the Clinton years. Such a step would raise tax rates for all American taxpayers. I was reminded that Henry J. Aaron of the Brookings Institution presented this fascinating chart: Dr. Aaron was quick to add that he took the chart directly from an analysis by the Center on Budget and Policy Priorities. The chart illustrates how prominent a role the tax cuts of 2001 and 2003 have played in the buildup of deficits and public debt in the United States. An additional factor, of course, has been the economic downturn (dark blue), along with two wars. Evidently, the stimulus package (the bulk of the “recovery measures”) played a role as well, although probably not nearly as prominent a role as seems to have been widely assumed.

Some Rich People Aren't Feeling Rich Enough - You've probably been laboring under the misapprehension that the rich are doing just fine. And I admit it,  I have promulgated that view over and over again here at DOTE. But it's not true. I've been misleading you. Some of the rich don't feel very rich at all, especially when they compare themselves to people who are much richer than they are. We have a lot of problems in the United States—many people can't afford to buy food or pay their energy bills, 77% of them live paycheck to paycheck, and 75% of them are not certainly able to raise $2000 in a pinch—but the rich not feeling rich enough is surely something we need to worry a lot about right now. Catherine Rampell at the New York Times' Economix blog updates us on this tragic situation. The Tax Policy Center has updated its figures on the income distribution in America, which we’d previously written about in a post about why most rich people don’t feel very rich. They have now crunched income levels for every single percentile, and the numbers refer to 2011 rather than 2010. So I’ve updated my chart on this subject.

Deficit May Clip 12-Year Tax Streak for Wealthy Americans - The year 2013 may snap a 12-year winning streak for wealthy Americans on taxes due on income, capital gains, dividends and giving money to their heirs. The U.S. deficit, forecast by the nonpartisan Congressional Budget Office to reach a two-year cumulative total of $2.5 trillion in 2012, has prompted calls by some in President Barack Obama's administration, Congress and a bipartisan commission to limit tax breaks for home mortgage interest, charitable contributions, municipal bonds and retirement contributions. "The deficit is an issue,". Many wealthy taxpayers "have already decided in their minds that something is going to happen and they're going to pay higher taxes." Rates on income, capital gains and dividends will rise in 2013 because tax cuts extended last year are scheduled to expire at the end of 2012, unless Congress acts. In 2013, top earners also face additional levies on unearned income and wages to help pay for health-care reform.

Is the Fair Tax Herman Cain's Ace in the Hole? - The Fair Tax is a proposal that has been kicking around for at least 20 years. It would replace all federal taxes, including income and payroll taxes, with a national retail sales tax similar to those levied by the states. Indeed, a prime virtue of the Fair Tax, in the eyes of its supporters, is that it would be collected by the states, thus allowing for abolition of the hated Internal Revenue Service and an end to filing tax returns or keeping financial records. The rate would be set at 23 percent — but only if you accept the unconventional way in which Fair Tax supporters insist on calculating it. If calculated the way state and local sales taxes are calculated, the Fair Tax rate is actually 30 percent. Its supporters say 23 percent because a 30 percent sales tax on a $1 purchase would yield an after-tax price of $1.30 and the 30 cent tax is 23 percent of $1.30. I’ve always viewed this as legerdemain designed solely to disguise how high the rate is, but Fair Tax supporters are convinced that their unorthodox way of calculating it is the correct way of doing so. Governments would have to pay the tax on their purchases, including the federal government, which would pay the tax to itself; the true purpose is to cut government spending by the amount of the tax.

Making Tax Expenditures Sound More Like Other Spending - I want to better explain the ways in which (most) tax expenditures are economically equivalent to spending-side subsidy programs.  I also want to look at the reform of the tax system and reductions in these tax expenditures from a fiscal policy, and not just tax policy, perspective.  This entails demonstrating the ways in which these tax-side spending programs are an even better target when it comes to deficit reduction than most spending-side programs–for reasons of economic efficiency, income distribution (fairness), and/or fiscal sustainability (the projected growth in their cost and hence their contribution toward the deterioration in the fiscal outlook over the next several decades). To do this effectively, we have to start talking about tax expenditures more like we talk about direct spending, regardless of the asymmetry that still exists in the official federal budget process because tax cuts are not annually appropriated–even when they are enacted to expire after only a year or two.  (For this reason, most tax cuts are more akin to entitlement programs rather than annually-scrutinized discretionary spending.)  So I’m going to spend some time trying to change our vocabulary on tax expenditures in highlighting particular types of tax expenditures as examples of spending our society might rather cut than the direct spending programs the small-government types tend to limit their attention to.

Cut Spending by Raising Taxes - Here’s a shocker: America can cut government spending by eliminating tax breaks. I know that sounds crazy. Everyone usually talks as if spending and tax breaks are distinct. Spending is what the government gives out or uses for purchases; tax breaks reduce how much revenue it collects. Reality, however, is a lot blurrier. Hundreds of billions of dollars of spending are disguised as tax cuts. It’s not hard to see why. Voters like tax cuts more than spending increases. Politicians understand that, so they convert spending into tax breaks. The ethanol tax credit is a perfect example. Fuel producers qualify for a 45-cent tax credit for each gallon of ethanol they blend into gasoline. Blenders calculate their income taxes like other businesses, then deduct the value of the credit before they send their check to the Internal Revenue Service (IRS). The ethanol subsidy thus looks like a tax cut, but it’s really government spending in disguise. The Department of Energy could accomplish the same thing by sending out subsidy checks. The same is true for dozens of other tax provisions, such as the business credit for research and development and personal tax breaks for mortgage interest, health insurance, and charitable giving.

Even Mitch McConnell Is Starting to Ponder the Spending That’s Done Through the Tax Code - (Video courtesy of Huffington Post.) As David Callahan writes on Huffington Post: All in all, it is possible to imagine a bipartisan deficit reduction deal in which large new revenues are raised by closing loopholes. That is clearly where some members of the Gang of Six (now five) have been for weeks. Last month, Republican Senator Tom Coburn [the departing gang member] said on Meet the Press that he would favor a “net” increase in revenue if it didn’t raise tax rates. It is even easier to imagine that scenario after a television appearance yesterday by Senate Minority Leader Mitch McConnell, who said that Republicans were dead set against higher tax rates. As reported by CNN.com: “Chris Wallace of Fox caught the distinction and asked McConnell if his language indicated he was open to collecting more tax revenue by ending some subsidies and loopholes. McConnell deflected the question, saying he wouldn’t negotiate a deal on the program.” Maybe I’m naive, but that sounds like a clear signal that at least Senate Republicans would go along with a tax reform plan that raises revenue.

Taxes and Spending - Josh Barro writesThe United States has tremendous available fiscal capacity, as demonstrated by significantly higher tax burdens in most other first-world countries. The real risk of elevated spending is that we’ll adopt a permanently higher level of taxation.That is a risk, but not a catastrophic one. While there is a link between government spending and economic growth, it is not as strong as conservatives like to believe. For example, Mueller and Stratmann find that a one percentage point rise in government spending as a share of GDP will tend to reduce annual GDP growth by a bit under one-twentieth of a percentage point. I think Josh’s points are well and good but they present an opportunity for me to make another point. To spend may be to tax but taxing and spending are not the same thing. There are many reasons why but an important one is the effect on economic growth. For a lot of reasons it makes a lot more sense to think that increased government spending will slow economic growth over the long run than increased taxes.

Is heavy taxation bad for the economy? - Taxes reduce the payoff to entrepreneurship, investment, and work effort. If taxation is too heavy, these disincentives will weaken a nation’s economy. But at what point does the harmful impact kick in? And how large is it? Half a century ago, in 1960, taxes totaled about a quarter of GDP in Denmark, Sweden, and the United States. The tax take then began to rise in Denmark and Sweden, reaching half of GDP by the mid-1980s, where it has remained. In America it has barely budged, hovering between 25% and 30% of GDP throughout the past five decades. Has heavy taxation hurt the Danish and Swedish economies? If so, how much? His detailed answer to these questions is here. The bottom line is: At what point does the harmful impact of taxes on the economy kick in? And how large is it? The Danish and Swedish experiences over the past generation pose a challenge for those who believe the answers to these two questions are “somewhere below 50% of GDP” and “large.” It’s a challenge that in my view has yet to be met.

Small Business and Taxes - We’ve all heard the allegation: President Obama wants to raise taxes on “small business.”  But buried in that claim is a massive amount of confusion about just what businesses we are talking about, what they do, and how they operate. Fortunately, we may soon get some new information to help sort it out. My Tax Policy Center colleagues have tried to clarify some of this confusion by distinguishing between “small businesses” and pass-throughfirms that report income on the individual tax returns of their owners. These can be S corporations, partnerships, sole proprietorships, or limited liability companies. Using currently available IRS data, we’ve concluded there are about 20 million people who report business income on their 1040s. Very few—only about 3 percent—are in the top two tax brackets (and even some of them would avoid higher tax rates under Obama’s budget). We’ve also concluded that this handful of firms accounts for nearly half of all business income reported on individual returns.

Tax Breaks For The Oil Industry? Who Cares? - For as long as I can remember, Democrats—liberals those on the left, progressives—have complained about the massive profits the majors (e.g. ExxonMobil, Chevron, etc.) accrue when oil prices are high. There's little doubt that high oil prices constitute a gift to these producers. Bloomberg reported on the lastest failed attempt to repeal the tax breaks. The U.S. oil and gas industry survived an effort to repeal $21 billion in tax breaks over 10 years as three Democrats broke with Senate leaders who said the revenue should go to reduce the federal deficit... The Republicans—conservatives, those on the right, regressives—always assume there is a relationship between tax breaks and oil production. They had a different idea. A Republican-backed measure that would increase offshore production and expedite permits faces a vote today in the Senate. OK, let's get back to basics. What is the relationship between either of these proposals, and domestic oil production over the next 10 years? There is no relationship. None. Zero, zip, nada. What is the relationship between either of these proposals and current high oil prices, or future high oil prices? There is no relationship. None. Zero, zip, nada. And in the grand scheme of things, $21 billion (21,000,000,000) amounts to nothing, it's pocket change for a government that runs annual deficits in the $1.5 trillon range (1,500,000,000,000).

Fed’s Use of $80 Billion Facility as Subsidy Vehicle Confirms Regulatory Deficiencies - - Yves Smith - Bob Ivry has done a solid job of reporting on some of the documents that Bloomberg forced the Fed to release through a Freedom of Information Act request. In short form, the Fed created a special facility called the single-tranche open- market operations. It was established in March 7, 2008, the week before the Bear meltdown, and continued through the end of December. The facility size was $80 billion and the program was limited to 20 primary dealers. Three groups, Credit Suisse, Goldman, and Royal Bank of Scotland each borrowed at least $30 billion at various points.  Why is this program now controversial? First, Congress appears to have overlooked it in its Dodd Frank drafting. Barney Frank is quoted saying he never heard of it. But more troublingly, its use appears to have morphed from an “keep the markets from seizing up” by providing more liquidity in the repo market, to a back door prop to the banks. Admittedly, the numbers paled compared to the TARP, but here we have the Fed either deliberately or incompetently handing cash to the banks (we assume deliberately since anyone could see how cheap the funds on offer were). Key extracts: They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

The Fed’s secret giveaway to European banks - File under “things you never knew the Fed did during the financial crisis”: an $80 billion loan scheme known as ST OMO, which was so obscure that even Barney Frank had no idea it existed when he required the Fed to turn over its lending data in his Dodd-Frank bill. In any case, Bloomberg’s Bob Ivry has the details, thanks to a FOIA which went all the way to the Supreme Court. As with most of these things, it’s impossible to work out what the Fed was so worried about — but it’s easy to see how the Fed made it as hard as possible for Ivry to get information on ST OMO. Not only did they refuse to give him the information he was asking for, but then, when they were ordered to, they dumped 29,000 pages of documents on him. Hidden in which we find charts like these:

"Secret loans" that were not so secret -  Atlanta Fed's macroblog - I confess to be more than a little surprised when yesterday's morning reading turned up the following headline, from Bloomberg's Bob Ivry: "Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%" The crux of the story found its way to the Wall Street Journal's Real Times Economics blog: "Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren't revealed to shareholders, members of Congress or the public. The $80 billion initiative, called single-tranche open-market operations, or ST OMO, made 28-day loans from March through December 2008, I think a couple of clarifying points are in order. First, these transactions were hardly, in my view, "secretive." On March 7, 2008, the following was posted on the New York Fed's website (with similar information provided by the Board of Governors): "The Federal Reserve has announced that the Open Market Trading Desk will conduct a series of term repurchase (RP) transactions that are expected to cumulate to $100 billion outstanding.

Shadow Banking Makes a Comeback, S.&P. Warns - The shadow banking industry is back — and it could become bigger than ever, according to a new report by Standard & Poor’s. As traditional lenders and big investment banks face a wave of new rules stemming from the Dodd-Frank financial overhaul, their lightly-regulated brethren — money market funds, private investment companies and hedge funds — see an opportunity to profit, S.&P. said.  These resurgent shadow-banking firms are aiming to “bolster their balance sheets to take on business that the banks discontinue,” according to the report. While the shadow industry has benefits — like providing cheap financing to companies — it also comes with plenty of risk to investors and the broader economy.  “Under certain circumstances, that might destabilize the financial system,” S.&P. warned.

Former Treasury Restructuring Official Supports View That Dodd Frank Resolution is Failure Prone - Yves Smith - As readers may know, we’ve been engaged in a long-running argument with a persistent Administration defender on the subject of Dodd Frank resolution, which is the one of the big arguments used for not doing much to make the TBTF banks less TBTF (see here for the latest in the series). The argument goes that since they will be allowed to fail, and they can be resolved non-catastrophically, the problem is solved. We’ve gone through the FDIC’s example of how they say they could have used the new powers under Article II of Dodd Frank and pointed out numerous (ahem) unrealistic assumptions, as as well as made more general arguments against its viability with anything other than a purely domestic institution. It’s also worth noting that a number of domestic banking and bankruptcy experts, as well as the BIS Cross-border Bank Resolution Group and the Institute for International Finance have also expressed serious doubts about the viability of Article II resolutions.The latest critique comes from former Treasury official Jim Millstein who was the chief restructuring officer and headed the AIG rescue. His comment in the Financial Times echoes a concern voiced by some critics, including yours truly, that the Article II procedures not only make unduly optimistic assumptions about the ease and timetable for finding buyers of capital market businesses, but are also likely to accelerate a run

Fed's Hoenig calls for new limits on bank activity - The Volcker Rule should be strengthened in its reach in order to bar U.S. banks from all forms of trading activity, said Thomas Hoenig, the president of the Kansas City Fed on Tuesday. Banks should not be allowed to act as dealers and market markets in over-the-counter derivatives and repo markets, provide brokerage services for investors and hedge funds, or conduct proprietary trading for own account or other funds, Hoenig said in a speech at a conference at Drexel University in Philadelphia. Such trading activity "extend the safety net and yet do not have much in common with core banking services," Hoenig said. Hoenig dismissed claims his limits would drive U.S banks and jobs overseas. "We have 200 years of banking success in this country that tends to refute that assertion," he said, adding "U.S. authorities should consider carefully whether it is wise to insure and therefore protect creditors of foreign organizations that operate in this country outside of the U.S.'s prudential standards."

Measuring systemic financial risk - On a recent visit to UCSD, NYU Professor and Nobel Laureate Rob Engle called my attention to the NYU Stern Volatility Laboratory, a great resource that anyone can use to get some very interesting real-time analysis. Here I'd like to describe some of the features available for assessing the systemic risk posed by financial institutions. The first step that Engle and colleagues propose is to calculate what they call the Marginal Expected Shortfall (MES) associated with a given financial institution. This is an estimate, based on recent dynamic variances and correlations of observed stock prices, of how much the stock valuation of a given institution would be expected to fall today if the overall market were to decline by more than 2%. This is essentially a time-varying tail-event beta, details of whose estimation can be found here.

Stress Test Success and Bank Opacity - NYFed - In contemplating the recent financial panic, it is easy to get lost in the weeds of repo markets and asset-backed securities and lose sight of the fact that, at the fundamental level, the panic was about inadequate information. Investors were uncertain about what particular assets were worth, and they were uncertain about which banks were exposed to those assets and to what degree. They were also uncertain about how the government would handle undercapitalized banks. It was against this background that the Treasury announced in February 2009 that the nineteen largest U.S. bank holding companies would be subject to an unprecedented stress test to determine if the banks had sufficient capital to survive and maintain lending in the event of a worse-than-expected recession. In this post, I discuss a recent New York Fed staff report that I wrote with Stavros Peristiani and Vanessa Savino that provides evidence that the stress test supplied new information to the market, and thus may have helped quell the panic.

Monetary and macroprudential policies - Vox EU - The global financial crisis has prompted an intense debate on the role of macroprudential policies in limiting the accumulation of risks and imbalances. Major economies have recently established new institutions, or strengthened existing ones, with a mandate to pursue financial stability. This column examines the effectiveness and consequences of macroprudential policies with a focus on their interaction with monetary policy.

Fed scholars: A run on the repurchase market caused the financial crisis and will probably happen again → The financial crisis of 2007-2008 was primarily a run on the repurchase market, when lenders refused to role over their repo loans to large investment banks. This was like bank runs decades ago, when depositors rushed to take their money out of commercial banks, according to two visiting scholars at the Federal Reserve Bank of Minneapolis. The recessions were not caused by the housing crash and the stock market crash that preceded the two recessions, respectively. They were caused by people’s opinion – whether or not correct – that they had to get their money out of a bank fast because it might fail, and that opinion frightened people at other banks, and the run spread, say the authors.The potential for repo runs has not been fixed, the scholars write. It’s not addressed by the Dodd-Frank Act, and future crises probably cannot be prevented, but they can be made less severe. Bank runs, on the other hand, have been largely controlled since 1933 by FDIC insurance for deposits.

Basel III break for banks in EU - Banks in the European Union could evade part of the tighter Basel III capital requirements under draft legislation implementing the new globally agreed standards across the 27-member bloc. The 500-plus page draft, which has not been officially released, could allow EU banks to count more of the capital in their insurance subsidiaries than the global rules call for. It will also allow some banks to continue issuing hybrid capital – preference shares and other debt-like instruments – for longer than expected. The biggest French financial companies, including Société Générale and BNP Paribas, and the UK’s Lloyds Banking Group have insurance arms. They would benefit disproportionately from the exception. The Basel Committee on Banking Supervision agreed last year to tighten the definition of capital and require all banks to maintain core tier one capital equal to 7 per cent of their assets, adjusted for risk. But it is up to national regulators and the European Commission to implement the rules.A regulator involved in the Basel process said that if the two exceptions stand “it would be a violation of the global agreement” and would undermine the international effort to make banks safer.

Tough Swiss Regs Induce UBS to Consider Glass Steagall Lite Partition, So Risky Ops May Become US Problem - Yves Smith  - Switzerland has taken the sensible move of recognizing that it cannot credibly backstop banks whose assets are more than eight times the country’s GDP. It is in the process of imposing much tougher capital requirements, expected to be nearly 20% of risk-weighted assets, well above the Basel III level of 7%.  UBS apparently plans to partition the bank in a Glass-Steagall lite split, leaving the traditional banking operations in Switzerland and putting the investment bank in a separate legal entity outside Switzerland. The problem is that the devil lies in the details. Regulators need to be scrupulous that there is no lending or guarantees between the two units, or even cross promotion which may create liability. Recall that auction rate securities, a capital markets product, were sold as an alternative to money market funds. Regulators would need to bar this type of cross marketing if they were serious about separating the entities from a risk assumption standpoint. And if they really were THAT separate, why are they under the same roof? Managerially, it’s hard to manage such disparate businesses, particularly if you end the offsetting benefit of cheaper funding. The Wall Street Journal questions whether this finesse will work

Dodd-Frank's Challenge: Derivatives Without Borders - The Dodd-Frank financial regulatory law spans nearly 1,000 pages — but apparently not the United States border.  Members of the Commodity Futures Trading Commission, the agency responsible for implementing dozens of Dodd-Frank’s restrictions on derivatives trading, told lawmakers in Washington on Wednesday that the exact scope of the law was vague. “This is an issue that has been the subject of much legal debate, but I think that we need to cut through that morass to provide some certainty to market participants who are concerned about what laws are going to apply to them,” Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, told the House Agriculture Committee’s panel on commodities and risk management.  His comments echo larger complaints made by banks and other financial firms, which argue that the Dodd-Frank rules could push derivatives business and profits overseas.  The Dodd-Frank Act says that new restrictions on proprietary trading and the derivatives business do not apply in foreign countries unless there’s a “direct and significant connection with activities” in the United States.

One-Time Warren Foe Now Pressuring Obama To Give Her Recess Appointment To Head Consumer Bureau - The head of the Oklahoma Banker's Association -- a one-time Elizabeth Warren skeptic who believed she was "akin to the Antichrist" -- is now asking President Obama to provide her a recess appointment to direct the new Consumer Financial Protection Bureau.  "I write to encourage you to appoint Elizabeth Warren as the first Director of the Consumer Financial Protection Bureau, and to do so with a 'recess appointment' at the first opportunity," wrote Roger Beverage -- President and CEO of the OBA -- in a May 19 letter to Obama, provided to TPM. "In light of the action taken by the forty-four senators who have stated they will oppose any nominee to serve as Director of the new Bureau unless certain changes are made to the Bureau's structure, I encourage you to wait no longer and give Elizabeth a recess appointment before the July 21st transfer date." The CFPB was created as part of the Wall Street reform bill enacted into law last year to protect consumers from predatory financial actors. Though the bill had bipartisan support, Republicans have been eager to weaken the bureau, and recently threatened to block anybody Obama nominates to head the bureau unless Congress passes new legislation to weaken its rule-making and enforcement powers.

Democrats Try to Woo Consumer Advocate to Run - Officials in the Democratic Party¹ are wooing Elizabeth Warren² to run for the Senate against the Massachusetts Republican Scott P. Brown³ rather than have her continue to set up the new Consumer Financial Protection Bureau⁴.  Ms. Warren has become a lightning rod for controversy over the new agency, which she conceived and is helping create. Consumer groups and some Democrats have demanded her appointment as its first director. A group of 44 Senate Republicans, with applause from the financial industry, has promised to block any nominee.  In seeking to enlist Ms. Warren for a different campaign, Democrats are taking aim at two birds. They can lay the groundwork for a potential compromise over a different candidate to lead the new agency and, they hope, they can increase their chances of reclaiming Mr. Brown’s seat by sending against him a woman who has won considerable acclaim and popularity among liberals for taking on the financial industry.

CFPB Oversight - I testified as a Minority witness today at a House Government Oversight Committee hearing on the CFPB.  It was a rather extraordinary hearing, not for the substance of the hearing, which was just the latest installment in the Elizabeth Warren witchhunt, but for the exchange between Professor Warren and the Subcommittee Chairman, Patrick McHenry, regarding the scheduling of the hearing. It has strange echoes of Jim DeMint's "You Lie!" outburst.  Amazingly, this was only part of the exchange.  If you watch the full exchange on C-SPAN, it starts at about 56:00-58:00 and then starts up again at around 1:02:30 and runs until 1:09:30.  All of this followed a good hour of Professor Warren being asked questions but then being interrupted before she was able to give complete answers.

CFPB Oversight Compared with Other Regulators - A lot of the debate at today's Government Oversight hearing on the CFPB dealt with whether the CFPB was the most accountable or the least accountable federal government agency ever. My position has been that compared with other federal financial regulators, the CFPB is remarkably accountable. But accountability comes in many different ways and forms. I've tried to summarize comparative accountability visually in the chart below. It compares the oversight mechanisms that apply to the CFPB with some other agencies: the Environmental Protection Agency, the FDIC, the Federal Reserve Board, the FTC, the Office of Comptroller of the Currency and Office of Thrift Supervision, the SEC, and the Social Security Administration.

House GOP Escalates Attack on Elizabeth Warren, Consumer Bureau - Congressional Republicans have frequently attacked Harvard Law Professor Elizabeth Warren and the new Consumer Financial Protection Bureau¹ (CFPB) she’s setting up, which officially launches on July 21. The House GOP escalated its anti-Warren, anti-CFPB campaign² at a hearing of the House Oversight Committee today, chaired by Representative Patrick McHenry (R-NC). McHenry was once known as Tom DeLay’s “attack-dog-in-training³,” a title he more than earned today. Before the hearing had even begun, McHenry went on CNBC and brazenly accused Warren of lying to Congress⁴. He claimed that Warren had misrepresented her role in advising state attorneys general who are seeking a multibillion-dollar settlement⁵ with the country’s largest mortgage service providers, who stand accused of massive and widespread foreclosure fraud. As evidence, McHenry pointed to a leaked internal document prepared by the CFPB that laid out different settlement options for the state AGs. McHenry claimed this went beyond the scope of the “advice,” that Warren had already admitted to providing, at the behest of the Treasury Department, in earlier testimony to Congress in March. “We’ve given advice when asked for advice,” she reiterated this afternoon.

Why Elizabeth Warren Scares Republicans - No one is arguing that Elizabeth Warren shouldn't be appointed director of the Consumer Financial Protection Bureau (CFPB) because she isn't the best person for the job. No, the opposition to her comes from the exact opposite position:  Republicans oppose Elizabeth Warren because she is too good at her job. Since when is being too good at your job--too qualified, too committed--a bad thing? Well if you are a conservative, bankrolled by Wall Street and beholden to their interests, these are all bad qualities because what you really want is to destroy all financial regulation.

Why Are Republicans So Keen to Persecute Elizabeth Warren? - Yves Smith - The House Oversight and Government Reform Committee session today with the Republican’s favorite punching bag, Elizabeth Warren, managed to notch abuse up to a level that is politely described as unseemly or more accurately called Republican Derangement Syndrome. The fact that Republicans’ last effort to use screechy and mean against Warren failed to deter her has not led them to improve their game. Two months ago, a nasty two hour Congressional hearing with Warren was the culmination of weeks of right wing media attacks, with the Wall Street Journal leading the pack. We noted: 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.  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 is rock solid competent and 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.

Arguments About Regulation - There’s a good reason to fear regulation even if you can imagine beneficial regulation.  You may be suspicious of government agencies’ motives or competence to implement it. Giving power to an agent when we can’t rely on her to use it in a beneficial way is often a bad idea. But the same kind of fear, viewed through a mirror, often argues in favor of regulation.  Take for example financial regulation.  We may understand that if investors, managers, or insurers could be assumed to act reliably in ways that are consistent with their self-interest then markets would work well and there would be no rationale for regulation. But should we predicate laissez faire on the assumption that they don’t make mistakes, that they perfectly fathom the complex path to their self-interest?  If we can’t be sure, then giving them the power to do damage is often a bad idea.

The Elizabeth Warren Test - The incredibly boorish grilling of Elizabeth Warren by Republican members of a House subcommittee on Tuesday raises two interesting questions: After a decade in which money lenders raped and pillaged homeowners, home-buyers and credit-card holders, why are Republicans so intent on gutting an agency that would protect the American middle class from such persistent sleazebags? And second: Why has the Obama Administration been so reluctant to appoint Warren director of the Consumer Protection Finance Bureau–and force a massive and very accessible public fight on an absolutely crucial economic issue: the corrupt, predatory nature of the financial community? Beats me. This seems a political no-brainer.  Furthermore, this is a no-lose political battle for Democrats–who among us hasn’t been outraged, or ripped off by, the small print that accompanies every mortgage, credit card and home equity loan?

Warren Groundswell Pressures Administration to Make Recess CFPB Appointment (Updated: Panicked Republicans Keep Senate Open for Business) - Yves Smith - Progressive groups launched an online petition calling for the Administration to make a recess appointment of Elizabeth Warren to head the CFPB. Not surprisingly, it gained traction quickly, and now has 158,000 signatures. This weekend is theoretically a window for a recess appointment (note that the lengthy Senate confirmation process makes it impossible for anyone to be in place by the Dodd Frank start date of July 21, so a recess appointment looks to be inevitable). But there’s no reason to use this opportunity given a Senate July 4-10 break.  I urge readers to sign the petition while maintaining my view that Warren will not get the nod. The Administration has been casting about for Anybody But Warren to take the job, with the amusing result than many of the candidates saying that Warren should get the job. Warren’s stubborn refusal to take the Republican’s aggressive moves and the Administration’s obvious antipathy seriously is creating marvelous political theater. We’ve now had the spectacle of Geithner, whose bank-coddling stance makes him an ideological opponent of the Harvard professor, being forced to support her in public in the face of ham-handed attacks by Republican Senators this week.

Financial Lobbying and the Housing Crisis - A recent update to a continuing study finds a link between bailouts and the lobbying of the financial industry. It is sometimes asserted that the housing boom of the first half of the last decade was largely a result of easy credit by the Federal Reserve – that low interest rates made it too easy for too many people to borrow to purchase a new, bigger home. But interest rates were only a bit lower in the decade than they were in the 1990s, when there was not a housing boom. By the standards of the 1990s, one might expect the somewhat lower interest rates of the last decade to elevate housing prices only a bit (as I have estimated; Edward Glaeser of Harvard and his co-authors have, as well), rather than the much sharper increase that actually occurred. The study, by  three economists at the International Monetary Fund, suggests that implicit subsidies and a lack of regulation helped make it possible for lenders to offer lower rates on mortgages that were increasingly likely to default. My fellow Economix blogger Simon Johnson has also noted the interplay of political influence on regulation and finance.

Taibbi: “US Politics – Reality Show Sponsored by Wall Street” - Taibbi discusses the lack of financial reform and failure to prosecute Wall Street on RT America

Bill Black: In Praise of Sorkin’s Praise of Lowenstein’s Praise of Financial CEOs - Roger Lowenstein has just taken the brave step of praising the failure to prosecute elite financial managers for fraud as a demonstration of the greatness of America. Lowenstein declares (1) that Blankfein was right – Goldman really was doing “God’s work,” (2) virtually no financial elites committed crimes, (3) any crimes they may have committed were trivial and played no material role in causing the crisis, (4) those that wish to hold fraudulent elites accountable for their crimes are (a) financially illiterate, (b) paranoid conspiracy theorists equivalent to those claiming the U.S. attacked the twin towers on 9/11, (c) a threat to our democracy and constitutional rights, and (d) engaged in “punishing profit,” (5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights, (6) the FBI is conducting a “serious” investigation of the elite financial frauds (despite points one through four above), and (7) the crisis was caused by “society” – because we’re all guilty no one should be held accountable – except those paranoids who want to destroy America’s greatness by prosecuting financial CEOs on fraud charges.

Hidden bank fee of the day, wholesale FX edition - The WSJ has done a great public service today with its analysis of BNY Mellon’s forex pricing, nicely summed up in this chart: Note the grey bars here, which are particularly egregious: a significant percentage of the time, BNY was giving its clients prices which were bad to the point at which they were physically impossible: no trades were actually done in the interbank market at that price that day. This is about as cut-and-dried as things get. BNY Mellon’s clients put in FX orders, the bank executed those orders and reported back a price. Only it lied to its clients about the price it was getting, padding its own profits while so doing. This is doubly evil: not only did the bank lie, but it lied while serving as a fiduciary to its clients, with an affirmative duty to give them “best execution.”

CFTC charges traders over oil price - The US commodities regulator has charged a trading house and two individuals with manipulating oil prices in 2008 by amassing dominant positions in the physical market that created the impression of a shortage. The CFTC’s complaint comes as high oil prices have again triggered a political backlash in Washington, with a group of lawmakers demanding a crackdown on speculators and oil companies. The regulator alleged that Parnon Energy, a US oil trader, together with its Swiss and UK affiliates Arcadia Energy (Suisse) and Arcadia Petroleum, made more than $50m from the scheme in January and March 2008.  The CFTC alleged that two traders at the company amassed large positions in the physical market at Cushing, the pipeline hub in Oklahoma that serves as the delivery point for the WTI futures contract. The CFTC complaint alleges that by mid-January the traders had accumulated 4.6m barrels of physical oil, or two-thirds of oil available for delivery against the February WTI futures contract. In March they bought 6.3m barrels, equal to 84 per cent of oil available for delivery against the April contract. The buying created the impression of a shortage and pushed up the price of WTI futures on the New York Mercantile Exchange. Ahead of their move in the physical market, the traders allegedly bought large amounts of futures and other financial instruments that would profit from a price rise.

U.S. sues big oil traders for 2008 manipulation - Regulators launched one of the biggest ever crackdowns on oil price manipulation on Tuesday, suing two well-known traders and two trading firms owned by Norwegian billionaire John Fredriksen for allegedly making $50 million by squeezing markets in 2008. The Commodity Futures Trading Commission (CFTC) said traders James Dyer of Oklahoma’s Parnon Energy, and Nick Wildgoose of Europe-based Arcadia Energy, amassed large physical positions at a key U.S. trading hub to create the impression of tight supplies that would boost oil prices. Later they dumped those barrels back onto the market, causing prices to crash and racking up profits from short positions they had accrued in futures markets, the suit said. “Defendants conducted a manipulative cycle, driving the price of WTI (crude) to artificial highs and then back down, to make unlawful profits,” the lawsuit filed in New York said.

Oil price manipulation -The Commodity Futures Trading Commission on Tuesday filed a civil enforcement action alleging that Nicholas Wildgoose and James Dyer, who worked as traders for Arcadia Petroleum Ltd. and its affiliates, profited by manipulating the price of oil and oil futures in early 2008. The CFTC complaint alleges that Wildgoose and Dyer subsequently acquired by January 25 a net short position in March futures and long position in April futures equivalent to 12.2 million barrels. The allegation is that this was done in anticipation of suddenly selling off on the last possible day (Jan 25) all 4.6 million barrels of the physical oil previously accumulated; I gather that the allegation is that this was achieved by finding somebody currently holding rights to delivery of an equivalent volume in March who was willing to swap and take delivery instead in February, provided that the offered February price was sufficiently low. The effect of such a huge last-day sale would have been to depress the February physical price as the market discovered that the apparent big demand for oil just wasn’t there. Although Wildgoose and Dyer would of course have taken a big loss on their physical contracts (by virtue of having bought at the artificially higher prices that their bids created and then selling at the artificially lower prices that their sales induced), the CFTC alleges that they more than made up for these losses with bigger profits on the corresponding futures transactions. The CFTC complaint alleges that the pair lost $15 million on the physical transactions but gained $50 million on futures transactions, profiting first by the increase in the February-March spread induced by creating the impression of an unusually tight February physical market, and then later profiting by the decrease in the March-April spread by surprising the market with much more physical oil available for delivery than people had been assuming.

Wikileaks: Saudis Warned About Oil Speculators in 2007 and 2008 - - Yves Smith  - Kevin Hall of McClatchy wrote about Wikileaks releases showing that the Saudis were concerned about oil market speculation leading to unduly high prices in 2007 and 2008. In 2008, we wrote that the Saudis said they did not see tightness in the market, and they also warned that prices were excessive. The Wikileaks thus confirm that these statements were not just PR, to shift blame from them as the historical swing producer, but were consistent with their private communications. It was quite frustrating in 2008 to see economics commentators reject statements by numerous oil market participants that supplies were more than adequate, that the price rise was driven by speculators. Paul Jay of the Real News Network interviewed Kevin Hall (video)

Justice Department, SEC investigations often rely on companies’ internal probes - The government is especially likely to rely on internal probes in cases involving the Foreign Corrupt Practices Act, which prohibits companies from paying bribes to win business abroad. Those crimes almost by definition take place overseas, where culture, language and distance are just some of the many obstacles federal investigators would confront.The U.S. Chamber of Commerce, a major business group, has said the government’s heightened enforcement of the FCPA includes “the effective outsourcing of investigations by the government to the private sector.” In a recent proposal explaining how it plans to act on tips from corporate insiders¹ and other whistleblowers, the SEC said that, “in appropriate cases . . . our staff will, upon receiving a whistleblower complaint, contact a company, describe the nature of the allegations, and give the company an opportunity to investigate the matter and report back.”

Bailout Bonus: Chrysler Pays Its Tab to Uncle Sam - There must be a sweet taste of revenge in Motor City these days, what with Chrysler having successfully raised $7.5 billion by selling bonds to Wall Street. Sure, the Fiat-run American automaker had to pay a stiff interest rate, but it did manage to raise money from the same folks who balked at taking a haircut when Chrysler was desperately trying to restructure its loans during the financial crisis.  The Street eventually took a scalping then, and now it stepping back up to buy again. (They never learn, do they?) Chrysler used the money to pay off $5.9 billion to the U.S. government, and $1.7 billion to Canada, more than six years ahead of schedule. If there is any remaining doubt that the much debated government bailout bought time enough for the U.S. auto industry to regroup, this should end it. Chrysler was in the worst shape of the Detroit Three, bleeding cash and without much in the way of product in the pipeline. But the crisis was going to end sometime, and any still around was going to make some money

Bank Profits Soar And Corporate Bonuses Swell As Broader Economy Stagnates - The divide between corporate fortunes and those of ordinary Americans continues to widen, as banks post strong profits and the nation's largest companies boost executive pay. Banks and corporations are exhibiting a confidence reminiscent of pre-crisis days, even as the broader economy still sputters. Bank profits soared in the first three months of the year, and corporate profits likewise swelled last year. And executives saw ever fatter bonuses. But the amount of cash banks sent out into the economy as loans declined last quarter, and the pace at which companies are hiring new workers remains disappointing with the unemployment rate stuck around 9 percent. For big corporations, the recession's legacy has all but faded. But for much of the rest of America, finances are still tight. Home values are falling at an accelerating pace, and high energy prices recall the nightmarish summer of 2008. The widening divide in fortunes constitutes a long-term drag on the economy, experts say. "If a very small number of people have everything, everybody else has nothing,"

Unofficial Problem Bank list increases to 988 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 20, 2011. Changes and comments from surferdude808:  There were many changes to Unofficial Problem Bank List because of failure and the OCC releasing its actions through mid-April 2011. In all, there were 12 additions and seven removals, which leaves the list at 988 institutions with assets of $423.9 billion. Last week, the list had 983 institutions with assets of $425.4 billion.

FDIC says list of ‘problem banks’ is still growing - The number of “problem banks” in the United States grew to 888 in the first quarter, up from 884 in the previous quarter, the Federal Deposit Insurance Corp. (FDIC) reported today. Banks on the FDIC’s problem list - those which have low capital levels - have grown in number in the aftermath of the Great Recession. The banks on the FDIC’s troubled list are not disclosed by name. Nevertheless, banks insured by the FDIC reported a profit of $29 billion in the quarter ended March 31, a 67-percent increase from the first quarter of 2010. It marks the best quarterly result since the second quarter of 2007 and is the seventh consecutive quarter that industry earnings have registered year-over-year gains, the agency said. "The industry shows continuing signs of improvement," said FDIC Chairman Sheila Bair. "Though there is a limit to how far reductions in loan-loss provisions can boost industry earnings."

Record defaults predicted for US CMBS - Default rates on US commercial mortgage-backed securities will hit record levels this year after a 20 per cent jump in defaults on such bonds in 2010, says a study by Fitch Ratings. Bonds backed by loans to developers of office blocks, shopping malls and other commercial properties have soared in value as investors have rushed into sectors offering higher yields on growing optimism that an economic recovery would help reduce defaults on property investments. However, despite the improved sentiment, the losses on CMBS, especially those sold in the run-up to the financial crisis in 2007, have continued to rise. Total defaults rose to 10.6 per cent by the end of 2010, up from 6.6 per cent in 2009. Fitch expects the default rate to exceed 12 per cent by the end of 2011. The Fitch report, due to be released on Tuesday, shows “some slowing in the pace of new defaults”, but adds: “It is too early to predict a meaningful decline in default rates in the near future due to commercial real estate fundamentals lagging the overall economic environment.”

US Commercial Real Estate Prices Decline to Post-Crash Low, Moody's Says - U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.  The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.  The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.  The index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices,” Tad Philipp, Moody’s director of commercial real estate research, said in the statement. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded.”

Moody's: Commercial Real Estate Prices declined 4.2% in March, Hit new Post-Bubble Low - Moody's reported yesterday that the Moody’s/REAL All Property Type Aggregate Index declined 4.2% in March. 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.  The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement ...So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said. 

Fitch: U.S. CMBS Loan Defaults Likely to Climb to 12% by End of 2011 - Increasingly successful loan modifications and rising new issuance will not be enough to put a stop to rising CMBS loan defaults, which are likely to exceed 12% by the end of this year, according to Fitch Ratings in its latest annual fixed rate conduit loan default study. Loan defaults increased 20% last year, with 1,477 loans totaling $22.09 billion defaulting for the first time in 2010. Cumulative loan defaults increased to 10.60% ($57.58 billion) through the end of last year, compared to 6.59% ($35.49 billion) through the end of 2009. The pace of loan defaults declined to $3.50 billion during 4Q'10 following a highwater mark of $8.41 billion during 1Q'10. 'Although CMBS loan defaults declined over the course of 2010, it is still too early to predict a meaningful decline,' said Managing Director Mary MacNeill. 'Commercial real estate fundamentals are still lagging the overall economy.' Not surprisingly, 2007 CMBS deals led all vintages, with nearly 50% of all new loan defaults coming from 2007 deals. The 2006 and 2005 vintages followed with 19.2% and 16.1% respectively.

“No Sign of Recovery” in Commercial Real Estate - Calculated Risk details (via Bloomberg): The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement ...So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. The overall index shows “no sign of recovery,” Moody’s said. The Moody's / REAL Commercial Property Index is in nominal terms (despite the "real" name), but still hit a post-bubble low. In real terms? 21% down since the series began back in December 2000 and 50% below August 2007 levels....

Las Vegas commercial mortgage delinquencies lead nation, hit $2.9 billion - Despite recent improvements in the Southern Nevada economy, Las Vegas continues to lead the nation in delinquencies for commercial mortgages financed by Wall Street. That’s according to Moody’s Investor’s Service, a debt rating agency. Last week, it reported the delinquency rate locally for commercial mortgage-backed securities in April was 29.4 percent, well above the national rate of 9.22 percent. The debt rating agency said the commercial markets in some of the metro areas hit hardest by the recession continue to struggle, with high delinquency rates also reported in Riverside, Calif. (19.8 percent), Tampa, Fla., (17.9 percent), Phoenix (17.4 percent) and Orlando, Fla. (15.5 percent). The best performers included Boston (2.9 percent), Seattle (3.4 percent), Washington, D.C. (3.7 percent), San Francisco (3.8 percent) and San Jose, Calif. (3.9 percent).

Quelle Surprise! SEC Worked Hard to Ignore Warnings of Subprime Fraud - Yves Smith  - Saying that regulators ignored danger signs in the run up to the financial crisis now verges on being a “dog bites man” account. But the New York Times excerpt from the new book Reckless Endangerment by Gretchen Morgenson and Josh Rosner show that the SEC was not merely asleep at the switch, but apparently peopled with higher ups who were looking hard for reasons not to pursue suspicious conduct. The extract is about a particularly rancid case, that of subprime originator NovaStar, which was one of the twenty biggest. Not only did it issue the drecky mortgages in impressive volumes, but it engaged in obvious financial misreporting. While the frauds it foisted on borrowers fell largely between regulatory cracks, since NovaStar as a non-bank mortgage broker was regulated only at the state level, and those offices are chronically understaffed, misstatements in public reports reside squarely in the SEC’s beat.  Morgenson’s and Rosner’s account follows the efforts of short seller Marc Cohodes. Admittedly, the SEC has reason to take the claims of short-sellers with a grain of salt, but the evidence that Cohodes provided over time was extensive and troubling

ZeroHedge: "We want our secrets kept secret" - FHFA Director - The administrator of Fannie and Freddie, Edward Demarco, had this to say yesterday regarding a bill to open the GSE’s to the FOIA: H.R. 463, introduced by Representative Chaffetz, would subject the Enterprises to the Freedom of Information Act (FOIA). FOIA’s “core purpose” is to:
1) Enhance “public understanding of the operations or activities of the government;”
2) FOIA is “often explained as a means for citizens to know what their Government is up to."
This core purpose is not served by applying FOIA to Fannie Mae and Freddie Mac, which are still private companies operating in conservatorship. They did not cease to be private legal entities when they were placed into conservatorship, nor did they become part of FHFA. Still private companies? That’s the reason they are shielded? After the taxpayers shelled out $200b (and counting)? Bullshit.

Fed Investigating Goldman Over Possible HAMP Mortgage Mod Violations - Yves Smith - The Financial Times discusses a curious development, namely, that the New York Fed is making an inquiry into allegations that Goldman’s mortgage servicing unit, Litton Loan Services, failed to comply with HAMP guidelines. Readers may recall that HAMP Is the half-baked Do Something About the Mortgage Crisis program designed to give homeowners “permanent” year payment reduction mods, which is a kick the can down the road strategy. In HAMP, servicers routinely asked borrowers to send the same documentation multiple times and assured borrowers they were likely to get a mod, only to refuse them. The worst is that many homeowners wound up worse off since they were not told that when the reduced payment trial mod ended, they would be asked to fork over the foregone portion of the payments plus late fees, pronto. Servicers often encouraged borrowers to use the savings to pay down other debt, thus assuring the homeowner would be unable to catch up and would lose their home. The reason the Fed inquiry is curious is not that there were abuses; they were rampant. But HAMP was a voluntary program, and to encourage banks to participate, my understanding is there were no penalties for failure to adhere to its requirements, save Treasury could claw back incentive payments. Last August, when there had been a good deal of unfavorable press about HAMP, Treasury officials acknowledged that banks had gamed the program, but then maintained they had no power to do anything.

Improper Military Foreclosures: U.S. Settles With Two Firms…Active-duty military are protected by the Servicemembers Civil Relief Act, a law that provides a slew of consumer protection measures designed to protect military personnel from financial distress. The Justice Department alleged that the Bank of America unit, formerly part of Countrywide Financial, improperly foreclosed on 160 military personnel between January 2006 and May 2009 and didn't check whether the borrowers were active-duty military. They also alleged that Saxon Mortgage Services Inc., a subsidiary of Morgan Stanley, foreclosed on 17 servicemembers without obtaining court orders. Bank of America agreed to pay $20 million, and Saxon Mortgage Services, of Fort Worth, Texas, agreed to pay $2.35 million. If additional military members come forward, the companies have agreed to compensate them beyond those amounts.

Banks Face $17 Billion in Suits Over Foreclosures - State attorneys general told five of the nation's largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isn't reached to address improper foreclosure practices, according to people familiar with the matter.The figure doesn't cover additional billions of dollars in potential claims from federal agencies such as the Department of Housing and Urban Development and the Justice Department. State and federal officials haven't proposed a specific comprehensive settlement figure, but Tuesday's discussions represented the first effort to formally quantify potential liability. Representatives of the nation's largest banks met in individual meetings on Tuesday with state and federal officials designed to highlight the potential costs they will face if a settlement isn't reached.  Banks and federal officials have made halting progress over two months to settle allegations of abuses related to mortgage servicing, and the numbers floated Tuesday indicate that the two sides are still far apart on the size of the penalty.

JPMorgan, UBS, Deutsche Bank Said to Face N.Y. Mortgage Probe…- JPMorgan Chase & Co., UBS AG and Deutsche Bank AG are being investigated as part of New York Attorney General Eric Schneiderman’s expanded probe of mortgage securitization, according to a person familiar with the matter.Four bond insurers also were subpoenaed: Ambac Financial Group Inc., MBIA Inc., Syncora Holdings Ltd. and Assured Guaranty Ltd., according to the person, who couldn’t be identified because the probe isn’t public. Schneiderman is seeking information on claims paid out during and after the economic crisis and any information or documents related to litigation or settlements with the banks, according to the person. The expanded investigation was reported earlier by the Wall Street Journal. Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley were already part of the probe, the person said earlier this month.

More banks targeted in New York probe - The New York state attorney-general’s probe into mortgage practices at large banks has expanded to include Royal Bank of Scotland, UBS, JPMorgan Chase and Deutsche Bank, bringing the number of banks under scrutiny to seven, people familiar with the matter say.Eric Schneiderman, the state’s top lawyer, has sought informal meetings with executives from the four banks as part of the office’s investigation into the securitisation and marketing of mortgage securities, these people say. The meetings are expected to take place over the next few weeks. Previously the state investigators had requested meetings with Morgan Stanley, Goldman Sachs and Bank of America. Morgan Stanley executives visited the attorney-general’s office last week, and other meetings are under way, people familiar with the matter said. Mr Schneiderman succeeded Andrew Cuomo as the state’s attorney-general this year. His probe into mortgage practices is separate from the effort by 50 state attorneys-general to try to negotiate settlements with banks over their foreclosure practices.  The New York office is focusing on the packaging and selling of mortgage products and has subpoenaed four bond insurers requesting information about litigation and settlements involving the banks and any claims that have been paid, this person said.

Mortgage fraud: California forming mortgage fraud task force - California Atty. Gen. Kamala Harris, saying that years of unscrupulous lending still haunts the state, is creating a 25-person task force to target mortgage fraud of any size — from small operations that preyed on troubled borrowers to corporations that sold risky loans as safe investments. The team of 17 lawyers and eight special agents from the state Department of Justice will pursue three major areas, Harris said in an interview:

•Corporate fraud, including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses. Harris said her office plans to prosecute some cases under California's False Claims Act, which she described as "one of those very powerful tools that California uniquely has … to pursue, in essence, what are false claims that are submitted to the state."

•Scams, including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing. •Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms and qualifying people for loans who couldn't afford the terms

California Establishes Mortgage Fraud Task Force - - Yves Smith - In further proof that attorneys general are abandoning the 50 state attorneys general investigation, California AG Kamala Harris announced that she is establishing a 25 person mortgage fraud task to look into abuses across the spectrum, from the individual borrower level to practices, such as questionable transfers to trusts when the securitizations were formed, that hurt investors.  Note that the defection of a second Democrat (Harris follows New York’s AG Eric Schneiderman in creating her own effort) from the AG investigation is particularly significant. A number of Republicans joined at the 11th hour and were never on board with the premise of talks, so their defection is expected. By contrast, the AGs from solidly Democratic states were expected to stay the course. The fact that the AGs from two major states have effectively left the talks confirm what we have said all along: that the negotiations were not serious precisely because no investigations had been conducted.  We applaud this step forward by Harris, since it shows at least some public servants are taking mortgage abuses seriously. From the Los Angeles Times

California and Illinois Expand Foreclosure Probes - Attorneys general in California and Illinois said they issued subpoenas to two companies that help mortgage servicers manage home loans, in the latest sign state officials are stepping up pressure on the mortgage industry. On Tuesday, California Attorney General Kamala D. Harris and Illinois Attorney General Lisa Madigan said they had issued subpoenas to Lender Processing Services Inc. as part of their investigation of questionable foreclosure practices, including so-called robo-signing, when employees approve legal documents without proper review. Ms. Madigan's office said it also issued a subpoena to Nationwide Title Clearing Inc., a mortgage-industry services provider.  The Illinois subpoenas seek information about the companies' clients, practices and relationships with foreclosure law firms, Ms. Madigan said. California didn't provide details on the specific information requested, but Ms. Harris's office said in a release it was seeking documents and written answers to questions in relation to the probe.

We Speak on BNN About the US Housing Market - Yves Smith

Federal Court in Texas Deals a Potentially Serious Blow to MERS -- Yves Smith - Texas is not exactly a consumer-friendly state, so the Federal court ruling in the Eastern District of Texas against MERS has the potential to have broad ramifications. Oddly, even though this decision took place last month, it seems to have escaped the notice of most real-estate oriented sites until now. Hat tip to April Charney for highlighting it (literally and figuratively, she marked the filing that I’ve posted below): Kingman Holdings v. CitiMortgage & MERS April 21, 2011 The borrower challenged an assignment from Citimortgage to MERS based on a pretty simple basis: MERS was not authorized to do so and on top of that violated its own procedures: Plaintiff alleges that the assignment by MERS to CitiMortgage is void for the following reasons: (1) Blackstun was not appointed as vice president by MERS’ board of directors; and (2) MERS was without authority to transfer the Note. Plaintiff claims that the Deed of Trust is a cloud on its title and sues to quiet title in the Property and claims the assignment violates Chapiter 12 of the Texas Civil Practices and Remedies Code. Alternatively, Plaintiff sues to enforce its equity [*3] in re-demption.  The court found that the mechanism used by MERS, of having MERS’ corporate secretary (Hultman) appointment various MERS signing officers was invalid because the appointment has not been approved by MERS’ board of directors, as required by MERS’ by-laws. That means that when the signing officer executed the assignment, it resulted in MERS filing a fraudulent document in the deed records.

Illinois plan to cut mortgage debt is making waves - A pilot program close to getting off the ground in Illinois seeks to use $100 million in taxpayer dollars to help potentially thousands of troubled mortgage holders in the state who owe more than their homes are worth. Backers of the program, which needs the approval of the U.S. Treasury Department to move forward, argue that it will stabilize neighborhoods, reduce foreclosures, help the economic recovery and ultimately cost taxpayers nothing. Opponents insist it will leave taxpayers on the hook and drive better-off homeowners to engage in so-called strategic default, leading to more foreclosures and less stability. Mercy Housing is seeking to use the fund to initially buy as many as 3,000 mortgages from underwater borrowers. Proponents say the loans — which are on the verge of foreclosure — can be bought at such a major discount from banks that balances could be reduced to levels below what the homes in question are worth.

Cleaning Up the Subprime Aftermath - JPMorgan Chase  earned a record $17.4 billion in quarterly profits in fiscal year 2010, a 47 percent jump from the previous quarter. Three days later, the bank quietly released a less flattering statement. Its mortgage-servicing division, the third largest in the country, had overcharged some 4,000 active-duty troops on their mortgages and improperly foreclosed on 14 of them, violating a law called the Servicemembers Civil Relief Act. This story broke because of embarrassing litigation. A Marine F-18 fighter pilot, Capt. Jonathan Rowles, who had been faithfully paying his mortgage, was marked delinquent. He and his wife hired a lawyer and spent two years fighting to get JPMorgan Chase to relent. The foreclosure mess is the sequel to the subprime calamity. During the housing bubble, investment bankers sought to move as many mortgages as they could, sound or otherwise. No-documentation loans packaged by Wall Street were blessed by the ratings agencies and sold to investors who would go on to lose a ton of money. The aftermath is just as messy. A business model that lost trillions during the crash is now pursuing profit by further bilking the victims. But servicers are also finding that basic paperwork trails were not properly created during the boom. So as they try to expedite foreclosures, they play fast and loose with the law.

Judge sides with homeowners in foreclosure suit - U.S. District Judge Dee Benson left open a legal window Wednesday for two South Jordan residents facing the loss of their house, one of the first cracks in federal court for Utahns trying to save homes from the wave of foreclosures swamping the state. Benson declined to grant a motion to dismiss the lawsuit brought by Michael and Dana Geddes to halt the foreclosure on their home while they try to negotiate a loan modification.  Federal judges in Utah have generally been hostile to lawsuits by homeowners who say that, in the process where mortgages were packaged and resold to groups of investors, traditional property recording practices and laws were bypassed and that, as a result, foreclosures were proceeding illegally.Benson conducted a 90-minute hearing in the Geddes lawsuit in which he intently grilled both sides over various legal questions. But what seemed to sway him was the admission by attorneys for the foreclosing entities that they were not sure who actually owned the couple’s mortgage note.

Hank Investigates: Mortgage Documents - Tonight -- an exclusive investigation -- if you've ever bought or sold a home...you need to hear this. Hank found a signature buried deep in your mortgage documents could be a ticking time bomb for thousands of Massachusetts homeowners. For those in foreclosure: it could be a lifesaver. It's a shocking, amazing, unbelievable story. Hank Investigates. This Nantucket home is Bob Jepson's most treasured possession. He built it himself and cared for it for 40 years. When hard times hit--he almost lost it in foreclosure.  Marie's home in Rhode Island was also in foreclosure--but now the bank's agreed not to kick her out.  What Marie calls a blessing is really a signature - this signature that reads Linda Green. We found those two words are saving some people from foreclosure but putting other homeowners at risk. There's a Linda Green signature on one of Bob's mortgage documents and on one of Marie's and on all these documents from mortgages on other people's homes.   You can see they're all the same name - but they're not written by the same person.

Florida Clergy, Faith Leaders Tell AG Bondi: Stop Siding with Wall Street Banks -This morning, a group of 75 clergy, faith leaders, and homeowners from five counties across Florida converged on the state Capitol in Tallahassee to hold a prayer vigil outside the office of Attorney General Pam Bondi, to urge her to stop siding with the Wall Street banks and drop her opposition to a provision in the 50-state Attorneys General settlement that would help underwater homeowners in the state reduce their mortgage debt.   Vigil organizers set-up a fake “moral hazard” work zone outside of AG Bondi’s office to tell the Attorney General that she is fostering moral hazard by continuing to make responsible Florida homeowners bear the full brunt of the cost of a housing bubble and bust that big Wall Street banks fueled and profited from. According to Zillow, forty-seven percent of Florida mortgage holders are underwater. 

Fannie Mae and Freddie Mac Serious Delinquency Rates decline - Fannie Mae reported that the serious delinquency rate decreased to 4.27% in March from 4.44% in February. This is down from 5.47% in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the serious delinquency rate decreased to 3.57% in April from 3.63% in March. (Note: Fannie reports a month behind Freddie). This is down from 4.06% in March 2010. Freddie's serious delinquency rate also peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.

LPS: Mortgage Delinquency Rates increased slightly in April, Foreclosure pipeline "Bloated" - LPS Applied Analytics released their March Mortgage Performance data. From LPS:

•Delinquencies increased slightly in April. Delinquencies are down almost 10% on the year and over 25% from the peak in January 2010.
•The inventory of late stage delinquencies continues to age, with 40% of borrowers who are in 90+ delinquency status having not made a payment in over a year.
•Improvement continues in the early stages of the pipeline as new seriously delinquent loan rates have dropped to three year lows.
•Both foreclosure starts and sales declined in April -foreclosure sales are still well below the pre-moratoria levels of late 2010.
•The foreclosure pipeline remains bloated with overhang at every level and limited foreclosure sale activity

According to LPS, 7.97% of mortgages were delinquent in April, up from 7.78% in March, but down from 8.80% in February and down from 9.52% in April 2010. Some of this increase is the normal seasonal pattern. LPS reports that 4.14% of mortgages were in the foreclosure process, down from the record 4.21% in March. This gives a total of 12.11% delinquent or in foreclosure. For a total of 6.39 million loans delinquent or in foreclosure in April.This graph provided by LPS Applied Analytics shows the aging for the 90+ days delinquent bucket.  About 40% of loans in the 90+ days bucket - or about 800,000 loans - have been delinquent over a year. The second graph - from the March report - shows the aging of loans in the foreclosure process.

Mortgage Delinquencies by Loan Type - By request, the following graphs show the percent of loans delinquent by loan type: Prime, Subprime, FHA and VA. First a table comparing the number of loans in Q2 2007 and Q1 2011 so readers can understand the shift in loan types: Both the number of prime and subprime loans have declined over the last four years; the number of suprime loans is down by about one-third. Meanwhile the number of FHA loans has increased sharply. \The first graph is for all prime loans. This is the key category now  Since there are far more prime loans than any other category (see table above), over half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types. The second graph is for subprime. This category gets all the attention - mostly because of all the terrible loans made through the Wall Street "originate-to-distribute" model. Although the delinquency rate is still very high, the number of subprime loans had declined sharply. The third graph is for FHA loans.  The last graph is for VA loans.  There are still quite a few subprime loans that are in distress, but the real keys going forward are prime loans and FHA loans.

Fannie, Freddie, FHA and PLS Real Estate Owned - Although the FHA hasn't released their March data online yet, housing economist Tom Lawler obtained a copy and sent me the data. He also sent me an estimate of the Private Label Securities (PLS) REO inventory (from Barclays Capital). We can now update the Q1 graph with the final FHA data. The combined REO inventory for Fannie, Freddie and the FHA decreased to 287,380 at the end of Q1, from a record 295,307 units at the end of Q4. The REO inventory increased 37% compared to Q1 2010 (year-over-year comparison). The REO inventory for the "Fs" increased sharply in 2010, but may have peaked in Q4 2010. The Fs acquired 101,997 REO units in Q1, but sold 110,023. Both are records, and the numbers will probably increase all year. The second graph includes the data for the Fs and adds Private Label Securities (PLS).  The PLS blew up first because it contained the worst of the worst loans; poorly underwritten subprime and Alt-A. Also the PLS wasn't set up to effectively manage REO and they just dumped houses on the market. Usually house prices are sticky downwards - prices decline, but slowly.

Lawler: FDIC-insured institutions’ Real Estate Owned (REO) decrease in Q1 - The FDIC released its Quarterly Banking Profile for the first quarter of 2011. ... On the REO front [lender Real Estate Owned], the carrying value of 1-4 family residential real estate owned on FDIC-insured institutions’ balance sheet on 3/31/11 was $13.2795 billion, down from $14.0498 billion on 12/31/10 and $14.5527 billion last March. The steep drop suggests that banks probably increased the pace at which they sold SF REO properties last quarter.As I have noted before, it is unfortunate that the FDIC does not collect data on the NUMBER of REO properties held, and there are actually significantly different estimates across analysts of the average carrying value of 1-4-family REO properties at FDIC-insured institutions. If one were to assume an average carrying value of about $150,000 – which is slightly over 50% above that for Fannie and Freddie – then FDIC-insured institutions would have owned about 88,530 residential REO properties last quarter. (Barclays Capital analysts believe the average carrying value is higher, and as a result the number of properties would be lower). Using the $150,000 number, here is a chart of REO holdings of Fannie, Freddie, FHA, and FDIC-insured institutions.

Lawler: Census 2010 Demographic Profile: Highlights, Excess Housing Supply Estimate, and Comparison to HVS - This is a long piece from economist Tom Lawler. First Lawler looks at the Census 2010 data and compares to the Housing Vacancies and Homeownership (HVS). This is very important because the HVS is used by many analysts to estimate the excess housing supply. Later in the piece, Lawler looks at several quick and dirty methods of estimating the national excess housing supply. I suspect housing analysts and journalists will want to read the entire post (the excess supply is critical and just about everyone uses the HVS). For those only interested in the excess supply section, scan down to "excess supply" NOTE: I've added a page break because this is very long! I will work up my own estimate of the excess supply very soon. The following is from Tom Lawler ...

Foreclosures for sale: Big supply, low prices -- There's a three-year inventory of homes in foreclosure for sale, and that's devastating home prices. Las Vegas¹ has so many foreclosures that 53% of all the homes sold in Nevada are in some stage of foreclosure, according to a report from RealtyTrac, the online marketer of foreclosed properties. Foreclosures represent 45% of sales in California and Arizona, and 28% of all existing home sales during the first three months of 2011.  "This is very bad for the economy," said Rick Sharga, a spokesman for RealtyTrac. What's more, the homes are selling at steep discounts², especially so-called REOs, bank-owned homes that have been taken in foreclosure procedures. The average REO cost on average about 35% less than comparable properties, according to RealtyTrac.  But in some areas, the discounts were ever greater: In New York State, the discount for REOs was 53% during the first quarter. And it was nearly 50% in Illinois, Ohio, and Wisconsin.

Distressed Homes in U.S. Sold at 27% Discount - U.S. homes in the process of foreclosure sold at an average 27 percent discount in the first quarter and purchases of distressed properties fell to less than half the peak set two years ago, according to RealtyTrac Inc.  The discount reflects the price of distressed properties relative to normal sales. A total of 158,434 homes that sold in the period received notices of default, auction or repossession, down 16 percent from the fourth quarter and 36 percent from a year earlier, RealtyTrac said in a report today. At that pace, it would take three years to clear the supply of distressed and bank-owned houses, the Irvine, California-based company said.  “While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery,” Chief Executive Officer James Saccacio said in the statement. Foreclosures are luring all-cash buyers who demand discounts, pushing down the value of all properties. More than three-fourths of U.S. metropolitan areas showed price declines in the first quarter, with foreclosures and short sales accounting for 40 percent of all transactions, the National Association of Realtors said

Seriously Delinquent Homeowners Undermine Hopes Of A Market Recovery - According to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey released in mid-February of this year, nearly half of all nationwide home purchases in January 2011 involved a distressed property -- either a foreclosed home or a short sale. Their January distressed property index reading of 49.5% was up from 47.2% in December and was the highest level since March of 2010. This index rose in spite of cutbacks in the sale of repossessed homes last fall by servicing banks because of the robo-signing mess. Short sales continued to climb because most banks finally concluded that it was in their interest to accept a short sale offer rather than go through the time, expense, and complications of foreclosing and then selling the property. As bad as this distressed property index is, it hides what is going on with the “shadow inventory” about which I have written extensively. Take a look at this amazing chart from Lender Processing Services.

As Lenders Hold Homes in Foreclosure, Sales Are Hurt - The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.  All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.  Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months. . “Housing prices are falling, and they are going to fall some more.”

More Worries About the Foreclosure Overhang - Yves Smith - The New York Times provides a workmanlike update on the impact of current and probable foreclosures on the housing market. The odd bit is that even though the article is downbeat, it manages to be relatively optimistic compared to industry sources. For instance, consider this section of the article: Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy. Contrast this view with the outlook from the industry cheerleader, the Mortgage Bankers Association: A full housing recovery is three to four years off as the nation grapples with a shadow housing inventory of 4.5 million distressed properties, according to Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association. The difference is that the MBA is considering not only foreclosures but people who really want or need to sell and are still holding on in hopes of a better market.

The Foreclosure Pipeline - Last night we discussed the NY Times article: Banks Amass Glut of Homes, Chilling Sales I pointed out that the RealtyTrac estimate of 872,000 REO (lender Real Estate Owned) was probably too high, and I also noted that there are approximately 2.25 million homes currently in the foreclosure process. There are another 1.8 million homes with the borrower more than 90 days delinquent - so there is more to come. I'd like to add these two table to hopefully clarify the situation. The first table shows REO inventory in Q1 2011 by Fannie, Freddie, FHA, PLS (Private Label Securities). Tom Lawler sent me the FHA data (released today) and the PLS data (an estimate from Barclays Capital).

Number of the Week: Glut of Vacant Homes Complicates Recovery - 14.3 million:

The number of homes vacant year-round as of the end of March 2011. How long will the housing market take to hit bottom? A lot depends on whether people will want to occupy millions of empty homes. Five years after the housing bust began, the market is still groaning under the weight of a near-record 14.3 million vacant residences. That’s about 3 million more than what was normal before the bust — a glut that could take more than 13 years to eradicate, given the depressed rate at which Americans have been starting new households and assuming construction of new homes remains at April’s low annualized level of only 551,000. With so many homes waiting to be occupied, it’s hard to imagine how prices nationwide could recover anytime soon (though, of course, the experience of individual local markets can differ). The only hope, and a perverse one, is that many of those homes are actually phantom inventory — built in such awful locations, or in such disrepair, that nobody will want to live in them.

BofA to give away houses - Have too many foreclosed properties? Why not give them away? That's what Bank of America plans to do with as many as 150 vacant and abandoned properties in and around Chicago through a new "collaboration" with the city that's intended to address the problem of abandoned properties. As part of the new effort, BofA plans to:

• Register properties with the city when the mortgage is delinquent and the property has been identified as vacant and abandoned.
• Identify up to 150 properties that will be referred to a new Cook County vacant and abandoned building court call in an effort to speed up the foreclosure process and return the properties to stable, productive use. The foreclosure timeline for vacant and abandoned properties in the area currently averages 18 months, the bank said.
• Contribute funds toward the city's costs of demolishing deteriorating buildings on the donated properties.
• Donate foreclosed and vacant condominiums to the nonprofit Community Investment Corp. as part of an initiative to upgrade, preserve and stabilize management of affordable rental housing.

House prices slip 2.5% in first quarter, FHFA says -- U.S. house prices fell a seasonally adjusted 2.5% in the first quarter and 0.3% in March, the Federal Housing Finance Agency said Wednesday, using home sales price information from Fannie Mae- and Freddie Mac-acquired mortgages. The March index is 19.8% below its April 2007 peak. "In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery. Fortunately, serious delinquency rates also are declining," said FHFA Acting Director Edward DeMarco. The FHFA also made what it called minor changes to its methodology; under the old rules, March prices would have been flat while the first-quarter drop would have been a steeper 3%.

Prices Post Biggest Drop in Two Years as Foreclosures Depress Market - Home prices in the U.S. continue to tumble. In recent months, that path of descent has become more precipitous as foreclosures claim a larger share of the market. Residential home prices slipped 2.5 percent during the first quarter of this year when compared to the previous quarter, according to a national index from the Federal Housing Finance Agency (FHFA), which is calculated using sales price information from mortgages acquired by Fannie Mae and Freddie Mac. The GSE’s purchase-only index shows that prices fell 5.5 percent between the first quarter of 2010 and the first quarter of 2011.  It’s the largest annual drop recorded since the second quarter of 2009, and the largest quarter-over-quarter decline seen since the fourth quarter of 2008. Economists were projecting the declines to be much smaller. Those at the research firm Capital Economics say it signals that the housing downturn “has gone from bad to worse.”

Sinking values prompting homeowners to consider strategic default as best business decision - Strategic default — opting to walk away from a mortgage you can afford — isn't a new phenomenon in the housing crisis. But with home values continuing to decline, more owners are finding themselves in a position where they may see it as a savvy business decision to destroy their credit rather than wait years for prices to recover.The decision to walk, tied to a housing crisis that continues to grip the market, is far-reaching, raising serious questions about whether financial commitments can ever be considered optional. Earlier this month, CoreLogic reported that as of the end of March, home prices had declined for eight consecutive months, and more than 11 million borrowers nationally were underwater, which means they owe more on their mortgages than the home is worth. It's difficult to predict just how many of those borrowers may opt for default, but FICO, the widely used credit scoring system, recently developed a formula to help lenders pinpoint borrowers who might default. "This is not a problem that's going away," "There's an exceptionally high interest from the banks in getting ahead of it.''

Sales of New Homes in U.S. Rose in April - Purchases of new houses rose in April for a second month as the market struggled to recover from a record low.  Sales climbed 7.3 percent to a 323,000 annual pace last month, figures from the Commerce Department showed today in Washington. The median estimate in a Bloomberg News survey of economists called for sales at a 300,000 annual rate. New houses sold at a 278,000 rate in February, matching the pace in August as the lowest in data going back to 1963.  Job gains and increased affordability may be starting to help underpin a housing market that’s lagged behind the rest of the economy. Nonetheless, the prospect that foreclosures will keep driving down property values means that buyers may continue to favor previously owned dwellings, indicating it will take years for builders like D.R. Horton Inc. to see a full recovery.  “We’re looking at a modest upward trend, with some bouncing around at this level,”

New Home Sales in April at 323 Thousand SAAR, Ties Record low for April - The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 323 thousand. This was up from a revised 301 thousand in March (revised from 300 thousand). 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 decreased to 6.5 in April from 7.2 months in March. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal).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 inventory of completed homes for sale fell to 67,000 units in April. The combined total of completed and under construction is at the lowest level since this series started.  The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In April 2011 (red column), 32 thousand new homes were sold (NSA). This ties the record low for the month of April. The record low for April was 32 thousand in both 1982 and 2009 - and now 2011. The high was 116 thousand in 2005.

April Pending Home Sales Drop After Two Monthly Gains - Pending home sales fell in April with regional variations following increases in February and March, with unusual weather and economic softness adding to ongoing problems that are hobbling a recovery, according to the National Association of Realtors®. The Pending Home Sales Index,* a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit. The data reflects contracts but not closings, which normally occur with a lag time of one or two months. Lawrence Yun, NAR chief economist, said the dip in contracts may be due to temporary factors. “The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months,” he said. “The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.”

Pending home sales slump 11.6% in April Economic Report - An index of contracts signed to sell existing homes tumbled 11.6% in April, a trade group reported Friday in yet another worrying sign about the moribund housing market. The National Association of Realtors' pending home sales index fell 11.6% to a reading of 81.9 in April, from a downwardly revised 92.6 in March. (March’s index initially was reported to be 94.1.)  The drop in April pending home sales followed two months of gains.The index is 26.5% below its April 2010 peak, when buyers were rushing to beat a contract deadline for the homebuyer tax credit.  “The widening imbalance between demand and supply likely means further home price declines,”  “The light at the end of the tunnel looks even dimmer and further away.”  The NAR cited unusual weather and economic softness but said the severity of the slump raises questions about whether April will just be a one-month aberration.

Pending Sales of U.S. Existing Homes Drop 12% as Foreclosures Hurt Values - The number of Americans signing contracts to buy previously owned homes plunged more than forecast in April, a sign the industry that triggered the recession continues to struggle.  The index of pending home resales declined 12 percent after a revised 3.5 percent increase the prior month, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 1 percent decline.  The prospect that foreclosures will continue to drive down property values may keep buyers on the sidelines awaiting further price declines. Unemployment at 9 percent and stricter credit requirements are further signs that a housing recovery may take years to unfold.  “This makes me believe it will take longer to clear the excess inventory,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. “It pushes the housing recovery even further out into the future.”

Pending home sales plunge in April - Pending sales of existing U.S. homes dropped far more than expected in April to touch a seven-month low, a trade group said on Friday, dealing a blow to hopes of a recovery in the housing market. The National Association of Realtors Pending Home Sales Index dropped 11.6 percent to 81.9 in April, the lowest since September. Pending home sales lead existing home sales by a month or two. Economists, who had expected pending home sales to fall 1.0 percent last month, said bad weather in some parts of the country might have affected home shopping. "There may some temporary factors like bad weather in the South," "Higher gasoline may be making potential home buyers a bit cautious. It is signaling further weakness in housing, but we do expect housing to turn around later this year. It just hasn't happened yet." Pending home sales in the South, which was ravaged by tornadoes, dropped 17.2 percent. Sales were also down in the Midwest and the West.

Consumer Sentiment increases in May, Pending Home Sales decline sharply - From NAR: April Pending Home Sales Drop¹ The Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit. Consumer Sentiment: The final May Reuters / University of Michigan consumer sentiment index increased to 74.3 from the preliminary reading of 72.4, and from 69.8 in April.  This was above expectations for a reading of 72.5. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. This is still a low reading, but sentiment probably improved a little possible due to the decline in gasoline prices.

Troubled home market creates generation of renters - A growing number of Americans can't afford a home or don't want to own one, a trend that's spawning a generation of renters and a rise in apartment construction. Many of the new renters are former owners who lost homes to foreclosure or bankruptcy. For others who could afford one, a home now feels too costly, too risky or unlikely to appreciate enough to make it a worthwhile investment. The proportion of U.S. households that own homes is at its lowest point since 1998. When the housing bubble burst four years ago, 31.6 percent of households were renters. Now, it's at 33.6 percent and rising. Since the housing meltdown, nearly 3 million households have become renters. At least 3 million more are expected by 2015, according to census data analyzed by Harvard's Joint Center for Housing Studies and The Associated Press.  All told, nearly 38 million households are renters.

Analysis: Number of renters rising as housing market struggles - The number of homeowners has tumbled to its lowest level since 1998, a recent analysis shows. The percentage of renters has increased to 33.6 from 31.6 when the housing market began its decline four years ago. Since the market crashed, nearly 3 million households have become renters, with another 3 million expected by 2015, according to census data analyzed by Harvard's Joint Center for Housing Studies and The Associated Press. There are now 38 million renting households. Some of the reasons for the increase in renting are that many households can't afford to purchase a home, or don't want to own one, pushing up the numbers of renters and the amount of apartment construction, according to the analysis, released Tuesday. Before the housing market's decline, mortgage rates made it cheaper to own than rent, whereas now it's cheaper to rent in about 72 percent of metro areas.

ATA Trucking index decreased 0.7% in April - From ATA Trucking: ATA Truck Tonnage Index Fell 0.7 Percent in April -The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 0.7 percent in April after gaining a revised 1.9 percent in March 2011. March’s increase was slightly better than the 1.7 percent ATA reported on April 26, 2011. The latest drop put the SA index at 114.9 (2000=100) in April, down from the March level of 115.6.  Here is a long term graph that shows ATA's Fore-Hire Truck Tonnage index. The dashed line is the current level of the index. Compared with April 2010, SA tonnage climbed 4.8 percent. In March, the tonnage index was 6.5 percent above a year earlier.

Survey: Gasoline price down 9 cents over last two weeks - According to an AP report, the Lundberg Survey shows gasoline prices have fallen 9 cents per gallon over the last 2 weeks. GasBuddy.com is showing a 16 cent per gallon decline in my area from the recent peak, and a decline of about 13 cents nationally. If WTI oil futures stay under $100 per barrel, I expect prices to fall 30 cents or more from the peak over the next few weeks.  It might be too early to see an increase in the Reuter's/University of Michigan's Consumer sentiment survey due to falling gasoline prices. Right now analysts are expecting a slight increase for May to 72.5 from the preliminary reading of 72.4. But if this trend of falling prices continues, I'd expect some improvement in June. (Note: Usually the two main drivers of sentiment are the unemployment rate and gasoline prices).

DOT: Vehicle Miles Driven decreased 1.4% in March compared to March 2010 - The Department of Transportation (DOT) reported that vehicle miles driven in March were down 1.4% compared to March 2010: Travel on all roads and streets changed by -1.4% (-3.5 billion vehicle miles) for March 2011 as compared with March 2010. Travel for the month is estimated to be 250.4 billion vehicle miles. Cumulative Travel for 2011 changed by -0.1% (-0.8 billion vehicle miles). This graph shows the rolling 12 month total vehicle miles driven.  The second graph shows the year-over-year change from the same month in the previous year. So far the current decline is not as a severe as in 2008. U.S. oil prices in March averaged $103 per barrel, and although prices have declined in May from the April highs, prices have only fallen to just below the prices in March. Also other sources have reported demand for gasoline is down in April and May, so I expect the data for April to show a sharp year-over-year decline in miles driven.

Fed's Duke Paints Grim Picture For U.S. Consumers --Federal Reserve Governor Elizabeth Duke Tuesday painted a grim picture for the U.S. consumer, underlining how many Americans are still hurting from the devastating financial crisis of 2008 and 2009.  In prepared remarks at a financial education conference in Boston, Duke said higher gasoline prices were forcing many consumers to make tough choices, given their limited budgets.  "Family incomes have not kept pace with rising costs and many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage," Duke said.

U.S. Consumer Spending Rose Less Than Forecast in April - Consumer purchases in the U.S. rose less than forecast in April as food and fuel prices climbed, and pending sales of existing houses plunged, showing the economy was struggling to strengthen at the start of the second quarter. Household spending rose 0.4 percent after a revised 0.5 percent March gain that was smaller than previously estimated, Commerce Department figures showed today in Washington. The number of Americans signing contracts to buy previously owned homes fell 12 percent last month, the second-biggest drop in a decade’s worth of records.  Wal-Mart Stores Inc. (WMT) is among retailers feeling the pinch as higher grocery and energy bills force households to dip into savings or cut back on less essential items. Disposable incomes, or the money left over after taxes, were little changed for a second month after adjusting for inflation. The savings rate held at 4.9 percent, matching the March reading as the lowest since October 2008.  “When you account for higher food and energy prices there’s barely anything left,”

Consumers hold back growth, rebound seen muted (Reuters) - Unexpectedly weak consumer spending hobbled the economy in the first quarter and fresh signs of a slowdown in the labor market pointed to an uphill struggle for the recovery. The economy grew at an annual 1.8 percent rate in the first three months of this year, the Commerce Department said on Thursday, unchanged from an earlier estimate and weaker than most forecasts. A separate report from the Labor Department showed the number of Americans claiming unemployment benefits unexpectedly rose last week by 10,000 to 424,000. Some of the slowdown in growth was linked to bad weather in early 2011 and an 11.7 percent drop in defense spending, trends which are expected to reverse in the second quarter. But economists were less hopeful about the expected bounce-back in growth, citing the rise in jobless claims and a moderation in factory output, which has been hit by disruptions to supply chains after the March earthquake in Japan

Personal Income and Outlays increased 0.4% in April - The BEA released the Personal Income and Outlays report for April:  Personal income increased $46.1 billion, or 0.4 percent ... Personal consumption expenditures (PCE) increased $41.5 billion, or 0.4 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in April, the same increase as in March. The following graph shows real Personal Consumption Expenditures (PCE) through April (2005 dollars). PCE  The graph shows the recent slowdown in the growth rate in real PCE. The personal saving rate was at 4.9% in April. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the April Personal Income report. The saving rate has declined even as growth for real personal consumption expenditures has slowed. Part of this is due to higher overall inflation and higher oil / gasoline prices.

Consumer Income & Spending Rise In April, But Warning Signs Persist - Disposable personal income and personal consumption spending rose last month, the U.S. Bureau of Economic Analysis reports. But after adjusting for inflation, the nominal rise fades to zero for income and posts only the smallest of increases for consumption. As such, today’s income and spending report is likely to give bears and bulls something to chew on. One trend that bears watching is the growing gap between spending and income when measured on a rolling 12-month percentage-change basis, as the chart below shows. This can’t last, and so it implies that either spending must slow or income must rise, or perhaps a bit of both. Another way to look at income and consumption is on an inflation-adjusted (real) basis for rolling 12-month periods, which has a fairly good history of dropping clues about major turning points in the economic cycle. Unfortunately, there’s some reason for anxiety in looking at these numbers, as the second chart below indicates.

Consumer spending, income drop as inflation accelerates -  On its face, today’s report from the Bureau of Economic Analysis looks like good news.  It shows personal income rising 0.4% in April, and personal consumption expenditures increasing by the same amount.  However, when the BEA accounts for increased taxes and inflation, the picture looks quite different indeed: Real DPI decreased less than 0.1 percent in April, in contrast to an increase of less than 0.1 percent in March.  Real PCE increased 0.1 percent in April, the same increase as in March... Reuters calls the narrow decline in real DPI a “tepid” and modest rise in its report, but notes that inflation has returned — and that means that the second quarter has shown even more weakness in the start than Q1′s 1.8% annualized GDP growth rate:

Gas Prices Up, Wages Down, Americans Caught in the Middle - When picturing people who are so far into debt they can’t get on top of their bills, many likely see images of flat screen TVs, Escalades, and giant, unnecessary houses. But the sad truth is that one of the biggest reasons Americans carry $796.5 billion in revolving debt is that wages have stagnated while the cost of necessities rose. That’s particularly true now, at the end of a decade where wages actually dropped, 13.7 million people are unemployed, and prices are through the roof. Median income fell by $5,261 in the past decade. The average price of gas is up 80 cents per gallon. With Americans consuming about 140 gallons per year, that’s an extra $112 billion over the course of 2011 that consumers will have to shell out at the pump. So is rent. It is too damn high. A new study came out recently that showed the level of renters spending more than half of their income on rent is the highest in half a century. That’s not just low-income people, either. “About 26 percent of renters — or 10.1 million people — spent more than half their pre-tax household income on rent and utilities in 2009,”.

Gas tanks are draining family budgets - There's less money this summer for hotel rooms, surfboards and bathing suits. It's all going into the gas tank. High prices at the pump are putting a squeeze on the family budget as the traditional summer driving season begins. The squeeze is happening at a time when most people aren't getting raises, even as the economy recovers.  For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal. Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Families now spend more filling up than they spend on cars, clothes or recreation. Last year, they spent less on gasoline than each of those things.

America's Most Gas-Dependent States Also The Least Prepared For Having No Gas  - Oil is a necessity of modern life. We use it for almost everything, and becoming less dependent on it is going to be a long, arduous process. But it's going to be easier for some people than others, as the results of a new study by the NRDC shows. Some states are much more dependent on gasoline than others. And the ones that need a lot of gas are the ones doing the least to prepare for a gas-less future. The report looked at what percent of their income the average driver spent on gas in a year. The states where people spend more on gas are labeled more gas insecure. Assuming gas prices rise at basically uniform rates around the country, people in those states have less recourse when gas becomes incredibly expensive:

Consumer Sentiment Gains as Gas Prices Fall - Consumer sentiment at the end of May turned sunnier, according to a report released Friday. Inflation expectations slipped.The Thomson Reuters/University of Michigan final May consumer sentiment index increased to 74.3 from the preliminary May reading of 72.4 and from 69.8 at the end of April. The latest reading was much better than the 72.4 expected by economists surveyed by Dow Jones Newswires. The end-May current conditions index edged up to 81.9 from 80.2 early in the month. The expectations advanced to 69.5 from 67.4. The Michigan report showed households curtailed their forecasts for short-run inflation, probably because gasoline prices have begun to retreat. The Federal Reserve has mentioned that inflation expectations will be a key driver to future policy decisions. Within the survey, the end-May one-year inflation expectations reading fell to 4.1% from 4.4% in the preliminary May survey, while the five-year inflation reading slipped to 2.9% from 3.0%.

Don’t Cut the Gas Tax for Summer Holidays, Double It - The Comptroller of Maryland is urging the state to eliminate its 23.5 cent gas tax for all holiday weekends this summer.   Franchot acknowledges his gas tax holiday would reduce state revenues by about $2 million-a-day. Maryland, it happens, faces a $1.4 billion budget shortfall for 2012. So why would he propose this? It would, he insists, “be a big boost for the state’s economy and most of all, it would just give our citizens a break.” I have seen no evidence that the former is true. It may be that lower gasoline prices over an extended period can boost the national economy. But would lowering prices for 2-3 days improve a state’s economy? I don’t think so. Would a gas tax holiday “give citizens a break?”  Sure, but perhaps less of one than Franchot hopes. Joseph J. Doyle and Krislert Samphantharak  found that gas stations will pass on some—but not all—of a temporary tax cut to customers. Once the tax holiday ends, gas prices may be higher than before the tax. So yes, people will get something of a break. But not a huge one.  And it may not last long.

Nearly Half of Americans Are ‘Financially Fragile’ - Nearly half of Americans say that they definitely or probably couldn’t come up with $2,000 in 30 days, according to new research, raising concerns about the financial fragility of many households. In a paper published by the National Bureau of Economic Research, authors used data from the 2009 TNS Global Economic Crisis survey to document widespread financial weakness in the U.S. and other countries. The survey asked a simple question, “If you were to face a $2,000 unexpected expense in the next month, how would you get the funds you need?” In the U.S., 24.9% of respondents reported being certainly able, 25.1% probably able, 22.2% probably unable and 27.9% certainly unable. The $2,000 figure “reflects the order of magnitude of the cost of an unanticipated major car repair, a large copayment on a medical expense, legal expenses, or a home repair,” the authors write. On a more concrete basis, the authors cite $2,000 as the cost of an auto transmission replacement and research that reported low-income families claim to need about $1500 in savings for emergencies.

Less Income, More Layoffs - Less income, more layoffs. That isn’t a combination to bring joy to U.S. consumers. The soft patch seen in the first quarter is carrying into the spring. And consumers are the ones slipping toward trouble. The Bureau of Economic Analysis revised its calculation of first-quarter real gross domestic product, but the growth rate remained at 1.8%, the same weak pace reported when the BEA issued its initial GDP report. The new mix of growth was very troubling, however. More of the growth came from inventory accumulation and less from consumer spending. Even more alarming for the outlook: The BEA now says real disposable income barely grew over the past three quarters. Previously, income growth looked to be accelerating: the annualized increases were 1.0% in the third quarter of 2010, 1.9% in the fourth, and 2.9% in the first quarter of 2011. Now, the three-quarter growth string is: 1.0%, 1.1% and 0.8%. Hardly the pace to inspire a shopping spree.

"Dismal Start" for Auto Sales in May - J.D. Power and Associates: High Gas Prices and Lower Incentive Levels Contributing to Dismal Start for May New-Vehicle Retail Sales "Retail sales in May are being hit by several negative variables—specifically, high gas prices, lower incentive levels and some inventory shortages," said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates. "As a result, the industry will likely be dealing with a lower sales pace at least through the summer selling season, putting pressure on the 2011 outlook." J.D. Power is projecting total light vehicle sales of 11.9 million in May (SAAR: seasonally adjusted annual rate). This would be down from 13.2 million in April, and only up slightly from 11.6 million in May 2010.  The projected decline in sales is mostly due to the tragedy in Japan and related supply chain issues: However most of the decline in production will be in Japan:  So auto production in the U.S. is forecast to decline slightly although retail sales will be off sharply over the next six months.

U.S. Durable Goods Orders Fell 3.6% in April - Orders for U.S. durable goods dropped more than forecast in April, reflecting a slump in aircraft demand and disruptions in supplies of auto parts stemming from the earthquake in Japan.  The 3.6 percent decrease in bookings for goods meant to last at least three years was the biggest since October and followed a 4.4 percent surge in March that was larger than previously estimated, a Commerce Department report showed today in Washington. Economists projected a 2.5 percent April decline, according to the median forecast in a Bloomberg News survey.  Bookings for Boeing aircraft slumped last month and vehicle makers slowed production due to a components shortage that may be short-lived as Japanese factories recover. At the same time, rising overseas sales at manufacturers such as Deere and General Electric indicate the industry will keep driving the U.S. expansion.

New Durable Goods Orders Tumble In April - New orders for durable goods suffered a hefty fall last month, dropping 3.6% in April on a seasonally adjusted basis, the Census Bureau reports. That’s the biggest monthly slide since last October’s 3.7% retreat. This isn’t news we want to hear right now, given renewed worries of an economic slowdown. What's more, there's no statistical hiding spot: April’s drop in new orders was broad based. But the trend is still positive on an annual basis, and that counts for something. Indeed, given the unusually high rate of recent gains on a rolling 12-month basis for new orders was destined to slow and so it's not terribly surprising to see a bit of red ink.  For the year through last month, new orders rose 5.3%, despite last month's drop. As the chart below reminds, that’s still a strong pace. It’s probably headed lower without a surge in economic activity in the months ahead. That seems unlikely, which implies that we should expect additional downshifts in the new orders.

Seasonal Factors Skewing Durables Numbers - Today’s durable goods report is disappointing. Besides the big drop in orders, a key measure that economists watch to gauge companies’ capital spending plans — nondefense capital goods orders, excluding aircraft — dropped 2.6% in April from May.  But there’s a catch: For the past three years, the capital spending measure has fallen in the first month of every quarter. Then, in the second and third months, it has tended to bounce back up. That suggests that the adjustments that Commerce Department statisticians are using to smooth out seasonal swings in the data are falling short.  If you look at the unadjusted capital goods orders figures, the swings are much more pronounced. That’s because many companies wait until late in the quarter — when they know that they’re going to hit their sales and profit targets — before they order new equipment and software. The seasonal adjustment factors that the Commerce Department uses are based on that historical pattern.Problems can arise, however, when companies change their behavior, and that could be what’s happening now.

Durable goods orders: more evidence of near-term weakness in the US economy - Rebecca Wilder - From the Census April preliminary release on durable goods orders and shipments:  New orders for manufactured durable goods in April decreased $7.1 billion or 3.6 percent to $189.9 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.4 percent March increase. Excluding transportation, new orders decreased 1.5 percent. Excluding defense, new orders decreased 3.6 percent. We know that the auto industrial production print was influenced by the supply chain disruptions stemming from the Japanese earthquake. This probably affected the durable goods orders and shipments as well. Furthermore, the big monthly drop was driven (partially) by a large 30% decline in nondefense aircraft and parts orders over the month. But the gist of the report, in my view, was disappointing. Total durable goods shipments fell 1% over the month, while new orders plummeted 3.6%. This is a very volatile series, and the March growth in new orders was revised upward to 4.4% over the month from 2.5%; but the average growth rate in 'core orders' is showing holes.

Factories’ Breather Will Resonate Through Economy - Recent data point to a slowdown in the once-robust factory sector. A slowdown in goods production virtually guarantees a soft patch for overall U.S. economic growth. The latest weak note came from Wednesday’s report on durable goods. New orders fell a larger-than-expected 3.6% in April and shipments were down 1.0%. Some of the weakness in the report reflected auto-plant shutdowns because vehicle makers can’t get parts from Japan. But the April drop was evident in other sectors. Of great concern was the 2.6% drop in new bookings for nondefense capital goods excluding aircraft. These orders are considered a leading indicator for business investment in equipment. Their flat trend so far this year suggests businesses may be holding back on new capital projects.

What would it take for an American manufacturing revival? - Paul Krugman on the maybe-kinda-sorta revival of American manufacturing: Manufacturing is one of the bright spots of a generally disappointing recovery, and ... a sustained comeback may be under way...[W]hat’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed. Why might manufacturing be important? There are many theories, but I tend to focus on the fact that manufactured goods are easily exportable. When goods are easily exportable, relatively small changes in exchange rates can allow large changes in the trade balance, which can be an effective way of fighting recessions. Sure, we export a lot of services, but a change in net services exports big enough to fight a recession probably requires a much bigger movement in exchange rates. And exchange rate are "sticky," they don't like to move a lot. So what we could really use right now is a manufacturing export-driven recovery, enabled by a weaker dollar. Brad DeLong and Christina Romer agree.

US manufacturing jobs: Song two | The Economist - IN THE past year American manufacturers have added almost 200,000 jobs to the payrolls (197,000 from April 2010 to April 2011 to be precise). That's a "terrific increase," writes Mark Doms, chief economist of the Department of Commerce, in his preview of tomorrow's durable-goods report. It didn't sound all that terrific to me, until I checked the numbers. It turns out that no administration has been able to make that claim since President Clinton's in the summer of 1998. The closest we got during the Bush years was the 12 months to October 2004, when American manufacturers added zero workers (see chart below). Just to be clear: the chart shows the year-on-year change in manufacturing employment, not the level. (A straightfoward chart of the number of people employed in manufacturing looks like this.)

Offshoring Bias - I just read Offshoring Bias in U.S. Manufacturing, by Hausman et al. It was illuminating, especially in relating the offshoring bias to the outlet bias in the CPI, an issue that I understand. The outlet bias is the problem of Super Wal-Mart and everyday low prices. Do these prices really mean that shoppers are getting a better deal or does Wal-Mart offer lower prices because it’s a worse place to shop. The way the BLS adds things up it assumes the latter, however, some economists have argued this doesn’t make sense. Ok so now lets more to international relations and think of China as the new Wal-Mart. When China moves into a sector the prices drop. Is this because Chinese goods are worse or because they are just cheaper. All the reason that make us think Wal-Mart is just cheaper make us think China is just cheaper.

Manufacturing — A Story Of America's Decline - If you were only able to read one story explaining America's decline, Michael A. Fletcher's In Rust Belt, manufacturers add jobs, but factory pay isn’t what it used to be is the one to look at. Yet, Fletcher's narrative, which appears in the Washington Post, purports to show that America is experiencing a "budding revival" in manufacturing, a conclusion which is at odds with reality. And as we shall see, economist Paul Krugman touts the recent increase in manufacturing jobs as indicating the success of America's weak dollar policy. From the Post— — More than 1,000 applicants began lining up this week outside a former Hoover vacuum plant here in the hopes of joining a surprising trend in this part of the nation’s manufacturing heartland: new jobs. But the new hiring also reflects another emerging reality of U.S. manufacturing: Many of the jobs don’t pay anything close to what they used to. Assembly-line workers who will be making the EdenPure products under the auspices of Suarez Corp. Industries will start at $7.50 an hour. That’s a far cry from the $20 an hour that most workers made with Hoover, which shifted its century-old production lines to Mexico and El Paso in 2007

This Excess Capacity You Keep Talking About…What is It? - A fair question, and one that begs for a bunch of graphs, the assembling of which is especially fun. Those of us worried about current economic conditions (that’s you, Brad) talk a lot about how the economy has “excess capacity,” it’s not at “full employment,” and other such catchy phrases that imply economic resources, including people, machines, structures, are not currently being fully utilized. It sounds obscure but it’s actually really, really important.  If the job market is “too loose,” meaning there are a lot more people seeking jobs than finding them, wage growth tends to slow and living standards stagnate. Here’s a look at two pictures of job market weakness.  First, the share of the population employed is a basic measure of labor market demand.  It’s very cyclical, as you can see, falling in downturns and climbing in recoveries, but it tanked in the Great Recession and while it’s stopped falling, it’s yet to start making up lost ground.

Changing the Subject: Where Are the Jobs? - The Republicans, deeply dinged by a politically damaging foray in badly designed Medicare reform, are trying to shift the conversation to jobs.  Based on my post yesterday on excess capacity in the job market, I’m all for that conversation.  (Wow, Eric Cantor must be reading my blog…cool!  Yo, Eric…whassup!?) But as Ezra and Paul point out, there’s nothing in there that we should expect to help much.  Tax cuts, deregulation (the Obama admin is going there too), trade deals, and that job-creating juggernaut: patent reform. The important question here is what should we be doing on the jobs front?  Or, more specifically, what should we do that we could do. One can and should wax about optimal ways to rev up the American jobs machine, which has thankfully shifted out of reverse but remains stuck in low gears.  Yet given our political dynamics, if those ideas represent traditional Keynesian stimulus, they’ll be…um…hard to get through Congress.   I’m all for a good fight, but with unemployment at 9%, and underemployment at 16%, we need more than a fight.  We need a win.

New Jobless Claims Rise By 10,000 Last Week - Today’s update on initial jobless claims suggests that the recovery is at risk of stalling. Indeed, the April surge in new filings for unemployment benefits warned as much. Although the surge has moderated this month, the data appears stuck in a range that implies weak economic growth at best.  New claims rose last week by 10,000 to a seasonally adjusted 424,000. That’s too high to inspire much confidence that the economic reports in the weeks ahead are poised to impress on the upside. More disturbing is the recent increase in the four-week moving average of new claims. The message here is that the ranks of the newly unemployed have popped higher and that this change for the worse is more than statistical noise.

7 US Corporations Advise Obama on Jobs While Investing Overseas - Seven publicly traded U.S. corporations represented on President Barack Obama's advisory council for jobs and competitiveness -- including General Electric Co. and Intel Corp. -- have devoted a growing pool of their non-U.S. earnings to investments in other countries. As a group, multinational companies with current or former chief executive officers on Obama's jobs council have, over the past four years, almost doubled the cumulative amounts they’ve reinvested overseas, according to data compiled by Bloomberg. By doing so, companies may be able to take advantage of faster-growing markets or lower production costs, and they can defer U.S. income taxes on profits from overseas sales. Underscoring the difference between corporate interests and the national interest, they’re also investing money elsewhere that could be helping the U.S. economy, said former U.S. Labor Secretary Robert Reich.

Mark Provost: Why the Rich Love Unemployment - Christina Romer, former member of President Obama’s Council of Economic Advisors, accuses the administration of “shamefully ignoring” the unemployed. Paul Krugman echoes her concerns, observing that Washington has lost interest in “the forgotten millions.” America’s unemployed have been ignored and forgotten, but they are far from superfluous. Over the last two years, out-of-work Americans have played a critical role in helping the richest one percent recover trillions in financial wealth.  On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies. From the first quarter of 2008 to the end of 2010, US gross domestic product (GDP) growth outperformed every G-7 country except Canada. But when it comes to jobs, US policymakers fall short of their rosy self-evaluations. Despite the second-highest economic growth, Paul Wiseman of the Associated Press (AP) reports: “the U.S. job market remains the group’s weakest."While executives must adapt to falling demand, they retain a fair amount of discretion in how they will respond and who will bear the brunt of the pain. Corporate culture and organization vary from country to country. In the boardrooms of corporate America, profits aren’t everything – they are the only thing.

Why a Bad Job Market is Good News for Some - Mark Thoma reminds us of the striking gap that has opened up between the productivity of labor and the compensation paid to labor. The problem, in a nutshell, is this picture: Whereas classic labor market theory suggests that when workers become more productive firms should bid up the price of labor by a similar amount, that has clearly not happened over the past 25 years or so.  Frank Levy and Tom Kochan set out a list of factors that they believe have caused this divergence (pdf of their draft paper). They focus on structural and institutional factors that will seem very familiar to anyone who has read or thought about middle-class wage stagnation more generally:

• technological change
• globalization and international trade
• declining unionization and collective bargaining
• declining value of the middle wage
• "financialization" of the economy, including financial deregulation
• "fissurization" of the labor market

The Effects of the 2009 Stimulus Package - The CBO has just updated their estimate of the impact that the stimulus package enacted in the US in early 2009, the American Recovery and Reinvestment Act ("ARRA"). I've summarized the conclusion in the chart below. The blue line shows actual real GDP (incorporating today's updated figures from the BEA for 2011:Q1), while the red line shows what would have happened in the absence of the ARRA. The impact was significant, and at its peak in 2010 the ARRA was responsible for creating between 1.3 and 3.3 million additional jobs for unemployed Americans. To generate this estimate, the CBO relied primarily on "versions of the commercial forecasting models of two economic consulting firms, Macroeconomic Advisors and Global Insight, and on the FRB-US model used at the Federal Reserve Board." In other words, the CBO is using the type of macroeconomic models that businesses rely on to understand the macro economy, which means that the models have effectively been "market-tested".

Unemployment: Why Stimulus Hasn’t Created More Jobs - In the wake of the Great Recession, why has employment been so slow to recover? One answer is that an important but widely unrecognized change in fiscal policy has taken place.  Due largely to the influence of supply-side Republicans and many Democrats who embrace growth policies, policies that were originally intended to stimulate innovation in the private sector were applied to the government sector and infrastructure spending. This change in policy that puts growth at the forefront has shifted resources and attention away from traditional policies that could have reduced joblessness at a more rapid rate. To understand the change in policy, it’s useful to divide fiscal approaches into two broad categories: supply-side policies designed to enhance the economy’s long-run growth prospects and demand-side policies designed to stabilize short-run business cycle fluctuations.  Supply-side policies, which almost always involve tax cuts and tax credits, attempt to stimulate the three factors that determine economic growth: technological innovation, growth in the capital stock, and growth in the labor force.

Obama, GOP unveil competing plans for job growth - After months of fighting over spending, taxes and how to rein in the national debt, President Obama and congressional Republicans on Thursday turned the spotlight to the nation’s anemic economic growth and announced competing plans to reduce the cost of doing business for American companies. The Obama administration said it would seek to scale back or eliminate hundreds of regulations¹ affecting workplace safety, environmental protection, endangered species, hospitals and other subjects, saying the measures would save businesses billions of dollars a year. House Republicans, meanwhile, offered a proposal that would lower the top tax rate on individual and corporate income to 25 percent from 35 percent. ²The plan would also strengthen patent protections against some lawsuits, require congressional approval of significant new regulations, increase domestic oil protection and promote the party’s effort to make large cuts in government spending.

Rediscovering an interest in jobs - For two years, congressional Republicans claimed to be interested in job creation. Unemployment, it’s safe to say, was the driving factor behind the huge GOP gains in the midterms. After which, Republicans completely forgot about the issue. What has the GOP been spending its time on lately? Wasting time on health care bills they know they can’t pass, abortion bills they know they can’t pass, climate bills they know they can’t pass, and budget bills they know they can’t pass. Republicans have also invested considerable energy in accusing Muslim Americans of disloyalty, targeting Planned Parenthood, and going after NPR, when they weren’t threatening to shut down the government and cause a national default. In April, the House Speaker said his party’s focus would soon change, and the GOP would have a jobs agenda. That was nearly eight weeks ago. Today, after nearly five months in office, Boehner said his party is now ready to take the issue seriously.. “A number of economists tell us if we can cut spending it will lead to a better environment for job creation in America,” the Ohio Republican said during a press conference. Sigh.

No Ideas - Krugman Ezra Klein points us to the House GOP’s rather pitiful jobs manifesto. Ezra describes it as “now more than ever”: the GOP’s response to the employment crisis is to demand exactly the same things it demands when the economy is doing well. Actually, the same is true of the Ryan plan: when the GOP claimed that deficits don’t matter, it called for privatizing major social insurance programs while cutting taxes on the rich, and now that it claims to be deeply concerned about deficits, it calls for privatizing major social insurance programs while cutting taxes on the rich.  Anyway, the new “jobs plan” illustrates, once again, the foolishness of believing that we can reach any real bipartisan agreement on economic policy. The GOP stopped thinking a long time ago; all it knows how to do is parrot Reaganite rhetoric over and over. And there’s so little there there that the document — look at it! — has to rely on extra-large type and lots of pointless pictures to bulk it out even to 10 pages.

The Post Helps Obama and Republicans Cover Up on Jobs - The headline of the Washington Post article told readers: "Obama, GOP Turn to Job Growth." Actually, both plans described in this article would have almost no effect on job growth as almost any economist would have told reporters. This is a cynical effort to pretend to be concerned about job growth by politicians who are not prepared to take any of the steps that actually could lead to more rapid growth. Reporters are supposed to expose these public relations charades, not act as conduits. That is what the politicians' communications staff are supposed to do.

House GOP “Jobs” Plan a Non-Answer to Nation’s Challenges -The United States faces high unemployment, stagnant living standards for working and middle-class people, increasingly high inequality, and an unsustainable long-term fiscal path.  Unfortunately, the main tax policy elements of the “House Republican Plan for America’s Job Creators” announced yesterday would ignore or significantly worsen each of these problems:

• Windfall for the wealthy.  The GOP tax agenda would permanently extend the Bush tax cuts, which flow disproportionately to high-income people.  (Households with annual incomes above $1 million receive $129,000 apiece, for example.)
• More debt.  Making the Bush tax cuts permanent would add $3.8 trillion in deficits over the next decade, about $700 billion of it stemming from the tax cuts exclusively for high-income people. 
• Incentives for overseas investments over domestic ones.  The plan also endorses one of the worst policy ideas now before Congress:  another tax holiday for overseas profits that corporations bring back to this country.  Congress tried this in 2004 and it was a complete failure.

Wonkbook: How you can tell Washington doesn't care about jobs -The best evidence that Washington has forgotten about the jobs crisis is to look at the plans emerging to address it. Yesterday's House GOP plan was a perfect example. It was, as MIT economist David Autor told me, a classic case of "now-more-than-everism": Everything on the agenda was also on the GOP's agenda in 2006, in 2002, in 1987, etc. It's lower taxes, less spending, fewer regulations, more trade agreements, more domestic oil production. You can argue about whether these proposals are good for the economy. But as Autor says, there's "no original thinking here directed at addressing the employment problem." But that's because the document doesn't admit the existence of a particular unemployment crisis that might require a tailored response. The only problem it admits is, well, Democrats. “For the past four years, Democrats in Washington have enacted policies that undermine these basic concepts which have historically placed America at the forefront of the global marketplace," the document explains on its first page. "As a result, most Americans know someone who has recently lost a job, and small businesses and entrepreneurs lack the confidence needed to invest in our economy. Not since the Great Depression has our nation’s unemployment rate been this high this long.”

Where Do You Fall on the Income Curve? - The Tax Policy Center has updated its figures on the income distribution in America, which we’d previously written about in a post about why most rich people don’t feel very rich. They have now crunched income levels for every single percentile, and the numbers refer to 2011 rather than 2010. So I’ve updated my chart on this subject. The graph below shows how much income is earned by a household at any given percentile in the income distribution, based on these new numbers for 2011: Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich.For example, the difference in income between a household at the 50th percentile and a household at the 51st percentile is $1,237 ($42,327 versus $43,564). But the difference in incomes between a household at the 98th percentile and the 99th percentile is $146,118 ($360,435 jumps up to $506,553).

Comparing Wages Across the U.S. - For employees in most occupations, it pays to work on the coast. Those working in metro areas scattered along the East and West coasts – San Jose, New York, Seattle – tended to get paid better last year than their middle-America counterparts, according to the Labor Department’s report comparing occupational pay in 77 metro areas, released Wednesday. Employees in the heartland and in certain southern metro areas, such as Lincoln, Neb., and Tallahassee, Fla., earned the least. (See a full-size interactive map.) Those working in the San Jose-San Francisco-Oakland, Calif., metro were the best paid. They earned 20% more than the average American worker last year. Employees in every major field there – from sales to construction – raked in above-average wages in 2010. The New York-Newark-Bridgeport area was also high on the list, with workers making an average of $1.14 for every $1 the average worker in the country earned. Workers in the Brownsville-Harlingen, Texas, metro area were the worst paid, bringing home 20% less than the average employee nationwide. Also low on the list: Ocala, Fla., and Lincoln, Neb.

Less Than Zero - The most telling characteristics of a society are often those that pass unnoticed. No one pays much attention to interns, for instance, yet the simple fact that at any given time hundreds of thousands of jobs are being performed for little or no pay is surely an important development in our political economy. Perhaps it says something about the value we place on work. Definitions of what exactly constitutes an internship vary widely. Are interns trainees, temps, apprentices, servants? Since the rules are vague or at least unenforced, employers simply fill in the blank with whatever tasks need doing, and interns often end up stuffing envelopes, fetching coffee, answering the phone, or collecting the boss’s dry cleaning. Not all their work is trivial, of course, and some internships offer useful training, but it is safe to say that vast numbers of interns are condemned to performing the mundane, vaguely humiliating chores that are the necessary if despised conditions of life in the white-collar world of work to which so many young people aspire. Far from providing an educational benefit or vocational training, internships have simply become, for many businesses, a convenient means of minimizing labor costs.

Why is America the 'no-vacation nation'? - Besides a handful of national holidays, the typical American worker bee gets two or three precious weeks off out of a whole year to relax and see the world -- much less than what people in many other countries receive. And even that amount of vacation often comes with strings attached. Some U.S. companies don't like employees taking off more than one week at a time. Others expect them to be on call or check their e-mail even when they're lounging on the beach or taking a hike in the mountains. Only 57% of U.S. workers use up all of the days they're entitled to, compared with 89% of workers in France, a recent Reuters/Ipsos poll found.

High Unemployment 'Most Pressing Legacy' of Financial Crisis - NYT -  The world economy is moving into a self-sustaining recovery, but high unemployment remains a threat three years after the financial crisis, a prominent economic research organization said Wednesday.  “The global recovery is getting stronger, more broad-based, more self-sustained,” Pier Carlo Padoan, the chief economist at the Organization for Economic Cooperation and Development, said. “The private sector is driving growth,” he added, “especially through a pick-up in trade,” while at the same time, support through government spending programs “is being withdrawn slowly.”  In its Economic Outlook report, the O.E.C.D. said global gross domestic product will likely grow by a healthy 4.2 percent this year and by 4.6 percent in 2012. But that figure reflects strong growth in emerging economies; O.E.C.D. members’ G.D.P. is expected to rise by a more modest 2.3 percent in 2011 and by 2.8 percent next year.

99ers and the Long-term Unemployed Are the Elephants in the Economic Recovery Room - The April 2011 BLS employment report showed a gain of 244,000 jobs, which was trumpeted by the Obama administration and the mainstream media as a continuation of a rapidly improving jobs market. While job growth is important, it’s also important to realize the jobs hole that needs to be filled. Over the past four months more than 800,000 jobs have been created, but in January 2009 alone, more than 800,000 jobs were lost. Since February 2010,1.8 million jobs have been created, but 8.8 million jobs were lost prior to that period. That’s a job shortage of 7 million and that doesn’t include the 125,000 jobs each month that needed to be created to simply absorb new entrants into the workforce. The job market is admittedly improving for some, but it’s not improving quickly enough for millions of jobless, especially the long-term unemployed. In April, the ranks of the unemployed who have been out of work for 99 weeks or more increased by 21,000 to a record 1,920,000. That equates to 14.5% of all unemployed.

Jobless Discrimination? When Firms Won't Even Consider Hiring Anyone Unemployed - When Sony Ericsson needed new workers after it relocated its U.S. headquarters to Atlanta last year, its recruiters told one particular group of applicants not to bother. "No unemployed candidates will be considered at all," one online job listing said. Other companies continue to refuse to even consider the unemployed for jobs — a harsh catch-22 at a time when long-term joblessness is at its highest level in decades. Refusing to hire people on the basis of race, religion, age or disability — among other categories — is illegal. But companies that turn away jobless people as a group are generally not breaking the law — at least for now. Job seekers have long known, of course, that it's easier to land a job when you are still working. There are no hard data on discrimination against the unemployed. But there have been reports from across the country of companies' making clear in job listings that they are not interested in people who are out of work. Employment experts say other companies have policies of hiring only people with jobs — but do not publicly acknowledge their bias.

Homelessness Jumps 25% In Houston -- An advocacy group says the homeless population in one of the state's biggest metro areas has jumped 25 percent this year.  The count is by the Coalition for the Homeless of Houston/Harris County. Volunteers also checked homeless numbers in neighboring Fort Bend County.  Coalition CEO Connie Boyd told the Houston Chronicle that the increase in homeless numbers is partly due to the recession. Boyd said Monday that the Texas economy has fared relatively well, but sometimes when people moved to the Houston area to find jobs it didn't work out.  The group's Jan. 31 census found 8,538 homeless people, compared with 6,819 in 2010. The count affects how much social services agencies seek in government help.

“Let them eat their own Goodwill Store bootstraps!” - Fitting that in 2011, the Republicans are branching out from Ayn Rand’s political philosophy to one once attributed to an Austrian in a foreign land (insert Arnold Schwarzenegger joke here)…Marie Antoinette: Republicans proposed cutting $832 million – or 12 percent – from this year’s budget for the federal nutrition program that provides food for low-income mothers and children…Two analysts from the liberal research and advocacy group Center on Budget and Policy Priorities, Zoe Neuberger and Robert Greenstein, said Monday that the cuts could mean turning away as many as 475,000 people from the Women, Infants and Children program if food prices continue to rise.Let them eat, uh, nothing! Although, you have to admit it’s not like poor infants and children are going to vote for John Boehner, let alone donate to him, anyway. He saves his tears for those who can afford to play in his foursome.

Welfare Reform Not the “Success” Ryan Claims - So, how did welfare reform do? In its early years, welfare reform, which replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF), benefited from an especially strong labor market.  In its first five years, unemployment never rose above 5.4 percent (in November and December 1996) and reached a low of 3.8 percent in April 2000.  But, the employment and earnings gains were short-lived.  As critics warned when Congress debated welfare reform in 1996, shifting to a block grant with fixed federal funding has resulted in a greatly weakened safety net that failed to respond effectively when the economy weakened and need rose.

• The employment gains of the early years of welfare reform, when the labor market was unusually strong,have since been wiped out.
• Welfare reform made the poorest families poorer.
• Welfare reform has left a large and rising number of families with children disconnected from both work and the safety net.
• TANF has failed to respond adequately to increased need during the current downturn.
• Moreover, the national TANF caseload rose by just 13 percent during the current downturn, even though the number of unemployed doubled.

The Black Unemployment Epidemic, Pt. 2: Pre-Existing Conditions - When white America catches a cold, the saying goes, black America gets pneumonia. Or in this case, when white America has a recession, black America gets a depression. It was true in the Great Depression, and it's no less true in the "Great Recession." It seems counterintuitive that, with the first black president in office, African Americans would be worse off economically. But, as has been made clear over and over again, the election of Barack Obama was not a curative for the nation's racial ills, or for the economic pre-existing conditions that have turned white America's recession into black America's depression.

Whites believe they are victims of racism more often than blacks - -- Whites believe that they are replacing blacks as the primary victims of racial discrimination in contemporary America, according to a new study from researchers at Tufts University's School of Arts and Sciences and Harvard Business School. The findings, say the authors, show that America has not achieved the "post-racial" society that some predicted in the wake of Barack Obama's election. Both whites and blacks agree that anti-black racism has decreased over the last 60 years, according to the study. However, whites believe that anti-white racism has increased and is now a bigger problem than anti-black racism. "It's a pretty surprising finding when you think of the wide range of disparities that still exist in society, most of which show black Americans with worse outcomes than whites in areas such as income, home ownership, health and employment," said Tufts Associate Professor of Psychology Samuel Sommers, Ph.D., co-author of "Whites See Racism as a Zero-sum Game that They Are Now Losing," which appears in the May 2011 issue of the journal Perspectives on Psychological Science.

State and local governments may cut 450000 jobs in FY2012 (Reuters) - Around 450,000 people who work for U.S. states, counties, cities, towns and villages could get pink slips in fiscal 2012, sharply up from the 300,000 positions shed this year, a report said on Monday. The number of job cuts will rise mainly because the federal stimulus program is ending while the cost of Medicaid is "spiraling," said the report by UBS Investment Research.  States got billions of extra dollars primarily for education and Medicaid from the stimulus plan. Medicaid is the state-federal health plan for the poor and disabled. Maury Harris, a UBS economist, on a conference call said the deficits states and municipalities will have to close will climb to $155 billion in fiscal 2012 from about $108 billion in the current fiscal year.

States shorten duration for unemployment benefits– Some of the states that have drained their unemployment insurance funds are cutting the number of weeks that a laid-off worker can count on those benefits. Legislators are trying to limit tax increases for businesses to replenish the pool and are hoping the federal government keeps stepping in when the economy slumps. Michigan, Missouri and Arkansas recently reduced the maximum number of weeks that the jobless can get state unemployment benefits. Florida is on the verge of doing so. Unemployment in those states ranges from 7.8 percent in Arkansas to 11.1 percent in Florida. The benefit cuts come as legislatures deal with the damage that the recession inflicted on state unemployment insurance programs. The sharp increase in the number of people who lost their jobs drained the reservoir of money dedicated to paying out benefits.

Judge Strikes Down Anti-Union Law in Wisconsin - Dane County Circuit Judge Maryann Sumi has struck down Wisconsin’s anti-union law, which strips most collective bargaining rights from public employees, because she found that the legislature violated the state’s open meetings requirements in passing the law.In a 33-page decision issued Thursday, Dane County Circuit Judge Maryann Sumi said she would freeze the legislation because GOP lawmakers on a committee broke the state’s open meetings law in passing it March 9. If Sumi’s ruling stands, it would void the anti-union law, forcing Scott Walker and the Republicans to have to pass it again. On July 12, six state Senate Republicans face a recall election, and the task of having to pass the law that riled up the electorate in Wisconsin in the first place is very daunting. If it were so easy they would have passed it by now. Republicans have said they would consider passing the law again within the state budget, but that’s a fiscal bill and could be subject to another walkout by Democrats.

Frustrated with Democrats, some large unions cut back on donations - Some of the nation’s largest labor unions are cutting back dramatically on their financial support to the Democratic Party, saying they are highly frustrated with the failure of Democrats to put up stronger resistance to Republican proposals opposed by labor. The unions have cited what they see as Democrats’ tepid response to Republican efforts to eliminate collective bargaining rights for public sector workers, cut Medicare funding and require voters to show identification at the polls.  “It doesn’t matter if candidates and parties are controlling the wrecking ball or simply standing aside,” said Richard Trumka, president of the AFL-CIO, in a speech Friday. “The outcome is the same either way. If leaders aren’t blocking the wrecking ball and advancing working families’ interests, working people will not support them.”

America's Fiscal Crisis: What States Can Do with Their Own Banks - “President Ford to New York: Drop Dead,” said a famous headline in 1975.  Now the Federal Treasury and Federal Reserve seem to be saying this to the states, which are slated to be the first ritual victims in the battle over the budget ceiling. On May 2, Treasury Secretary Timothy Geithner said that the Treasury would stop issuing special securities that help state and local governments pay for their debt. This was to be the first in a series of “extraordinary measures” taken by the Treasury to avoid default in the event that Congress failed to raise the debt ceiling on May 16. On May 13, the Secretary said these extraordinary measures had been set in motion. The Federal Reserve, too, has declared that it cannot help the states with their budget problems -- although those problems were created by the profligate banks under the Fed’s purview. The Fed advanced $12.3 trillion in liquidity and short-term loans to bail out the financial sector from the 2008 banking collapse, 64 times the $191 billion required to balance the budgets of all 50 states. But Fed Chairman Ben Bernanke declared in January that the Fed could not make the same cheap credit lines available to state and local governments -- not because the Fed couldn’t find the money, but because it was not in the Fed’s legislative mandate.

Monday Map: State Corporate Income Tax Rates - Today's Monday Map shows the top marginal state corporate income tax rate in each state. States with a top marginal rate higher than or equal to 9% are colored blue; states with a flat (single bracket) corporate income tax are colored pink.  States with a gross receipts tax instead of (or in addition to) a corporate income tax are colored green, and states with no corporate income tax or gross receipts tax are colored white.

States Report Strong Growth in Tax Revenues in the First Quarter of 2011 - Preliminary tax collection data for the January-March quarter of 2011 show strong growth in overall state tax collections as well as for personal income tax and sales tax revenue. However, tax revenue collections are still below peak levels. We will provide a full report on the January-March quarter after Census Bureau data for the quarter are available. The Rockefeller Institute's compilation of data from 47 early reporting states shows collections from major tax sources increased by 9.1 percent in nominal terms in the first quarter of 2011 compared to the same quarter of 2010. That represented the third consecutive quarter of increasing strength in revenues. Tax collections now have been rising for five straight quarters, following five quarters of declines, but were still 3.1 percent lower in early 2011 than in the same period three years ago. Virtually every state reported growth in overall tax collections as well as in tax collections from two major sources: personal income tax and sales tax. States' personal income taxes represented a nearly $6.7 billion or 12.4 percent gain, and sales taxes a $2.9 billion or 5.6 percent gain for the period.

State Treasurer Says 'No' to More State Debt - Illinois' treasurer cannot stop lawmakers from borrowing billions to pay the state's backlog of unpaid bills, but he can make it more expensive — and that's exactly what Dan Rutherford says he plans to do. Rutherford on Monday said he cannot support adding to Illinois burgeoning debt. The first-term Republican treasurer released his own report that states Illinois total debt would cost every household in the state $42,000. Rutherford arrived at the number by adding Illinois' $140 billion in unfunded pension and health-care liabilities, the state's $45 billion bond debt, and the nearly $8 billion in unpaid bills. The treasurer said lawmakers must cut spending and live within their means in order for Illinois to pay off the debt.  "You can't borrow anymore money," said Rutherford. "And if I need to send letters to the rating companies to tell them the treasurer of Illinois is opposed to any more borrowing, I'll go ahead and do that." Rutherford said alerting national rating agencies and bond houses could make it more expensive for Illinois to borrow. He said hopes that step would give lawmakers pause before asking for a billion dollars.  

Illinois Treasurer says he would call bond houses, warn against lending to Illinois - Illinois chief fiscal officer said Monday he is willing to dial up the bond houses and finance companies to alert them that lending the state more money, as Gov. Pat Quinn has proposed, would be a "major risk." "If I need to send letters to the rating companies to tell them the treasurer of Illinois is opposed to more borrowing, I'm going to do that," said Republican Treasurer Dan Rutherford.Rutherford says the debt from past borrowing has soared to $45 billion in recent years, which amounts to $10,000 for every household in the state. As a result, Illinois has the second-worst credit rating in the nation, above only California, he added. The backlog of unpaid bills will reach $8 billion by July, Comptroller Judy Baar Topinka recently estimated.

Thousands storm Oregon's capitol steps rallying for "a better way" - Taking to the steps of the state capitol in Salem on Friday, thousands of state workers, union members and advocacy groups rallying for alternatives to budget cuts, wage freezes and furlough days in Oregon. At least 36 busses carried people in to Salem from communities across all corners of Oregon. Many rally members say they're tired of making concessions while corporation and wealthy Oregonians “aren't paying their fair share.”  The “Better Way” plan calls for various actions, including higher taxes on corporation and cutting their tax breaks, also collecting overdue taxes, investing in schools, health care, public safety, the elderly and disabled. Most of the participants in Friday's rally were state workers on an unpaid furlough day, one of 10 the state is forcing employees to take this year to help balance the budget.

State Lawmakers Tap $3.2 Billion From Rainy Day Fund - The Texas Legislature has sent a measure to spend about $3.19 billion from the state’s savings account to Gov. Rick Perry’s desk. The Senate gave a final vote Wednesday evening to the measure that allows the state to use the money from the Rainy Day Fund to close a deficit in the current state budget. The vote comes after weeks of tense negotiations between the House and the Senate on the next budget. Conservatives in both chambers had pledged to limit how much they spend from the Rainy Day Fund. Instead, they chose to make massive cuts to all levels of state government to grapple with a multibillion dollar revenue shortfall. The Senate had initially proposed to use several hundred million more from the Rainy Day Fund than the House.

Brown's California budget focuses on debt repayment - Like many cash-strapped families, California paid bills late and ran up its credit cards when the economy tanked. Gov. Jerry Brown says it is time to straighten out the state's finances, in part by extending higher taxes on income, sales and vehicles worth about $10 billion a year. Under the governor's new budget schedule, much of the state's tax revenue growth over the next two years would help clean up balance sheets rather than buy more school days or restore Medi-Cal cuts.  The state would generally wait to pump more money into programs until 2013-14. Despite significant revenue growth in the meantime, schools and low-income residents would generally have to wait to claw back from the Great Recession.

Supreme Court orders California to free 40,000 prisoners - The US Supreme Court ordered California Monday to free thousands of prison inmates, saying chronic overcrowding violated inmates' rights -- but one judge warned the ruling was 'outrageous.' In a narrow 5-4 majority ruling upholding a lower court decision, the top US court said the release is the only way to address the constitutional violation of cruel and unusual punishment. 'This case arises from serious constitutional violations in California's prison system. The violations have persisted for years. They remain uncorrected,' Justice Anthony Kennedy wrote in a majority opinion. Cash-strapped California has for some years had a problem with prison overcrowding: the western US state has some 148,000 inmates housed in 33 jails designed for some 80,000 people, according to its own figures."

Sunny days ahead? Or is this just the silver lining to federal tax system clouds? - As I noted a couple of weeks ago, California’s April income tax revenues were well above forecast levels.  Many other states, especially those reliant on somewhat progressive income taxes have also reported higher than expected revenues.  Goldman Sachs reports first quarter state revenues were up 9 percent year over year with April alone up 12 percent.  Last week, Governor Brown’s May Revise (the update to his January budget) anticipated an additional $3.5 billion in revenues for the current fiscal year, and a combined two-year gain of $6.6 billion.  Coupled with budget actions adopted in March (about $13 billion) this brings California’s budget closer to balance from an estimated $25 billion in the red to a $9.6 billion budget gap.  So what’s happening here? Before we pop the champagne, let’s look at both where the money is coming from and what that source means to the budget process.  Federal and state personal income tax revenues are up nationwide even though in some places corporate taxes are down.  The revenue gain may reflect stronger ongoing economic activity, but it could also represent a one-time revenue boost due to taxpayer actions.  I already blogged about potential revenue gains from IRA conversions.   I’m guessing at least some high-wealth households decided to realize some capital gains to lock in the 2010 rates and avoid the uncertainty of potentially higher future rates.

Cargo Theft: The New Highway Robbery - McNew had been driving all afternoon, starting from Louisville (Ky.), and hauling $10 million in pharmaceuticals. He was bound for Memphis, to the warehouse of a medical supply wholesaler. McNew filled his tank and headed into the truck stop for a shower. When he came out, his truck was gone.  The thieves had stolen goods worth about 100 times the average taken in a bank robbery, and there wasn't a single witness. Thus began a chain reaction that threatened the nation's drug supply. The drugs were owned by the U.S. division of Tokyo-based Astellas Pharma. It was Astellas's first experience with a stolen truck, and a shock to the company's directors. On the advice of the Food & Drug Administration, they started calling everyone in the supply chain that night, from wholesalers to hospitals, to warn them that the stolen drugs might surface in their facilities. The lost truck had contained 18 pallets with 21 different medicines. They were concerned about the release of all the medicines, but an immunosuppressant called Prograf was especially troubling. The drug prevents patients from rejecting transplanted organs such as hearts, livers, and kidneys. The pills are sensitive to temperature and humidity, and if left in an uncooled trailer or warehouse, can fail and result in major complications for a transplant recipient.

Flogging Could Answer U.S. Prison Problems (Seriously) “In Defense of Flogging” isn’t a joke, a satire or a thought experiment. Peter Moskos, a former Baltimore cop who’s now a professor at John Jay College of Criminal Justice, seriously wants to reintroduce corporal punishment in the United States.  Don’t laugh: He makes a convincing case. From the straightforward question he begins with -- “Given the choice between five years in prison and 10 brutal lashes, which would you choose?” -- he had my attention.  Moskos isn’t a sadist or a fetishist. In fact, he finds flogging distasteful. (He describes the physical effects in graphic detail: “skin is literally ripped from the body,” etc.)  But he’s far more outraged by the American penal system, which incarcerates the largest total number (2.3 million) and the largest per capita proportion (750 per 100,000) of prisoners of any country in the world.

Six More Private Prisons, Zero Accountability - The Cincinnati Enquirer reports that Ohio’s proposed budget for the coming year includes a plan to sell an additional six prisons to private operators.  If that saves money or raises revenue, that’s great.  But maybe in connection with that move, the Ohio Legislature could correct an absolutely horrendous Ohio Supreme Court decision from a few years back that allows privately run prisons to be free from public accountability.  The case was State ex rel. Oriana House Inc. v. Montgomery.   The issue was whether the records of a prison run by a private company should be subject to the Ohio Public Records Act.  The prison received 88% of its funding from public sources and it obviously performed a public function.  Previous decisions from the Ohio Supreme Court had ruled that a public agency couldn’t shield records from public view by outsourcing a public function to a private entity.  For example, Hamilton County Ohio couldn’t stop the production of records related to the massive cost overruns in the construction of Paul Brown Stadium just because a private firm actually handled the construction of the publicly funded facility.

Steady Decline in Major Crime Baffles Experts - The number of violent crimes in the United States dropped significantly last year, to what appeared to be the lowest rate in nearly 40 years, a development that was considered puzzling partly because it ran counter to the prevailing expectation that crime would increase during a recession. In all regions, the country appears to be safer. The odds of being murdered or robbed are now less than half of what they were in the early 1990s, when violent crime peaked in the United States. Small towns, especially, are seeing far fewer murders: In cities with populations under 10,000, the number plunged by more than 25 percent last year. Criminology experts said they were surprised and impressed by the national numbers, issued on Monday by the Federal Bureau of Investigation and based on data from more than 13,000 law-enforcement agencies. They said the decline nationally in the number of violent crimes, by 5.5 percent, raised the question, at least in some places, of to what extent crime could continue to fall — or at least fall at the same pace as the past two years. Violent crimes fell nearly the same amount in 2009.

A New York City 'Living Wage'? - New York City spends more than $2 billion a year on efforts to promote economic development, but the benefits flow more to developers than to workers. Why not follow the example of some other big cities, including Los Angeles, and require large city-subsidized projects to pay a “living wage”? I happened to be in New York on May 12, when the City Council held public hearings on proposed legislation along these lines, requiring recipients of more than $100,000 in financial assistance to pay all their employees either $10 an hour plus health benefits or $11.50 a hour without benefits. Mayor Bloomberg opposes the legislation and questions whether the City Council has the authority to legislate wage standards. About an hour and a half into the meeting, a sizable rally in support of the proposal was under way out front and the council was hearing testimony both pro and con, peppering the participants with questions.  As several advocates for the legislation pointed out, when work doesn’t pay, taxpayers do – low-wage workers are often forced to rely on public assistance in the form of food stamps or Medicaid.

Michigan Central Station, Detroit, the waiting room - an interactive 360 degree photo tour of several spots in or around the ruins of Detroit

Less Than a Full-Service City - More than 20% of Detroit's 139 square miles could go without key municipal services under a new plan being developed for the city, with as few as seven neighborhoods seen as meriting the city's full resources. Those details, outlined by Detroit planning officials this week, offer the clearest picture yet of how Mayor Dave Bing intends to execute what has become his signature program: reconfiguring Detroit to reflect its declining population and fiscal health. Yet the blueprint still leaves large legal and financial questions unresolved.  But the approach discussed by city officials could have that effect. Mr. Bing's staff wants to concentrate Detroit's remaining population—expected to be less than 900,000 after this year's Census count—and limited local, state and federal dollars in the most viable swaths of the city, while other sectors could go without such services as garbage pickup, police patrols, road repair and street lights.

Michigan Schools Still Face Deep Cuts Next Fall -- Michigan school districts are scrambling to spare themselves some of the deep cuts coming to public education next fall.  The districts face cuts of $470 per student, but they could shrink that by $100 if they meet several conditions. Among them are contracting out some services or getting teachers to pay for 10 percent of their health care premiums.  It's expected most of the state's districts would qualify for the $100.  However, school districts already are laying off teachers to make up for the lost funds. Saginaw Public Schools announced last week it's making cuts across the board. In all, 65 teachers, 36 service employees, nine educational support staff, six secretaries, six administrators and five bus drivers could receive pink slips.

Wash. budget deal relies on massive education cuts - — A tentative agreement to fill Washington state's $5 billion budget shortfall relies largely on massive cuts to education, including reductions in teacher pay and dramatic increases in university tuition. Negotiators announced the plan Tuesday in a somber news conference, saying they sought to make the painful reductions as responsibly as they could. With new taxes essentially off the table due to an initiative voters approved last year, the $32 billion plan for the next two years includes $4.6 billion in spending cutbacks. "There were sacrifices made in every single part of services provided by state government," said Sen. Ed Murray, D-Seattle. Education suffered the most, accounting for roughly half of all cuts. Teachers, who have already had salaries trimmed when lawmakers decreased paid training days, face another 1.9 percent decrease while other K-12 employees could get a 3 percent reduction. Those changes will save the state $179 million over the next two years and come even though the pay for legislators will remain steady.

Lee County schools plans to lay off 10 percent of its employees - The Lee County school system plans to lay off 10 percent of its employees because of expected state budget cuts. The Board of Education gave Superintendent Jeff Moss permission Tuesday to notify 126 employees that they won't have jobs for fiscal 2012, which begins July 1. Moss plans to send letters to the employees by June 1. The letters will tell the employees that their positions are being eliminated unless the school system gets additional revenue. Certified employees have 15 days from the notification to request a hearing before the school board. Moss said Wednesday that most of the 57 employees losing their jobs in certified positions are teachers. He said 67 people being laid off hold noncertified positions, with most being teaching assistants. An administrator and a support worker in the central office also are losing their jobs, he said. The system has 1,258 full-time employees.

Public Schools Charge More Fees - Budget shortfalls have prompted Medina Senior High to impose fees on students who enroll in many academic classes and extracurricular activities. The Dombis had to pay to register their children for basic courses such as Spanish I and Earth Sciences, to get them into graded electives such as band, and to allow them to run cross-country and track. The family's total tab for a year of public education: $4,446.50. "I'm wondering, am I going to be paying for my parking spot at the school? Because you're making me pay for just about everything else," says Ms. Dombi, a parent in this middle-class community in northern Ohio. Public schools across the country, struggling with cuts in state funding, rising personnel costs and lower tax revenues, are shifting costs to students and their parents by imposing or boosting fees for everything from enrolling in honors English to riding the bus. At high schools in several states, it can cost more than $200 just to walk in the door, thanks to registration fees, technology fees and unspecified "instructional fees."

12% of Americans Are Immigrants, But the Top 70% of Science Students Are Children of Immigrants - From the Executive Summary of the new study "The Impact of the Children of Immigrants on Scientific Achievement in America" by Stuart Anderson of the National Foundation for American Policy:  "One surprising characteristic unites the majority of America’s top high school science and math students – their parents are immigrants. While only 12 percent of the U.S. population is foreign-born, 70 percent of the finalists in the 2011 Intel Science Talent Search competition were the children of immigrants (see chart above). Just 12 of the 40 finalists at this year’s competition of the nation’s top high school science students had native-born parents. While former H-1B visa holders comprise less than 1 percent of the U.S. population, 60 percent of the finalists had parents who entered the U.S. on H-1B visas, which are generally the only practical way to hire skilled foreign nationals. Finalists’ parents sponsored through a family preference category represented 7.5 percent of the total, about four times higher than their proportion in the U.S.

UCSB Students may see Tuition Spike - University of California students may be among those who bear the brunt of an “all-cuts” budget, especially under a scenario where tuition could skyrocket by 32% later this year.  The Board of Regents already approved an 8% tuition increase that would take effect this fall. UC leaders warned that students could see tuition jump 8% per year over the next five years, starting in 2012.  The scheduled increase will take tuition to $11,124. The steepest proposed hike would bring the annual undergraduate tuition for California residents at UCSB to $14,684. This would occur if Gov. Jerry Brown’s plan for tax extensions is not approved.  “It’s not desirable. But people have to understand the grave consequences to this university,” UC President Mark G. Yudof said May 18 at a regents meeting in San Francisco

America Falling Behind In College Completion - It’s difficult to talk about “college degrees” in the abstract, and the problem only gets worse when you turn that into an international comparison. But I think conversations about whether or not college is “worth it” or whether we’re having a “bubble” in higher ed benefit from some information on international comparisons. Fortunately, the Yglesias Blog has a new intern this week, Matt Cameron, who helped me find this report from the College Board (PDF) which has a lot of interesting charts.  For starters, if you look at older workers America nearly leads the world in college degrees.  But among the youngest cohort, that’s not the case:And if you look at the racial and ethnic breakdown, it looks like one factor in the stagnation is the fact that the Hispanic share of the population has grown over time but Hispanic college attainment hasn’t:

Top Colleges, Largely for the Elite - The last four presidents of the United States each attended a highly selective college. All nine Supreme Court justices did, too, as did chief executives. Like it or not, these colleges have outsize influence on American society. So their admissions policies don’t matter just to high school seniors; they’re a matter of national interest.  The truth is that many of the most capable low- and middle-income students attend community colleges⁴ or less selective four-year colleges close to their home. Doing so makes them less likely to graduate from college at all, research has shown⁵. Incredibly, only 44 percent of low-income high school seniors with high standardized test scores enroll in a four-year college, according to a Century Foundation report⁶ — compared with about 50 percent of high-income seniors who have average test scores.  This comparison understates the problem, too, because SAT scores are hardly a pure measure of merit. Well-off students often receive SAT coaching and take the test more than once, Mr. Marx notes, and top colleges reward them for doing both.

Grading on a Partisan Curve - The divide between liberals and conservatives applies to more than just attitudes about the role of government. It appears to make a difference in university grading, too. A new study looked at patterns in how Republican and Democratic college professors graded students. It is based on a data set of grades, courses and SAT scores of 17,062 students at an unnamed “elite university.” The researchers then determined the political affiliation of the professors assigning those grades, based on listings on local voter registration rolls (for the 511 professors who were registered with a party, anyway). The authors were interested in whether Democrats professors gave out a more egalitarian distribution of grades, since liberals believe more strongly than conservatives “in the justification for governmental action to reduce inequality.” And their hunch appears to be right. Here’s a chart, taken from the paper, that shows the average grades given to students who had scored in a few different SAT ranges. The dashed line shows Republican professors’ grades, and the solid line shows Democratic professors’ grades:

Pushing Colleges to Become More Diverse - How can top colleges be persuaded to admit more talented low- and middle-income students? My column this week laid out a strategy for making colleges more economically diverse and meritocratic, based on policies at Amherst College and the University of California. But I didn’t spent much time on the politics of getting colleges to make changes. Fortunately, several other writers have done so — some today, in response to the column, and some long before. The first potential lever is the federal government. It pays for and administers Pell Grants, a huge program that benefits, roughly, the bottom half of the income distribution. Goldie Blumenstyk of The Chronicle of Higher Education wrote last year: … the chancellor of the California State University system, Charles B. Reed, … has been pushing a proposal to reward institutions that enroll higher numbers of Pell Grant students with more federal money and withhold support from colleges whose Pell enrollments fall below 15 percent.

China Rush to U.S. Colleges Reveals Predatory Fees for Recruits - Eager to mine a newly affluent China, the State University of New York, Tulane University in New Orleans and scores of other schools are starting to pay agents a commission for each student enrolled -- an incentive that’s banned when recruiting U.S. students.  These agents also often misrepresent or conceal their U.S. affiliations. They receive payments not only from the families, who even pony up a share of any scholarships awarded to their children, but also from an increasing number of colleges, as well as small operators seeking to profit stateside from the influx of Chinese students.  The upshot is that some Chinese students end up paying at least twice as much as their American counterparts to go to colleges that aren’t necessarily the best match for them.

If You Want Solutions, First Pin Down Where the Money Is Going - Everybody wants solutions. Here's the first step to any real solution: pin down exactly where all the money is going. Only when you know the true, full costs in any system, and have a system of accountability that aligns with the cost structrure, can any real solutions emerge.  Everyone agrees education is important, but the "solution" demanded by the Education Cartel and Fiefdom is more money. More money may or may not be the solution to what's wrong with education, and to ascertain that, we need to first "follow the money" and track down exactly where every dollar currently allocated to education goes.  Unsurprisingly, perhaps, education does not have a transparent cost structure.  Once we have a full accounting of every cost, then we can compare those costs on a per capita basis (so we're adjusting for population growth and inflation) with costs in the recent past (20 years ago, for example) and then move on to aligning the cost structure with a metric of accountability.

The “Careers” of College Graduates - In an update, of sorts, to the recent post about the influence of the Recession on current college graduates, Ezra Klein over at the Washington Post is letting us know that it’s actually even worse. Two charts explain it: Leaving aside the salaries (not so surprising that engineering majors make more than education or humanities majors) it’s importantly to look pretty seriously at those light green bars. That represents people who went to college and are now employed in jobs that don’t require them to have gone to college. That’s 22 percent of employed people under age 25. They’re earning less than $16,000 a year on average. That’s depressing. Those are people who have jobs. There are a lot of college graduates out there who don’t have jobs and are not included in this chart. As Klein puts it: The implication is clear: If you’re going to college to get a job after college, you’re better off in a major that lends itself to an obvious job after college. Engineering, say, or teaching. A humanities or communications degree turns out to be a much tougher sell.

Three-Quarters of Employers Plan to Hire New Graduates - Three out of four companies plan to hire recent college graduates, a new survey shows, in the latest sign of an improving job market for the Class of 2011. After a couple years of bleak hiring prospects, the outlook is improving for recent college graduates. Of those companies looking to hire new grads, 23% said they planned to hire more than they did a year ago, according to a survey released Wednesday that was conducted by EMC Research and commissioned by the Academy of Art University in San Francisco. Just 12% of those business executives surveyed said they would hire fewer graduates than last year. Employers ranked computer efficiency highest on their list of desired skills with 84% rating it as valuable. Meanwhile, 79% said the same about analytical skills and 75% said demonstrated writing ability was valuable.

Despite Wage Disparities Across Majors, College Degree Still Worth It - Graduates in some fields are clearly better off than others, according to a report released Tuesday by Georgetown University’s Center on Education and the Workforce. The highest-paying majors earned, in general, 314% more than the lowest-paying majors in 2009, according to the center’s analysis of Census data for 171 undergraduate majors. Women earned the most when they had majored in pharmacy pharmaceutical science and administration, a median of $100,000, and information sciences, a median of $75,000. Those with degrees in theology and religious vocations earned the least: $33,000. Human services and community organization majors were also among the lowest-paid, earning $35,000. Men tended to earn the most with degrees in petroleum engineering, raking in a median of $120,000. Pharmacy pharmaceutical science and administration majors earned a close $110,000. On the opposite end of the spectrum, men recorded lowest-paying majors identical to their female counterparts: theology and religious vocations and human services and community organization. Men earned slightly more though, taking home a median of $40,000 for each.

Median Earnings by Major and Subject Area - Interactive graphic - The economic value of a bachelor’s degree varies by college major. New data from the U.S. Census Bureau show that median earnings run from $29,000 for counseling-psychology majors to $120,000 for petroleum-engineering majors. Even when majors are looked at by groups, such as business or health, there is variation in pay depending on the specific major.

State Auditor Says Pittsburgh Pension Plan 'Severely' Underfunded --  State Auditor General Jack Wagner warned Pittsburgh leaders on Tuesday that the city's pension plans are severely underfunded and that the city needs to do something now.  Wagner released an audit on Tuesday morning of Pittsburgh's plans and said even with new parking tax revenues, the pension plan needs a boost to protect current and future interests.  According to a news release from Wagner's office, 71 pension plans in Pennsylvania are considered severely underfunded, meaning they are less than 50 percent funded. The anticipated infusion of parking tax revenues would boost Pittsburgh’s pension plans to just a fraction over 50 percent, at best, Wagner said.

San Francisco Mayor Ed Lee proposes pension-reform measure - San Francisco city workers would pay a maximum of 12.5 percent of their salaries to pensions and police and firefighters would pay up to 13.5 percent under a pension-and-health-care reform package to be unveiled today by Mayor Ed Lee, according to a memo from the city's Department of Human Resources obtained by The Chronicle. Today is the deadline for the mayor to submit a measure to the Board of Supervisors to qualify it for the November ballot. Lee appears to have the six votes required, but big questions remain, including how much money his proposal will save. Despite months of negotiations with labor groups to work out the proposed ballot language, Lee's office didn't know late Monday how far the measure will reduce the city's pension and health-care costs. This year, the city is paying 14 percent of salaries - $357 million - to pensions and is expected to be on the hook for $800 million in pension costs in 2014. The city also owes $4.36 billion in health benefits to retirees and city employees, but has put aside almost nothing for it.

Fed Governor Duke: Recession impact on Financial Decisions - From Fed Governor Elizabeth Duke: Research, Policy, and the Future of Financial Education The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. The pace and timing of their saving and investing life cycle has also been disrupted. In addition, starting salaries for recent college graduates have also declined, which means that young Americans who are employed will have fewer resources for saving and investing than their predecessors. Young people are living with their parents longer, which helps conserve their limited resources but likely places a strain on their parents' budgets.  Also troubling is research showing that many consumers who should be saving for retirement instead have been forced to take hardship withdrawals from their 401(k) plans. According to an analysis by Vanguard, hardship withdrawals increased by 49 percent between 2005 and 2010. Other types of withdrawals increased by 56 percent.  The increasing use of retirement savings for other purposes is particularly troubling given that the responsibility for saving for retirement has shifted away from employers to individual employees.

Retirement And The Recession: Savings Destroyed For One Out Of Four Older Workers, Says AARP Survey - Workers older than 50 are gloomy about retirement after getting beat up by the Great Recession, according to a survey released Tuesday by AARP's Public Policy Institute.  During the course of the economic downturn that started in December 2007 and technically ended in June 2009, one in four older workers burned through all of his or her retirement savings, the survey found.  More than half of older workers weren't confident they'd have enough money to live comfortably in retirement, and nearly half said they expected a "less economically secure" retirement than their parents had.  "Many older Americans have been buffeted by skyrocketing health care costs, dwindling home values, shrinking pension and investment portfolios, and employment struggles," AARP executive John Rother said in a statement. "Even if you have a job, this survey demonstrates that you are not immune to the negative effects of the recession."

Alan Simpson Still Confused About Social Security Numbers - Former Sen. Alan Simpson (R-Wyo.) demanded cuts in Social Security Wednesday while lashing out at Republican strategist Grover Norquist, the AARP, "the cat food commission cats" and "sharpshooters" at The Huffington Post. Speaking before a luncheon sponsored by former Wall Street tycoon Pete Peterson's foundation, Simpson, a Republican appointed by President Barack Obama to co-chair a bipartisan commission on the federal debt, accused Norquist of being "a nut" and repeatedly harped on a new, misleading statistic about Social Security. "The AARP, I mean, come come," Simpson said to an audience of Washington insiders. "If you can't understand that when I was a freshman at the University of Wyoming, there were 17 people paying into the system and one taking out, and today there are three people paying into the system and one taking out -- if you can't understand that it was never set up as a retirement program, it was an income supplement which became a retirement, if you can't understand it was never structured to handle disability insurance, it couldn't exist with that burden on it.

Hey Stupid Seniors! The Post Says a 9 Percent Cut In Social Security Benefits Won't Hurt - It's amazing what you can learn reading the Washington Post. Today it's lead editorial told readers that reducing the annual cost of living adjustment for Social Security by 0.3 percentage points won't hurt. This would come as news to most seniors who rely on Social Security for most of their income. This 0.3 percentage point cut is cumulative. After a person has been retired for 10 years benefits would be roughly 3 percent lower than would otherwise be the case. Benefits would be almost 6 percent lower after 20 years, and almost 9 percent lower after 30 years, when most beneficiaries will be in their 90s. The poverty rate is highest for the oldest seniors, most of whom are women living alone. Most people think cutting benefits for this group by 9 percent would hurt, thankfully we have the Washington Post to tell us otherwise.(This is a newspaper that has run front page stories warning that raising taxes by less than 1 percent [of income] on people earning $300,000 a year would inflict real pain.)

Christie eyes lower income limit for Medicaid eligibility - Gov. Christie plans to seek approval for a proposal that would deny Medicaid coverage to adults in a family of four with an annual household income of little more than $6,000, down from the current $30,000. A single mother raising three children who earned as little as $118 a week would not qualify for the government-funded medical coverage. The eligibility-requirement change, which must be cleared by the Obama administration and would apply only to new adult Medicaid applicants, would follow Christie's eliminating - for the second year - a long-standing line item that would provide nearly $7.5 million in funding to family-planning clinics.

Paul Ryan, Republicans, And Generational Politics - To senior citizens at town hall meetings angry or worried about their plan to convert Medicare to a private insurance scheme, Republicans have a simple answer: It’s not about you. You’ll be fine. This is for “the next generation.” The next generation is everyone 55 or under, since the plan would not start for ten years and would affect only newly eligible seniors. The stated logic of the ten-year delay is that it takes time to put the system in place and that people need time to plan. But the line they chose is more than a gimmick: The 55-and-over cutoff marks a sharp and significant generational divide. Those over 55 will continue to benefit from one of the triumphs of social insurance in the Great Society, while the rest of us will be on our own, with a coupon for private health insurance. If you consider what it means to be 55 years old in 2011, you’ll see the significance of the line.

Medicare Breaks the Inflation Curve - Today, S&P released data tracking the growth of health care costs which showed that over the year ending March 2011pending rose at an annual rate of 2.78% posted for the Medicare Index in its six-year history. (Hat-tip to Kent Bottles for calling attention to this report on Twitter). This news is, as Bottles says, “very important”, not to mention timely, given the deficit debate in Washington.) By contrast, over the same 12 months, health care costs covered by commercial insurers rose by 7.57%. Still, as the chart below shows, even these costs (tracked by the “commercial index”) have been falling, down from a peak inflation rate of nearly 10 percent in the 12 months ending in July 2010 to 7.5% in the 12 months ending March 2, 2011. Why is health care inflation decelerating? In the commercial sector, the recession no doubt plays a major role. Insured patients often have high deductibles that must be paid before they receive care. As a result, hospitals report that patients are putting off elective surgery. Thus, commercial insurers are paying out a lower share of premiums

Life Extension versus Quality-of-Life Enhancement - The Medicare program subsidizes medical care for the elderly so heavily as to create serious concern about the fiscal soundness of the federal government. And, as longevity rises, the size of the subsidy rises, and the rise in cost is compounded by the increasing cost of medical technology. Among possible measures that would reduce the rate at which the cost of Medicare is increasing would be means-testing and—the focus of this piece—shifting the balance of subsidized R&D so that more is spent on increasing the quality of life of elderly people and less on extending their (our) lives.  We need to recognize that the public subsidy of medical care for the elderly is not limited to the Medicare program (and Medicaid as well, which provides medigap insurance—insurance against the part of the cost of medical care not covered by Medicare—to millions of Medicare participants who can’t afford private medigap insurance), but includes much of the public expenditure on medical R&D, since the elderly are by far the principal beneficiaries of continued advances in medical knowledge and treatments. Although federal expenditures on medical R&D are small relative to Medicare, they have a multiplier effect: every year of life added by advances in medical technology increases the size of the elderly population and hence the cost of the Medicare program.

Are There Sizable Benefits From Extending the Lives of the Old and Frail? -The federal government subsidizes basic and applied research on both the quality of life and the length of life. An example of research on quality is the efforts to find implantable artificial kidneys that can replace dialysis for persons with severe kidney disease since dialysis is a limited and very confining procedure. Research into finding cures for breast and prostate cancers exemplifies research on extending the length of life. It might seem clear that research on extending the lives of frail persons over say age 80 does not produce much value to these persons or to society, but economic analysis of the “value of life” shows that this conclusion is far from obvious. The main criterion used to measure benefits from all kinds of medical advances is how much individuals affected by these advances, and society as a whole, would be willing to pay for them. Clearly, reducing the incidence of Alzheimer’s disease, or finding drug substitutes for dialysis, would add great value to  individuals who would have been victimized by Alzheimer’s or would have been on dialysis. As Posner indicates, however, this does not necessarily imply that putting lots of time and money into developing ways to extend the lives of old people is worthwhile, particularly those who are frail.

Why Not Let the Dead Pay for Medicare? - Here's how it works. Basically, we leave Medicare alone. Oh, we can still go ahead with some of the obvious reforms. It would be great if that stuff works. But if it doesn't, then people will need to pay more for their care. So why not have dead people pay? They don't need the money any more, after all. So Medicare stays roughly the same, but every time you receive medical care you also get a bill. You don't have to pay it, though. It's just there for accounting purposes. When you die, the bill gets paid out of your estate. If your estate is small or nonexistent, you've gotten lots of free medical care. If it's large, you'll pay for it all. If you're somewhere in between, you'll end up paying for part of the care you've received. Obviously this gives people incentives to spend all their money before they die. That's fine. I suspect they wouldn't end up spending as much as you'd think. What it does mean, though, is that Medicare has first claim on their estate, not their kids. But that seems fair, doesn't it?

Vox Schizophrenia - Okay, I think I get it.  Fourteen months ago, a majority of Americans, anywhere from 52 to 58 percent depending on the politically bias nature of the polling, were against government-run health care. Today, anywhere from 60 to 74 percent of Americans polled are against the Paul Ryan plan to begin the gradual but eventual eradication of Medicare, which is, of course, a government-run health care system. Wait, what? So, well... maybe... no, I don't think... but... Where do they find these people?  Normal commentators might call this hypocritical or dumb, but this space would like to put forth the notion that what we're dealing with here is an acute case of mass schizophrenia. And it's spreading.

Vermont moves closer to single-payer health plan - Vermont became the first state to lay the groundwork for single-payer health care on Thursday when its governor signed an ambitious bill aimed at establishing universal insurance coverage for all residents. "This law recognizes an economic and fiscal imperative," Democratic Governor Peter Shumlin said as he signed the bill into law at the State House. "We must control the growth in health care costs that are putting families at economic risk and making it harder for small employers to do business." Legislators say the plan, approved by the Democratic controlled House and Senate this spring, aims to extend coverage to all 620,000 residents while containing soaring health care costs. A key component establishes a state health benefits exchange, as mandated by new federal health care laws, that will offer coverage from private insurers, state-sponsored and multi-state plans. It also will include tax credits to make premiums affordable for uninsured Vermonters.

More Solid Proof That Obamacare Is Working, by Rick Ungar: Recent data provided by the nation’s largest health insurance companies reveals that a provision of the Affordable Care Act – or Obamacare – is bringing big numbers of the uninsured into the health care insurance system. And they are precisely the uninsured that we want– the young people who tend not to get sick. The provision of the law that permits young adults under 26, long the largest uninsured demographic in the country, to remain on their parents’ health insurance program resulted in at least 600,000 newly insured Americans during the first quarter of 2011. The Health & Human Services Department had estimated that the changes in the law would result in about 1.2 million new enrollees in 2011. However, according to Aaron Smith, the executive director of a Washington based non-profit that advocates for the young, it now looks as if that number will be exceeded.This is very good news – particularly for those in the individual and small group markets that tend not to ‘self-insure’ as the larger corporations tend to do.

ObamaCare Is Working As Advertised to Increase the Number of Insured - Rick Ungar notes that the Affordable Care Act is working precisely as advertised to increase the number of people with health insurance into the United States. In particular, it’s increasing the number of young adults with health insurance — precisely the people we want insured to bring down premium costs.The provision of the law that permits young adults under 26, long the largest uninsured demographic in the country, to remain on their parents’ health insurance program resulted in at least 600,000 newly insured Americans during the first quarter of 2011.[...] Because the under 26 crowd tends not to get sick, adding them to the insurance pools helps bring the very balance that was intended by the new law. The more healthy people available to pay for those in the pool who are ill (translation- the older people), the better the system works and the lower our premium charges should go.

Obesity and Health Costs - The world is experiencing an obesity epidemic. Even the UN has conceded there are more obese than hungry people, even in developing countries!  Over the entire planet 15% of the world’s population is overweight; 5% is obese.   Among developed nations, the US has more obese people than any other by far: two easy stats to remember: two thirds of adult Americans are overweight; one third is obese. We know health care costs are growing. How will obesity affect these costs? This article addresses this question with data just analyzed by the Congressional Budget Office (CBO). But first, a short primer on obesity.

Are american children to be used in medical experiments to test anthrax vaccine? - The highly controversial and potentially lethal anthrax vaccine may be tested on US children if the federal government gets its way. Although adverse event reports related to the vaccine among adult test subjects have included hospitalization, disability and even death, the U.S. Department of Health and Human Services (DHHS) is exploring the possibility of testing the vaccine on children. Nicole Lurie, the assistant secretary for preparedness and response at the DHHS, recently requested that the National Biodefense Science Board submit an evaluation of safety issues related to testing the anthrax vaccine on children. The DHHS frames the possible testing as an issue of biodefense preparedness. However, the possibility of pediatric testing of the vaccine both ignores the vaccine’s dangers, and raises the specter of class- and/or race-based selection of medical test subjects which has haunted US health agencies for over a century.

Cancer Now Leading Cause of Death in China - Cancer is now the leading cause of death in China. Chinese Ministry of Health data implicate cancer in close to a quarter of all deaths countrywide.   While this might be expected in China’s richer cities, where bicycles are fast being traded in for cars and meat consumption is climbing, it also holds true in rural areas. In fact, reports from the countryside reveal a dangerous epidemic of “cancer villages” linked to pollution from some of the very industries propelling China’s explosive economy. By pursuing economic growth above all else, China is sacrificing the health of its people, ultimately risking future prosperity. Lung cancer is the most common cancer in China. Deaths from this typically fatal disease have shot up nearly fivefold since the 1970s. In China’s rapidly growing cities, like Shanghai and Beijing, where particulates in the air are often four times higher than in New York City, nearly 30 percent of cancer deaths are from lung cancer

Tests Reveal Mislabeling of Fish - Scientists aiming their gene sequencers at commercial seafood are discovering rampant labeling fraud in supermarket coolers and restaurant tables: cheap fish is often substituted for expensive fillets, and overfished species are passed off as fish whose numbers are plentiful.  Yellowtail stands in for mahi-mahi. Nile perch is labeled as shark, and tilapia may be the Meryl Streep of seafood, capable of playing almost any role.  Recent studies by researchers in North America and Europe harnessing the new techniques have consistently found that 20 to 25 percent of the seafood products they check are fraudulently identified, fish geneticists say.  Labeling regulation means little if the “grouper” is really catfish or if gulf shrimp were spawned on a farm in Thailand.

Groups sue FDA to stop Big Ag antibiotic abuse—and it just might work - A growing weight of research links routine antibiotic use on factory farms to the rise in antibiotic-resistant bacteria -- which are showing up in more and more places worldwide (including, according to recent studies, in your local supermarket). Doctor groups, from the American Medical Association to the American Society of Microbiology, have appealed to the government and industry to restrict the practice, lest critical antibiotics become useless for human treatments. Over the past couple of years, the FDA changed its tune and has finally begun to respond to the threat. Top officials at the FDA have testified of the dangers to Congress. The agency itself is developing "voluntary guidance" that would restrict the practice -- which currently sees 80 percent of all antibiotics used in this country given to food animals. Sadly, though, the FDA is still whistling when it should be belting its song to the rafters. As a result, a coalition of environmental groups including the Center for Science in the Public Interest, Food Animal Concerns Trust, Public Citizen, Union of Concerned Scientists, and the Natural Resources Defense Council (NRDC) has decided to sue.

Contamination: The totalitarian strategy of the GMO crop industry -Certainly, many of us know people who say (wrongly) that nowadays everything causes cancer. This view becomes a justification for making no effort to avoid carcinogens, especially in food. It is a case of learned helplessness that becomes a major public relations weapon for creating and maintaining docile populations. Make people feel powerless. Then, even if they disagree with you, they won't oppose you. This appears to be the strategy of the genetically modified organism (GMO) crop industry. The mode of attack is the contamination of non-GMO crops through the spread of pollen and the inadvertent mixing of GMO and non-GMO seeds. Large agribusiness giants such as Monsanto claim to recognize "coexistence" with conventional and organic growers as a desirable state. But, the industry acknowledges that contamination is inevitable. In fact, the complete segregation of GMO and non-GMO crops was never on the table. And, what we now know about the spread of genes via pollen from GMO to non-GMO plants makes it all but certain no regulatory regime, no matter how comprehensive and severe, could prevent contamination.

New Resistant Strains of Disease Could Wipe Out Global Wheat Fields… Aggressive new strains of wheat rust disease called stem rust and stripe rust have decimated up to 40 percent of wheat fields threatening to wipe out wheat farming amid rising food shortages in the East African region. At a meeting of the International Wheat Stripe Rust Symposium last week in Aleppo Syria, scientists said unless serious and urgent measures were taken to combat the rust, it would adversely reduce wheat production in the world.The strain of the deadly wheat pathogen will likely continue to affect Kenya, Ethiopia, Morocco, North Africa, the Middle East, Central Asia and the Caucasus, including Syria, Egypt, Yemen, Turkey, Iran and Uzbekistan The greatest threat emanates from the stem rust first discovered in Uganda in 1999.

Corn Planting 79% Complete; Wet Weather Concerns Remain - Producers across the country made substantial progress in planting corn last week, including in states such as North Dakota and Indiana. But with more rain forecast for northern parts of the Corn Belt, concerns remain about the 21 percent of the crop that has yet to be planted. The nation's corn crop was 79 percent planted as of Sunday, May 22, compared to 63% last week and an 87 percent five-year average, according to USDA's weekly Crop Progress report. Analysts were expecting about 80% of the crop to be planted. The crop is 45 percent emerged, compared to 21 percent last week and a five-year average of 59 percent. "Notable states that moved to 90 percent planted or better were Illinois (90%), Iowa (98%), Kansas (93%) and Nebraska (94%)," Ohio only sits at 11 percent done, or 69 percentage points behind the average pace." Meanwhile, soybeans are 41 percent planted, compared to 22 percent last week and 51 percent average, and on par with analysts' projections.

Corn-Planting Delays Signal Price Gain as U.S. Farmers Switch to Soybeans - U.S. corn farmers are running out of time to plant this year’s crop after wet weather swamped fields from North Dakota to Ohio, signaling higher costs for livestock and ethanol producers as growers switch to soybeans. About one-fifth of the corn crop had yet to be sown as of May 22 in the U.S., the world’s top producer and exporter, government data show. In Ohio, where some areas got 10 inches (25 centimeters) of rain in the past month, the pace of seeding was the slowest in 15 years. Fields planted after mid-May yield less, while soybeans can be sown until late June.  “I have not planted the first kernel,” said Fred Yoder, a farmer in Plain City, Ohio, who may switch to soybeans if fields don’t dry out by next week. Soggy fields are the norm in central Ohio, Yoder said. “A few guys have tried to mud in some corn, but the stuff that has been planted looks horrible.”  Corn futures doubled in 12 months, boosting feed costs for meat producers including Tyson Foods Inc. and ethanol makers such as Archer Daniels Midland Co. Prices may reach a record $8 a bushel.

Food-Cost Gains to Quicken as Nestle, Whole Foods Raise Prices - U.S. food-price inflation may top the government’s forecast as higher crop, meat, dairy and energy costs lead companies including Nestle SA, McDonald’s Corp. (MCD) and Whole Foods Market Inc. (WFMI) to boost prices.  Retail-food prices will jump more than the U.S. Department of Agriculture’s estimate of 3 percent to 4 percent this year, said Chad E. Hart, an economist at Iowa State University in Ames. Companies will pass along more of their higher costs through year-end, said Bill Lapp, a former ConAgra Foods Inc. chief economist. The USDA will update its forecast today.  Groceries and restaurant meals rose 2.4 percent in the four months through April, the most to start a year since 1990, government data show. During the period, rice, wheat and milk futures touched the highest levels since 2008, and retail beef reached a record. Yesterday, J.M. Smucker Co. announced an 11 percent price increase for Folgers coffee, the best-selling U.S. brand, after the cost of beans almost doubled in a year.

Russia Grain Curbs Ending as Drought Wilts Europe Crops -- Russia, once the world’s second- biggest wheat exporter, plans to let a grain-export ban expire July 1 after almost a year, bolstering global supply as drought and flooding threatens crops from Europe to the U.S.  Farmers have sown 10 percent more acres and stockpiles exceed 6 million metric tons, First Deputy Prime Minister Viktor Zubkov said today, according to a government statement. Russian grain traders accelerated purchases in the last several weeks, moving supply to silos near ports in anticipation of the end of the ban which began in August, agricultural researcher SovEcon said May 20.  Wheat traded in Chicago, a global benchmark, as much as doubled in the past year as drought and flooding from Canada to Russia to Europe ruined crops. Russia’s export ban, combined with quotas on shipments imposed by Ukraine, tightened supply and contributed to global food prices tracked by the United Nations surging to a record in the first quarter. While extra shipments will help ease supply concerns, extreme weather may curb output elsewhere and keep prices high.  “The complicated weather and crop situation around the world means we shouldn’t expect a significant price drop,”

Global Food Costs May Rise More on Supply Lag, BOJ Executive Nakaso Says - Global food costs may extend gains as it will take time for producers to catch up with demand driven by the rapid growth of emerging economies, the Bank of Japan’s assistant governor said.  The surge in commodity prices is also being spurred by increased trading of financial products linked to commodities such as exchanged-traded funds and indexed-investment products, Hiroshi Nakaso, who leads a Group of 20 panel studying global commodity inflation, said in an interview yesterday in Tokyo.  “The lead time for increasing food production is often long and we can’t rule out the possibility that food prices may become volatile to some extent,” Nakaso, 58, said at the BOJ’s headquarters. He added that there won’t be a “critical situation” if food production can be increased at a “reasonable pace.”  Soaring commodity costs, seen in the United Nations FAO Food price index’s rise to a record in February, threaten to drive millions of people into poverty and have prompted central banks around the world to boost borrowing costs

UN food agency stunner: World loses one-third of total global food production - Bloom: “2% of all US energy goes to food we’re throwing away.” -- The agriculture sector is one the largest emitters of greenhouse gases, approximately 10-12% of the global total according to the 2007 IPCC Fourth Assessment Report on Climate Change. Climate Progress’s ongoing series on food insecurity explores both how climate change is affecting agriculture and how agriculture is contributing to climate change.  This post examines something close to our hearts (and stomachs): food waste. The UN Food and Agriculture Organization (FAO) released a study on food production last week that concluded 1.3 billion tons of food is lost each year.  That’s one third of total global production.  This inefficiency in food production and consumption reflects wasted energy and consequently unnecessary GHG emissions. Figure 2 shows that the per capita food loss in Europe and North-America is 280-300 kg/year. In Sub- Saharan Africa and South/Southeast Asia it is 120-170 kg/year. The total per capita production of edible parts of food for human consumption is, in Europe and North-America, about 900 kg/year and, in sub-Saharan Africa and South/Southeast Asia, 460 kg/year.

We should ban financial speculation on food prices - Over the last several months I have been asked by many readers to explain how banks and hedge funds manipulate commodity prices to their advantage. This has been a recurring theme over the last several years and these activities were a principle reason why inflation rates increased in the period leading up to the crisis. Major international organisations like World Development Movement have associated these speculative forays with rising starvation. Their The Great Hunger Lottery report shows how such speculation on food has impacted on the poor around the world. Hunger and starvation escalated between 2007 and 2008 with over 1 billion people considered chronically malnourished at the time they prepared the Report. The major players in creating this havoc are Goldman Sachs, Bank of America, Citibank, Deutsche Bank, HSBC, Morgan Stanley and JP Morgan. In my view, this speculation creates no widespread good and should be declared illegal. We should ban financial speculation on food prices.

How industrial agriculture makes us vulnerable to climate change, Mississippi floods edition - In a report on the PBS Newshour blog, Rabelais delivers some bad news: Floods in the Mississippi River watershed this spring are washing tremendous amounts of fertilizer into Gulf, promising to generate the largest dead zone on record. In addition to carrying in fertilizer runoff, the floods threaten to worsen the dead-zone problem by flushing in much more fresh water than normally makes it into the Gulf, PBS reports: A surge of fresh water creates a layering effect in the seawater, which compounds the problem. The freshwater sits above the heavier saltwater, acting as a cap that prevents oxygen from reaching the deeper water levels. Agribusiness interest groups like to sow doubt about the cause of the annual dead zone by claiming that other factors, such as residential lawns, contribute more fertilizer runoff than agriculture. I obliterated that notion in this post last year.

As Mississippi River Recedes, Risk Remains - The bulging Mississippi River¹ broke records this week when the crest rolled through in Vicksburg, Miss., at 57.1 feet.  And while water levels have started to recede slightly in some places, officials warned on Saturday that the river would remain above flood stage for several weeks.  “Just because conditions have crested doesn’t mean the flood is over,” said Robert Simrall, the Army Corps of Engineers² chief of water control for the Vicksburg district. “People think, ‘The crest is here! Phew!’ and they relax. But people are still gong to be at risk until the water falls off the levees.”  So far, this year’s floods have killed at least three people³ and affected millions of acres of farmland in the Mississippi Delta. The enormous amounts of water shooting downstream have created dangerous currents, especially in parts of Louisiana. Economists and farmers estimate that damages could add up to hundreds of millions of dollars⁴.

More than 20,000 people turned down by FEMA in Alabama The Federal Emergency Management Agency said Friday it has provided grants to about 15 percent of the more than 72,000 people who sought assistance after tornadoes killed hundreds across Alabama last month, but twice as many were turned down for aid after an initial review.  The agency, which released the statistics in response to a request from The Associated Press, said many of the more than 20,000 applicants who received letters saying they were ineligible for assistance still could receive money or other aid after submitting additional information, like insurance documentation.  But Gov. Robert Bentley said he was worried that the letters FEMA is sending people are too full of government jargon and would discourage many people from pursuing assistance.  "The first line should not say, 'You have been turned down by FEMA.' That's my concern,"

Cantor Says Congress Won’t Pay For Missouri Disaster Relief Unless Spending Is Cut Elsewhere - Firefighters and rescue workers who arrived in Joplin, MO, found that the deadly tornado that hit the state Sunday had left a “barren, smoky wasteland” in its path. Rescue workers worked through more storms in an effort to find potential survivors, even as the death toll rose to at least 119. President Obama pledged full support to the state Monday, telling survivors, “We’re here with you. We’re going to stay by you.”  House Majority Leader Eric Cantor (R-VA), however, said that before Congress approved federal funds for disaster relief, it had to offset the spending with cuts to other programs. The Washington Times reports: House Majority Leader Eric Cantor said Monday that if Congress passes an emergency spending bill to help Missouri’s tornado victims, the extra money will have to be cut from somewhere else. “If there is support for a supplemental, it would be accompanied by support for having pay-fors to that supplemental,” Mr. Cantor, Virginia Republican, told reporters at the Capitol. The term “pay-fors” is used by lawmakers to signal cuts or tax increases used to pay for new spending.

Record Snowpacks Could Threaten Western States - For all the attention on epic flooding in the Mississippi Valley, a quiet threat has been growing here in the West where winter snows have piled up on mountain ranges throughout the region.  Thanks to a blizzard-filled winter and an unusually cold and wet spring, more than 90 measuring sites from Montana to New Mexico and California to Colorado have record snowpack totals on the ground for late May, according to a federal report released last week.  Those giant and spectacularly beautiful snowpacks will now melt under the hotter, sunnier skies of June — mildly if weather conditions are just right, wildly and perhaps catastrophically if they are not.  Fear of a sudden thaw, releasing millions of gallons of water through river channels and narrow canyons, has disaster experts on edge.

America’s next disaster: Multiple floods in Western states as monster snowpacks melt - It's been one long series of natural disasters this year - and now it looks like another is on the way.  The focus may soon be shifting from the epic flooding in the Mississippi Valley to Westwern states where enormous winter snows have piled up on mountain ranges. More than 90 sites from Montana to New Mexico and California to Colorado have record snowpack totals on the ground for late May. This has been caused by a winter marked by blizzard and an unusually cold and wet spring. Now there is a very real fear of localised flooding at those sites as the snowpacks melt under hotter, sunnier conditions in June. A sudden thaw could mean millions of gallons of water rushing through river channels and narrow canyons.

Prayer as an adaptation strategy: Texas plans to cut budget of agency battling record wildfires - First an “unprecedented drought” drove a “never-before-seen wildfire situation in Texas” by mid-April.  Then Governor Rick Perry officially proclaimed three “days of prayer for rain” — starting on Earth day. Soon after, NOAA reported that April 2011 saw “wildfire activity that scorched more than twice the area of any April this century,” most of it in Texas.  By mid-May, the Weather Channel was calling the southern drought, “truly exceptional.” So what do Texas legislators do?  They propose cutting funds for firefighters, slashing the Texas Forest Service budget by “almost $34 million in budget cuts over the next two years, roughly a third of the agency’s total budget.” Prayer beats funding adequate levels of firefighting every time, no?

Drought in US, EU stressing crops, farmers — Drought from Paris, France to Paris, Texas has farmers and grain dealers looking upwards. The farmers are looking to the skies for rain and the dealers are wondering where rising grain prices are going to stop.  U.S. wheat prices are on their way to their biggest weekly gain and European benchmark wheat futures have jumped just under 30 percent in the past nine weeks as wheat belts on both sides of the Atlantic show signs of irreversible drought damage. "We need Mother Nature's help to save a crop, which whatever happens will be mediocre," said a senior European trader, referring to France, the EU's biggest wheat producer. An unusually dry and hot spring in top EU wheat producers and severe dryness in U.S. states Texas, Kansas and Oklahoma, have revived memories of the dry summer of 2010, which ravaged Russian and Ukrainian wheat harvests and choked off supplies from the key exporters.

West Texas sees worst drought since Dust Bowl - Climatologist: "Along with the U.S., France, and China all are experiencing some pretty nasty drought that is going to have a major global impact on commodities, wheat in particular." - Were it not for the Biblical flooding of the Mississippi River and, well, Biblical whirlwinds slamming the Midwest, the “hellish” side of Hell and High Water would be the big news.  Last month a “record breaking 1.79 million acres burned across the country” and most of that was in Texas, NOAA reported. The Houston Chronicle reported this week, “Texas’ farmers and ranchers are coping with their eighth drought in the last 13 years, and this one, while still young, has a chance of slamming producers with their biggest losses ever, officials said. Nearly four fifths of Texas is under extreme or exceptional drought.  Reuters reports, the “dire drought” has “expanded across the key farming state of Kansas … the top U.S. wheat-growing state” over the last two weeks, “adding to struggles of wheat farmers already dealing with weather-ravaged fields.”

Extreme weather's frequency to increase - The deadliest tornadoes in decades. Severe flooding on the Mississippi River. Drought in Texas, and heavy rains in Tennessee.  What's up with the weather? Scientists say there are connections between many of the severe weather events of the past month and global warming.  "Basically, as we warm the world up, the atmosphere can hold more moisture in it," "Weather patterns that used to be limited to the South move farther north now," she said. "Both of those things together will increase the frequency with which we see these big rainstorms, and those are likely to increase flooding in the future." Flooding on the Mississippi has become more frequent and more extensive since about 1950, Jefferson said. This year's huge flood was created by snowmelt and rain-on-snow in the upper Mississippi River basin, and very intense rain in its middle regions. "Climatically we have a higher frequency of rain-on-snow events, a real recipe for flooding," she said. "Also you're getting more warm moist air from the Gulf of Mexico farther north up the Mississippi. It's both a warming and, more so, the fact that the weather patterns have changed and are projected to continue to change, so the precipitation patterns are changing."

A link between climate change and Joplin tornadoes? Never… It is vitally important not to make connections. When you see pictures of rubble like this week’s shots from Joplin, Mo.¹, you should not wonder: Is this somehow related to the tornado outbreak three weeks ago in Tuscaloosa, Ala.², or the enormous outbreak a couple of weeks before that (which, together, comprised the most active April for tornadoes in U.S. history). No, that doesn’t mean a thing. It is far better to think of these as isolated, unpredictable, discrete events. It is not advisable to try to connect them in your mind with, say, the fires burning across Texas — fires that have burned more of America at this point this year than any wildfires have in previous years. Texas, and adjoining parts of Oklahoma and New Mexico, are drier than they’ve ever been — the drought is worse than that of the Dust Bowl. But do not wonder if they’re somehow connected.  If you did wonder, you see,  you might find your thoughts wandering to, oh, global warming, and to the fact that climatologists have been predicting for years that as we flood the atmosphere with carbon we will also start both drying and flooding the planet, since warm air holds more water vapor than cold air.

Dr. Kevin Trenberth on the tornadoes and excess precipitation - The Gulf of Mexico is 3 °F (1.6 °C) warmer than pre-1970 levels, which means it can carry 12% more moisture, said Kevin Trenberth, distinguished senior scientist at the National Center for Atmospheric Research in Boulder, Colorado. “Two degrees of that can be attributed to natural variability while one degree Fahrenheit is associated with climate change,” Trenberth said. “Some part of it is global warming-climate change and some part is natural variability.” He said the La Nina phenomenon, a cooling of the Pacific Ocean, is also still focusing the storm track across the U.S. “just the right distance from the Gulf” to enhance tornado and severe thunderstorm development. The Gulf moisture has also meant more rain than normal across the U.S. The Mississippi and Ohio rivers have set flooding records this year from Illinois to Louisiana. “There has been enough rain in this event that there will probably be another bubble that will go down the Mississippi as well,” Trenberth said.

GOP cut crucial weather satellites with fierce hurricane season looming - Earlier this year, Congressional Republicans decided accurate weather forecasting and hurricane tracking were services the American people could live without. The GOP-sponsored 2011 spending bill slashed the budget for the National Oceanic and Atmospheric Administration, slashing $700 million targeted for an overhaul of the nation’s aging environmental satellite system. NOAA scientists have stated unequivocally the existing satellites will fail and if they aren’t replaced, the agency’s ability to provide life-saving information to the American people will be compromised. Jane Lubchenco, NOAA administrator, told reporters yesterday that the agency’s hurricane outlook last year was “spot-on” and cautioned that “not having satellites and applying their latest capabilities could spell disaster“: Satellites are a must-have when it comes to detecting and tracking dangerous tropical weather. Not having satellites and their capabilities could spell disaster. NOAA’s satellites underpin hurricane forecasts by providing meteorological data over vast areas where we don’t have other means of information.

The oceans are emptying fast - It was a shameful par for a very long course when European, Middle Eastern and North African governments met in Rome this month to decide how to save the fast-vanishing fisheries in their common sea. After all, scientists had warned that 22 of the sea’s 23 stocks of bottom-living fish – including hake, mullet and red shrimp – are over-exploited, and called for drastic catch reductions in fishing. But even though the commission’s raison d’être is to “promote the development, conservation, rational management and best utilisation” of fish and other “living marine resources”, the meeting broke up last week without having adopted a single measure to address the decline. This was typical of the way governments have approached the ravaging of the seas, where we still catch what we can without, like farmers, taking care to maintaining and increasing the stock. And few measures have been more disastrous than the EU’s Common Fisheries Policy, whose meetings, former agriculture and fisheries minister William Waldegrave once told me, reminded him of “Buffalo Bill and Wyatt Earp arguing over who should shoot the last buffalo”.

Misguided Objection to Progressive Policy: The EJ Lawsuit Against Implementation of California’s AB 32 Climate Policy - On May 20th, San Francisco Superior Court Judge Ernest Goldsmith ruled that the California Air Resources Board had not adequately explained its choice of a market-based mechanism –  a cap-and-trade system  — to achieve approximately 20 percent of targeted emissions reductions by 2020 under Assembly Bill 32, the Global Warming Solutions Act of 2006. The ruling was in response to a lawsuit brought by a set of “environmental justice” groups, who fear that the cap-and-trade system will hurt low-income communities.  These groups hope — at a minimum — to delay implementation of the system, scheduled for January 2012.  Their preferred outcome would be for California Governor Jerry Brown to abandon the approach altogether in favor of conventional regulatory mechanisms.I’ve written about this controversy before, but the potential importance of Judge Goldsmith’s ruling suggests that it’s important to revisit this territory.

In the 2012 campaign, environmentalists don’t matter - Shortly after his party's "shellacking" in the midterm election, President Obama ordered government agencies to ensure that new regulations took economic growth into consideration and that old ones be revoked if they "stifle job creation or make our economy less competitive." Five months later, it's becoming pretty clear what he meant: The environment and public health will be thrown under a bus for the sake of his reelection in 2012. The latest victim of the administration's new political direction is a proposed Environmental Protection Agency rule to limit emissions from industrial boilers, which power oil refineries, chemical plants and other factories. The EPA indefinitely rescinded the proposal this week, citing Obama's January executive order on regulations and claiming that the agency hadn't had time to properly address industry concerns about the rule since a draft was released in September. The EPA first proposed a version of the boiler rules in 2004, and it has had ample time and input to get it right by now.

Wall Street Journal’s James Taranto equates science with religion - I suppose it was inevitable that some anti-science extremist would compare the doomsday claims of evangelical broadcaster Harold Camping with the overwhelming body of scientific evidence that says unrestricted greenhouse gas emissions risks multiple simultaneous catastrophes for human civilization. It’s just sad that this extremist was the editor of The Wall Street Journal’s online editorial page, James Taranto.  His inane, defamatory piece, “The Christian Al Gore: The eternal appeal of doomsday cults,” makes one question the factual basis of every thing that appears in the WSJ.  After all, if an astrologer and Flat-Earther can rise to such prominence at the leading financial newspaper in the country, and publish pure anti-science nonsense, then on what basis is there to believe that the rest of the staff is any more rational?

Reality-based journalism? - The fact that, with no observable exceptions, the Republican Party relies on delusional beliefs for most of its claims about economics, science and history has been obvious for some years. But, until recently it’s been outside the Overton Window. That seems to have changed, as witness:

• Jacob Weisberg, who only a little while ago was giving qualified praise to the Ryan Plan, now says the Repubs have  moved to a mental Shangri-La, where unwanted problems (climate change, the need to pay the costs of running the government) can be wished away, prejudice trumps fact (Obama might just be Kenyan-born or a Muslim), expertise is evidence of error, and reality itself comes to be regarded as some kind of elitist plot.
• USA Today comparing Republican climate change delusionism to birtherism and saying The latest scientific report provides clarity that denial isn’t just a river in Egypt. It paves a path to a future fraught with melting ice caps, rising sea levels, shifting agricultural patterns, droughts and wildfires.
• The Washington Post, home of High Broderism says “the Republican Party, and therefore the U.S. government, have moved far from reality and responsibility in their approach to climate change.”
• Even GOP house journal Politico draws the formerly off-limits link between “skeptics” and “deniers”,

The Right's Top 5 EPA Conspiracy Theories - Bullets, cow farts, human respiration—and other outlandish things conservatives insist the agency's poised to regulate. From cracking down on milk spills to regulating human respiration, the power-crazed bureaucrats at the Environmental Protection Agency will stop at nothing to impose their sinister, tree-hugging agenda on the American public. At least, that's what Republican lawmakers, tea party activists, and industry groups would have you believe. Conservatives have never been big fans of the EPA and its regulations, but lately the right has ramped up its assault on the agency. During the recent budget battle, House Republicans sought to decimate the agency's funding and handcuff it from acting on a long list of environmental concerns. GOP Presidential contender Newt Gingrich, meanwhile, has made abolishing the agency part of his campaign platform.

Republican’s Climate Solution: Clear-Cut the Rain Forest - Representative Dana Rohrabacher, Republican of California, needs to hit the science books, forestry experts suggest. They reached that conclusion after hearing Mr. Rohrabacher declare during a Congressional hearing on Wednesday that clear-cutting the world’s rain forests might eliminate the production of greenhouse gases responsible for climate change.  On the witness stand was Todd Stern, the Obama administration’s climate change envoy, who was questioned on whether the nation’s climate policy should focus on reducing the more than 80 percent of carbon emissions produced by the natural world in the form of decaying plant matter. “Is there some thought being given to subsidizing the clearing of rain forests in order for some countries to eliminate that production of greenhouse gases?” the congressman asked Mr. Stern, according to Politico. “Or would people be supportive of cutting down older trees in order to plant younger trees as a means to prevent this disaster from happening?” he continued.

Forget facts, it's personality that rules reactions to climate change - The report is a powerful enunciation of what science now knows about climate change and the risks it poses. That the atmosphere and the oceans are warming, ice is being lost from glaciers and ice caps, sea levels are rising and the biological world is changing. ''We know beyond reasonable doubt that the world is warming and that human emissions of greenhouse gases are the primary causes.'' In the nuanced language of science, it doesn't get much stronger. History shows us clearly that science does not provide certainty. It does not provide proof. It only provides the consensus of experts, based on the organised accumulation and scrutiny of evidence. And here we have it.  So how do you respond to such confronting news? Do you weigh the credentials of the speakers, study the evidence? Or do you switch it off, turn the page, scream and shout? According to psychological research by the Cultural Cognition Project at Yale University, your reaction either way will have little to do with the strength of the arguments or the calibre of the science. It will have everything to do with whether it gels with, or offends, your deep-seated views about morality and how the world ought to work.

The Impact of Pollution on Worker Productivity - Environmental protection is typically cast as a tax on the labor market and the economy in general. Since a large body of evidence links pollution with poor health, and health is an important part of human capital, efforts to reduce pollution could plausibly be viewed as an investment in human capital and thus a tool for promoting economic growth. While a handful of studies have documented the impacts of pollution on labor supply, this paper is the first to rigorously assess the less visible but likely more pervasive impacts on worker productivity. In particular, we exploit a novel panel dataset of daily farm worker output as recorded under piece rate contracts merged with data on environmental conditions to relate the plausibly exogenous daily variations in ozone with worker productivity. We find robust evidence that ozone levels well below federal air quality standards have a significant impact on productivity: a 10 ppb decrease in ozone concentrations increases worker productivity by 4.2 percent.

A City Prepares for a Warm Long-Term Forecast - The Windy City is preparing for a heat wave — a permanent one. Climate scientists have told city planners that based on current trends, Chicago will feel more like Baton Rouge than a Northern metropolis before the end of this century. So, Chicago is getting ready¹ for a wetter, steamier future. Public alleyways are being repaved with materials that are permeable to water. The white oak, the state tree of Illinois, has been banned from city planting lists, and swamp oaks and sweet gum trees from the South have been given new priority. Thermal radar is being used to map the city’s hottest spots, which are then targets for pavement removal and the addition of vegetation to roofs. And air-conditioners are being considered for all 750 public schools, which until now have been heated but rarely cooled.  “Cities adapt or they go away,”  “Climate change² is happening in both real and dramatic ways, but also in slow, pervasive ways. We can handle it, but we do need to acknowledge it. We are on a 50-year cycle, but we need to get going.”

The New-Economy Movement - The idea that we need a “new economy”—that the entire economic system must be radically restructured if critical social and environmental goals are to be met—runs directly counter to the American creed that capitalism as we know it is the best, and only possible, option. Over the past few decades, however, a deepening sense of the profound ecological challenges facing the planet and growing despair at the inability of traditional politics to address economic failings have fueled an extraordinary amount of experimentation by activists, economists and socially minded business leaders. Most of the projects, ideas and research efforts have gained traction slowly and with little notice. But in the wake of the financial crisis, they have proliferated and earned a surprising amount of support—and not only among the usual suspects on the left. As the threat of a global climate crisis grows increasingly dire and the nation sinks deeper into an economic slump for which conventional wisdom offers no adequate remedies, more and more Americans are coming to realize that it is time to begin defining, demanding and organizing to build a new-economy movement.

Study links 1,000-year Arctic storm to climate change - A study says that a howling beast of an Arctic storm that caused the worst flooding in 1,000 years backs up predictions that climate change will cause unprecedented and unpredictably violent weather. "It's exactly what one would predict with increased warming," said John Smol, co-author of a paper published Monday in the prestigious Proceedings of the National Academy of Sciences. Smol's team looked at a catastrophic storm that battered Canada's northwest coast near Tuktoyaktuk, N.W.T, in September 1999. The researchers found that high winds, combined with lower-than-average sea ice, sent a torrent of water inland that was so large its effects continue to this day. That salty surge killed more than half of all the alder shrubs up to 20 kilometres from the coast. Another third of the ones remaining died within five years. Residual salt in the soil still poisons plants trying to revegetate the area. Lakes remain saltier than lakes that weren't swamped by the sea water.

Do Biofuels Reduce Greenhouse Gases? - Greenhouse-gas emissions from biofuels, such as ethanol and biodiesel, may be lower than many researchers have estimated, according to a new study. The findings could further fuel a debate over whether biofuels actually reduce greenhouse-gas emissions compared to gasoline, and if so, by how much. Some recent studies have suggested that the indirect effects of biofuels production, such as higher food prices, could encourage farmers to clear forested land to grow more crops—thereby worsening climate change. At least one study suggested that the emissions resulting from such decisions would make biofuels—even advanced biofuels made from cellulosic materials such as switchgrass—worse for the environment than gasoline. These studies use economic analysis to predict the effect of future biofuels production on land use, while attempting to control for other factors that influence farmers, such as the amount of grain stocks on hand and changes in food demand.

Amazon activist and wife shot dead in Brazil - An Amazon rainforest activist and his wife have been shot dead in northern Brazil as the country’s Congress debated a divisive land bill that threatens to increase deforestation. Federal authorities said a rubber tapper and leading forest conservationist, whom Brazil’s presidency identified as Joao Claudio Ribeiro da Silva, and his wife Maria do Espirito Santo were ambushed and killed in the Amazon state of Para. It was not immediately clear who shot the couple but Mr Da Silva had warned of death threats against him by loggers and cattle ranchers. Both victims were active in the same organisation of forest workers that was founded by legendary conservationist Chico Mendes, who was assassinated by ranchers in 1988.

Furor Over Proposed Brazilian Forest Law - The passage on Tuesday by Brazil's Chamber of Deputies of an amended forest law favorable to ranchers and loggers has brought an outpouring of concern from environmentalists, with some calling it a green light for deforestation. The bill, which passed by a wide margin but is subject to change by Brazil's Senate, offers amnesty from penalties for illegal cuts made prior to July 2008, and for small landholders in the Amazon (up to 400 hectares) it would suspend a rule requiring them to maintain a minimum of 80% forest cover, among other changes.  "It's a disaster. It heightens the risk of deforestation, water depletion, and erosion," Paulo Gustavo Prado, head of environmental policy at Conservation International-Brazil told The Globe and Mail .

Indonesia deforestation moratorium gutted by plantation industry - Indonesia revealed a long list of exemptions on Friday to a two-year moratorium on new permits to clear forest, a concession to the hard-lobbying plantation industry in the world's top palm oil producing nation that vexed green groups.  The moratorium, taking effect on Friday after a five-month delay, will exempt permits already given in principle by the forestry ministry and extensions of existing permits, as well as projects to develop supplies of energy, rice and sugar.  The exemptions were wider than expected after pressure from firms worried about expansion and a forestry ministry concerned about losing billions each year in revenue from chopping down forests in Southeast Asia's biggest economy.

The scale of the effect we have on the planet is yet to sink in - Surely it is inconceivable that human activity could rival the forces of nature. We are such insignificant creatures that it seems breathtakingly arrogant to believe our impact on the immense grandeur of our planet could be anything but minuscule. That's what some prominent climate sceptics indignantly assert. Their incredulity may be understandable, but they are just plain wrong. Our species is now a geophysical agent of unprecedented power, albeit with unsustainable growth expectations. Indeed, our impact is already so profound that my colleagues are seriously debating whether to christen this period ''the Anthropocene'' - a geological epoch dominated by the global effects of our own species. This is a timely reminder that humanity is not only altering the composition and dynamics of the atmosphere and the oceans but leaving its mark on the planet in many other ways. Rivers and glaciers, for example, have moved about 10 billion tonnes of sediment from mountain to sea each year on average, over geological time. Each year humans mine about 7 billion tonnes of coal and 2.3 billion tonnes of iron ore. We shift about the same amount again of overburden to access these resources, along with construction aggregate and other excavations. In short, we are now one of the main agents shaping the earth's surface.

Philip Pilkington: Beyond growth – are we entering a new phase of economic maturity? - It has long been pointed out by environmentalists, concerned citizens and the sane how, if we are to prevent global warming from melting the planet, we have to put some sort of a ceiling on economic growth and industrial development. This is a truly pressing concern – yet it appears that economists and policymakers simply cannot integrate it into their worldview.  But here’s an uplifting thought: what if History is doing our work for us? What if we are already entering a sort of ‘post-growth’ world? A few days ago Professor Bill Mitchell – a man who I predict will turn out to be one of the most important economists of his generation – ran a piece on his blog entitled ‘When a nation stops growing’. The piece deals with the sluggish growth of the Japanese economy over the past two decades.  While most economists have been cooking up madcap schemes to reignite growth without end, Professor Mitchell took a far more interesting tack. Instead of concocting fantasies of what the world should be like, he took a glance at reality and asked a very important question: what if the Japanese economy has entered a stage of ‘post-growth’?

America's Invisible Energy Policy - Once in a while I point out that the United States lacks an energy policy to deal with our oil problems, but we do have one. You can be forgiven for not knowing much about it because that energy policy is largely invisible. I was reminded about it by a story at physorg.com called $25,000, 350-mile-per-charge electric car could be reality by 2017, DOE says. In an event flanked with all the electric cars that have recently come to market, and a handful of those that are poised for sale later this year, U.S. Energy Secretary Steven Chu [left] and L.A. Mayor Antonio Villaraigosa flipped the switch May 13 on the 500th electric-vehicle charging station installed by Coulomb Technologies as part of its ChargePoint America network. Coulomb, based in Campbell, Calif., received $15 million last year from the Department of Energy, and $22 million in private funds, to install 4,600 chargers across the country by the end of 2011. About 1,600 are slated for California, 210 of which have so far been installed. L.A. currently has 71 Coulomb charging stations, including the one installed today in the California Science Center parking lot.

China Widens Lead in Renewable Energy Ranking - China widened its lead over the U.S. as the most attractive country for renewable energy projects, following its “greenest” five-year plan to date, Ernst & Young LLP said.  China’s score out of 100 increased to 72 from 71 last quarter, while the U.S. remained in second place at 67 points in the consultant’s quarterly Renewable Energy Country Attractiveness Index released today in an e-mailed statement. India drew ahead of Germany to claim third spot.  “This is principally due to China diversifying its renewables portfolio through an increased focus on offshore wind and concentrated solar power,” Ernst & Young said in the report. The group also cited new targets for renewable energy set in March in China’s 12th five-year plan.  China took a lead in the wind and solar industries in recent years, and last year, the government’s China Development Bank Corp. agreed to lend 232 billion yuan ($35.7 billion) to Chinese renewable companies. The UN’s top climate change diplomat, Christiana Figueres, in January said China will leave “all of us in the dust” because of their commitment to win the “green economy race.”

Risk From Spent Nuclear Reactor Fuel Is Greater in U.S. Than in Japan, Study Says — The threat of a catastrophic release of radioactive materials from a spent fuel pool at Japan¹’s Fukushima Daiichi plant is dwarfed by the risk posed by such pools in the United States, which are typically filled with far more radioactive material, according to a study released on Tuesday² by a nonprofit institute.  The report, from the Institute for Policy Studies³, recommends that the United States transfer most of the nation’s spent nuclear fuel from pools filled with cooling water to dry sealed steel casks to limit the risk of an accident resulting from an earthquake, terrorism or other event. “The largest concentrations of radioactivity on the planet will remain in storage at U.S. reactor sites for the indefinite future,” the report’s author, Robert Alvarez⁴, a senior scholar at the institute, wrote. “In protecting America from nuclear catastrophe, safely securing the spent fuel by eliminating highly radioactive, crowded pools should be a public safety priority of the highest degree.”

Swiss energy minister to back nuclear exit -papers - Energy minister Doris Leuthard is set to propose Switzerland gradually exits nuclear power, two Swiss newspapers reported on Sunday, citing sources close to the government. The multi-party Swiss government was expected to make an announcement on nuclear policy on Wednesday and may recommend an exit. The NZZ am Sonntag and the SonntagsZeitung both reported Leuthard favoured an approach similar to that of economy minister Johann Schneider-Ammann."She wants to set a clear signal for the exit," the NZZ am Sonntag quoted a source as saying. The damage to the Fukushima nuclear power plant in Japan has revived debate about energy policy in Switzerland, where the approvals process for three new nuclear power stations was suspended in March pending a review of safety standards.The two papers reported Leuthard backed continuing to use current nuclear plants until the end of their lifespans, not building any new ones, and expanding alternative energy sources such as water power.

Operator of Japan nuclear plant confirms meltdowns of 2 more reactors -Tokyo Electric Power Co., the operator of the Fukushima Daiichi nuclear power plant disabled by the March 11 earthquake and tsunami, confirmed on Tuesday that there were meltdowns of fuel rods at three of the plant’s reactors early in the crisis. It had said earlier this month that fuel rods in the No.1 reactor had melted, but officials of the utility, known as Tepco, confirmed at a news conference that there were also meltdowns of fuel rods at the plant’s No.2 and No.3 reactors early in the crisis. Engineers are battling to plug radiation leaks and bring the plant northeast of Tokyo under control more than two months after the 9.0 magnitude earthquake and deadly tsunami that devastated a swathe of Japan’s coastline and tipped the economy into recession.

IAEA Knew Within Weeks of Japanese Earthquake that Reactors Had Melted Down … Public Not Told for a Month and a Half - As I noted last week, reactors 1, 2 and 3 all melted down within hours of the Japanese earthquake. On Monday, Mainchi Daily News provided an important tidbit: A meltdown occurred at one of the reactors at the Fukushima No. 1 Nuclear Power Plant three and a half hours after its cooling system started malfunctioning, according to the result of a simulation using “severe accident” analyzing software developed by the Idaho National Laboratory. According to the simulation, the reactor core started melting about 50 minutes after the emergency core cooling system of the No. 1 reactor stopped functioning and the injection of water into the reactor pressure vessel came to a halt. About an hour and 20 minutes later, the control rod and pipes used to gauge neutrons started melting and falling onto the bottom of the pressure vessel. After about three hours and 20 minutes, most of the melted fuel had piled up on the bottom of the pressure vessel. At the four hour and 20 minute mark, the temperature of the bottom of the pressure vessel had risen to 1,642 degrees Celsius, close to the melting point for the stainless steel lining, probably damaging the pressure vessel. In other words, the IAEA knew in late March that there was a meltdown.  Government agencies sat on this information, and the world didn’t learn the truth until the operator of the stricken reactors itself made the announcement a month and a half later. This is not entirely surprising given that governments have been covering up nuclear meltdowns for fifty years to protect the nuclear industry.

Soil contamination from Fukushima crisis comparable to Chernobyl: study - Radiation released by the crippled Fukushima Daiichi nuclear power plant has caused soil contamination matching the levels seen in the Chernobyl disaster in some areas, a researcher told the government’s nuclear policy-setting body Tuesday. ‘‘A massive soil decontamination project will be indispensable before residents in those areas can return,’’ said Tomio Kawata, a research fellow of the Nuclear Waste Management Organization of Japan, at the meeting of the Japan Atomic Energy Commission, which sets policies and strategies for the government’s nuclear power development. According to Kawata, soil in a 600 square kilometer area mostly to the northwest of the Fukushima plant is likely to have absorbed radioactive cesium of over 1.48 million becquerels per square meter, the yardstick for compulsory migration orders in the 1986 Chernobyl catastrophe. Kawata also said soil in a 700 square km area is likely to have absorbed 555,000-1.48 million becquerels per square meter, which was a criteria for temporary migration during the Chernobyl disaster.

Fukushima “Worse Than Chernobyl” When It Comes To Oceans - The disaster in Fukushima still has Japan and the rest of the world reeling at the dangers of nuclear power plants. But experts believe that it’s the oceans that could bear the brunt of fallout from this most recent power plant failure. In fact, one expert estimates that when it comes to the oceans, Fukushima could be worse than Chernobyl. The National Science Foundation reports, “Japanese officials recently raised the severity of the nuclear power plant incident to level 7, the highest level on the international scale and comparable only to the Chernobyl incident 25 years ago. Radionuclides in seawater have been reported from the Fukushima plant’s discharge canals, from coastal waters five to ten kilometers south of the plant, and from 30 kilometers offshore.”

Tepco Failed to Disclose Scale of Fukushima Radiation Leaks, Academics Say - As a team from the International Atomic Energy Agency visits Tokyo Electric Power Co.’s crippled nuclear plant today, academics warn the company has failed to disclose the scale of radiation leaks and faces a “massive problem” with contaminated water. The utility known as Tepco has been pumping cooling water into the three reactors that melted down after the March 11 earthquake and tsunami. By May 18, almost 100,000 tons of radioactive water had leaked into basements and other areas of the Fukushima Dai-Ichi plant. The volume of radiated water may double by the end of December and will cost 42 billion yen ($518 million) to decontaminate, according to Tepco’s estimates. “Contaminated water is increasing and this is a massive problem,” Tetsuo Iguchi, a specialist in isotope analysis and radiation detection at Nagoya University, said by phone. “They need to find a place to store the contaminated water and they need to guarantee it won’t go into the soil.”

Fukushima Reactor 1 Drywell Reading Hits All Time High 204 Sieverts/Hour - Remember Fukushima, the worst nuclear catastrophe in the last 20 or so years which soon will surpass Chernobyl in total radioactive emissions into the environment? Well, the radiation in the now officially melted down Reactor 1 has just hit the highest ever reading since the crisis began, or 204 sieverts/hour, recorded in the drywell. Not Micro. Not Milli. Sieverts. It appears the "excuse" that the counters are broken isn't being used this time, although we are confident that the "spurious reading" allegations will fly. Courtesy of ENEnews, which has more.

Fukushima Station Considered as Site for Nuclear Graveyard - Japan’s atomic energy specialists are discussing a plan to make the Fukushima Dai-Ichi nuclear plant a storage site for radioactive waste from the crippled station run by Tokyo Electric Power Co.  The Atomic Energy Society of Japan is studying the proposal, which would cost tens of billions of dollars, Muneo Morokuzu, a professor of energy and environmental public policy at the University of Tokyo, said in an interview yesterday. The society makes policy recommendations to the government.  “We are involved in intense talks on the cleanup of the Dai-Ichi plant and construction of nuclear waste storage facilities at the site is one option,” said Morokuzu.  Radiation leaks from the three reactor meltdowns at Fukushima rank the accident on the same scale as the Chernobyl disaster in 1986. The 20-kilometer exclusion zone around Fukushima has forced the evacuation of 50,000 households, extermination of livestock and disposal of crops, drawing comparisons with the Ukraine plant.

Ten Thousand Holes in Fuku Dai-ichi - It seems that there are a growing number of holes at the Fukushima Dai-ichi nuclear facility. Although nobody has actually seen them, much less counted them all, holes from 3cm to perhaps 7cm in diameter are believed to exist in the primary containment vessels for at least two of the reactors. Tepco suspects that the holes were created by molten fuel eating its way through the steel walls. Water is being injected into the containment in an effort to continuously remove heat from the fuel, but the water leaking through the holes is bringing radioactive contaminants along with it while filling up the no-longer-drywell and the basement of the reactor building. A plant to process this water is being designed. In the meanwhile, highly radioactive water is being pumped to a storage facility next door. Unfortunately, this facility is almost full. But perhaps this is not a problem, as the storage facility is apparently leaking as well.

Fukushima Faces ‘Massive Problem’ From Radioactive Waste Water - As a team from the International Atomic Energy Agency visits Tokyo Electric Power Co.’s crippled nuclear plant today, academics warn the company has failed to disclose the scale of radiation leaks and faces a “massive problem” with contaminated water.  The utility known as Tepco has been pumping cooling water into the three reactors that melted down after the March 11 earthquake and tsunami. By May 18, almost 100,000 tons of radioactive water had leaked into basements and other areas of the Fukushima Dai-Ichi plant The volume of radiated water may double by the end of December and will cost 42 billion yen ($518 million) to decontaminate. according to Tepco’s estimates. “Contaminated water is increasing and this is a massive problem,” Tetsuo Iguchi, a specialist in isotope analysis and radiation detection at Nagoya University, said by phone. “They need to find a place to store the contaminated water and they need to guarantee it won’t go into the soil.”

Japan moves to protect children as new nuclear leak revealed (Reuters) - Japan will pay schools near the quake-ravaged Fukushima nuclear power plant to remove radioactive top soil and set a lower radiation exposure limit for schoolchildren after a growing outcry over health risks. The Education Ministry triggered protests in April when it set a radiation exposure limit for children of 20 millisieverts per year, the same dosage the International Commission on Radiation Protection recommends for nuclear plant workers. The decision became a focal point for anger over Prime Minister Naoto Kan's handling of the crisis and the forced evacuation of tens of thousands residents. Education Minister Yoshiaki Takaki said Tokyo would pay for local schools to remove topsoil in playgrounds that exceeded radiation limits. It would also set a target of radiation exposure for children at schools of one-twentieth of the previous limit.

Typhoon Strengthens, May Hit Fukushima Nuke Plant - Typhoon Songda strengthened to a supertyphoon after battering the Philippines and headed for Japan on a track that may pass over the crippled Fukushima nuclear plant by May 30, a U.S. monitoring center said.  Songda’s winds increased to 241 kilometers (150 miles) per hour from 213 kph yesterday, the U.S. Navy Joint Typhoon Warning Center said on its website. The storm’s eye was about 240 kilometers east of Aparri in the Philippines at 8 a.m. today, the center said. Songda was moving northwest at 19 kph and is forecast to turn to the northeast and cross the island of Okinawa by 9 p.m. local time tomorrow before heading for Honshu.  The center’s forecast graphic includes a possible path over Fukushima Dai-Ichi plant, which has been spewing radiation since March 11 when an earthquake and tsunami knocked out cooling systems. Three of six reactor buildings have no roof after explosions blew them off, exposing spent fuel pools and containment chambers that are leaking.

Japan ‘plans solar panels for all new buildings’ - Japan is considering a plan that would make it compulsory for all new buildings and houses to come fitted with solar panels by 2030, a business daily said Sunday. The plan, expected to be unveiled at the upcoming G8 Summit in France, aims to show Japan’s resolve to encourage technological innovation and promote the wider use of renewable energy, the Nikkei daily said. Japan has reeled from the March 11 earthquake and tsunami and the nuclear crisis they triggered as it battles to stabilise the crippled Fukushima Daiichi atomic power plant.

Kan vows to boost 'green' power to 20 percent by 2020 - Prime Minister Naoto Kan set a high hurdle for Japan, pledging in a May 25 speech here to increase the ratio of power generation using renewable natural energy sources to 20 percent by early in the 2020s.  Kan made his commitment in a speech to commemorate the 50th anniversary of the founding of the Organization for Economic Cooperation and Development.  Japan currently relies on natural energy sources, such as wind and solar power, for about 9 percent of its total energy needs.  To reach the goal of more than doubling the ratio of power generated by natural energy sources, Kan said Japan would seek to reduce the cost of power generation using solar cells "to one-third current levels by 2020 and to one-sixth current levels by 2030."

We underestimate the environmental costs of fracking - Why do environmentalists care so little about non-living things? This irreplaceability should be borne in mind as westerners tap domestic fossil fuels to break their countries’ “dependence” on Arab oil. Over the long term, doesn’t using up one’s own non-renewable resources – as opposed to buying other people’s – make one more dependent? Maybe this indifference to the inanimate environment is beginning to change. Few industrial innovations have sowed such controversy as the extraction of natural gas from sedimentary rock through hydraulic fracturing, or “fracking”. Trillions of cubic metres of gas are trapped in shale, a mile or so underground. By driving a high-pressure mix of water, sand and noxious chemicals into the rock, it is possible to fissure and splinter it, releasing the gas. There is a hitch. For the most part, these gaseous shale deposits are not out in the middle of some desert, or on Alaska’s North Slope. They are in the industrialised world’s backyard. . The most promising is probably the Marcellus Shale that runs from New York southward, with its heaviest gas concentrations just north of Philadelphia. Quebec’s big deposit, the Utica Shale, is tucked underneath Montreal and Quebec City. There is a natural-gas field beneath Blackpool and another outside Paris.

How gas drilling contaminates your food - Last year, the Pennsylvania Department of Agriculture quarantined 28 cattle belonging to Don and Carol Johnson, who farm about 175 miles southwest of Jaffe. The animals had come into wastewater that leaked from a nearby well that showed concentrations of chlorine, barium, magnesium, potassium, and radioactive strontium. In Louisiana, 16 cows that drank fluid from a fracked well began bellowing, foaming and bleeding at the mouth, then dropped dead. Homeowners near fracked sites complain about a host of frightening consequences, from poisoned wells to sickened pets to debilitating illnesses. The Marcellus Shale itself contains ethane, propane, and butane, arsenic, cobalt, lead, chromium -- toxins all. Uranium, radium, and radon make the shale so radioactive that companies sometimes drop Geiger counters into wells to determine whether they have reached the gas-rich deposits. But those compounds are almost benign compared to the fracking fluids that drillers inject into the wells. At least 596 chemicals are used in fracking, but the companies are not required by law to divulge the ingredients, which are considered trade secrets. According to a report prepared for the Ground Water Protection Council, a national association of state agencies charged with protecting the water supply, a typical recipe might include hydrochloric acid (which can damage respiratory organs, eyes, skin, and intestines), glutaraldehyde (normally used to sterilize medical equipment and linked to asthma, breathing difficulties, respiratory irritation, and skin rashes), N,N-dimethylformamide (a solvent that can cause birth defects and cancer), ethylene glycol (a lethal toxin), and benzene (a potent carcinogen). Some of these chemicals stay in the ground. Others are vented into the air. Many enter the water table or leach into ponds, streams, and rivers.

Ohio GOP want to drill for oil in Lake Erie - Those who don't remember the past....“On June 22, 1969, an oil slick and debris in the Cuyahoga River caught fire in Cleveland, Ohio,” explains Ohio History Central.  CAP’s Kiley Kroh has the story of the Ohio Republicans with a short memory: The next target for the GOP’s “drill everywhere now” craze could very well be the Great Lakes. Earlier this month, both the U.S. House and Senate took up sweeping measures that would disregard lessons learned in the wake of the Deepwater Horizon catastrophe and open up enormous areas of the country to offshore drilling. Following suit, the Ohio state legislature is voting this week on a bill that would make state-owned lands available to the highest-bidding oil and gas companies — an area that includes Lake Erie. As several studies have concluded, the risks of oil and gas exploration in Lake Erie far outweigh the benefits – but that hasn’t stopped the oil companies from circling for several years.

Global Oil Supply Flat in April - The OPEC and the IEA are both out with their April numbers for total liquid fuel production.  OPEC shows it slightly up, but the IEA shows it slightly down, so I guess it's flat to within the margin of error.  The above shows the graph of the last couple of years (not zero-scaled to better show changes).  The next graph shows a slightly longer term, also with prices on the right side (but not zero-scaled either). Interestingly, both agencies made revisions that made the Jan-Mar fall greater.  With the sharp rise in prices in April, the price production graph stayed just about in the envelope of the last oil shock: Prices fell sharply last week, so this may change next month.  However, supply will need to increase for prices not to resume their upward march.

ASPO May 23 Energy Review - Analysts were expecting that the US stocks report would show crude and gasoline supplies were continuing to rise, so it came as a surprise when Wednesday’s report showed a slight drop in US inventories on increased refinery operating rates. Flooding along the Mississippi is also causing some disruptions to oil supplies, but the threat to the 10 refineries along the lower Mississippi appears to be abating as a large share of the flood water is being diverted down the Atchafalaya. Pakistan and China continue to top the list of countries with the most serious power shortages. Last week brought in reports of energy shortages developing or worsening in Egypt, Guyana, the Dominican Republic, India, Japan, El Salvador, Bangladesh, Libya, Mozambique, Nepal, Venezuela, Argentina, Zimbabwe, Kenya, and Tanzania. Most of the reported shortages are of electric power caused by inadequate water levels at hydro dams or insufficient coal, but some of these shortages stem from unaffordable oil prices or the inability to import sufficient quantities of liquid fuels.

The Operator Of The World's Largest Oil Tanker Fleet Gives Up On The Global Recovery - Norway's Frontline, which operates the world's largest oil tanker fleet, announced an 81-percent decline in net income for the first quarter compared to last year. The company issued a grim outlook: “It is hard to see a strong recovery in the tanker market as long as the net supply of tonnage grows faster than the total ton mile demand.” Frontline increased fleet size right before the recession hit. Three years later, CEO John Frederickson has given up on demand returning to those levels. Thus Frontline may seek to 'optimize' its fleet, which 'may involve selling assets and becoming “passive.' Returns on very large crude carriers reached $177,036 a day in July 2008, but have fallen to $8,900, according to Businessweek.

Speculator Ghosts in the Oil Machine - Persistent strength in the price of oil has once again unleashed maximum nonsense about the influence of speculators. Yes, it’s painful that oil never returned to earth after its 2004 repricing. But, in the search for an explanation, substituting the arcane for the obvious will not help: speculators did not create 5-6 years of flat to falling global oil production. Furthermore, as oil made its way from below $25.00 to its new level at $100.00, more of the world’s cheap oil from old reservoirs was swapped out for the new. Given that this new oil is much harder to extract, the world economy is lucky that oil remains so cheap. $100 is a bargain. In the United States where the economy has barely recovered (if at all) from the 2008 financial crisis, oil consumption remains weak. With punk demand at home, however, we are instead using our newly spare refining capacity to turn oil into oil products, which we then export. In just 2-3 years the US has doubled its export of gasoline, distillate, and diesel especially. Here is a chart through the latest reporting week in May, denoted in million barrels.

Global Oil Exports/Imports   - Yesterday, I posted some UNCTAD shipping data which suggested that the global oil tanker fleet was expanding rapidly post 2005: The most obvious interpretation would be that the global oil trade was expanding, which is a little counterintuitive, given that global oil production has been more-or-less on a plateau since 2005 and oil exporters have been growing their own consumption rapidly as their economies are stimulated by high oil prices. One possibility is that shippers have been building too many ships in error, so that actual usage is not rising, even though fleet capacity is.  Commenter cimon9999 dug up this data on actual tonne-miles shipped: This shows some increase in crude oil shipments, albeit more modest than the growth in the shipping fleet.  There is more growth in the trade in oil products. To get a better handle on things, I then looked to the EIA who used to maintain global data on oil imports and exports (until their budget got cut). 

More on Oil Import/Export statistics - In response to yesterday's post, several commenters noted that there's an apparent discrepancy between the EIA numbers for oil import/exports, and the numbers in the BP Statistical Review of World Energy.  The two sets of series are above, but in the BP case, imports and exports are identical to the barrel, suggesting they are deliberately harmonized, rather than being independent estimates. The reason for the discrepancy becomes fairly clear if we look at oil exports from out of the United States.  For 2007-2009, EIA has those at 27kbd, 29kbd, and 44kbd - very small numbers, reflecting the fact that the US is a major importer of crude oil, not an exporter.  Presumably, there are a few wells somewhere that are easier to connect to a pipeline in Canada or Mexico than in the US, but that's about it. However, the BP spreadsheet shows US exports for the same years as 1439, 1967, and 1916kbd.  These are much larger numbers, and strongly suggest that the BP numbers include trade in oil products, not just crude oil itself.  As Gregor McDonald noted recently, US exports of refined products are increasing recently as US consumers are having to conserve, and thus are not using all the products of American refineries, some of which are now being reexported elsewhere.

Goldman says commodity correction is over - Having been proven right about their prediction of a rather substantial correction in commodities  earlier this month, Goldman Sachs is now out with a new view. A bullish view. As Jeffrey Currie and team wrote on Tuesday: Although we remain structurally bullish and have long argued the structural case for being long, timing does remain critical. This was evident in the recent market correction, which brought commodities down roughly 10% from their April highs. With prices now more in line with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities. Although the economy has likely shifted into a slower, but sustained, growth environment, we continue to expect that economic growth will likely be sufficient to tighten key supplyconstrained markets in 2H2011, leading to higher prices from current levels

Goldman says Brent crude will hit $130 - Goldman Sachs has called a bottom to the correction in commodity markets, advising clients to buy oil, copper and zinc after a 9 per cent price fall since the start of May. Last month, the bank caused a stir when it recommended cutting exposure to commodity markets, arguing that oil prices had “pushed ahead of where fundamentals currently suggest”.  A few weeks after Goldman’s bearish call, commodities suffered one of their sharpest one-day falls on record, with oil falling by up to $12 a barrel in a day. On Tuesday, however, Goldman reversed that call. In a note to clients, the bank argued that the correction in prices since the start of the month had created “a good entry point for long positions”. Goldman’s commodity strategists said: “The recent pull back in commodity prices brings the market back towards levels more consistent with the global growth story that was being priced in before events in Libya forced all the financial markets into pricing a supply shock environment”.

Are Goldman Sachs And Morgan Stanley Manipulating The Oil Market?: "These are some pretty interesting comments by Oppenheimer’s Fadel Gheit on the big banks and their involvement in the commodity markets. In market action that is similar to the tech bubble and the conflict of interest between research firms and their investment banking arms, today, there seems to be a credible argument that the same sort of conflict of interest could exist between research arms and the trading arms of these big banks. Some will argue that this speculation is good for the economy, however, I fail to see how it is good for the economy when Goldman Sachs is changing their position on oil prices every few weeks, moving the market, creating volatility, never taking delivery and reaping the benefits by trading on these same market moving opinions. Gheit elaborates in what appears like a very common sense approach to the current commodity market craze (via Bloomberg TV): Gheit on whether he thinks the notes out of Morgan Stanley and Goldman Sachs are market manipulation: “The interpretation will be left to the market. It is a self-fulfilling prophecy. They can invent reasons why oil prices go to $130 or $150, but history has shown that these people are able to move markets. It is not Exxon or BP or Shell that moves the oil markets. It is the financial players. It is the Goldman Sachs, the Morgan Stanley, all of the other guys. It is a shame on the government that allows them to get away with that.”

Facing Up to End of 'Easy Oil' - The Arabian Peninsula has fueled the global economy with oil for five decades. How long it can continue to do so hinges on projects like one unfolding here in the desert sands along the Saudi Arabia-Kuwait border.Saudi Arabia became the world's top oil producer by tapping its vast reserves of easy-to-drill, high-quality light oil. But as demand for energy grows and fields of "easy oil" around the world start to dry up, the Saudis are turning to a much tougher source: the billions of barrels of heavy oil trapped beneath the desert. Heavy oil, which can be as thick as molasses, is harder to get out of the ground than light oil and costs more to refine into gasoline. Nevertheless, Saudi Arabia and Kuwait have embarked on an ambitious experiment to coax it out of the Wafra oil field, located in a sparsely populated expanse of desert shared by the two nations. That the Saudis are even considering such a project shows how difficult and costly it is becoming to slake the world's thirst for oil. It also suggests that even the Saudis may not be able to boost production quickly in the future if demand rises unexpectedly.

Saudi looks at restarting its first oilfield - State oil giant Saudi Aramco will study drilling again at its long mothballed, first oilfield, industry sources said on Tuesday. Dammam, now known as the "Prosperity Well", is where the top crude exporter has made its first discovery in 1938. Saudi Aramco's chief executive Khalid Al Falih has said the Number 7 well there produced 32 million barrels of oil before it was shut. The kingdom's oldest field, Ghawar, has pumped more than 65 billion barrels since 1951."The well remains capable of producing even today, and the Dammam Field as a whole still accounts for half-a billion barrels of our proven reserves," Falih said.

Brazil Cuts Estimate for 'Gigantic' Oil Field After Drilling - Brazil’s oil regulator reduced its estimate for the Libra field after conducting a drilling program at the site, director Magda Chambriard said.  The agency, known as the ANP, said the field likely holds 5 billion barrels and may contain as few as 4.5 billion barrels, Chambriard said today at the Latin Oil Week conference in Rio de Janeiro. That’s down from a previous estimate of as many as 15 billion barrels.  The agency said in October that the field may hold “gigantic” reserves almost twice as large as those of Tupi, which has since been renamed Lula and was the biggest discovery in the Americas in the past three decades. Brazil is counting on large discoveries in the so-called pre-salt region offshore to fund social programs aimed at reducing poverty in South America’s largest economy.

British Government Faces Up To Peak Oil - The UK Secretary for Energy and Climate Change, Chris Huhne, has committed to establish an “Oil Shock Response Plan” to cope with some of the consequences of peak oil. While there remains dissent as to the facts of peak oil, a growing body of experts think that the phenomenon will occur at some point during the next five years. On a recent BBC radio 4 broadcast a former president of Shell, John Hofmeister, reckoned that there was no problem with the production of oil meeting demand for it until 2050/2060. This kind of estimate includes various sources of unconventional oil for which the EROEI (Energy Returned on Energy Invested) is far lower than for the cheap readily available conventional oil on which the modern global world depends. Specifically, there are reckoned to be 1.2 trillion barrels of conventional oil and another 3.7 trillion barrels of unconventional oil, which includes oil-shale and tar-sands. Neither of these resources contain “oil” as such, but kerogen and bitumen, respectively, which need to be processed into fuel using substantial amounts of energy and water. By way of comparison, the EROEI for conventional oil is reckoned at somewhere between 11 and 18 (it was 100 for the original Texan “gushers”) while it is around 3 for these unconventional sources.

UK Government to Work with Business on Plans to Tackle Peak Oil Threat - Business leaders today welcomed a commitment by the Government to work with the private sector on contingency plans to protect the UK and its economy from the growing risk of rising oil prices. It follows a meeting between Chris Huhne, Secretary of State for Energy and Climate Change, and representatives from the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES). During the meeting, the Secretary of State agreed that the Department for Energy and Climate Change and ITPOES should work more closely together on peak-oil threat assessment and contingency planning. The collaboration should begin with a joint examination of concerns that global oil supply will begin to fall behind global demand within as little as five years – far earlier than previous widely-held assumptions. While full details are to be agreed, Mr Huhne has indicated this would be the first step in the development of a national Peak Oil contingency plan. DECC has already begun to explore the likely damaging economic impact of rising oil prices, as reported in The Times.

Past Peak Oil - Why Time Is Now Short - cmartenson - With so much going on with Europe's debt crisis, the continuing disaster and economic contraction in Japan, and the potential for a very hard landing in the Chinese growth miracle (which is in the running as my favorite "black swan candidate" for 2011), I am going to return our attention to oil in this report.  The next report will assess the developing and unfolding debt crisis that will drag down most of the developed economies at some point, and this report will provide essential context for understanding why this result is inevitable and when it will occur. The only thing that could prevent another oil shock from happening before the end of 2012 would be another major economic contraction.  The emerging oil data continues to tell a tale of ever-tightening supplies that will soon be exceeded by rising global demand.  This time, we will not be able to blame speculators for the steep prices we experience; instead, we will have nothing to blame but geology.

The case for a disorderly energy descent - The energy descent from peak oil production imposes decades of contraction in the global economy. An orderly contraction, particularly in the US, is not likely for a number of reasons. This is a summary of the case for a disorderly descent, garnered from many sources, a couple of which are listed at the end of the essay. One reason has to do with the nature of the oil extraction and processing industry. According to industry experts, once existing oil wells are shut down, the costs of restarting production are high. The same is true for refinery shut-downs. Also, refineries cannot be economically run at less than capacity. Finally, oil exploration is an increasingly costly and lengthy process. These supply chain problems magnify oil price volatility as it interacts with global economic contraction, thereby punctuating economic behavior with ever deeper stall-outs. Other reasons derive from the nature of modern industrial society and its world-economic system. First, debt-based economies cannot shrink slowly. Because of the need for an economy to grow to pay interest on debt, when growth is no longer possible credit tends to dry up, the investment needed to merely maintain an economy in operation begins to fail, and the economy experiences periods of paralysis as critical pieces break down.

Mongolia faces critical diesel shortage - Mongolia is running critically low on diesel after Russian deliveries failed to arrive, a development that threatens to crimp mining activity in the resource-rich country. The shortage reflects how oil supply troubles in Russia are spreading to neighbouring countries after Moscow recently slapped a prohibitive duty on petrol exports. China this month also banned diesel exports as stubbornly high crude prices threaten domestic supplies. The diesel shortages in Mongolia have already affected the booming sector. Enebish Baasngombo, executive director of Erdenes MGL, the company developing Tavan Tolgoi – Mongolia’s flagship coal deposit, said operations had seen “some” impact from the shortage. Another person familiar with the situation said there had not been an immediate impact on mining activities at Oyu Tolgoi, a large copper and gold deposit operated by Rio Tinto and Ivanhoe, but said mine operators were in discussions with the government to ensure adequate fuel supplies.

China Luring Crude From U.S. as Ecopetrol Targets Asia for Surge in Output - Ecopetrol SA, the Colombian oil producer which expects to more than double output this decade, said it plans to ship a greater share of its crude to Asia as growing demand in China competes for supplies with the U.S. The company may no longer ship the majority of its crude to the U.S. in 10 years because Asia sales will be more profitable, Chief Executive Officer Javier Gutierrez said yesterday in an interview in Bogota. A pipeline the company is weighing that would carry oil to a new port on the Pacific coast to supply Asian refineries may also attract Chinese investment, he said.  “We are opening markets in the East -- China and India are starting to be significant for us,” Gutierrez said. Asian “markets will keep growing a lot,” he said.  China is buying oil assets in Latin America and helping finance exploration at companies such as Brazil’s Petroleo Brasileiro SA (PETR4) to meet rising oil demand as its economy surges.

The Deepwater China Era Begins - China's first deepwater oil rig launched yesterday in Shanghai.  The CNOOC981, which cost $6 billion to develop, can drill in depths up to 12,000 meters -- potentially the deepest oil well in history. This is a huge increase for China, which was previously limited to 500-meter-deep seas. The Global Times has more on the geopolitical consequences: Energy-thirsty countries around the South China Sea have been tapping its oil resources for years, but this will mark the first instance of China's influence spreading to its southern tides... Zhao Ying, a scholar with the Chinese Academy of Social Sciences, told the Global Times that the new drilling platform is strategically important. "The value of the South China Sea natural resources is immense. Now that technologies are available for China to tap resources there, efforts to guard its operations and deter foreign illegal explorations become meaningful and necessary," Zhao said

China Growth Rates. The Real Doomsday Scenario - Even with the Great Recession ‘slump’ to 6% growth, China’s most recent growth trends have since snapped back to nearly 10%.  A quick glance at a chart since 2000 shows this is at about trend.   The current China GDP is roughly $9.8 trillion.  If this growth rate were to continue for the next 20 years, China’s GDP would be more than $60 trillion!  That’s an unsustainable total.  It’s more than four times the US current GDP and greater than the 2009 total world GDP of $58.26 trillion! Looked at another way, in 20 years the Chinese economy will by itself require 100% of the resources used by the entire world in 2009. Just saying.

China’s Power-Capacity Utilization at Record Low - China’s power plants are operating at a record-low utilization rate as many have closed, potentially causing the most severe electricity shortage since 2004, Mirae Assets Securities said. “Burdened by bulging losses, many power generators have shut,” . “High coal prices and the capped electricity price have also reinforced fears” that power rationing may spread to manufacturing hubs including Guangdong, Zhejiang and Jiangsu, Kwan said. China’s April electricity output fell from a seven-month high as the cost of coal rose. Prices of the fuel at Qinhuangdao port, a domestic benchmark, climbed for a sixth week as of May 9 to the highest in more than two years,

China forced to ration electricity - Chinese provinces are rationing electricity as soaring coal prices squeeze power generation companies, underlining the challenges facing the world’s largest energy consumer as global fuel prices rise.  While China experiences power cuts each summer, some provinces have started rationing earlier than usual this year. In recent days Hunan, Zhejiang, Jiangsu and Anhui provinces have implemented cuts, alongside Shanghai and Chongqing.  Chinese officials have been warning for weeks that shortages would be more severe than usual this year. On Tuesday, Xue Jing of the China Electricity Council, an industry body that reports to state regulators, told state media that China would “face its most severe electricity shortage since 2004”. Ms. Xue said there could be a national shortage of 30 million kilowatt hours this summer, which she said would equate to the consumption of three Chongqings, referring to the southern city of 31 million.  Chinese electricity companies are facing financial pressure from the increase in global energy costs as Beijing hesitates to increase state-controlled electricity prices because of concerns over inflation.

China’s Zhejiang Plans Punitive Power Prices to Curb Consumer Demand - China will impose punitive power prices on businesses that exceed consumption limits in Zhejiang province, a manufacturing hub bordering Shanghai, to curb demand during an expected electricity supply shortfall this summer. China faces the worst power shortage in seven years as the economy grows faster than forecast and some utilities cut production or shut, hit by rising coal prices and government caps on tariffs. Zhejiang, on the eastern coast to the south of Shanghai, is host to companies including automaker Zhejiang Geely Holding Group Co., owner of Volvo Cars. The province’s 35.4-gigawatt generation capacity is 3.5 gigawatts short of what it needs during peak summer demand, the local government said.

China’s Utilities Cut Energy Production, Defying Beijing - It is a power struggle that is causing a power shortage — one that has begun to slow China¹’s mighty economic growth engine.  Balking at the high price of coal² that fuels much of China’s electricity grid, the nation’s state-owned utility companies are defying government economic planners by deliberately reducing the amount of electricity they produce.  The power companies say they face financial ruin if the government continues to tightly limit the prices they can charge customers, even as strong demand is sending coal prices to record levels. The chairwoman of one giant utility, China Power International, recently warned that one-fifth of China’s 436 coal-fired power plants could face bankruptcy if the utilities cannot raise rates. The utilities’ go-slow tactics include curtailing the planned expansion and construction of power plants, and running plants for fewer hours a day. And in a notable act of passive defiance, the power companies have scheduled an unusually large number of plants to close for maintenance this summer — right when air-conditioning season will reach its peak.

Chinese Manufacturing Index Drops to Lowest Level in 10 Months - A Chinese manufacturing index fell to its lowest level in 10 months, adding to signs that economic growth is cooling after the government raised interest rates and curbed lending to rein in inflation. The preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April. A number above 50 indicates expansion. HSBC’s preliminary manufacturing index, called the Flash PMI, is based on 85 percent to 90 percent of the total responses to its monthly purchasing managers’ survey sent to executives in more than 400 manufacturing companies. New export orders contracted in May and stocks of purchases and finished goods fell at a faster rate, HSBC said. An output gauge declined to a 10-month low, although it remained above the 50 level that divides expansion from contraction, the bank said.

Are China's factories running out of power? -Why has Global Sticks, a manufacturer of wooden ice cream sticks, moving from Dalian, China, to Thunder Bay, Ontario?  It’s the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labour abroad.  But wage costs are no longer everything they were cracked up to be. In today’s world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn’t matter if your labor is expensive. Factories don’t run on sweat alone.  As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store, becomes more expensive every day.  When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave.

Electricity shortage a growing pain for China - Financially crippled coal plants are shutting down their generators, even though the country is facing one of its most severe power shortages ever, which could hamper the 12th Five- Year Plan starting this year. Some 26 provincial regions under the management of the State Grid Corp of China (SGCC) would suffer combined power shortages of at least 30 gigawatts this year, Shuai Junqing, the company's executive vice president, was quoted by the Xinhua News Agency as saying Monday. The deficiency could reach 40 million kilowatts when power consumption reaches its annual peak during the summer, Shuai said, adding that the situation could become worse in 2012 and 2013.In 2004, China suffered its worst power shortage since the 90s, imposing power cuts or limits in 27 out of its 31 provinces, municipalities and autonomous regions. As more than 70 percent of the country's electricity generation comes from burning coal, analysts pointed out that the rising price of coal and the fixed price of electricity have forced many coal plants to trim production in order to curb losses.

China crisis over Yangtze river drought forces drastic dam measures - Severe drought has forced China to release 5bn cubic metres from Three Gorges reservoir for irrigation and drinking water. The Yangtze – Asia's biggest river – is experiencing its worst drought in 50 years, forcing an unprecedented release of water from the Three Gorges reservoir. The drought is damaging crops, threatening wildlife and raising doubts about the viability of China's massive water diversion ambitions. Between now and 10 June the dam will release 5bn cubic metres of water – equivalent to the volume of Lake Windermere in Britain every day – as engineers sacrifice hydroelectric generation for irrigation, drinking supplies and ecosystem support. The drastic measure comes amid warnings of power shortages and highlights the severity of the dry spell in the Yangtze delta, which supports 400 million people and 40% of China's economic activity. From January to April, the worst hit province of Hubei has had 40% less rainfall than the average over the same period since 1961. Shanghai, Jiangsu and Hunan are also severely affected.

Will China have an Arab Spring? - I just arrived in Cairo, perhaps the country changed most so far by the “Arab spring” pro-democracy movements sweeping across the Middle East, and it got me thinking about the future of authoritarian regimes back home in Asia – and most of all, China. There has been much talk about whether or not China is vulnerable to the sort of mass protests that toppled Hosni Mubarak's government here in Egypt. The Chinese leadership apparently thinks it is. In recent weeks, Beijing has engaged in a tight-fisted crackdown on any perceived form of dissent – informal church groups, the international media, and most notably, outspoken artist Ai Wei Wei, who has been detained for alleged economic crimes. We can only speculate about the causes of such suppression – could it be linked to next year's change of leadership? – but it is reasonable to assume, based on the timing, that Beijing is reacting to what's happening in Egypt and its neighbors. The lesson Chinese officials seem to be learning is that it is dangerous to leave any potential source of anti-government activism uncrushed, no matter how harmless it may appear to be at the moment.

Ten Reasons Why China is Different -– The China doubters are back in force. They seem to come in waves – every few years, or so. Yet, year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times. That seems likely to continue. Today’s feverish hand-wringing reflects a confluence of worries – especially concerns about inflation, excess investment, soaring wages, and bad bank loans. Prominent academics warn that China could fall victim to the dreaded “middle-income trap,” which has derailed many a developing nation. There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. But they stem largely from misplaced generalizations. Here are ten reasons why it doesn’t pay to diagnose the Chinese economy by drawing inferences from the experiences of others:

Chinese rare earth metals prices soar - A gravity-defying leap in the price of Chinese rare earth metals has triggered fears that the cost of components used in a range of goods from mobile phones to hybrid cars could soar. The three to fivefold jump in prices since January comes after China, the world’s biggest producer of rare earths, has clamped down on domestic output. The implications could be far-reaching. Although annual consumption of the metals is small relative to that of other commodities, rare earths are found in everything from fluorescent lights to wind turbines. They are very difficult, if not impossible, to substitute. Industrial buyers are in shock after witnessing the price of rare earths such as cerium oxide jumping 475 per cent in just five months, amid falling supplies. “I’ve never seen anything like it,” says one US-based purchaser of rare earths. “People are trying to wriggle out of using rare earths in any way they can, whether by developing new products or finding substitutes.”  Rare earths came under the spotlight after China, which produces more than 90 per cent of the world’s total output, started to reduce export quotas two years ago. Beijing’s influence aroused concern when exports of rare earths to Japan were temporarily suspended after a diplomatic dispute.

Western Australia shuns Canberra, eyes China - COLIN Barnett says relations between Western Australia and the Gillard government are at a low point, and the Premier has begun forging closer links with Beijing rather than Canberra as economic power shifts to the resource-rich state.  After a week in which Mr Barnett and Wayne Swan traded blows over Western Australia's infrastructure funding and declining share of GST receipts, the Premier said yesterday the Gillard government had "lost the plot" and relations had degenerated into an "unsavoury and unfriendly environment". Western Australia was striking closer political and business relationships with China rather than the rest of Australia, which largely did not understand the profound economic transformation occurring in his state. In an exclusive interview with The Weekend Australian, Mr Barnett denied that Western Australia was in effect running its own foreign policy and stressed he was not in favour of secession.

Those Shifting Plates - Only a little less interesting, however, was the news in a Financial Times op-ed by Yoichi Funabashi, former editor of Japan’s leading newspaper, Asahi Shinbun. A coterie of “senior business leaders,” reported Funabashi, recently has privately expressed the view that “This is the moment for Japan to break with the past and move closer to China.” In crisis lay opportunity, Funabashi wrote. Japan’s triple disaster was forcing Japanese manufacturers to shop for parts in China. Executives were worried, too, about energy dependency, given the disappointments of nuclear power.But the deeper development necessitating change was China’s emergence as an economic superpower. The Chinese have made no secret of their determination to dominate in many lines of business. Their domestic market was the fastest growing in the world.  Japanese manufacturers would have little choice but to diversify their supply chains and, in some cases, transfer them outright to China.

Toyota denies Japan output to return to 90 percent in June (Reuters) - Toyota Motor Corp denied media reports on Tuesday that its vehicle production in Japan would recover to 90 percent of pre-quake levels in June, higher than the 70 percent it had flagged on May 11. "The situation has not changed since we announced the latest plans along with our financial results on May 11," Toyota spokeswoman Monika Saito said. Public broadcaster NHK and Kyodo news agency reported that Toyota's domestic production would return to 90 percent of original plans next month. Toyota is currently producing at around 50 percent of pre-quake plans in Japan and an average 40 percent overseas.

Moody's warns Japan recession is negative for rating - Japan's return to recession and a bigger-than-expected slump in first-quarter economic growth are negative for its credit rating, Moody's Investors Service said, warning that a delay in recovery could warrant additional fiscal and monetary stimulus.The triple blow of the March earthquake, tsunami and nuclear crisis has nudged Japan into recession and led to a surprisingly deep 0.9 percent contraction in January-March, which Moody's said was negative for Japan's rating and made it increasingly urgent for Prime Minister Naoto Kan to compile a second extra budget. "Reconstruction and relief expenditures will eventually lead to a rebound in economic growth later this year and in 2012," Moody's said "But the scale of the loss in output and income caused by the earthquake may already have lowered the future growth trajectory of the Japanese economy, thwarting Japan's long-term growth rate, which is currently around 1 percent," it said. While the shock from power shortages will be temporary, the risk of Japanese companies permanently losing global market share due to current supply chain disruptions is more damaging, Moody's said.

Quake reconstruction may cost up to $184 billion, says Japan's economic minister - The reconstruction from the devastation earthquake that hit Japan¹ in March may cost the country 10 trillion yen to 15 trillion yen ($184 billion), said Japan²'s economic minister Kaoru Yosano, Reuters reported. Yosano said the government may have to issue bonds to cover the costs. But at the same time it should also think about ways to pay for redemption. He also mentioned about possibilities of some form of tax hike. "If we were to issue bonds for reconstruction, we need to decide in how many years we would pay the money back and how. That's important in maintaining market trust in Japan's fiscal state," Reuters quoted Yosano as saying.

Japan exports drop 12.5 pct in April after tsunami -  Japan's exports dropped in April, bearing the brunt of the March 11 earthquake and tsunami, which destroyed factories and caused massive production losses across the nation, the government said Wednesday. Exports fell 12.5 percent year-on-year - the biggest drop in 18 months - to 5.16 trillion yen ($62.8 billion). Imports rose 8.9 percent to 5.62 trillion yen, resulting in a trade deficit for the first time in three months, the finance ministry said. "Exports fell sharply as Japanese manufacturers simply could not produce goods due to severe supply shortages following the earthquake," said Hiroshi Watanabe, an economist at the Daiwa Institute of Research. Among Japanese exports, auto shipments took a beating, marking a staggering 67 percent drop in April. Exports of semiconductor products also fell 19 percent in the month.

Fitch lowers outlook on Japan sovereign debt - Fitch Ratings revised its outlook Friday on Japan's sovereign debt to negative from stable, citing rising government indebtedness, lack of policy direction in addressing its ageing population problem, and as yet unknown costs related to reconstruction efforts following the devastating tsunami and earthquake in March. The ratings agency retained Japan's long-term local currency rating at AA, while it also noted that Japan's government debt reached 210% of gross domestic product at the end of 2010, the highest of any nation it tracks. Fitch also said Japan's debt to GDP ratio is projected to rise 56 percentage points from the end of 2007 to the end of 2012, lagging behind only the banking-crisis-stricken economies of Ireland and Iceland. It said it cut its estimate of Japan economic growth rate this year by 0.5% owing to ongoing electrical power shortages, and added there was a risk of permanent loss of output as companies located abroad following the March disasters.

People Are Retiring Leads to Downward Pressure on Wages That's what Marketplace radio told listeners this morning in reference to to Japan. It explained Japan's deflation this way: "The underlying problem in Japan is that the country is getting older. More and more people are retiring so there's downward pressure on wages." Let's see, retiring workers reduce supply, therefore wages fall. Hmmm, lower supply therefore lower wages. What are we missing here?Actually, the larger point of this story, that the inflation caused by higher prices for energy and other unusual costs last month, was a good thing for Japan, also doesn't make sense. Japan will benefit from a situation in which there are broad based wage and price increases that erode the real value of debt and reduce real interest rates. Having the price of a small subset of goods rise (especially imported goods like oil) is bad news since it erodes workers' purchasing power.

Japan to Tackle Debt After Disaster Reconstruction, G-8 Says - Japan will begin tackling its public debt after the country rebuilds from this year’s earthquake and tsunami, Group of Eight leaders said.  “In Japan, while providing resources for the reconstruction after the disaster, the authorities will also address the issue of sustainability of public finances,” according to a draft statement prepared for G-8 leaders meeting today in Deauville, France. The comments underline the twin concerns about Japan, which is coping with the aftermath of a magnitude-9 earthquake and tsunami that killed about 23,000 people at a time when government debt amounts to more than two years of annual output. The Paris-based Organization for Economic Cooperation and Development urged Japan to set out a medium-term deficit- reduction plan in a report released yesterday.  “It is important to finance reconstruction spending by shifting expenditures and increasing revenues,” the OECD said in its annual Economic Outlook. “A detailed and credible fiscal-consolidation program, including tax increases and spending cuts large enough to achieve the government’s target for stabilizing the public debt ratio by 2020 is a priority.”

BOJ Open to Further Stimulus Measures - Bank of Japan Gov. Masaaki Shirakawa indicated Wednesday that he is open to additional steps to stimulate economic growth in the aftermath of the March 11 earthquake and tsunami, while saying that he sees some positive economic signs already emerging. Mr. Shirakawa said that the BOJ could look to do more with its special lending facility, which makes low-cost loans available through banks to growth-sector companies.  "The BOJ hopes to play a role as a catalyst to support the foundation for Japan's economic growth through this facility," Mr. Shirakawa said at an economic forum in Tokyo.

Economy, Insure Thyself - Robert J. Shiller – The basic principle of financial risk management is sharing. The theoretical ideal occurs when financial contracts spread the risks all over the world, so that billions of willing investors each own a tiny share, and no one is over-exposed. The case of Japan shows that, despite some of our financial markets’ great sophistication, we are still a long way from the theoretical ideal. Considering the huge risks that are not managed well, finance, even in the twenty-first century, is actually still rather primitive. A recent World Bank study estimated that the damage from the triple disaster (earthquake, tsunami, and nuclear crisis) in March might ultimately cost Japan $235 billion (excluding the value of lives tragically lost). That is about 4% of Japanese GDP in 2010. Newspaper accounts suggest that contributions from foreign countries could be put in the hundreds of millions of US dollars – well below 1% of the total losses. Japan needed real financial risk sharing: charity rarely amounts to much.

Power sector’s woes set to grow due to coal shortage - The summer is getting hot and the power crisis threatens to get hotter. The power ministry has said that only 25,000 MW or barely half the needed capacity will be added to the generation capacity, the same as last year because of coal shortage. Two thirds of India's power needs are met by thermal power plants. Coal India committed just 331 MT of supply for the power sector in 2011-12 against a demand of 426 MT. The balance 63 MT will have to be met through imports. Importing coal may not be the best solution, though. The existing operating power plants are designed to blend just about 10-15 per cent of imported coal. So, that poses a fresh challenge for power plants. Supplies from Coal India have grown by 2.9 per cent between 2008 to 2011. The situation is expected to worsen this fiscal, partly due to green restrictions. Adding to the problem is the fact that Coal India is unwilling to sign fuel supply agreements with power projects commissioned after April 2009.

Global Trade Has Recovered From the Great Recession - It's been a while since we looked at the WTO's statistics for global trade.  The latest data are above through March 2011.  A couple of cautions: the WTO converts all trade data to US dollars at prevailing market exchange rates.  The data are not seasonally adjusted, or corrected for inflation.  I then convert to an index based on Jan 2006 being 100, and doing some correction for missing data.  In theory, imports and exports should be equal on a global basis, so the discrepancy above is due to measurement error.  Notwithstanding the caveats, this is a pretty interesting and useful series, and was helpful in seeing the slowdown in the global economy last summer.  This time, what seems interesting is that the spring surge in trade is larger than usual (see red oval versus green ovals for this period in prior years).  Trade has now pretty much recovered to the peak level of mid 2008.  The great recession caused a huge fall of over 40% in the second half of 2008, but, two years later, the global economy has made up the lost ground. In the US economy, April has bought some signs of weakening.  It will be interesting to see if global trade statistics reflect this in coming months.

Antidumping in Action - Today's Washington Post provides another example of our dysfunctional "Antidumping" rules in action.  This case is about antidumping tariffs imposed on furniture imports from China: But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million. Over the same period, however, imports of the same goods from Vietnam — where wages and other costs are even lower than in China — have surged, rising from $151 million to $931 million. The loss of jobs in America, meanwhile, only accelerated.  This may be a case where the differential tariff treatment between Chinese and Vietnamese furniture which resulted from the antidumping case induced "trade diversion" - i.e., an efficiency loss because the trade preferences result in imports coming from someplace other than the low cost producer.  However, in this example, it could also be the case that comparative advantage shifted to Vietnam as China's labor costs have risen. 

Currency Link to Trade Balances May Not Be Ironclad - New empirical data suggest the link between an economy’s current account and the value of its currency may not be nearly as clear-cut as conventional economic wisdom holds. The formula is so universally accepted it borders on the simplistic: a weak currency plus exports equals trade boom.A weaker dollar, which recently fell to near three-year lows, helped send U.S. exports soaring last year by 21% to a cumulative $1.28 trillion, the sharpest rise since 1988. However, the current account — the broad measure of trade plus goods and services — remains in deficit, largely because the U.S. still imports much of its oil. To the extent that a weak dollar has improved American trade competitiveness, recent research from Citibank raises questions about exactly how much of a trade bang the U.S. — or for that matter any other country — can expect to get from a weaker buck.

IMF sees $160 billion in Middle East financing needs (Reuters) - The external financing needs of oil-importing countries in the Middle East and North Africa will exceed $160 billion over the next three years and donor countries must step in to help, the International Monetary Fund said on Thursday. In a report to the Group of Eight meeting in Deauville, France, the IMF urged G8 industrial nations and rich Arab partners to develop an action plan that lays out what help they could provide countries in need. "The region needs to prepare for a fundamental transformation of its economic model," Masood Ahmed, in charge of Middle East and Africa at the IMF, told journalists on the sidelines of a Group of Eight meeting in northern France. "This will be greatly facilitated if international players including the G8 can enter into strategic partnership with these countries...where incentives are linked to a social agenda."

World Bank to lend US$6B to Egypt and Tunisia - World Bank President Robert Zoellick on Tuesday unveiled US$6 billion in fresh funding for Tunisia and Egypt ahead of a meeting of Group of Eight industrial powers in France starting on Thursday.Zoellick said a Group of Eight meeting in Deauville, France, this week will discuss transitions sweeping the Middle East and North Africa, and ensure that financing for Egypt and Tunisia leads to reforms that ensure all-inclusive growth and create jobs.Zoellick said the G8 could help by promoting investment and trade with countries in the region. He said the World Bank was working closely with the IMF, which is overseeing a separate funding package focused on macroeconomic stability and reserve shortfalls.An IMF mission is currently in Egypt.

A World of Regions - Sachs - In almost every part of the world, long-festering problems can be solved through closer cooperation among neighboring countries. The European Union provides the best model for how neighbors that have long fought each other can come together for mutual benefit. This may seem an odd time to praise the EU, given the economic crises in Greece, Spain, Portugal, and Ireland. Europe has not solved the problem of balancing the interests of strong economies in the North and those of weaker economies in the South. Still, the EU’s accomplishments vastly outweigh its current difficulties. The EU has created a zone of peace where once there was relentless war. It has provided the institutional framework for reuniting Western and Eastern Europe. It has fostered regional-scale infrastructure. The single market has been crucial to making Europe one of the most prosperous places on the planet. And the EU has been a global leader on environmental sustainability. For these reasons, the EU provides a unique model for other regions that remain stuck in a mire of conflict, poverty, lack of infrastructure, and environmental crisis.

Interactive Chart of Public Debt by Country - Public debt, which is also called “government debt” or “national debt,” includes money owed by the government to creditors within the country (domestic, or internal debt) as well as to international creditors (foreign, or external debt). There are two standard ways to measure the extent of government debt: gross financial liabilities as a percent of GDP or net financial liabilities as a percent of GDP. General government gross debt refers to the short- and long-term debt of all institutions in the general government sector (some definitions of national debt include such government liabilities as future pension payments and payments for goods and services the government has contracted but not yet paid, and other definitions do not). General government net debt refers to gross debt minus all financial assets.

Is a Global "Happiness" Index on the Horizon? - GDP, which only measures economic output, passes over a lot of stuff that people really care about, like air and water quality, health, education, and leisure. So even if the economy is growing like gangbusters (say, China), which implies more jobs and more wealth, there may be a lot of other things going on that aren't so rosy, like pollution, deforestation, and corruption (again, China). And even if economic growth is creating more wealth, GDP also doesn't tell you who in society is getting the lion's share. Because GDP measures an average of per capita output, it doesn't reflect changes in specific segments of a population. So poorer populations within a single economy can be getting poorer, even though GDP is going up. The folks at the OECD have been thinking about this for a while. In fact, the concept of "happiness economics" dates back to the 1970s, when an economist named Richard Easterlin did research concluding that, on the whole, rich countries don't get happier as they get richer. If that's true, then using GDP to set policies on things like jobs and public spending can easily go astray. So why has it taken so long to come up with a new measure?

The Least Radical Case for Happiness Economics - There’s a fascinating debate on happiness going on over at The Economist. Officially, the motion is that: “This house believes that new measures of economic and social progress are needed for the 21^st-century economy.” (See recent Freakonomics Radio podcast: Health of Nations) My own contribution tries to discipline the grandiose rhetoric of both sides, concluding that:  The benefits of new happiness data have surely been overstated. But we economists compare benefits with costs. Adding a couple of questions to existing surveys is so cheap that it almost certainly passes any cost-benefit analysis. And when the motion passes, we nerdy social scientists need to stop writing grandiose treatises and get back to the mundane grind of social science, mining these data for yet more incremental insight.

IMF approves $36.8 billion loan for Portugal  - The International Monetary Fund on Friday approved a 26 billion euro ($36.8 billion) loan for Portugal to help the country recover from a debilitating sovereign debt crisis, saying it would immediately disburse 6.1 billion euros to ease investor concerns over the euro zone member's debts. The IMF said in a statement that total financing to Portugal in 2011 will include about 12.6 billion euros from the IMF and another 25.2 billion euros from the European Union. The funding is part of a joint IMF/EU 78 billion euro ($110 billion) bailout package. "The financing package is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track," the IMF said in a statement. The financial package was calibrated to allow Portugal to stay out of the market for medium- to long-term bonds for slightly more than two years, IMF Mission Chief Poul Thomsen said.

US House Republican Pushes Measure Against IMF Bailouts - A Republican member of the House of Representatives introduced a resolution today that expresses Congress’s disapproval of U.S. participation in International Monetary Fund bailouts for countries in the European Union until they comply with the bloc’s debt and deficit limits.  The measure by Representative Cathy McMorris Rodgers of Washington state comes as Europe’s debt crisis deepens, with policy makers in the region discussing whether to boost aid to Greece to avoid a default. The IMF has been providing about a third of the bailouts in the region and has agreed to continue doing so in the case of future packages. “At a time when the federal government is borrowing $5 billion every day on top of a $14 trillion national debt, I am gravely concerned by America’s growing involvement in the ‘gathering storm’ of European bailouts,”

Joseph Stiglitz: the IMF cannot afford to make a mistake with Strauss-Kahn's successor - The IMF will soon be confronted with the difficult decision of choosing a new head. If these were ordinary times, it might be of little moment. But these are not ordinary times.Europe faces a financial crisis and good leadership of the IMF will be essential to finding its way out. As the world focuses its attention on the allegations against Dominique Strauss-Kahn and we think about who might replace him, it is important not to lose sight of the IMF's crucial role. Europe has decided it cannot or will not manage the crisis on its own and has turned to the IMF. But Europe is in an awkward position. Its own Central Bank is at the centre of managing the very crisis that was helped into being by the flawed economic philosophy and policy to which it and the US Federal Reserve adhered. Those who thought that all that was needed for the euro to succeed was fiscal discipline should have learned their lesson – Ireland and Spain had surpluses before the crisis.

EU converges towards Lagarde as candidate for IMF - It is interesting to see how the succession debate for the IMF plays in different media across the world. While US-based bloggers (see Simon Johnson or Brad DeLong)  have been discussing the probability of the first managing director from the emerging markets, or even from the US in the case of Delong), opinion among European policy makers converges towards Christine Lagarde, who now is the favourite to succeed DSK. See for example Les Echos, Le Monde, Handelsblatt and FT Deutschland.  Angela Merkel yesterday came out in favour of the French finance minister, as did Jean-Claude Juncker, and Silvio Berlusconi. The Spanish will no doubt also support her, as does, of course, France. Jose Manuel Barroso and Olli Rehn said they would prefer a European candidate, whereas Herman van Rompuy said one should decide the issue very quickly, as DSK’s departure already opened up a power vacuum. (These week’s extraordinary policy cacophony is in part due to DSK’s absence. He would have impressed on the Ecofin, and on Merkel, a need for a much more coherently expressed position.)

EU leaders set to nominate Lagarde for IMF post - FRENCH FINANCE minister Christine Lagarde has emerged as the clear favourite to take the helm of the International Monetary Fund (IMF), with European leaders expected to agree on her nomination in the coming days. President Nicolas Sarkozy is understood to be pressing for Ms Lagarde to succeed her compatriot Dominique Strauss-Kahn after he resigned this week to fight charges of sexual assault and attempted rape in New York. Mr Sarkozy spoke to British prime minister David Cameron yesterday and with German chancellor Angela Merkel earlier this week. European leaders are resisting pressure to give the job to an emerging economic power and the expectation in European circles is that they will coalesce around a single candidate before a G8 summit in Deauville, France, on Thursday and Friday. Ms Lagarde received a public endorsement yesterday from Italian prime minister Silvio Berlusconi, while the president of the euro group, Jean-Claude Juncker, who played a vital role in Mr Strauss-Kahn’s nomination in 2007, said she would be the “ideal candidate”.

Cosmetic surgery will not save the eurozone - Munchau - At least European leaders can agree on Christine Lagarde, France’s finance minister, as the next managing director of the International Monetary Fund. But behind this display of unity, a war is raging over how to solve the Greek debt crisis as we enter the most dangerous phase of the crisis yet.  We have known for some time that the European Central Bank is hostile to any form of debt restructuring. This also includes a “voluntary” extension of the maturity of Greek debt. European finance ministers have invented a new word for this: “reprofiling” – a well-known expression taken from the field of cosmetic surgery What we did not know before was quite how strongly the ECB feels about this. Jean-Claude Trichet, ECB president, stormed out of a meeting with finance ministers on May 6. This was the famous super-secret meeting whose very existence had been denied by officials. The ECB has since stepped up its rhetoric, and is now threatening to deny Greek banks access to the ECB’s refinance operations after any restructuring.  Think about this for a second. Cutting Greece off from ECB liquidity would constitute a dramatic escalation of the eurozone debt crisis. It would force Greece out of the eurozone within days. You could say that the ECB is threatening to create so much mayhem in the financial system that the monetary union would effectively collapse.

Speak softly and...NOMINATIONS open today for the next boss of the IMF. Christine Lagarde of France is the clear frontrunner. But if she were to face a rival from outside the West whom might it be? One name tripping off agile tongues is Tharman Shanmugaratnam, the finance minister of Singapore who is now deputy prime minister too. He has a number of things going for him. He knows a bit of economics, having picked up a bachelor's in the subject at the LSE, a master's at Cambridge and an MPA at Harvard's Kennedy School. He served many years at the Monetary Authority of Singapore and was just appointed chair of the committee of ministers (the IMFC) that oversees the IMF. You can see his debut press briefing in this webcast, or read the transcript here. He welcomes the IMF's new pragmatism about capital controls (sorry, "macroprudential measures") which he describes as "a major break in the fund's thinking", and he urges it to pay further attention to "spillovers", ie risks that spill over from one country to another, and from the financial system to the macroeconomy (and vice versa). 

IMF Board Aims to Select New Leader by June 30 - The International Monetary Fund said it will aim to pick a leader to succeed Dominique Strauss-Kahn by the end of June and promised to choose the most-qualified candidate from among front-runners announced by the agency.  “The executive board has adopted a procedure that allows the selection of the next managing director to take place in an open, merit-based and transparent manner,” The pledge of transparency came in response to calls by Brazil, China and other developing economies for an end to Europe’s 65-year lock on the top job in favor of a selection process that is based on qualifications alone. Among the requirements for the job cited by the board is an understanding of “challenges facing the fund’s diverse global membership.”  Officials in Thailand, Russia and South Africa said the next managing director should come from a developing nation even as they failed to unite behind one candidate. By contrast, Europe has moved to maintain control of the post as officials closed ranks behind French Finance Minister Christine Lagarde.

Row Over New IMF Chief Intensifies (Updated) - Yves Smith - We wrote a couple of days ago about the young versus old economy struggle over who will be the next leader of the IMF in the wake of Dominique Strauss-Kahn’s resignation. Ever since its inception, the IMF had had a European in charge. Christine Lagarde, the finance minister of France, is the favorite, and the US and Europe have enough votes to determine the outcome.  Representatives of several emerging economies voiced their objections, pointing to a comment made by Jean-Claude Junker, president of the Euro group, in 2007: “The next managing director will certainly not be a European”.  The Financial Times reports that the unhappiness has gone beyond complaints in the media to an open rift. The IMF executive directors from China, India, Russia, Brazil, and South Africa issued a statement calling for “a truly transparent, merit-based and competitive process.” Good luck with the “merit” part; meritocracies are nice aspirations but unattainable in practice. Once you establish that candidates have the core skills needed to do a job, the decisions typically boils down to matters of taste (what vision for the organization do they represent) and politics. It also managed to get in a dig:

Would Another European Managing Director At The IMF Be The Answer For Greece? - Simon Johnson; for more on related issues, see my new Bloomberg column on the IMF succession.  Greece has no good options. Without question, Greece brought debt problems on itself – this is the consequence of politicians using irresponsible fiscal policy to win elections. As the International Monetary Fund put it when Greece became the first eurozone country to borrow from the fund in May 2010, “Even with the lower deficits envisaged under the program, the debt as share of GDP will continue to peak at almost 150 percent of GDP in 2013 before declining thereafter.” The situation has not improved in recent months – even under the most optimistic scenario, the debt-GDP ratio will peak above this number. The problem is that loose talk among European leadership of potentially “restructuring” or “reprofiling” Greek debt creates more problems than it solves. Financial markets fear another Lehman moment, in which authorities decide to let a significant borrower fail – without fully understanding the consequences. Who in the private sector or the various responsible governments or at the IMF can tell you exactly what would happen – and to whom and where – if Greece were to default in any fashion?

BRICmanship - I must confess to feeling a bit disappointed with the BRICs this morning. Here I was thinking they were poised to run the world and it turns out they can’t even stop the French running the IMF. At this point, it’s no good them railing against unwritten conventions. It’s time to start rallying behind a flesh-and-blood candidate. The BRICs and other prominent emerging economies may feel they don’t want the IMF job badly enough to turn this into a real contest. To win a proper fight they would have to paper over some big internal rivalries and annoy some powerful European partners and allies. (The United States probably isn’t that bothered either way.) By the same token, losing a geunine contest would be humiliating for them and possibly damaging for the institution, if the visible lack of consensus undermined the legitimacy of the new boss. Worse to have fought and lost, they must think, than never to have fought at all.

The IMF after Strauss-Kahn Our turn again - Europe seems likely to get its way when the empty chair is filled THE website of the IMF now lists the post of managing director as being vacant. Its most recent occupant, Dominique Strauss-Kahn, stands formally indicted in a case of sexual assault, and is expected to be released on bail today from New York’s Rikers Island jail. The fund itself is being run for the time being by its deputy head, John Lipsky. But even as it struggles to contain the damage to its reputation from the extraordinary circumstances in which its previous boss left it, politicking on the question of who should succeed him has begun in earnest. The big question is whether it will be another European, or whether the rest of the world will get a serious shot at the job for the first time since the IMF was founded in 1944. Europe’s lock on the top job at the IMF is not due to anything in the fund’s constitution. It is the result of an unwritten agreement between America and Europe dating back to the founding of the IMF and its sister institution, the World Bank, which is always headed by an American. Recent statements from top European politicians make it quite clear that they would like this tradition to continue.

Christine Lagarde: Why she is the best candidate to lead the IMF right now. - The International Monetary Fund has just started accepting nominations for candidates to replace Dominique Strauss-Kahn as managing director. The selection process is opaque, to say the least. But the outcome is almost certain: The IMF will choose Christine Lagarde, currently the finance minister of France. For her part, Lagarde formally announced her intention to seek the position on Wednesday. "It is an immense challenge which I approach with humility and in the hope of achieving the broadest possible consensus," she said. "If I'm elected, I'll bring all my expertise as a lawyer, a minister, a manager, and a woman" to the job. She reportedly has the support of most of the European Union, China, Brazil, and the United States. In the crass terms of identity politics, the IMF could hardly pick anyone better. Lagarde is a woman, of course. Moreover, she is a multilingual, teetotaling, vegetarian yoga enthusiast—an ascetic, in welcome contrast to the pathologically indulgent DSK. The main charges against her are two: First, she is a European. Second, she is not an economist.

Lagarde would change style, not substance at IMF (Reuters) - An effective negotiator but no economic visionary, French finance minister Christine Lagarde would bring a change of style, not substance to the IMF and be unlikely to push for radical solutions to Europe's debt crisis. A labor and anti-trust lawyer by training, Lagarde lacks the academic pedigree, including a doctorate in economics, which helped former International Monetary Fund chief Dominique Strauss-Kahn win the respect of European leaders and IMF staff. But the charismatic 55-year-old, who on Wednesday announced her candidacy to succeed Strauss-Kahn after he resigned last week, has gained on-the-job experience of the challenges facing the IMF during France's G20 presidency and the euro zone crisis. She has won a reputation for brokering deals under pressure, overcoming Chinese resistance to the use by G20 governments of indicators to measure global economic imbalances, and allaying German fears over the creation of a euro zone bailout mechanism.

The Problem With Christine Lagarde - Simon Johnson - Ms. Christine Lagarde, French finance minister, is the nominee of the European Union for the recently vacant position of managing director at the International Monetary Fund.  The EU has just over 30 percent of the votes in this quasi-election; the US has another 16.8 percent and seems willing to keep a European at the fund if an American can remain head of the World Bank.  It should be easy for Ms. Lagarde to now travel round the world engaging in some old-fashioned horse trading, along the lines of: Support me now, and I or the French government will get you something suitable in return, either at the IMF or elsewhere. The contest to run the IMF seems over before it has even really begun.  But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits.  There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out.

Israeli Central Bank Chief Exploring IMF Bid - Israeli central banker Stanley Fischer is examining a formal bid to head the International Monetary Fund, said an official familiar with his thinking, and figures he has an outside shot at the job if there is a deadlock in the voting. Mr. Fischer, a former deputy managing director of the IMF, is a long shot. While he's widely respected among central bankers and finance ministers, his current position as Israel's central bank governor would make it tough to win the support of Arab nations and other emerging-market countries, said an Arab official who has worked with Mr. Fischer.

Fisching for a job - PERHAPS he read this week's leader. Stanley Fischer--governor of Israel's central bank, former number two at the IMF, and one of the biggest names in macroeconomics--is thinking about running for the top job at the Fund. That, at least, is what a person "familiar with his thinking" has told Bob Davis of the Wall Street Journal. Mr Fischer considers himself a "compromise" candidate, says this unnamed person with a view inside his head. But surely that gets it backwards. He's the kind of candidate that might emerge if the hiring process were blissfully free of the political compromises that now weigh so heavily upon it. His record is not spotless, of course. He was a leading figure at the Fund from 1994 to 2001 during the most traumatic period in its history, fighting fires in Thailand, Indonesia and South Korea, which then spread to Brazil. The IMF's high-interest-rate defence of Asia's currencies remains controversial.

Who Should Lead the IMF? - Every time the International Monetary Fund awaits a new managing director, critics complain that it is past time for the appointee to come from an emerging-market country. But whining won’t change the unjust 60-year-old tradition by which a European heads the IMF and an American leads the World Bank. Only if emerging-market countries unite behind a single candidate will they have a shot at securing the post. Unfortunately, that is unlikely this time around, too, so the job will probably go to a European yet again. After all, the oft-repeated principle that the IMF’s managing director should be chosen on the basis of merit rather than nationality need not mean a departure from past practice.  But the proposition that the ongoing sovereign-debt crisis on Europe’s periphery is a reason to appoint a European is wrong. (Lagarde herself seems to acknowledge this.) Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system.

Battle Over IMF Chief: Proxy War Over Power of Banks? - Yves Smith - There’s a fight afoot over who will be the next head of the IMF. Yours truly is not making odds on this one, save that Christine Lagarde is getting far and away the most attention in the media and more generally, a big push is on to have a European take the reins. The logic is that with the eurozone mess far and away the biggest priority, the new IMF chief needs to have credibility with the major actors, and that argues for a European choice. The contrary camp is the “the countries formerly known as emerging” who point out that it is their turn to have an IMF head from one of their countries. But what is intriguing are the arguments that follow, which reveal what the real stakes are. Crudely speaking, the advanced economies are far more bank friendly than their “emerging” counterparts. China is actively hostile to neoclassical economics and unfettered capital markets. Efforts to make China safe for investment bankers have been rebuffed. India sailed though the global financial crisis relatively well by having capital controls and heavily regulated banks. Pretty much any country that has taken IMF medicine (such as the countries caught in the Asian crisis, like Indonesia, South Korea, and Thailand) also sees the IMF as an enforcer for major capital market firms and international banks. Japan, as a military protectorate of the US, has limited degrees of freedom. Even so, during the Asian crisis, it pushed for a bailout within the region (ie, outside the IMF) and that idea was quickly slapped down by the US.

When Institutions Rape Nations - Standing on the corner of 19th and G Street, just blocks from the White House, the International Monetary Fund looks no different from those other temples of capitalism -- the World Bank and the Inter-American Development Bank -- that make their home in our nation's capital. On a given morning, it's not uncommon to see protesters outside the IMF's hulking offices, railing against its policy of imposing a draconian, free-market agenda on developing nations which, in their desperation, often have little choice but to come to the fund for help. As we're quickly learning, in the aftermath of the arrest of its ex-leader, Dominique Strauss-Kahn, the culture inside the IMF is almost as toxic as the bitter economic poison doled out by the organization itself. The harassment-plagued tenure of DSK, as he was known, was just the tip of a Titanic-sized iceberg. As the New York Times reports, his IMF had almost no safeguards against the kind of harassment rampant in a place filled with domineering males .As TomDispatch regular Rebecca Solnit makes clear, the IMF's recklessness and disregard for the wellbeing of others reflects the organization's approach to the outside world, a history of using economic shock therapy on nations around the world with disastrous results.

Greek PM, ECB officials reject debt restructuring -  "Debt restructuring is not under discussion," Papandreou said in an interview in Sunday newspaper Ethnos. Greece has no other option but to follow through its fiscal plan, ECB governing council member Ewald Nowotny told Greek newspaper To Vima Saturday. "For the ECB, the line is one and clear: you have to implement the commitments you have made." Greece is considering deeper cuts in public sector wages and further tax increases on a range of products and professions to qualify for more aid, Greek newspapers said Saturday. The plan may include scrapping bonuses to civil servants and employees in state-run companies, newspapers Ta Nea and Isotimia reported, without citing any sources. The government may also lower or scrap tax-free thresholds on property holdings and the self-employed, raise consumption taxes on soft drinks and certain fuel types or shift a range of products to a higher VAT-bracket, other newspapers said.

France Signals a Shift on Greece - French Finance Minister Christine Lagarde signaled Paris might support a rescheduling of Greek debt, warning that Greece is at risk of default if it doesn't do more to bring its public finances into order.  The comments mark a shift in France's position in a debate that has pitted Germany and other euro-zone governments against the European Central Bank, which opposes any form of restructuring of Greek debt. French support for proposals to extend the maturities of Greek debt—a so-called soft restructuring—would leave the ECB isolated in its opposition. "What we certainly don't want is a state bankruptcy, a default, in Europe," Ms. Lagarde said in an interview published Friday in Austria's Der Standard newspaper. "You can use a lot of words—reprofiling, restructuring, re-this, re-that—but what there won't be is a restructuring of Greek debt." At the same time, she said: "We would accept anything that is based on a voluntary accommodation by banks."  "If the banks decided unilaterally after contacting the Greek authorities to offer a lengthening of the repayment time frame, she wouldn't be against it," Ms. Lagarde's spokesman said

Eurogroup head Juncker says Greece needs independent privatization agency - The head of the eurogroup says Greece should set up an independent privatization body tightly overseen by the European Union to bring down its debt level. Jean-Claude Juncker told German news weekly Der Spiegel's edition to be published Monday that the EU in future will monitor Greece's privatization program as tightly "as if we were conducting it ourselves." Luxembourg's prime minister, who also chairs meetings of the 17 eurozone finance ministers, told the magazine the agency should be independent of the government and feature international experts. Athens has singled out assets worth some €50 billion ($70 billion) for privatization, but has struggled to implement the plan. Privatizations are seen as crucial in keeping Greece's ballooning debt in check.

Greece Must Speed Up Asset Sales, Win Investment, Minister Says… - Greece must speed up its 50 billion- euro ($71 billion) plan to sell state assets and develop real estate and attract investments to get its economy back on the right track, Finance Minister George Papaconstantinou said.  “To be able to start up the Greek economy’s big engine so it produces what we all want -- jobs, investment and wealth for Greeks -- we must proceed faster and more decisively,” Papaconstantinou told lawmakers in Athens today in comments broadcast live on state-run Vouli TV. “The state property and real-estate development and state-asset sales plans move in this direction.”  Greece is aiming to raise the 50 billion euros by 2015 to help reduce its debt, which is expected to peak at 166 percent of gross domestic product next year, according to European Commission estimates released on May 13.

Greece fails to pay medical bills - The Greek government has fallen sharply behind on payments to healthcare companies only months after restructuring its €5.4bn ($7.6bn) debt to suppliers, raising doubts about patient safety while revealing the looming cash-flow crisis faced by the state. The pharmaceutical industry says only 30 per cent of €1.2bn in payments owed by public hospitals since the start of last year have been made. Of debt due from the start of 2011, just 1 per cent has so far been paid.  The cash crunch in the health sector adds to the urgency of measures planned by the Greek government to raise revenue through a pledge to sell €50bn of state-controlled assets. Fears are mounting in eurozone capitals, however, that the socialist leadership of George Papandreou, prime minister, is not committed to the painful measures necessary to meet revenue targets. “The situation has become dramatic,” the Hellenic Association of Pharmaceutical Companies said in a letter to the ministry of health, warning that it was “only a matter of time before drug shortages on the market begin to occur”. The concerns are shared by other medical suppliers, many of which have tightened payment terms and some of which are themselves struggling to continue operating.

When Austerity Fails, by Paul Krugman - In Europe the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems.  Greece’s government, finding itself able to borrow at rates only slightly higher than those facing Germany, took on far too much debt. The governments of Ireland and Spain didn’t (Portugal is somewhere in between) — but their banks did, and when the bubble burst, taxpayers found themselves on the hook for bank debts. The problem was made worse by the fact that the 1999-2007 boom left prices and costs in the debtor nations far out of line with those of their neighbors.  What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. Objections that these programs would be self-defeating — not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues — were waved away. Austerity would actually be expansionary, it was claimed, because it would improve confidence.

New Economic Thinking on Greece: Bailout, Default, or Plan C - The Greek debt crisis is once again upon us, and the FT is filled with articles about ramifications for the Eurozone, and recommendations for what to do now. (See here, here, here, and here.) Understandably so, since the Eurozone is now the largest creditor of Greece, perhaps soon to be even larger if, as I would expect, the Eurozone takes the IMF’s ill-considered exposure onto its own balance sheet. (California has no IMF package, and neither should Greece.)Jurgen Stark, of the ECB, tells us that restructuring, whether soft (reprofiling) or hard (default), would be a disaster for the Greek banking system, but the Greek banking system has much less total exposure than the Eurozone, including the ECB itself. Stark is talking his own book, and there is nothing wrong with that. To the contrary, rational discussion about the road ahead requires facing up to the magnitude of the European exposure, today and going forward.

Here Is What Happens After Greece Defaults - When it comes to the topic of Greece, by now everyone is sick of prevaricating European politicians who even they admit are lying openly to the media, and tired of conflicted investment banks trying to make the situation appear more palatable if only they dress it in some verbally appropriate if totally ridiculous phrase (which just so happens contracts to SLiME). The truth is Greece will fold like a lawn chair: whether it's tomorrow (which would be smartest for everyone involved) or in 1 years, when the bailout money runs out, is irrelevant. The question then is what will happen after the threshold of nevernever land is finally breached, and Kickthecandowntheroad world once again reverts to the ugly confines of reality. Luckily, the Telegraph's Andrew Lilico presents what is arguably the most realistic list of the consequences of crossing the senior bondholder Styx compiled to date.

Despite Ban, Protests Continue Before Spanish Vote — Tens of thousands of demonstrators across Spain continued sit-ins and other protests against the established political parties on Saturday. They did so in defiance of a ban against such protests and ahead of regional and municipal elections on Sunday.  About 28,000 people, most of them young, spent Friday night in Puerta del Sol, a main square in downtown Madrid, the police said. They stayed even as the protest ban went into effect at midnight under rules that bring an official end to campaigning before the election in 13 of Spain’s 17 regions and in more than 8,000 municipalities. Fueling the demonstrators’ anger is the perceived failure by politicians to alleviate the hardships imposed on a struggling population. The unemployment rate in Spain is 21 percent.

Tens of Thousands in Spain Defy Protest Ban - Tens of thousands of demonstrators across Spain continued sit-ins and other protests against the established political parties on Saturday. They did so in defiance of a ban against such protests and ahead of regional and municipal elections on Sunday. About 28,000 people, most of them young, spent Friday night in Puerta del Sol, a main square in downtown Madrid, the police said. They stayed even as the protest ban went into effect at midnight under rules that bring an official end to campaigning before the election in 13 of Spain’s 17 regions and in more than 8,000 municipalities. Fueling the demonstrators’ anger is the perceived failure by politicians to alleviate the hardships imposed on a struggling population. The unemployment rate in Spain is 21 percent. Beyond economic complaints, the protesters’ demands include improving the judiciary, ending political corruption and overhauling Spain’s electoral structure, notably by ending the system in which candidates are selected internally by the parties before an election rather than chosen directly by voters.

Euro Falls to Record Low Versus Franc on Debt Concerns, Spanish Election - The euro touched a record low against the Swiss franc as concern over Europe’s sovereign debt crisis deepened, reducing the appeal of the region’s assets. The 17-nation currency reached the lowest in a week against the dollar after Spain’s Socialist party suffered its worst electoral defeat in more than 30 years and Standard & Poor’s on May 20 said it may lower Italy’s credit rating. The Dollar Index climbed to its highest in almost seven weeks as declines in Asian stocks spurred demand for safer assets. Spanish voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party for soaring unemployment and spending cuts that aimed to shield the nation from Europe’s debt crisis. With 99 percent of votes counted, the opposition People’s Party won 38 percent of the vote in municipal elections, compared with 28 percent for the ruling Socialists, the Interior Ministry said.

How corruption, cuts and despair drove Spain's protesters on to the streets - The table that arrived in Madrid's Puerta del Sol square was part of the swirl of creative chaos, naive enthusiasm and pent-up frustration that has transformed it into a makeshift camp for thousand of protesters who call themselves los indignados, the indignant ones. Tents and mattresses, armchairs and sofas, a canteen, portable toilets and solar panels have sprung up in a remarkable display of organisational prowess. And the mass of people jostling around, each pursuing their own dream or demand, or just watching others doing the same, seemed more like something transported from the Arab spring in north Africa than from Europe. As the protests continued to swell on Friday, with 60,000 people defying authorities to obey the campaign's "Take over the square!" slogan in dozens of Spanish cities, and with copycat demonstrations across Europe, the question was whether this was the new May 1968 – a youth-led popular revolt against an establishment deemed to have failed an entire generation.

Matt Stoller: More Embers Striking Up Against the Global Liquidation - The youth in Spain are very very angry, with unemployment at Depression-levels of roughly 21%, and they are rocking the nation with protests. What is less clear is how this plays out. The echoes of Wisconsin are obvious. Protesters have set up an infirmary, a computer tent and a “guerrilla garden” of vegetables with the help of donations from supporters. The tents and tarps were still in place on Monday morning. But the crowd was smaller and analysts said the momentum of the movement will be hard to maintain. “The big problem is that (the movement) has no path into formal politics. There is no party legitimately speaking on their behalf… no Green party as in other European countries which would back them,” said David Bach, Professor of Strategy and Economic Environment at IE Business School in Madrid. The elite consensus is basically the same in both countries. Domestic actors representing popular interests are in a bind. American labor officials are frustrated but impotent, with a few officials claiming that they will no longer give money to Democrats.

Zapatero’s Socialists Routed in Austerity Backlash - Prime Minister Jose Luis Rodriguez Zapatero led his Socialist party to its worst defeat in more than 30 years in local elections, prompting a transfer of power in Spain’s regions that risks reviving concerns over the country’s public finances. The opposition People’s Party won 38 percent of the vote in municipal elections yesterday, compared with 28 percent for the ruling Socialists, with 99 percent of votes counted, the Interior Ministry said. The Socialists lost control of Barcelona, the country’s second-biggest city, for the first time since 1979, and also ceded Seville. The region of Castilla-La Mancha, Socialist for three decades, fell to the PP, as did Extremadura, another Socialist stronghold. “I know that many Spaniards suffer grave difficulties and they have expressed their discontent,” Zapatero said at a press conference in Madrid, where he pledged to press ahead with legislative overhauls. He said he won’t call early elections.

Prime Minister Zapatero’s Socialist Party Routed in Spanish Elections; Antinuclear Greens Surpass Merkel's Party in Local German Vote - The Euro is down nearly 2 cents vs. the dollar as incumbent parties in Spain and Germany were trounced in weekend elections.

• In Spain, Prime Minister Zapatero’s Socialist Party suffered a massive defeat over his austerity programs.
• The Spanish elections cast still more doubt about Zapatero's ability to stick with unpopular programs in the midst of 21% unemployment.
• In Germany, Chancellor Angela Merkel’s Christian Democratic party slumped to third place in a state election, trailing the Greens in a wave of antinuclear sentiment.
• Polls show Merkel would be soundly defeated if national elections were held today.

Merkel’s Party Slumps to Third in Bremen - German Chancellor Angela Merkel’s party slumped to third place in a state election in Bremen and blamed the result on having to shoulder Europe’s debt crisis, as the main opposition Social Democrats were re-elected. The Social Democratic Party took 38.3 percent in Bremen, a city-state that includes the car-exporting port of Bremerhaven, to cement their 64-year hold on Germany’s smallest state, ARD television projections showed yesterday. The Greens won 22.8 percent to take second place and continue their coalition with the SPD of the past four years. Merkel’s Christian Democratic Union slid to 20.2 percent, its worst result since 1959.Nationally, Merkel’s coalition trails the opposition SPD and Greens by as many as 13 percentage points in polls as euro- area bailouts sap voter faith and erode confidence in the euro.

Merkel's CDU Overtaken By Greens - Germany's Social Democrats and Green Party--in opposition nationwide--won elections in the city-state of Bremen Sunday, according to preliminary results broadcast by ARD television, handing another painful defeat to the parties in German Chancellor Angela Merkel's governing coalition. According to the preliminary results, the Greens for the first time in any state in Germany won more votes than Merkel's Christian Democrats, or CDU, as an antinuclear electorate doubted the veracity of Merkel's turnaround in nuclear policy after the disaster at nuclear plants in Japan. Were Merkel's government to decide to abandon nuclear power "then we would have achieved our goal," Green Party leader Claudia Roth said on ARD television. "The fight [against nuclear power] for more than 30 years would have been worth it."

Electoral routs for incumbents Regional elections in Germany and Spain over the weekend turn into a rout for incumbent governments. In the Spanish municipal elections, the Socialists suffered a landslide defeat, their worst results in history (27.8% of the votes) and almost 10 percentage points and two million fewer votes than the centre-right opposition Popular Party, El Pais reports.  Socialists lost power in nearly all regions and cities, even strongholds like Seville and the Castilla-La Mancha region, both plagued with especially high unemployment. Pressure is likely to grow on Jose Zapatero to call early elections, though he vowed on Sunday night to hang on to the end of his term in March next year, according to Reuters. While the outcome of local elections does not always forecast general elections, the Popular Party will want to turn Sunday's momentum into a victory at the national level with Mariano Rajoy as their candidate.  All German papers this morning lead with the elections in the city state of Bremen that produced the expected overall result, a victory of the ruling coalition of SPD and Greens, but which surprised by the scale of the meltdown of the CDU and the FDP. The CDU got 20.1%, trailing behind the Greens, and the FDP got 2.6%, clearly failing to pass the 5%-threshold. The national implications of this clearly local election should not be overstated. However the extremely weak results of the coalition parties confirm the general downward trend of Merkel’s government.

"Survey says".... German growth has probably peaked - Rebecca Wilder - This week further evidence has emerged of Germany's slowing growth trajectory. At 4.9% annual growth (calendar-adjusted) and a tightening bias from the ECB, this was, of course, to be expected. Yesterday the Manufacturing May 'Flash' PMI by Markit Research highlighted, in my view, that sentiment is unlikely to remain at these absurdly elevated levels indefinitely, as the index dropped to 58.2 from 62 in April. Notably, the index remained above 60 for five consecutive months. Today the Ifo Institute released its business survey for May, revealing that industry and trade remained stable in May. This index hovers at record highs compared to a post-unification time series. Overall, while the two sentiment indicators diverged this month (the PMI waning, while the Ifo holding firm), the story remains that Germany is slowing down. Furthermore, the Ifo survey portends a deceleration in industrial production growth (IP), perhaps over the next quarter.

Marshall Auerback: To Save the Euro, Germany Has to Quit the Eurozone - When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.

Italy Outlook Revised to Negative by S&P, Prompting Vow of Faster Reforms - Italy’s Treasury said it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014 after Standard & Poor’s said its debt rating is at risk of a downgrade.  “With regard to the economy, the government has initiated and will intensify its reforms; in regard to the budget, a phase of measures are in advanced preparation in order to balance the budget by 2014,” the Treasury said today in an e-mailed statement from Rome. It also said the measures will be submitted to the Parliament for approval by July.  Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor’s, which cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt, according to an S&P statement sent late yesterday. S&P affirmed Italy’s A+ long-term rating, the fifth-highest, and its top-ranked A-1+ short-term rating.

Italy Warning From S&P May Fan Contagion as Greece Presses Cuts-- Standard & Poor's threat that it may cut Italy's credit rating risks fanning contagion among debt- laden European countries as Greece fends off speculation that it's headed to a restructuring. Italy's Treasury said two days ago that it will "intensify" structural changes and push ahead with measures to balance the budget by 2014 after S&P said its A+ debt rating was at risk of a downgrade. Greek Prime Minister George Papandreou is set to brief his Cabinet today on added budget cuts and asset sales to keep the aid pipeline flowing. More than a year after European policy makers approved a 750 billion-euro ($1.1 trillion) bailout blueprint to stem the sovereign crisis, bond yields in debt-laden peripheral countries are at record highs and officials are floating plans to extend Greek repayments. Hours before the S&P warning about Italy, Fitch Ratings cut Greece three grades and said it would consider an extension of maturities as a default.

Italy attacks Standard & Poor's after credit downgrade - Italy has attacked credit rating agency Standard and Poor's for raising fears that the country could follow Greece, Portugal and Ireland into a sovereign debt crisis. Giulio Tremonti, Italy's finance minister, described S&P's decision to downgrade the outlook on Italy's government debt from stable to negative as "strange".  He said the move – which sparked economic concerns in Rome – lacked "even one example of a decline in the economy or public finances to justify downgrading the forecast".  The Italian Treasury said the European Commission, the International Monetary Fund (IMF) and the OECD had passed "very different" judgements on Italy's financial health.  The downgrade of the outlook means there is a one-in-three chance that Italy will be downgraded within the next 24 months.

Italy, Spain trigger fresh sovereign-debt fears — Europe’s sovereign-debt crisis reclaimed the spotlight Monday, sending investors around the world in search of safety after voters in Spain provided a thumbs-down on further austerity measures and Standard & Poor’s threatened to cut Italy’s credit rating.  “There are signs of the contagion spreading from Spain, even into Italy,” Following a week of anti-government protests, Spain’s ruling Socialist Party suffered widespread losses to the conservative Popular Party in regional elections over the weekend. The Popular Party held more than 37% of the votes versus around 28% for the Socialist Party, according to media reports.  Meanwhile, Standard & Poor’s Ratings Services late last week lowered its outlook on Italy’s A-plus sovereign credit rating from stable to negative, citing potential political gridlock that could derail the government’s plan to balance its budget by 2014.

European Woes - Not a good few days for Europe. S&P warned on Italy, Fitch downgraded Greece and said an extension of maturities would be considered a default. There were large protests in Spain and Iceland's Eyjafjallajökull volcano erupted. From Bloomberg: Greece Readies Crisis-Fighting StepsThe cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro- era high after Standard & Poor’s said May 20 it may cut Italy’s credit rating. That warning came hours after Fitch Ratings cut Greece three grades ... and said it would consider an extension of maturities as a default. Naturally bond yields are rising for some countries - and falling in Germany and in the U.S. (flight to quality). Here is a table for some European bond yields via Bloomberg (ht Nemo for the links). The Greece 10-year bond yield is now over 17% (another new record).

Protests: Has the Revolution Come to Spain?- Two political earthquakes have shaken Spanish life in the past week. First were the massive sit-ins that had tens of thousands of citizens camping out in the public squares of major cities in protest of the country's capsized economy and unresponsive political class. The second came Sunday night, May 22, when voters in regional and municipal elections delivered a sound drubbing to the governing Socialist Party (PSOE). Now, in Monday's harsh light, no one seems sure whether the first phenomenon had anything to do with the second. And everyone is wondering what both mean for the future of Spain. Since May 15, tens of thousands of Spaniards have taken over squares in 60 cities, clamoring for political, economic and social reform. As articulated by the group Real Democracy Now, which helped organize the protests, unemployment (21.3% among the general population; a shocking 40% among youth) is high on the list of complaints. But so too are political corruption (more than 100 candidates in Sunday's elections are currently under judicial investigation), social-welfare cuts and a general sense that elected officials in both of the two main political parties aren't listening to them. 'This isn't solely about unemployment or the upcoming election,' says Raúl, 29, who works for a marketing agency when he isn't volunteering in Madrid's Puerta del Sol. 'We're after a more responsible society.'"

Spain May Miss Its 2011 Budget-Deficit Goal, OECD Report Says -- Spain may miss its budget-deficit goal this year and the government should be ready to make more deficit measures if necessary, the Organization for Economic Cooperation and Development said. Spain's deficit will amount to 6.3 percent of gross domestic product, compared with the government's 6 percent goal, the Paris-based group said. GDP may grow 0.9 percent this year, below the government's estimate of 1.3 percent, the OECD said, accelerating to 1.6 percent next year, when it expects the government to meet its 4.4 percent deficit target."Some planned spending reductions in 2012 still need to be specified and the government should stand ready to introduce further measures if needed," the OECD said in a report today.

Thinking about Contagion in Europe - Greece has been hogging all of the stories regarding the euro-zone debt crisis, but this morning Alphaville notes that there have been some wider tremors in European financial markets in recent days. The Dread Pirate Contagion is threatening to set sail and once again terrorize the high seas. How likely is the crisis to spread in a meaningful way to Spain or Italy? That is, of course, one of the most important questions we can ask about this entire mess, because if investors lose confidence in the debt issued by those governments in any serious way, then Greece, Ireland, and Portugal will seem like mere footnotes by comparison. mIn order to get a feel for how likely contagion is in this situation, it's helpful to carefully think through the possible mechanisms by which the crisis could spread to Spain and Italy. And I think it makes sense to think about two different categories of transmission mechanisms: "spillover effects", and what I will call true "contagion".

Greek default would hit others in euro zone - A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default. Markets have piled pressure on heavily indebted euro zone countries this week as investors worry not just about Greece but also about Spain, where the government suffered a major defeat in regional elections at the weekend, and after ratings agencies warned about the health of Italy and Belgium. "A Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe,"Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters.

In Europe, Rifts Widen Over Greece - Fissures among Europe’s currency partners are becoming even deeper and more widespread than was previously evident, raising new doubts about whether the group can resolve the regional debt crisis that has simmered for more than a year.  Gloomy investors on Monday drove down Europe’s stock indexes by about 2 percent, while the euro¹ fell nearly 1 percent against the dollar², touching a two-month low.  Meanwhile, yields rose on 10-year Spanish and Italian bonds, reflecting a market perception that the risks are rising that those two indebted nations might be following the downward spiral of Greece. Greek 10-year bonds reached a record 16.8 percent as investors demanded a high premium for holding them.  The markets seem to reflect the growing discord within the 17-member euro zone currency union, barely a year after European governments came together with a 750 billion euro ($1 trillion) safety net for debtor-nation members. Tensions also remain over whether to restructure Greece’s debt and force bondholders to take losses.

EU policy options narrow to avert Greek default -  (Reuters) - Europe's policy options to avert a Greek default are narrowing fast after the ECB and ratings agencies warned against even voluntary debt rescheduling and Athens highlighted its urgent need for more EU cash. Moody's became the latest agency on Tuesday to warn of a chain reaction of severe consequences for the 17-nation euro area if Greece were allowed to default next month, when it faces a 13.4 billion euro ($18.85 billion) funding crunch. Greece kick-started a stalled privatization program on Monday and promised tougher austerity measures and tax hikes to meet EU/IMF conditions for the release of a 12 billion euro loan tranche in June, vital to keep Athens afloat. But the leader of the conservative opposition, Antonis Samaras, rejected the new package of fiscal measures, rebuffing a key condition for extra European Union financial assistance -- a cross-party consensus to support reforms. "I am not going to agree to this recipe which has been proven wrong,"

ECB's Noyer Says Greek Restructuring a 'Horror' - European Central Bank Governing Council member Christian Noyer ruled out a restructuring of Greece’s debt, calling it a “horror story” that would leave the nation shut out of financing for years. “There’s no solution possible” for Greece other than its austerity program, Noyer, Bank of France governor, told reporters in Paris today. “Restructuring is not a solution, it’s a horror story.” If the country fails to meet the terms of its bailout, Greek government debt will be “ineligible as collateral” at the ECB, he said.  ECB leaders and European Union policy makers are clashing over how to prevent the currency region’s first default, after 256 billion euros ($360 billion) in bailouts to Greece, Ireland and Portugal failed to stop contagion from the debt crisis. A year after its 110 billion-euro rescue, Greece remains shut out of financial markets and the cost of insuring its debt against default is at a record high

The horror… the horror…We’re slightly late to this, but nevertheless, Monday’s statement by Christian Noyer, governor of the Bank of France and a member of the European Central Bank’s governing council, on the ‘horror’ of a Greek debt restructuring is well worth a read.He sets out the ECB’s view of why a restructuring means default and what dire consequences would follow. Via Bloomberg: If we restructure Greek debt, that means Greece defaults.And what are the consequences of a default? The banks with the most Greek bonds are Greek banks. The Greek banks themselves will be badly damaged.  Who will recapitalize the Greek banking system? The Greek state.Next there are the Greek insurers and pension funds who will be hurt. That means it will weigh on the Greek population’s savings, which could cause a drop in consumer spending and Greek growth will take a hit. This counters the Greek recovery.Then, what else is there in terms of Greek creditors? There’s the European public sector, European governments and the central banks. This is directly tapping the European taxpayer.

New Call to Greece to Sell Off Its Assets Luxembourg Prime Minister Jean-Claude Juncker said that Greece should set up an agency to privatize state assets along the lines of the German institution that sold off East German enterprises in the 1990s. "I would very much welcome it if our Greek friends would set up a state-privatization agency after the model of the German Treuhandanstalt," Mr. Juncker said in an interview with Germany's Der Spiegel magazine set to run Monday. Mr. Juncker, who is also chairman of the Eurogroup of euro-zone finance ministers, said such an agency should include foreign experts among its staff. "The European Union will accompany the privatization program as closely as if it were carrying it out itself," Mr. Juncker told the magazine, adding that Greece could gain more from privatizations than the €50 billion ($71 billion) it has estimated. Mr. Juncker also said a so-called soft restructuring, or extending the maturities of Greek debt, could only be considered once Greece has consolidated its budget. "Then we can consider to extend the maturities of public and private loans, and lower interest rates," Meanwhile, French Finance Minister Christine Lagarde signaled that Paris might support a rescheduling of Greek debt, warning that Greece is at risk of default if it doesn't do more to bring its public finances into order.

Greece Will Accelerate State Asset Sales to Stem Debt - The Greek government endorsed an accelerated asset-sale plan and 6 billion euros ($8.4 billion) of budget cuts to win extra aid and stem a market slide that threatens to swamp debt-laden euro-area nations.  Belgium had the outlook on its AA+ investment-grade credit rating lowered to negative by Fitch Ratings yesterday as the cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro-era high.  Europe’s debt crisis has deepened as euro political leaders clashed with central bankers after floating the prospect of extending maturities on Greek bonds. That “soft” restructuring may also be accompanied by more loans to Greece, which received a 110 billion-euro bailout last year, now that the government has delivered the additional budget cuts and pledged to speed asset sales.

Greece to sell telecoms, state bank, top ports immediately - Greece on Monday said it would "immediately" sell stakes in telecoms giant OTE, the main ports of Piraeus and Thessaloniki and state-owned Hellenic Postbank to help reduce its huge debt. "The cabinet decided to immediately proceed with the sale of stakes in OTE, the Postbank, the Athens and Thessaloniki ports and the Thessaloniki water company in order to frontload its ambitious privatisation programme," Finance Minister George Papaconstantinou said in a statement. "To accelerate the process, the creation of a sovereign wealth fund composed of privatisation and real estate assets was also decided," he said. The Greek government has been forced to constantly redraft its privatisation strategy as the country's economic impasse became increasingly apparent. It had originally aimed to raise just seven billion euros by 2013 and some of the sales, like that involving Hellenic Postbank, had been slated for later.

The A-Team, Greece and mud volcanoes - There was a mild A-Team echo at an Economist conference I co-chaired in Greece last week. Session after session considered the problems facing the Greek economy. Government ministers gamely listed their achievements to date and batted aside suggestions of restructuring. But the immensity of the task still ahead loomed over the discussions.  And then, in the penultimate session of the event, a metaphorical blowtorch appeared. A group of geology professors took to the stage to give a series of lengthy and impassioned presentations about Greece’s untapped offshore oil reserves. Suddenly, the talk was of mineral wealth that would solve Greece’s debt crisis at a stroke.  The presence of mud volcanoes in the Mediterranean, said one speaker, had signalled oil reserves for other countries. Greece has mud volcanoes, ergo Greece has oil. One slide teasingly showed potential revenues of €300 billion, against the country’s outstanding debt of €340 billion. The speakers slammed the government for failing to pursue exploration. The audience applauded wildly. Given a choice between grinding structural reform and living like the Saudis, who could blame them?

Greece crisis worsens amid political stalemate - A damaging political stalemate is threatening to plunge Greece deeper into crisis as hopes of cross-party support for further austerity measures were dashed on Tuesday by the main opposition leader. Antonis Samaras, head of New Democracy, the conservative party that earlier this month called for a renegotiation of the original €110bn (£95bn) bail-out, said he would not support additional austerity measures, totalling €6bn, to reduce the country's budget deficit.  His refusal to back the government could jeopardise both payment of the rescue package's next instalment, of €12bn due in June, as well as ongoing talks over a second bail-out, of as much as €60bn. The political wrangling came as Vince Cable, the Business Secretary, became the first UK politician to admit openly that Greece has no option but to restructure its €330bn of public debt.

Greek economic crisis highlights EU divisions - Greece's economic crisis highlighted Tuesday growing divisions at the highest levels in Europe over the rights and wrongs of a risky Greek debt re-scheduling or wider restructuring involving the banks. Markets fear that any debt restructuring -- which the ratings agencies have said they will treat as an outright default -- will increase the pressure on Italy and Spain, the eurozone's third and fourth-largest economies, just one year after a 110-billion-euro Greek bailout was supposed to stop the rot. The backdrop is not promising -- the economic recovery is slowing, rating agencies have downgraded Greece and warned on Italy, Spain's government is struggling to impose its austerity programmes and the financial markets are more than nervous. The European Union and International Monetary Fund bailed out Greece, then Ireland and Portugal in the hope of stabilising the eurozone's strained public finances but now Athens's massive debt problem has come back to the fore.

Juncker Strongly Against Full Restructuring of Greece’s Debt - Jean-Claude Juncker, who heads the group of euro-area finance ministers, said he is strongly against a full restructuring of Greece’s debt.  Euro-region countries may take further steps to help Greece with its debt crisis if the country meets all requests by the 17-member currency zone, he told reporters today in The Hague, where he and Belgian Prime Minister Yves Leterme met their Dutch counterpart Mark Rutte. A final assessment on new measures for Greece may come as early as next week, he said.  “As far as Greece is concerned, a certain number of requests to some extent have been met by the Greek government yesterday,” he said. “We were asking them to enlarge the privatization program and we were asking for further structural measures. If all these points are met by our Greek colleagues, then we have to consider,” along with the International Monetary Fund, if a disbursement at the end of June can be made.

Greek unions threaten strikes against latest debt action - Greek unions on Tuesday threatened strikes against a new tax drive and emergency privatisations by the government which is struggling to win over political opponents and avert a new debt crisis. "This policy must stop now," the country's second-biggest union Adedy said in a statement, announcing plans for a general strike in June. "These measures will bring down the living standards of small and medium classes by over 20 percent," said the union that represents civil servants. The main Greek union GSEE, which claims a million private-sector members, also intends to mobilise against the new austerity drive adopted by the government in order to clinch a vital slice of funds from the EU and the IMF. "Our response will come in the street,"

Is There Any Hope for Greece's Debt Problem? - NYTimes Room for Debate… Global markets slipped on Monday as worries rose about the euro zone's fiscal stability. Meanwhile, Greece's cabinet approved another package of spending cuts and asset sales in response to demands from euro zone partners -- including Spain and Italy -- that it move faster on austerity measures.  Skeptics are saying that Greece, facing loans of more than 150 percent of gross domestic product, will eventually have to restructure its debt — paying back less than face value.  What's the answer for Greece? If staying in the euro zone means living with austerity plans that could lead to years of high unemployment and recession, would leaving the euro be a sound option?

• The Euro Zone's Structural Problem - Simon Johnson, economist, M.I.T.
• Dump the Euro -  Desmond Lachman, American Enterprise Institute
• Beyond Austerity Plans - Barry Eichengreen, economist, U.C. Berkeley
• It's About Political Will -  Edward Harrison, Credit Writedowns.com
• How Banks Fueled the Crisis - Anat R. Admati, professor, Stanford University
• Expect More Bailouts -  Veronique de Rugy, George Mason University
• It Could Have Been Worse - Vanessa Rossi, Chatham House

Greece must restructure - Yesterday, I had the pleasure of talking on CNBC along with Marc Chandler of Brown Brothers Harriman about the European sovereign debt crisis. Here’s the background to what we said:

• Greece needs a strategic plan. At a minimum, a soft restructuring – that is to say, a voluntary reduction of interest rates and an extension of maturities – will happen sooner than later under the EFSF facility.
• Bank capital must be protected from immediate losses. Principal reduction has to be done with timing and in a way that considers the stress to Greek and foreign bank balance sheets.
• It is unclear whether the move to principal reduction will be messy. An involuntary default would clearly be messy. I don’t see this scenario as likely, and it certainly won’t happen in 2011.
• Neither Marc nor I mentioned a euro zone break-up. My view is still that some combination of monetisation and a voluntary default, hard restructuring package is the most likely scenario for Europe. When I handicapped scenarios after the Irish stress tests in late March, I felt this way. I still do now.
• Credit default swaps triggers can be avoided. My view is that a restructuring that involves maturity extension, interest rate and principal reduction via an exchange of bonds or a roll off of maturing issues does not necessarily have to involve a technical default that triggers credit default swap payments.

German FM: Greece may need more time — Germany's finance minister says Greece may need more time to implement reforms including a big privatization program, and is highlighting the risks that restructuring its debt would entail. For the past year Greece has relied on a €110 billion ($155 billion) package of bailout loans from other EU countries and the International Monetary Fund. In return, it has been implementing austerity measures, but has slipped on its targets. German Finance Minister Wolfgang Schaeuble noted in an interview that Athens has approved a privatization program, but was quoted as saying: "at the moment, it looks as though the Greeks could need more time."If a report from international debt inspectors due in June "comes to the conclusion that even that isn't enough, we have to find a solution," he added, according to the report. "Only then can the next tranche of the aid be paid out."Schaeuble did not elaborate on what that solution might be.

Greek debt restructuring bears high risks -Germany - Restructuring Greece's sovereign debt would be a leap in the dark since there is no comparable previous experience to act as a guide, Germany's finance minister said."A debt restructuring scenario bears high risks. It could result in an immediate maturing of all loans, with the corresponding consequences for Greek solvency," Wolfgang Schaeuble told business daily Handelsblatt in an interview published on Thursday."The fact that there is no experience about what happens when a country within a single currency area becomes insolvent causes added uncertainty." Schaeuble said past cases, such as Argentina's default in 2002, were completely different to the situation Europe faces with Greece in this respect. He also said the practicalities of exiting the euro zone were unfathomable.

Pimco Says ECB, Central Banks Have EU130 Billion of Greek Risk - The European Central Bank and the 17 central banks of nations sharing the euro have about 130 billion euros ($183 billion) of risk from Greek debt in the event of a restructuring or default, Pacific Investment Management Co.’s fund manager Andrew Bosomworth estimated.  “A default is not a desire, but it’s something that might be inevitable” for Greece, Bosomworth told journalists. In case of a default, the Greek central bank wouldn’t be able to recapitalize the country’s lenders, which have borrowed about 80 billion euros from the central banks that compose the Eurosystem, Bosomworth said. As a result, Germany, France and the other euro-region governments may need to recapitalize their central banks, he said.

Europe Investors Should Accept 'Soft' Default: Gross - Private debtholders, including euro zone banks, should accept a debt extension or other form of "soft default" to alleviate the debt burden for countries such as Greece if Europe wants a solution to the sovereign debt crisis, Bill Gross, Co-CIO of PIMCO told CNBC on Tuesday. "We wouldn't go so far as to suggest that Greece or any other country leave the euro," Gross said. "What I think needs to be done....is for private debtholders and Euroland banks...to take a debt extension or some kind of soft default that alleviates the burden for these countries." Gross admitted it was difficult to suggest that countries such as Germany, which have been more forthright and fiscally conservative, should help peripheral nations. "But if they want a consolidated solution, that's really the way to go,"

Commissioner warns Greece may exit euro - GREEK EU commissioner Maria Damanaki has raised the prospect of her country being forced out of the euro zone if it does not quickly assert control over its wayward public finances.Amid a renewed bout of market turmoil as the European authorities squabble over the failing Greek bailout, Ms Damanaki said in a prepared statement that the country’s membership of the single currency is now under threat. She is the first senior European official to publicly declare that the debt crisis which has roiled the single currency area for more than 18 months could result in a euro member reverting to its old currency.

After the Greek Default - Feldstein - The Greek government, the European Commission, and the International Monetary Fund are all denying what markets perceive clearly: Greece will eventually default on its debts to its private and public creditors. But, even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming. And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability. More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again. In that case, Greece should be able to finance its future annual government deficits from domestic sources alone.

Are Greek bonds pricing in a massive default? - Martin Feldstein reckons that the market is pricing in a “massive” Greek default:Even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability. More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again. I don’t think this is true. The Greek yield curve is odd: 3-month T-bills yield about 6%, the 30-year bond yields about 10.8%, and the big spike is at 2 years out, where the yield is about 25%. Clearly the market isn’t pricing in any kind of massive default over the next three months

Lagarde, Juncker, and Greece’s solvency - Christine Lagarde’s international campaign to become the next head of the IMF is an attempt to maximize her credentials as the choice not only of Europe but of the rest of the world as well. The job is hers, at this point: once the US falls in behind Lagarde there’s no question that Lagarde will get the job, and with Hillary Clinton now waxing enthusiastic about how “we welcome women who are well qualified and experienced to head major organizations such as the IMF”, it’s going to be hard for the US to support anybody else. So Lagarde’s latest world tour should be seen as maneuvering to make her life as easy as possible when it comes to dealing with increasingly-powerful shareholders such as China and Brazil, after she starts in her new role. Meanwhile, Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, took it upon himself to come out in public and say just how bad the Greece situation has become. The key date we’re counting down to is June 29 — that’s the day on which the IMF is due to disburse its next tranche of aid to Greece. But before that can happen, the “troika” — the IMF, the ECB, and the EU — have to agree that all of Greece’s funding needs for the next 12 months have been covered or guaranteed by someone. Which they haven’t. “I don’t think that the troika will come to this result,” said Juncker.

IMF says it would force Greece into an immediate default unless EU agrees further funding for 2012 - Reuters has a story this morning, according to which the IMF will make any further release of financial aid under the current package dependent on a decision by the EU to secure funding for Greece for 2012. There is a time inconsistency problem here: The EU is all over the place in the discussion on reprofiling, and a vote on a second loan package for Greece is not expected until the autumn. Greece will, however, run out of funding in July, which would mean that the country would immediately cease all public payments. Reuters quotes from a story in the Dutch financial newspaper Het Financieele Dagblad according to which the EU was secretly preparing for a voluntary debt rescheduling – or reprofiling – despite increasingly dire warnings from the ECB and ratings agencies.  The Reuters article included a warning from Moody’s according to which even a reprofiling would constitute default. Fitch also said that any maturity extension, including a voluntary one, would constitute default. And S&P was even more specific say that any changes to a bond that reduced its net present value would constitute default – leaving virtually no options.

Greece Is 'Insolvent,' Unlikely to Honor Debt, Issing Says - -- Greece will probably be unable to meet its obligations as the euro region's most-indebted nation is insolvent, according to former European Central Bank Chief Economist Otmar Issing.While it is "not physically impossible" for Greece to honor its obligations, repayment is unlikely, Issing, 75, said at a press conference. The region's debt crisis, which has also forced Ireland and Portugal to seek bailouts, has left the euro in a "critical" condition, Issing said. "I'm skeptical about Greece," said Issing, who joined the ECB a year before the euro's inception in 1999 and stayed there until 2006. "Greece is not just illiquid, it's insolvent."

IMF May Not Pay Next Greek Loan Tranche -Greece might be denied the next tranche of financial aid if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months, Eurogroup President Jean-Claude Juncker said Thursday. "I'm not the spokesman of the International Monetary Fund, but the rules say they can only disburse if there is a financing guarantee for the 12-month period," Juncker told reporters at a conference in Luxembourg. "I don't think that the troika will come to the conclusion that this is given. If the Europeans have to realize that the disbursement of the IMF before June 29 can't operatively happen, the expectation of the IMF is then that the Europeans will take the place of the IMF," he added.

No deal in Greece over austerity measures - Greek political leaders failed on Friday to agree on further austerity measures to avert a new debt crisis, jeopardising further bailout funds from the EU and IMF urgently needed to keep the eurozone member afloat. The talks called by Greek President Carolos Papoulias came up empty with time running out to iron out differences between Europeans and the IMF on how to deal with a new deadlock materialising in Greece's economic rescue package. Despite a year of imlementing tough austerity measures, Greece's recovery programme appears dead in the water as all the main participants foresee imminent trouble ahead. Friday's talks were held after the IMF warned on Thursday that it could not extend further bailout funds to Greece unless the government can deliver on its commitments to stabilise its finances. International Monetary Fund spokeswoman Caroline Atkinson warned late on Thursday that it needed "assurances" on how Greece will pay its bills.

IMF may withhold Greece aid, warns top euro-zone minister - A TOP euro-zone policymaker has suggested the International Monetary Fund may withhold its payment next month on Greece's 110 billion euros ($146bn) bailout, forcing Europe to scramble to plug the gap.  Luxembourg Premier Jean-Claude Juncker, who heads the conclave of euro-zone finance ministers, suggested last night that an important review of the bailout program might conclude that the amounts pledged to Greece aren't enough to carry it through the next 12 months. If that happens, it could threaten the IMF's participation. The fund's rules, he said, require that a full-year plan be in place before it writes any more cheques. "I don't think that the troika will come to the conclusion that this is certain," said Mr Juncker, speaking at a conference in Luxembourg and referring to the delegation of European Commission, European Central Bank and IMF officials charged with presenting a report on Greece's progress next week.

IMF May Withhold Greek Aid: Juncker - Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the International Monetary Fund may withhold aid for Greece as questions mount about how the country can avoid default next year.  “There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Juncker said today at a conference in Luxembourg. “I don’t think that the troika will come to the conclusion that this is given,” he said.  Officials from the European Union, the IMF and the European Central Bank will complete their review of Greece’s progress in meeting the bailout terms next week. While the terms of Greece’s rescue last year assumed it will be able to tap the market for financing in 2012, that’s looking unlikely as its bonds slide. That puts Greece at risk of default, increasing the risk tied to any further disbursement of IMF funds.

Threat of IMF withholding Greek aid spooks markets (Reuters) - The International Monetary Fund could withhold the next slice of aid to Greece due next month, the head of euro zone finance ministers said on Thursday, spooking markets with the possibility of default. European stocks fell and safe haven bond futures rose after Jean-Claude Juncker said the IMF expected the European Union to step in if it were unable to release the June aid tranche, but that would be impossible. Greece's finance minister said this week that if the next 12 billion euro ($17 billion) payment, of which 3.3 billion euros is from the IMF, was not forthcoming, the country would be unable to meet its obligations and would default. Juncker said on Thursday: "If the Europeans have to acknowledge that the disbursement from the IMF on June 29 cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF's portion of the financing. "That won't work because in certain parliaments -- Germany, Finland and the Netherlands and others, too -- there is no preparedness to do so," he told a conference.

Next EU/IMF loan tranche to Greece in serious trouble - We are once again at a dangerous moment in the crisis. We have already reported that the IMF may refuse to pay the next, and fifth loan tranche to Greece, which totals €12bn, by June 29. The IMF’s share of that tranche is €3.3bn. Jean-Claude Juncker came out yesterday, as reported by Frankfurter Allgemeine, that an IMF refusal to continue the payments would throw Greece into an immediate, and full default.  "If the Europeans have to acknowledge that the disbursement from the IMF on June 29 cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF's portion of the financing. That won't work because in certain parliaments -- Germany, Finland and the Netherlands and others, too -- there is no preparedness to do so." Juncker is obviously piling massive pressure on Greece and the creditor countries to ensure the conditions for further loan disbursements. The big issue for the IMF is not only non-compliance on the part of the Greeks, but the most important problem is the lack of readiness by the EU to secure follow-on financing in 2012. So we are at an impasse: The IMF won’t do anything until the European agree to a 2012 finance package, while the Europeans wait for the IMF’s review to come out before they can agree on such a package. Dutch PM Mark Rutte, was quoted by Reuters as saying yesterday: “"We are looking very carefully at what the IMF does ... and if they don't say a new tranche in loans should go the Greeks, then we won't either."

Greek leaders fail to agree as IMF deadline looms - Greek leaders meeting in Athens have failed to agree on Prime Minister George Papandreou's new austerity plan. Conservative leader Antonis Samaras rejected the measures, saying they would "flatten the Greek economy and destroy Greek society". Mr Papandreou, a Socialist, had been trying to secure cross-party agreement for further cuts. The chairman of the eurozone finance ministers has warned the IMF may not extend further bail-out payments. Luxembourg Prime Minister Jean-Claude Juncker said IMF rules might stop it paying because Greece could not guarantee its solvency for the next year. Mr Papandreou's government began a programme of privatisations on Thursday, but Mr Juncker has said the privatisation plan needs to be more ambitious. A 12bn-euro ($17bn; £10bn) payment is due to be made to Greece on 29 June, 3.3bn euros of which should come from the IMF.

Why a Greek Default Would be Worse Than Lehman Brothers' Collapse (CNBC) If Greece defaults on its debt, the direct secondary effects on financial institutions could be much worse than what we saw after the collapse of Lehman Brothers. The collapse of Lehman Brothers sent shockwaves through the global financial system—in part because it revealed that the United States government was willing to let a large, interconnected, complex financial company go bankrupt. Panic erupted, threatening the financial stability of other companies.  But the actual direct effects were few.  Lehman’s institutional creditors were generally required to reserve some capital against Lehman’s collapse. This greatly diminished the direct knock-on effects of Lehman’s bankruptcy. .  There is roughly 270 billion Euros in outstanding Greek sovereign debt. Banks—mostly European banks—hold around 100 billion Euros of Greek bonds. Insurance companies, pensions funds and central banks hold most of the other 170 billion. For the most part, these holders of Greek debt have not had to reserve any capital against losses. This means that most of the holders of Greek debt will feel the full brunt of the losses, which raises the question of whether they are adequately capitalized to take the loss.

Irish face junk status if Greece restructures - Moody’s has warned that Ireland could be pushed further into financial turmoil if Greece restructures its debt, saying bailout recipients could have debt downgraded to “junk” status if Athens defaults. Amid renewed market attention on Spain and anxiety about new credit downgrades of Italy and Belgium, Moody’s made it clear yesterday that a Greek default would be “highly destabilising” and would have implications for the creditworthiness of bond issuers across Europe. Alastair Wilson, Moody’s chief credit officer in Europe, said such an action would “potentially” result in Ireland and Portugal receiving a “junk” rating. “If there were to be a Greek default there could potentially be multi-notch downgrades to the weakest sovereigns.” Any junk rating on Irish sovereign debt would severely compromise the Government’s effort to regain entry into private debt markets.

Belarus Just Devalued Its Currency By 56% - When it comes to currency warfare, one can be polite and gentlemanly about it, like Brazil for instance, which every day, and sometimes on several occasions during the day, will proceed to buy dollars in an attempt to keep one's own currency lower. Or one can do what the Belarus central bank just did, and officially devalue one's currency, in this case the Belarus ruble, by 56% overnight, against every currency out there. At this point, it sucks (that is a technical term) to be holding any exposure in BYR. Luckily for those who held their 'money' in the form of gold and silver, they just got an instantaneous 56% value preservation and a relative boost in their purchasing power with just one central bank announcement. Also, any and all indebted parties who have BYR-denominated debts are throwing one big party tonight, as their debt was just cut by more than half. And yes, the Greeks are jealous with envy.

S&P warning heralds tough times ahead for Italy - Standard & Poor's surprising decision to revise downward its outlook for Italy could mark the start of increased market scrutiny on the euro zone's third-largest economy, which faces tough challenges that it is probably unable to meet. Italy has escaped the brunt of the euro zone debt crisis that has engulfed Greece, Ireland and Portugal, due largely to a prudent fiscal policy and low levels of private debt. But if markets begin to focus more on the country's appalling growth record, weak reform prospects and the grim implications for reducing its mountain of public debt, then Italian bond yields will rise and its situation could become untenable. Italy's public debt stood at 119 percent of gross domestic product at the end of 2010 -- second only to Greece in the euro zone. The government last month said it would remain above that level both this year and next. But the real and interlinked problem for Italy is growth. For well over a decade, when the rest of the euro zone goes into recession, Italy has gone into a deeper one, but when the rest of the euro zone recovers, Italy's rebound is weaker.

Banks’ exposure to Italy dwarfs risk from PIGS - Further jitters at the eurozone periphery today with Irish, Spanish and Greek sovereign yields higher, and news that Spanish banks tapped the ECB for €140bn during July. Of particular interest, demand for Italian bonds dropped significantly. This matters because European banks are exposed very heavily to Italian sovereign debt – the top 91 banks own €100bn of the stuff in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn.

Euro-Zone Growth Slows to 7-Month Low - Growth in the euro zone's private sector eased more than expected to its weakest pace in seven months in May, led by a sharp slowdown in manufacturing, the preliminary results of a survey by financial-information firm Markit showed Monday. The flash reading of the euro zone's composite-output index, a gauge of activity based on partial results of a survey of manufacturing and services firms, dropped to 55.4 in May from 57.8 in April. A reading above the 50 level indicates an expansion in activity. The level of activity is in line with the average of last year, but the fall in the main index was the sharpest since November 2008, Markit said. Economists were expecting the headline reading to drop to 57.4. The manufacturing-purchasing-managers' index dropped much more than expected to 54.8 in May, from 58.0 the previous month, while the euro-zone services-business-activity index fell to a five-month low of 55.4, from 56.7 in April. Economists had predicted a manufacturing reading of 57.5 and an unchanged services reading of 56.7.

Right. Italy. Serious.  Oh boy, oh, just lovely. Where to begin? The Eurozone mess spreads faster than wildfire. We should start considering the possibility that it doesn't matter much who will next lead the IMF, because that person won't be in office until June 30 at the earliest, and who knows what the situation will be by then?  There's a lot of resilience left in Europe, it's rich and won’t blow up easily, but it still might do so fast. All it would seem to take is rifts, divisions, fights etc. to emerge. Already, the EU finance ministers and the ECB don't see eye to eye anymore, quarrels between countries can't be all that far off, and governments will start to fall at increasing rates too. Argentina had how many presidents in no time at all when its last major financial collapse hit? After Greece, Ireland, Portugal and Spain, Italy is now joining the ranks of increasingly exposed economies. And as always, the denial levels are deafening. Don't forget Eurogroup head honcho Jean-Claude Juncker's recent words, though: "When it gets serious, you have to lie". Here's guessing Jean-Claude thinks this is serious.

Crisis creeps up on Spain and Italy - The eurozone debt crisis is expanding to Spain and Italy, as bond spreads in both countries rose by close to 100 basis points. Italian 10-year spreads over German bunds have risen to 1.796%, and Spanish spreads to 2.522%, as markets expressed concerned over S&P’s downgrade warning for Italy, and Spain’s political upheavals. The euro fell below $1.40 at one time, and traded at $1.4054 this morning.  The Financial Times quoted a fixed income strategist as comparing the contagion of the crisis to a a group of climbers roped together. If country slips, the others are affected as well. As a result of these market tensions yesterday, S&P released a statement saying that it does not believe Italy to need financial aid as there is no problem with the country’s external balances (current account, net external debt).  Spiegel magazine had the story (hat tip Reuters) that central banks in the eurozone massively understated the risks associated with their lending policies on their balance sheets, giving rise to large potential losses. The report went into some detail.

Italy is the elephant in the euro room, not Spain - Looking through the latest round of EU GDP data, one thing is becoming increasingly obvious: when it comes to future monetary policy decisions at the ECB, and to exactly how many more interest rate hikes we are going to see, then the performance of the Italian economy is going to be critical. The growth pattern now is clear enough: Germany and France move forward at a lively pace, while the so called “peripheral” economies (Portugal, Ireland, Greece, and Spain) either remain in or continually flirt with recession. They are constrained by the combined burden of their lack of international competitiveness, their over-indebtedness and the contractionary impact of their austerity programmes. In this sense, given its size, Italy is in a key position to tip the balance between core and periphery one way or the other. And the fact that, growth in the Italian economy seems once more to be grinding to a halt is not good news in this sense, with the quarterly gowth rate falling back from a quarterly 0.6% in Q2 2010, 0.5% in Q3, 0.1% in Q4 and 0.1% again in Q1 2011.

Belgium's Debt Outlook Revised to Negative by Fitch on Political Stalemate - Belgium had the outlook on its debt rating lowered to negative at Fitch Ratings, which joined Standard & Poor’s in saying that political deadlock complicates efforts to cut the euro area’s third-highest debt load.  Fitch may cut Belgium’s AA+ rating, the second-highest investment grade, should the country fail to adhere to its deficit targets, it said in a statement today. Belgium needs to reduce its budget deficit to less than 3 percent of gross domestic product next year and balance its books by 2015, as agreed with the European Commission. A caretaker administration has ruled Belgium since elections last June as north-south tensions in the linguistically divided nation led to the longest postwar political stalemate in Western Europe. A strengthening economic recovery has helped shrink the deficit to an estimated 3.6 percent of GDP this year from 5.9 percent in 2009, though reducing the debt will require political resolve, Fitch said.

Get on with it - Aside from some minor disagreements among the panellists, the overall impression was that a solution is simple: restructure wobbly debt and write-down dud loans without delay. This is, more or less, the approach that Sweden took following banking crises in the early 1990s. Bo Lundgren, a key Swedish minister during the 1990s debacle, said that his greatest hope for Europe's financial regulators was that they simply "learn lessons". He himself has been busy dispensing these lessons in one financial capital after another in his guise as "Mr Fix-It".. When other explanations for the fiscal indiscipline in the euro area's periphery seemed insufficient, someone would inevitably suggest that innate cultural factors were to blame. Half-joking, a proposal was mooted for improving Europe's monetary union by splitting it into a Protestant North and a Catholic South (or cold and hot countries, as a more secular-minded attendee suggested).

Spanish protesters clash with police over clean-up (video) Protesters who have camped out in Spanish squares for the past 12 days clashed with police for the first time on Friday after authorities dismantled a camp in the centre of Barcelona. Police and clean-up trucks moved into the Plaça de Catalunya, with about 200 protesters being corralled peacefully in the centre of the square. Protesters were told they were not being evicted and would be allowed back, but municipal workers took away tents, mattresses, tarpaulins, computers and materials used to build the camp. Trouble erupted when thousands of supporters arrived and blocked access roads. Police cleared routes out of the square by using batons, reportedly injuring 99 people and arresting two.

Is the euro zone headed for an Arab Spring? - How can I think genteel Europe could see public upheaval massive enough to overthrow long-entrenched, democratic regimes, in the way Arab countries have witnessed popular movements upset the political order? Well, maybe the Europeans aren't ready to storm the Bastille, so to speak, but more and more of them are in revolt against the euro zone, or more specifically, the policies imposed in a (so far fruitless) attempt to quell its debt crisis. That dissent is taking place at the highest levels of the euro zone's leadership as well. The consequences of this growing resentment and disagreement could be dire – they are making the debt crisis harder to fix, heightening the cost of resolving it, and increasing the chances that eventually members of the monetary union will decide their fortunes would be better without the euro.

Michael Hudson: Breakup of the euro? Is Iceland’s rejection of financial bullying a model for Greece and Ireland? - Yves here. This piece describes how voter opposition may derail rule by bankers via IMF, European Commission, and ECB austerity programs in Europe. Last month Iceland voted against submitting to British and Dutch demands that it compensate their national bank insurance agencies for bailing out their own domestic Icesave depositors. This was the second vote against settlement (by a ratio of 3:2), and Icelandic support for membership in the Eurozone has fallen to just 30 percent. The feeling is that European politics are being run for the benefit of bankers, not the social democracy that Iceland imagined was the guiding philosophy – as indeed it was when the European Economic Community (Common Market) was formed in 1957. By permitting Britain and the Netherlands to blackball Iceland to pay for the mistakes of Gordon Brown and his Dutch counterparts, Europe has made Icelandic membership conditional upon imposing financial austerity and poverty on the population – all to pay money that legally it does not owe. The reason why the EU has fought so hard to make Iceland’s government take responsibility for Icesave debts is what creditors call “contagion.” Ireland and Greece are faced with much larger debts. Europe’s creditor “troika” – the European Central Bank (ECB), European Commission and the IMF – view debt write-downs and progressive taxation to protect their domestic economies as a communicable disease.

Supercore! (Wonkish) - Krugman - Two questions about inflation: 1. What would the ECB be doing if it were the Fed? 2. Why have some measures of US core inflation ticked up slightly recently? On the first question, Eurostat offers us a consumer price index sans energy, food, and tobacco, which is more or less US-style core. Here’s what the 12-month change looks like: The eurozone looks like the United States — there is no good reason to raise rates. To be fair, on the labor side things look a bit different: there are actual labor shortages in some parts of Europe, reflecting both low labor mobility and the extreme asymmetry of the European shock. But raising rates for all of Europe because parts of Germany are doing well is, as I’ve written before, worse than the one-size-fits-all policy euroskeptics warned about; it’s one size fits one. And the case for a somewhat higher inflation target is even stronger for the euro zone than it is for the US.

European Bond and CDS Spreads - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released yesterday (graph as of May 24th). From the Atlanta Fed:  Since the April FOMC meeting, peripheral European bond spreads over German bonds continue to be elevated, with those of Greece, Ireland, and Portugal setting record highs. The 10-year Greece-to-German bond spread has widened by 192 basis points (bps), through May 24. The spreads for Ireland and Portugal have soared higher by 91 bps and 68 bps, respectively, over the same period. The spreads for Greece, Ireland and Portugal were all at record highs.  Spreads for Spain and Italy have increased recently, but are still much lower than for Greece, Ireland and Portugal. The second graph shows the Credit Default Swap (CDS) spreads: From the Atlanta Fed:  The CDS spread on Greek debt has widened about 47 basis points (bps) since the April FOMC meeting, while those on Portuguese and Irish debt continue to be high. The WSJ mentioned a new unreleased IMF paper that examines "debt restructurings by countries using a common currency": In Standoff Over Greece, Will ECB Have to Fold?

Climbing a Debt-Driven Wall of Worry - How likely is it that a country will default on part or all of its national debt in the next five years?  That's a question that we can use the reported spreads in Credit Default Swaps (CDS) for debt issued by sovereign nations to answer!  Since credit default swaps are a kind of insurance policy that only pays out if a borrower defaults against the owner of the debt, the cost of these financial instruments will depend greatly upon the likelihood of a default occurring.  That question is immediately relevant for nations like Greece and Venezuela, both of which are above the critical 50% threshold for five-year CDS spreads, suggesting that both are very likely to default on their government's debt within the next five years.   But how can we use the CDS spread data that we can find on the web to estimate what the odds are that the country in question will go into default? We've sampled CDS spread data from CMA DataVision on 21 May 2011, which we used to reverse engineer a formula to estimate the cumulative probability that a nation will default on its government-issued debt within the next five years, which we've presented in the chart below

The Link Between CDS Spreads and Interest Rates - Now that we've connected the dots between the CDS (Credit Default Swap) spreads on government-issued bonds and the probability that the government will default on that debt in the near future, how does that risk tie into the yields on the bonds?  It's not like bond investors are clueless in the situation where a government might not make good on its debt. Although Credit Default Swaps have only become well known since the 1990s, bond investors have had to be on the watch for potentially deadbeat governments for centuries.  So they've come to do what lenders do when they make deals with people who have a higher probability of running out on their obligations. They charge them higher interest rates. And the more likely the borrower might run out on them, the higher the interest rate they charge.  The same is true for governments. The chart below shows what we found when we matched the 10-Year government bond rate for a number of nations with the 5-Year CDS mid-spread values, both of which we recorded during the period from 20 through 24 May 2011:

How to destroy the web of Debt - Why have we heard nothing in the media or parliament about A People's or a Sovereign Debt Jubilee? Is it because a People's Debt Jubilee is simply a nice but unworkable fantasy dreamt up by crackpot bloggers like me? This is what I have been wondering. And then in response to the Jubilee article, a regular contributor to this blog, Hawkeye, wrote to me and suggested I take a look at "The Great EU Debt Write Off". The web site contains details of a 'proof of concept' study of the Jubilee idea done by Professor Anthony  Evans and his colleagues at The ESCP Europe Business School. The study used up to date figures from the IMF and the Bank of International Settlement (BIS) to see what would happen if Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany simply cross cancelled all the foreign debt they owed each other - a Sovereign debt jubilee. The web of mutually destroying debt they studied looks something like this. The image is from a New York Times article called Europe's Web of Debt.

U.K. Deficit Widens More Than Forecast to $16 Billion as Income Declines - Britain posted its largest budget shortfall for any April since monthly records began in 1993 as tax revenue fell and spending climbed, casting doubt on whether the government can meet its deficit-reduction target this year.  Net borrowing was 10 billion pounds ($16.2 billion), compared with 7.2 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 12 forecasts in a Bloomberg News survey was for a shortfall of 6.5 billion pounds. Revenue fell 0.8 percent, partly reflecting a one-time boost from a bank bonus tax a year ago, and spending rose 5 percent.  Chancellor of the Exchequer George Osborne may find it hard to meet his deficit-cutting goals as the economy struggles to gain momentum, the opposition Labour Party and some economists say. Growth stagnated in the six months through March and the government will step up its program of cuts this year.

China agency downgrades UK sovereign credit rating - A Chinese ratings house on Tuesday downgraded Britain's sovereign credit rating over what it said was the country's gloomy economic growth prospects and weakening ability to pay back debt. Dagong Global Credit Rating Co. Ltd. downgraded the country's local and foreign currency sovereign credit rating to A+ from AA- with a "negative" outlook for its solvency, the company said in a statement.The downgrade reflected "the deteriorating debt repayment capability of the UK and the difficulty in improving its sovereign credit level in a moderately long term in the future," it said. Uncertainties arising from the Bank of England's future monetary policy and the impact of debt-laden European countries on the British financial system are "likely to further worsen the government's fiscal status", it said.

UK Uncut ‘emergency operation’ targets banks in protest at NHS changes - Campaigners dressed in doctors' coats and armed with fake blood are planning to close 30 high street banks on Saturday in the biggest direct action to date against proposed changes to the NHS. More than 30 groups across the country are expected to occupy major high street banks, turning them into mock hospitals and setting up "operating theatres" inside to draw attention to the banks' role in creating the deficit. Dubbed "the emergency operation", the national action has been organised by the anti-austerity campaigning group UK Uncut, which has staged a series of campaigns against tax avoidance and public spending reductions since it was formed in October. Health worker and UK Uncut supporter Rosie Beech, 29, who will be joining the protest, said: "David Cameron said he wasn't going to cut the NHS. He lied. 50,000 NHS staff will lose their jobs, whilst the taxpayer continues to subsidise the banks. Why is the government cutting the NHS and privatising what's left rather than forcing our broken banking system to pay up?"

Why the British economy is in very deep trouble - Here’s something for the Chancellor and the Office for Budget Responsibility (OBR) to chew on: a warning from Dr Tim Morgan, the global head of research at Tullett Prebon, that the deficit reduction plan won’t work and the UK is headed for a debt disaster.Morgan says sectors that account for nearly 60 per cent of UK economic output are critically dependent on debt (public or private) and set to contract rather than expand. This will render economic growth implausible and means the burden of public and private debt will prove too heavy for the nation to carry: Over the past decade, the British economy has been critically dependent on private borrowing and public spending. Now that these drivers have disappeared – private borrowing has evaporated, and the era of massive public spending expansion is over – the outlook for growth is exceptionally bleak. Sectors which depend upon either private borrowing or public spending now account for at least 58% of economic output. These sectors are now set to contract rather than expand, which renders aggregate economic growth implausible. And, without growth, there may be no way of avoiding a debt disaster.

We Just Got The Ultimate Proof That Austerity Has Failed In The UK - We've been pointing to UK's shambolic economic data as evidence that austerity is failing in the UK, but then of course, the whole point is to reduce public sector debt, so if that were happening, then the pain might be worth it. Well, it isn't.Her Majestey's Treasury (link available on this page) just announced the following: (T)he public sector current budget was in deficit by £8.4 billion; this is a £2.8 billion higher deficit than in April 2010, when there was a deficit of £5.6 billion;  (P)ublic sector net borrowing was £10.0 billion; this is a £2.7 billion higher deficit than in April 2010, when net borrowing was £7.3 billion; Both numbers are worse than expected. Expectations were for net borrowing of just over £6 billion Meanwhile, public debt to GDP just keeps rising.  Sky News points out that this is the worst ever April for borrowing.

More Effects of Austerity in the UK - The outlook for the UK in the midst of its austerity program looks worse and worse. From the FT this morning: Why the British economy is in very deep trouble. Here’s something for the Chancellor and the Office for Budget Responsibility (OBR) to chew on: a warning from Dr Tim Morgan, the global head of research at Tullett Prebon, that the deficit reduction plan won’t work and the UK is headed for a debt disaster. Morgan says sectors that account for nearly 60 per cent of UK economic output are critically dependent on debt (public or private) and set to contract rather than expand. This will render economic growth implausible and means the burden of public and private debt will prove too heavy for the nation to carry: These sectors are now set to contract rather than expand, which renders aggregate economic growth implausible. And, without growth, there may be no way of avoiding a debt disaster....Short of almost unthinkably drastic restructuring, there may be no way out of Britain’s low-growth, high-debt trap. Not surprising, but still depressing.

Now is not the time to raise interest rates - The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now: no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has. The recent consumer price inflation rates above 4 per cent result from this year’s value added tax increase and the recent energy price shock. Removing those factors, UK inflation has averaged 1.5 per cent over the past year – including any remaining effects of sterling’s past decline. Of course, higher taxes and energy prices shrink British real incomes, but the monetary policy committee was right not to respond to them, and should not do so now. Setting monetary policy in response to short-term commodity price gyrations would only destabilise the UK economy and create greater uncertainty about future inflation. These temporary factors are a distraction from the post-crisis dynamic of the UK economy – weak recovery, no wage pressures and, yes, declining headline inflation to come. The Bank’s monetary easing to date, combined with the global stimulus of 2008-09 and an aggressive financial clean-up, put a floor under developments and kept core inflation above zero. But recovery from a financial crisis takes years. Tightening fiscal policy with no offset from additional monetary easing will strengthen the underlying disinflationary pressures – as in Japan in 1997, when VAT was raised without a monetary response