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

Saturday, May 21, 2011

week ending May 21

Fed balance sheet hits another record (Reuters) - The U.S. 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 $2.742 trillion in the week ended May 18 from $2.729 trillion the prior week.The central bank's holding of U.S. government securities grew to $1.495 trillion on Wednesday from last week's $1.466 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 $923.58 billion, from $927.02 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 $120.76 billion from $125.12 billion a week earlier.

Fed balance sheet grows to record $2.762 trillion - The Federal Reserve's balance sheet expanded to a record $2.762 trillion in the week ended May 18 from $2.749 trillion in the prior week, the central bank said Thursday. The Fed continues to buy bonds to try to lower long-term interest rates under its plan, dubbed quantitative easing or QE2, to purchase $600 billion of Treasurys by the end of June. Fed officials have begun to discuss how to shrink the balance sheet, according to the minutes of their April meeting released Wednesday. Fed officials want to return to holding only Treasurys and get the balance sheet back to pre-crisis levels. The Fed's assets and liabilities were only $870 billion in December 2007. Most Fed officials preferred that asset sales begin after a hike in short-term rates, and want the sales to be put on a predictable and preannounced timetable. The report shows that the Fed's holdings of Treasurys rose to $1.495 trillion from $1.466 trillion in the previous week. The Fed's holdings of mortgage-backed securities declined to $924 billion from $927 in the prior week

US Fed Total Discount Window Borrowings Wed $14.98 Billion‎ - The Fed's asset holdings in the week ended May 18 increased to $2.762 trillion from $2.749 trillion a week earlier, it said in a weekly report released Thursday. Holdings of U.S. Treasury securities rose to $1.495 trillion on Wednesday, from $1.446 trillion the previous week.Thursday's report also showed total borrowing from the Fed's discount window slid to $14.98 billion from $15.33 billion a week earlier. Borrowing by commercial banks edged up, but remained low. It rose to $5 million Wednesday, from $3 million a week earlier.U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, fell to $3.449 trillion from $3.460 trillion.U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.704 trillion from $2.699 trillion. Holdings of agency securities slid to $745.01 billion from the previous week's $761.40 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 19, 2011

FRB: Recent balance sheet trends - Credit and Liquidity Programs and the Balance Sheet  (Fed Graphics)

Federal Reserve board debate turns back to exit strategy, minutes show - US Federal Reserve officials turned their focus to tightening monetary policy at their last meeting, laying out a blueprint for how to go about unwinding their easy-credit policies, but didn't say when the economy may be ready for such a move. After debating for most of the past year how to provide further monetary stimulus for an economic recovery that stumbled last northern summer, officials had an extensive discussion about what is known as their exit strategy, minutes of the April 26-27 Federal Open Market Committee meeting showed today. At the FOMC meeting, the central bank affirmed plans to complete a $US600 billion ($565bn) bond-buying program at the end of June, marking the end of a monetary-easing cycle that began in 2008. The stage is now set for some challenging decisions about when and how to start closing the credit tap in the face of both high unemployment and looming threats of inflation.

Fed Debate Shifts Back To Exit Strategy - After debating for most of the past year how to provide further monetary stimulus for an economic recovery that stumbled last summer, officials had an extensive discussion about what is known as their exit strategy, minutes of the April 26-27 Federal Open Market Committee meeting showed Wednesday. At the FOMC meeting, the central bank affirmed plans to complete a $600 billion bond-buying program at the end of June, marking the end of a monetary- easing cycle that began in 2008. The stage is now set for some challenging decisions about when and how to start closing the credit tap in the face of both high unemployment and looming threats of inflation.The first step, as Fed Chairman Ben Bernanke indicated in a press conference following the FOMC meeting, will be a decision to allow the Fed's portfolio of some $900 billion in mortgage-backed securities to mature without reinvesting the proceeds, which will shrink its overall balance sheet, the minutes indicated. Accompanying that decision, or possibly following it shortly thereafter, will be a decision to also let around $1.5 trillion in Treasury holdings to gradually run down.

FOMC Minutes: Exit Strategy Discussion - The Bernanke press conference after the FOMC meeting covered some of discussion in the statement. From the April 27, 2011 FOMC meeting. There is a lengthy discussion on the eventual exit strategy, although it clearly will not happen soon. In addition, nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to gradually reduce the size of the balance sheet. It was noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying that that decision should be made in the context of the economic outlook and the Committee's policy objectives. In addition, changes in the statement language regarding forward policy guidance would need to accompany the normalization process.

Factbox: Fed's April debate on exit strategy- The U.S. Federal Reserve policymakers discussed how to eventually normalize the stance of monetary policy at their April meeting. Minutes of the meeting released on Wednesday showed that while they did not make any decisions on their strategy for normalizing policy, the did agree on principles to guide it. The minutes also gave a flavor of the state of play on how officials are viewing the likely sequencing of their exit.

  • -- The goals of maximum employment and price stability would guide the policy normalization.
  • -- The aim would be to return to a regime whereby the federal funds rate would be the main tool, rather than asset sales.
  • -- Another aim would be to eventually return to holding only Treasury securities on the Fed's balance sheet in order to minimize the extent to which the Fed affects the allocation of credit across specific sectors of the economy.
  • -- Asset sales would be implemented within a framework communicated in advance, though the balance sheet could still be adjusted to respond to changes in economic or financial conditions as needed.
  • -- Nearly all participants indicated that the first step toward normalization would be stopping reinvestments of agency securities and, simultaneously or soon after, ceasing reinvestments of Treasuries.
  • -- Most participants felt that once asset sales became appropriate, they should be done on a largely predetermined and preannounced path, although many of those said sales could still be adjusted as needed.
  • -- Several other participants preferred the pace of sales to be a key policy tool and varied actively.
  • -- Most preferred sales of mortgage agency securities come after the first increase in the target for short-term rates, and many wanted sales to proceed "relatively gradually" to return the balance sheet to all Treasuries

Monetary Policy - The minutes for the FOMC meeting of April 26-27 were released today, and contain much more information than is usual. Typically, the minutes just give some background to the previously-released FOMC statement and, without names, or exact words spoken, they don't tell you a lot. In this case, there is a detailed account of a discussion about "strategies for normalizing the stance and conduct of monetary policy." "Stance" refers to whether policy is tight or accommodative. By normalizing the stance, the committee seems to mean that, with an inflation target of 2%, a normal fed funds rate should be in the range of 3%-5%. Normalizing conduct seems to mean reducing the size of the Fed's balance sheet to the point where the quantity of excess reserves held overnight is zero. It is clear that the Fed will have to tighten at some point, but how to do it?

Quick Take on FOMC Minutes: Letting the Hawks Have Their Day, Raising Downside Risks - When does the Fed first tighten? We will know the answer by September. By that time the economy will have worked through enough of the current downside risks listed in the most interesting addition to the minutes. To the extent that the recovery is still intact by the fall we could very well see the first steps towards removing monetary accommodation in the fourth quarter. The more interesting question will be whether the Chairman has the support to do something if those downside risks cause the recovery to falter, and what that something would be.  The minutes contain what is, by now, the rather standard argument between the hawks and doves on inflation risk in a high unemployment economy. To me, the more important addition to the minutes is the much broader view on the potential for downside in the economy in the second half of the year: I believe that this view is shared by Bernanke, Dudley and Yellen.The hawks have the upper hand right now in driving Fed policy; the Chairman, Dudley, and Yellen will have their day again if the economy falters as they fear it will. It seems to me that there is no other rational political way for the Chairman to play his hand.

Fed's Bullard Says Fed May Tighten in 2011 by Cutting Assets - Federal Reserve Bank of St. Louis President James Bullard said the central bank may tighten policy this year by allowing its balance sheet to decline even with inflation showing signs of slowing in recent weeks. “I still think it is reasonable” to expect tightening by year end, Bullard said. “I like a balance-sheet-first policy and I think the Fed will take a balance-sheet-first policy,” he said, referring to the central bank’s option of allowing its total assets to shrink as its bonds mature. Fed officials are discussing how quickly to begin withdrawing record stimulus after completing the purchase of $600 billion in U.S. Treasuries by the end of June. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said this month he favors raising the target interest rate this year, while Philadelphia’s Charles Plosser urged a pull-back in the “not-too-distant future.” New York Fed President William C. Dudley said the recovery hasn’t met the central bank’s goals.

Fed's Evans says no need to alter easy money policy yet (Reuters) - The U.S. economy is on a firmer footing after a deep and lengthy recession, but still-high unemployment is keeping inflation under wraps and continues to warrant ongoing support from the Federal Reserve's ultra-easy money policy, a top Fed official said on Thursday. The U.S. central bank will watch inflation and inflation expectations closely, Chicago Fed President Charles Evans said in remarks prepared for delivery to the AFP Global Corporate Treasurers Forum, "and we will adjust policy if developments move our forecast to rates incompatible with our inflation mandate." But Evans said he expects moderate economic growth to trim the unemployment rate, which was 9 percent in April, only slowly, and inflation to crest this year at between 2 percent and 2.5 percent before returning to below the Fed's informal 2 percent target.

Federal Reserve Communication: Striving for Clarity in a Fast Changing World - Key Points:

  • •Lockhart expects GDP growth for the rest of this year and over the next couple of years to be in the range of 3 to 4 percent annually. He anticipates that over the next two years, inflation will converge to the Fed's de facto inflation objective of 2 percent or a bit less.
  • •Lockhart believes that communication is integral to the monetary policy process. In his view, the better that financial markets and the public understand what the Fed is trying to accomplish in the medium and long term, the more effective monetary policy ought to be.
  • •According to Lockhart, a particularly big challenge lies ahead as the Federal Reserve contemplates when, and how, to exit today's accommodative policy. In his opinion, formally communicating as a committee about an imminent change in policy will actually start the process of changing the policy. The exact timing of initiating the exit remains to be determined by the FOMC.

Fed Watch: Patting Themselves on the Back? - The yield on 10-year Treasuries has slipped back to just a hair over 3% - despite the fact that the US has hit its legal "debt ceiling." The fresh reversal in yields appears to be further evidence against the ongoing hard-money fears that the combination of quantitative easing, deficit spending, and a falling dollar are sure to spell inflationary doom. As Paul Krugman likes to quip, the bond market vigilantes remain invisible. From a monetary policy perspective, the behavior of the Treasury market would suggest that it may be too early to tap on the policy breaks. Here I offer an alternative perspective – one that I suspect will find some play among Fed officials. Recall that in his recent press conference, Federal Reserve Chairman Ben Bernanke focused on the need to maintain stable inflation expectations. Consider the behavior of an admittedly rudimentary measure of inflation expectations, the spread between Treasuries and inflation protected Treasuries:   Further evidence that bond market vigilantes were getting ahead of themselves? Or evidence that the Fed did what “needed” to be done – throttle back on monetary policy to keep expectations under control?

Bernanke QE2 Averts Deflation, Spurs Rally, Expands Credit as Program Ends -  Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth. The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008. “Looking at market indicators, you have to be convinced it’s been a success,”

Monetary policy. I'm sorry, it's just not doing it for me. - Stock market is up, Profits are up and banks are safe. So what? Unemployment is somewhere between going down and I can't get no satisfaction. Housing values are still falling.   A new nationwide survey from real estate Web site says the value of U.S. homes fell 3% from January 1 to March 30 -- the steepest quarterly decline since 2008. I know, I'm suppose to care. Bigger picture and all. But frankly, when I read comments such as that by Mark Sadowski's: Since Bernanke's Jackson Hole speech the steep rise in stock prices has increased household wealth by some $5 trillion. The rise in inflation expectations has helped to ease the household debt deflation problem. Consumption has been the bright story in the BEA numbers last two quarters,...I'm going to be bold here and state right out that I'm speaking for the middle-class. (Those of this class can correct me if I'm wrong.) Five trillion dollar in new stock market wealth is not reaching us. I'm happy for you all that are now more wealthy, but really, you're only a small percentage of the population and thus your success is not representative of how well We the People in total are doing.

What is central bank independence? - Linking to Bennett McCallum with some puzzlement a while back, Brad DeLong asked why a higher inflation target could be seen as undermining central bank independence. I’m with McCallum on the analysis, but not on the policy conclusion. A higher inflation target would reduce central bank independence, and a good thing too.  The problem is that ‘central bank independence’ like the famous efficient markets hypothesis, comes in weak and strong forms. The weak form of central bank independence is the principle that the executive government should not direct the decisions of the central bank.  In this sense, central bank independence has always been the norm in developed countries.

Will the Federal Reserve’s Asset Purchases Lead to Higher Inflation? – NY Fed - A common refrain among critics of the Federal Reserve’s large-scale asset purchases (“LSAPs”) of Treasury securities is that the Fed is simply printing money to purchase the assets, and that this money growth will lead to much higher inflation. Are those charges accurate? In this post, I explain that the Fed’s asset purchases do not necessarily lead to higher money growth, and that the Fed’s ability (since 2008) to pay interest on banks’ reserves provides a critical new tool to constrain future money growth. With this innovation, an increase in bank reserves no longer mechanically triggers a series of responses that could lead to excessive money growth and higher inflation. To follow my argument, think of the relationship between Fed asset purchases and inflation in terms of a pipeline with several sections. The first section of the pipeline relates to reserve balances. When the Fed purchases assets, it pays for the purchases by creating reserve balances. These reserve balances can put pressure on later sections of the pipeline—the money supply and inflation rate. Now, however, there is a new valve—interest on reserves—that provides an outlet from the pipeline to a reservoir, enabling policymakers to reduce the pressure from reserves.

Fed Fears of Wage Increases Carry Risks - Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute…That’s one reading of the minutes from the Federal Reserve‘s April 26-27 Federal Open Market Committee. The strategy makes sense from an economics’ standpoint; but it carries risks on both the political and growth fronts. According to the minutes, Fed officials continue to think the impact from higher commodity prices will be “transitory.” The bigger concern would be if wage increases took hold. After all, labor remains the biggest expense for most U.S. businesses. If wages were to increase rapidly, companies would be under more pressure to raise their selling prices — which would cause workers to ask for bigger raises to cover the higher prices. And as long as the pressures on labor costs remain muted, “a large, persistent rise in inflation would be unusual,” the minutes added. In other words, higher prices concentrated in energy and raw materials won’t bring a response from the central bank. But if wages pick up, the Fed may step in.

Should the Fed be worried about wage inflation? - Kathleen Madigan blogs — without linking to — the latest FOMC minutes, and picks up on an important point: the Fed is keeping rates low largely because it sees little risk of wage inflation. If and when wages pick up, the Fed isn’t particularly worried about inflation. “But if wages pick up,” she writes, “the Fed may step in.” Mark Thoma is unimpressed by this: “We are much too worried about a wage-price inflation cycle breaking out and causing problems,” he says. “If the Fed is too trigger happy, it could snuff out the recovery it is hoping to bring about.” There’s a good reason to be sanguine about rising wages, and that’s rising food and energy prices. The Fed prefers to look at core inflation when setting monetary policy, on the grounds that food and energy prices are too volatile for it to be able to control, or tend to be cyclical. But they loom large for Americans when it comes to the cost of living, and wage increases are needed to pay for higher grocery bills and more-expensive tanks of gas.

Is there any reason to target headline inflation? - Stephen Williamson (who proclaims that the “Core is Rotten”) directs us to a speech by Jim Bullard, President of the St. Louis Fed, attacking the use of core inflation in monetary policy. Bullard is a serious critic, but I think that his speech falters on a foundational issue that he barely even addresses: why should the headline CPI be a goal at all? He takes for granted that headline CPI should be the medium-term target of monetary policy, and that targeting the core is just a (flawed) short-term approach for achieving it: Measures of overall, or headline, inflation attempt to include changes in the prices paid for a wide variety of goods—that is, what households actually have to pay for their daily purchases. This is a sensible notion of precisely what the central bank can and should control over the medium term.

Think Commodity Prices Are High Now? Just Wait - The way we calculate inflation is fraught with problems. There is the awkward distinction between the headline rate (which is now 3.2% and includes volatile food and fuel prices) and the core rate (which strips out volatile food and fuel prices and now stands at 1.3%). Statistically we have the luxury to differentiate, but in our individual lives, we can't separate expenses into “core” and “headline.” The official inflation rate as defined by the “consumer price index” (CPI) also includes a component meant to capture home price moves using the rental market, which may or may not track actual home prices. But the real issue today is that inflation is almost entirely a product of rising raw material costs and for now, these are being born not by individuals but by companies. Many economists assume that eventually, these rising input costs will be passed on to consumers in the form of higher price tags.  What is striking, however, is how rare that currently is.

Are Rising Commodity Prices Unanchoring Inflation Expectations? - NY Fed -The U.S. inflation outlook is the focus of considerable discussion in business and central banking circles. As shown in the chart below, headline inflation measured as a year-to-year percentage change declined over the first half of 2010, leveled off in the second half of the year, and has been rising recently—driven largely by higher commodity prices. An important question is whether this recent increase is likely to be transitory or the beginning of a more sustained rise in headline inflation. In this post, we examine data from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters (SPF) and discuss how the survey’s unique features and rich information on inflation expectations can shed light on this question as well as offer insight into the inflation outlook that is not available from other survey instruments. While inflation has indeed increased recently, our analysis suggests that inflation expectations are not presently at risk of becoming “unanchored,” or showing a greater concern over higher future inflation.

Are We on the Brink of High Inflation? - Here's a plot of three measures of core m/m inflation. I don't see hyper (or even high ) inflation on the horizon, as some do [0] [1]. Since one observation doesn't make a trend, for good measure I include also 3 month inflation. I've included Core PCE as well as the BLS Chained Core CPI. It’s of interest that on the 3 month basis, both of these measures are below the official core CPI. As I've discussed before, the official CPI is a base-year (Laspeyres) index at the components level, so it tends to overstate the true price level [2]. The chain weighted series obviates this problem, as it approximates the Fisher price ideal index [3] (since the BLS chained series is not seasonally adjusted, I adjusted the log series using X-12; hence the graphed series is not the official series). Finally, the PCE is a chained series, but with different coverage (as discussed in [3]).

Inflation and Economic Hooliganism, by Paul Krugman - Are we in a runaway boom, or is growth weak? Is inflation low, or is it spiraling out of control? The answer to all of these questions is yes. China, India and Brazil are growing much too fast for comfort; America, Europe and Japan remain depressed. Inflation is running high in the emerging world, while the prices of oil and food, which are determined in global markets and are largely driven by demand from those emerging nations, have soared; but underlying inflation in the wealthy nations remains low.In short, at this point we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears. ...So it’s a mixed-up, crazy world... What are the dangers?Well, as I see it, the biggest danger for the United States isn’t that there’s another financial crisis lurking out there, ready to pounce. It is instead that we’ll get confused by all the crisscrossing signals in the global economy and end up focusing on the problems we don’t have while ignoring the problems we do. Not to put too fine a point on it: I’m worried that Ben Bernanke may end up being bullied into raising interest rates when he should do no such thing. For while some countries have a problem with homegrown inflation, we don’t. Our problem is unemployment. And to deal with our job shortage, we need low interest rates and, yes, continuing budget deficits to keep our economy growing

Krugman’s column on the financial crisis in Sunday’s Izvestia is shocking and appalling -- Lordy: The global financial crisis of 2008-9 had its roots in more than two decades of growing complacency in wealthy nations, a complacency whose main financial manifestation was ever-growing leverage. Bankers and households alike piled on levels of debt that would have been sustainable only if nothing ever went wrong. Inevitably, something [what?] did — and a result was to force [note lack of agency] much of the advanced world into a harsh process of deleveraging, of slashing spending to pay down debts."Complacency," forsooth? Nothing to do with ideology or deregulation, let alone accounting control fraud? MERS alone gives the lie to this; how do you fit an unauditable electronic system that controls half the mortgages in the country, loots $200 billion from the states and localities, and destroys centuries of contract law into a framework of "complacency"? Krugman's column shocks the conscience. It is bankrupt in every way: Analytically, historically, morally, and as a guide to reforming political economy. The rot at the elite level is very, very deep, and I say this as an admirer of Krugman's writing and work.

Is The Treasury Market's Inflation Forecast Flashing A Warning? - The outlook for inflation is dropping fast, according to the yield spread between the nominal and inflation-indexed 10-year Treasuries. That's worrisome if the economy's growth momentum is slowing. Although some pundits argue that higher inflation is a big risk, the Treasury market is telling us different. If the economy is downshifting, falling inflation expectations are a sign of trouble. The latest inflation forecast is 2.26%, based on yesterday’s yield spread for 10-year Treasuries. That represents a modest but consistent drop from just a month earlier, when the forecast was 2.6%. The decline is still moderate in absolute terms, which raises the possibility that it's all just noise. But with some analysts warning that the economy may be headed for a rough patch, lower inflation expectations at this juncture aren't productive.

Philly Fed Finds Economic Conditions For Low And Moderate-Income Families Deteriorated Under The "Wealth Effect" Mandate -  In its first quarter community outlook survey looking at the economic factors of services focused on low- and moderate-income households in the Third Fed District, the Philly Fed finds the the lower and middle classes are not only not benefiting from the Fed's financial experimentation, but that they are in fact being adversely affected by changes in the broader economy from Q4 2010 to Q1 2010 as the table below demonstrates. As the Fed confirms: "Overall, the negative trend identified in the first Community Outlook Survey in January 2011 continued. All diffusion index values remained below 50 except for demand for service providers’ services. All seven indicators for this survey were below the future expectations reported by respondents to the previous survey." In other words, while the lower and middle classes, as proxied by services geared toward them, continue to hold on the "hope and change" their current existence and living conditions are deteriorating.

US Recession Indicators - May 2011 -The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has increased even further with an April reading of 536. This is an increase from last month's reading of 529. Despite the high reading of 2011 Q1 over the average, GDP growth for this period was only moderate (confounding my own predictions of substantial growth). Inflation readings in April continue to grow. The index reading of 224.433 implies annual inflation of 3.1% but the annualised monthly figure was 5.1%. Prices since December (220.186) have increased by 1.9%, which implies an annualised inflation rate of 4.6%, still uncomfortably high. As 2011 continues the momentum of these high monthly figures will translate into higher annual inflation. Since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation. This unconventional policy by the Fed continues to provide the conditions for good economic growth.

My Reply to Paul Krugman - Paul Krugman appreciates my efforts against the hard money advocates.  He questions, however, my and other quasi-monetarists' belief that monetary policy can still pack a punch when short-term interest rates hit the zero bound: [T[hey want to keep that policy action narrowly technocratic, limited to open-market operations by the central bank.  As I’ve argued before, this doctrine has failed the reality test: liquidity traps are real, and blithe assertions that central banks can easily pump up demand even in the face of zero short-term rates have not proved correct. It is true that us quasi-monetarists believe that the efficacy of monetary policy is not limited by the zero bound, but we have never said the that all it takes is further open-market operations.  Rather, we have said that monetary policy can be highly effective regardless of circumstance if the following steps were taken by the Fed:

  • (1) Set an explicit nominal GDP level target so that expectations are appropriately shaped. 
  • (2) Purchase assets other than t-bills as needed to make sure the nominal GDP level target is maintained.

F for Fail - I've been grading papers for the past half week, so when this popped into my mailbox yesterday morning, I was in a "grading" mood. And when I finished reading it, I determined I would give it an F. From "The Price of Oil and the Value of the Dollar: Declining Value of the U.S. Dollar Adds to the Price of Oil and Gasoline," Arguably, there are other factors affecting the price of gasoline than just the price of oil. However, the retail price of gasoline in the United States moves in tandem with the price of oil. In fact, the correlation between the two is greater than 98%. Given that oil is the primary input to gasoline and the close correlation we can perform a similar analysis to determine how much of the current price of gasoline is attributable to the declining value of the dollar.  The final chart shows what the price of gasoline would be if the value of the dollar had not declined. In other words, the dollar’s decline accounts for 56.5 cents of the $3.963 current price of gasoline. Clearly, the objective of the study is to argue tha t QEI and QEII raised oil prices, I think by arguing that they caused inflation. Well, this may very well be the case, but here I’m just going to critique the analytics of the memo.

Koo says QE2 drove speculation, but what about the real economy? Richard Koo was out with a note yesterday that was sharply critical of the Federal Reserve's second round of quantitative easing (hat tip Zero Hedge). While Koo sees QE2 as having created speculative flows into commodity markets, he also wanted to set the record straight about what QE2 does and does not do. Koo writes: In the debate surrounding these issues, I was struck by (1) the misconceptions of QE2 held by some market participants and (2) the fundamental problems inherent in QE2. Turning first to the market's misconceptions regarding QE2, many investors believe that the large-scale quantitative easing programs implemented by the Federal Reserve and the Bank of England have left the markets awash in money, and that this money is providing substantial support for the real economy and markets. That is why investors had such high expectations of quantitative easing. Koo is pointing to the money multiplier fallacy that comes from the concept that banks are reserve constrained. Of course, none of this is true. Banks are never reserve constrained in our non-convertible floating rate monetary system; They are capital constrained.

"Global Slowdown to Hit by Summer, Even for U.S." - The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth. "It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on,". "And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer." Take a look at the institute's chart here. The downturn follows in lock-step the fall in short-term indicators like ISM survey and the ECRI's Industrial Commodity Inflation index.Also of note in ECRI's recent data is its future inflation gauge, which excludes commodities. This index had been inching up since last year until last month, says Achuthan, when the index dropped two points, or a little less than two percent.

CFOs Expect Modest Recovery - Finance executives world-wide are braced for a modest recovery, with companies in emerging markets expressing more optimism than their American counterparts. A survey of chief financial officers by CFO Research Services and American Express Co. showed that while 75% of executives expect economic expansion this year, most said growth would be modest as opposed to substantial. Executives in emerging markets tended to have a brighter outlook than those in established markets, such as the U.S. and Europe. “In North America, there is very slow growth in terms of consumer consumption, even though the economy seems to be recovering nicely,” “In the emerging markets, where the economy has recovered faster, and which have been growing at a much higher rate consistently, the inflationary environment is a concern for us.” The report notes that “two broad recoveries are taking shape around the world, with emerging markets in Asia and Latin America leaping forward while mature economies proceed on a more subdued course.”

Fed's Dudley Says 'Moderate' Economic Recovery Is Falling Short of Goals - Federal Reserve Bank of New York President William Dudley said the central bank is falling short of its goals because of the modest pace of the recovery, with unemployment too high and headline inflation likely to ease.  “The recovery remains moderate and we still have a considerable way to go to meet the Fed’s dual mandate of full employment and price stability,” Dudley said today in a speech in New Paltz, New York.  Fed officials are considering how quickly to begin an exit from record stimulus after purchasing a total of $600 billion in U.S. Treasuries by the end of June. They are also discussing 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 yesterday.

The Historical Relationship Between the Economy and the S&P 500, Part 1 - This post is the first in a series on the historical relationship between the economy and the stock market. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous "quarterly" S&P 500 figures.  The following graph shows how the two series have evolved since 1950.  A simple eyeball test does indicate that historically, the two series have mostly moved together. And in fact, the correlation between the two series has been 93.5%, which is extremely high.  But which series has led and which has followed? For that, we look at the next graph:

Why the U.S. GDP number may be as bogus as a three-dollar bill - In 10 days, Washington will release its revised estimate of first-quarter economic growth. This figure, based on more complete data than were available when the first assessment was issued toward the end of April, will undoubtedly grab headlines. It could affect everything from the Federal Reserve’s view on interest rates to corporate decisions about spending and the public’s evaluation of how well the Obama administration is managing the economy. Economists will issue a variety of learned opinions about what it all means. What most of them will not be saying is that the GDP figure is essentially meaningless.

Geithner Says “The Size Of The Shock Was Larger Than What Precipitated The Great Depression”  - Tim Geithner says: Things were falling apart. We had no playbook and no tools…Life’s about choices. We had no good choices…We allowed this huge financial system to emerge without any meaningful constraints…The size of the shock was larger than what precipitated the Great Depression. Indeed, there are some signs that we’ve been in a depression for a number of years. Geithner also warned that another financial crisis will hit: “It will come again. There will be another storm,” warned Geithner, who in early 2009 succeeded Paulson as treasury secretary. “But it’s not going to come for a while.” “I’m certain we will” experience another catastrophe—he just couldn’t say when or what kind.“You will not know,” As I noted last year: Greenspan says that the financial crisis was caused by a once-in-100-year event. Tim Geithner says its more like once every 40 years. Jamie Dimon implies every 5-7 years. But Simon Johnson says its really once every 5 years:

Our Peculiar State of Suspended Animation - The U.S. is in a peculiar state of suspended animation: nothing is actually moving, we're all frozen in an extended moment of disbelief, denial and crisis, waiting for something to finally break loose.  We know the present isn't sustainable, but we go through the motions of phony "reforms" and "trimming the deficit" as if another 1,000 pages of "reforms" will fix what's broken in the economy or that trimming $50 billion from $1.7 trillion annual deficits will actually matter.  The wheels visibly fell off the bubble-debt-fraud economy four years ago in mid-2007. In a nutshell, here's the reality: the entire "prosperity" of the past decade was a false prosperity, constructed entirely of money borrowed by the private sector based on the rising value of McMansions and strip-malls that made no sense except as speculations based on the Federal Reserve's credit-bubble policies and Wall Street's systemic financialization of that debt based on fraud and misrepresentation of risk.

The Good, The Bad, And The Ugly Part 3 - The economic peril that we find ourselves confronted with, has been ninety-eight years in the making. The confluence of debt, demographics, delusion, and denial has left the country at the precipice of annihilation. There are two kinds of people in the world, those who control the money and those that are controlled by those who control the money. The last century has been marked by a methodical looting of the good (working middle class) by the bad (Federal Reserve & bankers) and supported by the ugly (Washington D.C. politicians).  It is not a coincidence that the percentage of the working age population employed bottomed in 1964 at 59%. The participation rate rose steadily for the next thirty six years, topping out in 2000 at 67.1%. The employment to population ratio also bottomed at 55% in 1964. It rose to 64.4% by 2000. It seems that future historians will mark the year 2000 as the peak of the American Empire. Apologists for the Federal Reserve and politicians who have steered this country since 1964 would argue the increase in the percentage of the population working was a positive development. Nothing could be further from the truth.

We're Number Two? - A week ago I wrote about my subjective impression that Western Europe has passed the US in terms of economic development. It turns out that that impression is generally supported by the data. The question now is what to make of it all. But just looking at national income data in isolation is insufficient, so I also assembled a variety of other indicators of economic well-being. Those indicators also generally confirm the suspicion that Western Europe is now "richer" than the US. To make the comparison even more striking, the data shows that Western Europeans enjoy a standard of living surpassed by no one in the world while also having hundreds of extra leisure hours per year compared to Americans. So it does indeed seem that Western Europe is now generally better off than the US. Note that this was not always true -- I would say that the US was equally well off 20 or even 10 years ago, though the US has always made very different choices regarding what to do with its available resources. But now, for the first time in my life, I am actually convinced that the US does not enjoy the highest standard of living in the world.

Against the ‘strong dollar.’ And the ‘weak dollar.’ -In Washington, undoing isn’t much harder than doing. But how do you change a word? Or, more to the point, four words? Is there a committee? A complaint box? An incantation? The issue is the dollar. Or, more specifically, how we talk about it. When its value goes up, we call it a “strong dollar.” And a “strong dollar” sounds great! It sounds like a strong America, like Old Glory waving in the breeze, like our soldiers planting the flag at Iwo Jima. As for the “weak dollar,” well, yech. That’s American decline, compact cars, the Vietnam War.  But it’s unwise to apply emotionally loaded words to economically neutral concepts. Now every major economic policymaker in America pledges his or her fealty to a strong dollar with the same glassy-eyed obedience you see in coerced confessions. Sometimes, of course, a strong dollar is in our best interest. And over the long run, a strong economy will produce a strong dollar. But there are moments when stronger isn’t better. Moments like, well, this one.

Zimbabwe Says Days Of The US Dollar Are Numbered, Pushes For Gold-Backed Local Currency - Topping off a weekend of surreal news is the announcement from the Central Bank of Zimbabwe that the country is now evaluating introducing a gold-backed Zimbabwean dollar, and, in keeping with the Salvador Dali feel to the past 48 hours, that the "days of the US dollar as the world's reserve currency are numbered." Yes. Zimbabwe, the same place that two years ago sported a brand new crisp Z$100 trillion bill. What is just as odd is that this news comes less than a week after Iran's President Mahmoud Ahmadinejad criticized US economic policies, saying that the paper currency created by the American government is taking a heavy toll on the global economy. While Zimbabwe, which now transacts almost exclusively in foreign currencies such as the USD and the South African Rand, is actively considering ways to return its own currency into circulation, the man who has up to now served as an inspiration and a role model to Ben Bernanke, Gideon Gono, said the country should consider adopting a gold-backed currency. “There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,”

Will Strauss-Khan's Fall Lead to the Dollar's Demise? - There's a lot of talk about what Dominique Strauss-Kahn's arrest for sexually assaulting a maid means for the eurozone crisis. Less attention has gone to the fate of another project close to DSK's heart: weaning the global financial system off of the U.S. dollar. DSK had been a vocal proponent of using the IMF's de-facto currency, the Special Drawing Right, as a way to diversify countries' reserve pools away from the U.S. dollar. There are a lot of technical hitches and drawbacks to making the SDR the world's only reserve currency. But the idea of expanding the role of SDRs as one among several global currencies has slowly gained traction as emerging economies like Brazil and China have voiced support. Their backing is partly a way to chide U.S. officials for abusing the dollar's dominance with loose monetary policy (which stokes inflation in emerging markets) and overspending (which undermines the dollar's value for foreign holders). Whoever takes the helm at the IMF will have to contend with this issue sooner rather than later, since the stability of the world's financial system lays in the balance.

"Act As If" - Greece vs America Edition - The most memorable scene from the movie Boiler Room is when the character of Ben Afleck tells the room full of wannabe brokers to "Act As If" (and in the tangent regarding male genitalia, the head of the IMF would have been wise to take the advice instead of opening his fly and disproving it). Who would have thought that a few short years later, it would be none other than insolvent countries taking this advice: specifically, America acting as if it wasn't insolvent, and Greece acting as if it was beyond saving. The irony, as William Buckler observes in his latest edition of the Privateer, is that while US debt continues to trade (if no longer be accepted) as the "Rock of Gibraltar" and Greek paper is trading with a certainty of bankruptcy, it is Greece that has taken proactive steps in taxing and spending policy, while the US has merely retrenched its profligate ways, and while much political theater takes place, nothing ever really changes. For some of the more perverse consequences of this bizarro world inversion, read below.

Deficit may be sapping some foreign U.S. asset buys (Reuters) - Foreigners cut purchases of long-term U.S. securities in March, U.S. Treasury data showed on Monday, and analysts said concern about America's public finances may have spurred a shift to shorter-dated assets. The United States attracted a net long-term capital inflow of $24 billion in March compared with February's revised $27.2 billion inflow. That was the fourth straight monthly decline.But including short-dated assets such as bills, foreigners bought a net $116 billion compared with a downwardly revised $95.6 billion the prior month. According to Treasury data, March's inflow was the largest since foreigners bought a net $272.9 billion in October 2008. Because markets expect near-term U.S. interest rates to remain near zero until 2012, the increased demand for short-term assets may reflect worries about America's ability to cut its huge deficits

China Trims U.S. Bond Holdings for Fifth Month as Debt Approaches Ceiling - China, the biggest foreign owner of U.S. government debt, trimmed its holdings of Treasuries for a fifth straight month in March as lawmakers debate how to expand borrowing after reaching a statutory threshold. The Asian nation owns $1.145 trillion of the debt, down $9 billion, or less than 1 percent, from the previous month, according to Treasury data released yesterday. The holdings reached a record $1.175 trillion in October.  China’s concern that U.S. government securities may become more risky because of the nation’s deficits and debt burden prompted its call this month for President Barack Obama’s administration to lay “a solid fiscal foundation” for long- term growth. Former Chinese central bank adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default.  China may “gradually cut its U.S. Treasuries as it seeks to diversify its foreign-exchange holdings,” “China is probably routing trades through other places such as London,” meaning U.S. data may not give a full picture.

Chinese Official Lectured Senators to Get Fiscal House in Order -- Not only is the mounting U.S. debt causing anxiety at home, but one Democratic senator told ABC News that a group of senators faced an embarrassing reprimand by a Chinese official on a recent Congressional delegation to Asia. "The most embarrassing moment to me on that trip was when a government official said to me, or said the to the delegation, 'You guys need to get your fiscal house in order,'" Sen. Michael Bennet, D-Colo., said of an April trip to China with nine other senators.  "I felt like being at a shareholder meeting for a corporation and the shareholder is saying you're being irresponsible." China now owns $1.2 trillion of the $14.3 trillion U.S. debt, according to the Treasury Department. "Not only do they own a bunch of our debt, but they have a cash surplus which they're using to invest in infrastructure and in natural resources all over the globe," Bennet said.  "That's what we are increasingly incapable of doing unless we get this resolved."

Pimco Sees Financial Repression in U.S. Amid ‘Deteriorating Debt Dynamics’ - Pacific Investment Management Co., which runs the world’s largest bond fund, said “deteriorating debt dynamics” will stoke faster inflation and financial repression in the U.S. as well as at least one sovereign-debt restructuring in Europe.  In a report aimed at establishing a worldview for investors in the next three to five years, Pimco Chief Executive Officer Mohamed El-Erian raised the prospect of U.S. policy makers trying to force savers to accept returns below the rate of inflation as the government grapples with a budget deficit the White House reckons will reach $1.6 trillion this year.  “It is a world where several governments in advanced economies, and the U.S. in particular, opt for financial repression and mild inflation as the major way to accommodate their deteriorating debt dynamics,” Newport Beach, California- based El-Erian wrote in a report published today on the firm’s website. “It is a world that heals slowly and unevenly and remains structurally impaired.”

‎Slow Growth, Inflation Make US Bonds Bad Buy: Gross - The US economy is headed for a period of higher inflation and lower growth that makes the nation's debt unappealing when measured against its global competitors, Pimco's Bill Gross told CNBC. The head of the world's largest bond firm, with nearly $1.3 trillion under management, explained the firm's position further as it has cut out all longer-dated exposure to US debt. Instead, the firm is comfortable with more stable countries such as Canada, Brazil and Germany. At the same time, Pimco also has turned to the equity markets to combat low-yielding US debt as the country tries to get its finances under control. "Debt tends to slow economic growth," Gross said in a live interview. "We're going to have a slow-growth economy and probably one in which inflation goes higher, which is not a conducive recipe for financial markets."

President Obama's Asset Allocation - This is surprising: The Obamas reported total financial assets valued between $2.8 million and $11.8 million in 2010....They report having between $1.1 million-$5.25 million invested in Treasury bills and another $1 million to $5 million in Treasury notes....The Obamas report having between $200,000-$450,000 invested in the Vanguard 500 Index Fund. In other words, it looks like the president has only a small percentage (about 10 percent) of his personal financial assets invested in equities.  This is far, far less than financial advisers would recommend.  (If you are curious, I am at 60 percent equities.)  Either the president is not very financially savvy, or he has reason to believe that the future of the U.S. economy is not very bright.

A Bond Market Meme - Mankiw - There seems to be a conventional wisdom forming that long-term interest rates in the United States are as about as low as they can possibly be.  For example, this is from an article in today's Wall Street Journal: "Rates are so low it's hard to see them going much lower, but it's easy to imagine them going higher," said Kevin March, chief financial officer of Texas Instruments.And this is from a post at Brad DeLong's blog: It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can't see U.S. nominal interest rates falling much lower than they are now. I don't buy it.  Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent. No, I am not predicting the United States is about to become just like Japan.  But it is not inconceivable.

Watch out for tail risks hanging over Treasuries - In recent months, the atmosphere in the Treasuries market has been eerily calm, so much so that this week 10-year yields dropped to their lowest level this year.  That is striking, given that the Treasury technically hit the debt ceiling this week (the limit to how many bonds it can legally issue), and could even tip into a technical default in August if Congress fails to reach a deal to raise that debt ceiling by then.  But while it is reassuring to see that investors are continuing to gobble up US debt, even amid this political uncertainty, investors and politicians would do well to look also at what type of debt the US is selling today – and, more importantly, what it has sold in the past.  The issue revolves around the average maturity of the Treasuries market, or how frequently the government needs to sell new bonds to replace expiring ones. This average maturity is now about 61 months, meaning the debt needs to be replaced, on average, every five years, or a fifth of the stock must be replaced each year. By the standards of recent US history, this does not look too odd.

Geithner Issues Warning on Debt Ceiling - Treasury Secretary Timothy Geithner warned in a letter to Congress that failure to raise the $14.294 trillion debt ceiling would drive up interest rates, push down household wealth, put more pressure on federal entitlement programs and cause a double-dip recession.Mr. Geithner's letter to Sen. Michael Bennet (D., Colo.), sent Friday, marked one of the Obama administration's most explicit warnings about the consequences of failing to raise the debt ceiling. The U.S. government debt is projected to hit the ceiling Monday. Treasury officials say they have until Aug. 2 before the country could begin defaulting on its debt."This would be an unprecedented event in American history," he wrote. "A default would inflict catastrophic, far-reaching damage on our Nation's economy, significantly reducing growth, and increasing unemployment."

More on Debt Ceiling Charade - First, even though the U.S. will hit the debt ceiling on Monday, there are games that Treasury can play - so Congress has until August 2nd. And there might even be some more tricks that can delay the date further - like promising to pay defense contractors sometime in the future. But some day in the not too distant future Congress will have to raise the debt ceiling - or suffer the consequences that Geithner describes. Second, Congress will probably push this to the brink, but they will raise the debt ceiling before the country defaults. The first rule for most politicians is to get re-elected, and the easiest way to guarantee losing in 2012 is to throw the country back into recession. If that happened, I believe the voters would correctly blame the leaders of Congress, and I think Congress knows that too. Therefore it won't happen. I'm not worried and neither are investors.

Debt ceiling drama starts today -- Monday's the day: The federal debt will hit its legal limit and Congress doesn't plan to do anything about it. That leaves Treasury Secretary Timothy Geithner in a bit of a pickle. It now falls to him to jump through hoops every day to keep the world's largest economy from defaulting on its legal obligations. Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so. But then he said that's it. If lawmakers don't get it together by Aug. 2, the United States will no longer be able to pay its bills in full.

Debt Limit: Routine or the End of the World? video

The Debt Ceiling: What is at Stake? - Congress is currently considering whether it should raise the debt ceiling. This is not new territory. Congress has raised the debt ceiling ten times in the last ten years.3 However, raising the debt ceiling for the eleventh time in as many years without recognizing and correcting systemic problems would have consequences beyond merely tapping revenue and assets to meet FY2011 budget commitments. Continuing to pass debt ceiling increases without proper spending reforms would be irresponsible. The United States should not consider defaulting on its debt, nor should it put itself in a position where it has to postpone payment to contractors or “manage” other non-debt obligations. Neither, however, should Congress be forced to raise the debt ceiling under false pretenses. By our calculations, the United States has enough expected cash flow (tax revenue) and assets on hand to avoid either of these unattractive options until at least the end of the current fiscal year in September, perhaps even longer.

Against the ceiling - TODAY is the day. As of this Monday, May 16th, America has issued as much debt as it is allowed to under the statutory debt ceiling. Because the country's obligations currently exceed its revenues, Treasury Secretary Tim Geithner has now been forced to take extraordinary measures to keep America current on its debts: It can get away with this, according to Secretary Timothy Geithner, until August 2. If Congress doesn't lift the debt ceiling by then, the country will default, triggering a number of severe economic consequences. Already, Geithner has stopped issuing bonds to states that help them keep their books in balance and maintain infrastructure. Today, the government will defer payments to and investments in federal pension funds -- pensions Republicans want federal workers to pay more money into than they currently do. By early August, Mr Geithner says, the government will have run out of ways to stiff people without defaulting. At that point, very bad things will happen. Luckily, leaders of both parties agree that the limit should be increased. But until it's raised, it isn't raised, and the worst remains a possibility, however unlikely.

Pile of debt would stretch beyond stratosphere (Reuters) - President Ronald Reagan once famously said that a stack of $1,000 bills equivalent to the U.S. government's debt would be about 67 miles high. That was 1981. Since then, the national debt has climbed to $14.3 trillion. In $1,000 bills, it would now be more than 900 miles tall. In $1 bills, the pile would reach to the moon and back twice. The United States hit its legal borrowing limit on Monday, and the Treasury Department has said the U.S. Congress must raise the debt ceiling by August 2 to avoid a default. The White House is trying to hammer out a deal with lawmakers to cut federal spending in exchange for a debt-limit increase. Most people have trouble conceptualizing $14.3 trillion. Stan Collender, a budget expert at Qorvis Communications, said the biggest sum most Americans have ever handled -- in real or play money -- is the $15,140 in the original, standard Monopoly board game. The United States borrows about 185 times that amount each minute.

Treasury to tap pensions to help fund government - The Obama administration will begin to tap federal retiree programs to help fund operations after the government lost its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt. Treasury Secretary Timothy F. Geithner has warned for months that the government would soon hit the $14.3 trillion debt ceiling — a legal limit on how much it can borrow. With that limit reached Monday, Geithner is undertaking special measures1 in an effort to postpone the day when he will no longer have enough funds to pay all of the government’s bills. Geithner, who has already suspended a program that helps state and local government manage their finances, will begin to borrow from retirement funds for federal workers. The measure won’t have an impact on retirees because the Treasury is legally required to reimburse the program.

Treasury Confirms Debt Ceiling To Be Breached Today; Will Tap Pension Funds - It's official: the US credit card has officially been maxed out, just as we predicted on Wednesday, and througout Q1 and Q2. The United States is expected to reach the legal limit on its debt later on Monday and will start dipping into federal retirement funds to give the country more room to borrow, a Treasury official said. As Reuters reports further, The U.S. Treasury will settle $72 billion in maturing bonds on Monday, which will push the country right up against its $14.294 trillion borrowing cap, the official said. To all those who thought only the insolvent government of Ireland will plunder pension funds, our condolences. Full release (no pun intended): As US Reaches Debt Limit, Geithner Implements Additional Extraordinary Measures to Allow Continued Funding of Government Obligations

No Guarantee Debt-Ceiling Deal Will Get Done - A split among economists over whether a debt ceiling vote should be tied to spending cuts highlights the risk of overconfidence, despite a consensus opinion in the latest Journal survey that the ceiling will be raised before an August deadline. “The problem with games of chicken is that occasionally they result in collisions,” said David Wyss, chief economist of Standard & Poor’s Corp., referring to the political tussle over increasing the amount the U.S. can borrow. If a deal isn’t reached “the bond market is going to react badly, the question is how badly.” He also noted the efforts to avoid a technical default by cutting government payments elsewhere could have negative implications for the economy. By a 9-1 margin the economists expect a deal will be reached to raise the debt ceiling by August. However, of the 46 economists who answered the question (nine survey participants chose not to respond to the query), 23 said the the vote should be tied to spending cuts, while the other 23 thought linking the two is a mistake.

As Debt Limit Reached, Agreement Still Far Off - -The U.S. government is expected to hit the $14.294 trillion debt ceiling Monday, setting in motion an uncertain, 11-week political scramble to avoid a default. The Treasury Department plans to announce Monday it will stop issuing and reinvesting government securities in certain government pension plans, part of a series of steps designed to delay a default until Aug. 2.  The Treasury's moves buy time for the White House and congressional leaders to reach a deficit-reduction agreement that could clear the way for enough lawmakers to vote to raise the amount of money Congress allows the nation to borrow. Gene Sperling, director of the National Economic Council, said reaching the debt ceiling "should be a warning bell to the political system that it's time to get serious about preserving our full faith and credit." The Obama administration says a default would tip the U.S. back into a financial crisis.

No Deal in Sight as Debt Deadline Nears - The debt limit that the United States hit yesterday isn’t a big deal yet but, by any reasonable accounting, it could be pretty soon. The situation deserves serious attention because, at some point before any official deadline, if bond raters get jittery enough to downgrade the debt this alone could cause a recession. It could be a day before an official deadline or several weeks but, at some point, a debt downgrade—which would sent interest rates soaring and business plummeting–could happen without an actual default if investors begin to think default is likely. Bond ratings, basically, assess the chances of default and, if a politically caused default is likely, credit will freeze up. Because other countries don’t have debt ceilings–or, for that matter, legislatures that are co-equal branches of government—there’s no exact precedent for a downgrade happening in these circumstances but the logic of bond rating suggests that one would take place and a recession would follow. And Republicans—a few of whom on the party’s fringes seem to relish in the idea of forcing a default—need to be careful of what they wish for: even a debt downgrade would hurt the party terribly.

A sword of Damocles for the debt ceiling - Pete Domenici and Alice Rivlin - Congress must increase the debt limit in the next few weeks to avoid a financial crisis. Calls for default on the obligations our government has already incurred are reckless posturing that does nothing to alter future obligations and makes the world doubt our elected representatives’ ability to govern responsibly. We favor raising the debt ceiling promptly and mandating actions to put the federal budget back on a sustainable path.  The best outcome would be for Congress and President Obama to enact comprehensive policies similar to the recommendations of the president’s fiscal commission or the Bipartisan Policy Center’s Debt Reduction Task Force, which we co-chaired. We are hopeful that bipartisan agreement on substantive policies to contain future debt will be achieved this year, but crafting such a difficult bargain is nearly impossible on the timeline imposed by the debt ceiling. We therefore propose including a tough enforcement mechanism with the debt ceiling legislation to build confidence among members of both parties, in both chambers, that future deficit cuts will actually occur. Whether paired with deficit-reduction policies or enacted on its own, an enforcement mechanism is necessary to ensure that legislators stay the course and to prevent them from backtracking on any progress. While no process can substitute for political will, it can stiffen the backbone.

Boehner Says U.S. Must Raise Debt Limit - Boehner, who in a May 9 speech demanded spending cuts greater than the amount of any debt-ceiling increase, told CBS yesterday that he understood “what the president was saying about jeopardizing the full faith and credit of the United States.” “Our obligation is to raise the debt ceiling,” he said. “But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible.” Last month Obama appointed Vice President Joe Biden to lead negotiations with a small bipartisan group of congressional leaders to try to strike a deal on reducing the debt and deficits. The negotiators have met three times with Biden; the president held separate talks with Senate Democrats and Republicans May 11 and May 12. “I’ve said, ‘Get them in a room, hammer out a deal, and make sure that we don’t even get close’” to defaulting on the nation’s debt, Obama said.

Boehner says the debt ceiling must increase -- Speaker John Boehner (R-Ohio) said he’s “ready to cut a deal today” to raise the debt ceiling. “I think it is necessary, but I understand the doubts,” Boehner said on “Face the Nation.” “They’ve pushed the date back, pushed the date back, pushed the date back. But it’s clear to me that at some point we’re going to have to raise the debt ceiling.” Senate Minority Leader Mitch McConnell (R-Ky.) said he wouldn’t vote to increase the debt limit unless deficit reductions are made. Boehner has made similar demands. “To get my vote, we need to get something significant in the short-term, medium-term and long-term,” McConnell said on “State of the Union.”

As the Federal Government Hits Its Debt Limit, Lawmakers Spar Over Solution -  The Treasury1 secretary, Timothy F. Geithner2, officially informed Congress on Monday that the government, as projected, had reached its $14.3 trillion debt limit3 and had begun taking what he has called “extraordinary measures” to meet obligations while lawmakers and President Obama seek a budget deal to raise the limit.  Mr. Geithner, in a letter to Congressional leaders of both parties, stood by an earlier projection that even with the Treasury’s accounting maneuvers, on Aug. 2 “the borrowing authority of the United States will be exhausted,” ultimately threatening a government default.  With the House in recess all week, few members of Congress were even in town, and budget talks between Vice President Joseph R. Biden Jr. and Congressional leaders were suspended. But a bipartisan “Gang of Six” continued negotiating toward a long-term debt-reduction compromise in what could be their make-or-break week.

America Held Hostage, by Paul Krugman - Six months ago President Obama faced a hostage situation. Republicans threatened to block an extension of middle-class tax cuts unless Mr. Obama gave in and extended tax cuts for the rich too. And the president essentially folded. Now, predictably, the hostage-takers are back: blackmail worked well last December, so why not try it again? This time House Republicans say they will refuse to raise the debt ceiling — a step that could inflict major economic damage — unless Mr. Obama agrees to large spending cuts, even as they rule out any tax increase whatsoever. And the question becomes what, if anything, will get the president to say no. For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills.  So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt?  At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.

U.S. Debt Holders Willing to Miss Payments: Rep. Ryan - Holders of US government debt would be willing to miss payments “for a day or two or three or four” if it put the US in a stronger position to pay them later on, Rep. Paul Ryan told CNBC Tuesday. “That’s what I’m hearing from most people,” said the Wisconsin Republican, chairman of the House Budget Committee. “What is more important is that you’re putting the government in a materially better position to be able to pay their bonds later on.”Unless the government acts to raise the debt ceiling by Aug. 2, the U.S. will be in default. Ryan, echoing House Majority Leader John Boehner, argued any deficit-reduction plan should include no tax increases and cutting spending by a dollar for every dollar the debt ceiling is raised.Ryan doesn’t expect Congress to reach an agreement by the deadline.“Look, I don’t think we’re going to solve 40 years of ideological differences between the two parties by August,” he said.

Paul Ryan Fine With Defaulting On Debt Payments “For A Day Or Two” - House Budget Committee Chair Paul Ryan doesn’t seem to think that defaulting on the national debt is a big deal: Holders of US government debt would be willing to miss payments “for a day or two or three or four” if it put the US in a stronger position to pay them later on, Rep. Paul Ryan told CNBC Tuesday. . “What is more important is that you’re putting the government in a materially better position to be able to pay their bonds later on.”Andrew Pavelyev is flabbergasted: Aren’t there any adults left in the Republican Party who could tell Paul Ryan that it is never acceptable for a chairman of the House Budget Committee to talk like this?  Such crazy talk from somebody in such position has the potential to plunge the country into a recession. Fortunately, the markets seemed not to take Rep. Ryan seriously. Next time we may not be so lucky.

Treasury Bill Rates at Almost Record Low as U.S. Debt Ceiling Is Reached - Treasury bill rates were at almost record lows as the U.S. reached its federal borrowing threshold and a congressional vote loomed in the next few months on raising the nation’s $14.3 trillion limit. Six-month rates were at 0.07 percent, compared with the record low 0.0305 percent set on May 7, as Treasury Secretary Timothy F. Geithner said he has taken action to stave off the federal debt limit until Aug. 2, using accounting measures that involve two retirement funds. Three-month bill rates were at 0.02 percent, almost the lowest level since they went negative during the financial crisis. “The debt ceiling issue continues to keep bill rates remarkably low,”  “With the cuts in issuance for short-term securities. demand for paper in the front end demand remains firm for bills.” Geithner wrote lawmakers today to say he has declared a “debt issuance suspension period,” a technical measure that allows him to free up borrowing room from the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund.

When Will the U.S. Debt Limit Actually Roil Markets? - The U.S. government reached its $14 trillion borrowing limit today. But the debt ceiling debacle has dragged on for months now, so when does this thing actually hit the fan? After the debt ceiling is hit, the U.S. can't legally borrow more money to pay off its debts. But the Treasury department has "emergency measures" it uses to keep paying its bills in the short-term to put off a default, such as underinvesting in government funds like Social Security or delaying debt auctions. Through these measures, Treasury Secretary Tim Geithner has said the government can stave off a default for another eleven weeks, until August 2. During that time, reaching the debt limit is unlikely to cause major market disruptions. But the closer we get to the 11-week mark, the more financial pain Washington's political haranguing will cause.  Example: when the U.S. reached the debt limit in 1995, bond yields fell for several months before rising slightly during the few months before the debt ceiling was raised. By some estimates, an increase of 25 basis points on Treasury yields resulting from the debt limit showdown could cost taxpayers as much as $500 million more per month.

Bond market optimism should scare us - TODAY, Treasury reached its debt ceiling and began emergency manoeuvres to gain a few months before running out of borrowing room. Most everyone agrees that failure to raise the debt ceiling before that happens would be a calamity. Tim Geithner, the Treasury secretary, has just warned for the umpteenth time that it would lead to “ catastrophic far-reaching damage”, sending interest rates skyrocketing and unleashing chaos on the American economy and the financial system. Oddly, one particularly influential group of observers isn’t the slightest bit worried: the people who buy bonds. If they were worried America won’t repay the principal and interest, they’d demand higher interest rates as compensation. In fact, the opposite has happened. In a little over a month, as the White House and Republicans have dug in over the issue, the yield on the 10-year Treasury bond has fallen to just 3.15% today from 3.6% a little over a month ago.What seems nonsensical makes perfect, and worrying, sense if you understand how this debate is likely to play out.

The Outcome of the Debt Ceiling Battle Could Hurt the Economy - If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.

The debt limit and uncertainty - Over the last couple of years, a common conservative talking point about federal policy changes has been that uncertainty is dangerous. When people don’t know what future government policies will look like, the risk inherent in business investment is greater, without average returns being higher.  This argument is true, although sometimes the importance of uncertainty can be overstated. Still, isn’t it odd that we’re not hearing it in regard to the debt limit negotiations? The biggest problem that a debt limit impasse could create would be the creation of uncertainty about whether the government will default on interest payments. However, as I’ve written before, I think there is actually very little risk of that (and the bond markets seem to agree, as bond yields are not spiking.) But there are other ways that the debt limit fight certainly creates uncertainty. The biggest unknown is this: if we get to early August without an increase and Treasury starts selectively delaying payment of bills, what will go unpaid?

The Debt Ceiling Battle From 30000 Feet - If you can avoid getting down in the weeds of the debate, the big-picture view of what’s ahead is not that difficult to analyze. First, at this point it’s hard to see how the big budget deal that some on Capitol Hill are demanding as the price for their vote on a debt ceiling increase can happen by Aug. 2 — the date the Treasury says it will run out of cash management options. If anything, there is less of a consensus today than at any time over the past year about even the most basic elements of a budget deal, let alone the always-difficult specifics.  And even if a big budget deal is somehow negotiated, it’s not at all clear that there will be enough support to enact it by Aug. 2, or perhaps at all. The Republican House and Senate caucuses in particular have shown no signs that they will automatically follow their leadership on budget-related issues

Debt ceiling crisis: The debt ceiling is a pointless, dangerous relic, and it should be abolished - Today, the United States officially hit its $14.3 trillion debt ceiling, meaning the country can no longer issue new bonds to finance its debt. The Treasury Department has already started undertaking "extraordinary measures" to keep the country's bills paid. Eventually, though, the United States will need to do one of three things: default on its obligations, start making drastic cuts in federal spending, or raise the debt ceiling again. But perhaps there is a fourth alternative, one that will spare us from endless partisan bickering and protect the markets from uncertainty: The United States should just get rid of the debt ceiling, once and for all.  The ceiling is entirely unnecessary for managing the country's finances. Every year, Congress determines the government's rates of taxation and spending, and therefore its surplus or deficit. Annual deficits accrue to the overall national debt, which Treasury finances by issuing bonds. The ceiling relates only to the total amount of debt the Treasury is allowed to issue. In and of itself, it does nothing to constrain spending, raise taxes, or otherwise improve the country's fiscal situation.

Debt Ceiling: False Comparisons to 1995 / 1996 -In discussions of the debt ceiling, I keep seeing comparisons to the 1995/1996 government shutdown (here is an example from the WSJ) In fiscal 1995, the economy was in the middle of a strong expansion with the unemployment rate around 5.6%. There was no cyclical deficit (from a recession), just a left over structural deficit that was steadily being reduced. The deficit in fiscal 1995 was 2.2% of GDP (about 10.8% of outlays). This year, the economy is fragile, the unemployment rate is at 9.0%, and the deficit is a combination of both a structural deficit and a cyclical deficit (from the great recession). The total deficit is now close to 9% of GDP and about 37% of outlays. In fiscal 1995, the government could do the same "extraordinary measures" as today to delay the day of reckoning, and then eventually cut off all non-essential discretionary outlays (the "government shutdown"). That was enough to buy more time, and the government didn't have to default on the debt, or cut Social Security or Medicare payments. Now there is a cyclical deficit on top of an even larger structural deficit. It is impossible to just shutdown non-essential discretionary outlays - the cuts will have to go deeper. So the comparison isn't valid.

Adventures with debt-ceiling politics -- As the debate over the debt ceiling has heated up over the past month, the yield on the ten-year bond has plunged, from 3.57% on April 11 to 3.12% today. This is not a market which fears catastrophe come August 2. So it’s easy to see why Republicans simply don’t believe Tim Geithner when he tells them that if the debt ceiling isn’t raised by then, we will have some kind of macroeconomic Armageddon. Remember, the House Republicans were told in no uncertain terms — by George W Bush, no less — that if they voted against TARP, that would have equally catastrophic consequences. Bush’s threat was more credible than Geithner’s, and the Republicans in the House were less truculent then than they are now. And even so they voted against TARP. But here’s what I don’t understand: we’ve already reached the debt ceiling. At this point, Geithner can point at just about anything and say that it’s an expenditure we can’t afford right now, and we’ll have to put it off until the debt ceiling is raised. Why doesn’t he just do that with all Congressional salaries?

The Battle is Squared, and Why We Need Budget Jujitsu - Robert Reich - Technically, the federal government has now reached the limit of its capacity to borrow money. Raising the debt ceiling used to be a technical adjustment, made almost automatically. Now it’s a political football. Democrats should never have agreed to linking it to an agreement on the long-term budget deficit. But now that the debt ceiling is in play, there’s no end to what the radical right will demand. John Boehner is already using the classic “they’re making me” move, seemingly helpless in the face of Tea Party storm troopers who refuse to raise the ceiling unless they get their way. Their way is reactionary and regressive – eviscerating Medicare, cutting Medicaid and programs for the poor, slashing education and infrastructure, and using most of the savings to reduce taxes on the rich. That goal can be achieved by doing exactly the opposite of what radical Republicans are demanding. We can reduce the long-term budget deficit, keep everything Americans truly depend on, and also increase spending on education and infrastructure — by cutting unnecessary military expenditures, ending corporate welfare, and raising taxes on the rich.

The symbolic battle over the debt ceiling - Symbolism doesn’t pay off debts or cover the costs of Social Security and Medicare. This has not stopped politicians in the nation’s capital from engaging in an extended and entirely symbolic fight over how to raise the debt ceiling. It’s time to stop the charade. The outlines of an eventual deal are already clear. Both parties will agree to some spending cuts and to a deficit-reduction trigger that won’t take effect until well after the 2012 elections. The triggering language will be vague enough so Republicans can say it would force large spending reductions and Democrats can say it would allow for a mix of cuts and tax increases. Republicans holding the debt ceiling increase hostage to their efforts to eviscerate programs know perfectly well that Congress will not risk a financial crisis. They even acknowledge this. Yet Boehner needs to push things to the brink because the Tea Party members of his caucus believe that last year’s election gave the GOP a “mandate” to make their wildest small-government dreams a reality.

Debt Ceiling: Tea Party Making Life Hell For GOP Leaders - This excellent story by Nick Carey at Reuters about how the tea party folks are making life exceedingly difficult for House Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) is well worth a few minutes of your time.Carey's story provides some important updates my post from March 22 about my experience speaking at the first meeting of the House tea party caucus.  Here's what I concluded back then:

  • First, GOP representatives who are tea party supporters told me that their leadership’s unwillingness to cut off funding for health care reform was a big problem for them because they were assuming that once it was taken off the table, cutting off funding would never come back.
  • Second, the tea party folks – both members of Congress and others – do not trust House Speaker John Boehner (R-OH) or Majority Leader Eric Cantor (R-VA) not to sell out their agenda.
  • Third, as I’ve been saying for a while, compromise is not an option.

The Debt Ceiling Fiasco - The debt ceiling "crisis" started on Monday when the U.S. government reached the legal limit on how much it is allowed to borrow—a limit that, curiously, counts even debts that one branch of government owes to another. What happens then? Before attempting an answer, let's first note that this should not be happening in the first place. Other countries pass budgets estimating total receipts and expenditures for the year, which in turn imply how much they plan to borrow. But not here. Our Congress can pass a budget that implies an illegal amount of new borrowing. In fact, it did so last month when the two parties agreed to a fiscal year 2011 budget projected to push the national debt over $15 trillion, even though the law limits the debt to $14.3 trillion. What happens if we crash into the debt ceiling? Nobody really knows, but it's not likely to be pretty. Inflows and outflows of cash to and from the Treasury jump around from day to day as bills are paid and revenues arrive. But at average fiscal 2011 rates, receipts cover only about 60% of expenditures. So if we hit the borrowing wall traveling at full speed, the U.S. government's total outlays—a complex amalgam that includes everything from Social Security benefits to soldiers' pay to interest on the national debt—will have to drop by about 40% immediately. How in the world do you do that? No one really knows.

Will The US Have A “Debt Crisis”? by Simon Johnson - If the Republicans’ threats were credible, any news that increased the likelihood of a problem with the debt ceiling would send Treasury bond prices down and yields up. This is not happening, because bond traders cannot imagine that the Republicans would be able – or even willing – to follow through. After all, the consequences of failing to increase the debt ceiling would be catastrophic. The entire credit system in the US – and in much of the rest of the world – is based on the notion that there are “risk-free assets,” namely US government securities. There is no provision in the US Constitution to guarantee that the US will always pay its debts, but the American Republic has proven itself for 200-plus years to be about as good a credit risk as has ever existed.At least in the near term, the chance that the US will not service its debt is vanishingly small – perhaps in the same order of probability as a large meteor striking the earth. To be sure, there are big fiscal questions to be sorted out – including how much the government should spend and on what, as well as how much tax it should collect and by what means.

Goolsbee: Failure to Raise Debt Ceiling ‘Last Thing Economy Needs’ - A failure to raise the U.S. debt ceiling is the last thing the U.S. economy needs, Austan Goolsbee, chairman of U.S. President Barack Obama‘s Council of Economic Advisers, said Thursday. If the debt ceiling isn’t raised, the U.S. would be forced to default either on government bonds, Social Security, Medicare or the military, Goolsbee said while speaking at the Council on Foreign Relations in New York. “We’re finally seeing promise in a lot of industries to come out of a deep hole. That strikes me as the last thing the economy needs,” Goolsbee said.  The U.S. hit its debt limit Monday, and Treasury officials expect to exhaust the federal government’s capacity to borrow in August. Treasury Secretary Timothy Geithner has warned of an economic catastrophe if the U.S. defaults.

GOP Congressman Suggests Staving Off Default By Selling Most Of Utah - To address the nation’s deficit as we reach our impending statutory debt limit, conservatives refuse to consider asking the wealthiest to pay their fair share. Instead, many want to place the burden on the backs of Main Street America. Florida Republican congressman Dennis Ross went a step further today, suggesting that the U.S. government could actually sell off part of AmericaDennis Ross, a House Republican and a member of the Tea Party caucus, told Reuters: “I don’t think Treasury has been up front with us. I am not convinced the sky will fall in on August 3.” Ross added: “I’m not an economist, but I have maintained a household. The federal government owns 70 per cent of Utah, for example. There are federal buildings. If you need cash, let’s start liquidating.” Among other novel approaches offered by conservatives to address the deficit: Selling off all the gold at Fort Knox.

US should sell assets like gold to get out of debt, conservative economists say -- With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion. “It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.” But that’s cockamamie, declares the Obama administration. Mary J. Miller, Treasury’s assistant secretary for financial markets, said the U.S. should sell assets in an orderly, “well-telegraphed” manner, not in a “fire sale” atmosphere with a debt limit deadline accelerating the process.

Selling Gold at Fort Knox Emerges as Next Big Question in Debate on Federal Debt Limit - The next big question on the federal debt limit could be whether to start selling the government’s holdings of gold at Fort Knox — and at least one presidential contender, Ron Paul, has told The New York Sun he thinks it would be a good move. The question has been ricocheting around the policy circles today. An analyst at the Heritage Foundation, Ron Utt, told the Washington Post that the gold holdings of the government are “just sort of sitting there.” He added: “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.” His comment came in the wake of not only the government having reached the statutory debt limit of $14.29 trillion but also the release of a report by the Heritage Foundation of a report on asset sales. The report outlined how a “partial sales of federal properties, real estate, mineral rights, the electromagnetic spectrum, and energy-generation facilities” might garner the federal treasury $260 billion over the course of the next 15 years.

Don’t Tax You, Don’t Tax Me, Sell the Gold Behind the Tree? - I thought Sunday’s front page story by Lori Montgomery in the Washington Post–on the idea of reducing federal government retirement benefits–was just the latest (depressing) installment of politicians avoiding broad-based, fundamental reforms that are needed to get projected budget deficits down to economically-sustainable levels.  Government workers are to the conservatives what really rich people and evil corporations (be they oil and gas ones or financial/insurance ones) are to liberals:  not a middle-class, Main-Street, majority of voters, and hence a group those policymakers are willing to say ought to pay for deficit reduction. But today’s (Monday’s) front page story highlights an idea that goes way beyond the “tax the guy behind the tree” attitude.  As Joel Achenbach explains: With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion. Good idea?  Well, Treasury and other Administration officials don’t seem to think so...

What To Do If The Debt Ceiling Is Not Raised? Ignore It - We are indeed approaching an unprecedented situation. As I have repeatedly pointed out, the US is the only nation ever to have a nominal debt ceiling, long ignored as a trivial matter since its imposition in 1917, given the routine way it has been raised so many times previously. So, my proposal is that if the Congress is unable to come to some sort of reasonable deal that will allow a vote on raising the debt ceiling, Treasury Secretary Geithner should simply ignore the debt ceiling and continue to pay the bills as they come in, thereby avoiding any defaults or spending cuts or financial crises. The fact is, in the absence of any direct instructions from the Congress on which bills should be paid and which should not be in the face of crashing into the debt ceiling (surely we are not talking about paying no bills at all), he has no authority not to follow the instructions of the Congress in its latest budget, and spend what has been mandated. That will be the last coherent instruction from the Congress, and I say he should obey that in the absence of anything else more specific. Indeed, it will be the only responsible thing to do.

Politico Has Not Heard About the Collapse of the Housing Bubble and Economic Crisis - Dean Baker - That is the conclusion that readers of a Politico article headlined, "budget surplus to deficit: how we got here," must conclude. This article attributes the increase in the deficit in the Obama years to increased spending coupled with tax cuts, only mentioning in passing at the end of the article that the single biggest factor in the rise of the deficit was the economic collapse. It fails to point out that virtually all of the additional spending and tax cuts by President Obama was carried through for the explicit purpose of counteracting the loss of private sector demand due to the collapse of the bubble. It is absolutely inexcusable for a serious news organization to run a piece like this. The collapse of the housing bubble was by far the biggest economic disaster since the Great Depression. Complaining about the size of the deficit under President Obama, while only mentioning in passing the reason for the deficit, is like complaining about a city's use of water without mentioning that it had been trying to extinguish a massive fire.

JP Morgan CEO: US default would be 'disaster' - It would be a "moral disaster" if the United States were to default on its debts and become unable to pay its obligations, JPMorgan Chase & Co. CEO Jamie Dimon said at an appearance in Colorado Thursday evening.  The U.S. is the financial linchpin of the world, and the economic effects of the U.S. defaulting could be "potentially catastrophic," "It will dwarf Lehman," Dimon said, referring to the 2008 collapse of the investment bank Lehman Brothers, which contributed to the beginning of a global financial crisis. Congress is debating raising the country's $14.3 trillion borrowing limit. White House officials say the government will run out of cash to pay expenses Aug. 2, but lawmakers have said they want spending cuts before they agree to raise the debt ceiling.

Cost to hedge US default highest since January (Reuters) - The cost to hedge against a U.S. government debt default rose on Friday to its highest level since January ahead of the government's sales of $99 billion in securities next week. Worries persist over Washington's struggle to reach a deficit-cutting deal and to raise its $14.3 trillion legal borrowing limit, which was hit on Monday. Anxiety over sovereign creditworthiness has been manifested in a rise in credit default swaps on the government debt of Japan and European countries as those regions face their own fiscal problems. "It's a general disdain against these sovereign problems. Those problems are not going away," Despite the higher cost to hedge against a U.S. default, Ahrens expects the U.S. Treasury Department will have little trouble selling next week's supply of two-year, five-year and seven-year notes.

Bo Cutter on the Debt Ceiling Fight - “This view is spreading like wildfire in the GOP.” Brian Beutler notices that the argument that a so-called “technical default” wouldn’t be bad for the economy is on the rise as a talking point within the GOP. I honestly can’t tell if these people really believe it or not. Example, Senator Toomey made the case at AEI: At an event at the conservative American Enterprise Institute Wednesday morning, Sen. Pat Toomey (R-PA) laid out the case. “This problem is so urgent that there is — an alternative school of thought has emerged recently,” Toomey said. “The most high-profile advocate for this was Stanley Druckenmiller … one of the world’s most successful hedge-fund managers, extraordinarily wealthy from his knowledge of the markets, a big money manager now, and a big holder of Treasury securities — and he has said that he would actually accept even a delay in interest payments on the Treasuries that he holds. And he would prefer that if it meant that the Congress would right this ship.”  I really can’t believe it’s come to this.

Stupid Debt Brinksmanship - As Brian Beutler summarizes over at Talking Points Memo, a number of Republican officials (including Pat Toomey and Paul Ryan) are relying on advice that a brief default on federal bonds would not rattle the financial markets:  Ryan told [CNBC] that he talks to “lots of bond traders” and “lots of economists” and they all say that investors are willing to put up with a default of “a day or two or three or four” if it produced massive budget changes as part of a Capitol Hill debt limit deal. This is a very dangerous thing for policymakers to think. The problem is not that these traders are necessarily wrong. None of the previous debt limit impasses has led to a temporary bond default, and it’s possible that a brief default really would be just a minor hiccup. Unfortunately, it’s also possible (as many other voices on Wall Street are warning) that a default would permanently raise Treasury spreads, drive investors to find alternative safe havens, cause a double-dip recession, and unleash various other evils. So, if they are willing to create the possibility of a default, Republicans in Congress are willing to expose America to severe downside risk.

Debt Ceiling: No Chance of US default - Republican Senator Pat Toomey is now making the point that with debt payment an executive priority, and with tax receipts more than sufficient for interest payments, not raising the debt ceiling will not mean default, instead it will mean other federal spending will get cut, which he pronounced analogous to a partial government shut down. While this has always been factually correct, it is only very recently that this has become the lead response from the Republicans, in direct response to warnings by the Democrats of a US default. With the Democrats being exposed as factually wrong and guilty of at least innocent fear mongering, their entire negotiating position is weakened by both the facts and their reduced credibility in general. So I have to conclude the end result will be dramatic spending cuts, no tax increases, a large reduction in long term aggregate demand, and most likely reductions in short term aggregate demand as well.

Treasury Prepares To Plunder Another $45 Billion From Retirement Funds As It Issues $110 Billion More Debt Next Week - Now that it has finally been made clear that in order to accommodate the debt ceiling by adding marketable debt, the Treasury has no choice but to literally plunder retirement accounts, we now know that in order to fit in the just announced $110 billion in new bond issuance over the next week, Tim Geithner will have to reduce US retirement funding (the bulk of which, the Social Security Trust Fund already lost $1.1 trillion in the past year) by at least $45 billion. That is the net result of $60 billion in net new cash and $15 billion in bill paydowns which will settle between May 19 and May 31. What remains to be seen is just how much cash the Treasury will bleed as it seeks a parallel track of under-rolling maturing Bills, in order to keep its previously disclosed intentions of issuing just $142 billion between April and June. Keep in mind almost two thirds of this period has passed, which means that somehow the Treasury has to not only stop but in fact reverse its net issuance. We are not sure how this will actually happen.

Treasury using federal pension funds opens up move to take 401K’s - On Monday, the government reached the debt ceiling, and the Treasury Department immediately implemented measures to appropriate federal pension fund payments to use for government spending. This step in pulling from government held retirement funds is once again bringing up the potential for the Obama administration to seek acquisition of the public's 401K's to help pay for spending and debt. On May 16th, the Obama administration agreed to tap into federal retirement programs to help fund programs and agencies that would otherwise be funded through borrowing before the debt ceiling was reached. The use of retirement and pension funds as the first resort of the government to pay for programs, debt obligations, and even ongoing military operations is a large warning signal to the American people regarding a huge and untapped resource that up until now, the government has refrained from exploiting. The amount of money stored in corporate retirement funds, federal retirements, and market based 401K's amount to several trillion dollars that unlike Social Security, which it is collateralized by IOU's, this is real money that the government has already sought to acquire in budgetary discussions.

Number of the Week: 95 Days to Wipe Out 2011 Growth - 95

— Days required to wipe out this year’s economic growth, if the U.S. doesn’t raise the federal debt limit. Lawmakers are setting the stage for some dramatic brinksmanship over whether to raise the federal debt limit. If they keep it up too long, they could quickly turn a tepid recovery into a tailspin. Treasury Secretary Timothy Geithner has warned that if the debt limit isn’t increased by August 2, the government will no longer be able to spend more than it collects in revenue. That means it will have to cut spending by about 35%, probably choosing among such items as payments to contractors, soldiers’ salaries, social security and Medicare.  On average, the cuts would amount to about $3.8 billion a day, according to our own estimates based on projections from the Congressional Budget Office. At that rate, over a period of only 95 days, the cuts would add up to 2.9% of gross domestic product, adjusted for inflation*. That’s just enough to negate all the economic growth forecasters expect in 2011.

Fed's Bullard Says US Must Fix Deficit Before Crisis Strikes‎ - Federal Reserve Bank of St. Louis President James Bullard said the U.S. needs to address its budget deficit before investors lose confidence in the nation’s ability to repay its debt.  “When it does blow up it will be too late,” Bullard said today in an interview at Bloomberg’s headquarters in New York. “When markets lose confidence in the U.S. and say that they don’t trust us anymore, rates will skyrocket and the crisis will be upon you, all the debt and deficit figures will look all that much worse, and you won’t be able to do anything about it because these are problems that take a long time to fix.” Lawmakers and investors shouldn’t take comfort in current U.S. borrowing costs because markets are often “complacent” about the risk from excessive deficit spending, as evidenced by the unfolding of the sovereign debt crisis in Europe, Bullard said.

Secretary Geithner’s budget speech, part 1 -- There have been three important recent fiscal policy speeches:

Washington relies too much on off-the-cuff comments and tweets to drive policy debates. Serious policy addresses like these three provide depth that is essential to the national dialogue. I also wish we had more frequent serious policy speeches on the House and Senate floors. Today I will begin to respond to the Geithner speech, which is the most effective presentation of the Administration’s fiscal policy argument I have seen.  It’s a long speech with a lot that deserves analysis and response.

Geithner: U.S. must deal with budget woes or pay more - Treasury Secretary Timothy Geithner said on Tuesday the country's debt situation was so severe that Congress must deal with it or face the risk the country will be charged much higher interest rates to borrow. "There is no way of knowing how long financial markets will give the American political system to get ahead of this problem," Geithner said in prepared remarks for delivery to the Harvard Club in New York. "When confidence turns, it can turn with brutal force and with a momentum that is very difficult and costly to arrest." Geithner, who is in the midst of intense negotiations with congressional Republicans over a budget, said a Republican-backed version in the House of Representatives "will not pass the Congress, now or in the future." He urged lawmakers on both sides to work on a plan that will bring deficits down "gradually but dramatically" over a three-to-five-year period. The intent would be to get the budget deficit down to below 3 percent of GDP from the current level of about 10 percent.

Geithner Offers Fiscal Facts - Here are five facts that Treasury Secretary Timothy Geithner offered in a speech in New York Tuesday as  “context for the [fiscal] choices we must make now to preserve room for important investments in our future.”

  • In the U.S. today , 40% of children born each year are covered by Medicaid.  If you are born today in hard-pressed communities in many American cities, like St. Louis or Baltimore, you are more likely to die before your first birthday than if you were born in Sri Lanka or Belarus.
  • In education, we’re losing ground…. In Los Angeles, only about half the kids graduate from high school.
  • Over the next 25 years, the number of Americans eligible for Medicare and Social Security will nearly double, while the number of working age Americans will only increase by about 10%, putting substantial new burdens on working Americans.
  • We spend $700 billion a year on national security… about two-thirds of what we spent as a share of our economy during the Cold War.
  • The effective income tax rate for the wealthiest Americans—those earning more than $250,000 a year—is at its lowest level in 50 years. And the effective rate for the very rich—those earning over $10 million per year— has declined much further and is now around 21%

Druckenmiller Calls Out The Treasury Ponzi Scheme: "It's Not A Free Market, It's Not A Clean Market", Identifies The Real Bond Threat - We hadn't heard much from legendary investor Stanley Druckenmiller since last August when he decided to shut down his Duquesne Capital hedge fund. Until today. In a must read interview, the man who took on the Bank of England in 1992 and won, says that he join the camp of Bill Gross et al, making it all too clear that all the recent fearmongering about the lack of a debt ceiling hike by the likes of Tim Geithner, Ben Bernanke and, of course, all of Wall Street, is misplaced, and that the real threat to the country is the continuation of the current profligate pathway of endless spending. From the WSJ: 'Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years. 'Excuse me? Russia had a real default and two or three years later they had all-time low interest rates,' says Mr. Druckenmiller. In the future, he says, 'People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order.'

The Silliness of Spending Caps - One of the new old ideas floating around Washington these days is an aggregate spending cap for the federal government. For example, calls for limiting total government spending at around 21 percent of GDP. This is silly for at least two reasons. First, and less controversially, the number of dollars that flow from the federal government to entities that are not the federal government is not an economically significant number*. The most obvious example of this is tax expenditures: subsidies that are implemented through the tax code, usually as deductions or credits. So a spending cap simply motivates Congress to spend money through tax credits rather than by writing checks, which is bad for all sorts of reasons. There are plenty of other ways to game the system, too. The federal government could impose unfunded mandates on the states — and then provide federal tax credits that make it easier for states to raise money. Second, even without the tax expenditure issue, the federal government lumps together all sorts of different kinds of animals that should not be thought about in the same way. I’ve discussed this a bit in a previous post, but let’s try again.

Some Simple Deficit Reduction Arithmetic - Here’s a short lesson about something that every policy-maker should have learned in Macro 101, but apparently has been forgotten by many of them. Suppose we are in a country that is running a large budget deficit but, for whatever reason, decides that it needs to dramatically reduce it. Take your pick of examples, because there are plenty to choose from: Greece, the UK, the US. Suppose that the country – let’s call it Austerityland – has a GDP of $100/year, and a budget deficit of $10/yr, or 10% of GDP. And suppose that the government decides it wants to get the deficit down to 5% of GDP. How can it get there?  To keep things simple (and to make it particularly relevant to the three examples mentioned above), let’s focus on the strategy of trying to halve the budget deficit primarily through spending cuts. So the government of Austerityland decides to cut spending by $5/yr. What happens? ... If G is reduced by $5 in Austerityland, the first thing that happens is that GDP falls by $5. But then a bunch of secondary effects kick in ...

Family Budget Not Equal to Government Budget - Heading into work the other day, I heard a Congresswoman on the radio using a common argument that always sticks in my craw—or it would if I knew what a ‘craw’ was. Here’s the gist: “The federal budget is just like a family budget, and we in government must tight our belts and live within our means just like families do.” There are similarities which I’ll note below, but it’s almost always used as an argument for cutting everything to the bone right away, and in that sense it’s wrong. First of all, it’s bass-akwards: when families are tightening their belts, the federal government is the one institution that can actually help the economy—and these belt-tightening families—by loosening its belt and running a deficit. That deficit should be temporary and should come down when the private economy climbs up off the mat—which again tweaks the analogy: when families start to loosen, gov’t should eventually start to tighten (“eventually” because these transitions can be fragile and if gov’t tightens too soon, it can reverse the early gains–see UK).

Budget Talks by 'Gang' Falter -Negotiations among a group of senators seeking a deficit-reduction deal threatened to collapse Tuesday as a key lawmaker pulled out, endangering what many in Washington had considered the best chance for a comprehensive, long-term budget agreement this year. "I'm not going to bang my head against a wall anymore," said Sen. Tom Coburn (R., Okla.) in an interview. "They're just over for now." He added, "I've got other things I want to be doing."The bipartisan talks, which had been underway about six months, hit an impasse about two weeks ago, participants said. Mr. Coburn would not say what prompted him to leave, but a person familiar with the talks said the immediate issue was Medicare cuts. The group, unofficially dubbed the "Gang of Six," had a heated meeting Monday night during which Mr. Coburn proposed additional Medicare cuts, the person said.  He asked for cuts of $130 billion beyond the $400 billion the president's debt commission recommended over 10 years, an idea resisted by other participants.

‘Gang of Six’ on verge of collapse as Republican Sen. Coburn withdraws - Since January, six senators have engaged in difficult negotiations and made painful concessions in a politically dangerous quest for something that has long eluded Washington: a bipartisan compromise to control the nation’s mounting debt.By Tuesday evening, however, the “Gang of Six”1 was on the verge of collapse. Sen. Tom Coburn2 (R-Okla.) withdrew from the bipartisan working group, saying the senators simply could not overcome the polarizing political pressure that each faces. The group’s two other Republicans said it would be hard to continue without Coburn. “The debt is still $14 trillion. It’s got to be solved in a bipartisan way,” Sen. Saxby Chambliss (R-Ga.) told reporters Tuesday night. “I hope that we’ll eventually, as a Gang of Six, be able to come together on some long-term resolution of the issue. But it looks like that’s not going to happen in the short term.”

Coburn Out: Is this The End For The Gang of Six? - I never expected much from the Gang of Six talks in the Senate anyway.  But Roll Call just reported that Senator Tom Coburn (R-OK) has announced that he's leaving the gang because he doesn't see the point in talking any further. Coburn seems to have left the door open just a bit by indicating that he could return at some point if he thinks it makes sense.  That sounds like what you say when you want to break up with someone but don't want to hurt their feelings too much. Coburn was considered the most important Republican member of the gang because of his willingness to consider eliminating tax expenditures as a member of the Bowles-Simpson Commission and his leaving almost certainly is going to be hailed as a victory in the days ahead by the no-tax-changes-to-reduce-the-deficit-no-matter-what crowd.

And Then There Were Five - This is not good news for bringing the Republicans around to the idea of reducing tax expenditures as part of a bipartisan agreement on deficit reduction.  As David Rogers reports on Politico: The Gang of Six is now the Gang of Five, as Sen. Tom Coburn made a quick departure from Tuesday afternoon’s meeting of the bipartisan Senate budget group struggling for months to reach agreement on a long range deficit reduction plan. “We’re still talking, still trying. This is not easy stuff,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) told POLITICO after the meeting concluded about 45 minutes later. Asked about Coburn, Conrad had no comment, but the Republican later confirmed to reporters that he is dropping out of the effort. he talks are at an “impasse” [said?] Coburn, but allowed that the remaining senators “may continue to meet without me.” hy drop out today?  He seems to have suddenly taken a turn toward the “glass half empty” view.

Gang of Six Members Were Willing to Cut $400 Billion from Medicare - Greg Sargent has more of the story about Tom Coburn’s unceremonious exit from the Gang of Six. We pretty much knew it had to do with Coburn seeking a global spending cap for Medicare. We didn’t know the details: The “Gang of Six” talks on deficit reduction broke down after Senators Dick Durbin and Tom Coburn got locked in a heated yelling match over Coburn’s demand for extremely deep cuts in Medicare that Durbin thought would “destroy” the popular program, a Senate aide familiar with the talks tells me. According to the aide familiar with the talks, the senators got into a heated argument on Monday night, after Coburn demanded an additional $130 billion in Medicare, in addition to the $400 billion in Medicare cuts recommended by President Obama’s fiscal commission, for a total of $530 billion in cuts for current recipients. “Coburn came in on Monday and said, ‘I want $130 billion,’” the aide says. “The conservation was heated. There was yelling. Durbin said, ‘I am not doing this. That destroys Medicare. That goes even further than Paul Ryan. We’re not doing it.’”

Do We Need an Election to Fix the Deficit? - I spent this morning at one of those Washington institutions: the budget roundtable. Today’s (at the Aspen Institute) gave me a chance to pose a question in exchange for my muffin:  Should Washington await the results of the 2012 election before reaching a cosmic budget agreement? It will, of course. The odds that President Obama and Congress will reach across the gaping fiscal divide anytime soon are vanishingly small. But does it even make sense for lawmakers to agree to what would be a profound change in the relationship between government and the people without first having an election? Here is why they should wait…and why they should not.

The Chart That Should Accompany Every Discussion of Deficits - All the time, and every day. It's this one, from the Center on Budget and Policy Priorities, released yesterday (and also highlighted by Andrew Sullivan and Ezra Klein today).Why does this chart matter? Because it makes clear, in that wonderful "worth 1,000 words" way, two realities that are fundamental to sane discussion of public finance, but that most of the public doesn't realize and that the Republican leadership is actively working to obscure. They are:
- The very large, but temporary and self-limiting, expenditures for TARP and other measures proposed by both the Bush and Obama administrations to avoid a second Great Depression, plus Obama stimulus spending. And;
- The very large, but permanent and worsening, budgetary impact of the "Bush tax cuts" -- which when first proposed back in the pre-9/11 era, were supposed to end in 2010 and were in response to what back then seemed to be the "problem" of a burgeoning surplus in federal accounts! Since "extending" those cuts just sounds like business as usual, I think it is hard for most people to envision the profound and growing effect they have.  Last year Austan Goolsbee had a marvelous chart of his own on that point. And, as a bonus half-point, the chart clarifies that budget problems would be on the path to self-correction, if the Bush cuts had lapsed as originally planned.

We’re not broke nor will we be - Many policymakers and pundits claim “we’re broke” and “can’t afford” public investments and policies that support workers. These claims are meant to justify efforts to scale back government programs and public sector workers’ wages and benefits. The “we’re broke” theme also implies that America’s working families should be satisfied with the status quo in terms of wages that have been stagnant for 30 years.Despite the rhetoric, it is clear that “we” as a nation are not broke. While the recession has led to job loss and shrinking incomes in recent years, the economy has produced substantial gains in average incomes and wealth over the last three decades, and economists agree that we can expect comparable growth over the next three decades as well. Between 1980 and 2010, income per capita grew 66.4%, and wealth per capita grew 73.2%. Over the next 30 years, per capita income is projected to grow by a comparable 60.6%. In other words, “we” are much richer as a nation than we used to be and can expect those riches to rise substantially in the future.

Heritage Criticism of CBPP Analysis Is Off-Base - The Heritage Foundation says that our methodology to calculate what caused the federal budget deficits of the coming decade “fails statistics 101,” but, in fact, it’s the Heritage response that’s faulty.  Here’s why: This chart from my colleagues Kathy Ruffing and Jim Horney, which has circulated widely in the blogosphere (for example, here, here, and here), shows that the economic downturn, the 2001 and 2003 tax cuts, and the unpaid-for wars in Iraq and Afghanistan account for virtually the entire deficit over the next ten years. As President George W. Bush took office in January 2001, the Congressional Budget Office (CBO) and the Office of Management and Budget were projecting the budget would run surpluses for the ensuing two decades or more.  Today, these agencies and virtually every reputable private budget expert project huge and rising deficits under current policies as far as the eye can see.  Our analysis and chart explain what happened — in other words, what has changed since 2001.  They go beyond recent analyses by CBO and the Pew Charitable Trusts to examine how bad policies and bad luck poisoned the fiscal outlook in the decade ahead.

CBO: Recent spending bill falls short on cuts -- The big spending bill passed into law with much fanfare last month will cut the deficit by $122 billion over the next decade - less than half of what top lawmakers promised at the time - the government reported Monday. Speaker John Boehner, R-Ohio, had touted the legislation as reducing the deficit by more than $300 billion over a ten-year span. His prediction was based on an analysis by a Senate aide that the $38 billion in cuts this year would translate into $315 billion over a decade. But the Congressional Budget Office, the closest thing to an official referee, said Monday the cuts add up to much less. Released the same day the Treasury Department announced that the government has reached the $14.3 trillion legal limit on its ability to borrow money, the CBO study illustrates the difficulty in cutting the deficit, especially for the immediate future.

OOPS! Historic ‘Spending Cut’ Bill Increased Spending By $3 Billion - Republicans stormed Capitol Hill in January vowing to slash discretionary spending by $100 billion right off the bat. In their pledge to America, they promised that, "[w]ith common-sense exceptions for seniors, veterans, and our troops, we will roll back government spending to pre-stimulus, pre-bailout levels, saving us at least $100 billion in the first year alone." As time went on, it became clear that they wouldn't get the whole loaf, and the key question became: How many billions of dollars in spending would Democrats agree to cut, without risking massive Republican defections, and, perhaps, a protracted government shutdown? A few weeks after they cut the deal, we have an answer. It turns out the six-month spending bill Congress passed in April increased discretionary outlays through the remainder of the fiscal year by a bit over $3 billion. In other words, total direct spending will be higher by the end of September than if Congress had just set spending on autopilot for the remainder of the fiscal year back in April.

Measuring Spending Cuts Enacted Last Month - On Monday, Doug Elmendorf – the Director of the Congressional Budget Office – published a post on his blog about the spending legislation for FY2011 that was enacted in April (P.L. 112-10). As you probably remember, this was the spending legislation hammered out by the Administration and Congress to avert a government shutdown. When the House cleared the final measure, the first reports indicated that the bill would cut $38.5 billion in the first year – and as much as $300 billion over 10 years. Then a previous CBO analysis emerged (from March) that indicated the compromise bill would actually only reduce this year's deficit by about $352 million – not by the roughly $38 billion, as many expected. This revelation clearly caused a stir about why the numbers were so different.  The latest CBO analysis (published yesterday) estimates that the bill will actually increase the deficit by 3.2 billion for the rest of this fiscal year, but then decrease the deficit by 122 billion over 10 years. The CBO Director explained that “part of the reason that total outlays will increase this year is that some defense funding was shifted from slower-spending to faster-spending activities.”

Extrapolation Through 2021 of Full-Year Appropriations for 2011 - CBO Director's Blog -For programs funded through annual appropriations (which are called “discretionary” programs), CBO uses the funding provided for the current fiscal year as the starting point for its baseline budget projections for the coming decade. Specifically, appropriations for those programs are generally assumed to grow each year with inflation. In March 2011, when CBO prepared its most recent baseline spanning fiscal years 2011 to 2021, it based its projections of discretionary spending on the continuing resolution that was in effect through March 18 (Public Law 112-4). Subsequently, on April 15, full-year appropriations for 2011 were enacted in the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10). CBO has been asked how a 10-year projection of the enacted appropriations would differ from the amounts shown in its baseline projections. CBO has not prepared new baseline projections incorporating the effects of P.L. 112-10; it will next update its baseline, as usual, in August. But in response to requests from Congressional staff, it has extrapolated through 2021 the full-year amounts of discretionary budget authority provided in P.L. 112-10 and compared the results with its March baseline projections.

Funny Numbers at the Pentagon - As the defense budget creeps toward the table in budget discussions on the Hill, we are likely to be treated to more and more of a contest over cuts, savings, baselines, budget projections, and the like.  There is no more fun, or frustrating game, than trying to peel away the numbers we get from DOD and get to a transparent reality of what is really going on. The latest fun was provided by the President's announcement last month that he was seeking another $400 billion out of the defense budget over the next 12 years.  In This was quite a claim, one the Pentagon has not provided any basis for making.  But it would seem to reflect the combination of the $330 billion Gates has repeatedly said he has saved by cancelling such weapons programs as the C-17 cargo plane, the F-22 fighter, the Marine's amphibious vehicle (EFV), and the Army's Future Combat System vehicle (FCS), and the $78 billion in other budget cuts he announced with the release of the FY 2012 budget. Secretary Gates (and now the President) continue to trot out these numbers, as if they had talismanic reality.

Means-Testing Doublethink - Krugman -- Reading Dean Baker this morning, something occurred to me: if you look at what passes for serious commentary about our fiscal situation, what you see is a remarkable example of doublethink: believing two contradictory things at the same time. On one side, we have a steady barrage of articles about how it would be cruel to raise taxes on everyone making more than 250K, even though that puts you in the top 2 percent of the income distribution, because 250K isn’t really rich. And on the other side we have confident assertions that we can curb entitlement spending by means-testing, by not giving full Social Security and Medicare benefits to people who don’t really need them. And by and large the people saying these two things are the same people.

"Class Warfare" - Krugman - Aha. Paul Ryan is whining about people playing the class warfare card. That, folks, is the sound of desperation. Actually, for the most part critics of his plan haven’t focused on the distributional issues so much as on the nonsense he’s talking; they’ve been playing the arithmetic card, not the class warfare card. But yes, the Ryan plan does impose huge sacrifice on the poor and the middle class, while cutting taxes on the rich and corporations. And this is, of course, the game conservatives have played over and over again since Reagan. Without exception, their policy proposals call for sacrifice on the part of most people, but lavish tax cuts on high incomes — and when you point this out, they yell “class warfare”. Again, the big problem with the Ryan plan isn’t the unfairness — although there’s plenty of that. It’s the fact that the plan is a fraud.

Poll: Americans Want Government to Push Economic Mobility - An overwhelming majority of Americans want the government to help poor and middle-class Americans better their lot, but there was significant disagreement about whether or not the government was pursuing the right strategy. The poll seems to underscore a long-running truism that everyone wants to help the poor but no one agrees how to do it.Some 83% of respondents in a new poll by the Pew Charitable Trusts supported a government role in promoting economic mobility, and 58% said the government could do more. Yet 37% believed the government is pursuing the “wrong strategies” and 43% believed it was pursing the right strategies ineffectually. This belief cut across party lines, Pew said, with 91% of Democrats and 73% of Republicans supporting a government role in helping the poor and middle class from falling behind.

In Media Coverage, Deficit Eclipses Unemployment - Major U.S. newspapers have increasingly shifted their attention away from coverage of unemployment in recent months while greatly intensifying their focus on the deficit, a National Journal analysis shows. The analysis -- based on a measure of how often the words "unemployment" and "deficit" appear in major publications -- portrays a dramatically shifting landscape of coverage over the past two years, as the debate over how to fix the federal deficit has risen to prominence and the question of how to handle still-high unemployment has faded from the media's consciousness. National Journal compiled counts of articles that mention one of the words in their headline or first sentences in the five largest newspapers in the country by print circulation using LexisNexis, a news information service. Mentions of unemployment have been dwindling since they spiked to 154 in the month ending August 15, 2010; over the month ending Sunday, there were 63. Deficit mentions, meanwhile, surged up to 261  when the leaders of President Obama's deficit commission released their final report. Mentions of the deficit remained higher after the commission's work wrapped up and as House Republicans and then the White House unveiled dueling proposals. In the month ending Sunday, there were 201 mentions.

They Never Cared About Unemployment - Mark Thoma posts the following chart (via Derek Thompson) to show that folks are “forgetting about the unemployed”: Chris Hayes quips, “well, there you have it: unemployment’s over.” What’s striking, though, is that even in January of 2010, when unemployment was over 10%, deficits received equal mention as unemployment. The media is certainly culpable here, but I’m guessing that their headlines are driven by the political discussion, which since the passage of the stimulus has been entirely warped. Goes to show that our political leaders, and the media by extension, will never give unemployment the attention it deserves.

Stupid Stimulus Tricks - Paul Krugman - So there’s another the-stimulus-didn’t-work paper (pdf) making the rounds, and as usual being seized on by people who have no idea what the issues are with this kind of estimation. Basically I’m with both Dean Baker and Noah Smith here, but I thought I might add some more general discussion. What this study claims to do is estimate the effect of the stimulus by looking at cross-state comparisons. So the first thing we should understand is just how difficult it is to do that. Remember, the stimulus was not big compared with the economic downturn. The original Romer-Bernstein estimate was that it would, at peak, reduce unemployment by about 2 percentage points relative to what it would otherwise have been. And most of that effect was supposed to come through measures that would have been common to all states: tax cuts, transfer payments, etc.. At most, differences between predicted effects among states should have come to no more than a fraction of a percentage point off the unemployment rate.

Public Programs Keep Millions Out of Poverty, CBPP: With anti-poverty programs under serious attack in Washington, here’s something to keep in mind: a major new study from the National Bureau of Economic Research (NBER) finds that public programs keep one in six Americans out of poverty — primarily the elderly, disabled, and working poor — and that the poverty rate would double without these programs. Without the cash and non-cash income provided by programs such as Social Security, SNAP (formerly food stamps), and the Earned Income Tax Credit:

  • The share of Americans below the poverty line in 2004 ($19,307 for a family of four) would have more than doubled, from 13.5 percent to 29 percent. That is, 45 million more Americans would have been poor.
  • The share of Americans in “deep poverty,” with incomes below half the poverty line, would have more than tripled, to 21 percent.
  • The share of Americans who are poor or near-poor, with incomes below one-and-a-half-times the poverty line, would have risen to about 40 percent.

Think of the Children - Krugman - One of the favorite lines of austerians is to claim that they’re concerned, above all, with the future prospects of our children. Paul Ryan says it all the time. So a couple of interesting points: First, as Tim Egan says, the key political calculation behind the Ryan plan was the belief that seniors would be greedily concerned only with their own benefits: Anyone born before 1957 would not be affected. They could enjoy the single-payer, socialized medical care program that has allowed millions of people to live extended lives of dignity and decent health care. And their kids and grandkids? Sorry, they would have to take their little voucher and pay some private insurer nearly twice as much as a senior pays for basic government coverage today. Medicare cuts would be postponed, Medicaid would face savage cuts right away. And while much of Medicaid’s spending is on nursing care, many of its beneficiaries are children. In fact, as Tim Geithner just pointed out, at this point 40% of children born in America are on Medicaid. So the actual content of the Ryan plan is pro-geezer, anti-child. Because nothing serves the nation’s future more than making sure future citizens lack adequate health care and nutrition.

Rep. Paul Ryan Defends Medicare Proposal: ‘Give Seniors The Power’ - With his proposed changes to Medicare being dinged not just from Democrats but GOP presidential candidate Newt Gingrich as well, Rep. Paul Ryan (R-WI) on Monday defended the GOP plan under which the federal government would give future seniors money to pay for private companies for health insurance coverage. Ryan said:There is widespread, bipartisan agreement that the open-ended, fee-for-service structure of Medicare is a key driver of health-care cost inflation. As my friend Jim Capretta, a noted health-care policy expert, likes to say, Medicare is not the train being pulled along by the engine of rising costs. Medicare is the engine – and the rest of us are getting taken for a ride. The disagreement isn't really about the problem. It's about the solution to controlling costs in Medicare. And if I could sum up that disagreement in a couple of sentences, I would say this: Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors.

Do Do That Voodoo - Paul Krugman - So Paul Ryan gave his big speech defending his plan — and demonstrated, in case you were wondering, that there’s no there there (and there never was). Remember how everyone declared that Ryan was a serious person, truly willing to face up to our deficit problem? Well, now he’s out there denouncing the way “the budget debate has degenerated into a game of green-eyeshade arithmetic” — in other words, enough with all these numbers. And his answer to the deficit now is that we have to grow our way out. There’s a name for that: voodoo economics.And in fact almost his whole speech was standard supply-side boilerplate. Low taxes are the secret to growth, nobody ever solved a deficit problem by raising taxes (Clinton, anyone?). He even denounced austerity.

Paul Ryan defends Medicare plan in wake of Newt Gingrich's slam - Rep. Paul Ryan spent Monday defending his plan to radically rework Medicare after it came under fire in surprising fashion from a fellow Republican, Newt Gingrich. Gingrich became the first GOP presidential candidate to openly rip the plan, which would convert Medicare into a private insurance program, after the proposal -- part of a House budget blueprint to tame federal spending -- drew heavy criticism from some voters, and polls showed it to be unpopular. “The budget passed by the House last month takes credible steps to controlling healthcare costs,” Ryan, chairman of the House Budget Committee, said in a speech to the Economic Club of Chicago. “It aims to do two things: to put our budget on a path to balance, and to put our economy on a path to prosperity.”

Ryan 1, Newt 0 - Newt Gingrich’s attack on Paul Ryan’s Medicare plan as “right-wing social engineering” could have resolved itself one of two ways. The first is that Gingrich could have stood his ground, proposed a different Medicare plan, and provoked a healthy debate among GOP presidential candidates about the role of government in health care. The second is that he could have apologized and groveled at Ryan’s feet for forgiveness. And groveling it is: Professing himself “big fan” of Rep. Paul Ryan, Newt Gingrich conceded Tuesday night that his criticism of the Republican budget leader’s Medicare plan was a “mistake.” “I made a mistake,” Gingrich told Fox News host Greta Van Susteren, recounting his apology call to Ryan earlier in the day. “The fact is that I have supported what Ryan’s trying to do on the budget,” he said. “The budget vote is one that I am happy to say I would have voted for.”

The Food Stamp Fight - Newt Gingrich is receiving a lot of well deserved criticism for calling President Obama “the food stamp President" but as Dottie Rosenbaum notes cutting the food stamp program is part of Paul Ryan’s long-term budget plan: The House-passed plan to convert SNAP (the Supplemental Nutrition Assistance Program, formerly called food stamps) to a block grant and cut the program by almost 20 percent rests on the false claim that the program is experiencing “relentless and unsustainable growth.  Figure 1 of her CBPP discussion says a lot. First of all – the rise in food stamp recipients is a consequence of the Great Recession.  The other thing to note is that food stamp expenditures were less than 0.3 percent of GDP before the Great Recession and are projected to fall below 0.3 percent of GDP over time. As usual – GOP fiscal “discipline” is limited to big cuts in small programs.

GOP budget cuts would hit poor hard - After campaigning on the promise to roll back spending to Bush-era levels, House Republicans have overshot their mark and landed in the last years of the Clinton administration — at least in the case of cuts from labor, health and education appropriations1 important to poor and working-class families.  Indeed, a proposed $139.2 billion cap for the annual labor, health and education bill is about $19 billion less than the eight-year average for the same discretionary spending under former President George W. Bush — when measured in current dollars. The Back to the Future scenario is important to the current debt ceiling debate on two counts.  First, it underscores the often heavy concentration of cuts from programs most sensitive to low-income families. Second, if Clinton-era appropriations are truly the new standard, it invites more study of the past decade and the parallel growth of tax cuts and discretionary spending since he left, both contributing to the deficit crisis today.

On The Chopping Block: Federal Worker Pensions = Bipartisan support endorses ending vital social benefits incrementally, principally Social Security, Medicare, Medicaid, healthcare for those who can’t afford it, and public pensions. Notably, deep Medicare cuts were made. Much more is planned, including slashing Medicaid. Now federal pensions are being targeted. Civilian federal employees receive benefits under the Federal Employees Retirement System (FERS), consisting of three components:

  • – a FERS annuity defined benefit plan;
  • – mandatory Social Security participation; however most Civil Service Retirement System (CSRS) employees aren’t part of Social Security unless they qualify separately from additional private sector employment; and
  • – the Thrift Savings Plan (TSP), a 401(k) type defined contribution plan.

The Republican Anti-Tax Position Is Rapidly Crumbling Under the Weight of Deficits - The American people are concerned about the budget deficit and know enough basic arithmetic to understand that it can result from higher spending or lower revenues. Republicans, however, insist that taxes must not be increased by a single penny; indeed, they argue that the government doesn’t even have a deficit problem, just a spending problem. Therefore, the only deficit reduction measures they will consider in the Republican-controlled House of Representatives are spending cuts. Democrats all know that the Republican position is ridiculous, that the Bush tax cuts have added some $2 trillion to the national debt and constitute the largest component of projected deficits going forward. Unfortunately, Democrats have been oddly reluctant to explain the truth about the deficit. They seem paralyzed by fear that they will be attacked by Republicans for being tax increasers. Consequently, the Republican mantra that spending must be slashed, even if it means effectively abolishing Medicare, and any tax increase, no matter how small, will destroy the economy is just about the only budget option voters ever hear.

Too Many Cooks on Tax Policy? - I’m preparing a presentation on our tax system for a group of visiting foreign tax officials and they wanted to know how responsibilities are divided within the federal government.  Seems like a fair question. In other countries, the process is often quite streamlined:  a Ministry of Finance, which makes the political decisions, a Treasury Department, which houses the professional staff for the ministry, and an Inland Revenue Service, which administers the tax system and is sometimes actively involved in policy formation.The US process is a tad more decentralized (by which I mean, insane). Because it’s so easy to get images off the internet, I decided to illustrate the federal process with a mélange of logos/images for the agencies and committees involved.  (See above.)  I filled a page and had only scratched the surface.

How Not to Fix the Housing Market - Housing clearly needs another boost and I have just the ticket. Let’s use Fannie and Freddie to deliver direct cash payments to buyers when they first take out mortgages and then send them checks each year until they pay off their loans. To boost demand as much as possible, let’s give the most money to rich people who buy the biggest houses.  After all, because jumbo mortgages have higher interest rates, giving bigger subsidies to people who buy the biggest houses in the most expensive markets makes sense. To really encourage people to borrow the most they can, let’s pay 35 percent of the mortgage interest for the highest-income homebuyers but only, say, 10 or 15 percent for moderate-income people who borrow less. Of course, if you happen to live in a place that has cheap housing and low property taxes, you won’t need any subsidy so we won’t give you one. It may sound kind of crazy, maybe even totally misguided, but it just might work.  Oh, wait a minute—we already have a subsidy like that: the good old mortgage interest deduction.

"The Disappearing Tax Foundation Blog Post" - I recently noted a post from The Tax Foundation accusing the Wall Street Journal editorial page of of "a textbook example of how to lie with statistics."Bruce Bartlett points to a Tax Foundation article that accuses the WSJ's editorial page of "a textbook example of how to lie with statistics.": The Wall Street Journal's Misleading Income Chart. When the Tax Foundation questions someone's reliability, you know a line has been crossed. Brendan Nyhan notes today that the Tax Foundation post has been taken down [cached copy]:... At this point, you're probably wondering why this post doesn't contain any links to the Tax Foundation website. The reason is that this sort of intra-movement criticism has a short shelf life -- so short that the post had already vanished by this morning. Scott Hodge, the president of the Tax Foundation, confirmed that the post had been removed: "we withdrew the post for editorial and content reasons." He did not elaborate further.

Apparatchiks - Krugman - Via Mark Thoma, Brendan Nyhan catches the Tax Foundation trying to disappear some apparently accidental honesty. The story goes like this: the Wall Street Journal had a deeply dishonest editorial claiming that taxes on the rich can’t help with out budget problems. (Are you surprised?) There were actually multiple problems with the editorial; Jonathan Chait pointed out that it repeatedly compared apples with oranges, that if you actually read the numbers straight the editorial disproved its own point. None of this was surprising. What was surprising was that the Tax Foundation, which normally produces a fair bit of disinformation itself, actually published a blog post pointing out that the chart accompanying the editorial was a classic case of how to lie with numbers. Was the Tax Foundation actually taking a stand for intellectual honesty? Well, guess what: the blog post has now vanished — although not before a number of people cached it. As the people at Heritage could have told them, memory holes just don’t work like they used to.

The Rich Are “Different” — But Don’t Treat Them That Way - In an excellent post on the latest IRS data on the 400 highest-income taxpayers, the Tax Policy Center’s Roberton Williams cites F. Scott Fitzgerald’s famous quote — “Let me tell you about the very rich.  They are different from you and me” — and then shows just how different.  With an average income of $270 million in 2008, the typical household in the Top 400 made 4,700 times as much as the average American filing a 1040 form. Congressional Republican leaders are trying to put a new twist on how the very rich are different.  By seeking to reduce long-term deficits entirely through huge budget cuts that fall disproportionately on low-income programs — rather than a balanced package of budget cuts and tax increases — they are effectively arguing that wealthy Americans shouldn’t have to sit with other Americans at the table where sacrifices will be made. As the chart shows, the top 400 have enjoyed the best of both worlds over the past couple of decades:  dramatically higher incomes and much lower taxes. 

The Great Switch by the Super Rich - Robert Reich - Forty years ago, wealthy Americans financed the U.S. government mainly through their tax payments. Today wealthy Americans finance the government mainly by lending it money. While foreigners own most of our national debt, over 40 percent is owned by Americans – mostly the very wealthy.  This great switch by the super rich – from paying the government taxes to lending the government money — has gone almost unnoticed. But it’s critical for understanding the budget predicament we’re now in. And for getting out of it.  Over that four decades, tax rates on the very rich have plummeted. Between the end of World War II and 1980, the top tax bracket remained over 70 percent — and even after deductions and credits was well over 50 percent. Now it’s 36 percent. As recently as the late 1980s, the capital gains rate was 35 percent. Now it’s 15 percent.  Not only are rates lower now, but loopholes are bigger. 18,000 households earning more than a half-million dollars last year paid no income taxes at all. In recent years, according to the IRS, the richest 400 Americans have paid only 18 percent of their total incomes in federal income taxes. Billionaire hedge-fund and private-equity managers are allowed to treat much of their incomes as capital gains (again, at 15 percent).

Who said taxes are fair? - IF YOU live in a developed country your taxes will probably increase. Politicians won't necessarily tell you this. They would rather pretend that someone else will pay for our profligacy. In America, Republicans claim they can cut spending enough that taxes won’t need to increase. But if they are to balance the budget over the long run, they will have to make drastic cuts to services and entitlements: large enough to rattle an armchair libertarian. Across the aisle, Democrats often say we can close the gap if the “rich pay their fair share”. That is also unrealistic because there are not that many rich people and you can only tax them so much. This raises an interesting question: what is your “fair share"? Politicians seem to say if you’re part of my base your fair share is zero. But let’s first acknowledge that probably everyone will have to pay something and then indulge the normative question: who should pay what if the goal is fairness? To me, fairness would suggest taxing behaviour that poses a negative externality to everyone else. Pollution is the obvious example. Fairness can also mean not taxing things you want to encourage, like working and saving, which bolster long-term growth. Instead you’d tax consumption.

The long and short (runs) of tax reform - Atlanta Fed's macroblog -  I had a somewhat nostalgic response to an item at Angry Bear, written by contributor Dan Crawford. In essence, the Crawford post formally (through statistical analysis) asks the question "How is GDP growth related to marginal tax rates (that is, the tax rate applied to your last dollar of income)?" More specifically, Crawford analyzes how gross domestic product (GDP) growth next year is related to the marginal tax rate faced by the average individual and the marginal tax rate faced by the highest-income taxpayers.  I don't intend to quibble with the specifics of that experiment per se but rather highlight an aspect of taxation and tax reform that I think should not be forgotten. That is, the short run is no place for a decent discussion of tax policy to be hanging out. To say that more formally, the largest effects of tax policy accrue over time, and it is probably not a good idea to be too focused on the immediate—say, next year's—effects of any given policy or change in policy.

Is Corporate Tax Reform Realistic? - This morning, a panel of veteran international tax experts tried to put the U.S. struggle to fix its corporate tax system in broader perspective. Unfortunately, they concluded that the U.S. is lagging well behind the rest of the world in corporate reform and, worse, the odds of any serious progress anytime soon are slim. The group spoke to the National Tax Association’s annual conference here in Washington. As we await possible reform plans from both the Obama Administration and the House Ways & Means Committee, this panel put some interesting ideas on the table..

Subsidies to Oil and Other Energy Sources-Becker - President Obama and members of Congress are calling for a sharp reduction in the substantial direct subsidies to American oil companies. Many countries also give an indirect subsidy to oil producers and refiners by subsidizing the purchase of gasoline. In Saudi Arabia, for example, subsidies have reduced the price of a liter of gasoline (1 gallon equals about 3 ¾ liters) to 12 cents, which had made gasoline there cheaper than bottled water. The largest subsidies to gasoline are usually found in oil producing countries: Saudi Arabia, Iran (although the Iranian government greatly reduced gasoline subsidies in 2010), Russia, Venezuela, Indonesia, and the UAE. Yet, the economic case for either direct or indirect subsidies to the production and refining of oil is quite weak. One argument commonly made for subsidizing gasoline prices, especially when, as at present, oil prices are rising rapidly, is that this helps the poor. Yet these subsidies disproportionately favor the middle classes and the rich since poor families are much less likely to own cars, and the poor drive fewer miles with the cars they do own.

The U.S. Tax Subsidies for Oil Companies—The current and I think healthy concern with the growing gap between federal revenue and federal spending has focused attention on all sorts of questionable fiscal arrangements. One of these is tax subsidies. Conservatives have managed to make tax increases seem un-American, yet it is obvious that the few politically feasible spending cuts, both present and future, that are under discussion cannot begin to close the revenue-expenditure gap. Hence the attention to tax subsidies. The term is misleading. A tax subsidy is not an expenditure, but a selective tax reduction, as distinct from some general or uniform reduction. Hence to eliminate a tax subsidy is to raise taxes. But eliminating a tax “subsidy” sounds like reducing wasteful government spending rather than raising taxes, so it has more popular appeal than an explicit tax increase.  The principal tax subsidies for the oil industry are as follows: a “domestic manufacturing deduction” that allows oil and gas companies to deduct an extra 6 percent of their taxable income; a deduction for “intangible costs,” which are costs for investments in oil exploration or production that have no salvage value.

Decreasing subsidies and gas prices -The Congressional Research Service was asked by Sen. Harry Reid to assess how much proposed tax changes on the oil industry would affect domestic gasoline prices. The May 11 memo issued in response concluded the changes would have little immediate impact on gasoline prices: The price of oil is determined on world markets and tends not to be sensitive to small cost variations experienced in regional production areas. In the recent market environment, with the price of oil averaging approximately $90 per barrel over the period December 2010 through February 2011, and the current price over $100 per barrel, prices are well in excess of costs and a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices. Even in the longer term, little influence of gasoline prices is expected. Domestic production may be reduced a bit, but not to worry the report says, we can always import more.

Senate Refuses to End Tax Breaks for Big Oil - The Senate on Tuesday blocked a Democratic proposal to strip the five leading oil1 companies of tax breaks that backers of the measure said were unfairly padding industry profits while consumers were struggling with high gas prices.  Despite falling eight votes short of the 60 needed to move ahead with the bill, top Democrats said they would insist that eliminating the tax breaks to generate billions of dollars in revenue must be part of any future agreement to raise the federal debt limit2.  “We have to stand up and say, ‘Enough is enough,’ ” said Senator Al Franken, Democrat of Minnesota. “While oil prices are gouging the pocketbooks of American families, these companies are on a pace for a record profit this year.” The defeat on Tuesday was expected since most Republicans were dug in against what they saw as a politically motivated plan in advance of the 2012 elections. Democrats had hoped that directing the savings toward the deficit would make it harder for Republicans to reject it.

Is there a macroeconomic rationale for higher gas taxes? -- Several of my favorite bloggers like to argue that the macroeconomic effects of oil shocks justify higher taxes on oil, to bring down overall consumption and the harm from future shocks. While I agree that oil should be taxed at a higher level, I’m not sure that this provides a convincing rationale. First of all, we need to be clear about why oil shocks have an effect on the economy. To my knowledge, there are three main possibilities:

  1. As consumers spend more on oil, they spend less on other forms of consumption, thus lowering output.
  2. Higher oil prices make the production of certain goods uneconomical, and there is an optimizing shift away from these goods, possibly lowering overall output.
  3. An increase in oil prices raises inflation fears and pressures the Fed into adopting a tighter policy.

Don't Tax Oil Companies, Nationalize Them! -Yesterday, $112M was stolen from US consumers.  It will happen again today and probably tomorrow and that is on top of the $800 Million PER DAY that is being overcharged by oil companies in America alone, ACCORDING TO EXXON’S CEO.   That’s right, Rex Tillerson himself just testified to Congress that "based purely on supply and demand- should be in the $60 to $70 a barrel range." The reason it’s above $100 a barrel, Tillerson explained, is due to the oil majors using futures contracts to lock in current high prices, and speculation that is engineered by the high-frequency trading of quantitative hedge funds. Other disclosures were made in last week’s testimony that may interest you: 

  • The average cost of producing 1 barrel of oil was $11 (THAT IS ELEVEN, NOT A TYPO!); the average price of the oil in the marketplace–$92– some 8.5 times the cost of getting the oil out of the ground.
  • The profits for the big 6 oil companies was $36 billion in the year’s first quarter. A large part of the $36 billion was used to buyback shares or pay dividends to shareholders.
  • The deduction for intangible drilling expenses was given to the oil industry in 1960 when a barrel was worth about $15-17. So, why do they need this favor when oil is $100 a barrel?

White House Seeks Executive Order to Expose Anonymous Political Spending - In an email blast1 to supporters this week, former Sen. Russ Feingold decried “legislators who are unwilling to stand up to corporate power,” including prominent Democrats. “Some Democrats are joining Republicans in pressing to keep the cycle of political money and federal contracts hidden,” he wrote. The Beltway press was momentarily2amused3 by the intraparty warfare, but the skirmish is actually part of a larger, crucial effort to force stronger disclosure of political contributions in a post-Citizens United world. At issue was a draft executive order4 being circulated by the White House that would compel all federal government contractors, and those submitting bids for government contracts, to fully disclose information about their political contributions.  The text5 of the draft order says the measure is needed to “[address] the perception that political campaign spending provides enhanced access to or favoritism in the contracting process.”

Why We Need to Rein In Government Contractors That Use Taxpayer Money for Political Advantage - President Obama is mulling an executive order to force big government contractors to disclose details of their political spending. Big businesses are already telling their political patrons in Congress to oppose it – and the pressure is building. The President should issue the executive order immediately. And he should go even further – banning all political activity by companies receiving more than half their revenues from the U.S. government. Lockheed Martin, the nation’s largest contractor, has already got more than $19 billion in federal contracts so far this year. But we know very little about Lockheed Martin’s political spending other than its Political Action Committee contributions. We don’t know how much money it gives to the Aerospace Industries Association to lobby for a bigger defense budget.We don’t even know how much Lockheed is giving the U.S. Chamber of Commerce to lobby against Obama’s proposed executive order requiring disclosure of its political activities. Don’t we have a right to know?

Lucas and Stokey: Liquidity Crises - I have talked quite a bit about how the financial crisis can be viewed as a traditional bank run in the non-traditional financial sector, the repo market in particular, and how, despite Dodd-Frank, we are still vulnerable to the non-traditional bank run problem. I've also talked about deposit insurance for firms engaged in maturity transformation as one potential way to reduce the likelihood of bank runs in the non-traditional system, and how fees and regulation can be used to offset the moral hazard problems that come with deposit insurance.So it's nice to see agreement with these ideas. In a new (surprisingly non-mathematical) paper, Robert Lucas and Nancy Stokey talk about how to build a theoretical model of liquidity crises, and use these ideas to examine how deposit insurance, regulation, and other policies can reduce, but not fully eliminate, the likelihood of a liquidity crises in the future: Understanding sources and limiting consequences: A theoretical framework, by Robert E. Lucas and Nancy L. Stokey,

Deathbed Designations  - One of the biggest issues outstanding in financial reform is which institutions the Financial Stability Oversight Committee (FSOC) will deem “systemically important,” and thus subject to all the enhanced Title I regulations. These systemically important financial institutions, known as SIFIs, will presumably be subject to the new resolution authority rather than the bankruptcy code — although for some reason SIFIs aren’t automatically subject to the resolution authority, a problem which I pointed out within hours of the Treasury releasing its initial legislative language back in 2009. In spite of that anomaly, SIFIs will be required to continually submit comprehensive “resolution plans” to the FDIC, so that the FDIC will have all the information they need to plan, design, and execute a successful resolution of a SIFI. As I’ve said before (see here and here), and as Sheila Bair has been emphasizing repeatedly in recent weeks, the resolution plan requirement is hugely important.

Reforms will not improve the system  - . Most of the wrong lessons have been learned, and some highly complex, badly directed processes are being developed. The US will wind up with a more concentrated financial system than it had before the crisis, bureaucratised and restricted credit growth, and, probably, an even less transparent system than it did before the crisis.  This is particularly evident in the reorganisation of the residential mortgage securities markets, if “markets” will really be the word to describe the process of credit allocation that is being developed. Democrats and Republicans are competing to come up with the least workable solutions to difficult problems; both are enjoying a measure of success. There are some clear winners, though. The management groups at the top of the very largest banks may have to endure occasional demonstrators waving papier mache caricatures of robber barons, and finger-pointing at Congressional hearings, but they, and their compensation packages, are more secure than they were before. Things could have been much worse.  The Washington legal community, regulatory staffs, and the public activists who move in and out of appointive or commercial positions are even more important now. House prices in upper middle class Washington neighbourhoods reflect this continued prosperity.  There are many more hearings, billable hours, seminars, webinars, and so on before Dodd-Frank is expensively amended and finally implemented. Let’s consider just a couple of aspects of the Oligarchy Preservation Act of 2010 – wait, did I get the formal name right?

Financial regulation: A shield asunder - On a late January day in a discreet basement room of the Grischa Hotel by the ski lifts of Davos, Tim Geithner listened to grievances from 14 executives from some of the biggest financial groups in the world. Some complained to the US Treasury secretary about regulation – but not regulation that emanated from Washington. Bob Diamond, a prominent American banker, was in the room at the Swiss resort but he was representing Barclays, the British group he now runs. Among the rest were Jan Hommen, chairman of the Dutch ING, and Urs Rohner of Credit Suisse. Many of those present maintained that it was Europe’s rules that were unfairly severe. Mr Geithner had had the group assembled deliberately and it achieved its purpose – providing him with a refreshing counterpoint to the moans and groans of bankers at home, always complaining that their European rivals had a softer ride. But that does not mean every regulatory gap is bankers’ fantasy. A wide range of interviews by the Financial Times with top officials and financial executives on both sides of the Atlantic, many of whom would not speak publicly, convey a common impression that international talks are entering a crucial period that will decide whether new rules of the road will be comparable in London, Frankfurt, Paris and New York.

Still too many latent triggers of next crisis - How long before we confront a new financial crisis? Usually a severe shock to the financial system damps risk appetite for some considerable time. Economies have to recover, bank capital has to be substantially rebuilt and debt workouts, which can take 10 years or more, have to be far advanced before trouble brews anew. However, if the core ingredients of a financial crisis are boundless optimism, excessive leverage and overpriced assets, then we are already in dangerous territory less than three years after the collapse of Lehman Brothers. Consider the state of asset markets. Commodities remain overblown despite the setback that recently overtook silver and subsequently spread to other markets. Developed world government debt markets look seriously overpriced in the light of the slow response to spiralling fiscal deficits in the US and elsewhere. While US house prices have collapsed, those in the UK look far too high in relation to earnings.In equities, we have a new internet bubble with shares in the likes of Facebook, LinkedIn and Renren trading on absurd multiples of revenue. As for credit markets, lending standards are falling and covenant-lite lending has staged a comeback.

At a Time of Needed Financial Overhaul, a Leadership Vacuum - With Sheila C. Bair soon to leave her post at the Federal Deposit Insurance Corporation, the Obama administration will have five major bank regulatory positions either unfilled or staffed with acting directors. The administration has inexplicably left open the vice chairman for banking supervision, a new position at the Federal Reserve created by the Dodd-Frank Act, despite having a candidate that many people think is an obvious choice: Daniel K. Tarullo [2]. The new Consumer Financial Products Board chairman is unnamed. There are some lower-level positions that don't have candidates, including the head of the Treasury's Office of Financial Research and the Financial Stability Oversight Council insurance post.  Perhaps most important, the Office of the Comptroller of the Currency, is being headed by an acting comptroller, John Walsh, who took over the agency last August. Nine months have passed without a leader who might better reflect the Obama administration's views on banking regulation, a time lag made worse by the office's coddling of the banks [3] even as they have acknowledged rampant abuse and negligence in the foreclosure process.

When Regulators Side With the Industries They Regulate - Simon Johnson - The Office of the Comptroller of the Currency is one the most important bank regulators in the United States — an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates what in the United States, see this primer). Over the last decade, the Office of the Comptroller of the Currency repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection.  After suffering some serious and well-deserved loss of prestige during the financial crisis of 2007-9, the comptroller’s office survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In its view and that of its senior staff — including key people who remain from before the crisis — the “safety and soundness” of banks requires, above all, not a lot of protection for consumers.  This is a mistaken, anachronistic and dangerous belief.

Don’t close the lid on bank fraud - The news this week that Eric Schneiderman, the New York attorney-general has launched yet another inquiry into Wall Street’s role in the mortgage crisis will no doubt be greeted with groans at investment banks. Four years – and multiple investigations – after the meltdown started at two Bear Stearns hedge funds, isn’t it time to move on? I think not, for there is still work to be done. With the exceptions of Bernard Madoff and Raj Rajaratnam, no senior Wall Street executive has faced criminal charges, although some in the industry – whether at the top or in the middle – probably broke the law. Such criminality may be hard to pin down after all this time, but it is worth the effort. There is an element of grandstanding in Mr Schneiderman’s foray – Eliot Spitzer, the former New York attorney-general, parlayed his crackdown after the internet bubble into becoming governor (before his downfall). Wall Street remains unpopular after the bail-out and politicians see opportunity there.

Fed seeks annual US bank stress tests - The Federal Reserve wants to subject US banks to annual capital tests, reserving the right to veto dividend pay-outs if they do not pass. A draft of the new rule is set to be approved by the Federal Reserve Board and put out for public comment within weeks. Bank executives told the Financial Times that they have begun discussing the proposal with Fed officials, who remain wary of a return to the over-generous shareholder pay-outs that left financial institutions under-capitalised during the crisis. Stress tests conducted by the Fed in 2009 helped rebuild confidence in the battered US financial system. In March, the central bank reviewed capital plans submitted by the country’s 19 largest lenders. The Fed signed off on a series of dividend increases and stock buybacks from many of the biggest US banks, while prompting others – including Bank of America – to acknowledge they would have to resubmit capital plans rejected by the regulator.

The Derivatives Market’s Helpful Enemies - Today the market for derivatives is oligopolistic, with a few banks running huge profit margins. And, regardless of whatever political motivations might lie behind the latest investigations, this market concentration is a real problem. According to a 2009 study by the European Central Bank, the five largest CDS dealers were party to almost half of the total outstanding notional amounts, while the 10 largest CDS dealers accounted for 72% of the trades. The markets for other derivatives are not much better. A high degree of concentration distorts the market... Over-the-counter trading also contributes to the opacity of derivatives markets, further reducing competition and increasing the margin enjoyed by the traders. The major investment banks are fully aware that every day that they delay appropriate market regulation, they earn millions of dollars for their managers’ bonus funds. It is no surprise that the reform process is taking so long.

The New Normal - There seem to be to be two broad narratives of our present situation. The dominant, official narrative, is that there was a technical crisis of money flow, precipitated by a bolus of bad debts which then caused a collapse of confidence in the value of several large asset classes. What was required was to show that such assets would always retain their ability to find a buyer and thus their value, even if the buyer had to be, in the immediate term, the public purse. The public purse was duly opened to steady nerves and sales, and massive purchases of whatever could not find any other buyer were duly made. The plan was and is that the purchased assets would be sold by our governments, back to the market once other buyers returned. The dissident narrative is that this was never a technical crisis of money flow - liquidity - but one of insolvency due to the troubled asset classes being, in fact, vastly over valued. The collapse in value and the lack of buyers was not a temporary lack of confidence in an otherwise sound financial system, but a rational shunning of paper assets whose previous value was almost entirely due to the press of gullible buyers who were keen to partake in the buy, flip and buy some more ponzi scheme of speculation.

S.E.C. Proposes Crackdown on Ratings Agencies - Securities regulators are out to tame the credit rating agencies, crucial Wall Street players at the center of the financial crisis. The Securities and Exchange Commission proposed sweeping new rules on Wednesday to overhaul the rating business — regulations that would force tougher internal controls, potentially curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees. “These rules are intended to help investors and other users of credit ratings better understand and assess the ratings,” Mary L. Schapiro, chairwoman of the S.E.C., said at a public meeting on Wednesday. “It is a massive proposal,” she said of the plan, which spans more than 500 pages. The S.E.C.’s five commissioners unanimously agreed to advance the proposals, which are now open for public comment for 60 days.

Ratings agencies react favorably to SEC’s proposed rules - Credit ratings agencies reacted favorably to rules proposed by the Securities and Exchange Commission that would fundamentally change how the firms manage internal controls and public disclosures on securities ratings. The SEC is giving the agencies 60 days to comment on guidelines that would require companies, like Standard and Poor's, Fitch Ratings and Moody's Investors Service, to add more internal ratings oversight, while also eliminating conflicts of interest between their sales and ratings departments. Among a series of other reforms, the proposed rules would require agencies to file annual reports disclosing the effectiveness of their internal ratings controls and the overall effectiveness of issued ratings. They also call for standards of professional training for analysts.

As Republicans Declare War On Bank Customers, A Call to Support Warren - A group of Democratic representatives has joined consumer groups- along with prominent figures like Dr. Phil (yes, that Dr. Phil) - in calling on the President to make a "recess appointment" of Elizabeth Warren. That will allow her to get to work running the new bureau charged with protecting bank customers from deceptive, dishonest, and unfair bank practices.  That should be a no-brainer: A Warren appointment would be a policy win and a political win. Republicans have purchased first-class tickets on the Crazy Train by vowing to block any appointment to that position, even a person that shares their radical anti-regulation ideology. The President can be a voice for sanity by acting decisively to fill this urgently-needed position.  A well-run CFPB wouldn't just make people's lives easier. It could also reduce the likelihood of another financial crisis. As for Ms. Warren herself, she hasn't even been nominated and the war over her appointment has already turned white-hot. Whether or not the President wants this battle, it's on. He can either attack or retreat. There's no third choice. The only way for him to win this war is by striking preemptively. A petition is now available that allows people to send a message to the President urging him to make a recess appointment of Elizabeth Warren.

Goldman Braces for Federal Subpoenas - Goldman Sachs Group Inc. executives expect to receive subpoenas soon from U.S. prosecutors seeking more information about the securities firm's mortgage-related business, according to people familiar with the situation. Officials at the New York company believe the Justice Department will demand certain documents and other information, possibly within days, these people said. Spokesmen for Goldman and the Justice Department declined to comment Thursday. Subpoenas don't necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely. The company turned over hundreds of millions of pages of documents to the Federal Crisis Inquiry Commission, a 10-member panel that examined the causes of the financial crisis. Goldman also gave tens of millions of documents to the Senate Permanent Subcommittee on Investigations.

Levin Optimistic That DoJ Will Act on Goldman Disclosures - Yves Smith - The Financial Times interviewed Senator Carl Levin, whose report contained a great deal of information pointing to what at a minimum can be called bad faith dealing by Goldman. Matt Taibbi has argued in his characteristic forceful manner that Goldman execs clearly perjured themselves in their testimony.  Keep your champagne corked. The DoJ has been missing in action for so long I can’t imagine that they will actually put in an appearance, particularly on Goldman, but I’d be delighted to be proven wrong.  From the FT: Carl Levin, chairman of the Senate investigative subcommittee, said there was “real hope” law enforcement authorities would act on his panel’s report accusing Goldman Sachs of misleading investors and Congress… Eric Holder, attorney-general, said this month the justice department was looking at the report “that deals with Goldman”.The senator was confident officials were taking it seriously. “There’s real hope here that there’s going to be a good scrub by a number of law enforcement entities, so I am not pessimistic about this.” Given that the Administration has been in “public be damned” mode from the outset, I doubt that “pressure” weight much into their calculus. Levin pointedly took no sides on the Taibbi perjury issue, but said that fines alone were insufficient, that the banks needed to admit they were guilty. Of course, that is precisely what they do not want to do, since that would pave the way for private litigation.

The People Versus Goldman Sachs - Apparently, Rolling Stone's Matt Taibbi will not rest until some Goldman Sachs executives are behind bars. He will not rest until the tarnished company's reputation lies in tatters on the floor. These goals are admirable. Give Taibbi an 'A' for effort. Unfortunately, these noble goals, as much as we might hope for their fulfillment, are unachievable. His latest article, The People Vs. Goldman Sachs, lays out the case for the prosecution, which comes from the 650-page report of Senator Carl Levin's Senate Subcomittee on Investigations. The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it.

The End Of Wall Sreet Accountability: A Response To Roger Lowenstein - Bloomberg's Roger Lowenstein argues in "Wall Street: Not Guilty" that the outcry for Wall Street prosecutions is both misguided and dangerous. Citing the misgivings of Charles Ferguson, Joe Nocera, The New York Times, NPR, Matt Taibbi and even Bernie Madoff, Lowenstein concludes: [T]hese sentiments imply that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated. I love a periodic sentence as much as the next guy, but these conclusions are specious.  The vast majority of people asking for more action by prosecutors do NOT believe these things.  Let's take them one by one.

Lowenstein Lets Wall Street Off the Hook - Roger Lowenstein has a big piece out in Bloomberg BusinessWeek, an apology for Wall Street—duly celebrated by The New York Times’s Andrew Ross Sorkin on Twitter as “courageous” and “probably right”—arguing “Wall Street: Not Guilty.” What’s with our elite financial journalists? Problem is, this piece is based on a straw man: that fire-breathing critics of Wall Street like Taibbi and, um, Joe Nocera and, well, the news reporters at The New York Times and NPR, think that the crisis was caused by financial fraud alone. But none of them—not even Taibbi—thinks fraud was the sole cause of the crisis, which had many contributing factors, including excess Chinese savings, regulatory capture, financial wizardry, and, yes, fraud. Lowenstein himself concedes that the “crisis was accompanied by fraud” and that “mortgage fraud exacerbated the bubble,” but writes like he’s offering the pitchfork-wielding mob of well-paid journalists a new insight that the crisis was “multi-causal.”

You Cannot Have Capitalism Without Failure - Jim Rogers, when he made that statement, was referring to the lunacy of using public money to preserve failed private enterprise in a “capitalist” economy. That is what we did, after all. We saved failed institutions, failed individuals, and failed thinking. That is wrong on many levels. But we went a step further: we saved dishonesty, criminality, and corruption. That is a far more serious proposition. Bill Black is arguably the most important voice when it comes to the criminality that was preserved. If you are not well-versed in the criminal aspects of the crisis and in Gresham's Dynamics, the following is an important video to watch (I recommend following the Powerpoint presentation while running the video - filmed 2/18/2010): Powerpoint slides from the presentation can be viewed here.

In an Undercollateralized World - The world is undercollateralized. This is the single most important feature of the 2011 economy. Sixty years ago, if assets were worth less than loans, it was possible to work our way into the black. In 1950, 59% of U.S. corporate profits were from manufacturing; 9% were from finance. The roles of manufacturing and finance have reversed. Thus, we witness the desperate attempts to forestall what cannot be prevented. Yet, the world must deleverage. Banks must write off loans. Loans to bankrupt developers and companies must be called. Living standards must fall. “Rather than confronting sources of volatility, policymakers have sought to smooth out volatility at all costs. Unfortunately, these costs are proving to be very high and will ultimately prove prohibitive. Pressures build inside complex systems until they can no longer be suppressed. When these pressures can no longer be contained, they tend to erupt with far greater violence than had they been allowed to adjust earlier.

The extend and pretend exposé – coming to a bank near you - In March, the US Securities and Exchange Commission fired off a few letters asking a number of America’s regional banks to clarify their loan modification practices. In particular the SEC is reportedly looking into “troubled debt restructurings” (TDRs) which involve modifying existing loans’ terms. Just to be clear, this particular form of ‘extend and pretend‘ is 100 per cent legal, though it’s governed by some fairly nebulous accounting rules and is meant to be reported. First though, look at those TDR growth rates. In a special report out on Thursday, Fitch Ratings says reported TDRs increased 48 per cent to $106bn in 2010. The mix, however, is the really interesting (and significant) thing.TDRs have traditionally been the remit of residential loans, but they’re suddenly booming in the commercial real estate sector. So while residential loans still represented about 87 per cent of outstanding TDRs at the end of last year, commercial TDR’s grew at a whopping 85 per cent rate.

Death Derivatives Prompt Banks to Package Pension Risks of Living Too Long - Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and JPMorgan Chase & Co. (JPM), which bundled and sold billions of dollars of mortgage loans, now want to help investors bet on people’s deaths. Pension funds sitting on more than $23 trillion of assets are buying insurance against the risk their members live longer than expected. Banks are looking to earn fees from packaging that risk into bonds and other securities to sell to investors. The hard part: Finding buyers willing to take the other side of bets that may take 20 years or more to play out.  As insurers reach the limit of how much pension-fund liability they’re willing to shoulder, companies such as JPMorgan and Prudential Plc (PRU) last year set up a trade group aimed at establishing and standardizing a secondary market for so- called longevity risks. They’re also developing indexes that measure mortality rates and securities to let pension funds pay fixed premiums to investors in return for coverage against major deviations from projections.

On Longevity Derivatives - I am a firm believer in “you can’t get something for nothing.”  So it is when a new derivative is proposed.  Either there are natural counterparties to take up the exposure (reducing their risk), or speculators must be encouraged to take the risk (more likely). So, with longevity derivatives, the risk is people living too long leading to more pension payments in future years.  The proposition is: find a party that is willing to make more payments if mortality is better than expected, and offer him a payment, or series of payments, as an inducement to enter the transaction. Let’s think for a moment, what entities benefit from a rise in longevity?  I can think of one: life insurers.  But there is a problem: anti-selection.  People who buy life insurance tend to be sicker than those of the general population, who tend to be sicker than annuitants.   Life insurers would find taking on longevity risk to be a dirty hedge at best for their life insurance books.  In general there have been few reinsurance agreements for longevity risk for immediate annuity portfolios, but then, that would be a really small component of the life insurance industry at present.

 Ally Financial + ING Bank? Richard Alford on Lessons Forgotten at the Greenspan/Bernanke Fed - This week in The Institutional Risk Analyst we feature a comment from Dick Alford on the lessons forgotten by the Fed when it comes to financial regulation. Showing his considerate nature, Dick even uses the official histories of past crises prepared by the FDIC as the timeline to make it easier for some of our former colleagues at the Fed to follow along. But first, let's have some fun with one of the toys developed for The IRA Bank Monitor, namely our pro forma M&A analysis tool.  News reports have suggested that Ally Financial Inc (Q4 2010 Bank Stress Rating: "A+") may acquire the bank unit of Dutch insurance giant ING Group, ING Bank, FSB (Q4 2010 Bank Stress Rating: "A"). Both banks have strong ratings from The IRA Bank Monitor, with stress levels well below the industry average.

Benmosche 9% Yield Hunt May Mean AIG Got Junk, Mortgage Bonds -- American International Group Inc. (AIG)’s hunt to boost investment income may have steered the bailed-out insurer toward junk bonds and securities backed by home loans.  Chief Executive Officer Robert Benmosche is working to lift annual returns on AIG’s portfolio by as much as $700 million as he seeks capital in a public share offering after posting insurance underwriting losses. Benmosche is getting yields of 8 percent to 9 percent on about $5 billion invested this year after the Federal Reserve rejected AIG’s bid to repurchase mortgage bonds turned over in its bailout, he said last week.  “He’s either going out really long duration or really buying some suspect stuff,”

The Coming Postal Bailout -  One thing we'll say about federal bailouts—if you pay attention, you can usually see them coming a mile away. It was true of Fannie Mae and General Motors, and it's increasingly clear that the next candidate will be the U.S. Postal Service. The odds of a multibillion-dollar rescue package went way up this week when Postal Service management reported a $2.2 billion loss for the first quarter, more than 25% higher than last year despite the economic recovery. It now appears that the $15 billion line of credit the feds have offered USPS will be used up by the end of this year, with low odds on ever being paid back. If that isn't ugly enough, the Postal Service expects $42 billion in additional losses over the next four years. Mail volume and revenues have suffered what Postmaster General Patrick Donahoe concedes are 'unprecedented declines' since 2006, with projections of another drop of 20 billion letters mailed by the end of the decade, down from 171 million this year, thanks to competition from electronic mail. If this were a private business, the obvious response to these losses would be urgent cost-cutting to avoid insolvency. Instead, Postal Service management recently concluded negotiations offering the 205,000-member American Postal Workers Union a new four-and-a-half-year contract that will provide a 3.5% pay raise over three years, dole out automatic cost of living wage hikes after 2012, and expand no-layoff protections. Postal officials say this is the best deal they could get and that, had they not agreed to it, an arbitrator would have been even more generous to the union. But given that 80% of postal costs are for wages and benefits, this contract is unhinged from all fiscal reality.

On Short-Termism and the Institutionalization of Rentier Capitalism - Yves Smith - Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.  A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced: PriceWaterhouseCoopers conducted a survey of FTSE-100 and 250 executives, the majority of which chose a low return option sooner (£250,000 tomorrow) rather than a high return later (£450,000 in 3 years). This suggested annual discount rates of over 20%. Recently, Matthew Rose, CEO of Burlington Northern Santa Fe expressed frustration at the focus on quarterly earnings when locomotives lasted for 20 years and tracks for 30 to 40 years. Echoes, here, of “quarterly capitalism”.

All hail the negative repo regime - In April the Federal Deposit Insurance Corp. introduced a new fee on banks, helping to lower the general collateral rate and bust a popular arbitrage trade for the banks, involving the interest rate paid by the Federal Reserve on excess reserves. Soon after, the US Treasury also announced a reduced auction schedule for short-term USTs, further reducing supply to the repo market. All of that, combined with the death of the SFP, means some UST issues are now so special, that the lucky owners of such Treasuries can charge to lend them out in exchange for cash. Repo rates have gone negative. This also wreaks super havoc with things like money market funds, which tend to be heavily invested in repo Treasuries. We bring it up because Joseph Abate at Barclays Capital — a long-time chronicler of Treasury market tightness and money market woes — has an interesting statistic: With repo rates in the low single digits, the number of issues trading at less than zero has increased sharply. Roughly one-third of the Treasury repo volume now trades at rates below repo – compared to just 7% in the first quarter.

Google Plays the Yield Curve - I was fascinated a story in today's Wall Street Journal.  Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds.  Why?  To take advantage of low interest rates. It is like reverse maturity transformation.  The banking system borrows short and lends long.  Google is borrowing long and lending short.  (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.) Does this make sense for Google?  I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am.  But there is reason to be skeptical.   The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill.  The yield spread is now high by historical standards.  The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long--the opposite of what Google is doing.

Google and the Term Structure Once Again...- DeLong - The argument that Google is making a mistake in borrowing now when the yield spread between short-term and long-term interest rates is high goes more-or-less like this:

  1. The long-term interest rate is the average of expected future short-term interest rates, plus a (nearly constant) term premium.
  2. When long-term interest rates are unusually far above short-term rates, it is a sign that investors are unusually and irrationally pessimistic about the likely course of short-term rates.
  3. As time passes, investors will learn that they were irrationally pessimistic--and so long-term interest rates will fall.
  4. Thus it is better to wait and borrow long in the future rather than to borrow long now.
  5. Conversely, it is more profitable to lend long now than it will be in the future after investors have learned and so corrected their irrational pessimism.

New York Investigates Banks’ Role in Fiscal Crisis - The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.  Officials in the office of the attorney general, Eric T. Schneiderman1, have also requested meetings with representatives from Bank of America2, Goldman Sachs3 and Morgan Stanley4, according to people briefed on the matter who were not authorized to speak publicly. The inquiry appears to be quite broad, with the office’s requests for information covering many aspects of the banks’ loan pooling operations. They bundled thousands of home loans into securities that were then sold to investors such as pension funds, mutual funds5 and insurance companies.  It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

Maiden Lane puts pressure on MBS market - When the Federal Reserve decided to block American International Group's  attempt to buy back its portfolio of subprime assets, the government took a bet the notes would be worth more on the open markets. According to mortgage-backed securitization traders, that decision is proving to be a risky gamble. They say the latest round of MBS sales from the Maiden Lane II vehicle that holds the government's AIG toxic residential loans is being met with waning enthusiasm. Reports in The Wall Street Journal and Structured Credit Investor both call it "investor fatigue." Further sources inside the government say the street is generating rumors in an effort to manipulate the markets. One source said the weekly sales will continue as planned. Roughly two-thirds of the bonds offered last week sold, a source tells HousingWire. This would be a huge shift from the more successful offerings in April.

Accounting for FHA’s Single-Family Mortgage Insurance Program on a Fair-Value Basis - CBO Director's Blog - Over the past two years, the Federal Housing Administration (FHA) has guaranteed more than 17 percent of new and refinanced mortgages on single-family homes in the United States.  FHA’s mortgage guarantees still expose the government (and ultimately taxpayers) to potentially significant losses.  This afternoon, CBO released an analysis—prepared at the request of House Budget Committee Chairman Paul Ryan—examining the estimated cost of the program using a different accounting approach, fair-value estimating, which provides a more comprehensive measure of the cost to taxpayers of FHA’s guarantees. Fair-value estimates differ from estimates produced using the FCRA methodology in an important way: By incorporating a market-based risk premium, fair-value estimates recognize that the financial risk that the government assumes when issuing credit guarantees is more costly to taxpayers than FCRA-based estimates suggest. Using a fair-value approach, CBO estimates that the program will have a cost of $3.5 billion in 2012 on $233 billion in loan guarantees.

New York AG Schneiderman Investigating Goldman, Morgan Stanley, Bank of America Mortgage Operations -- Yves Smith - New York attorney general Eric Schneiderman has announced that he is investigating Goldman, Morgan Stanley, and Bank of America on their mortgage securitization activities. His office made a broad document request in recent weeks and has also asked to meet with these banks.It is not yet clear what the focus of the probe is, but since Goldman and Morgan Stanley were not lenders, it could relate to their mortgage originations, their servicing operations (Litton for Goldman Saxon for Morgan Stanley) or their role as CDO issuers. With Bank of America, the investigation could cover additional ground.  Note that this announcement effectively blows up the 50 state attorney general settlement talks. Schneiderman has signaled early and often that he was not comfortable with the seriousness of the talks, particularly the fact that Tom Miller had not discussed with his fellow AGs what form of release from liability he was prepared to offer. This move by the New York AG is likely to embolden other AGs who are also unhappy with Miller’s effort to abandon the talks and launch their own probes.

NY AG Investigation: Why Haven't Wall Streeters Gone to Jail? - Smith was supposed to be the manager supervising these deals, and the e-mail was to tell Lind what he thought of the latest deal Lind was trying to pitch to the firm's clients. In two words: Not much. Smith called the bond named SACO 2006-8 a "sack of s**t," and wrote, "I hope your [sic] making a lot of money off this trade." For investigators looking for smoking guns that show Wall Street bankers at the height of the bubble knew the mortgage bonds they were pushing on clients were worthless junk, these e-mails seem about as good as you can get. And yet, nearly five years later after these e-mails were written, and months after they became public this year as part of case brought by mortgage insurer Ambac against Bear and J.P. Morgan Chase nothing has happened. Neither Lind nor Smith have been charged with any wrong-doing over the deal, nor has anyone else at Bear. Other Wall Street firms did similar deals, with similar risky bonds. No one has been prosecuted there either. What's going on?

Bank Tout Dick Bove Proves His Ignorance in Defending of His Meal Tickets -- Yves Smith - Is Dick Bove’s put-foot-in-mouth-and-chew exercise yesterday proof of the eagerness of the banking industry to push back against any and all interference in their ability to milk the public, or merely that Bove is a great negative indicator (one of his most famous calls was to buy Citi in early March 2008. You’d have lost more than 3/4 of your money if you’d followed his advice.) News that New York attorney general Eric Schneiderman has opened an investigation into the mortgage activities of Goldman, Morgan Stanley, and Bank of America sent Bove into a tizzy. Despite ample evidence of bank malfeasance (forgeries, fabricated documents, foreclosing on the wrong people, inability to find notes, force place insurance, and the report that the US Trustee, an arm of the Department of Justice, has found widespread, significant overcharges) Bove insists their right to prey on the public must be preserved…..because it will hurt lending.  I’m not making this up. From Forbes: Bove calls Schneiderman’s a “witch hunt” and says the efforts are more likely a way for the AG to “make a name for himself.”

Putting “trust” back in American housing finance - News reports suggest that New York prosecutors are preparing fraud charges against a number of large investment banks for defrauding insurance companies with respect to mortgage loans. These allegations and many civil claims with precisely similar predicates illustrate one of the most important aspects of the subprime financial crisis, namely the construction and collapse of the non-bank financial sector. Thousands of trusts based on a variety of different assets were created to sell bonds to investors, and some of these trusts carried private mortgage insurance. Most of the trusts used to fuel the subprime debt debacle were filled with residential mortgage loans, but other types of loans and commercial paper also were used as collateral. Roughly a third of the US financial markets were financed by the non-bank sector, which has largely disappeared. Thus deflation abounds.

Bill Proposes Mortgage Shake-Up - Two lawmakers, a California Republican and a Michigan Democrat, are set to unveil legislation Thursday to replace mortgage giants Fannie Mae and Freddie Mac with at least five private companies that would issue mortgage-backed securities with explicit federal guarantees. The measure is a compromise between conservative Republicans who have advanced bills to build a mostly private mortgage-finance system and Democrats, who say the government shouldn't abandon the mortgage market.Fannie and Freddie were taken over by the government in 2008 as rising mortgage losses wiped out thin capital cushions. Taxpayers are on the hook for $138 billion to keep the companies afloat and stabilize mortgage markets.

Let's demolish this poor housing policy - Dean Baker - A child learns the dangers of fire by getting his hand burned. Washington policy wonks are not as quick learners. This is demonstrated by the reports that the Obama administration is about to come forward with a plan to replace Fannie Mae and Freddie Mac, the two mortgage giants that are now in conservatorship, with five mini Fannies and Freddies. There are differences in the proposed structure of these new public/private entities and the pre-crisis Fannie/Freddie, but these details are less important. The more basic question is why the government feels the need to create a special financial system to subsidise housing. If there is a good answer, nobody has bothered to bring it up in public debates. Fannie Mae, when it was originally created in the Depression, served a useful purpose. It created a secondary market in mortgages, allowing banks to sell their mortgages and get the capital necessary to issue new mortgages. Given the development of the national banking system over the last 75 years, the same concerns no longer exist today.

The New York Fed Working to Bend Real Estate Law to Suit Needs of Banks -- Yves Smith - But the Fed’s spin is diverges from the reading I got from attorneys who have a vantage on the process. Per Housing Wire:But the New York Fed said solutions are on the way. The Uniform Law Commission and the American Law Institute, which facilitated the recent meetings, seek to clarify and update federal and state laws governing the securitization process. I’m bothered by the dishonest presentation, which a close reading of the related NY Fed document confirms. Let’s start with its opening paragraph: Problems with mortgage foreclosures have been in the headlines during the past several months. The media attention arises from several concerns. One concern relates to whether lending institutions have followed proper foreclosure procedure. Another reflects a popular misconception among many that a mortgage can become separated from the note it secures. Yet another concern arises out of the complexity of some of the structured transactions involving the mortgages. This seeks to present the concerns as mere noise in the media, rather than a result of troubling incidents and widespread abuses. In addition, notice the failure to mention the elephant in the room: chain of title issues, which are so widespread that a borrower challenging a foreclosure in a post 2004 securitization has a decent chance of winning if he argues that the trust lacks standing.

US Trustee Estimates Servicing “Errors” at 10x Level Claimed by Banks (and Parroted by Federal Regulators) - Yves Smith - Gretchen Morgenson has an important piece tonight which describes how US Trustee Program, which is the arm of the Department of Justice which oversees bankruptcy courts, has found ongoing servicing abuses in bankruptcy courts which are an order of magnitude worse than claimed by mortgage servicers and their mouthpieces among the Federal banking regulators. And it’s funny how a real prosecutor has managed to find significant problems in a mere six months, when the 50 state attorneys general effort, which has undertaken no investigation, is rushing to get a deal done. If the leader of that effort, Tom Miller of Iowa, instead had gotten to work when the effort was formed last October rather than having tea and cookies with the Treasury Department, they might have something to show by now. Note that this article provides support what this blog and foreclosure defense attorneys have said: that servicers are engaged in a significant amount of overbilling, via charing impermissible or inflated fees. And experts have pointed out that in addition to these junk fees and/or excessive fees, the servicers apply payments in a manner contrary to Federal law and the terms of the mortgage (to fees first rather than principal and interest first) which leads to fee pyramiding:

Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers -- A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges. The federal audits mark the latest fallout from the national foreclosure crisis that followed the end of a long-running housing bubble.

HUD Audits Show Five Biggest Servicers Defrauded Taxpayers - Yves Smith -- This revelation, that HUD audits of the biggest servicers over a mere two-month period, showed extensive fraud, is proof that abuses were extensive. It also establishes that the effort by Tom Miller to settle the 50 state attorneys general investigation quickly and and the recent “see no evil” Federal consent orders are a cover up. The fact that HUD found extensive misconduct over a similar time frame as the Foreclosure Task Force, which Assistant Treasury Secretary Michael Barr described as a ““11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks” proves that the latter to be pure regulatory theater. And as we’ve noted, the Tom Miller-led effort has done no investigations, guaranteeing that the negotiators would have no bargaining power. From Shahien Nasiripour at Huffington Post: A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans… The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges…

HuffPo: HUD IG Finds Servicing Fraud -- Shahien Nasirpour at Huffington Post has broken a story that HUD's Inspector General has conducted an audit of FHA-insured loan foreclosures by the big 5 servicers (BoA, JPM, Wells, Citi, Ally) and concluded that they have been defrauding the government by filing for FHA insurance payments to cover losses "on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents."  Shahien reports that the HUD IG has referred the matter to the Department of Justice for potential False Claims Act (defrauding the government) suit.   Three things are worth noting here. First, the HUD IG seems to have been able to conduct a much more thorough review of foreclosures than any of the bank regulators. Not surprising given that HUD has its money on the line. HUD doesn't want to be defrauded, whereas the OCC wants to keep the banks happy. Second, the all-clear sounded by the OCC and Fed on the servicing front just isn't credible. This is a major problem for the US financial recovery. Financial regulators are the guarantors of the credibility and soundness of the US banking system.  Third, it's worth noting that irrespective of whether DOJ pursues the HUD IG's findings under the False Claims Act, HUD has a major disciplinary tool at its disposal:  FHA lender eligibility.

HUD: Mortgage Servicers Defrauding Taxpayers - Well this is interesting.  A two-month investigation by HUD finds extensive documentation errors when it comes to foreclosed properties going through the  procedure for reimbursements.  If HUD can find that in two months how actively do other regulators have to be in not finding problems?   The stalled 50-AG settlement should be put on hold until more is disclosed about what an actual investigation can get you. This finding by HUD should also tell skeptics that there is a there-there to these problems.  And hopefully it can give new AG investigations, like the newest one launched by NY AG Schneiderman’s on the process for mortgage securitization and foreclosures, a better roadmap on where to look for the problems that are choking our fragile housing market.

Former LPS Employees Allege 30% to 78% Error Rate in Borrower Mortgage Records, Contradicting Banker/Regulator Cover-Up -- Yves Smith - One investor said that every time he looked at corporate misconduct, “No matter how bad you think it is, it’s always worse”. Lender Processing Services is proving to be a classic illustration. The City of St. Clair Shores Employees’ Retirement System is the lead plaintiff in a class action lawsuit against Lender LPS that was amended and expanded yesterday. The suit is against the company and its three top officers, charing them with violations of Federal securities laws with the intent of inflating the company’s revenues and stock price. City of St. Clair Shores Employees’ Retirement System v. LPS et al. Amended Complaint May 18, 2011.  Even though the filing is very long, the first third, which provides detailed descriptions of LPS’s purported misconduct, makes for gripping reading even for those who have been on this beat a while. Later on, it cites various media sources to track increasing public recognition of what LPS was up to, and NC is quoted at some length. The filing relies heavily on affidavits by 17 confidential witnesses, all former LPS employees, some of them supervisory level. It is thus able to allege that bad practices were widespread and clearly designed and driven by top management.  The document goes through a detailed account of firm’s use of robosigners, surrogate signers (aka forgers) and its document fabrication service, DocX. While this may seem to be old hat, some of the details are nevertheless intriguing (management at least bothered to try to select forgers based on their ability to make signatures that resembled the original; anyone who questioned whether this activity was proper was fired within a week).

Banks find it easy to skirt federal laws protecting servicemembers from foreclosure -  While they are fighting for our nation overseas, some military personnel are losing their houses to foreclosure here at home. In the thick of battle, in the heat of the fight, it's the last thing a GI should have to worry about.  While Coast Guardsman Keith Johnson was fighting for our country overseas, he was losing a battle here at home, for his home.   A battle, he claims, he had no idea was being waged until the moment he got back and spoke to his wife. "It just boggled my mind. I got back and she said 'the house is basically foreclosed' and I was like 'What do you mean?'" Johnson says. At the same time, Johnson and his wife Alysia were negotiating with their lender, Wells Fargo, to modify the mortgage on their Clearwater home, the bank's lawyers were foreclosing on the property, getting a summary judgment, and auctioning it off. That happens fairly often.  Banks negotiate loan modifications at the same time they move to foreclose. The difference here is that Johnson says no one ever informed him the bank was foreclosing.

Lawyers Threatened With Sanctions for Talking About Foreclosure Abuses - 05/21/2011 - Yves Smith - So much for the idea that the legal profession cares about integrity. While there are no doubt many upstanding attorneys, state bar associations seem vastly more concerned about trying protect the industry’s meal ticket than policing questionable conduct. It’s well known in the profession that to the extent lawyers are ever sanctioned, it’s almost without exception small firm operators. The big boys pay a lot in dues and often have partners in their firms that hold offices in the state bar organization. One damning illustration: even though Florida has been a virtual cesspool of legal malfeasance, with its biggest foreclosure mill having shuttered its doors and impermissibly not passed open cases on to other lawyers and all of the other big players on the ropes, not a single lawyer has been sanctioned. Yet two lawyers in the state were threatened because they’ve dared to say a candid word or two about the mortgage mess. The bar association’s excuse is investigations take time, but the old state attorney general has been investigating these firms since last August. The state bar’s speed in efforts to silence members who are candid versus the leisurely pace in taking action on rampant abuses smacks of cronyism.  We’ve written about previous efforts to silence one of the two lawyers mentioned in this article, Matthew Weidner:

Registers of Deeds as Unexpected Foot Soldiers Fighting Mortgage Abuses? - Yves Smith  - As regular readers no doubt know, the reason for creating the electronic mortgage registry service MERS was to save on recording fees when notes (the borrower IOUs) were transferred through multiple parties when mortgage securitizations were set up. As MERS legal status has come under questions, a few local registers of deeds (the officers in charge of local recording offices) have made estimates of the losses to their county and have come up with significant numbers.  As more and more information about mortgage abuses have gotten media coverage, some registers of deeds have dug further into their records to document their extent.  So far only a couple of local officers are undertaking these assessments, on their own initiative. At the same time, their efforts provide persuasive evidence of the extent of abuses, and thus help support the critics’ case. If more recorders were to take interest and start digging in their files and come up with tallies of various types of misconduct, this could have a significant effect on the debate. A favorite tactic of the banks has been to treat problems as “mistakes” and therefore exceptional. If more local level compilations show that “mistakes” are common or even pervasive, it will reveal that these alleged errors were a cynical profit maximizing policy dressed up as incompetence. And it would again show the banks to be liars.

MERS Ruling in Michigan Leaves Title Companies Hesitant on REO Sales - The Michigan Court of Appeals has ruled that Mortgage Electronic Registration Systems, Inc. (MERS) does not meet the requirements under state statute to foreclose by advertisement.  As a quasi-judicial state, Michigan recognizes both judicial foreclosures that go through the courts and “foreclosure by advertisement,” which gives creditors’ the right to foreclose after they post a notice of the default in a newspaper for four consecutive weeks when the mortgage includes a power of sale clause.  The appellate court ruled the latter is not a valid function of MERS because the company does not own any interest in the debt.  The judgment does not apply to judicial foreclosures conducted by MERS, but observers warn the court’s decision could void thousands of foreclosure actions in the state, including properties that have already been sold to new buyers. The Detroit Free Press says it’s received reports from local Realtors that title companies are canceling closings on some bank-owned homes in light of the appellate court’s ruling.

CMBS delinquency rate climbs to 9.22% in April: Moody's - The rate of delinquent loans in commercial mortgage-backed securities rose again in April and remains higher than 9%, as it has for all of 2011, according to Moody's. Analysts said the agency's delinquency tracker climbed another 6 basis points last month to 9.22% from 9.16% in March. The balance on delinquent loans fell slightly for the second month in a row, inching down to $56.4 billion from $56.5 billion a month earlier. The number of total delinquent loans in April fell to 4,047 from 4,097 in March. Moody's said the rising rate and declining balance of delinquent loans is a result of fewer new mortgage defaults and slowing in the number of loans leaving delinquency. (Click on chart to expand.) Analysts said foreclosures and REOs now account for 53% of all delinquent loans.

AIA: Architecture Billings Index indicates declining demand in April - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From Reuters: US architecture billings index falls in April-AIA The architecture billings index fell almost 3 points last month to 47.6, a level that indicates declining demand for architecture services, according to the American Institute of Architects (AIA). "The majority of firms are reporting at least one stalled project in-house because of the continued difficulty in obtaining financing," said AIA Chief Economist Kermit Baker. "That issue continues to be the main roadblock to recovery, and is unlikely to be resolved in the immediate future." This graph shows the Architecture Billings Index since 1996. The index showed billings decreased in April (index at 47.6, anything below 50 indicates a decrease in billings).  Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

Foreclosuregate E-mail Draft - Although I’ve written extensively about the Land Scandal, up till now I haven’t had the occasion to tell someone I know personally about it. But just last night I learned that a friend is facing foreclosure. I don’t know anything about her situation – whether she was trying to get a mod, whether she’s been the victim of servicer abuses, etc. I have no idea if she knows anything about Foreclosuregate. So I figured I’d drop her a line with a brief rundown, just in case it could be worthwhile to her to know about it and maybe look into whether or not it could help her situation. But I haven’t written about this for novices before, so I figured I’d throw a draft out there and ask what people think of it. Is it a clear enough introduction? Too many links? Does anyone know of better introductory links? (I’ve been lax in keeping my archive orderly, so by now I have >200 Land Scandal links, and I don’t recall which were the best ones. I just selected a few I do remember as being clear to me.) This is perhaps a worthwhile exercise for all of us, as we should all be ready to be educators on this subject, at least being able to steer others in the right direction.  So here’s the draft. I left out the personal details which will go into the customized version:

New Homeowner Scam: Mortgage Securitization Audits - Yves Smith - Con artists who prey on people who are already in financial hot water deserve their own circle of hell. The latest sighting comes via April Charney: “mortgage securitization audits” which charge thousands of dollars for dumping public information into binders. From Brian Canupp’s website: While millions of Americans are in the middle of the foreclosure storm a cottage industry of companies and individuals providing Mortgage Audits are now attempting to capitalize on the fear and desperation gripping many homeowners…. In the last 6 weeks I have met with three families that had paid up to $2,100.00 for an audit. All three of these “audits” were three ring binders filled with documents from the Securities and Exchange Commission Home page and articles from the newspaper detailing successful mortgage defense decisions. These products are problematic for a number of reasons:

  • The documents from the SEC are free and available to the public.
    The newspaper stories, while informative, cannot be used as precedent to a judge.
    The analysis does nothing to breakdown what has happened with your payments after they were received by the Mortgage Company.
    The “expert” who is rendering the opinion would never be accepted by a court to testify in an expert capacity.
    The analytical process supporting the audit conclusion is flawed and that leads to an impossible opinion.
    None of the analysis brought to me by clients have included a review of the money paid by the homeowner.

Florida Kangaroo Foreclosure Courts Likely to Fold - Yves Smith - We reported from time to time on the special foreclosure courts created in Florida to clear up its foreclosure backlog, and this horribly implemented experiment looks as if it is moving to a well deserved death. In concept, creating a specialized court system to provide extra capacity and judges who focused only on that issue was a sound move. In practice, it was an embarrassment and a disaster for many borrowers. As we recounted last September: These new foreclosure-only courts are special creations of the Florida legislature, funded separately from the usual court system. They are manned by retired judges, which means in many cases they are not familiar with real estate law. But perhaps most important, the explicit objective of these courts is to clear up the backlog. And that is coming to pass not by the Legislature having thrown enough resources at the problem (that is, having greatly enlarged court capacity to process more cases in parallel) but by pushing for faster resolution. The problem is that an accelerated process runs roughshod over due process and allows banks to foreclose when they may not be the right party, or worse, when the foreclosure is the result of servicing error.

Should Mortgage Servicing Data Be a Public Utility - Members of Congress, state banking regulators and academics say they have been regularly stymied in attempts to access the data. In many cases they cannot afford it. Sometimes regulators who have the data cannot share it because of proprietary arrangements with data providers.But thanks to a little-discussed provision of the Dodd-Frank Act, legislators, regulators and even nonprofit housing activists may eventually get a more comprehensive picture of the mortgage servicing industry. Section 1447 of the law calls for the Department of Housing and Urban Development to establish and maintain a comprehensive national database on foreclosures and defaults on mortgages and to make the information publicly available. The data is supposed to drill down to the census tract level and include the number and percentage of loans that are delinquent by more than 30 days; those that are in the foreclosure process; and those that are underwater.

Hopes for ‘short sales’ of US homes falter - Banks are stumbling in efforts to clear inventories of unsold US homes through a strategy known as “short sales” – in which distressed borrowers are given approval to sell properties for less than the value of their mortgages. Market-watchers say an unexpectedly large number of prospective home buyers are walking away from such deals rather than endure a closing process that is so complicated it can take up to two years to complete. Mark Zandi, chief economist of Moody’s Analytics, said such short sales have accounted for only 10 per cent of home sales this year – half as much as he expected. Movoto, an online firm that connects home buyers with local real estate agents, said about one-fifth of short sales were falling through. The results are disappointing bankers and economists who had hoped that short sales would continue to gain in popularity as a way for distressed borrowers to settle their debts and banks to clear their books of troubled loans.  Mark Brandemuehl, Movoto’s vice-president of marketing, said: “The main problem is getting the bank to agree on the terms of the sale.

Late payments on mortgages fall again in 1st quarter - The number of homeowners making late payments -- or no payments -- on their mortgages fell for the fifth straight quarter in the first three months of 2011. But the figure remains stubbornly high compared with the pre-crisis norm, likely because of the huge backlog of homes waiting to be foreclosed. The rate of borrowers nationwide who were 60 days or more past due on their mortgage payments fell to 6.19 percent for the three months ended March 31, according to credit reporting agency TransUnion. That was down from 6.77 percent at the same time last year. Delinquency rates were highest in Florida, at 14.37 percent, down from 14.65 percent a year ago, followed by last year's leader, Nevada, at 14.19 percent, down from 15.98 percent. Arizona was next, at 9.14 percent, compared with 10.94 percent in the 2010 first quarter. California, fourth at 8.58 percent, showed the biggest drop of any state in the past year, falling from 10.68 percent. These four states were the hardest hit by the housing meltdown.

Missed payments on mortgages jump to 6.4 million in April - Mortgages 30 or more days delinquent or in foreclosure totaled 6.38 million in April, a 2.3% increase from the previous month, according to Lender Processing Services.The LPS "first look" monthly mortgage performance report showed a sudden increase in troubled loans in April after an 11% monthly drop in March. However, delinquencies are still 16.3% below levels seen one year ago. Overall, 7.97% of all loans in the LPS database are 30 or more days delinquent. Of the 6.38 million properties in 30-day delinquency or worse, 4.2 million are not in foreclosure. There are also 1.9 million loans 90 days or more delinquent but not in foreclosure. These mortgages are the exact ones making up the shadow inventory of foreclosures that are keeping downward pressure on home prices and stalling out a recovery.

LPS: Delinquencies edge up in April, FNC: Non-Distressed House Prices stable in March -  From LPS "first look" report: April Month-End Data Shows an Increase in Delinquency Rate and Drop in Foreclosure Inventories. After the sharp drop in delinquencies in March, the delinquency rate edged up in April. The delinquency rate increased to 7.97% from 7.78% in March. There were an additional 4.14% of mortgage in the foreclosure process, down from 4.21% in March.  A total of 6.39 million loans were delinquent, up slightly from 6.33 million. The full report will be released on May 26th. Note: The Q1 delinquency report from the MBA will be released this Thursday and will probably show a sharp decline in delinquencies.  From FNC: March Home Prices Show Improving Trends - Rising 0.1% from February. This is one of several house price indexes I'm following in addition to Case-Shiller and CoreLogic. This is non-distressed sales.  FNC announced Wednesday that U.S. home prices in March continue to show signs of stabilization following rather mild declines in February, making March the second consecutive month with better-than-expected price momentum. FNC has data online for 30 MSAs here.

Negative Equity is “Stubbornly High” -  Negative equity, which remains “stubbornly high” as the economy slowly improves, is concentrated among lower valued properties in foreclosure and in properties valued between $100,000 and $200,000 reported CoreLogic in its monthly US Housing and Mortgage Trends Report. As of Q4 2010, over 11 million or 23 percent of borrowers were in a negative equity position and the level has been stable over the past year. Aggregate negative equity was $750 billion as of Q4 2010, of which $355 billion is composed of 1st liens alone and $395 billion is composed of 1st liens that have one or more junior liens.Demand remains weak but the weakness in the housing market is not limited to sales but also to supply. Supply includes visible supply of inventory on MLS systems and the current shadow supply which is typically not included in the MLS unsold inventory.

Signs show strategic default on the decline - Definitions for what qualifies as a strategic default varies. But analysts took a deeper look in the report. One widely held requirement for strategic default is that the borrower stops making payments when the property loses equity, meaning the mortgage is worth more than the underlying home. JPMorgan analysts used Standard & Poor's/Case-Shiller indices and tracked prices against original loan amounts on a metro level. Then, analysts collected counts for all defaulted loans since 2007 and tracked those that started missing payments once the loan went underwater. They found 60% of all defaults were strategic by the middle of 2009, more than double the percentage in January 2008. But analysts wanted to get more specific. Using data from Equifax, the JPMorgan analysts looked at which borrowers did not experience a monthly payment increase before defaulting. Then, they added in which borrowers were still making payments on other debts after missing their first mortgage payment.

Foreclosure flood may not have crested yet - Since the housing market peaked in 2006, some 6.5 million homes have been lost to foreclosure. There are likely another 4.3 million more homeowners who are “seriously delinquent,” meaning they are more than three months behind in their payments, according to data released by the Mortgage Bankers Association this week. Many of those homeowners will soon enter the foreclosure pipeline. Though the pace of new foreclosures has fallen recently, that is largely the result of lenders choking on the torrent of paperwork created by the millions of foreclosures already in progress. After lenders tried to speed the process and cut corners by “robo-signing” documents, bank regulators last month ordered them to clean up their act – saying those practices had jeopardized the “safety and soundness” of the banking system. Some 14 of the biggest mortgage lenders were ordered to come up with a plan to fix the problem within 60 days. When they do, analysts expect the pace of foreclosures to pick up again.

Survey: More Underwater Homeowners Open to Strategic Default - Nearly twice as many underwater borrowers think it is okay to walk away from a mortgage if they face financial distress than harbored this sentiment a year ago, according to a survey conducted by Fannie Mae.  The GSE found that because of feelings that they are less financially secure, 27 percent of homeowners with negative equity would consider strategic default as a viable option. That stat is based on a nationwide poll taken during the first three months of this year, and is up from 15 percent who answered so in the January 2010 survey. While more homeowners may be leaning toward strategic default should they find themselves in financial distress, the Chicago Booth/Kellogg School Financial Trust Index, which regularly assesses Americans’ trust in various aspects of the nation’s financial system, found that the number of strategic defaulters appears to be trending down, at least based on the perceptions of their fellow homeowners. The index recorded a decrease in strategic defaults among all states to 30 percent in March 2011from 37 percent in December 2010.

Another Mortgage Refinance Wave? - Freddie Mac reported this week: 30-Year Fixed-Rate Mortgage Drops to 4.63 Percent - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), which shows mortgage rates at their lowest level for 2011 after declining for the fourth consecutive week. The 30-year fixed-rate averaged 4.63 percent, and the 15-year fixed averaged 3.82 percent. Will this lead to another wave of mortgage refinancing?  Here is a graph of refinance activity and mortgage rates: This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  Although mortgage rates are at the lowest level this year, it takes lower and lower rates to get people to refi (at least lower than recent purchase rates). With 30 year mortgage rates still about 0.4 percentage points above the lows of last October, mortgage refinance activity will probably only pickup a little.

The upward slope of Real House Prices - On Friday, Dave Altig asked Just how out of line are house prices?. Dr. Altig's post featured both a price-to-rent graph and the following real house price graph based on Professor Robert Shiller's work (credits: the graph is from Barry Ritholtz's The Big Picture blog and is an update of a New York Times graphic with a possible projection by Steve Barry).For the underlying data for the NY Times graphic, please see Professor Shiller's Irrational Exuberance website.This graph has suggested to many observers that house prices track inflation (i.e. that house price adjusted for inflation are stable - except for bubbles).  I've disagreed with the assertion of stable real prices, and I've argued that "In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices." The second graph shows the Professor Shiller real prices and the CoreLogic HPI real prices (adjusted for CPI just like Shiller).The third graph shows the upward slope for both real price indexes. Even the Shiller Irrational Exuberance real price index has an upward slope - and the CoreLogic upward slope is steeper. Sure - house prices could overshoot to the downside. But the projection on the first graph of close to 25% in further real price declines is probably excessive.

Mortgage Delinquencies by State: Percent and Number - Here are two more graphs based on the MBA Q1 National Delinquency Survey released this morning.  Earlier the MBA released a graph of the percent of loans "in foreclosure" by state. The following graph is similar, but includes all delinquent loans (sorted by percent seriously delinquent). Florida and Nevada have the highest percentage of serious delinquent loans, followed by New Jersey, Illinois, New York, Arizona and California.  It has always bothered me that several southern states always have an elevated percentage of mortgage loans 30+ day delinquent (Mississippi, Alabama, Texas, Georgia, and Louisiana all have a large percentage light blue). Most of these borrowers always seem to catch up - they just make their payments late. That means the lenders generate plenty of late fees in these states. This might be something for the Consumer Financial Protection Bureau to investigate. The second graph shows the number of loans delinquent in each state (as opposed to the percent). California is the largest state, so it is no surprise that the number of delinquent loans is very high (I'd expect California to always be #1). In that sense this graph is misleading - in reality California is in about the same shape as New York, Arizona, Ohio and Rhode Island (first graph).

Mortgage Delinquencies by State: Before Crisis, Peak and Current - Yesterday I posted Mortgage Delinquencies by State: Percent and Number for Q1 2011. This raised the question of how this compares to before the crisis - and also a comparison to the peak of the delinquency crisis nationally (Q1 2011).  The following graph shows the percent delinquent by bucket of delinquency for the 10 worst states in Q1 2007, Q1 2010 (the peak of the crisis nationally), and Q1 2011. These are the 10 worst states sorted by the current percent seriously delinquent. For each state there are 3 columns (Q1 2007, 2010, and 2011). In Ohio and Indiana, delinquency rates were already elevated by Q1 2007. Some states have made progress: Arizona, Nevada and California. For other states like New Jersey and New York, serious delinquencies were higher in Q1 2011 than in Q1 2010.  But even though there has been some progress, there is a long way to go to get back to the 2007 rates.

Mortgage Delinquencies by State: Before Crisis, Peak and Current (40 states) As followup to the previous post (that showed the 10 highest state by serious delinquencies), here are graphs for the 40 remaining states. The following graphs shows the percent delinquent by bucket of delinquency for the states in Q1 2007, Q1 2010 (the peak of the crisis nationally), and Q1 2011. The order is by the current percent of loans seriously delinquent. For each state there are 3 columns (Q1 2007, 2010, and 2011).  Note that the y-axis scale change between the graphs. To use this graphs, find the state of interest - and compare 2007 to 2010 and 2011 (sorry there is so much data on each graph). Most states have seen a decline from Q1 2010 to Q1 2011, although all states are well above the Q1 2007 delinquency rates. NOTE: when you use the graph gallery, you can scroll between graphs - and use the "print" button (below the image on the left) to see the full size image. Some states always have a high rate for 30 day delinquencies (mostly southern states). These borrowers usually catch up, and this generates late fees for the lenders. An example is Alabama on this graph.  Nebraska has seen the smallest increase in the serious delinquency rate - just over 60% from 2.0% in Q1 2007 to 3.3% now. At the other extreme, the serious delinquency rate in Florida increased from 1.8% in Q1 2007 to 18.97% in Q1 2011. Ouch.

Empty Mansions Causing Headaches for Vegas Realtors - According to a recent report from online real estate service Zillow Inc., more than 28% of U.S. homeowners with mortgages have negative equity, which means they owe more on their mortgage than the home is worth. In Las Vegas, Zillow reported negative equity for a whopping 85% of homes in the city with mortgages.  For hard hit Las Vegas, and many other markets, there could be another problem on the horizon: the Obama Administration wants the government to gradually step away from the mortgage market and turn it over to the private sector. As a part of its plan, the temporary loan limit increase for expensive homes, also known as "jumbos," will expire after September 31 and will drop from $729,750 to $625,500. States with expensive home markets could be drastically affected by the move, which would mean larger down payments for higher-end homes.

Las Vegas Is Looking Like the New Detroit - Home prices here have fallen 58.1% from their 2006 highs, the most in the Standard & Poor's/Case-Shiller 20-City Composite Home Price index. They've even lost 12.6% from the nationwide recession low in April 2009 again the worst performance of the cities in the index. The median home-sale price in the Las Vegas area at the 2006 peak was $313,500; in 2010, that fell to a stunning $138,100, according to the National Association of Realtors.  Currently more than 70% of the homes in the area are under water, meaning their value is worth less than the amount owed on the mortgage, according to Stephen Miller, chairman of the economics department at the College of Business at the University of Nevada, Las Vegas. Nationwide, it's more than 28%.

$1 billion in commercial real estate assets up for grabs in Las Vegas -A large auction of commercial real estate properties will go down Tuesday in Las Vegas. About $1 billion worth of retail, multifamily, land and industrial spaces will be up for grabs online on Tuesday and Wednesday, according to the auction house hosting the event. Thursday, the third and final day of the auction, will be in person at the Cashman Center near North Las Vegas Blvd. "In our opinion, the unprecedented volume of distressed real estate we are seeing here represents the bottom of the market for Nevada and in particular, Las Vegas," . "The quality and condition of these assets will compel even the most sophisticated of investors to take notice." Investors can bid on 55 different assets, all of which are nonperforming and will be sold individually, said. Some of the featured assets include a $56 million note secured by a 333,000-plus square foot retail center on nine acres and a $50 million note secured by The Fountains at Flamingo apartment complex on the strip.

Foreign Buyers Getting Firesale Prices on U.S. Housing - For U.S. homeowners, the family moving in next door could be Canadian. Or Chinese. U.S. real estate, especially on the high end, is getting support from international buyers. If U.S. buyers find homes attractively priced, global buyers are finding a fire sale once exchange rates are figured in. According to a report released Wednesday by the National Association of Realtors, foreign clients spent about $41 billion in U.S. housing in the 12 months ended in March 2011. Individuals with visas to stay for more than 6 months purchased an additional $41 billion. Taken together, that’s about 8% of the total U.S. housing market. Foreign buyers are more likely to buy on the high end of the market. The report notes that the average purchase price paid by an international buyer was $315,000 compared to the overall U.S. average of $218,000. (Read related Journal coverage.) International buyers are also more likely to pay cash, in part because they face difficulties getting U.S.-based financing. The report said 62% of foreign buyers used all cash. In recent months, about one-third of existing-home sales were all cash.

In Luxury Real Estate, the New Global City - Russian billionaire Yuri Milner paid $100 million for a French chateau-style mansion in Silicon Valley, setting a record for the highest price ever paid for a single-family home in the U.S.  Ukraine's Rinat Akhmetov closed on two of London's most expensive apartments ever for a combined $222.5 million. In Paris, a Gulf princess spent $96.9 million last year for a mansion with an inner courtyard, garden and private chapel on the Left Bank.  Some of the biggest residential real-estate buyers in many cities are emerging from halfway around the globe. In London, one report finds that 65% of buyers in the luxury market hail from abroad. According to the Miami Association of Realtors, nearly 60% of all sales last year throughout the city were to buyers from foreign countries. About half of the buyers in one new luxury condominium on Manhattan's Fifth Avenue are from overseas. While foreign purchasers make up about 7% of the U.S. residential real-estate market, their numbers have swelled: According to the National Association of Realtors, 18% of Realtors in the U.S. market reported selling a home to at least one international buyer in 2010, up from 12% in 2009.

Existing-Home Sales in US Unexpectedly Fall‎ - Sales of existing U.S. homes unexpectedly declined in April, indicating the industry is struggling to gain traction as the economy expands.  Purchases of existing homes dropped 0.8 percent to a 5.05 million annual pace last month, the National Association of Realtors said today in Washington. A 5.2 million rate was the median projection in a Bloomberg News survey and the April figure was less than the most pessimistic forecast. The median sales price declined from a year earlier and 37 percent of transactions were of distressed dwellings.  Falling prices and the prospect of more foreclosures entering the market signal more Americans may be hesitant to purchase homes. With unemployment at 9 percent and wages stagnant, any sustained recovery in residential real estate may take years to unfold.

April Existing Home Sales: 5.05 million SAAR, 9.2 months of supply - The NAR reports: April Existing-Home Sales Ease. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in April 2011 (5.05 million SAAR) were 0.8% lower than last month, and were 12.9% lower than in April 2010.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.87 million in April from 3.52 million in March.  Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall and winter. Inventory will probably increase over the next several months. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply.  Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory - so the increase in months-of-supply during the Spring is expected. Although inventory increased from March to April (as usual), inventory decreased 3.9% year-over-year in April from April 2010. This is the third consecutive month with a YoY decrease in inventory.

Existing Home Sales: Investors, Distressed Sales and First Time Buyers - The following graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2011.  Sales NSA are below the tax credit boosted level of sales in April 2010, but slightly above the level of March sales in 2008 and 2009.  The level of sales is elevated due to all the investor buying. The NAR noted:  All-cash transactions stood at 31 percent in April, down from a record level of 35 percent in March; they were 26 percent in March 2010; investors account for the bulk of cash purchases. ...First-time buyers purchased 36 percent of homes in April, up from 33 percent in March; they were 49 percent in April 2010 when the tax credit was in place. Investors slipped to 20 percent in April from 22 percent of purchase activity in March; they were 15 percent in April 2010. The balance of sales was to repeat buyers, which were 44 percent in April. Another survey, the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey "showed the proportion of first-time homebuyers in the housing market fell to 35.7% in April compared to 43.4% a year earlier. [The] Distressed Property Index, a key measure of the health of the U.S. housing market, fell slightly to 47.7% in April, although sales of distressed properties continued to account for nearly half of the market."

Lawler: The “Excess Supply of Housing” War - A few weeks ago Goldman Sachs’ analysts made headlines by arguing that the “excess” supply of housing, or actually the number of US housing units sitting vacant “above and beyond normal seasonal and frictional vacancies,” was “about” 3.5 million. This week Deutsche Bank analysts estimated that at the end of 2010 there were about 1.2 million “excess” vacant housing units in the US. Both sets of analysts relied heavily on data “provided” by the US Bureau of the Census in deriving their “estimates.” And, to the best of my knowledge, neither set of analysts was comprised of imbeciles. Yet jiminy cricket, those are pretty huge differences with massively different implications about the prospects for the housing markets and home prices over the next few years!!!!! And the major reasons for these differences? You guessed it, massively disparate sets of data from different areas of the Census Bureau on US housing!!!!

First-time Buyers Evaporate - First-time buyer market share fell 18 percent below the level of a year ago, reducing absorption of distressed properties, which accounted for nearly half of all sales during the month. First-time homebuyers absorb housing supply, while move-up and move-down buyers produce no net take-up in inventory. When the supply of distressed properties exceeds the demand from first-time homebuyers, investors must step into the market to buy these properties, often at bargain-basement prices. The disappearance of first-time buyers compared to April, which was the height of the first-time home buyer tax credit boomlet, put pressure on inestors to take up the slack.   Investors accounted for 23.0 percent of the housing market in the month of April, up from 18.0 percent a year earlier, according to the Campbell/Inside Mortgage Finance HousingPulse Survey. Survey respondents in April reported that potential first-time homebuyers are having trouble finding foreclosed homes in move-in ready condition.

Housing in North America: Peak Oil’s Primary Victim - Of the many asset classes to be victimized by the end of cheap energy, residential real estate is perhaps the most vulnerable. A call option on future wage growth, and, leveraged to our liquid-fuel based transport system, housing in North America is currently making its way back to the stable, but barely appreciating asset it once was. However, having started this journey only recently there is still a long way to go. A long way in price that is, for housing to fall. The housing crash is currently in the midst of its next leg down. In similar fashion to those who missed the initial crash, the past year has seen a number of observers calling for a bottom. One of my favorite calls came last year from Karl Case in an editorial in the Wall Street Journal. In A Dream House for All, Mr Case made the following argument: because house prices had fallen so much already, housing was now more affordable. But of course that wasn’t true at all. Not then, and not now.

Maybe Americans Just Aren't Dumb Enough To Keep Buying Houses: "The housing market remains soft, so we’re told, and the best minds of central economic planning are struggling to understand why and what new government gimmicks can be applied. I’m wondering if former homeowner sentiment has been factored in. This article from Zillow says that approximately 37 percent of home sellers are selling at a loss. Whatever the loss figured by Zillow you also have to add another 5-6 percent in real estate commission, equivalent to more than a year of rent in many markets. Psychologically, a person who just lost enough money to have paid for 5-10 years of rent is not a very likely candidate to go back into the market where he was just burned. Thus the more houses are sold, the worse the buyer-seller ratio will get. Every sale has a roughly 37% chance of removing a person from the real estate ownership market. More and more Americans will be conditioned to the idea that home ownership is a waste of time and money, not to mention the inflexibility that it imposes on a person who might otherwise have been able to get a better job by moving.

Survey: Americans Still Believe Homes Are A Better Investment than Stocks - Home values are down about 30 percent1 on average since the housing bubble started to burst nearly five years ago. So it stands to reason that hard fall would have disabused Americans on housing as a great investment. So much for reason. Two recent reports show that we’re still convinced that owning a home is a better investment opportunity than funding our 401(k)s or IRAs. In a recent survey the Pew Research Center found that 81 percent of Americans believe that owning a home is the best investment2 a person can make. And that’s not just among current homeowners who have a vested interest in thinking they made a smart investment. Just 24 percent of renters said they rent by choice, not necessity, which implies the rest would prefer to own if they could. A new report from Fannie Mae released last week echoes the Pew survey. Eighty seven percent of Americans say homeownership is superior to renting3, and even among the renters in the Fannie survey, three of four gave the nod to home ownership.

US builders see little to like in housing market (AP) -- U.S. homebuilders are concerned that the struggling housing market won't recover this year and some feel it may be getting worse. Builders' outlook for the industry in May was unchanged at 16, the National Association of Home Builders said Monday. It has been at that level for six of the past seven months. Any reading below 50 indicates negative sentiment about the market. The index hasn't been above that level since April 2006. When asked about where they see sales of single-family home heading over the next six months, the builders offered their most pessimistic outlook since September. Last year the number of people who purchased previously owned homes fell to a 13-year low. Sales of new homes were even worse, hitting the lowest level on records dating back nearly a half-century.

Housing Starts decline in April - Total housing starts were at 523 thousand (SAAR) in April, down 10.6% from the revised March rate of 585 thousand.  Single-family starts decreased 5.1% to 394 thousand in April. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

Construction of new homes plummeted in April - Construction of new homes plummeted in April, dragged down by a major drop in apartment building. Builders broke ground on 10.6 percent fewer new homes last month from the previous month. The seasonally adjusted rate fell to 523,000 homes per year, the Commerce Department said Tuesday. That's less than half the 1.2 million homes per year that economists consider a sign of a healthy market. Single-family homes, which make up roughly 80 percent of home construction, fell about 5 percent in April. Apartment and condominium construction plunged more than 28 percent. Building permits, a gauge of future construction, fell 4 percent. The weak construction data provided further evidence that the housing industry is far from recovering, analysts said.

The Quadruple Dip: Housing Starts, Permits Drop, Miss Expectations; Houses Under Construction At New Record Low -Since the triple dip in housing was recently circumvented courtesy of QE2, and was "transitory" in theory today's subpar housing starts and permits data is the beginning of the quadruple dip. And subpar it was: starts came at 523K on expectations of 569K, down from revised 585K previously. Permits were also ugly, missing expectations by a comparable account, printing at 551K, with consensus of 590K(and the previous revised this time lower from 594K to 574K). In starts, annualized single-family units dropped from 415k to 394k, with declines in Northeast and South, and increases in the Midwest and West. The actual, non-annualized number of starts was 46.8k, with 36.2k in single family units. Completions increased modestly from 532k to 554k. And the most interesting number was the number of houses under construction, which hit a fresh all time low on an annual, seasonally adjusted basis, or 418k.

Housing Weakness Is Mixed Blessing - Housing has long been the whipping boy of the Federal Reserve. But not in this business cycle. In the past, when the central bank wished to slow the economy, it raised interest rates which slowed the flow of credit to big-ticket sectors, especially housing. Once the Fed’s goal was reached, the Fed took its foot off the brakes. Lower rates stimulated housing again, creating jobs and renewing confidence. The scenario can’t play out this time around in large part because the collapse of the housing and mortgage bubbles caused the last recession. That is why the unexpectedly large 10.6% drop in April housing starts should be viewed as a mixed blessing. In the short run, the drop in construction will be a drag on growth of U.S. gross domestic product. In the long run, however, the sector can recover only if supply is drastically pared down to better balance with modest gains in demand.

Mutli-family Starts and Completions, and Quarterly Starts by Intent - Also from the Housing Starts report this morning ... Although the number of multi-family starts can vary significantly month to month, apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and will be breaking ground this year. So we should see a pickup in multi-family starts in 2011.  However, since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - there will be a record low number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling average. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.  Also today, the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q1 2011. Although this data is Not Seasonally Adjusted (NSA), it shows the trends for several key housing categories.  This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

Residential Remodeling Index increases in March - The BuildFax Residential Remodeling Index was at 98.0 in March, up from 95.1 in February. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFaxThe Residential BuildFax Remodeling Index rose 14% year-over-year - and for the seventeenth straight month - in March to 98.0, the highest March number in the index aside from March 2006. Residential remodels in March were up month-over-month 2.9 points (3%) from the February value of 95.1, and up year-over-year 12.0 points from the March 2010 value of 86.0. ... This is the highest level for a March since 2006 - and above the level of 2005 (during the home equity and remodel boom). Note: permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

Housing Activity Weakens In April & Industrial Production Is Flat - Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.  The residential real estate market remains in a deep slump and there’s nothing in today’s numbers from the Census Bureau to tell us different. The only questions: 1) Will the slump worsen; and 2) if the answer to first question is yes, will it drag down the rest of the economy? Answering no in both cases is still reasonable, although the level of confidence with that outlook is far from robust.  It doesn’t help to learn that industrial production was flat last month vs. March, or that manufacturing production slipped 0.4% in April after nine straight months of growth, according to the Federal Reserve update today.

While Home Prices May Be Falling, Insurance Premiums Are on the Rise - Already plagued by stubbornly low home prices, homeowners soon may be facing another blow: rising insurance premiums. After five years of relatively stable premiums, some of the country's biggest insurers have raised rates—or say they plan to. Premiums vary by state, but last year, State Farm Mutual Automobile Insurance Co. says it increased homeowners rates 7.3% on average and, this year, has raised them in 18 states, including a few by more than 7%. By contrast, it cut rates in just two state.  In Florida, upscale insurer PURE Risk Management raised premiums 11% this year. Fireman's Fund Insurance Co., a subsidiary of Allianz1 SE, says it has started to raise premiums in some areas. For some Pennsylvania homeowners, premiums shot up 33% last year. For homeowners, the increases may seem counter-intuitive. Why are they paying more to protect a house that may have lost significant value? Insurers say premiums are partly based on rebuilding costs, not on a home's appraised market value.

Inside the Consumer Price Index - Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, see table 3 in the BLS's monthlyConsumer Price Index Detailed Report. The chart below shows the cumulative percent change in price for each of the eight categories since 2000.

Restaurant inflation is edging up - Rising commodity prices and the high cost of gasoline have finally broken the budget-minded approach that restaurants embraced to keep their cash-strapped customers coming. Across the country, in chain after chain, menu prices are climbing — or portions are shrinking — as restaurants contend with across-the-board increases in the cost of everything from pork to plastic cups. So far, the price increases have been incremental and nearly negligible — 1% seems to be the norm — but federal agencies predict that relief won't arrive for restaurants until next year, meaning more increases could be ahead. By the time 2011 ends, expect restaurant prices to be 3% or 4% higher, according to the U.S. Department of Agriculture.

UPI: 'Fill 'er up,' hits a limit - U.S. drivers are reporting that higher prices at the gas pump also means quicker shut offs when credit cards hit their limits. "I just want to fill my tank and go," said Ashly Stringer of Dearborn Heights, Mich., who finds gas pumps shut down when she reaches a $75 limit, leaving her tank only three-quarters full, The Detroit News reported Saturday. Gas stations are complying with limits of $75 for Visa and Discover card holders who pay at the pump and MasterCard's limit of $100, because they are responsible for any losses above those limits with any fraudulent use of credit cards. "The retailer doesn't have to have the pump shut off, but the risk is really too great,"

In Consumer Behavior, Signs of Gas Price Pinch - Ms. Greene spent the weekend packing up to move to a rental house much closer to work. At $4 a gallon, gas is too expensive to justify the 50-mile round-trip commute.  “The option was either to sell my truck and get something smaller, or to try to get closer to work,” Economists say steady job growth over the last three months, as well as this year’s federal payroll tax cut, have offset the downward pull of rising energy costs on the economy as a whole. But like a lot of economic news these days, what looks good on paper does not feel good for Americans still digging their way out of the recent recession1. “Our customers are consolidating trips due to higher gas prices,” said Bill Simon, who oversees the [WalMart] United States business. “Rising gas and energy prices are cited by homeowners as the top factor affecting future spending plans, followed by the state of the overall economy and inflation in general,” said Lowe’s chief executive, Robert A. Niblock,

With $4 Gas, More Folks Skip the Trip -  Americans living paycheck to paycheck are looking at the gas gauge before they run their errands, and that's hurting big retail chains such as Wal-Mart Stores Inc. and Lowe's Cos. "Our customers are consolidating trips due to higher gas prices," said Wal-Mart U.S. head Bill Simon during the retailer's earnings conference call Tuesday. "One in five Wal-Mart moms list gasoline as a top expense behind housing and car payments." Reflecting those concerns about the cost of driving, customer visits to Wal-Mart are down—and that's hurting sales. Wal-Mart on Tuesday reported its eighth consecutive quarter of sales declines at U.S. stores open at least a year.  "Despite improvements in some areas of the economy, core Wal-Mart U.S. customers are still stretched," Wal-Mart Chief Executive Mike Duke said. "They remain concerned about rising prices for gas, energy and food, as well as employment issues." Lowe's said it sees a shift due to gasoline prices. "We do believe it has affected traffic going to stores. And some people are staying home and ordering more" online.

Do High Gasoline Prices Threaten Consumer Spending? - The rebound in retail sales is at the top of the list for thinking that the economy will weather any challenges to growth in the months ahead. Consumer spending, after all, accounts for roughly 70% of GDP, as we’ve so often been told. That implies that a robust rate of growth in retail sales is just what the doctor ordered to chase away the business cycle blues. The good news is that the headline number for retail sales certainly looks encouraging these days. But if we strip out sales at gasoline stations, the case for optimism suffers a bit.  The first chart confirms that retail sales have rebounded sharply since the Great Recession. In fact, total nominal sales have recently hit new highs on a seasonally adjusted basis (black line). Joe Sixpack is spending more than ever. But if we strip out retail gasoline station sales (red line), the trend isn't quite so strong. Every dollar spent on gasoline is presumably a dollar less spent elsewhere on goods and services that are more likely to contribute to economic growth.

Charts of the Day: TrimTabs Consumer Spendables Index, Dependency Ratio II - I received an email today from TrimTabs regarding their Consumer Spendables Index and a new measure called Dependency Ratio II/ The Consumer Spendables Index consists of three components.

  1. Cash Extracted from Real Estate
  2. After Tax Income from Other Sources
  3. After Tax Income from Wages and Salaries

TrimTabs reports ... The Federal Reserve discontinued its data on cash-outs in Q3 2008, but we use another source of refinancing data from Freddie Mac to estimate cash-outs and thus consumer spendables. According to the Fed, cash-outs peaked at $804 billion in the four quarters ended in Q2 2006 (we refer to four-quarter periods to smooth quarterly volatility). At that time, cash-outs were equal to 13.6% of the $5.9 trillion in after-tax income. We estimate that cash-outs amounted to only $62 billion in the four quarters ended in April, down $742 billion, or 92.2%, from the peak. Consumer spendables peaked at $7.06 trillion in the four quarters ended in Q4 2007, more than a year after cash-outs began to decline. Then consumer spendables began to decrease, bottoming at $6.06 trillion in Q2 2010. In the past year, consumer spendables rose an estimated $245 billion, or 4.0%, to $6.31 trillion. This increase is not impressive given that it was accompanied by the payroll tax cut and $1.5 trillion in federal deficit spending

Consumers Come to Terms with Frugality - Our Daily Growth Index at the Consumer Metrics Institute has continued its descent into record depths of contraction, reaching the year-over-year level of decreasing consumer demand of -6.68% on May 12, 2011. There are several key aspects of that decline that lurk beneath the raw contraction rate:

  • – The numbers are year-over-year against already contracting consumer demand last year. At mid-May 2010 our measurements of consumer demand for discretionary durable goods were already showing a -1.8% slowdown compared to May 2009 — meaning that the compounded two year movement is well in excess of -8.5%.
  • – The new record low of -6.68% should be viewed in the context of previous records: the lowest level reached during the “Great Recession” was the then record -6.02% set on August 29, 2008; while the most recent new record “bottom” was -6.13% set on October 4, 2010. The new record exceeds the 2008 low by 10%, and the 2010 “bottom” by over 8%:

Is REW the new MEW? (Retirement Equity Withdrawal) - Reader asks if Retirement Equity Withdrawal is replacing Mortgage Equity Withdrawal (MEW) for those in need? Borrowing from retirement accounts has definitely increased. From CNBC two weeks ago: More Americans Raiding Retirement Funds Early ... 19 percent of Americans — including 17 percent of full-time workers — have been compelled to take money from their retirement savings in the last year to cover urgent financial needs, the Financial Security Index found.  And from a new study by Aon Hewitt: Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income Note: "DC" is Defined Contribution - like a 401(k) plan.  As of year-end 2010, nearly 28% of active participants had a loan outstanding, which is a record high. Nearly 14% of participants initiated new loans during 2010, slightly higher than previous years. The average balance of the outstanding amount was $7,860, which represented 21% of these participants’ total plan assets. Hmmm ... $7,860 is 21% of total assets? That means the average total balance is less than $40,000 for participants who borrow from a DC plan.

Minnesota sues debt collector for robo-signing (Reuters) - Minnesota sued Encore Capital Group Inc, one of the largest U.S. debt collectors, for allegedly using fraudulent "robo-signed" affidavits in collection cases, a practice that critics say also infects home foreclosures. Thursday's lawsuit against Encore's Midland Funding LLC and Midland Credit Management Inc units follows a ruling by an Ohio federal judge that Minnesota's case would not interfere with a $5.2 million class-action settlement of similar claims. "Midland has perverted the justice system by filing robo-signed affidavits in court and hounding citizens for debt they don't owe," Minnesota Attorney General Lori Swanson said. Encore Chief Executive Brandon Black in an emailed statement said the company changed its affidavit process in 2009, believes its practices are "legally sound," and will work with Swanson to resolve the matter. He added that "because 95 percent of consumers ignore letters sent by the company, the legal channel is often the only remaining option."

Credit Error? It Pays to Be on V.I.P. List - The credit rating bureaus, whose reports influence everything from credit cards to mortgages1 to job offers, have a two-tiered system for resolving errors — one for the rich, the well-connected, the well-known and the powerful, and the other for everyone else.  The three major agencies, Equifax2, Experian and TransUnion, keep a V.I.P. list of sorts, according to consumer lawyers and legal documents, consisting of celebrities, politicians, judges and other influential people. Those on the list — and they may not even realize they are on it — get special help from workers in the United States in fixing mistakes on their credit reports3. Any errors are usually corrected immediately, one lawyer said.  For everyone else, disputes are herded into a largely automated system. Their complaints are often electronically ferried to a subcontractor overseas, where a worker spends, on average, about two minutes figuring out the gist of the matter, boiling it down to a one-to-three-digit computer code that signifies the problem — “account not his/hers,” for example — and sending a dispute form to the creditor to investigate. Many times, consumer advocates say, the investigation translates to a perfunctory check of its records.

Postal Service expects $8.3 billion loss this year - The U.S. Postal Service estimates it will lose $8.3 billion this year, not counting adjustments for workers' compensation liabilities, which could add to the total. Postmaster General Patrick Donahoe disclosed the loss estimate during a Senate panel hearing Tuesday, a week after the agency posted worse-than-expected second-quarter results, driven by a sharp drop in profitable first-class mail volume. Last year, the agency suffered a $6 billion loss not counting workers compensation adjustments. Workers' compensation liabilities for this year are unknown, but last year they amounted to $2.5 billion.

Worst Recovery Ever For Small Businesses - The recovery that never was, took a turn for the worse in the latest survey of small businesses. The NFIB reports Small-Business Optimism Index Dips for Second Consecutive Month in April The net percent of owners expecting better business conditions in six months slipped another 3 points to negative 8%, 18 percentage points worse than in January. Uncertainty is the enemy, and there is plenty of it to convince owners to “keep their powder dry”. Only 50% of all firms reported making capital outlays last month, down 1 point from the month prior. The percent of owners planning capital outlays in the next three to six months fell 3 points to 21%, a recession level reading. Money is cheap, but most owners are not interested in a loan to finance equipment they don’t need. Prospects are still uncertain enough to discourage any but the most profitable and promising investments.

A Surprising Jobs Recovery: American Manufacturing is Back - Amid a lackluster economic rebound, the manufacturing in this country has, for the first time in decades, seen an unlikely boom. And it's not just in farm related businesses. The U.S. manufacturing sector overall, after shrinking by six million positions between 1997 and 2009, has added 240,000 workers since the beginning of 2010. In fact, the manufacturing sector has been one of the few stars of the poor economic recovery. Nearly one in every six jobs that have been created by the economy since the beginning of 2010 has been in manufacturing.Politicians and economists have long given up on the idea that the U.S. would be a manufacturing powerhouse. And indeed, high labor costs in the U.S. have driven a number of U.S. companies to move their production overseas. But a combination of factors has caused U.S. manufacturing to see a surprising recovery in the past year and a half.

New Manufacturing Data Show Weaker Recovery - There’s been a lot of happy talk recently about the revival of U.S. manufacturing .  According to an article in the New York Times,  “manufacturing has been one of the surprising pillars of the recovery. “  In a column entitled “Manufacturing Stages A Comeback,”  well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.”  The Economist writes that “against all the odds, American factories are coming back to life.”* Unfortunately,  the latest figures do not back up the cheerful rhetoric.Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments,  incorporating the results of the 2009 Annual Survey of Manufacturers.  The chart belows shows the comparison between the original data and the revised data (three-month moving averages):

Manufacturing Recovery: an Update - Mike Mandel is not convinced that US manufacturing is really doing particularly well: He cites and presents two pieces of data. First, he shows that recent revisions to the figures on factory shipments in 2009 indicate that manufacturing output fell by more than initially belived during that year. Second, he shows that US imports of goods have risen rapidly over the past year.  But neither of these observations really tell us anything about whether US manufacturing is recovering unusually strongly.  As I've argued before, US manufacturing has done far better during this recovery than what we've grown used to seeing over the past 30 years. The fact is that that real output of the US's factories has climbed at a surprising rate over the past two years. The following chart compares the recovery of US manufacturing output (measured by the FRB's Industrial Production series) in the wake of the most recent recession compared to the two previous recessions. (Update: the chart now incorporates today's data release for April 2011, which undoubtedly reflects some effects of the earthquake in Japan.)

Slower Growth vs. Slow Growth - Manufacturing activity in the state of New York “improved in May, but at a slower pace than in April,” according to this morning’s update of the Empire State Manufacturing Survey from the New York Fed. Meanwhile, the outlook for U.S. economic growth softened a bit according to economists surveyed by the National Association for Business Economics. "NABE panelists revised their projections for economic growth in 2011 downward compared with their February projections," says Richard Wobbekind, NABE president in a statement. "Real GDP is expected to grow at a moderate pace of roughly 3 percent in the current year and only slightly faster in 2012." The risk of a slowing rate of growth for the economy isn’t particularly shocking, given the recent jump in jobless claims. As for rounding up suspects, NABE’s Wobbekind notes:

Philly Fed business index sinks to 3.9 in May - Business activity at manufacturing firms in the Philadelphia region grew in May but at a much slower pace compared to a few months ago, according to the survey issued Thursday by the Federal Reserve Bank of Philadelphia. The Philly Fed index sank to 3.9 in May from 18.5 in April, well below expectations of an increase to 20.1. Any reading over zero in the diffusion index indicates growth. Higher readings mean that more firms are reporting better conditions instead of worse conditions

Making Things in America, by Paul Krugman - Some years ago, one of my neighbors, an émigré Russian engineer, offered an observation about his adopted country. “America seems very rich,” he said, “but I never see anyone actually making anything.”  That was a bit unfair, but not completely — and as time went by it became increasingly accurate. By the middle years of the last decade, I used to joke that Americans made a living by selling each other houses, which they paid for with money borrowed from China. Manufacturing, once America’s greatest strength, seemed to be in terminal decline.  But that may be changing. Manufacturing is one of the bright spots of a generally disappointing recovery, and there are signs — preliminary, but hopeful, nonetheless — that a sustained comeback may be under way.  America’s industrial heartland is now leading the economic recovery. In August 2009, Michigan had an unemployment rate of 14.1 percent, the highest in the nation. Today, that rate is down to 10.3 percent, still above the national average, but nonetheless a huge improvement.  I don’t want to suggest that everything is wonderful about U.S. manufacturing. So far, the job gains are modest, and many new manufacturing jobs don’t offer good pay or benefits.

US Manufacturing Employment - Paul Krugman has an editorial this morning expressing some optimism about US manufacturing and manufacturing employment in particular: You can see that this fraction has been declining since about 1970.  It's worst in recessions.  It used to recover somewhat between recessions, but since the 1980s it's tended to be flat or declining even during recoveries.  Krugman is quite right that it was worse in the 2000s than in the 1990s.  It's also true that its performance after the great recession is slightly better.  However, it's only flat - it's not actually recovering. I don't personally see much medium term cause for optimism here.  The reason the 2000s were worse than the 1990s was the huge explosion of manufacturing in China.  Here's the BLS data for Chinese manufacturing wages as a percentage of US manufacturing wages:

What's Behind the Seventh District Resurgence? - Chicago Fed - Fame and fortune can be fleeting, but over the past year the Seventh District has been leading other U.S. regions in the pace of economic recovery. It is not so much that economic conditions are better here. Rather, it is that the pace of improvement has been quicker. As the map below illustrates, unemployment rates have fallen most rapidly in Michigan, followed by Illinois, and in quick succession by Indiana and Wisconsin.  The rebounding District economy is being pulled along by its two hallmark goods industries—agriculture and, especially, manufacturing. The manufacturing output recovery has far exceeded overall output growth in both the nation and the District. Since the District’s manufacturing concentration exceeds that of the nation, this unbalanced recovery has exerted an outsized effect on the District economy. Moreover, output gains in the Seventh District have outpaced those in the U.S. manufacturing sector overall. The chart below compares U.S. industrial production to its regional counterpart, the Chicago Fed Midwest Manufacturing Index. From their respective troughs in mid 2009, the IPMFG has gained 14.2 percent and the CFMMI has gained 24.2 percent. Jobs in the manufacturing sector have also been rebounding from deep lows. From the first quarter of 2010 to the first quarter of 2011, the District states of Michigan, Wisconsin, and Indiana, in that order, have led all other states in net job growth in the sector.

In Rust Belt, manufacturers add jobs, but factory pay isn’t what it used to be - The nation’s factories have added 250,000 jobs since the beginning of last year — about 13 percent of what was lost during the recent recession — marking the first sustained increase in manufacturing employment since 1997. 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 Mexico2 and El Paso in 2007 after concluding that it was too expensive to make its products in the industrial Midwest.

Industrial Production unchanged in April, Capacity Utilization declines slightly - From the Fed: Industrial production and Capacity Utilization. This graph shows Capacity Utilization. This series is up 9.6 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 76.9% is still "3.5 percentage points below its average from 1972 to 2010" - and below the pre-recession levels of 81.2% in November 2007.  The second graph shows industrial production since 1967. Industrial production was unchanged in April at 93.1; previous months were revised down, so this is a decline from the previously reported level in March. Production is still 7.6% below the pre-recession levels at the end of 2007.  The consensus was for a 0.4% increase in Industrial Production in April, and an increase to 77.6% for Capacity Utilization. So this was well below expectations - partly because of the earthquake in Japan.

U.S. April Industrial Production Stalls on Autos - Industrial production in the U.S. unexpectedly stalled in April and housing starts dropped, posing hurdles to a rebound from the first quarter’s economic slowdown.  Output at factories, mines and utilities was unchanged after a 0.7 percent gain in March, figures from the Federal Reserve showed today, led by a drop in auto production after parts supplies were disrupted by the earthquake and tsunami in Japan. Work began on 523,000 houses at an annual pace, down 11 percent, as tornadoes and floods in the South shut down construction sites.  Production may reassert its place at the leading edge of the recovery as parts supplies resume, while overseas demand and business investment boost sales at companies like Caterpillar Inc. (CAT) At the same time, a housing recovery may take years to unfold as foreclosures and 9 percent unemployment hold back demand.

Things that Give Me Pause: Industrial Production Edition - I’ve mentioned before that there are many stats on the health of a modern economy but even in the new information age, Industrial Production remains the grand-daddy of them of all. Given that this is unwelcome news. Industrial production was unchanged in April after having increased 0.7 percent in March. Output in February is now estimated to have declined 0.3 percent; previously it was reported to have edged up 0.1 percent. In April, manufacturing production fell 0.4 percent after rising for nine consecutive months. Total motor vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million units in April, mainly because of parts shortages that resulted from the earthquake in Japan. Excluding motor vehicles and parts, factory production rose 0.2 percent in April. The output of mines advanced 0.8 percent, while the output of utilities increased 1.7 percent. At 93.1 percent of its 2007 average, total industrial production was 5.0 percent above its year-earlier level. The St Louis Fed’s data is not yet updated but this information will transform what looks like a strong spike into a premature hump.

When is it worth remanufacturing? - Remanufacturing products rather than making new ones from scratch — widely done with everything from retread tires to refilled inkjet cartridges to remanufactured engines — should save a lot of energy, right?  But out of 25 case studies on products in eight categories done by a team led by Professor of Mechanical Engineering Timothy Gutowski, there were just as many cases where remanufacturing actually cost more energy as cases where it saved energy. And for the majority of the items, the savings were negligible or the energy balance was too close to call. Why are the new results so different from what might have been assumed? The MIT team looked at the total energy used over the lifetime of a product — a life-cycle analysis — rather than just the energy used in the manufacturing process itself. In virtually all cases, it costs less money and less energy to make a product from the recycled "core" — the reusable part of the product — than to start from scratch. But the catch is that many of these remanufactured products are less energy efficient, or newer versions are more energy efficient, so the extra energy used over their lifetime cancels out the savings from the manufacturing stage.

Is this the end of the Mancession? - After the financial crisis, it looked like men were toast, at least in the job market. Between December of 2007 and June of 2009, 70 percent of the jobs lost in this country were lost by men. No wonder, given that the recession disproportionately hit areas like finance, manufacturing and construction – areas that employ many more men than women.  I was one of the many who wrote pieces noting that the “New Normal” would be an economy that favored women. Was I wrong? Recent stats would make it seem so – in ten out of the most recent 12 months of job gain, growth in jobs for men outpaced those for women. Men gained over a million jobs last year, while women gained only 149,000. As a recent Slate piece summed it up, “women are now the economy's big losers,” especially given the current downturn in the public sector, made up largely of women. But as compelling as these figures are, I think it's much too early to declare a crisis in female employment.

Gallup Finds U.S. Unemployment at 9.2% in Mid-May - Unemployment, as measured by Gallup without seasonal adjustment, is at 9.2% in mid-May -- down slightly from 9.4% at the end of April. It is also slightly lower than the 9.4% of mid-May last year. Underemployment, a measure that combines the percentage of unemployed with the percentage working part time but wanting full-time work, was at 19.1% in mid-May -- down from 19.3% at the end of April. Underemployment remains as high as it was in mid-May 2010. While Gallup's not seasonally adjusted U.S. unemployment rate suggests little improvement (0.2 percentage points) compared with the same time in 2010, the government's unadjusted results show a year-over-year decline of 0.8 points

Jobs Miscount: How Flawed is the Nation's Most Watched Economic Indicator - Last October, when the government released its monthly tally of how many people had jobs, there was a collective groan. The September report, which came out the first Friday in October, said the number of employed people in the U.S. had dropped by 95,000, worse than the 57,000 job drop the month before. After looking like we had finally hit an economic rebound, the jobs market was again slipping back again perhaps toward the dreaded double-dip recession. Or was it? A month later the Bureau of Labor Statistics, which tracks and releases the employment numbers for the government, revised its jobs count for September. In fact, the economy, it turned out, had lost only 41,000 jobs that month. Is that right? Actually no. A month later, the BLS revised the number again. The final tally: In September, the number of people working in America fell by just 24,000. So the economy was improving? Not quite. Remember that month before figure of 57,000 jobs lost. Yeah, well, that was wrong, too, off by nearly all of the drop, or 56,000 jobs.

Real Earnings - Weekly - Hourly (graph)

Most Common Jobs Among Lowest Paid - The largest occupations in the U.S. last year were mostly low-paying jobs like salesmen and waitresses, a new report shows. The 10 largest fields accounted for about 20% of the workforce last year — and they tended to include some of the worst-paying positions, the Labor Department said Tuesday. Heavily concentrated employment in low-paying jobs has been a concern for some economists, who note the economy is creating more low-paying jobs and more high-paying jobs (that require higher education) and leaving fewer opportunities for the traditional American middle class. Retail salespersons and cashiers were the largest fields last year, employing 7.6 million — 6% of total employment. Also included were food preparation and serving workers, cashiers, and waiters and waitresses — the lowest paying of the largest fields and among the poorest-paying jobs of the nearly 800 occupations the Labor Department tracks.

Bernanke Speaks on Government Role in Research -The chairman of the Federal Reserve1, Ben S. Bernanke, said on Monday that the United States and other countries needed to better understand the most effective ways to use government money for research and development projects.  Mr. Bernanke listed options available: direct financing to research institutions, grants to universities or private sector researchers, contracts for specific projects and tax incentives. But he offered no preference to which is best. That varies based on the type of project, he said.  The federal government accounted for roughly 26 percent of total spending on research and development in the United States in 2008. That’s down from around 50 percent in the previous three decades. Mr. Bernanke also said that government support for research and development financing was most effective if seen as a long-term investment in the economy.

Digging Deeper Into What Caused Job Losses - Census Bureau data on employment by pay level cast doubt on credit-crunch and demand-based theories of the recession. One theory is that a credit squeeze left businesses short on funds, and they responded by cutting payroll, their major expense. Indeed, the bank bailouts were rationalized on the grounds that a bailout would help employers maintain their payrolls. If cutting payroll spending had been the primary motivation of employers, then they should have cut deepest among their most expensive employees. Firing one person making, say, $2,000 a week saves more than firing three people making $600 a week. It is true that part-time employment, which is typically low-paying, increased significantly during the recession. However, last week I showed Census data suggesting that employment of people making more than $2,000 a week may have been greater in the 12 months after Lehman Brothers failed than it was before, even while employment of people making less than $2,000 a week fell several million. Hiring more high-paid people is not a way to reduce payroll spending.

Lumpy Labor - Skidelsky - As the world recovers from the Great Recession, it has become increasingly difficult to discern the true trend of events. On the one hand, there is a disquieting sense that today’s “new normal” may be slower growth and higher levels of unemployment. So the challenge now is to formulate policies to provide work for all who want it in economies that, as currently organized, may not be able to do so.  The problem has two aspects. As countries become more prosperous, one would expect their growth rates to slow. In earlier times, growth was fueled by capital scarcity: capital investment attracted a high rate of return, and this created a virtuous circle of saving and investment. Today, capital in the developed world is abundant; the saving ratio declines as people consume more; and production shifts increasingly to services, where productivity gains are limited. Hence the growth of casual, discontinuous, part-time jobs. The other aspect of the problem is the long-term increase in technology-driven unemployment, largely owing to automation. The market’s solution is to re-deploy displaced labor to services. But many branches of the service sector are a sink of dead-end, no-hope jobs.

Skidelsky Channels Sandwichman - Over at Project Syndicate, Keynes biographer, Professor Lord Robert Skidelsky knocks a chunk out of the venerable lump-of-labour fallacy claim: So, are we doomed to a jobless recovery? Is the future one in which jobs are so scarce that many workers will have to accept a pittance to find any employment, and become increasingly dependent on social transfers as market-clearing wages fall below the subsistence level? Or should Western societies anticipate another round of technological wizardry, like the Internet revolution, which will produce a new wave of job creation and prosperity? It would be foolish to rule out the last possibility a priori. . But there is also a more troubling possibility: if, by proceeding on our current profligate path, we succeed in making natural resources scarce, we will require a new wave of technology, regardless of the cost, to rescue us from calamity. But let’s put these grim prospects aside, and ponder what a civilized solution to the problem of technology-driven unemployment would look like. The answer, surely, is work-sharing.

Immigration: The United States v Canada - The Economist - AS A matter of national policy, Canada actively solicits immigrants and has done so for years. The public supports this and the default political assumption is in support of continued immigration. According to a recent poll, only a third of Canadians believe immigration is more of a problem than an opportunity, far fewer than any other country included in the survey. Rather, Canadians are concerned about "brain waste" and ensuring that foreign credentials are appropriately recognised and rewarded in the job market? Being an immigrant is also no barrier to being a proper Canadian; in parliamentary elections earlier this month, 11% of the people elected were not native. This warm embrace isn't just a liberal abstraction; 20% of Canadians are foreign-born. It's well-known that Canada is an outlier among immigrant nations, but it is nonetheless interesting to consider in reference to the ongoing and heated debate about immigration in the United States. Why is Canadian public opinion so different from views in United States?

Rocket Scientists, Part 2 - The stalwart Bureau of Labor Statistics happened to release a new report on workers by occupation that caught my eye in the context of my earlier post regarding skill demands in occupations expected to add the most jobs. This release focuses on jobs and wages in the hundreds of occupations that comprise our job market today (more precisely, from May 2010), and the chart below shows the top ten occupations with the most jobs.  Together, these jobs accounted for more than 20% of all jobs—that’s over 25 million jobs. What’s notable here again is that, with a few exceptions (e.g., registered nurses) these are not jobs that typically demand high levels of education.  Moreover, as numerous commenters noted, they are jobs that risk being of low quality.  As the Bureau notes: “Most of the largest occupations were relatively low paying. Of the 10 largest occupations, only registered nurses had an average wage above the U.S. all-occupations mean of $21.35 per hour or $44,410 annually. Combined food preparation and serving workers, cashiers, and waiters and waitresses were the three lowest paying of the 10 largest occupations, and also among the lowest-paying occupations overall.”

Actually, "The Rich" Don't "Create Jobs," We Do. - You hear it again and again, variation after variation on a core message: if you tax rich people it kills jobs. You hear about "job-killing tax hikes," or that "taxing the rich hurts jobs," "taxes kill jobs," "taxes take money out of the economy, "if you tax the rich they won't be able to provide jobs." ... on and on it goes. So do we really depend on "the rich" to "create" jobs? Or do jobs get created when they fill a need? Here is a recent typical example, Obama Touts Job-Killing Tax Plan, written by a "senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth," Some people, in their pursuit of profit, benefit their fellow humans by creating new or better goods and services, and then by employing others. We call such people entrepreneurs and productive workers.  Others are parasites who suck the blood and energy away from the productive. Such people are most often found in government.

There is something very wrong with this picture - This graph is from a new paper by Frank Levy and Tom Kochan, showing trends in labor productivity and compensation since 1980:  Labor productivity increased by 78 percent between 1980 and 2009, but the median compensation (including fringe benefits) of 35-44 year-old males with high school (and no college) education declined by 10 percent in real terms.  Women have done in general better, but two-thirds of women still have seen their pay lag behind productivity.  Levy and Kochan call for a Social Compact to reverse these trends, and outline some of the steps necessary to get there. The paper is very well worth reading.

Some educated women choose prostitution - Prostitution is illegal except for a few areas of the United States, but some educated women work in the sex industry by choice, researchers says.  Jennifer Hafer, a doctoral student, and economics Professor Amy Farmer of the University of Arkansas say contrary to conventional wisdom that women enter prostitution because they are desperate -- they need money to pay bills or buy drugs -- many educated and affluent women are making a rational decision to enter certain segments of the "world's oldest profession." However, the research confirmed women do not explicitly choose to become streetwalkers. "The findings suggest that these [educated and affluent] women are not forced into the prostitution market but rather choose to enter it for many of the same reasons that people enter the conventional job market -- money, stability, autonomy and even job satisfaction," Hafer said in a statement.

Nobel Laureate Spence: U.S. May Have to Live with Slow Employment Growth -  'Major employment problems in the near future are a near certainty.' That's one of the conclusions of a March report co-authored by Nobel-Prize winning economist Michael Spence. Spence, the author of a new book, The New Convergence: The Future of Economic Growth in a Multispeed World, says the U.S. is grappling with a multispeed domestic labor market. A study he conducted for the Council on Foreign Relations with co-author Sandile Hlatshwayo, entitled 'The Evolving Structure of the American Economy and the Employment Challenge', paints a pretty bleak picture. It broke down jobs in the U.S. into two very large sectors: tradable and non-tradable. Tradable jobs are ones that can be done by anyone around the world: manufacturing, back-office operations, pharmaceuticals, engineering, finance, consulting. Non-tradable jobs are those that really can only be done by people in the U.S., such as retail, health care, food service, government, and construction.

What Can the Distribution of Unemployed Job Matches, by Duration, Tell us About the Long-Term Unemployed? - The Bureau of Labor Statistics just released some data that I had spent the last year coveting like it was my neighbor’s ass. Summary data on unemployment to employment flows by duration of unemployment is finally online in this report – How long before the unemployed find jobs or quit looking?  The BLS was also kind enough to sent me the monthly data unadjusted too when I asked them. Super-sweet.  This data will hopefully help us unpack this meme of the situation of the long-term unemployed. But before that, let’s recap some structural unemployment developments. First, the BLS dramatically overstated the number of job openings throughout 2010, leading policy makers and economic commentators to discuss structural unemployment with a much better job market in mind than ever actually existed in reality. Second, data regarding a decrease in mobility turned out to have major flaws, leading to a wave of research finding little impact, and perhaps even a positive relationship, between the housing bubble and mobility. The amount of people underwater correlates much better with de-leveraging than it does with less mobility. Third, education or gender job dynamics are not sufficient conditions for explaining our jobs crisis. And fourth, our back-of-the-blog estimates based on the Beveridge Curve give an increase in structural unemployment of about 1%; really sophisticated estimates also give an estimated increase of at most 1%.

Did the stimulus destroy a million private-sector jobs? - This week, Greg Mankiw links us to a paper by Timothy Conley of Western Ontario and Bill Dupor of Ohio State University. The paper's eye-popping finding is that the American Recovery and Reinvestment Act (ARRA), also known as the Stimulus, was responsible for a net loss in jobs. No, really! From the paper's abstract: Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs...The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services. Wow! Seriously? The stimulus directly resulted in a net loss of six hundred and fifty thousand jobs? That's it, I'm voting Republican from now on... But wait. A still small voice is nagging me from the back of my mind, urging me to read beyond the abstract. And so my dissertation will have to wait 40 minutes while I wade through three dozen pages of PDF in search of an answer to my nagging doubts. Because I do have some doubts about this result. Stimulus spending destroys jobs?

To Maximize "Kumbaya," Get Somebody Else -- From an interview of Larry Summers: Q: What would the economy look like now if $1.2 trillion had been spent?  Summers: I think it’s an artificial question because there would have been all kinds of problems in actually moving $1.2 trillion dollars through the system — finding enough bridge projects that were ready to go and the like. But the recovery probably would have proceeded more rapidly if the fiscal program had been larger. That’s why we advocated a larger fiscal program than the one that passed. Andrew Gelman reacts: Not enough bridge projects, huh? I don’t believe it. We’ve been hearing for decades about America’s crumbling infrastructure. Summers (and, more generally, Obama’s economic team) had a staff, right? If they had put in the effort I think they could’ve found lots of bridges, water pipes, etc., that needed repair. I also find it a bit annoying that Summers tries to have it both ways on this: (a) there weren’t enough projects on which to spend the money, (b) a bigger stimulus plan would’ve been better. It’s no surprise that people were skeptical of (b) given that the government’s most prominent economist was claiming (a)!

Study: $2 trillion needed for U.S. infrastructure‎‎ - The United States is falling dramatically behind much of the world in rebuilding and expanding an overloaded and deteriorating transportation network it needs to remain competitive in the global marketplace, according to a new study by the Urban Land Institute.1 Burdened with soaring deficits and with long-term transportation plans stalled in Congress, the United States has fallen behind three emerging economic competitors — Brazil, China and India, the institute said. The report2 envisions a time when, like Detroit, U.S. cities may opt to abandon services in some districts and when lightly used blacktopped rural roads would be allowed to return to nature. Eventually, the report says, the federal gas tax will be increased; local governments will be allowed to toll interstate highways; water bills will rise to pay for pipe and sewer replacement; property and sales taxes will increase; and private, profit-seeking companies will play a much larger role in funding and maintaining public projects.

Standoff over jobless benefits keeps 37,000 in limbo - A battle raging in the state legislature is more than a game of politics for a Garner woman, one of 37,000 unemployed people in the state whose jobless benefits were cut short last month. It's her livelihood. When Joyce Fowler lost her job as a manufacturing specialist two years ago, she wasn't surprised; she said she knew the economy was in trouble and that layoffs at her company were imminent.  But she was blindsided by the news that she would no longer receive unemployment benefits.  In April, Republican leaders in the No Carolina General Assembly passed a bill to keep federal funds flowing to those who have been unemployed for up to 99 weeks.  Gov. Bev Perdue, however, vetoed the measure because it contained the stipulation that if the state budget is not in place by June 30, Republicans would go forward with slashing her proposed budget by 13 percent.

Long-term Jobless See Reduction In Benefits - Gordon, 53, of St. Louis, worked in call centers and as a patient coordinator at a hearing clinic before being laid off. Last month, Missouri became the first state to quit the federal program that provides an additional 20 weeks of extended benefits for people such as Gordon: the long-term unemployed who have exhausted their otherwise-maximum 79 weeks of benefits.  In his state and elsewhere, benefits for the jobless are under pressure. Governors and legislatures across the nation are moving to cut the length of time unemployed workers can receive benefits, despite historically high unemployment rates, amid concerns that states may need to boost taxes on employers to shore up unemployment trust funds exhausted by the jobless benefits.

State Unemployment Rates "little changed or slightly lower": in April - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed or slightly lower in April. Thirty-nine states recorded unemployment rate decreases, three states and the District of Columbia registered rate increases, and eight states had no rate change, the U.S. Bureau of Labor Statistics reported today. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate.  Nevada saw the most improvement in April, but still has the highest state unemployment rate. One states is still at the recession maximum (no improvement): Louisiana. Every other state has seen some improvement and only seven states have double digit unemployment now (19 states had double digit unemployment during the great recession).

Interactive map: State unemployment, April 2011

For teen job-seekers, summer again offers dismal prospects - The number of teens holding summer jobs in Massachusetts and across the country is expected to match or be even less than last year’s record lows, with only about 1 in 4 teens finding work, according to research by Northeastern University. Just 26 percent of US teens held jobs last summer, the lowest youth employment rate since World War II, and this year youth advocates are scrambling to fund job opportunities amid federal cutbacks and a shaky private-sector recovery.The economy’s slow recovery has forced many unemployed adults and financially struggling retirees to take part-time and seasonal jobs once favored by teens. Federal stimulus funds that paid to put nearly 2,000 Massachusetts teenagers to work were eliminated this year. And the Legislature, facing its own budget deficit, is weighing funding cuts for youth employment programs of as much as $2 million.

Arizona's older unemployed workers crowd youths for summer jobs - High school students seeking summer jobs flipping burgers or bagging groceries are likely to find more competition from older unemployed workers. Teens often fill their summers and pocketbooks with entry level, low-skill and low-paying jobs. But as the unemployment rate remains persistently high, teens looking for their first job now could be competing with a 50-year-old career changer trying to make ends meet. Arizona's overall unemployment rate in April was at 9.5 percent. That compares with nearly a third of Arizona teens seeking work, but unable to find it in 2010. Arizona is eighth in the nation for teen unemployment, according to the Washington, D.C.-based Employment Policies Institute. The group said 25 states have teen unemployment rates above 25 percent.

Reducing Pennsylvania's Unemployment Insurance 'A Fairness Thing,' GOP Lawmaker Says - Republican member of the Pennsylvania House of Representatives says he wants to reform the state's unemployment insurance system in part because the way benefits are currently calculated lets workers take a paid vacation for most of the year. 'This is a fairness thing,' Rep. Scott Perry said in an interview with The Huffington Post. 'What we're trying to accomplish here is to make sure the system is solvent for people who are truly needy.' Perry's bill would save the state $632 million a year through 2018, according to an analysis by the Pennsylvania Department of Labor and Industry. The measure would achieve most of the savings by changing the way benefit amounts are calculated. Under current Pennsylvania law, the size of a claimant's weekly check is based either on his highest quarterly earnings in the previous year or 50 percent of his full-time weekly wage, whichever is higher. Perry would change the former method to base benefits on the average of a claimant's best three quarters. While it sounds like a small, technical change, it would reduce payouts to unemployed workers by $463 million a year. The average weekly payment would drop from $324 to $277.

Lack of stimulus funds leaves $1.8B hole in state's '11-13 budget - With thousands of Wisconsinites out of work, stress increased on safety-net programs like BadgerCare Plus at a time when lost jobs has led to lost health insurance. From 2006 through 2010, Medicaid enrollment increased from 834,000 to 1.1 million. While the number of people using the program went up, the cost to Wisconsin taxpayers for Medicaid programs actually dropped during that period. The federal government's share, however, rose from $2.7 billion to $4.7 billion. The stimulus dollars provided by the federal government for that program have dried up. That leaves a $1.8 billion hole in the state's 2011-13 Medicaid budget, which is more than half of the state's $3 billion deficit in the biennium. It appears the increase in enrollment during the five-year period put Wisconsin on a path toward promising beyond what it could afford.

Welfare-queen states - In 2007, the foundation published a survey8 of 2005 federal spending in each state and compared that with each state’s contribution in federal taxes. In other words, the foundation identified the states that sponge off the federal government and those that subsidize it. The welfare-queen states and the responsible, producing states, as it were.. The 10 biggest net recipients of taxpayers’ largess were, in order, New Mexico, Mississippi, Alaska, Louisiana, West Virginia, North Dakota, Alabama, South Dakota, Kentucky and Virginia. The 10 states that paid in the most and got back the least were New Jersey, Nevada, Connecticut, New Hampshire, Minnesota, Illinois, Delaware, California, New York and Colorado. Even allowing for cyclical variations and political transformations, it’s patently clear that the states that drain the government also constitute the Republicans’ electoral base, while those that produce the wealth constitute the Democrats’. Far from strengthening our moral character, the red states plunge us into the slough of dependency.

Private Prisons Found to Offer Little in Savings - The conviction that private prisons save money helped drive more than 30 states to turn to them for housing inmates. But Arizona shows that popular wisdom might be wrong: Data there suggest that privately operated prisons can cost more to operate than state-run prisons — even though they often steer clear of the sickest, costliest inmates.  The state’s experience has particular relevance now, as many politicians have promised to ease budget problems by trimming state agencies. Florida and Ohio are planning major shifts toward private prisons, and Arizona is expected to sign deals doubling its private-inmate population.  The measures would be a shot in the arm for an industry that has struggled, in some places, to fill prison beds as the number of inmates nationwide has leveled off. But hopes of big taxpayer benefits might end in disappointment, independent experts say.

California Expects $6.6 Billion Revenue Gain - California’s economy is “on the mend,” driving revenue $6.6 billion higher than forecast through fiscal 2012, reducing the deficit of the most populous U.S. state and trimming the need for higher taxes, Governor Jerry Brown said. The deficit estimate shrank to $9.6 billion from about $15.4 billion, Brown said in revising his budget proposal for the year that begins July 1. Brown’s initial plan in January asked lawmakers to put those tax extensions directly before voters in June. His revised budget calls for lawmakers to extend the taxes and then ask voters in November to validate the move. Jim Nielsen, the top Republican on the Assembly budget committee, said he doesn’t expect Republicans to agree to the tax extensions.

Senate Votes $4 Billion From Rainy Day Fund for Deficit  - The Texas Senate approved a $3.97 billion draw on the state's Rainy Day Fund to cover a deficit of the same size in the current budget, but not before rejecting efforts to add on a larger amount to help balance the 2012-13 budget. Sen. Steve Ogden, R-Bryan, matched the size of the withdrawal to the size of the current deficit. But he asked the Senate to use more of the fund than the House used, casting aside other revenue sources that were in that chamber's mix. If that prevails, it would mean a bigger draw on the Rainy Day Fund and would make an additional $855.9 million available for the next budget.

Hawaii's bond rating lowered as state finances dwindle - Hawaii’s general-obligation bonds had their rating cut to Aa2 from Aa1 by Moody’s Investors Service, affecting about $5.1 billion in outstanding debt. The downgrade to the third-highest ranking reflects Hawaii’s “strained financial operations following the recession-driven fall-off over the last several years,” Moody’s analysts Nicole Johnson and Nicholas Samuels said in a report today. The latest projections for fiscal 2011 revenue is 1.6 percent lower than last year and 8 percent below the recent peak in 2008, the analysts said, reflecting in part the natural disasters in Japan that reduced tourism from that country.The state faced a $539 million deficit for its 2012 fiscal year and $498 million for 2013, amounting to 10 percent and 8.6 percent of operating revenue.

To Eat and Survive in LA: On Track for a Million Food Stamp Users - Los Angeles County food stamp users are now on track to reach the 1,000,000 mark by later this year. After the California housing market cracked in 2006, and leading into the financial crisis of 2007-2008, LA County food stamp recipients were registering at the 625,000 level in the Spring of 2008. March 2011 shows that 967,301 persons are now in the program in LA County. The last three years therefore has seen 50% growth in those needing help from the (SNAP) —Supplemental Nutritional Assistance Program. Given monthly growth rates, still at 1-2%, we should see the one million mark hit sometime this Autumn. | see: Los Angeles County SNAP Users vs the Price of Oil 2007-2011.  This blog has tracked continually the lack of economic recovery in California. In particular, the fact that new lows in total employment were just recorded in November/December of 2010 suggests, along with other data on wages and the housing market, that California has recently face renewed recession risk. As you can see, there has been no slowdown in the growth of SNAP users in LA County. (I also track the other large population counties in California, and results are either similar or worse).

Governor Christie Faces Potential $2.3 Billion Bill for Schools, Tunnel - New Jersey Governor Chris Christie may face about $2.3 billion in unplanned costs next fiscal year to pay for schools, Medicaid and his decision to scrap a commuter-train tunnel to New York.  The first-term Republican warned of “unthinkable” cuts if the state Supreme Court rules that his $1.7 billion of education-aid reductions are unconstitutional. He may need to find another $300 million in savings if the U.S. government rejects his budgeted Medicaid changes and at least $271 million if he is forced to repay money spent on the canceled tunnel.  Christie isn’t alone in proposing a budget that banks on cost savings that haven’t been secured. In New York, Governor Andrew Cuomo’s budget assumes he will win union concessions and Medicaid reductions. Christie may have to choose between abandoning his no-tax-increase pledge and making deeper cuts that could hobble state government if those $2.3 billion of costs materialize

New Jersey Gov. Christie: Let schools teach creationism - New Jersey Gov. Christie (R) dodged questions over the teaching of creationism in schools at a press conference Thursday morning, claiming that school districts should be able to decide for themselves. 'Evolution is required teaching,' Christie said. 'If there’s a certain school district that also wants to teach creationism, that’s not something we should decide in Trenton.' When asked if he believed in creationism or the theory of evolution, Christie responded, 'that's none of your business.' The governor was also asked about the teaching of creationism at a town hall event in Manalapan on Wednesday. 'I think it’s really a dangerous area for a governor who stands up from the top of the state to say you should teach this, you shouldn’t teach that,' Christie said.

While cutting education, Kentucky gives $43 million tax break to creationism theme park - In December, I reported that the Kentucky creationism theme park set to open in 2014 will “include dinosaurs.” The park “will feature a 500-foot-long wooden replica of Noah’s Ark containing live animals such as juvenile giraffes.”  It will also include “a replica of the Tower of Babel with exhibits.” TPM — the source of this photo illustration — called it the “Park of the Covenant.“ Now the park has been granted $43 million in state tax breaks.  At the same time, “the state has gone through eight rounds of budget cuts over the past three years,” including cuts to “education at all levels” and a pay freeze for all teachers and state workers. A group of private investors and religious organizations is hoping to build a Bible-themed amusement park in Kentucky…  Their effort got a shot in the arm yesterday when the state approved $43 million in tax breaks for the project. In addition to the tax incentives, approved unanimously by the state’s tourism board, taxpayers may have to pony up another $11 million to improve a highway interchange near the site

A Country Without Libraries - All across the United States, large and small cities are closing public libraries or curtailing their hours of operations. Detroit, I read a few days ago, may close all of its branches and Denver half of its own: decisions that will undoubtedly put hundreds of its employees out of work. When you count the families all over this country who don’t have computers or can’t afford Internet connections and rely on the ones in libraries to look for jobs, the consequences will be even more dire. People everywhere are unhappy about these closings, and so are mayors making the hard decisions. But with roads and streets left in disrepair, teachers, policemen and firemen being laid off, and politicians in both parties pledging never to raise taxes, no matter what happens to our quality of life, the outlook is bleak.“The greatest nation on earth,” as we still call ourselves, no longer has the political will to arrest its visible and precipitous decline and save the institutions on which the workings of our democracy depend.

Broward County, nation's 6th largest school district, slashing teaching positions  — The Broward County school district is cutting teaching positions as it grapples with a $144 million deficit for the upcoming school year. Officials say more than 1,400 teachers will receive letters Tuesday morning informing them of the layoffs. Most of these teachers had either been with the district for less than two years or signed one-year contracts. These jobs were covered by federal stimulus money, which is not being renewed. Teachers who receive pink slips will finish out the school year, which ends in June. Officials warned this may not end job losses for the nation's sixth largest school district. State budget cuts slashed student spending by about $540 per student. Officials say about $81 million will be cut from schools, meaning more teachers may be laid off this summer.

More than 1,400 Broward teachers losing their jobs - More than 1,400 teachers will be receiving letters Tuesday morning officially informing them that they won’t be coming back to their Broward County classrooms in August. And hundreds of more will likely be laid off in the coming weeks as the school district grapples with a $140 million deficit. The first to lose their jobs are those who have been with the school district for less than two years or those who signed a one-year contract this year. Those jobs were paid for by federal stimulus money that isn’t being renewed. “It’s unfortunate we have to say goodbye to so many valuable teachers,’’  Between inflation, federal stimulus money running out and state cuts — which slashed student spending by about $540 per student — the district is looking at a $144 million shortfall from its $1.9 billion budget. District officials have said $81 million will likely come from schools.

School Board OKs budget with at least 1834 layoffs - The Clark County School District Board unanimously approved its fiscal 2012 budget on Wednesday, bridging a $407.4 million shortfall by laying off 1,834 school district employees. The approved budget is based on updated tax revenue projections from Nevada’s Economic Forum expected to bring in $69.1 million more than originally estimated. If that money does not comes through, an additional 1,000 positions might have to be cut. The School District also is seeking $166.5 million in concessions from its four unions — those representing teachers, support staff, administration and police. If concessions cannot be reached, another 2,477 positions would need to be eliminated. Concessions include passing along half the cost of pension fund increases to employees, freezing step-wage increases, increasing employee health insurance payments by 20 percent and requiring workers to take nine unpaid furlough days.

Texas budget shorts schools by $4 billion -- Hours of closed-door meetings in the Texas Legislature on Thursday did not produce a deal on the state's two-year budget.  Lawmakers did reach a key compromise that underfunds public schools by $4 billion, instead of $8 billion.  But budget negotiators were still haggling over cuts to higher education and a Senate decision to tap the state's savings account by about $900 million more than the House.  The 140-day session has been consumed by an up to $27 billion budget shortfall, and lawmakers are running out of time -- only 11 days left to reach an agreement.  Weeks of budget negotiations have not yielded a compromise between the House and Senate, and the chambers could be sent into a special session if they don't work out their differences quickly.

Colorado Initiative Effort Begins for Higher Income and Sales Taxes - Earlier this year, Colorado Gov. John Hickenlooper (R) proposed reducing K-12 education spending from $5.4 billion in the current budget to $5.1 billion for the next budget, and reducing university spending from $547 million to $519 million. The final amount, in the end, was a $228 million reduction. Seeking to reverse this trend, left-of-center advocacy groups are launching a ballot initative drive to increase the state's income and sales taxes: The plan would raise state personal and corporate income tax rates to 5 percent from the current 4.63 percent. The state portion of sales taxes would go from 2.9 to 3 percent. The additional revenue could be used only for public schools and the state's higher ed system and couldn't be used to supplant existing funding. The measure sets 2011-12 spending for schools and colleges as a floor. Lawmakers would decide how the additional funding would be allocated among school districts and state colleges and universities. Ballot measure text

Survey shows potential for rising Pa. school cuts - A survey of more than half of Pennsylvania's school districts shows the potential for a rising number of layoffs and program eliminations, such as summer school and full-day kindergarten. In addition, the survey released Thursday shows more districts may raise taxes by more than the inflation rate or use reserves to get by. The survey conducted in April came on the heels of Gov. Tom Corbett's plan to slash state aid to school districts by more than $1 billion, or about 10%. That plan is receiving strong criticism from state lawmakers, who are exploring alternatives as they try to address an anticipated multibillion-dollar budget deficit. The Pennsylvania Association of School Business Officials and the Pennsylvania Association of School Administrators released the report. Out of 500 school districts, 263 responded.

Pasco County school teachers brace for budget cuts -Pasco County's School district is facing serious cuts to deal with a $54 million deficit.Last week, the School board approved a plan to eliminate 513 positions. "A lot of the new teachers are concerned about losing their job, and whether they are going to stay in the career or not," said Blankenship.  "What are they going to do?" Lynne Webb is the president of Pasco County's teachers union. She has been talking with worried school employees for weeks. "Even the best case scenario is going to be a bad situation for students, because we cannot maintain the same quality of education when we've been cut by this many people," said Webb.

Texas Tech braces for 800 possible layoffs - Texas Tech University says it may need to cut 800 jobs under the budget proposed out of Austin. State lawmakers are facing a budget deficit that could top $30 billion over the next two years.  "We've planned for the worst, but were hoping for the best," Texas Tech President Guy Bailey said. The worst case scenario would cause the entire Texas Tech University system to lose 100 million dollars. "I think realistically we could lose employees in the amount of about 400, but hopefully somewhere between 200-250," Texas Tech Chancellor Kent Hance said. Texas Tech employs over 18,000 employees, but President Bailey says they are "ahead of the game" in preparing for the possible layoffs and taking preventative measures.

UCSC Budget Cuts Called “Grim,” “Devastating” - Senior administrators at UCSC met with students on Tuesday night to talk about the looming budget cuts to the state university system. The prognosis agreed to by everyone at the meeting was that the situation is “grim,” and that the impending cuts would be “devastating.” The school is currently trying to trim $19 million from its budget, and Executive Vice Chancellor Alison Galloway told the students that layoff notices are in the process of being sent out. Her greatest fear, however, was that voters might reject an extension of temporary taxes when they expire later this year. Were that to happen, the UC system would lose another $500 million in state funding. Of that, UCSC would absorb $31 million in additional cuts, raising the sum total of cuts for next year to $50 million. The possibility of using student fees to cover the losses seems unlikely. In fall 2010 student fees rose 32 percent, and they are already scheduled to go up an additional 8 percent this fall. That would make the 2011-2012 academic year the first time in the school’s history that student fees exceed the state’s contribution to their education.

Partisan Grading: Democratic Professors Are More Likely to Redistribute Grades Than Republicans - From a very interesting forthcoming paper in the American Economic Journal titled "Partisan Grading" by economists Talia Bar (Cornell) and Asaf Zussman (Hebrew University): Abstract: We study grading outcomes associated with professors in an elite U.S. university who were identified using voter registration records as either Republicans or Democrats. The evidence suggests that student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower grades awarded to Black students relative to Whites.

The Rise of the Five-Year Four-Year Degree - During this graduation season, roughly 1.7 million students will collect a bachelor’s degree. And here’s what should be an easy question: how long does it take to earn a four-year degree?  For a majority of today’s college graduates, the answer is at least five years.  This is not explained primarily by students attending part-time or leaving school for some time and then returning. Even among graduates who continuously attend full time, 45 percent need an extra year or more to finish (see chart below). It wasn’t always this way: research by Sarah Turner documents a substantial decline in on-time degree completion over the last 30 years. So what’s going on? From an economic perspective, it’s not clear that there is an optimal time-to-degree, and for many students, it’s certainly better to complete college in five or six years than never complete at all. But stretching out a four-year degree means extra years of tuition costs, and additional years of labor market earnings and experience forgone. For students on financial aid, the five-year four-year degree also costs taxpayers.

The real debt crisis - For the millions who will graduate this year, the events of this month and next represent not just the end of college but the beginning of a new and meaningful chapter in their lives. That chapter, for most, however, will be accompanied by hefty student loan payments. According to the Wall Street Journal1, the average debt for a bachelor’s degree recipient in 2011 will reach almost $23,000, making this year’s graduating class the most debt-burdened in history. In fact, student loan debt is expected to outpace credit card debt, probably reaching more than $1 trillion 2this year.  This is partly a function of tuition3, which the Wall Street Journal reports has increased at a rate of 5 percent a year. It is also a function of a flailing economy in which parents are far less able to help their children pay for college. It’s no wonder that a staggering 85 percent of 2011 college graduates are moving back home 4after graduation.

Congratulations Class of 2011, the Most Indebted Ever - It’s almost graduation time for seniors among the nation’s 14 million college students. Among what I’m sure are many statistics about the number of sharp minds, distinctive awards, and high ambitions, there is one figure that stands out about this year’s graduating class: it is the most indebted ever. The average load for graduating seniors is $22,900. As the Wall Street Journal reports, “that’s 8% more than last year and, in inflation-adjusted terms, 47% more than a decade ago.” Total student debt outstanding — not yet paid off, in other words — already stood at $530 billion in December 2010, up 29% from December 2007, while other kinds of household debt were reduced by 8% over the same period. In total, student loan debt is set to hit $1 trillion for the first time ever this year. While all debt can weigh heavily on a borrower’s shoulders, there are reasons that student debt is one of the most pernicious kinds. Again from the WSJ, “student debt can carry interest rates as high as those on subprime mortgages, and it’s much harder to shed in the event of trouble. There’s no house to give back to the bank, and even bankruptcy rarely offers relief.” In fact, unlike credit card and mortgage debt, these loads can’t be discharged in bankruptcy.

Many With New College Degree Find the Job Market Humbling -  The individual stories are familiar. The chemistry major tending bar. The classics major answering phones. The Italian studies major sweeping aisles at Wal-Mart. Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed. Even for college graduates — the people who were most protected from the slings and arrows of recession1 — the outlook is rather bleak.  Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work. What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.  The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released2 on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.

So, How's That College Degree Working Out For You? - I have documented how our corrupt society eats its own young, most recently in The College Degree Scam Goes Ballistic. I'm not going to rehash that material today, but the New York Times just added fuel to the fire in Many With New College Degree Find the Job Market Humbling.  The data (left) is compelling, but the real-life stories tell the tragic tale. The Times tells us that Pitt graduate Kyle Bishop, who has been working every part-time job he can find to make ends meet, also has some student debt to worry about. "Mr. Bishop, the Pittsburgh graduate, said he is 'terrified' of the effects his starter jobs might have on his ultimate career, which he hopes to be in publishing or writing. 'It looks bad to have all these short-term jobs on your résumé, but you do have to pay the bills,' he said, adding that right now his student loan debt was over $70,000."

Are Young College Grads Too Lazy to Work? - I’ve received a lot of passionate (and angry) e-mails in response to my article today on the employment fate of recent college graduates. While the messages from young people almost uniformly expressed frustration at the job market they’d been thrust into, some of the e-mails from older readers argued that today’s college graduates were having trouble finding jobs because they hadn’t worked hard enough. For example, a reader named Norman Berger asks why graduates wonder why they prove worthless to a potential employer when they follow this approach: Take ’soft’ subjects, be lulled into complacency by grade inflation, have teachers who are tenured and don’t care how rigorously you think, start partying on Wednesdays, take 3-4 courses per semester/quarter and spend 5-6 years to graduate, study six hours per week (at best), believe in all of the liberal causes which produce soft qualative rather than quantative thinking, learn to hate the capitalistic system, don’t care when you get out of school that you’ll still be living at home, etc …

Why Can't College Grads Find Better Jobs? - A study out yesterday from Rutgers University found that, not surprisingly, college grads are having a tough time finding a job. And those who do find one are being paid less to do work that isn't up to snuff with their skill level. Yet, despite the meager payoffs of their college degrees, many graduates think the solution is more school, and more debt. The New York Times reports that 60% of those who graduated in the last five years think they'll need more formal education to be successful. That's even as the majority of Americans think the U.S. education system fails to provide enough bang for its buck, according to a new Pew study. Pair this information with a new Manpower study that finds one-third of employers worldwide cannot find qualified talent, and our unemployment problem seems very confusing. How can there be too many over-qualified college graduates and too many under-qualified job candidates?  According to the Manpower survey, many employers think the problem is rooted in the education system, which fails to get children interested in what the economy really needs: science and engineering.

The College Majors That Do Best in the Job Market - In my article today on the job market for recent college grads, I mentioned that academic majors seem to have a big effect on whether students are employed — and employed in jobs that use their college degrees — after they graduate. In 2009, the Labor Department’s American Community Survey began asking people what discipline they majored in, if they graduated from college. Andrew Sum, a labor economist at Northeastern University and leading expert on the youth labor market, has analyzed the resulting answers, and then looked at what types of jobs graduates of each major held. If the type of job is one that typically requires a college degree (based on other Labor Department data), he categorized these people as being in the “college labor market.” Here’s a look at his results, which show 2009 employment rates for college alumni under age 25.

Is College Worth It? - This report is based on findings from a pair of Pew Research Center surveys conducted this spring.  Here is a summary of key findings from the full report:

  • Cost and Value. A majority of Americans (57%) say the higher education system in the United States fails to provide students with good value for the money they and their families spend. An even larger majority (75%) says college is too expensive for most Americans to afford. At the same time, however, an overwhelming majority of college graduates (86%) say that college has been a good investment for them personally.
  • Monetary Payoff. Adults who graduated from a four-year college believe that, on average, they are earning $20,000 more a year as a result of having gotten that degree. Adults who did not attend college believe that, on average, they are earning $20,000 a year less as a result.

Once Again: Is College Worth It? - The dismal job prospects for new college graduates have revived debates about whether college is “worth it.” The PayPal founder Peter Thiel is among the major skeptics, but there are plenty of others. Check out the comments on yesterday’s article about employment rates for recent grads to see what I mean. College provides plenty of intellectual and psychic benefits alongside the potential economic ones, granted. Let’s just focus on the economic ones. Is college worth it, economically? My colleagues David Leonhardt and Floyd Norris had a blogging debate about this question, which I encourage you to go back and read. For now I’d just like to highlight a few factors to consider. It’s true that the job market for new college graduates stinks right now. But you know what? The job market for non-graduates is worse. People with more skills have a broader range of jobs they can do, and having a postsecondary degree sometimes serves as litmus test for employers who can be picky about hiring.

Can you have a bubble in something that can't be sold? -- KASH makes an interesting point about the debate over whether higher education is in the midst of a bubble: [I]t is simply not possible that the high cost of higher education in the US is a bubble the way that the housing market was a bubble, because it is not really possible to have "bubbles" for things that are not assets -- at least not the way we traditionaly understand the meaning of the term "bubble". A speculative bubble, such as we saw with housing during the mid 2000s or with the US stock market in the late 1990s, is usually defined as a situation in which the price for something becomes detached from its underlying true value because people suppose that they will be able to resell the item for an even higher price at a later time... Once you think you will be able to resell something in the future at a higher price, then you become willing to pay more than its underlying value would actually recommend. But with services such as education, there's no way to store the purchased item and resell it later...

Economics for Sale - If you don’t like what economics professors like me are saying, go hire your own. Of course, if they’re on your payroll, no one will be surprised if they agree with you, so it’s best to hire them indirectly, through a tied donation to a university. Frustrated that so few students are reading your favorite book about the virtues of free enterprise? Offer highly respected universities money to make it required reading. As Catherine Rampell pointed out in Economix last week, conservative foundations founded by Charles Koch and John Allison have actively pursued such strategies. Deft investigative reporting by James Lardner at Remapping Debate shows how another foundation established by one of the country’s wealthiest men, Peter G. Peterson, hired professors at Columbia University to develop a “fiscal responsibility” curriculum for high schools in the United States that closely reflects his own “deficit hawk” views..

How the Internet is Revolutionizing Education - As connection speeds increase and the ubiquity of the Internet pervades, digital content reigns. And in this era, free education has never been so accessible. The Web gives lifelong learners the tools to become autodidacts, eschewing exorbitant tuition and joining the ranks of other self-taught great thinkers in history such as Albert Einstein, Alexander Graham Bell, Paul Allen and Ernest Hemingway 10 years ago in April 2001, Charles M. Vest, the MIT President at the time, announced that the university would make its materials for all its courses freely available on the Internet. This initiative, found at OpenCourseWare, has enabled other teachers and lifelong learners around the world to listen and read what is being taught at MIT. 5 years later, in April 2006, UC Berkeley announced its plan to put complete academic courses on Apple’s iTunes U, beginning what is now one of the biggest collections of recorded classroom lectures in the world. One year later, in October 2007, the school launched UC Berkeley on YouTube. According to Benjamin Hubbard the Manager of Webcast at UC Berkeley, the school has had well over 120 million downloads since first sharing videos online, which they began doing in 2001.

Federal Workers Facing More Cuts  -- Already enduring a two-year pay freeze, federal workers are once again in the crosshairs of a plan designed to cut government spending. This time, their retirement packages are on the line.At least one union has held discussions in recent days with officials from the White House, the Office of Management and Budget and Office of Personnel Management about changes to pensions.At issue: A debt ceiling deal that could sharply increase the amount federal workers are expected to contribute to their own retirement packages. For government workers, the prospect of additional cuts come at a time when they're already feeling picked on. Late last year, President Barack Obama requested, and Congress approved, a two-year pay freeze for federal workers.

U.S. Postal Service pension funding - The challenge of meeting pension payments is starting to put a huge burden on the San Diego and California budgets, leading many of us to regret that more voices weren't raised in objection at the time these commitments were quietly made years ago. For that reason, discussion this week of pensions for U.S. postal workers got my attention.  The position of the Postal Service appears to be that (1) it doesn't have the money to make the $5.4 billion in payments it is required by law to make this year in order to prefund its growth in pension liabilities, (2) it shouldn't have to make the payment, since it has already overpayed $75 billion for this purpose in what it describes as an inequitable arrangement, and (3) if the accumulated pension surplus were returned to the Postal Service, it could be better used to help fund health benefits for USPS employees. The details for the latter arguments are contained in this 2010 report from the Office of Inspector General of the United States Postal Service.

How Raising The Retirement Age Screws the Poor - I've never been a fan of raising the Social Security retirement age. It's a blunt instrument mainly favored by journalists and policymakers who don't plan to retire at age 65 anyway and figure that asking people to work a little bit longer than they used to is no big deal. But people who don't have white collar jobs quite plainly don't feel the same way about it, as the skyrocketing number of people who retire early at age 62 demonstrates. We've already raised the full retirement age to 67 (this was part of the 1983 Social Security deal put in place by the Greenspan Commission), and I think there are plenty of better ways of bringing Social Security into balance than by raising it yet again. Aaron Carroll demonstrates this dramatically with the chart below, taken from a paper by Hilary Waldren. As you can see, life expectancy in the top half of the income distribution has indeed risen dramatically over the past few decades. But in the bottom half of the income distribution, it's barely risen at all.

More U.S. seniors going hungry - Even with about 5,000 Meals On Wheels programs across the country, about one in nine seniors are at risk of hunger because of factors that include poverty and limited mobility, program officials say. "They're the hidden hungry," says Enid Borden, president and CEO of the Meals On Wheels of America. "It's a national problem with community implications." The most recent Meals On Wheels study on the issue, conducted in 2009, showed Mississippi had the highest rate of residents 60 to 90 at risk of hunger at 12.3%. South Carolina ranked No. 2 at 9.8%. The problem has continued to grow since then, Borden says, exacerbated by the nation's economic struggles...the rate of senior hunger has been climbing nationally over the past decade, with as many as 5 million seniors facing hunger.

Almost four in 10 workers say they’ll retire after age 70 — or just keep working - Almost four in 10 workers said they’ll work long past the normal retirement age, if they even retire at all, and a growing number of people said the recession will force them to work longer in life, a new survey finds.  Thirty-nine percent of people said they’ll work past age 70 or simply never retire, according to the annual survey from the Transamerica Center for Retirement Studies, a nonprofit private foundation. Fifty-four percent of those surveyed said they plan to retire between age 60 to 69, and 6% said they’ll retire between age 50 to 59.  Meanwhile, 40% of workers said the recession will force them to work longer than planned — up from 28% who said that a year ago — and 54% said that even after they retire, they’ll continue to work, according to the survey of 4,080 U.S. workers conducted by Harris Interactive in February and March.  Of those who say they’ll work in retirement or after age 65, 34% said it was because they can’t afford to retire and 9% said it was because they need the health benefits, according to the survey.

Means Testing Is An Increase In Marginal Tax Rates - There has been a lot talk recently about means-testing Social Security. There are a couple of different forms this can take 1) Giving everyone the same size benefit regardless of taxes paid in. 2) Actually reducing the benefit based on how much income you have later in life. In either case, neoclassical economics calls these a marginal tax increase. Why? Because it reduces the marginal return from working and saving.

Social Security deficits now 'permanent' -Social Security will run a permanent yearly deficit when looking at the program’s tax revenues compared to what it must pay out in benefits, the program’s trustees said Friday in a report that found both the outlook for Social Security and Medicare, the two major federal social safety-net programs, have worsened over the last year. Medicare’s hospital insurance trust fund is now slated to run out of money in 2024, or five years earlier than last year’s projection, while Social Security’s trust fund will be exhausted by 2036, a year earlier than the prior projection. The trustees stressed that exhaustion of the trust funds doesn’t mean the programs will stop paying all benefits. Social Security could fund about three-fourths of benefits past 2036, and Medicare could pay 90 percent of benefits past 2024 under current trends. The figures come as Congress and President Obama are wrestling over whether to make major changes to the entitlement spending, and Republicans said the new projections should force the debate to turn in their direction. “Today’s report makes it clearer than ever that doing nothing is not an option.

Why Do Opponents of Social Security Have So Much Difficulty Getting Their Facts Right? - The obvious answer is because it doesn’t matter. Those pushing for cuts in Social Security and the other big items on the right’s agenda can get the basic facts about Social Security, the budget and the economy wrong over and over again and it doesn’t in any way affect their standing in the public debate on these issues. One need only look at the career of former Senator Alan Simpson, who has repeatedly shown that he doesn’t have the most basic understanding of the finances of the Social Security system, yet is still seen as a respected voice on this topic. In keeping with this “ignore the facts” approach, the Progressive Policy Institute recently released a paper by Sylvester Schieber telling readers that Franklin Roosevelt would be pushing large cuts in Social Security benefits for middle income workers. Schieber and the Progressive Policy Institute have been pushing cuts to Social Security for close to two decades so it is not exactly surprising that they would be trying to take advantage of the current hysteria around the budget deficit to push their agenda on this topic. What is interesting is that in their eagerness to take money away from ordinary working people they showed even more disregard for the facts than usual.

Medicare, Social Security Funds Expiring Sooner, U.S. Says…-- Medicare, the U.S. health insurance program for the elderly and disabled, and the Social Security trust for the disabled and retirees are running out of money sooner than the government had projected. While Medicare won’t have sufficient funds to pay full benefits starting in 2024, five years earlier than last year’s estimate, Social Security’s cash to pay full benefits runs short in 2036, a year sooner than the 2010 projection, the U.S. government said today in an annual report. Both forecasts were affected by a slower-than-anticipated economic recovery, the government said. The estimates for funding add urgency to talks between Democrats and Republicans on ways to cut spending to reduce the U.S. budget deficit. “Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided,” according to the report summary.

The Real Social Security and Medicare Problem (and a Doable Fix) - On Friday, the trustees of the Social Security and Medicare systems issued their annual reports for 2011. But in truth, these figures are virtually devoid of meaning. Benefits are not paid out of a trust fund filled with income-producing assets, like a private pension fund; benefits are paid out of tax revenues. The trust funds are merely accounting devices best thought of as budget authority. As the trust funds draw down their assets, general revenues — that is, tax revenues besides the payroll taxes earmarked for these programs — are injected into the trust funds to redeem bonds that had previously been placed there during years when revenue from the payroll tax exceeded costs. Although there is often speculation that Social Security and Medicare benefits would have to be slashed to the level of payroll tax revenue on the day the trust funds are empty, this is simply nonsense. There is never going to be a day when Social Security checks are cut across the board because the Social Security trust fund became exhausted.  What really matters for the viability of both Social Security and Medicare is their aggregate costs relative to the economy’s ability to pay them. In this regard, it is best to look at spending as a share of the gross domestic product, especially in the long run.

Nursing Homes Seek Exemptions From Health Law - It is an oddity of American health care: Many nursing homes and home care agencies do not provide health insurance to their workers, or they pay wages so low that employees cannot afford the coverage that is offered.  The numbers are stark. Among workers who provide hands-on care to nursing home residents, one in four has no health insurance. Among those who provide care to people living at home, one in three is uninsured.  The new health care law is supposed to fix the problem by guaranteeing access to affordable coverage for all. But many nursing homes and home care agencies, alarmed at the cost of providing health insurance to hundreds of thousands of health care workers, have started a lobbying effort seeking some kind of exemption or special treatment.  Mark Parkinson, president of the American Health Care Association, the largest trade group for nursing homes, says the problem is that reimbursement rates for Medicaid1 and Medicare2, set by government agencies, do not pay them enough to offer their employees medical coverage.

The Pieces of the Affordable Care Act - It's funny. When I talk to people playing for Team Republican, they are all more likely than not to be in favor of each of the pieces of the Affordable Care Act:

  • Making it more difficult for Congress to bust the budget and overrule CMS's attempts to improve quality of care and reduce costs? Yep.

  • Take more control over Medicare payments to doctors away from specialists? Yep.

  • Fund the useful computerization of medical records? Yep.

  • Try once again to support a business model by which you make money by providing people with good, cheap health care? Yep.

  • Tax employer-provided high-cost health insurance plans? Yep.

  • Level the playing field so that small businesses and individuals can see and choose the health insurance options that those with large-organization benefits departments have? Yep.

Health Care Thoughts: Accountable Care "Smackdown" Part II - While the feds were developing regulations for Medicare ACOs, both the feds and the American Hospital Association were developing cost numbers for ACO start-ups. Today the AHA published its preliminary numbers, listing 23 major competencies to form and operate a hospital-based ACO (the AHA has been generally supportive of reform efforts, seeing a grim future). The AHA costs estimates ranged from 600% and 1400% higher than the DHHS-CMS estimates. Both estimates are preliminary, but that is a huge difference. In my opinion (without deep analysis) the federal estimates have the substance of cotton candy. If ACOs do not fly, the major objectives of PPACA (Obamacare) will be difficult if not impossible to achieve.

Health-care expenses to rise 8.5% in 2012: study - Employers can expect to see an acceleration in health-care cost increases in 2012, with expenses rising 8.5% next year, according to a study released Wednesday by PricewaterhouseCoopers. The 30-page study says that the recession put a lid on health-care costs, which should keep the inflation rate to 8% for 2011, but those price hikes are getting steeper as the recovery gains momentum.  “Now, a few months into 2011, employers and health plans say utilization remains somewhat deflated, but they’re already worried about a rebound in 2012,” the study says. “Add to this recessionary effect the changes brought on by health reform, and the variables affecting cost trends in 2012 become an interesting blend of reactions.”

Insurers Told to Justify Rate Increases Over 10 Percent - Alarmed at soaring premiums and profits in the health insurance industry, the Obama administration demanded on Thursday that insurers justify proposed rate increases of more than 10 percent, starting in September.  Kathleen Sebelius1, the secretary of health and human services, issued a final rule establishing procedures for federal and state insurance experts to scrutinize premiums. Insurers, she said, will have to justify rate increases in an environment in which they are doing well financially, with profits exceeding the expectations of many Wall Street analysts.  “Health insurance companies have recently reported some of their highest profits in years and are holding record reserves,” Ms. Sebelius said. “Insurers are seeing lower medical costs as people put off care and treatment in a recovering economy, but many insurance companies continue to raise their rates. Often, these increases come without any explanation or justification.”

CDC Warns Public to Prepare for 'Zombie Apocalypse' - Are you prepared for the impending zombie invasion? That's the question posed by the Centers for Diseases Control and Prevention in a Monday blog posting gruesomely titled, "Preparedness 101: Zombie Apocalypse." And while it's no joke, CDC officials say it's all about emergency preparation. "There are all kinds of emergencies out there that we can prepare for," the posting reads. "Take a zombie apocalypse for example. That's right, I said z-o-m-b-i-e a-p-o-c-a-l-y-p-s-e. You may laugh now, but when it happens you'll be happy you read this, and hey, maybe you'll even learn a thing or two about how to prepare for a real emergency." The post, written by Assistant Surgeon General Ali Khan, instructs readers how to prepare for "flesh-eating zombies" much like how they appeared in Hollywood hits like "Night of the Living Dead" and video games like Resident Evil. Perhaps surprisingly, the same steps you'd take in preparation for an onslaught of ravenous monsters are similar to those suggested in advance of a hurricane or pandemic."First of all, you should have an emergency kit in your house," the posting continues. "This includes things like water, food, and other supplies to get you through the first couple of days before you can locate a zombie-free refugee camp (or in the event of a natural disaster, it will buy you some time until you are able to make your way to an evacuation shelter or utility lines are restored)."

Proposal to Cut Back on Potatoes in Schools Causes a Food Fight -  In a state where spuds are the top agricultural product, locals can't get enough of them, even at schools. 'We've got to have potatoes—our children are used to potatoes,' says Louise Bray, food-service director for Caribou, Maine, public schools. She regularly serves hash browns for breakfast, plus mashed potatoes, 'Maine fries,' a baked potato bar and potato puffs for lunch. But now the federal government wants to all but toss tubers out of school. The U.S. Department of Agriculture is proposing to eliminate the 'white potato'—defined as any variety but the sweet potato—from federally subsidized school breakfasts and to limit them sharply at lunch. Messing with a stalwart like the spud doesn't go well with the potato industry, school cafeteria directors and legislators from potato-growing regions. They're fighting to see that in schools, no potato is left behind. As part of the effort, spud sellers are promoting potatoes as a 'true gateway vegetable' that could lead kids to broccoli.

Discovery of Bt insecticide in human blood proves GMO toxin a threat to human health, study finds: "The biotechnology industry's house of cards appears to be crumbling, as a new study out of the University of Sherbrooke, Canada, recently found Bt toxin, a component of certain genetically-modified (GM) crops, in human blood samples for the first time. Set to be published in the peer-reviewed journal Reproductive Toxicology the new study shreds the false notion that Bt is broken down by the digestive system, and instead shows that the toxin definitively persists in the bloodstream. Industry mouthpieces have long alleged that Bt toxin, which is derived from a soil bacterium known as Bacillus thuringiensis, is harmless to humans. The built-in pesticide has been integrated into certain GM crops to ward off pests. Bt corn, for instance, has actually been designed to produce the toxin directly inside its kernels, which are later eaten by both livestock and humans ( In the recent study, researchers Aziz Aris and Samuel Leblanc evaluated 30 pregnant women and 39 non-pregnant women who had come to the Centre Hospitalier Universitaire de Sherbrooke (CHUS) in Quebec, Can., for a tubectomy. Upon taking blood samples, researchers detected the Bt Cry1Ab toxin in a shocking 93 percent of maternal and 80 percent of fetal blood samples. And 69 percent of non-pregnant women tested positive for the toxin in their blood. All women involved in the study had been consuming a typical Canadian diet which, like in the US, is riddled with GM materials and toxins. Conventional soy, corn, canola, and potato products, for example, are in many of the foods eaten in both the US and Canada, which explains why Bt toxin was highly prevalent in the women's blood samples

The USDA’s top bee scientist talks pesticides and colony collapse at a D.C. luncheon - Pettis pointed out that the class of pesticides known as neonicotinoids were developed as a better alternative to pesticides like DDT. "They were replacing things we knew were really bad," Pettis told the dozen or so naturalists, gardeners, and environmental advocates at the lunch at the Cosmos Club in D.C. Moreover, Bayer had offered products like pre-coated seeds for corn and cotton, which would limit the need to routinely spray whole fields with the treatment. "Even they thought they were targeting things a little better," he said of the company. But his tepid defense began and ended there. Most of the lunch, Pettis explained his research to the group, which was already familiar with the basics from reporting in the U.K. and in Grist. His research shows that neonicotinoids, from pre-coated seeds or treated crops, ooze out through the nectar, pollen, and water of plants like cotton and corn. Honeybees and other natural pollinators eat it, and even undetectable amounts most likely weaken their immune systems and make them susceptible to harmful pathogens they would be able to fight off when healthy.

Big Ag doesn’t want you to care about pesticides - The produce lobby is livid that consumers might be concerned about pesticides. They are taking their fury out on the USDA for its annual report on pesticide use (via The Washington Post): In a recent letter to Agriculture Secretary Tom Vilsack, 18 produce trade associations complained that the data have "been subject to misinterpretation by activists, which publicize their distorted findings through national media outlets in a way that is misleading for consumers and can be highly detrimental to the growers of these commodities." This report happens also to be the basis for the Environmental Working Group's popular "Dirty Dozen" and "Clean Fifteen" lists of fruit and vegetables with the most and least pesticide residues. The produce lobbyists are pretty steamed about those, too:

USDA Looks to Approve Monsanto's Drought-Tolerant Corn - The Obama administration will seek to allow the unlimited sale of a corn variety genetically engineered by Monsanto Co. to resist drought, the Department of Agriculture announced today. The corn, if approved, would be the first commercial biotech crop designed to resist stressful environmental conditions like drought, rather than pests or herbicides.  Drought tolerance has been a longtime goal of the agricultural biotech companies, who hold up the trait as one way they could aid both their bottom line and farmers in drought-prone regions. But the trait, influenced by a wide variety of genes, has proved difficult to develop.  In North America, up to 40 percent of crop-loss insurance claims are due to heavy or moderate drought. Worldwide, corn-growing regions lose about 15 percent of their annual crop to drought, and losses run much higher in severe conditions.  While the agency's draft environmental assessment of the modified corn found the crop unlikely to pose a plant pest risk, prompting USDA to seek deregulation, the agency also noted that many corn varieties on the market match Monsanto's strain in their water use.

Coming to a Cornfield Near You: Genetically Induced Drought-Resistance - Climate change has yet to diminish crop yields in the U.S. corn belt but scientists expect drought to become more common due to global warming in coming years. That could impact everything from the price of food to the price of fuel planet-wide. As a result, for the last several years agribusiness giants like Monsanto, Pioneer and Syngenta have been pursuing genetic modification to enable the corn plant to thrive even without enough rain. And now the U.S. Department of Agriculture (USDA) is considering approving a new corn hybrid genetically engineered to thrive on less water—the first time such a corn strain would be available.  "Working on something like drought is more complex than introducing a trait like insect resistance," says plant breeder Bob Reiter, vice president of biotechnology at Monsanto, the company seeking approval for the new strain. "We have screened through thousands of genes in the past several years, more than in the entire history for the herbicide-resistant or insect protection."

Only 7 percent of Ohio's corn in the ground‎ - The 28.75 percent of acres Tate has planted seems like a dismal number compared to 2010, but it is far ahead of the state's average, where only 7 percent of the corn crop had been planted as of Sunday, according to the latest U.S. Department of Agriculture's latest crop progress report issued Monday afternoon. While the delayed planting is no guarantee of yield loss, it has the potential to negatively affect Ohio's corn production by 129 million bushels on the bottom end to 255 million bushels on the top end, said Jeff Hamlin, director of research for WeatherBill, a San Francisco-based supplemental crop insurance company. In terms of dollars, the financial impact could be from $900 million-$1.7 billion. "The impact is going to be tremendous, and it will be tremendous on a national level," Peter Thomison, a corn agronomist with Ohio State University's Extension Office, said a rule of thumb is that for every day planting is delayed beyond May 10, the yield is diminished by one bushel per acre. If the planting season stretches into late May and early June, then the loss could be about two bushels per acre a day.

Worst planting season in 53 years could cost millions‎ - Unrelenting rains have meant unprecedented delays in planting corn, one of Ohio’s most valuable cash crops, and unsettled weather threatens to keep farmers out of local fields well into next week.The combination of high corn prices and the rising cost of transporting food and food ingredients will likely continue to contribute to higher food prices for consumers long-term, though corn prices fell Wednesday as the U.S. Department of Agriculture forecast a record corn crop and bigger corn stockpiles. Coming off of several strong years, corn growers are hoping to capitalize on those high corn prices that have flirted at times with record 2008 levels.But in Ohio, and in much of the Corn Belt east of the Mississippi River, farmers have been frustrated by the wet weather. Tuesday night’s deluge that left flood warnings spelled even more bad news for Clark and Champaign county farmers who were patiently waiting for their fields to dry out from the approximately 17 inches of rain since March 1.

Corn and Soybean Planting Progress Continues‎ - After weeks of delays and rain and flooding it looks like farmers in the soggy regions of the U.S., save for Ohio, are making great headway in getting crops into the ground. Today’s Crop Progress Report from the USDA is showing about 63% of the U.S. corn crop is in the ground. Still behind last year’s pace of 87%, and the five-year average of 75%, progress made a big jump from last week’s 40%. Ohio is still only at 7% complete, compared to last year’s pace of 83%. But, it’s probably time to quit comparing last year’s great planting conditions to this year’s problems. States nearly done planting corn include North Carolina (98%), Texas (93%) and Iowa (92%). Corn has emerged in every state but North Dakota and Wisconsin. The Upper Midwest is lagging the furthest behind, but that’s to be expected. Only 1% of the corn in Minnesota, Ohio and Pennsylvania has emerged; 2% has popped up in South Dakota, 3% in Michigan and 4% in Indiana. Soybeans are in the ground in every state, too. The crop is about 22% planted – a big jump over last week’s 7%.

Rain forecasts boost corn, beans‎ - Forecasts for rain in most of the Corn Belt from the Missouri River to Ohio kicked corn prices up 9 cents per bushel to $6.89 at the open on the Chicago Board of Trade..Although the bulk of corn planting is expected to be finished in Iowa this week, planting in Illinois, Indiana and Ohio has been far behind because of wet weather. Those states are expected to receive steady rainfall through the weekend, as will Wisconsin and Minnesota.Traders worry that once the middle of May has passed that farmers may switch some acres originally pegged for corn to soybeans, which have a shorter growing season. That would erode the USDA’s prediction in March of 92.2 million acres planted for corn, up 4 million acres from last year. U.S. domestic stocks of corn stand at 15-year lows and traders have warned that to rebuild stocks to the 1.5-2 billion bushel levels that have been common in recent years the U.S. will need a corn crop at least ten percent bigger than the 153 bushels per acre averaged for the 2010 crop.

Corn Advances for Third Day as Wet Weather Delays Planting in US ...Corn climbed for a third day on concern that wet weather will delay planting in the U.S. Midwest. Soybeans and wheat also advanced.  About 40 percent of the U.S. corn crop, the world’s biggest, was planted as of May 8, behind last year’s 80 percent and the prior five-year average of 59 percent, the U.S. Department of Agriculture said in a report last week. Flood warnings are in effect for states along the Mississippi River, including Iowa and Illinois, the largest growers, National Weather Service data show.  “The market is concerned that the flooding in the Mississippi River basin and into the delta is going to have a very bullish effect in the longer run, and shall do damage of consequence to the important grain crops there,”

Corn, Soybeans, Wheat Futures Soar as U.S. Planting Delays Threaten Yields - Corn futures rose the most in six weeks, wheat had the biggest gain in two months, and soybean and rice prices surged as adverse weather from North Dakota to Louisiana to Europe threatened to erode crop production.  In the U.S., corn planting was 63 percent complete as of May 15, down from the 75 percent average in the past five years, as soggy fields hindered fieldwork, mostly east of the Mississippi River and in northern states, government data show. Spring-wheat, soybean and rice sowing also were behind the pace of recent years. The Ohio Valley and North Dakota will see more rain this week, AccuWeather Inc. said.  “The weather looks to be a little more threatening on planting progress,” said Mark Schultz, the chief analyst at Northstar Commodity Investment Co. in Minneapolis. “Western Minnesota, South Dakota and North Dakota could start seeing clouding conditions today, and rain starting as early as tonight and into tomorrow

A Map Showing Government Payments to Farmers - While the Direct and Counter-cyclical Program and Federal crop insurance are both part of the farm safety net, they do not necessarily serve the same farmers. Looking at counties that received at least $20 in direct payments per cropland acre in 2008, or $20 in crop insurance indemnity payments averaged over 2007 to 2009, clear geographic patterns emerge.  Direct payments tend to be higher in the Corn Belt (corn and soybeans), Mississippi Delta (cotton and rice), and the Texas-Louisiana Gulf Coast (cotton and rice). They are also high in Arizona (cotton), California (cotton and rice), and parts of the Southern Atlantic Seaboard. Crop insurance indemnity payments tend to be higher in the wheat-growing regions in the Northern Plains and parts of the Southern Plains, as well as North and South Carolina. Both programs are high in the Texas Panhandle (cotton and wheat) and across Alabama and Georgia (cotton and peanuts).

Crop Weather Damage Grows as Europe Drought, Canada Rain Boost Prices...Less than a year after the worst drought in a generation destroyed one-third of Russia’s wheat crop and sent global food prices surging, more bad weather is damaging fields from North America to Europe to Asia.  Corn planting in the U.S., the world’s largest grower, is advancing at half of last year’s pace because of excess rain, government data show. The Canadian Wheat Board said fields are so muddy that only 3 percent of grain has been sown, compared with 40 percent normally. At the same time, drought left the Kansas wheat crop in the worst shape since 1996, and dry spells are threatening crops in France, Western Australia and China.  While the growing season is still early for Northern Hemisphere exporters, corn futures as much as doubled in the past year as U.S. stockpiles headed for a 15-year low, and wheat futures are up 62 percent from a year earlier. The United Nations says global food costs advanced in April for the ninth time in 10 months, and higher commodity expenses led food makers including General Mills Inc. and McDonald’s Corp. to boost prices to consumers

Are The Destructive Weather Patterns Man Made?‎ - The US has discovered a way to manipulate the Earth’s atmospheric rivers and use it as a weapon of mass destruction.  The Clinton administration (Al Gore as vice-president) began funding this new star wars weapon system in 1996.  HAARP (High-frequency Active Auroral Research Program) was created to give the US Force the capability of “Owning the Weather”.  HAARP was developed as a weather modification system to achieve military objectives.  HAARP scientists were given the task by Bill Clinton and Al Gore to manipulate or alter certain aspects of the environment to produce desirable changes in weather.  HAARP achieved what it was ordered to do when it developed a system of phased array antennas that beams gigawatts (1 gigawatt = 1 billion watts) of electricity into the protective ionosphere of Earth’s atmosphere.  The billions of watts of electricity beamed by HAARP heats up a targeted area of Earth’s atmosphere.  The heating manipulates the weather by pushing the Earth’s Atmospheric Rivers upwards.  HAARP atmospheric heating creates a low pressure system that pushes the Atmospheric Rivers upwards where the water vapor condenses and forms precipitation (rain, snow).  As Atmospheric Rivers are 400-600 km wide and carries an amount of water vapor roughly equivalent to 10-20 times the average flow of liquid water at the mouth of the Mississippi River HAARP is able to create extreme rainfall and massive floods.

Kansas Wheat Production Could Be Lowest Since 1996 - Two recently completed tours of the Kansas wheat crop confirm what farmers have suspected for some time: the 2011 crop could be one of the worst in many years. Earlier this month, more than 70 participants of the Wheat Quality Council's Hard Wheat Tour pegged the Kansas crop to total 256.7 million bushels, averaging about 37 bushels per acre. That is well shy of last year's 334 million bushel estimate, despite the fact that farmers planted 800,000 more acres of wheat last fall. On May 11, Kansas Agriculture Statistics released its own forecast of the 2011 wheat crop. It estimates farmers will grow 261.8 million bushels, down 27% from last year and the lowest production since 1996.

Wheat Damage Claims on Dry Weather May Signal Worse Harvest… Wheat crops in the U.S. Great Plains are showing signs that production may plunge even more than the government forecast last week as hot weather and a lack of rain erode plant quality and force farmers to harvest early.  As of May 15, U.S. winter-wheat was in the worst condition since 1996, with 44 percent of fields rated poor or very poor by the government. The National Weather Service estimates rainfall in the past two months was less than half of normal in much of Texas, Oklahoma and Kansas, where insurance adjuster David Reed said he’s had 300 farmer claims for drought damage in his area this season, already 10 times more than last year.  “I went out to look at fields, and it looked like the tips of the heads were burnt” after temperatures last week topped 100 degrees Fahrenheit (38 degrees Celsius), said Reed, an area claims supervisor for a unit of Wells Fargo & Co. “It’s kind of scary. I would think that the abandonment numbers probably are going to be fairly high.”

Wheat Gains for Fourth Day as Dry Weather Persists; Corn Extends Advance - Wheat rose for a fourth day in Chicago, the longest streak since January, as persistent dry weather in the U.S. and Europe may curb production. Corn gained for a sixth session, the lengthiest run since December.  Wheat in the U.S., the world’s biggest exporter, is in the worst condition in 15 years, government data show. Europe’s crop, making up a fifth of world production, is under threat from the driest growing conditions in at least 36 years. Soil moisture is “critical” in the U.K., France and Germany, the EU’s Monitoring Agricultural Resources unit said yesterday. “Increasing production uncertainty in the Northern Hemisphere may yet spark another summer price rally as we experienced last season,”

Drought expands dramatically in Texas, losses mount - Another dry week in the southern United States has driven the spread of a devastating drought further across Texas and neighboring states, promising to add to economic losses that could top $3 billion. Texas, suffering its longest dry spell on record, saw the highest level of drought — dubbed “exceptional” by climatologists — jump from 26 percent of the state to 48 percent over the last week, a report released Thursday by a consortium of national climate experts said.So far at least 9,000 wildfires have destroyed or damaged more than 400 homes and scorched 2.2 million acres (890,000 hectares) across Texas, according to state officials who have asked for federal assistance.  The region’s new wheat crop has largely withered as other crops being planted now thirst for moisture, while pastures and rangeland are so poor they cannot sustain grazing cattle. … March had the lowest rainfall totals ever for Texas and in April they were the fifth driest on record, according to state climatology data. The October-April period marked the driest seven consecutive months on record for Texas going back to 1895, according to the National Climatic Data Center

Drought in Europe Hits Wheat Crop - Estimates for the European Union’s wheat harvest are shrinking by the day as plants wilt in a months-long drought that looks set to continue for a while.  Several months of drier-than-usual weather have parched farmland and cut water reserves in France and Germany, two key grain producers in Europe, stoking worries of a drought similar to that experienced in 1976 and fueling concern for the final harvests.  Parts of central Europe had under 40 percent of their long-term average rainfall from February to April, and drought in much of Europe looks set to continue with little relief until June at the earliest, forecasters say.  Weather problems in the United States as well as those in Europe have pushed prices higher with benchmark U.S. July wheat rising more than 6 percent to a peak of $8.12 per bushel, its highest level in more than one week.

Central China Hit by Drought, as Reservoirs Become ‘Dead Water’ - A severe drought along the Yangtze River region in central China has rendered nearly 1,400 reservoirs in Hubei Province temporarily unusable, devastated farm fields and made drinking water scarce, according to a report on Monday by Xinhua, the state news agency. The drought, which has lasted for five months, has brought water levels in the middle part of the Yangtze to a near-record low. For the second time since the Three Gorges Dam, the world’s largest hydroelectric project, began operating, officials have had to make emergency water discharges from it to help ease the drought. As of Sunday, 4 medium-size reservoirs and 1,388 small reservoirs in Hubei had dropped below the allowable discharge levels for irrigation, Xinhua reported. One-fourth of all small reservoirs had what officials called “dead water” remaining, which could be pumped for use only in an emergency. The drought adds to concerns over the effect that a gargantuan water-diversion project will have on the central provinces of China. The project, called the South-North Water Diversion, is supposed to move water from the Yangtze and its tributaries north to Beijing along a canal, and to Tianjin along an eastern route.

China admits to ''urgent'' problems at Three Gorges Dam  - CHINA has made a rare admission that its Three Gorges Dam, a gargantuan engineering project on the Yangtze River, was experiencing ''urgent'' environmental and safety problems, state media reports.  China's State Council, or cabinet, acknowledged the environmental, social and geological problems in a statement after a meeting on the hydroelectric project's future presided over by Premier Wen Jiabao. ''While the Three Gorges project has brought great and comprehensive benefits, there are problems that must be urgently resolved in the smooth relocation of residents, ecological protection and preventing geological disasters,'' the statement said. The dam also had ''impacted'' downstream shipping, irrigation and water supplies, the statement said. Some of the problems were foreseen during the planning and design process, but others ''emerged throughout the construction period'',

4 million in China suffering from drought - As of May 18, 65,300 square kilometers of farmlands suffer from drought, mainly in Hubei, Gansu, Jiangxi and Hunan Provinces, severely affecting 4.2 million people, 3.2 million large livestock and 22,000 square kilometers of crops, according to the Chinese Office of State Flood Control and Drought Relief Headquarters. This year, the middle and lower reaches of the Yangtze River saw significant declines in precipitation, hitting the lowest level seen in the last 60 years. As the main flood period came, the amount of rainfall continually declined by 40 percent to 60 percent. As a result, the water levels of the Yangtze River hit record lows. Facing the current severe drought, the central government has taken a number of measures.  First, the drought situation should be under close surveillance. Second, drought relief work should be deployed based on an overall analysis of the current situation.  Third, technical support should be offered.

Mideast Staggered by Cost of Wheat - Wheat prices jumped on Wednesday, taking the week's gains to 17%, an ascent that threatens to put fresh pressure on fragile Middle East governments that import the grain to feed their people. Wet weather in the U.S. and dryness in Western Europe are driving the recent rise. Wheat futures jumped 53 cents, or 7%, to $8.17 per bushel Wednesday, the biggest single-day dollar gain in more than seven months, and are now up 91% in less than a year. Rising wheat prices jarred global markets last summer, amid a harsh Russian drought, and have stayed high for months. Some analysts worry the bad weather that pushed prices up this week could further curtail supplies and send prices even higher. That could be a boon to farmers in major exporting countries, but a threat to consumers around the world, and especially in the Middle East.  Tunisians eat more wheat than anyone on the planet: 478 pounds per person a year, compared to 177 pounds in the U.S. Egyptians and Algerians also eat more than twice as much wheat as Americans, says the U.N. Food and Agriculture Organization.

Brazil: Amazon rainforest deforestation rises sharply - Deforestation of the Brazilian Amazon rainforest has increased almost sixfold, new data suggests. Satellite images show deforestation increased from 103 sq km in March and April 2010 to 593 sq km (229 sq miles) in the same period of 2011, Brazil's space research institute says. Much of the destruction has been in Mato Grosso state, the centre of soya farming in Brazil. The news comes shortly before a vote on new forest protection rules.  Brazilian Environment Minister Izabella Teixeira said the figures were "alarming" and announced the setting up of a "crisis cabinet" in response to the news. "Our objective is to reduce deforestation by July," the minister told a news conference.

Global Food Prices Extending Gains Set to Raise Costs for Tyson, Kellogg - Global food prices are set to extend gains as production struggles to keep pace with demand, said Rabobank Groep and Armajaro Trading Ltd., potentially pushing up costs for Tyson Foods Inc. (TSN) and Kellogg Co. (K)  “My view is the only way would be up” in the longer term. “We can’t create any more land,” said Richard Ryan, chief executive officer of Armajaro Trading, in a separate interview.  World food costs are near a record as growing demand from China and India outpaces harvests hurt by flood and drought, the United Nations estimates. Rising prices have pushed 44 million people into poverty in the past year, helped fuel conflict and unrest in the Middle East and North Africa and spurred central banks from Brasilia to Beijing to increase interest rates.

The New Geopolitics of Food - In the United States, when world wheat prices rise by 75 percent, as they have over the last year, it means the difference between a $2 loaf of bread and a loaf costing maybe $2.10. If, however, you live in New Delhi, those skyrocketing costs really matter: A doubling in the world price of wheat actually means that the wheat you carry home from the market to hand-grind into flour for chapatis costs twice as much. And the same is true with rice. If the world price of rice doubles, so does the price of rice in your neighborhood market in Jakarta. And so does the cost of the bowl of boiled rice on an Indonesian family's dinner table.  Welcome to the new food economics of 2011: Prices are climbing, but the impact is not at all being felt equally. For Americans, who spend less than one-tenth of their income in the supermarket, the soaring food prices we've seen so far this year are an annoyance, not a calamity. But for the planet's poorest 2 billion people, who spend 50 to 70 percent of their income on food, these soaring prices may mean going from two meals a day to one. Those who are barely hanging on to the lower rungs of the global economic ladder risk losing their grip entirely. This can contribute -- and it has -- to revolutions and upheaval.

Food Inflation in India Seen Acclerating as Farmers’ Costs, Oil Increase -  Food-price inflation in India, Asia’s third-largest economy, may accelerate in the second half as farmers are paying 20 percent more to grow crops, according to the commission that helps set minimum farm-product prices. "The cost of production is going up very fast,” Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices, said “The labor cost has gone up dramatically in the past one year and energy costs are also going up.”  A pickup in food prices would add to inflationary pressures in India, where the central bank has raised interest rates nine times since mid-March 2010. The commission, which recommends the rates at which the government buys crops from farmers to prevent distress sales in the open market, will include an average 20 percent gain in production costs this year, Gulati said.

Would vested interests starve the world? - In his latest book entitled Bottleneck sociologist and ecologist William Catton Jr. explains in detail why he believes human society is destined for a major dieoff, a "bottleneck" from which few survivors will emerge. One cause, he says, is an array of vested interests who manipulate the media and the power structure, oblivious to the consequences of their actions. Many would say that this is business-as-usual. After all, what do we expect when governments are thoroughly dominated by the industries they are supposed to regulate? As a result, we may say, a few more people will be maimed or killed or maybe just ripped off than would otherwise be the case. But, would such interests be so crazy as to persist in their manipulations when faced with compelling evidence that suggests their actions could result in widespread starvation? Apparently the answer is yes.

Inequality & power - The Times today provides one answer to Sam Bowman's question: does inequality matter? It reports how Glencore's profits arise, in part from "exposing thousands of Zambians to dangerous levels of sulphur dioxide emissions." The firms is also accused of profiting from inside information obtained from an EU bureaucrat and using stolen land in Colombia.   These are all examples of how income and wealth inequality - Glemcore CEO Ivan Glasenberg is a multi-billionaire* - arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on. These, of course, are not isolated examples. As Rick says, "All pay is, ultimately, a function of power."

Was the Global Food Crisis Really a Crisis? -  So far everything we "know" about this topic comes from simulation studies, all of which estimate that poverty or hunger went up by somewhere between 63-160 million people as a result of higher food prices (see here and here and here for previous blogs by Dani on this topic). In a new IFPRI discussion paper I show that these simulations suffer from serious flaws, and that their results are largely contradicted by self-reported food insecurity trends from the Gallup World Poll. The poverty simulations are often quite nice studies, but they are partial equilibrium studies with no wage adjustments, no changes in other commodity prices (like fuel, cotton, coffee, minerals), and no changes in incomes (which were growing all around the developing world from 2000-2008). Hunger simulations have more fundamental problems. Basically they count calorie availability, but the problem with a food or a financial crisis is that it is an access shock, not a production shock. Hence the FAO had to rely on a USDA model (which included reduced "calorie imports") to provide estimates of changes in hunger during the crisis. Yet in my paper I show that USDA's estimates of calorie availability (from early 2008) seem to be contradicted by USDA's own historical data on cereal availability.

Study probes sources of Mississippi River phosphorus — In their eagerness to cut nitrogen and phosphorus pollution in the Mississippi River and Gulf of Mexico, people have often sought simple explanations for the problem: too many large animal operations, for instance, or farmers who apply too much fertilizer, which then flows into waterways. But according to new modeling research that examined phosphorus loading from all 1768 counties in the Mississippi River Basin (MRB), the true causes aren't nearly so straightforward. Livestock manure is widespread in many MRB counties, for example, but it shows little relationship to water quality, say researchers at the University of Illinois at Urbana-Champaign and Cornell University in the May-June 2011 issue of the Journal of Environmental Quality. Moreover, areas that load the most phosphorus into the Mississippi are also places where farmers add less phosphorus to the soil than they remove each year in crop harvests, suggesting that overzealous fertilizer use is not the issue.

Mississippi floods threaten New Orleans - US army engineers open floodgate in attempt to save New Orleans from the river’s worst flooding since 1927 Residents in swampy areas of Louisiana’s Cajun country are waiting for the rising waters of the Mississippi to engulf their homes, after army engineers opened a key floodgate in an attempt to save New Orleans from the river’s worst flooding since 1927. Units of the US Army Corps of Engineers opened up the first gate on a structure known as the Morganza spillway, sending about 10,000 cubic feet of water per second into the Atchafalaya river basin. Water shot through the gates like a waterfall, hurling fish through the froth, witnesses said. The Associated Press reported that 100 acres were under a foot of water in the space of 30 minutes. It was the first time the corps, which is in charge of managing the Mississippi flood controls, had to resort to the spillway since 1973.

Mississippi River Floodgate Opens, Inundating Cajun Country in Louisiana - Louisiana’s Morganza floodway was opened today, sending torrents of brown water from the Mississippi River into the Atchafalaya River basin, a move designed to spare Baton Rouge and New Orleans.  The spillway gates were opened as the National Weather Service forecast the river’s flow at Baton Rouge would exceed 1.62 million cubic feet per second, exceeding the 1.5 million cubic feet per second the city’s levees were designed to withstand. Within 20 minutes after the first gate was lifted, several square miles of the Atchafalaya River basin were submerged. The spillway, built in 1954 and not opened since 1973, can release 600,000 cubic feet per second of water at maximum capacity. It may send enough water to fill a football field 10 feet deep every second across the heart of what is known as Cajun country, eventually filling an area almost as large as Connecticut.  The river system is Louisiana “is under tremendous pressure and it is going to be under tremendous pressure for a long time,”

Mississippi floods: Raging southward - Shock is seeing the tops of telephone poles and trees poking above roiling waters on one side of the two-lane causeway between Morganza and Batchelor in Louisiana—particularly when the Mississippi River is on the other side of the road. Suspense is imagining where that water will be in a few days. And relief is knowing where it won’t be: in the streets of New Orleans or Baton Rouge. On May 14th the Army Corps of Engineers created that wall of water when it opened up the Morganza Spillway, sending 600,000 cubic feet of water per second into the Atchafalaya River basin but keeping the floods from reaching Louisiana’s two big downriver cities and keeping the river itself from changing course. The Mississippi drainage basin is exceeded only by the Amazon’s and the Congo’s. It stretches from Idaho to New York and from Alberta, Canada to the Gulf of Mexico. Heavy snowfalls last winter followed by heavy rainfall this spring swelled the river to levels unseen since 1927, when it flooded over 26,000 square miles, killing 500 and leaving 600,000 homeless.

Mississippi Delta Flooding: Dreams Of Bountiful Harvest Wash Away - Where the rolling green hills of Mississippi give way to the fertile flatlands of the Delta, Bernie Jordan bounced down a dirt road in his white pickup truck, surveying thousands of acres of farmland that, until recently, looked to be a bumper crop. But thoughts of a bountiful September harvest are all but erased from his mind. Now he focuses on saving anything he can, as a historic plume of Mississippi River water courses through some of America’s most productive natural farmland. In just the past day, Jordan's soybean fields have transformed into lakes; his cornfields have been swallowed by nearby streams; weeds begin to choke his cotton fields, but he sees no reason to spend money to kill them. "I haven’t hardly gotten any sleep in the past week," . "And when I do, I wake up and say, 'Is this bad dream over?'"

Mississippi River flood pictures: Officials warn of venomous snake threat - Satellite photos show the full devastation of the Mississippi River flooding - as venomous snakes begin to settle in the homes and yards of the river's local residents, and new areas go on flood alert with the swollen wall of water moving south towards the Gulf of Mexico.Home-owners are being warned to take extra care when returning to their houses as copperheads and water moccasins are appearing along the river’s burst banks and clinging onto trees.The Mississippi River crested at Memphis, Tennessee, just inches below the all-time record as many animals were displaced and residents were also warned to look out for alligators, spiders and rats.

Washington Post: 120 photos from the floods #photo=1

USATodayPhotos: Major flooding across the Midwest, South

Millions at stake over Mississippi River closure at Natchez; evacuations continue elsewhere - The Coast Guard has interrupted shipping along the country’s busiest inland waterway over fears that the bulging Mississippi River could strain levees that protect hundreds of thousands from flooding. Already, thousands have sought refuge from floodwaters up and down the river. The Coast Guard said it closed the Mississippi River at the port in Natchez, Miss., because barge traffic could increase pressure on the levees and because of fears that barges couldn’t operate safely in the flooded river. Heavy flooding from Mississippi tributaries has displaced more than 4,000 in the state, about half of them upstream from Natchez in the Vicksburg area. Several barges were idled at Natchez at the time of the closure, and many more could back up along the major artery for moving grain from farms in the Midwest to the Gulf of Mexico. It wasn’t clear when the river would reopen, but port officials said the interruption could cost the U.S. economy hundreds of millions of dollars per day.

Refiners Scramble as Floodwaters Rise - Rising floodwaters continued to snarl crude-oil and gasoline deliveries in the Southeast, forcing refiners near the swollen Mississippi River to find other ways to make shipments. Heavy rains and snow melt have caused parts of the Mississippi River to reach as high as 13 feet above flood stage, snarling barge and tanker traffic along the river and in some cases forcing pipeline closures. The congestion has caused traders to worry about disruptions of fuel delivery and helped boost wholesale gasoline prices.Exxon Mobil Corp. said Friday it shut down two crude-pipeline segments in its North Line System, north of Baton Rouge, La., and one pipeline in its Southwest Line west of Anchorage, La., until water levels subside.

Second-Largest U.S. Refinery Threatened as Mississippi Floods In Louisiana - Four of the 125 gates at Louisiana’s Morganza floodway are open, allowing the muddy Mississippi River to pour into the Atchafalaya River basin as part of the Army Corps of Engineers strategy to save Baton Rouge and New Orleans.  With the gates open, the National Weather Service is predicting near-record flooding for towns along the Atchafalaya and surrounding wetlands. The Mississippi was threatening to reach to a flow rate of 1.62 million cubic feet per second unless water was diverted, putting in peril the levees at Baton Rouge, home to an estimated 229,000 people and industrial areas that include an Exxon Mobil Corp. (XOM) refinery, the company’s second largest U.S. facility.  “With the opening of the Morganza, we are expecting some significant rises on the Atchafalaya,” “It will be the second-highest crest at Butte La Rose.”

Flooding hinders shipping on the Mississippi River – Cargo was slowly moving along the bloated Mississippi River after a costly daylong standstill, while officials kept an eye on the lower Delta where thousands of acres of farmland could be swamped by water that is inching closer to the top of a backwater levee. The Coast Guard for much of Tuesday closed a 15-mile stretch at Natchez, Miss., north of New Orleans, blocking vessels heading toward the Gulf of Mexico and others trying to return north after dropping off their freight. Barges that haul coal, timber, iron, steel and more than half of America's grain exports were allowed to pass, but at the slowest possible speed. Such interruptions could cost the U.S. economy hundreds of millions of dollars for each day the barges are idled, as the toll from the weeks of flooding from Arkansas to Louisiana continues to mount.

NASAEarthObservatory: Morganza Floodway after Five Days of Flow

Flooding Takes Vast Economic Toll, and It’s Hardly Done - The swollen Mississippi River1, already spilling over into wide areas of the Mississippi Delta, has dealt the South a heavy economic blow that is seeping into every possible corner of the region’s commercial and agricultural life.  From Tennessee to Louisiana, the arteries and tributaries that normally supply the lifeblood of trade and business to the communities along the river’s banks are now paralyzing them. The engorged river has disrupted waterway commerce, delaying barge traffic and forcing some cargo to be trucked overland. Grain elevators, a crucial link to the nation’s grain exports, have been swamped. Early corn and soybean plantings on delta farms are submerged.  Like the very nature of water, the trickle-down effects of the historic flooding are leaving no corner untouched. Retail gasoline prices, already at two-year highs, and food prices2 could rise in the region because of supply disruptions. Tens of thousands of people are unemployed, shut out of jobs at establishments that are literally under water. State and local government coffers, strained because of the economic downturn, may lose many millions of dollars in revenue from tourism and taxes.

Louisiana farmers face huge losses from flood, drought - Earlier in May, corn and soybeans planted in the Morganza floodway sat parched. Farmers were anxious for a rain. Today, water covers these same crops, drowned by the opening of the spillway.  Miles Brashier, LSU AgCenter county agent in Point Coupee Parish, said about 10 percent of parish’s crops were located within the flood zone. . “We’re talking about ($750,000) in crop loss just in this 1,000-acre field.” Water rushing through the spillway gates will make its way across the Morganza floodway into the Atchafalaya Basin. Estimates before the floodgates opened were that about 18,000 acres would be damaged. But flooding isn’t restricted to the basin. Water from flooding or seepage is affecting many acres from East Carroll Parish down to the coast, according to LSU AgCenter economist Kurt Guidry. “I think when it’s all said and done, we’re probably going to see, at least in our first estimate, nearly 300,000 acres impacted,” Guidry said, adding that this could translate into $200 million in damages.

Submerged - The Mississippi River, Mark Twain once wrote, is so uncontainable that "ten thousand River Commissions, with the mines of the world at their back, cannot tame that lawless stream."  Particularly, he might have added, in years like this one, with as much as three times the normal winter precipitation from the northern Midwest combined with about six to 10 times the average spring rainfall in states that border the river. On Tuesday, the river reached the flood stage in New Orleans, meaning the water may indeed overflow during a strong storm or hurricane in the coming months. And although the water was expected to crest, or reach its highest point, in areas like Vicksburg, Miss., on Thursday, officials say it may take until June for the water to totally recede.  The perfect storm of flood conditions is familiar to most of the 4 million residents in the 63 counties and parishes that flank the Mississippi River and Atchafalaya River Basin. Still, even the most veteran flood survivors were caught off-guard by this year's record-breaking overflow, which prompted the U.S. Army Corps of Engineers to open the Morganza Floodway for the first time since 1973, thus diverting water into sparsely populated land near the river. The Army Corps also blew up part of the Birds Point levee in Missouri in order to release water that would otherwise have overwhelmed the levees protecting towns in Missouri, Illinois, and Kentucky.

A River’s Crest Arrives, and Is Set to Linger - VICKSBURG, Miss. — The crest of the Mississippi rolled into town on Thursday morning, a few inches shy of earlier estimates but still, at 57.1 feet, setting a record by a healthy margin. For those along its banks, it was hardly a pivotal moment: the crest had been announcing its arrival for weeks by flooding neighborhoods and sending backwater over thousands of acres of Mississippi and Louisiana farmland, and the river was not going back down to normal levels anytime soon. The damage has already been extensive, and the waters have proved deadly.  Officials worried that residents, impatient to return to their homes, would try to come back sooner than they should. The emergency, they insisted, is continuing.  “For many people not familiar with a river flood, they think the crest is the magical end to this event,” The river will stay this high for at least a week, and the level is not projected to go below flood stage for several weeks. The worst of the flooding is also in store for the towns and small communities in southern Louisiana over the next week, and will stay there, too, for a long time.  And still, the backwater that is already inundating the farmland of the Mississippi Delta is continuing to rise to match the level of the river here, where the Yazoo River joins the Mississippi.

Mississippi River flood of 2011 sets all-time flow record, but has crested  - The great Mississippi River flood of 2011 crested yesterday and today, and the volume of water being pushed toward the Gulf of Mexico is the largest ever recorded on the Mississippi, said Bob Anderson, a spokesman for the Army Corps of Engineers for the Mississippi Valley Division. "It's never been this high; it's never had this much water," he said. "There's just a tremendous amount of strain on these levees." The Mississippi crested yesterday at Vicksburg, Mississippi, reaching 57.06'. This exceeded the previous all-time record of 56.2', set during the great flood of 1927. The river crested at Natchez, Mississippi early this morning, and is now falling. The flood height at Natchez was also the greatest on record--61.91', nearly three feet higher than the previous record height of 58', set in 1937. The opening of the Morganza Spillway on Saturday helped to reduce the flood heights from Vicksburg to New Orleans by 1 - 3 feet, greatly reducing the pressure on the levees and on the critical Old River Control Structure (which, as I discussed last Friday, is America's Achilles' heel, and must be protected.) According the National Weather Service, the Mississippi River is no longer rising anywhere along its length, and the great flood of 2011 has likely seen its peak

Record flooding threatens Gulf Coast—again - "Like a monster coming down the River" - The Gulf Coast region, still reeling from the oil-laden assault on its ecosystem and livelihoods, is now bracing for what’s being called one of the worst cases of flooding since the 1920s and “the nation’s slowest moving natural disaster.” Economists are projecting billions of dollars in damages just as local Gulf-dependent industries such as fisheries, aquaculture, and tourism are struggling back to profitability after the devastating blows from Hurricanes Katrina and Rita and the BP oil spill. Last week, residents braced for the worst-case scenario: levee breaks that could potentially exceed the damage wrought by Hurricane Katrina. To ease the threat of flooding in New Orleans and Baton Rouge, on Saturday the U.S. Army Corps of Engineers opened the Morganza Spillway for the first time in nearly four decades—sending a torrent of water toward thousands of homes in the French-speaking Louisiana countryside, “threatening to slowly submerge the land under water up to 25 feet (7.6 meters) deep.” The massive release of water from the Morganza and Bonnet Carre Spillway, which was opened earlier this month, means the river is slowly spreading across millions of acres of farmlands that contain enormous amounts of pesticides, fertilizers, and other chemicals that will eventually end up in the Gulf of Mexico.

Farm Runoff in Mississippi River Floodwater Fuels Dead Zone in Gulf - A dead zone -- already the size of the state of New Jersey -- is growing in the Gulf of Mexico, fueled by nutrient runoff from the swollen Mississippi River.  This year, with floodwaters from the Birds Point levee breach and the Morganza and Bonnet Carret spillways spreading over farmland and other residential areas, the river is collecting tremendous amounts of fertilizer and pesticides. This is contributing to what scientists say may become the largest dead zone ever, and posing a serious threat to already taxed marine life. During the rainy season, fertilizer, animal waste, sewage and car exhaust wash into the Mississippi and the Atchafalaya rivers, flow south and empty into the mouth of the Gulf.Nitrogen and phosphorous from farm runoff and animal waste are especially toxic to ocean life. They act as natural fertilizers, feeding harmful algae and causing it to bloom wildly. As bacteria consume these blooms, they suck oxygen from the water, depleting the ocean's oxygen reserves. Scientists call this oxygen depletion hypoxia.

Mississippi Flooding Is Part of 'Global Weirding' - Allstate CEO Thomas Wilson said: "There is a lot more severe weather. We are running our homeowners business as if this is a permanent change as opposed to an anomaly."; Swiss Re told reporters there's little doubt that "climate volatility is a major contributor." Extreme weather events, such as the heavy rains that recently flooded the Mississippi River and the tornadoes that ripped through an unprecedented 300 mile swath in Alabama, are extremely likely to occur more frequently in the future. This is prompting local governments to prepare for the impact of climate change, according to scientists and adaptation experts participating in a telephone press conference held yesterday by the Union of Concerned Scientists (UCS). "Climate change is about more than warming. What we're really seeing is global ‘weirding,'" said climate scientist Katharine Hayhoe, associate professor at Texas Tech University.

Jeff Masters: 300-year flood in Canada; wildfires destroy large portions of Slave Lake, Alberta - In Manitoba, Canada, heavy spring snow melt in combination with heavy rains have combined to create record flooding on the Assiniboine River. Authorities intentionally breached a levee over the weekend to save hundreds of homes, but inundated huge areas of farmland as a result. The flood is being called a 300-year flood, and damages are already in excess of $1 billion. In Alberta, Canada, reverse extreme is causing havoc: severe drought and strong spring winds have made ideal conditions for wildfires, which swept into the community of Slave Lake (population 6,700) yesterday. The fires destroyed hundreds of buildings, burning down the town hall and at least 30% of the town, according to preliminary media reports.

Wildfires and Spills in the Canadian Tar Sands; huge wildfires that gutted much of the town of Slave Lake, Alberta; two weeks before the fires, a massive spill from an oil pipeline sickened residents of the community of Little Buffalo, the traditional lands of the Lubicon Cree  If there’s one spot on earth that seems really snakebit this month, however, it’s the Canadian province of Alberta.  In the past week, a drought and strong winds have combined to produce huge wildfires that gutted much of the town of Slave Lake—all 7,000 residents had to evacuate, and the city hall and many other buildings were burned to the ground. Right now there are over a hundred wild fires raging in Alberta, with 36 of them still ‘out of control.’ Just two weeks before the fires, a massive spill from an oil pipeline sickened residents of the community of Little Buffalo, the traditional lands of the Lubicon Cree. It took the government six days to show up and begin monitoring the air, despite the fact that  local residents were suffering headaches, burning and nausea from the stench. Melina Laboucan-Massimo, a local Cree organizer, wrote board member Naomi Klein: My heart hurts, not a day has gone by that I have not broken down crying, but I hope that I can expose this cover up for what it is.

Drought in the Amazon: A death spiral? - By and large, the mainstream media has a pretty dismal record in reporting about climate change, and a recent op-ed in the National Post, written by Lawrence Solomon, continues in this vein. In the piece, Solomon makes light of the dire threat global warming poses to the continued existence of the Amazon rainforest. After the IPCC Amazon non-controversy, it's probably time to look at the issue in a bit more depth, and debunk Solomon at the same time.  In his article, Solomon highlights a sober assessment of the implications of the extreme 2005 and 2010 Amazonian droughts, from Simon Lewis, a leading Amazon researcher, based at the University of Leeds. To which Solomon writes:The Amazon and its species have made a dramatic comeback, so much so that the river populations of dolphins now exceed pre-drought levels, even in one of the hardest hit drought areas" Can dead trees really spring back to life? And can river dolphins really breed so astonishingly quickly?. Well, leaving aside the dolphin issue, the answer is a resounding 'no'. Here's where a bit of background information is useful:

Water shortages threaten the American West lifestyle - The next time you fly into a parched, western sprawl such as Phoenix, glance down at the amorphous blots of green and the splattering of aqua blue rectangles. Squint into the blinding sun and behold the glories of irrigation. But along with the golf courses and swimming pools made possible by a seemingly endless flow of H2O came people — and lots of them. Between 1920 and 2000, the seven states that share the Colorado River grew from 5.7 million to almost 50 million people. Peter Gleick, co-founder and president of the Pacific Institute for Studies in Development, Environment, and Security, says 23 million more people will be added by 2030 amid mounting evidence that our current practices in water use and management are unsustainable. As Gleick points out in “Roadmap for Sustainable Water Resources in Southwestern North America,” it’s not land, energy, mining or climate, that is going to be most difficult issue to address in the Western United States — it’s water.

Infographic: World’s Population with Access to Safe Drinking Water - The relative water consumption per capita, percent usage of available freshwater in each country, and the respective breakdowns of use in agricultural, municipal, and industrial sectors are shown for the 120 fastest-urbanizing countries.  In particular, desert countries are highlighted by their enormous consumption of water—often several times greater than the extent of water in the country. Additionally, many countries where there exists a great degree of struggle over water rights are, in fact, only withdrawing a small portion of their available freshwater, indicating that lack of infrastructure is a greater crisis when compared with water unavailability.

You Have No Idea What Mowing Your Lawn Is Doing To The Planet - Imagine a scenario where tens of millions of Americans are condemned by their own illusions to hours of hot, sweaty, grueling unpaid labor every week involving expensive and potentially dangerous chemicals, ear-shattering machines and fuels that pollute the air and water. This isn’t some nightmarish dystopian science-fiction plot. It’s happening right now as this nation’s suburban homeowners renew their unending and damaging war against nature to preserve, protect and pamper the foreign organisms that make up the American lawn. If you’re skeptical about the potential harm this lawn obsession can do, consider the following: Americans reportedly dump more than 80 million pounds of pesticides and other chemicals onto their lawns and gardens every year. Aside from the potential risks for people and animals coming into direct contact with this toxic crap, pesticides get washed into streams and rivers, ending up as marine pollution in vital places like Long Island Sound.

Will Shifting Political Winds Finally Kill Ethanol Subsidies? - As recently as last December, the coalition backing U.S. ethanol subsidies appeared to be alive and well, despite the fact that everyone knew they were bad for the environment, bad for energy efficiency, and bad for the budget. The largest subsidy, a tax credit for blending ethanol into gasoline, was set to expire at the end of 2010. At the last minute, though, ethanol's friends rallied to slip a little-noticed one-year renewal of the subsidy into a bill extending the Bush tax cuts and benefits for the long-term unemployed. As I blogged at the time, it looked like ethanol subsidies were a classic case of a bad policy that refused to die. Now ethanol subsidies are back in the news, and this time they may be on the way out. One piece of legislation, introduced by Senators Tom Coburn (R-OK) and Dianne Feinstein (D-CA), would not only end the 45-cent per gallon tax credit, but also eliminate the 54-cent per gallon tariff on imported ethanol. To understand what has changed, we need to look at the economics behind the shifting pro- and anti-ethanol coalitions.

Platts: Europe's biggest ethanol plant to shut up to 4 months end-May - Europe's largest biofuels refinery, Ensus' 400,000 cubic meter/year plant at Wilton in northeast England, will be shut at the end of May for up to four months on poor margins, plant commercial director Grant Pearson said Monday. The refinery has been hit by lower-than-expected demand in Europe, an oversupply of ethanol blends from the US and a slow roll-out of sustainability requirements in EU member-states, Pearson said. Pearson said the shutdown could be from 2-4 months. "We decided that for the time being, with these margins it's no longer profitable to be operating," he added, without given further details on Ensus production economics. "Given the fact that we have one of most efficient production processes in Europe and we are forced to take this step shows how the situation for the industry is right now.

Do Biofuels Reduce Greenhouse Gases? A new study fuels the debate over the impact of growing crops for fuel. - 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. The new study, to be published in an upcoming issue of the journal Biomass and Bioenergy, found no statistical correlation between changes in biofuel production in the U.S. from 2002 to 2007 and recorded changes in cropland use outside of the country.

Striking ecological impact on Canada’s Arctic coastline linked to global climate change - Scientists from Queen’s and Carleton universities head a national multidisciplinary research team that has uncovered startling new evidence of the destructive impact of global climate change on North America’s largest Arctic delta. “One of the most ominous threats of global warming today is from rising sea levels, which can cause marine waters to inundate the land,” says the team’s co-leader, Queen’s graduate student Joshua Thienpont. “The threat is especially acute in polar regions, where shrinking sea ice increases the risk of storm surges.” By studying growth rings from coastal shrubs and lake sediments in the Mackenzie Delta region of the Northwest Territories – the scene of a widespread and ecologically destructive storm surge in 1999 – the researchers have discovered that the impact of these salt-water surges is unprecedented in the 1,000-year history of the lake.

US Vehicle Miles Travelled - With global oil supply on a rough plateau, and developing oil countries' usage increasing, oil usage in developed countries must decline.  This has to be accomplished through some combination of using oil more efficiently and just doing less.  The above are the data for US vehicle miles traveled, and indicate that US VMT has not regained the peak of 2007.  With gasoline still above $4/gallon, I doubt that this series will be increasing sharply in the near future.

US Fleet Fuel Economy - If you take the total vehicle miles traveled estimated by the Federal Highway Administration that I graphed yesterday, divide by the amount of gasoline consumed according to the EIA (after removing the heavy truck mileage that's mainly diesel), you can get an estimate for the average fuel economy of the entire US auto fleet.  This is different than the EPA's estimates for new cars because it represents the actual performance of the entire fleet on the road, new and old. The graph above shows the numbers through February 2011.  This series continues to disappoint.  If I had my way, people would have paid more attention to the oil price shock in 2005-2008, and the fact that gas is $4/gallon again now even though the economy has barely recovered much at all, and would have started to change behavior and car models.  However, there's no detectable bend in the curve at all.  Here's an old graph from this piece, showing this estimate annually from 1945 to 2005.

Reasons to be cheerful (Part 1): Peak gasoline - There are plenty of reasons to be gloomy about the prospects of stabilising the global climate. The failure at Copenhagen (partly, but far from wholly, redressed in the subsequent meeting at Cancun) means that a binding international agreement, let alone an effective international trading scheme, is a long way off. The political right, at least in English-speaking countries, has deepened its commitment to anti-science delusionism. And (regardless of views on its merits) the prospect of a significant contribution from nuclear power has pretty much disappeared, at least for the next decade or so, following Fukushima and the failure of the US ‘nuclear renaissance’. But there’s also some striking good news. Most important is the arrival of ‘peak gasoline’ in the US. US gasoline consumption peaked in 2006 and was about 8 per cent below the peak in 2010. Consumption per person has fallen more than 10 per cent.

I don't care if I'm repeating myself, $1 per gallon gas tax is a driving tax and it makes sense. - The way I see it, taxing gas has multiple goals: reduce fuel consumption, reduce congestion, reduce the external costs of driving, create incentives for fuel efficiency, incorporate infrastructure depreciation into the cost of driving...Taxing gas on a per gallon basis has the potential to meet all of these goals. l've stated this all before in the form of a Fuel Efficiency Payment (yes I know I keep linking to that post, but I'm hoping eventually I will get my point across:  An $X per gallon gas tax is the same as a tax on low fuel efficiency, a tax on driving, a tax on externalities, a tax on road use.  The only thing it doesn't address directly is congestion (that would require peak load pricing), but it does address congestion indirectly in the form of fewer vehicle miles travelled.  So I lay it out here again.

Clarifying my stance on driving taxes, fuel efficiency payments and gas taxes - When I link to my post where I propose a complicated Fuel Efficiency Payment--equal to the inverse of a cars fuel efficiency multiplied by total miles traveled--to encourage/incentivize/force drivers to internalize the long list of externalities associated with driving, I get comments along these lines: No one ever mentions how easy it would be to circumvent this tax. Your mileage gets checked once per year? Just disconnect the odometer for most of the time. Or are we going to pay to retrofit all cars with "tamper proof" odometers that will soon be proven not-so-tamper-proof-after-all? Saving thousands of dollars per year in a tax is an awfully strong economic incentive for millions of very smart people to figure out how to game this silly system. Unfortunately, I think I made the original post too long and comments like this illustrate that no one reads to the end when I'm long winded. So here's the punchline: The proposed Fuel Efficiency Payment is ridiculously complicated and mathematically identical to the much simpler $1/gallon gas tax that some (many?) economists support.

China Warns Of "Urgent Problems" At Three Gorges Dam, As 4 Million People Downstream Face Severe Drought - China has acknowledged new problems at the notorious $37 billion Three Gorges Dam. A statement today from the Wen Jiabao and the State Council said the dam had caused severe problems to the environment, shipping, agricultural irrigation and water supplies in the lower reaches of the Yangtze River, according to Global Times. Other unspecified problems were mentioned: 'Problems emerged at various stages of project planning and construction but could not be solved immediately, and some arose because of increased demands brought on by economic and social development,' the statement said. Currently a severe drought is affecting 4 million people in the region downstream of the giant dam. Three Gorges was already controversial because to build it the government flooded 13 cities, 140 towns and 1,600 villages. The dam was supposed to help with China water supply issues, but its primary use was as the world's largest hydroelectric dam.

Hydropower’s Resurgence and the Controversy Around It - Hydropower, a renewable energy source often overshadowed by excitement about wind and solar power, is enjoying something of a global resurgence. Huge, controversial dam projects have recently made headlines in Brazil, Chile and Laos. Many developing countries, hungry for energy to supply their growing economies over the long term, are determined to keep building more modest-sized dams too. Record amounts of hydropower capacity came online in 2008 and 2009, the most recent years for which data are available, according to Richard Taylor, executive director of the International Hydropower Association in London. But the renewed attention to hydropower, which accounts for about 16 percent of the global electricity mix, comes with environmental red flags. More attention than ever focuses on people who face displacement, as well as the effects of new dams on land and fish.

How Will the California System Operator Cope With 33% Renewables?    The state grid operator has opened its Mission Critical Wing, powered by renewables for renewables. To meet California’s new standard requiring the state to get 33 percent of its power from renewables by 2020, the grid operator will have to stop talking about the weather and do something about it. The California Independent System Operator Corporation (ISO) just brought its Mission Critical Wing, a new high tech control center, on line to do that. “We partnered with Google and we went from your typical map board made of plastic tiles, with digital readouts, to an 81-foot video display wall,” The new center, in Folsom, California, incorporates security measures for vital grid operations and for energy delivery commensurate with a post-9/11 world. “It’s no secret that security was a big reason why we built this facility,” McCorkle said, “but we did need a new control center, especially with the thousands and thousands of megawatts of renewable power coming.”

No nukes, No problem. Germany is proving a rapid transition to renewable energy is possible - Countries around the world are in need of reliable and clean energy. Climate change will require a transition towards a low carbon economy within the next decades. In the wake of Fukushima, the key question is: “If not nuclear, what’s next?” As policy makers and industry stakeholders around the world continue to evaluate the role of nuclear power for energy transition, it will be useful for the US to benchmark its strategies against those of other countries. Germany, in particular, is pursuing a path forward that represents a significant departure from business-as-usual in the US and other countries. Rather than developing nuclear power, Germany is aggressively pursuing renewable energy in combination with innovative new electricity grid management strategies. In September 2010, the conservative government under Chancellor Merkel released its Energy Concept, which outlines the government’s plan to reduce carbon emissions 40% below 1990 levels by 2020 (and 80% by 2050) in part by increasing the national share of renewable electricity to more than 35% in 2020 and to 80% by 2050. Within four decades, one of the world’s leading economies will be powered almost entirely by wind, solar, biomass, hydro, and geothermal power.

University of Warwick Researchers Develop Golden Window Electrodes For Organic Photovoltaic Cells  Researchers at the University of Warwick have developed a gold plated window as the transparent electrode for organic solar cells. Contrary to what one might expect, these electrodes have the potential to be relatively cheap since the thickness of gold used is only 8 billionths of a metre. This ultra-low thickness means that even at the current high gold price the cost of the gold needed to fabricate one square metre of this electrode is only around £4.5. It can also be readily recouped from the organic solar cell at the end of its life and since gold is already widely used to form reliable interconnects it is no stranger to the electronics industry. An ultra-thin film of air-stable metal like gold would offer a viable alternative to Indium Tin Oxide (ITO), but until now it has not proved possible to deposit a film thin enough to be transparent without being too fragile and electrically resistive to be useful.

NOAA chief warns of rapid onset of ‘unprecedented’ changes in oceans - A combination of climate change, overfishing, pollution and other threats is changing the world’s oceans at an “unprecedented” rate, the head of the National Oceanic and Atmospheric Administration said yesterday. “For the oceans as well as the rest of the planet, the rates and scales and kinds of changes that are under way now are absolutely unprecedented,” NOAA chief Jane Lubchenco said in remarks at the Woodrow Wilson International Center for Scholars. “And they are happening even faster than our ability to measure or track some of them, much less have institutions that are responding in a fashion that is appropriate.” She touted the national ocean policy that President Obama implemented by executive order last year. The policy created a National Ocean Council to coordinate federal planning on a wide range of issues, including climate change, pollution, oil drilling and fisheries.

Arctic sea ice volume: The death spiral continues - One-year-old ice in Beaufort Sea now a foot thinner than in 2009 = In November, Rear Admiral David Titley, the Oceanographer of the Navy, testified that “the volume of ice as of last September has never been lower…in the last several thousand years.” Titley, who is also the Director of Navy’s Task Force Climate Change, said he has told the Chief of Naval Operations that “we expect to see four weeks of basically ice free conditions in the mid to late 2030s.” Wieslaw Maslowski of the Naval Postgraduate School has “projected a (virtually) ice-free fall by 2016 (+/- 3 yrs).” Contrary to some reporting, that projection has been unchanged for years, though Maslowski is in the process of creating a more sophisticated model that he expects “will improve prediction of sea ice melt,” as he explained to me recently. Until then, we have some new observational data of Canadian sea ice thickness and this remarkable figure of sea ice volume since 1979 from Neven’s Arctic Sea Ice Blog, based on data from the University of Washington’s Polar Science Center [click to enlarge]:

The True Cost of Carbon - The Hamilton Project is releasing a new paper on the costs of American energy policy. They argue: … our energy choices are based on the visible costs that appear on utility bills and at the gas pump. This system masks the social costs arising from those energy choices, including shorter lives, higher health care expenses, a changing climate, and weakened national security. As a result, we pay unnecessarily high costs for energy.For example, a coal plant must spent 3.2 cents to produce a kilowatt hour of electricity (and consumers then pay slightly more than this). This price appears to be a bargain, the economists write, but the true costs — once health costs, military costs and the like are taken into account — are more than twice high: 8.8 cents per kilowatt hour. The paper calls for four steps that will be familiar to anyone who follows climate policy: a carbon tax or cap-and-trade system; more money for research and development; more efficient regulations; and negotiations with foreign countries over similar steps elsewhere. In the foreseeable future, all these steps all seem to be an enormous long shot. But the climate problem is not going away.

NASA Satellite Photos Show Coal Mining Destroy a Mountain Range Over 25 Years - Does anyone out there still need convincing that mountaintop removal mining is in the running for mankind's worst idea? The reckless, greed-driven hubris that allows us to justify blowing up age-old mountains to get cheaper coal isn't surprising, however -- it's pretty much right in tune with plenty of our exploits over the last few centuries. Yet we also possess the innate ability to subsequently feel really bad about what we've done -- so maybe looking at these NASA satellite photos, which document, year by year, the destruction of a mountain for coal-mining, will cause coal barons the nation over to change their ways.  Fat chance. Still, if you can look at these breathtaking photos of a mountain literally being demolished over the course of 25 years without feeling any sense of despair, you may be a robot. The image above shows the West Virginia Hobet coal mine in 1984, after mining had already begun. But that was before they seriously started blowing up the surrounding mountainside in order to expose the coal seams and extract the stuff more cheaply. Here's the mine two years later, in 1986:

Humanity Can and Must Do More With Less, Experts Urge - By 2050, humanity could consume an estimated 140 billion tons of minerals, ores, fossil fuels and biomass per year -- three times its current appetite -- unless the economic growth rate is "decoupled" from the rate of natural resource consumption, warns a new report from the United Nations Environment Programme. Citizens of developed countries consume an average of 16 tons (ranging up to 40 or more tons) of those four key resources per capita. By comparison, the average person in India today consumes four tons per year.With the growth of both population and prosperity, especially in developing countries, the prospect of much higher resource consumption levels is "far beyond what is likely sustainable" if realized at all given finite world resources, warns the report by UNEP's International Resource Panel. Already the world is running out of cheap and high quality sources of some essential materials such as oil, copper and gold, the supplies of which, in turn, require ever-rising volumes of fossil fuels and freshwater to produce.

Seaports unprepared for climate change - Seaport officials are unsure how best to protect their facilities from rising sea levels and more frequent Katrina-magnitude storms, two possible consequences of global warming.  In 2009, Becker distributed 160 surveys to members of the International Association of Ports and Harbors and the American Association of Port Authorities – the first worldwide survey of port authorities to address climate change adaptation. “Part of the problem is that science says that by 2100, we’ll experience anywhere from 1.5 to 6 feet of sea level rise,” says Austin Becker, a PhD candidate in environment and resources at Stanford University. “That’s a huge range.” Port have to make tough financial decisions when it comes to funding infrastructure and need accurate information about what to expect, so that they can plan accordingly. Building a structure to withstand a 6-foot sea level rise would cost much more than trying to accommodate a 1.5-foot rise, Becker says

Are humans reshaping Earth? - Will homo sapiens, in other words, define a geological period in the way dinosaurs -- and their vanishing act -- helped mark the Jurassic and the Cretaceous? A growing number of scientists, some gathered at a one-day symposium this week at the British Geological Society in London, say "yes".One among them, chemistry Nobel laureate Paul Crutzen, has even suggested a new name: the Anthropocene. Whether this "age of man" will be short or long is unknown, says Crutzen, who shared his Nobel for unmasking the man-made chemicals eating away at the atmosphere's protective ozone layer. For the first time in Earth's 4.7 billion year history, a single species has not only radically changed Earth's morphology, chemistry and biology, it is now aware of having done so. "We broke it, we bought it, we own it," is how Erle Ellis, a professor of geography and ecology at the University of Maryland at Baltimore, put it.

In Japan Reactor Failings, Danger Signs for the U.S. - Emergency vents that American officials have said would prevent devastating hydrogen explosions at nuclear plants in the United States were put to the test in Japan — and failed to work, according to experts and officials with the company that operates the crippled Fukushima Daiichi plant.  The failure of the vents calls into question the safety of similar nuclear power plants in the United States and Japan. After the venting failed at the Fukushima plant, the hydrogen gas fueled explosions that spewed radioactive materials into the atmosphere, reaching levels about 10 percent of estimated emissions at Chernobyl, according to Japan’s nuclear regulatory agency.  Venting was critical to relieving pressure that was building up inside several reactors after the March 11 tsunami knocked out the plant’s crucial cooling systems. Without flowing water to cool the reactors’ cores, they had begun to dangerously overheat.

TechnologyReview: Atmosphere Above Japan Heated Rapidly Before M9 Earthquake - Today, Dimitar Ouzounov at the NASA Goddard Space Flight Centre in Maryland and a few buddies present the data from the Great Tohoku earthquake which devastated Japan on 11 March. Their results, although preliminary, are eye-opening. They say that before the M9 earthquake, the total electron content of the ionosphere increased dramatically over the epicentre, reaching a maximum three days before the quake struck.  At the same time, satellite observations showed a big increase in infrared emissions from above the epicentre, which peaked in the hours before the quake. In other words, the atmosphere was heating up. These kinds of observations are consistent with an idea called the Lithosphere-Atmosphere-Ionosphere Coupling mechanism. The thinking is that in the days before an earthquake, the great stresses in a fault as it is about to give cause the releases large amounts of radon.

The Good, The Bad, The Fukushima - Hey, remember Fukushima?  Arnie Gundersen is freaking me out! Gundersen is no tin-foil hat guy, he's the chief engineer of energy consulting company Fairewinds Associates and a former nuclear power industry executive who served as an expert witness in the investigation of the Three Mile Island accident. Gundersen has said that the U.S. nuclear industry and regulators need to reexamine disaster planning and worst-case scenarios, especially in reactors such as Vermont Yankee, which have the same design as the crippled nuclear plant at the center of the 2011 Japanese Fukushima nuclear emergency. Vermont Yankee and similar plants are vulnerable to a similar cascade of events as in Japan.

TEPCO reveals meltdown occurred hours after quake - In what amounts to a relatively stunning revelation, Japan’s Kyodo News has just reported that TEPCO, the nuclear power company in charge of the beleaguered Fukushima nuclear power plant, now claims that reactor number 1 had suffered a meltdown just 16 hours after the March 11 earthquake. Odder still, the news briefly appeared on the English version of the Kyodo News website around 8p.m., Sunday night Japan time, only to be removed roughly 15 minutes later. The alert was posted not as a linkable html news page, but via a Java script scrolling message at the top of the site. That message has now, inexplicably, disappeared. Despite the quick removal of the news alert we, as well as other veteran journalists, managed to catch the news before it was erased.

Radioactive turd, meet punchbowl - If this report is true, then:

  • a) Reactor 1 at Fukushima Daiichi melted down within sixteen hours of the quake (about eight hours after all active cooling was lost),
  • b) TEPCO management knew about it,
  • c) The press were systematically nobbled (an early report of the meltdown was withdrawn),
  • d) Going by his rather extraordinary remarks during the subsequent weeks, the Prime Minister, and presumably the rest of the Japanese government, were systematically misled by TEPCO.

I'm taking this report with a pinch of salt for the time being, because the IAEA reports on FD #1 don't reflect this account, but if the PM wasn't briefed then it would be unsurprising to learn that the IAEA (International Atomic Energy Agency) were also kept in the dark.

TEPCO admits nuclear meltdown occurred at Fukushima reactor 16 hours after quake - Based on provisional analysis of data on the reactor, the utility concluded that the water level in the pressure vessel began to drop rapidly immediately after the tsunami, and the top of the fuel began to be exposed above the water around 6 p.m. Around 7:30 p.m., the fuel was fully exposed above the water surface and overheated for more than 10 hours. At about 9 p.m., the temperature in the reactor core rose to 2,800 degrees Celsius, the melting point for fuel. At approximately 7:50 p.m., the upper part of the fuel started melting, and at around 6:50 a.m. on March 12, a meltdown occurred. On the reason why it took over two months after the earthquake to reveal the information, TEPCO said it had only been able to start obtaining detailed data on the temperature and pressure in the reactor for analysis in early May. 'Because there is similar damage to the fuel rods at the No. 2 and 3 reactors, the bottoms of their pressure vessels could also have been damaged.' He said the utility would carry out similar analysis on the two reactors.

Fukushima Update: A Very Bad Situation - Well, it now turns out that much of my worst fears and about Fukushima have been confirmed with the news that TEPCO has finally admitted that reactor #1 has experienced a meltdown event that may have breached the primary containment vessel. Further, truly alarming levels of radiation are now being reported in and around Tokyo. The prospects for containing the situation at reactor #1 are now much dimmer than previously admitted. A melted core is far more difficult to cool because the geometry of the slag heap at the bottom is not nearly as favorable as long thin tubes around which water can be relatively easily circulated. Worse, if the slag has either melted through the primary containment vessel or somehow leaked out through a fitting that has failed, then the ability to circulate water is even more compromised.

TEPCO: Meltdowns in Reactors 2 and 3 - The water gauges for the Reactors 2 and 3 are not to be trusted, said TEPCO's Matsumoto in the press conference on May 12 (I watched the live-recorded video) when the company officially acknowledged the meltdown of the Reactor 1.  If the water gauges for the Reactors 2 and 3 have been overstating the water levels, just like in the Reactor 1, it is very likely that all three reactors have hardly any water inside the Reactor Pressure Vessels (RPV), and the reactor cores are likely to have been melted.  Just like Michio Ishikawa of Japan Nuclear Technology Institute said on April 29. About the water gauges for the Reactors 2 and 3: "They are probably in the same condition as that of the Reactor 1. The numbers the gauges are currently showing are not very trustworthy. We need to monitor carefully with other parameters like pressure."

More radioactive water leaks into sea near Fukushima nuclear plant – ‘A very grave issue’ -A major new leak of highly radioactive water into the ocean near the Fukushima No. 1 nuclear power plant was discovered May 11. Local authorities and the embassies of the United States and other countries, including neighboring nations, were notified of the latest setback at the stricken plant, which has been out of control since the March 11 Great East Japan Earthquake. The plant's operator, Tokyo Electric Power Co., said cesium-134 at levels about 18,000 times above government standards for wastewater discharge into the ocean was detected in the sea near the No. 3 reactor. Workers discovered highly radioactive water in a pit connected to a trench of the No. 3 reactor around 10:30 a.m. May 11. The water leaked into the sea through cracks on the side of the pit facing the ocean.

Japan to release new plan to stabilize nuke plant - Japan was to release a revised roadmap Tuesday for stabilizing its stricken nuclear plant amid signs that three troubled reactors have suffered worse-than-expected damage from the March 11 earthquake and tsunami. The government is also expected to provide more details about how it will support some 80,000 evacuees who fled their homes near the radiation-leaking Fukushima Dai-ichi complex. While authorities insist they will stick with a timetable announced in April to bring the plant to a stable cold shutdown by early next year, the new plan will provide more details on achieving that goal, including how operator Tokyo Electric Power Co. will restore cooling systems that were knocked out by the twin disasters. Officials say that recent data from repaired gauges indicate that it's likely that fuel rods in at least one reactor had almost totally melted and fallen to the bottom of the capsule-shaped pressure vessel in the hours after the quake and tsunami hit. Although no workers were allowed inside two other reactor buildings to take new measurements, officials assume similar damage at Units 2 and 3 based on the duration they were out of cooling water.

Fukushima - One Step Forward and Four Steps Back as Each Unit Challenged by New Problems - Extremely important video by Arnie Gunderson. Explains what's really going on at Fukushima with the core meltdowns.

Tepco Posts $15.28 Billion LossTokyo Electric Power Co. said Friday it logged a net loss of ¥1.247 trillion ($15.28 billion) for the fiscal year ended in March—the biggest annual loss in Japanese corporate history outside the financial sector—as it was hammered by massive costs in battling the Fukushima Daiichi nuclear accident.  With compensation liabilities expected to run into trillions of yen (tens of billions of dollars), Tepco also warned that the "significant deterioration" in its financial position "raises substantial doubt about its ability to continue as a going concern."  As expected, the operator of the crippled nuclear power plant said President Masataka Shimizu will step down to take responsibility for the company's much-criticized handling of the March 11 disasters that crippled Fukushima Daiichi.

U.S.-Japan joint survey reveals high radiation beyond evacuation zone - The first map of ground surface contamination within 80 kilometers of the crippled Fukushima No. 1 nuclear power plant shows radiation levels higher in some municipalities than those in the mandatory relocation zone around the Chernobyl plant. The map, released May 6, was compiled from data from a joint aircraft survey undertaken by the Ministry of Education, Culture, Sports, Science and Technology and the U.S. Department of Energy. It showed that a belt of contamination, with 3 million to 14.7 million becquerels of cesium-137 per square meter, spread to the northwest of the nuclear plant. After the 1986 Chernobyl disaster, those living in areas with more than 555,000 becquerels of cesium-137 per square meter were forced to relocate. However, the latest map shows that accumulated radioactivity exceeded this level at some locations outside the official evacuation zones, including the village of Iitate and the town of Namie.

Japan widens evacuations outside plant zone - Japan on Sunday started the first evacuations of homes outside a government exclusion zone after the March 11 earthquake and tsunami crippled one of the country's nuclear power plants. Some 4,000 residents of Iidate-mura village as well as 1,100 people in Kawamata-cho town, in the quake-hit northeast, began the phased relocations to public housing, hotels and other facilities in nearby cities. Their communities are outside the 20-kilometre radius from the Fukushima Daiichi power plant, officially designated as an area of forced evacuation due to health risks from the radiation seeping from the ageing and damaged plant.The government told people in communities such as Iidate-mura they had to leave, but authorities are unlikely to punish those who choose to stay.

Over 900 tons of radioactive sludge from Fukushima sold for cement - Fukushima I Nuke Plant has been one big "dirty bomb." After Koriyama City's sewage treatment center was tested positive for high level of radioactive cesium in the sewage sludge and slag and the sludge had been already sold (my post here and here), Fukushima Prefecture ordered the testing in other 19 similar treatment centers in Fukushima. 18 out of 19 centers were found to have high concentration of radioactive cesium. What a surprise.At one facility in Horikawa-machi in Fukushima City, 446,000 becquerels per kilogram of radioactive cesium were found. At Koriyama, it was 26,400 becquerels per kilogram.  They say they'll have to find out where the sludge has gone. And at one of them, the facility in Fukushima City above, radioactive sludge may have nowhere else to go but spill into the river as soon as May 20. Nice.Koriyama City is 59 kilometers west of Fukushima I Nuclear Power Plant, and Fukushima City, prefectural capitol, is 62 kilometers northwest of the plant. (Distance with the calculator at this site.) Koriyama alone sold 928 tons of radioactive sewage sludge in 50 days to Sumitomo Osaka Cement. I hate to think how much total that these treatment facilities in Fukushima may have sold.

200,000 tons of radioactive water may accumulate in Fukushima Daiichi nuclear plant by December - Robots have been used to study the situation within the reactor buildings, but TEPCO could not determine specific levels of radiation in the No. 2 and No. 3 reactor buildings and whether workers could safely enter.The suppression pool in the No. 2 reactor building that is connected to the containment vessel is believed to have cracks. The TEPCO plan calls for closing those cracks with concrete, but work has not started on that task. One addition to the revised work schedule is consideration of ways to stop the flow of contaminated water underground or into the ocean. Until now, TEPCO officials were considering moving radioactive water and storing it before decontaminating it. Under the new plan, contaminated water will be recycled back into the reactor building to cool the core, meaning that radioactive water will accumulate in the building for long periods. TEPCO needs to come up with measures to prevent that water from leaking outside plant facilities. …

Japanese Power Plants Damaged or Closed by Earthquake - The following is a table showing nuclear and thermal power plants in Japan halted or damaged by the earthquakes on March 11. Capacity figures are in megawatts.

China Gears Up To Export Nuclear Technology - Still panicked after the Fukushima disaster? China's not: They're sending nuclear technology to everyone--even Pakistan. Despite post-Fukushima fears, China is seizing the opportunity to become a nuclear leader. Why waste a prime opportunity missed by wimpier countries? The country, which is currently the world's largest nuclear power plant builder, is reportedly planning to ramp up its nuclear-generating capacity sixfold by 2020--and it plans to export nuclear technology to countries in Asia including Vietnam, Thailand, Malaysia, Singapore, and Pakistan, according to Spero News. What could possibly go wrong? China doesn't plan on getting so-called third-generation nuclear technology ready on a large scale until 2013. That technology is already used in Japan (not at Fukishima, though), and is purportedly simpler, easier to operate, and less vulnerable to core meltdowns. Unfortunately for China's neighbors, the country is currently exporting its second-generation technology, which is more vulnerable.

Eyeing China, Rep. Coffman Seeks Rare-Earth Inventory- What do the Joint Direct Attack Munition smart bomb and your new iPad 2 have in common? They both rely on rare-earth elements, a group of 17 metallic elements with unique magnetic properties that make 21st-century technology possible. And if one GOP lawmaker has his way, the Department of Defense may start stockpiling the stuff. Rep. Mike Coffman (R., Colo.) recently introduced an amendment to the fiscal 2012 National Defense Authorization Act that would direct the Defense Department to draw up plans to build an inventory of the materials, which are found in high-tech military hardware as well as in consumer electronics. The defense bill goes to the House floor next week. The plan, the amendment says, is to help the Pentagon “avoid reliance on a single source of supply.” In other words: China. Rare earths are not rare, geologically speaking, but China has a corner on mining and processing them.  According to a 2010 Government Accountability Office report, China produced approximately 97% of the world’s rare-earth oxides in 2009.

Interesting Contrast - Krugman this morning Oh, and about commodity prices: rises on the order of what we’ve seen lately aren’t at all unusual, even during periods now considered to have been characterized by low and stable inflation. Here’s the IMF commodity price index...Just not something to get frantic about. Meanwhile, here's a UN press release about this report from a couple of days back: Global consumption of natural resources could almost triple to 140 billion tons a year by 2050 unless nations take drastic steps, the United Nations warned Thursday. A UN environment panel said the world cannot sustain the tearaway rate of use of minerals, ores and fossil and plant fuels. It called on governments to "decouple" economic growth from natural resource consumption. With the world population expected to hit 9.3 billion by 2050 and developing nations becoming more prosperous, the report warned "the prospect of much higher resource consumption levels is far beyond what is likely sustainable."

Prelude FLNG: Shell Gas Plant To Be Biggest Floating Object Ever - Royal Dutch Shell PLC will construct the biggest floating man-made object ever, a natural gas processing plant longer than four football fields and more massive than any aircraft carrier. The “Prelude FLNG” facility, to be anchored off the Australian coast, will be made of 260,000 tons of steel – five times more than Sydney’s famed Harbour Bridge, Shell said Friday. It is designed to take in the equivalent of 110,000 barrels per day in gas from undersea fields 200 kilometers (125 miles) off Australia’s Northwest coast and cool it into liquefied natural gas, known as LNG. Shell claimed the plant will be able to withstand category 5 cyclones, the worst type of storms, and is planned to remain moored above the Prelude gas field for 25 years after completion.

Shale gas environmental concerns - Technological breakthroughs in methods for drilling for natural gas have opened up the possibility of vast new supplies. However, environmental concerns may turn out to be significant. Stuart Staniford has taken a look at a study of the effects of shale-gas extraction on drinking water recently published in the Proceedings of the National Academy of Sciences. The scatter diagram below summarizes 60 drinking water wells in Pennsylvania, with distance from a natural gas well on the horizontal axis and methane concentration in the water on the vertical axis. All of the water wells with concentrations above 28 milligrams of methane per liter of water were within one kilometer of active drilling.

Marcellus Driller Fined Record $1.1M - The Pennsylvania Department of Environmental Protection on Tuesday fined Chesapeake Energy Corp. $1.1 million for violations related to natural gas drilling activities, the largest penalty ever against a Marcellus Shale operator. Under a consent order, Chesapeake will pay $900,000 for contaminating private water supplies in Bradford County. Under a second agreement, Chesapeake will pay $188,000 for a Feb. 23 tank fire at its drilling site in Avella, Washington County. Chesapeake is the largest operator working in Pennsylvania's Marcellus Shale, a gas-rich formation that has triggered a bonanza of drilling activity in the last three years.

Will Natural Gas Fuel America in the 21st Century? - Post Carbon Institute undertook this report in order to examine three widespread assumptions about the role that natural gas can and should play in our energy future:

  • Assumption #1: That, thanks to new techniques for hydraulic fracturing and horizontal drilling of shale, we have sufficient natural gas resources to supply the needs of our country for the next 100 years.
  • Assumption #2: That the price of natural gas, which has historically been volatile, will remain consistently low for decades to come.
  • Assumption #3: That natural gas is much cleaner and safer than other fossil fuels, from the standpoint of greenhouse gas emissions and public health.

Based on these assumptions, national energy officials at the Energy Information Administration (EIA) foresee a major expansion of natural gas in the coming decades. President Obama touted natural gas as a cornerstone of his Administration’s “Blueprint for a Secure Energy Future”[1] and endorsed plans for converting a sizable portion of the vehicle fleet to run on natural gas.[2] Some environmental groups, rightfully concerned about the greenhouse gas emissions of coal, have called for large-scale replacement of coal-fired power plants with those that burn natural gas, despite increasing concern over the environmental impacts of hydraulic fracturing. As this report details, all of these assumptions and recommendations need to be re-thought. What emerges from the data is a very different assessment.

Natural gas: study raises doubts on U.S. supply - The United States does not have a decades-long supply of inexpensive, locally sourced natural gas, according to a new report commissioned by the Post Carbon Institute, a nonprofit think tank that examines issues related to the economy, energy and the environment. The report, titled "Will Natural Gas Fuel America in the 21st Century?," is a challenge to the commonly cited projection that domestic natural gas can meet U.S. demand for more than 100 years. It comes on the heels of the U.S. Energy Information Agency's 2011 Energy Outlook released last month that projected an almost fourfold increase in domestic shale gas production by 2035 and growing use of natural gas to generate electricity.  "The question is what would it take in order to do that?" Hughes estimates there is only a 12-year supply of easily accessible, domestic natural gas. He said the number of producing gas wells almost doubled from 1990 to 2010, but the productivity of each well has declined nearly 50% over the same 20-year period.

Raging Alberta Wildfires Depress Canadian Crude Production, Have Little Impact On Prices - Contrary to conventional wisdom, America does not import the bulk of its crude from the volatile middle east region, but from its sleepy and unremarkable northern neighbor (by a factor of two compared to the second largest source of crude). Which is why the recent eruption of pervasive wildfires in Alberta, which have substantially disrupted production, probably should have far more of an impact on crude risk perception than what happens to 2 million of daily crude output out of Libya, most of which does not even reach the US. From Reuters: "Canadian heavy crude prices have changed little despite wildfires raging in northern Alberta and forcing production cuts, showing there is plenty of supply in storage, market sources said on Wednesday. Western Canada Select heavy blend for June delivery fetched around $17.30 a barrel under benchmark West Texas Intermediate crude, close to levels of a week ago. Dozens of forest fires that have spread in recent days have led to the shutdown of more than 100,000 barrels a day of output in the north-central Alberta region, most of it due to the outage of the 187,000 barrel a day Rainbow pipeline. The southern leg of the line, operated by Plains All American Pipeline LP, was shut due to the blazes. The northern leg has been out of service since a rupture and oil spill in late April."

BP and ConocoPhillips shelve Alaska pipeline project in light of shale boom - With natural gas from North American shale formations fundamentally altering the U.S. gas market, BP PLC and ConocoPhillips Co. yesterday announced they would stop work on a proposed $35 billion pipeline to bring gas from Alaska’s North Slope into Canada and to the Lower 48 states.Since the energy giants came together in 2008 to propose the massive project they called Denali, shale gas production has boomed in Texas, Louisiana, Arkansas and the Northeast. Estimates by producers and government agencies suggest shale gas could account for nearly half of the domestic gas supply by 2035. The shale gas, high gas storage across the country and lower industrial demand have conspired to keep the average price of natural gas near historic lows since 2009 at about $4 per million British thermal units. The prospect that the commodity price could remain low for decades because of the shale gas resource made it difficult for Denali to compete.

ID Summit: Warning over oil liability cap: InsuranceDay… MUNICH Re’s controversial plan to pull together a $20bn drilling liability product for the Gulf of Mexico created an unrealistic sense of available capacity among US regulators, and with proposals to lift the oil spill liability cap back on the agenda, oil companies are anxious that the same mistakes are not repeated. According to Robert Stauffer president and chief executive of Bermudian energy industry mutual Oil Insurance Ltd (Oil), US legislators had considered using Munich Re’s aspirational $20bn figure as the basis for setting the new cap, which he said would have left only the largest oil companies able to afford cover. In the mean time the reinsurance market’s response to Munich Re’s proposal, first unveiled at Monte Carlo last September, has been muted and the firm has subsequently cut the planned limits per offshore drilling facility to $10bn and Stauffer’s sources have suggested only 60% of this capacity is now committed.

Oil Prices Are Being Manipulated By Oil Companies. Very Clever If It’s True. - Came across this piece here.  It sounds plausible, and the facts are correct regarding US oil exports rising while imports are falling.  “There’s a current popular explanation for gas price increases. It’s that oil is a global commodity and that oil prices are set on the world market. Despite the fact that there’s currently a global surplus of oil, the story goes that it’s speculation that drives up world oil prices, which also drives up U.S. gas prices. But there’s more going on. Exporting more and importing less oil creates a shortage of oil available to be refined in the U.S. Had operating refinery capacity kept expanding per the 1992 to 2004 trend, there would have been 642M barrels greater U.S. refining capacity in 2010. Even ignoring slower expansion, idle refining capacity in 2010 was 216M barrels greater than in 2004. But none of that would be of use anyway, because there were 860M barrels less oil in the U.S. in 2010 than 2005 (that’s the sum of 483.4M barrels increased exports and 377.0M barrels decreased imports). Artificially restricting the supply of oil in the U.S. available for refining yields higher gas prices/profits and selling U.S. oil on the world market at prices driven higher by speculation does, too. Very clever.

Russia May Raise Oil Export Tax 1.9% in June to Three-Year High‎‎ - Russia plans to raise its export duty on most crude shipments by 1.9 percent on June 1 to the highest level since 2008 after oil prices climbed.  The standard duty will probably increase to $462.10 a metric ton ($63.04 a barrel) from $453.70 a ton in May, according to Bloomberg calculations based on Finance Ministry data. Oil taxes reached a high of $495.90 a ton in August and September 2008.  The discounted rate on some oil pumped via Russia’s East Siberian-Pacific Ocean pipeline to Asia and from the Caspian Sea may reach $217.50 a ton from $211.70 in May. OAO Rosneft’s Vankor project, TNK-BP’s Verkhnechonsk and OAO Surgutneftegas’s Talakan have had to pay full taxes since May 1, under an order signed last month by Prime Minister Vladimir Putin.

Obama Shifts to Speed Oil and Gas Drilling in U.S. - President , facing voter anger over high gasoline prices and complaints from Republicans and business leaders that his policies are restricting the development of domestic energy resources, announced Saturday that he was taking several steps to speed oil2 and gas drilling on public lands and waters. It was at least a partial concession to his critics at a time when consumers are paying near-record prices at the gas pump. The Republican-led House passed three bills in the last 10 days that would significantly expand and accelerate oil development in the United States, saying the administration was driving up gas prices and preventing job creation with antidrilling policies.  Administration officials said the president’s announcement, which included plans for expanded drilling in Alaska and the prospect of new exploration off the Atlantic coast, was intended in part to answer those arguments, signal flexibility and demonstrate his commitment to reducing oil imports by increasing domestic production.

Domestic production won't lower gas prices - How will the President respond to complaints from economists that his rhetoric is restricting the rational development of domestic energy policy? President Obama, facing voter anger over high gasoline prices and complaints from Republicans and business leaders that his policies are restricting the development of domestic energy resources, announced Saturday that he was taking several steps to speed oil and gas drilling on public lands and waters. It was at least a partial concession to his critics at a time when consumers are paying near-record prices at the gas pump. The Republican-led House passed three bills in the last 10 days that would significantly expand and accelerate oil development in the United States, saying the administration was driving up gas prices and preventing job creation with antidrilling policies. Administration officials said the president’s announcement, which included plans for expanded drilling in Alaska and the prospect of new exploration off the Atlantic coast, was intended in part to answer those arguments, signal flexibility and demonstrate his commitment to reducing oil imports by increasing domestic production.

House Approves a Bill to Spur Oil Exploration — Maneuvering on oil drilling, gas prices and industry profits intensified on Capitol Hill on Wednesday. House Republicans pushed through a bill to accelerate offshore oil and gas exploration as Democrats vowed action on measures to rescind billions of dollars in tax breaks for major oil and gas companies.The drilling bill was approved 263 to 163, with 28 Democrats joining unanimous Republicans, after the majority swatted down several Democratic amendments. The bill would force the Interior Department to act within 60 days on all applications for offshore drilling permits. The House then turned to a second Republican-sponsored bill that would open much of the Atlantic, Pacific and Arctic shorelines to new oil and gas exploration. A vote on that measure is expected Thursday. The Obama administration vigorously opposed both measures, but stopped short of threatening to veto them — in part because it is highly unlikely they will win enough votes in the Senate to overcome a filibuster.

Obama to open Alaska petroleum reserve to new drilling - President Obama1 will open Alaska's national petroleum reserve to new drilling, as part of a broad plan aimed at blunting criticism that he is not doing enough to address rising energy prices. The plan, unveiled in Obama's weekly radio address Saturday, also would fast-track environmental assessment of petroleum exploration in some portions of the Atlantic and extend the leases of oil companies whose work in the Gulf of Mexico and the Arctic Ocean was interrupted by the drilling moratorium after last year's BP oil spill2. The measures come as high gasoline prices and the resulting popular anger threaten the fragile economic recovery and, possibly, the president's reelection chances in 2012. Congressional Republicans3 and some Democrats have been clamoring for increased domestic production in response to the rising prices, which economists say vary with global demand.  Obama also took on rising anger over the record profits of energy companies and stood by his demand to end subsidies for oil and gas companies, a proposal discussed in the Senate this week, according to a transcript of the address released Friday by the White House4.

And It All Has Nothing to Do With the Price of Gas! - The Democrats want to take away tax breaks from the big oil companies, the Republicans want to let them drill more places. These may be good or bad policies, but neither will have any noticeable effect on the price of gas. Let's say that 20,000 times. Neither of these policies will have a noticeable impact on the price of gas. This is not a disputable point. Getting more tax revenue from the oil industry may be a good idea, especially in a context where Congress is obsessed with reducing the deficit, but it will not reduce the price of gas. Similarly, the opening of new areas off the coast to drilling cannot possible generate enough additional oil to have any noticeable effect on the world price of oil. When politicians say that they want to increase drilling to bring down gas prices they either do not know what they are talking about or they are not being truthful.

Battle For Arctic Oil Intensifies As U.S. Sends Clinton To Polar Summit - The US government has signalled a new determination to assert its role in Arctic oil and gas exploration by sending secretary of state Hillary Clinton and other ministers to a summit of the region's powers for the first time. Clinton and the US secretary of the interior, Ken Salazar, were both at the biennial meeting in the Greenland capital of Nuuk amid fears by environmentalists of a "carve up" of Arctic resources that could savage a pristine environment. The political manoeuvres came as Britain's Cairn Energy prepares to drill for oil off Greenland while Shell applies to explore for oil off Alaska and BP has done a deal to explore the Russian Arctic. They also came as cables were released by WikiLeaks showing American diplomats talking about the need to assert US influence over political and economic competitors such as China.

Does Saudia Arabia want Obama to lose? - Is the recent run-up in oil prices due in part to Saudis slashing production in March by over 800,000 barrels a day? - A Sunday WashPost op-ed, “Amid the Arab Spring, a U.S.-Saudi split,” by a senior fellow at the King Faisal Center for Research & Islamic Studies, calls it “a tectonic shift.”  They don’t like our Obama’s pro-democracy moves in the MidEast:  “With Iran working tirelessly to dominate the region, the Muslim Brotherhood rising in Egypt, there is simply too much at stake for the kingdom to rely on a security policy written in Washington.”  So “The special relationship may never be the same.” Presumably that mean the Saudis just aren’t into us and Obama anymore.  Of course, you’d be hard-pressed to find lots of evidence of that special relationship in, say, their influence on oil prices in the past several years. And if they are driving oil prices now to harm Obama, then one would have to conclude they really wanted to screw the Republicans and their old buddy George W. Bush when they let oil prices run up to almost $150 a barrel in mid-2008. But what’s germane here is a too-little-covered story from Bloomberg in mid-April in which the Saudis said they slashed production in March:

Libya's disputed oil: Better for the rebels - As the rebels advanced along the coastal road between Brega and Ras Lanuf, sites of two big refineries, the towns’ export infrastructure was knocked out and the country’s gas network was cut in half. In April loyalist troops drove hundreds of kilometres across the desert to attack oil installations above the huge Sarir and Mislah oilfields, about 500km (311 miles) south of Benghazi, and destroyed a booster station half way up the line that pumped oil to the port of Marsa el-Hariga, next to Tobruk.  That blocked off about 300,000 barrels of oil a day (b/d) the rebels hoped would give them a vital and steady source of income. To mend the station, they need spare parts from outside Libya, but foreign outfits are wary of coming back. Until those facilities are repaired, the rebels cannot export any oil from the area they control. Their only sale was on April 6th when a Swiss-based trading house, Vitol, loaded 1m barrels at Marsa el-Hariga. The deal earned them about $120m, paid into an account in Qatar, where the state petroleum company has agreed to market the east’s oil.

Official: Libyan oil won't flow until war is over   — Libya's biggest oil company will not resume production until the war ends, and that probably holds good for producers across the country, the firm's information director told The Associated Press on Sunday.  Abdeljalil Mohamed Mayuf said that the Arab Gulf Oil Co., responsible for more than a quarter of Libya's former production of 1.6 million barrels a day, stopped pumping for fear of further attacks by the forces of embattled leader Moammar Gadhafi.  "Everything depends on security. We can produce tomorrow but our fields would be attacked," Mayuf said in an interview. "We cannot put an army around each field. We are not a military company and the forces of Gadhafi are everywhere."

Iran’s President to Lead Next OPEC Meeting - The Iranian president, Mahmoud Ahmadinejad, is expected to lead next month’s OPEC conference in Vienna as he presses for higher oil prices to aid Iran’s struggling economy, while also seeking to protect and consolidate his power at home as he confronts a growing split with the nation’s supreme leader. As chairman of the meeting on June 8, Mr. Ahmadinejad is likely to inject a bit of drama into the usually predictable proceedings, in which members of the 12-nation bloc generally follow Saudi Arabia’s lead in promoting moderate oil prices. His position may complicate Saudi Arabia’s ability to direct policy at a time when industrialized nations are pressing for more production to restrain oil price increases.

Looking in the Rear View Mirror- It has often been said that we would only be able to see peak oil by looking in the rear view mirror. It's well past time for a head-check, so this post provides a quick look back at production over the last five years and at some of the predictions I and others have made. While the peak oil theory traces its roots back to M. King Hubbert in 1956, I think the contemporary peak oil movement can pin its origins on the Scientific American paper “The End of Cheap Oil” by Colin Campbell and Jean Laherrere in 1998. At some point those authors deserve a medal for the prescience of their work, and the rest of the world a slap in the face for ignoring it at a time when we could have usefully started the transition away from said cheap oil. It was not until 2004 though, when oil prices began to move firmly above their long-term trading range that awareness began to grow at all significantly. I started work in the oil industry in the UK in 2001 but first heard about ‘peak oil’ from an outside source and joined the growing numbers following peak oil websites in October 2004.

Peak Oil Market Forecast at ASPO Conference in Brussels - Erik Townsend on ASPO Brussels

Peak Oil: A Chance to Change the World - Despite its high-tech gadgetry, the oil industry is a relic of the days of the Beverly Hillbillies. The fossil-fueled sitcom of a world that we all find ourselves still trapped within may, on the surface, appear to be characterized by smiley-faced happy motoring, but at its core it is monstrous and grotesque. It is a zombie energy economy.Of course, we all use petroleum and natural gas in countless ways and on a daily basis. These are amazing substances—they are energy-dense and chemically useful, and they yield enormous economic benefit. America started out with vast reserves of oil and gas, and these fuels helped make our nation the richest and most powerful in the world. But oil and gas are finite resources, so it was clear from the start that, as we extracted and burned them, we were in effect stealing from the future. In the early days, the quantities of fuel available seemed so enormous that depletion posed only a theoretical limit to consumption. We knew we would eventually empty the tanks of Earth’s hydrocarbon reserves, but that was a problem for our great-great-grandkids to worry about.

More oil, less democracy – Evidence from worldwide crude oil discoveries -Can the recent protests across the Middle East and North Africa help spread democracy in the region? Many respond to this question by pointing out that a lot of these countries have substantial oil wealth and that natural resources are often a curse. For example, oil wealth is said to make bad authoritarian regimes more durable because it enables dictators to become stronger by funding patronage. But how do we reconcile the coexistence of some oil-rich non-democratic regimes, such as Saudi Arabia’s royal family, and some of the most democratic countries, like Norway, where the Norwegian Oil Fund is used to fuel the economy? It has been widely argued that natural-resource wealth is a curse that leads to corrupt politicians, closed and illiberal societies, and defunct economies. This column presents new evidence on the political impacts of oil wealth. It argues that the effects depend on geology and history, shedding light on the recent uprisings in the Middle East and North Africa.

Not Peak Oil — Peak People! - Despite a recent dip, oil prices have surged almost 50% in the last year.  The Obama administration routinely blames energy traders, BP and Exxon.  Meanwhile, pundits warn about “Peak Oil.”  According to this theory, the earth is running out of dead dinosaurs, and oil prices have no place to go but up. “We cannot drill our way out of the mess,” goes the refrain.  A few years ago, T. Boone Pickens turned in his oil drill-bit for a windmill and bought full-page ads proclaiming the end of fossildom. Since higher oil prices often coincide with climbing corn, cotton and cocoa prices, “Peak oil” pundits now extend their argument to all commodities.  They may not, as Thomas Friedman does, believe the world is flat – but they do seem to think the earth is hollow. In fact, the stumbling block to tamer pricing is not geologic – it is not even environmental — it is a lack of talent.  We are not suffering from peak oil – we’re suffering from “peak people.”

China ‘hit by power crunch’ amid drought, forced to ration electricity -- Chinese factories are facing curbs on electricity use as coal prices soar and a severe drought hits hydropower plants, state media have said, with possible major shortages ahead this summer. The situation has highlighted the difficulties faced by China, the world's largest energy consumer, as global fuel prices climb and the country battles soaring inflation. Businesses in coastal areas and some inland provinces have grappled with power cuts and full blackouts since March due to surging demand and a drop in hydroelectric output, the China Daily said.The shortage -- the worst since 2004 -- is likely to get worse in the summer when demand peaks, with coastal Jiangsu, an export powerhouse neighbouring Shanghai, the hardest hit, it said. The drought plaguing central China for months has left more than one million people without proper drinking water and crimped output of hydroelectric power, China's second-biggest energy source, previous media reports said. Since Sunday, water levels at nearly 1,400 reservoirs in Hubei province have fallen below the operational level, the China Daily said on Wednesday, citing government figures.

China's electricity shortages may worsen as summer looms - China's electricity shortage prompted manufacturers to use diesel-fueled generators as the world's fastest-growing major economy faces its worst power crunch in seven years.Many factories in the eastern province of Zhejiang, a manufacturing hub, have turned on diesel generators after local governments started rationing electricity supplies, state-controlled China Petrochemical Corp., the country's largest refiner, said in a statement on its website today.Rising prices of coal, used to generate about 80 per cent of China's power, and government caps on electricity prices have eroded profitability at power plants, causing generators to cut production or even shut. Some coal-fired power stations in provinces such as Gansu, Hubei, Hunan, Shanxi and Shaanxi have closed, resulting in the worst electricity deficit since 2004, the official Xinhua News Agency reported today. “We see exceptional diesel demand emerging as some manufacturers restart diesel-fueled power generators,”

China expands export quotas of rare earth metals - China has expanded export quotas for rare earth metals, further tightening its grip on the minerals used in a number of high-tech electronics.From Friday, iron alloys containing more than 10% of rare earths will fall under the export quota, the commerce ministry said in a statement. Rare earths are a collection of 17 chemical elements in the periodic table. World manufacturers rely heavily on China for these minerals. Rare earth metals are used in high tech goods such as mobile phone handsets, hybrid car batteries, wind turbines and weapons guidance systems . China had already cut exports by about 35% in the first half of 2011 driving up prices to record levels. It produces around 97% of rare earth metal supply.The Chinese government also wants to cut off what it calls illegal exports of the valuable metals. A directive issued on a government website said it will "resolutely crack down on illegal exports and smuggling of rare earths".

Eight Out Of China’s Top Nine Government Officials Are Scientists - Did you know that the president of China is a scientist? President Hu Jintao was trained as a hydraulic engineer. Likewise his Premier, Wen Jiabao, is a geomechanical engineer. In fact, 8 out of China’s top 9 government officials are scientists. What does the scientific prominence atop China’s ruling body say, if anything, about the role of science and technology in China’s ability to compete against the U.S. and the world in terms of innovation and economic might? Quick, name a scientist member of your government’s top offices. That’s a tough one if you’re an American, as out of the 535 members of the U.S. Congress, only 22 have science or engineering backgrounds, and of these only two might be considered experienced scientists or engineers. CEO of Lockheed Martin, Norm Augustine, writes in Forbes that: “…scientists and engineers are celebrities in most countries. They’re not seen as geeks or misfits, as they too often are in the U.S.”

China Builds Desert Ghost City as Critics Warn of Bubble (Video) Bloomberg's Adam Johnson reports on the construction boom in Kangbashi, a city in China's Inner Mongolia originally designed to accommodate around 1 million people that currently has about 30,000 residents. The desert city is part of the Chinese government's plan to add 36 million units of affordable or social housing in the next five years. Critics warn that "ghost cities" like Kangbashi are adding to the nation's real estate bubble.

Two Chinese Bond Auctions Fail - As Business China reports, "the central bank scheduled the auction of RMB 20 billion worth of one-year treasury bonds and RMB 10 billion in six-month bonds on the country’s interbank bond market for May 13. But banks, faced with tight liquidity, only purchased RMB 11.71 billion worth of one-year bonds and RMB 9.63 billion worth of six-month bonds, the report said." In other words, there was a nearly 50% miss on the 3 month auction. The key reason: "The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said." It appears investors don't agree with the central planners that 3% is an appropriate rate to compensate them for surging inflation. That, and also the fact that banks suddenly have no liquidity: "Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying.

Labour shortage could spell inflation and trade deficits for China - Informed researchers are asking what happens to China based on the recent demographic shift from rural labour surplus to rural labour deficit. The answer may be slower growth and higher inflation, according to a paper released last month by China's Center for Economic Research at Peking University. But other impacts may also be increased consumption and a deteriorating external balance. The paper by Huang Yiping and Jiang Tingsong is a very technical and dense work based on macroeconomic modelling. But the results are clear: If China's rural labour surplus evaporates (as seems to already have occurred), we are going to see savings drop and productivity collapse. The paper is based on the work of Sir Arthur Lewis, an economist from St. Lucia. What Lewis found is that industrial wages rise very quickly when the supply of excess rural labour is exhausted. This is called the Lewis Turning Point and is where China is right now.

Rebalancing through wage increases - Is China currently rebalancing?  The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging.  Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share.  Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011. Here is their summary:  China’s economic growth has remained resilient as the macro stance moved towards normalization. Both fiscal and monetary policy contributed to the normalization. Consumption growth slowed in early 2011. But overall domestic demand held up well, supported by still strong investment growth. Real estate investment has so far remained robust to measures to contain housing prices—a policy focus. Reducing inflation is the other policy priority, after inflation rose to 5.4%, largely on higher food prices.

Closer Look: 100 Trillion Yuan in Banking Assets - As of 2010, the total assets of China's banking industry have grown to 2.39 times the amount of national GDP, breaking records once again at nearly 100 trillion yuan. In comparison, according to OECD data, Japan's banking assets in 2008 stood at US$ 9.81 trillion, 2.27 times the amount of its GDP, which was US$ 4.32 trillion. Germany, another country representative of economies that rely on banks for financing, had 6.6 trillion euros for banking assets and 2.48 trillion euros for GDP in 2008. Its 2008 banking-assets versus GDP ratio was 2.66, almost the same as it had been in previous years. The surge in China's banking assets, which took off in 2009, was attributed to political directives rather than monetary policies. In 2009, huge amounts of loans were made at the order of government. The central bank did not cut interest rates; in fact, it conducted a net absorption of liquidity from the market through its open market operations. Meanwhile, the market capitalization of domestic stock exchanges more than doubled from a year earlier, an indication of too much capital flowing around.

Rules May Let Overseas Yuan Return: Central Bank China is drafting rules to allow overseas companies to invest in yuan on the Chinese mainland as part of efforts to boost the currency's global footing, a central bank official said yesterday in Shanghai. A small number of companies are participating in a limited trial to allow yuan-backed foreign direct investment in China and regulations on the trial are being drafted, Li Bo, director-general of Monetary Policy Department II of the People's Bank of China, told a discussion in the run-up to the Lujiazui Forum, which opened yesterday. Companies want to repatriate the yuan that has been accumulated in overseas markets back to the mainland as they seek more investment channels for their money. The demand is increasing as more yuan are circulating overseas amid growing popularity of using the yuan in the trade settlement program.  In mid-2009, China relaxed restrictions on the use of the yuan for cross-border trade under a trial, which was initially limited to Shanghai and four cities in Guangdong Province. The catalyst came in June 2010 when the program was expanded to 20 provinces and municipalities across the nation.

China’s central bank is new key player - Everyone is focused on the capital market and real resource implications of the great economic convergence between the east and west, but the markets tend to pay attention largely to the actions and intentions of the Federal Reserve and, periodically, the European Central Bank. Meanwhile, the People’s Bank of China (PBoC) is emerging as an increasingly important player. It matters more than is widely recognised. The Fed, in particular, has been cast (wrongly) as a villain for introducing a second round of quantitative easing, or QE2, allegedly causing inflation in assets and commodities. The end of QE2 next month has already been the subject of much concern that a sharp repricing of Treasury bonds will be the harbinger of fresh financial turbulence and weaker economic growth. It is also being associated with both the recent correction in commodity prices, and, for some analysts, the cyclical downturn to follow. These observations are largely but not entirely without substance, but they neglect to account for the fact that one important central bank has been tightening monetary conditions. The PBoC raised reserve requirement ratios (RRR) for banks last week for the fifth time this year, following 10 such moves in 2010. Interest rates on deposits and loans have been raised four times since October, and will probably be raised once or twice more..

China’s web spin doctors spread Beijing’s message - China, which employs an army of censors to police the Internet, has also deployed legions of "web commentators" to get the government's message out -- in a crafty but effective way. With nearly half a billion people surfing the net in China, more than half of them using microblogs, the Internet has quickly become a vital forum for debate in the world's most populous country -- and a major sounding board.That fact has obviously registered with the country's Communist leaders, who pay careful attention to the conversations that unfold online despite the heavy government restrictions on what can and cannot be discussed in cyberspace. Enter the "web commentators" who, either anonymously or using pseudonyms, spread politically correct arguments -- many of them for money.

On Chinese Trade - Here’s an interesting note from UBS’ Andy Lees this past Friday: Mexican steel maker Altos Hornos de Mexico (AHMSA) may return from a 12 year bankruptcy due to rising steel demand and prices. The . "There’s no question that this company has the ability to service debt. The question is when they’ll do it" according to Barclays. According to the attached economics note on Mexico "labour costs differentials have compressed sharply in recent years vis-à-vis key competitors: Mexican manufacturing wages in dollar terms were three-and-a half times those of China only 10 years ago; they are now only marginally higher."  So what’s happening in China that is creating this loss of competitiveness? Last April I postulated that it could be that China has reached an inflection point commonly known as the Lewis Turning Point:

Roach: GD II awaits if China bashing rhetoric turns into protectionism - Stephen Roach is pulling no punches now. After quipping "I think we should take the baseball bat out on Paul Krugmanregarding pro-protectionist statements Krugman made earlier this month, Roach has launched a blistering attack on the protectionist rhetoric in America. In an opinion piece released today in the Financial Times, Roach blamed America's problems on a deficit of savings and warned "scapegoating of China could take the world to the brink... [of a crisis which] would make the crisis of 2008-09 look like child’s play." Of course, Roach is entirely correct. The United States has been living beyond its means for a generation, running up enormous private sector debts and running large current account deficits as investment outstripped savings.  America's problem is America, not China. Singling out economists giving intellectual cover to the protectionism, Roach says: America’s fixation on the “China problem” is now boiling over. From Google to the renminbi, China is being blamed for all that ails the US. Unfortunately, this reflects a potentially lethal combination of political scapegoating and bad economics...

The "Game Over" Redux - Back in November, we posted a piece by Knight Research titled "The Game Is Over" in which the firm's strategist Mark Lapolla presented his thesis why he believes that "the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over." And while the article came out just as the barrage of $750 billion in daily POMOs courtesy of QE2 was starting and hence masked the true state of reality, now that QE2 is finishing, it is only appropriate to bring Mark back up front, as the imminent and very violent convergence of the rosy myth that is the stock market, and of the underlying miserable reality, is about to wake up all those who have been dozing under the Pied Printer of Eccleslin's soothing tune, and Lapolla's thesis is about to see its first validation. In a nutshell, and this won't come as a surprise to anyone, Lapolla believes that "the game is over because there is no collateral... When consumer debt is rooted 75%-plus in residential real estate and residential real estate is impaired, easy Federal Reserve  monetary policy simply cannot make it to Main Street. The transmission mechanism is broken. There is no conduit. "

The elephant in the "green room": China and the Doha Round - With the Doha Round on the brink of failure, the blame game is moving into high gear. This column argues that China’s export competitiveness in general and its exchange-rate policy in particular are the real problems. The authors assert that the core logic of WTO negotiations – the reciprocal exchange of tariff concessions – has been undermined by China's unrestricted ability to negate previous bargains by manipulating its exchange rate.

Is Vietnam the next China? - The obvious answer is no. Vietnam's population is less than 7% of China's. It is at best the next Guangdong. Nonetheless China veterans who visit its littoral communist neighbour often say it is like China a decade ago. That would make some sense politically. Vietnam introduced its economic reforms (known as doi moi, which is usually translated as "renovation", although the literal translation is apparently "change to something new") at the end of 1986, exactly eight years after China's policy of "reform and opening up" (gaige kaifang) was approved in December 1978. But judged by another reform milestone--WTO accession--Vietnam is closing the gap. It officially joined in January 2007 just over five years after China was admitted in December 2001. So much for the politics, what about the economics? Vietnam's income per head was $1,180 last year. China's roughly matched that amount eight years earlier in 2002. But $1,180 doesn't buy as much today as it did then. According to America's consumer-price index, $1,180 in 2010 was worth about the same as $932 in the year 2000, when China's income per head was $958. So by that reckoning China is ten years ahead.

Japan's government approves Tepco compensation scheme - Japan's government has approved a plan to help Tokyo Electric Power (Tepco) compensate victims of the crisis at its tsunami-crippled nuclear plant. Payouts are expected to run into the tens of billions of dollars over the Fukushima nuclear plant breakdown. The assistance could help Tepco avoid bankruptcy, but the government insisted it was not meant as a bail-out. Meanwhile, this summer the firm also plans to restart thermal power plants shut since the March earthquake. The move is to help it avoid possible power shortages during the peak season for demand.  Tepco plans to restart the 600 megawatt No 2 unit and 1,000 megawatt No 4 unit, both oil-fired, at its Hirono thermal plant, about 20 km (12 miles) south of the Fukushima plant.

Japan’s Nominal Economy Approaching 20 Year Low - Bloomberg details: Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade. Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop. The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending.  While real GDP was down 3.7% in the quarter (annualized basis), nominal GDP was down an even higher 5.2% due to continued deflation. The chart below shows that nominal GDP is now at an almost 20 year low, hitting the lowest point since June 1991.

Japanese Economy Collapses: Q1 GDP Drops At Double Consensus Rate, Epic Nominal Plunge Of -5.2% - Confirming once again that Wall Street economist (and sell side in general) is the most useless profession in the world (though gladly accepting a 7 figures compensation), is the latest data out of Japan which is yet another stunner to most, as nobody, nobody, could have possible predicted that the Japanese economy would literally fall off a cliff in Q1, plunging at a 3.7% rate (down from -3% previously), which is double the consensus print of -1.9%. DOUBLE. And in nominal terms the collapse was simply epic: -5.2%! And yes, this is officially a recession.  4 short days ago we said: "Increasingly we have come to believe that the real marginal economy over the next several quarters will be neither that of the contracting US, nor that of the rapidly tightening, yet still very much inflationary China, but the (arguably) third largest one: that of Japan." Today our prediction is more than confirmed. And instead of hiding deep in the whatever holes these morlocks cralwed out of, Bloomberg for some inexplicable reason continues to look to their blatantly horrendous opinion.

Deutsche Bank Downgrades The Economy After It Finally Realizes That The Japan Earthquake Will Not Boost Growth - When we discussed yesterday's miss in April Industrial Production, and noted the plunge in the vehicle assembly rate, we merely said what anyone with half a brain would have seen as glaringly obvious ever since the Japan earthquake in March. "The immediate impact: the drop in the industrial production already seen, but the bulk of it due to delayed aftereffects, will likely impact the May number, as the follow through from the Japanese supply chain halt starts ringing a loud alarm bell across Wall Street. Of course, this is another thing that all those calling for a 4% H2 GDP could have absolutely not foreseen (and in fact it was originally supposed to be positive for the economy, eh Deutsche Bank?). Expect to see drastic downward cuts to May Industrial Production and next, to Q2 GDP." Fast forward to today when we read in Reuters precisely what was predicted less than 24 hours ago: And irony of ironies: "Some financial institutions, including Deutsche Bank, are already trimming their second quarter GDP estimates." But, but, wasn't it Deutsche Bank's very own Joe LaVorgna who first said that the disaster would actually be beneficial for world GDP, and subsequently that the world is "overreacting." Guess not: "Before Tuesday's industrial production data, Deutsche Bank had been expecting economic growth to accelerate to a 3.7 percent annual pace during this quarter after a sluggish 1.8 percent rate in the January-March period.

In Japan, Capitalists Fall Out of Love With Free Markets - In Tokyo this week, corporate executives were outraged when a Japanese government official suggested that banks might have to take losses on loans to the company that produced a nuclear catastrophe.  Yukio Edano, the chief cabinet secretary, had the temerity to say “the public will not support” the injection of government money into Tokyo Electric Power, also known as Tepco, unless banks share in the pain. Tepco says it would like to pay compensation to victims, but needs government cash to do so.  The president of Japan’s largest bank, Mitsubishi UFJ Financial, was shocked by the very idea that a bank should lose money if it lent to a company that could not meet its obligations. To Yasuchika Hasgawa, the chief executive of the Takeda Pharmaceutical Company and chairman of the Japanese Association of Corporate Executives, the idea violated basic tenets of society. Mr. Hasgawa said he “cannot help but question how this country’s democracy can be made to work with free-market-based capitalism.”  His definition of “free-market-based capitalism” seems to assume that lenders should escape without pain, at least if they are lending to major institutions. It is an idea that has become remarkably pervasive.

Earthquake and Aftermath Push Japan Into a Recession - Japan1’s economy shrank at an annual rate of 3.7 percent in the first quarter, tipping the country into a recession, as the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back on spending.  The drop-off, reported Thursday, was worse than economists had expected. Among 23 economists surveyed by Bloomberg, the average projection was for a drop of 1.9 percent. The figures also indicated Japan’s second consecutive quarter of economic contraction, leading the country, by most assessments, into its second recession in less than three years.  Economists project that the Japanese economy will shrink again in the current quarter, which ends in June, as production continues to falter and weigh on industrial output and exports.

Why Japan's earthquake caused a recession - I've written at length about Japan's failed economic model, and the inability of policymakers to change it, but here's a quick summary: Japan's invest-and-export-at-all-costs economic system, which served it so well during its catch-up, rapid development decades, became out of date with the realities of high costs and competition from the rest of Asia, but the devotion to the system among the nation's powerful bureaucrats hasn't wavered. As a result, the domestic economy is stunted, suffering from a lack of investment, poor services, low productivity and high costs. But policymakers haven't been willing to open the system up to more competition to foster entrepreneurship or encourage consumer spending. The result is an economy that effectively hasn't grown ever since the unwinding of a stock-and-property price bubble began in the early 1990s. GDP has increased by more than 2% only six times since 1992.

Japan's economy: On a mission - THERE is something awe-inspiring about the Japanese on a mission. During Golden Week holidays this month, thousands of volunteers helped to sift through the muddy wreckage left by the March tsunami. Stricken roads, bullet trains and factories have returned to normal with astonishing speed. In people’s ardour to rebuild, once-taboo ideas are emerging on how to reform and deregulate not just the damaged areas but the country at large (see article). The government urgently needs to develop a sense of mission, too. The combined power of a quake, tsunami and full-scale nuclear accident has jolted whatever sense of complacency the Japanese had about the resilience of their country. Meanwhile, the smashed-up fishing fleets and sea-swamped rice paddies in the north-east have prompted discussion on bringing private investment into these heavily protected areas which no longer provide a future for the young. Many are championing the idea of special economic zones in the north-east, which would free the area from the cat’s cradle of rules imposed from Tokyo that hamper free enterprise. All of these are good ideas. But they will wither unless the central government throws its weight squarely behind them.

Japan's Recession Heightens Pressure for Faster Stimulus-- Japanese consumers are making deeper cutbacks after the March 11 earthquake than anticipated, heightening the urgency for policy makers to unveil measures to end the nation's third recession in a decade. Household spending had the largest back-to-back quarterly drop since the global financial crisis, the Cabinet Office said yesterday. The figures contrast with comments by Japan's central bank, which holds a policy meeting today, that the economy's main challenge is one of supply chain disruptions caused by the earthquake, tsunami and nuclear crisis. Prime Minister Naoto Kan, whose public approval rating is less than 30 percent, has held off on outlining the scale of further reconstruction spending as officials gauge the impact of an initial 4 trillion yen ($49 billion) package. BOJ Governor Masaaki Shirakawa has taken a similar stance since the central bank expanded its asset-purchase fund on March 14.

Japan govt mulling sales tax hike to 10 pct by 2015-Yomiuri (Reuters) - The Japanese government is considering raising the sales tax to 10 percent from the current 5 percent by 2015 to fund social security costs, the Yomiuri newspaper reported on Friday.  The government wants to include this idea in a plan to reform social security and taxes, which it aims to compile at the end of June, the Yomiuri reported without citing sources.  Japan is saddled with public debt twice the size of its $5 trillion economy, and Prime Minister Naoto Kan has put social security and tax reform as one of his key policy agenda.

Economic Effects of Japanese Quake Ripple - Much as radiation from the Japanese atomic power crisis was detected across the globe (mostly at safe-for-human levels), economic effects from the natural and nuclear disasters are starting to be detected, most acutely in Japan, where the economy shrank for the second quarter in a row.  Outside Japan, the impact is less severe, but starting to be noticed in the economic data. No countries outside Japan are forecast to suffer major growth impacts from the disasters, but the effects are being felt nonetheless. The earthquake economic impact comes at a time when the global economy is trying to sustain momentum in the face of handful of problems, including renewed European debt woes, $100-a-barrel oil and a possible slowdown in China.

Australian Employment Unexpectedly Falls Most Since 2009, Currency Weakens - Australian employers unexpectedly cut workers in April by the most since 2009 as hiring weakens in states less affected by the nation’s mining boom, sending the local currency tumbling and stocks lower.  The number of full-time jobs declined by 49,100 in April, the most since February 2009, and part-time employment rose by 26,900, today’s report showed. Australia’s participation rate, which measures the labor force as a percentage of the population over 15 years old, fell to 65.6 percent in April from 65.8 percent a month earlier, it showed. Last month’s decline in jobs brings to 26,300 the number of net new positions created in the first four months of the year, the weakest January-through-April period of employment growth number since 1999.

The World Economic Order, Circa 2025 - With China overtaking Japan as the world’s second-largest economy last year, there can be no doubt that emerging markets are becoming increasingly powerful. A new report from the World Bank predicts that by 2025, China, along with five other emerging economies — Brazil, India, Indonesia, South Korea and Russia — will account for more than half of all global growth, up from one-third now.The report, “Global Development Horizons 2011 — Multipolarity: The New Global Economy,” also anticipates that the dollar will be joined by the euro and the renminbi as dominant international currencies. The Chinese government is already easing currency controls and has taken other steps to help the renminbi become a fully convertible reserve currency, which would make it easier for foreign companies to finance projects in China.

Is America mis-thinking its 21st century trade strategy? Part 1 -- Two decades of spectacular growth and industrialisation in emerging economies has transformed the world economy, presenting US trade policy with new challenges.  When thinking about American market access – i.e. the tariffs that hinder US exports – the place to start is the markets that matter most to US exporters. About 40% of US exports go to rich nations. The rest is spread widely (see Figure 1). China, Taipei, Brazil, and India together absorb 19% with China accounting for the lion’s share (12% of US exports). This is the first of two columns that consider one aspect of the new challenges – the ways in which the Obama Administration can secure better access for American exporters.

Is America mis-thinking its 21st century trade strategy? Part 2 - An ambitious and balanced Doha Round package is within reach (HLTE 2010), but only if President Obama decides Doha is in the US’ strategic interest. Unless US trade negotiators get instructions to start compromising, Doha will die within weeks (of course, China, Brazil and India would also have to match any new American flexibility).1 Most observers in Geneva expect the Doha round to fail. If that happens, this column argues that the prospects for US market-access policy will be grim. New multilateral tariff cutting is unlikely before 2020 and special interest groups in the US will hold back free trade agreements, leaving the country to fall behind in the bilateral market-access game.

The “Other” Cities - For those who have been reading for years about jobs being offshored from the US to China and India, it may come as a surprise that job creation is a burning issue there as well. At the recently concluded UC Berkeley- Indian cities conference in New Delhi, Rakesh Mohan, one of India’s leading economists and policymakers, asked two questions. First, “where are the future jobs going to come from in urban India?” and second, “has India missed the bus, in terms of tapping manufacturing for employment growth?”  In other words, will the much heralded demographic dividend for countries such as India, which will have close to 500 million young (15-34 years) people by 2030, and an increase in the overall labor force of over 270 million in the next two decades, turn out to be a demographic disaster, severely undermining the urbanization process and its job creation potential?

Inflation in India Exceeds Estimates, Adding to Pressure on Interest Rates - India’s inflation was faster than estimated in April, adding pressure on the central bank to extend interest-rate increases as the biggest rise in gasoline tariffs in three years threatens to intensify price gains. The wholesale-price index rose 8.66 percent in April from a year earlier, the commerce ministry said in a statement in New Delhi today. The median of 19 estimates in a Bloomberg News survey was for an 8.5 percent climb. Prices advanced a revised 9.1 percent in March, according to data compiled by Bloomberg. The Reserve Bank of India pledged to maintain the fight against inflation after boosting borrowing costs this month for the ninth time since mid-March 2010, the fastest pace of rate rises among major Asian economies. The nation increased the cost of gasoline as much as 8.5 percent yesterday, triggering protests by the main opposition party.  “Inflation will further accelerate after hikes in oil prices, meaning the central bank’s focus will have to be on tightening to control inflation,”

John Rubino: Get Ready For Accelerating Devaluation of All Fiat Currencies - What is happening now is we are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like 12% right now. China is doing something new every couple of days to scale back bank lending, spending domestically, and everything. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Clearly that is unsustainable. At some point these countries are going to say “No, we want our currencies to depreciate, too. We want to be able to continue to export to you.” So what we will end up with is sort of like what happened in the depression. Everybody was trying to cut the value of their currencies at the same time. What that leads to obviously is global inflation instead of just localized inflation where a few countries are debasing their currencies. You have got everybody doing it at once. That is because the US, with the world’s reserve currency, basically controls this process. We have chosen to decrease the value of the dollar dramatically over the next few years. That is going to force the rest of the world to do the same thing or endure a rocketing economy or a rocketing currency value and recession. No elected politician can put up with that.

Trouble at the IMF  - Mr Strauss-Kahn had been planning to meet with Angela Merkel to discuss the crisis in the euro zone. Those duties will now fall to his deputy. But a vacuum at the top of the IMF is inevitable: Whatever the fall-out on French politics, Mr Strauss-Kahn's arrest has left the IMF reeling. One insider called it a “disaster”. Although he had been expected to leave within a couple of months, Mr Strauss-Kahn, unless quickly exonerated, will now presumably be forced out far sooner.  That leaves the fund without a political heavyweight at the top in the midst of important negotiations with European policymakers over Greece’s debt crisis... If Mr Strauss-Kahn goes, the fund’s first deputy managing director, John Lipsky, would take charge. Not only does Mr Lipsky lack Mr Strauss-Kahn’s (erstwhile) political stature, he is himself a bit of lame-duck: only three days ago, on May 12th, Mr Lipsky announced that he planned to leave in August. In a time of crisis, the absence of known, respected leadership at the top of the IMF is not a pleasant thought. This is rough news for Greece, whatever the outcome of the case.

What Strauss-Kahn's arrest means for the IMF - The biggest short-term impact of Strauss-Kahn's arrest will likely be felt in the euro zone. European finance ministers are meeting today to discuss what to do about Greece's debt woes. Strauss-Kahn has been a key player in the often fractious attempts by Europe's leaders to resolve the zone's debt crisis, and his sudden absence will likely add more confusion to the debates over how to handleGreece. However, in my opinion, any uncertainty caused by Strauss-Kahn's arrest will be minor in comparison with the dangerous divisions between the euro zone members themselves. There is absolutely no consensus among European governments over what is best forGreece, with some preferring to extend the existing bailout to the country, and others favoring some sort of delay to Greek bond maturities (a restructuring by another name). Perhaps Strauss-Kahn could have played an “honest broker” role between the factions, but the bigger issue facing the euro zone is whether or not its members can get on the same page on how to handle its continuing debt woes. However, from where I sit, the arrest of the IMF's chief raises more fundamental questions about that institution's role in the global economy.

Arrest of Dominique Strauss-Kahn Throws IMF Leadership Into Disarray -  Guilty or not, former and current IMF officials say they expect Mr. Strauss-Kahn, also a presidential hopeful in France, to step aside because of the gravity of the charges. He can't continue his work on the European debt crisis while in custody in New York. Because of the arrest, Mr. Strauss-Kahn was unable to hold an important meeting Sunday on Europe's debt problems with German Chancellor Angela Merkel. He was expected to miss a second meeting on the issue with European finance ministers set for Monday and Tuesday. The incident couldn't have come at a more inopportune time. Mr. Strauss-Kahn has played a key role in coordinating the joint response to the emergency bailouts of Greece, Ireland and now Portugal from their sovereign-debt crises. Greece is in renewed crisis, and many economists expect a restructured rescue package for the country. The IMF committed just over a quarter of the €110 billion ($155 billion) in aid to Greece, and has said it will put up one-third of a proposed €78 billion rescue package for Portugal.

Greece Aid May Be Clouded by Strauss-Kahn Arrest - Greece today will plead for a boost in its 110 billion-euro ($155 billion) bailout from European governments and the International Monetary Fund in talks clouded by the arrest of IMF Managing Director Dominique Strauss-Kahn.  Europe’s donor countries, led by Germany, are demanding deeper budget cuts in exchange for granting Greece extra aid or giving it more time to pay back official loans, and are weighing whether to make bondholders share the costs.  “No help without something in return,” Volker Kauder, the parliamentary leader of German Chancellor Angela Merkel’s Christian Democratic bloc, said on ZDF television today. He wouldn’t rule out a “soft restructuring” involving an extension of Greek bond maturities.   Greek bonds fell after Germany put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high-deficit countries on the continent’s periphery. Adding to the challenge is the absence of Strauss-Kahn, a former French finance minister, in the talks starting at 3 p.m. in Brussels.

A game changer for the eurozone - Dominique Strauss-Kahn was scheduled to meet with Angela Merkel on Sunday in Berlin to discuss Greece and was expected to talk with the euro finance ministers tonight in Brussels the same topic. The IMF rushed to confirm that one of DSK’s deputies was coming to Brussels today. Wolfgang Schäuble last night reassured the TV news magazine “Bericht aus Berlin” that the IMF remained functional and that the euro rescue programs remained unaffected by the arrest. Kathimerini writes that Greece will have to agree a new deal with the EU and the IMF or loan payments will stop next month. The fifth tranche of its 110-billion-euro loan in June cannot be paid out as the conditions in the Memorandum require Greece to be ready to go back to the markets in 2012. This is not going to happen, so there has to be a new Memorandum by June, likely to impose tougher conditions for the Greek government.  The negotiations are somehow put in jeopardy with the arrest of Dominique Strauss Kahn, who was at the forefront of these negotiations. Paul Taylor on Reuters writes that the IMF may now be less inclined to keep on bankrolling Greece without significant policy changes. It may also no longer support the view of the European Commission and the ECB that Athens does not need a debt restructuring. 

The eurozone after Strauss-Kahn - The sight of Dominique Strauss-Kahn, managing director of the International Monetary Fund and prospective candidate for the French presidency, doing the “perp walk” was stupefying. If the charges are true, this capable man is a lunatic. But, unless the case collapses, the event will cast a long shadow Mr Strauss-Kahn turned out to be the right man in the right job at the right time. Initially, I had my doubts about the appointment of yet another Frenchman and a politician, at that, to run such a central international institution. I was wrong. Mr Strauss-Kahn proved to be a bold decision-maker, an effective politician and a competent economist. This combination is very rare. None of the candidates under discussion is likely to do the job as well as he did during the worst of the global and then eurozone financial crises.  Of course, it was widely expected that Mr Strauss-Kahn would shortly depart from the IMF, to run for the French presidency. But if he had won, he might have transformed the eurozone’s ability to manage its current internal crisis. Certainly, he would have brought to this task abilities the current French president, Nicolas Sarkozy, lacks: above all, intellectual weight and so credibility with policymakers in Germany, Europe’s premier power

Why DSK’s arrest is bad for the IMF, France, and Greece - With Dominique Strauss-Kahn being denied bail this morning, it’s clear he can no longer run the IMF, let alone run for president of France. No matter how the trial turns out — even if he’s fully exonerated of all charges — this arrest has effectively ended DSK’s career.So when Mohamed El-Erian writes about the effect of the arrest if DSK’s career is over, we can take him as describing the state of the world as it is today: this news is bad for the IMF, bad for France, and bad for any Greek hopes of battling through without a debt restructuring.The IMF first:This would erode the confidence of an institution that, under the personal authority of DSK, has taken significant financial and reputational risk in making loans to countries whose medium-term debt viability is far from robust. It would undermine its effectiveness in responding to new challenges. And it would pull the rug from under initiatives aimed at enabling it to play a more effective role in global policy coordination...

Marshall Auerback: IMF’s Predatory Policies Likely to Continue with New Leadership -- Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn. The reality is far more brutal for all of Europe. The IMF is bank-centric. Its standard requirement is that any recipient of its “aid” maintain a primary budget surplus, which amounts to a prohibition against fighting recession by increasing domestic demand via fiscal stimulus. The rationalization behind all IMF programs is that countries that follow “sound” financial policies — balanced budgets, tight money, deregulation, and privatization of capital assets — will be rewarded with a stamp of creditworthiness. They should then benefit by being able to borrow from private capital markets on favorable terms, relative to their own histories and the record of countries which are deemed less responsible. In principle this should mean they can run deficits on their trade accounts, loan-finance the purchase of capital goods imports to support development, and maintain high levels of economic growth and job creation. They should be able to do all of this and still attract inflows of direct foreign capital investment.

Strauss-Kahn Resignation Kicks Off Succession Fight at IMF - Dominique Strauss-Kahn’s resignation as the 10th leader of the International Monetary Fund kicks off a contest on his successor, as European officials seek to retain the job amid a lack of unity among emerging-market nations. European officials, who have picked the IMF heads for 65 years under a deal that gives the U.S. the lock on running the World Bank, moved to retain their privilege. Sweden’s finance minister endorsed his French counterpart Christine Lagarde, while Dutch central bank Governor Nout Wellink suggested outgoing European Central Bank President Jean-Claude Trichet. South Africa and Russia said yesterday the next head of the IFM should come from an emerging economy. Trevor Manuel, head of South Africa’s National Planning Commission, is “highly respected in the world,” Finance Minister Pravin Gordhan said in an interview in Pretoria. Russian central bank Deputy Chairman Sergei Shvetsov said a developing country should be given the chance to run the IMF to better reflect the role of those economies in global trade. South Korea’s central bank governor made similar remarks before the announcement late yesterday that Strauss-Kahn would resign.

Emerging Markets May Name Strauss-Kahn’s Heir: Simon Johnson - Even before the shocking events of the past few days, the international policy community had been contemplating a successor to Dominique Strauss-Kahn at the International Monetary Fund. Strauss-Kahn, the IMF managing director, was expected to begin campaigning soon for the presidency of France. Now, whatever happens in the New York legal system as he defends himself against attempted rape allegations, it seems likely that the IMF will be searching for a new head sooner rather than later.  The idea that the job has become an attractive sinecure with nice fringe benefits should have been laid to rest by German Chancellor Angela Merkel’s preemptive strike earlier this week, when she said there are currently “good reasons” for the European Union to have a candidate. That produced similar expressions from other leading European politicians, although not all of them are willing to say that Strauss-Kahn is finished. Yesterday, the Chinese Foreign Ministry pronounced that the selection process must emphasize “fairness, transparency and merit.” Translation: China is pushing back against the idea that Europe necessarily gets to name Strauss- Kahn’s heir.

Fight intensifies to replace Dominique Strauss-Kahn as head of IMF - Dominque Strauss-Kahn's resignation as the IMF's managing director in the early hours of Thursday morning triggered the official start of the contest to replace the Frenchman, who faces charges of attempted rape in New York. Leaders on both sides of the Atlantic called for a speedy succession process at the fund, which under Mr Strauss-Kahn has played a critical role in handling the debt crisis that still threatens to unravel the euro. However, the prospect of a quick agreement on the IMF's 11th leader was thrown into doubt by the growing battle between Europeans who are pushing for their own candidate and emerging economies who want to break with tradition.  "There is a lot riding on this,"  "The crisis has been good for the IMF and it needs good leadership."  With no official succession procedure, European leaders spent Thursday attempting to generate more momentum for a European candidate.

In the IMF succession battle, a stench of colonialism - In its daily work, the IMF demands that the governments that seek its financial assistance adopt market principles of efficiency, transparency and meritocracy in exchange for its help. Yet that same institution selects its leader through a process completely at odds with those values. According to the agreement between Western Europe and the United States, the IMF’s top job always goes to a European, while the presidency of the World Bank is reserved for an American. This has been the case since these institutions were created in the mid-1940s, and while the deal might have reflected the world’s realpolitik at the time, it is now obsolete, unacceptable and counterproductive to the cause of global economic stability.This legacy — a product of an antiquated, post-World War II bargain struck among the world’s richest countries — means that only a European can become the new managing director of the IMF, an institution owned by 187 member nations. This arrangement, which effectively discriminates against 93 percent of humanity, has enjoyed the support of the United States, the IMF’s largest shareholder.

Lagarde: it’s a lock - Christine Lagarde is going to be the next managing director of the IMF. European consensus is clearly coalescing around her: she has been endorsed by Germany, France, Italy, and the UK, not to mention Jean-Claude Juncker, who chairs the euro zone finance ministers. And the only other front-runner for the job, Kemal Dervis, has now ruled himself out after the NYT published an article about an extramarital affair he had many years ago. (The woman, I understand, still works at the IMF.) The only thing standing in Lagarde’s way at this point is a French public prosecutor and the ongoing investigation into whether she abused her authority by pushing for an arbitration settlement in a case involving Bernard Tapie. The past three IMF managing directors — Horst Köhler, Rodrigo de Rato, and Dominique Strauss-Kahn — have all failed to finish their five-year term in the job, leaving unexpectedly for various reasons. It’s pretty important that the next person in the role not suffer the same fate.

Why Lagarde needs a full term in office - Would Mohamed El-Erian have moved from Harvard to Pimco in 2007 if he was only offered the job for less than 18 months, at which point he would have to reapply for his job under a different system? Because that’s the offer that El-Erian thinks the IMF should make to Christine Lagarde: Instead of a new five-year term, Lagarde should be appointed just to complete Strauss-Kahn’s term that runs until 2012. During this period, Lagarde would be charged to lead the IMF’s Executive Board to put in place a selection process that is open to all nationalities, transparent and merit-based — or the minimum standard of governance for an institution that is owned by 187 member countries and charged to serve them under the principle of “uniformity of treatment.”

Greece Had 13 Currency Swaps With Goldman, Eurostat Says - Greece had 13 off-market derivative contracts with Goldman Sachs Group Inc. (GS), most of which swapped Japanese yen into euros in a 2001 transaction aimed at concealing the true size of the nation’s debt, according to the European Union’s statistics office.The amount borrowed through the swaps was due to be repaid with an interest-rate swap that would have spread payments through 2019, Eurostat said in a report on its website today. In 2005, the maturity was extended to 2037, the report said. Restructuring the swaps spread the cost over a longer period, leading to an increase in liabilities and debt, Eurostat said.Repeated revisions of Greece’s figures, beginning in 2009, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis. The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by 5.3 billion euros ($7.5 billion), Eurostat said in November.Today’s report provides details of Eurostat’s analysis of data obtained by its inspectors in Greece last year. Eurostat said most issues surrounding the swaps were resolved in September, when Greece agreed to correct its debt figures

Kicking the Can to the End of the Road - This week we turn from the crisis brewing in the US to the one that is coming to a slow boil in Europe. We visit our old friends Greece and Ireland and ponder how this will end. It is all well and good to kick the can down the road, but what happens when you come to the end of the road? The European answer seems to be to haul in the heavy equipment and extend the road. I am asked all the time what my biggest worry is, and I quickly answer, the European Sovereign Debt Crisis. Of course, then we have to think about the Japanese Sovereign Debt Crisis, followed by the one in the US; but today we will focus on Europe. The biggest bubble in history is the bubble of government debt. It is a bubble in a world full of pins. It will take a great deal of luck and crisis management to keep it afloat, without wreaking havoc on the financial system and markets of the world.

Jeffrey Frankel: The ECB’s three mistakes in the Greek crisis and how to get sovereign debt right in the future - - Yves here. While Frankel’s take on the ECB’s errors has some merit, his recommendation, of imposing much harder limits on eurozone members who run deficits in excess of permitted levels, is more debatable. Any country running a large intra-eurozone trade deficit is going to show rising debt levels. If the increase in debt funds investments that increase economic productivity, that might work out fine in the long run, but that seldom proves to be the case. We’ve seen that big debtors either rack up rising government debt levels directly (Greece) or have rising private sector debts that eventually result in outsized financial sectors that produce financial crises that lead to collapses in tax revenues that then lead to rising government debt levels (or directly via bailouts, see Ireland). Note in most countries the explosion in debt to GDP is primarily the result of the impact of the global financial crisis on tax revenues). So fiscal deficits cannot be addressed independent of trade and cross border capital flows. Cross posted from VoxEU It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place.

How Europe Should Treat Sovereign Debt in the Future - My preceding blogpost identified three mistakes made by leaders of the European Economic and Monetary Union in dealing with Greece.   But what is done is done.  The mistakes now lie in the past.  How can Europe’s fiscal regime be reformed to avoid future repeats of this crisis?   The reforms that are now underway are not credible.  (”We are going to make the fiscal rules more explicit and make sure to monitor them more tightly next time.”)    Similarly, most proposals for how to put teeth into the rules are not be credible — penalties such as monetary fines or loss of voting privileges.  But it is not too late to apply the lesson of mistake number two: to adjust the ECB policy of accepting the debt of all member states as collateral.  This is the policy that short-circuited warning signals that the private markets would otherwise have sent via interest rates during 2002-2007. 

Policy Mistakes and the Euro-Zone Debt Crisis - In a pair of recent posts, Jeff Frankel brings some clear thinking to the euro-zone debt crisis. First he identifies three big mistakes made by European leadership that directly contributed to the crisis.

  1. "Mistake number 1 was the decision in 2000 to admit Greece in the first place."
  2. "The second mistake was to allow the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007
  3. "The third mistake was the failure to send Greece to the IMF early in the crisis."

I completely agree with this list. I would possibly add a fourth big mistake, however: underestimating how the debt crisis has the potential to rock the foundations of the EU's political institutions, and as a result, allowing the default policy response to political indecision to be "close-our-eyes-and-hope-for-the-best".In a new post today Frankel offers a sensible suggestion for the ECB going forward:[I]t is not too late to apply the lesson of mistake number two: to adjust the ECB policy of accepting the debt of all member states as collateral. This is the policy that short-circuited warning signals that the private markets would otherwise have sent via interest rates during 2002-2007.

David Apgar: Trash Trichet’s Stockholdings to Save the Euro Zone - The best hope for the euro zone may be to find a few bank stocks rattling around in European Central Bank (ECB) Governor Trichet’s brokerage account. There’s no chance that the long-time French civil servant would compromise his policy views to benefit himself, but it’s the kind of made-for-muddled-media factoid that, if found, could put a quick end to the farce he and the ECB perpetuate in pretending Greece is not bankrupt. Europeans tolerate this farce and the crisis it prolongs only because it will suppress the euro and block export-led recovery in the US. And if there’s one thing more attractive to the Euro-policy crowd than ending a crisis of the euro, it’s blocking US recovery. A leader in this week’s Economist lays out the dimensions of the problem. The editors write: Both the Greek government and its European and IMF rescuers admit that the country has no hope of tapping private capital markets in 2012, a central assumption of the original plan.

Labor Market Policy in the Great Recession: This paper reviews labor-market performance of Denmark and Germany during the Great Recession. From the mid-1990s through the onset of the Great Recession, Denmark had what were arguably the most successful labor-market outcomes in the OECD, but the country has suffered in recent years. Germany, on the other hand, struggled with high unemployment, slow job growth, and rising wage inequality through much of the period between unification and the onset of the Great Recession, but has outperformed the rest of the OECD since. Labor-market institutions may explain the different experiences of the two economies. Danish institutions – built around numerically flexible employment levels and strong income security for workers – appear to perform well when the economy is at or near full employment. In good times, the country’s expensive active labor market policies work to connect unemployed workers to available jobs. In a severe downturn, however, where the overwhelming cause of unemployment is a lack of aggregate demand, institutions that encourage adjustment through employment are a liability and policies that seek to “activate” workers are not particularly effective. German labor-market institutions, which emphasize job security by keeping workers connected to their current employers, may have drawbacks when the economy is operating near full employment because they may discourage the efficient reallocation of workers from firms and industries where demand is falling to firms and industries where demand is on the rise. These same institutions, however, appear to have been well-suited for coping with the Great Recession because they encouraged firms to cut hours rather than workers.

German Newspaper Tells Greek Prime Minister the "Tortured Body Will Surrender" because Greece is Insolvent - The editor-in-chief of Handelsblatt, a leading German business newspaper, published a Letter to Georgios Papandreou, Prime Minister of Greece, called "There is a life after death" Here are a few excerpts... Dear Mr. Papandreou, You are attempting the impossible. .... The bitter truth to which you and all parties who wanted to help Greece have to admit is that the help doesn’t help. Your country is getting deeper and deeper into the mess.The truth that Greece has to cut back and save has turned into an untruth. The right thing has turned into the wrong thing. You already cut pensions, lowered the salaries of civil servants by 30 per cent and raised the prices of gas by almost 50 per cent. You can’t restore the health of your country by saving. And the European Union can’t restore your country’s health by again and again injecting new loans

The Euro area is 'miserable' - Rebecca Wilder - For all of our economic problems here in the US, a simple measure of 'misery' illustrates that US households are less miserable in March 2011 than those in the Euro area. The chart below illustrates the simple 'misery index', which is the unemployment rate plus inflation. The blue line is a 45-degree line; those countries below it have seen their misery index fall on a y/y basis. Not one Euro area economy misery index fell since this time last year - French and German misery indices are unchanged despite improving employment. In contrast, the US misery index improved over the year with labor market conditions. The problem is, that European fiscal austerity is clinching aggregate demand, raising inflation (via higher taxes) and producing unemployment. Consumers and firms alike are feeling this in Europe.

German Bonds Rise as European Production Slips, Limiting Rate Speculation - German bunds rose, pushing the 10- year yield toward a two-month low, as a report showed European industrial production unexpectedly fell in March, strengthening the case for interest rates to be kept on hold. Production in the euro area slipped 0.2 percent in March from February, when it grew 0.6 percent, the European Union’s statistics office in Luxembourg said today. The median prediction of 25 economists surveyed by Bloomberg was for a 0.3 percent gain. Greek unions kept ferries docked at ports, grounded flights and shut hospitals and schools yesterday in protests against Prime Minister George Papandreou’s plans to sell state assets and usher in more spending cuts. The country’s unemployment rate rose to 15.9 percent in February, from 15.1 percent the previous month, Athens-based Hellenic Statistical Authority said.

A Jobs Recovery Is Happening Faster for Some Countries Than Others - THE financial crisis and the severe recession that followed destroyed jobs in every industrialized country. While many countries have started to recover, in only one major one, Germany, has unemployment declined to a level lower than it was in September 2008. When the downturn began, Germany had about 25 percent of the population in the euro zone and a similar share of the unemployed workers. Its population share is about the same now, but it has only 17 percent of the unemployed. If the euro zone were a fiscal union rather than just a monetary one, there would have been automatic subsidies through unemployment benefits and other programs for the weaker areas. If there were easy labor mobility in the zone, more workers would have moved to Germany. If there were separate currencies, the German mark would have appreciated against the other European currencies.

EU to unveil Greece and Portugal bail-outs - Brussels is expected this week to unveil the details of its €78bn (£69bn) rescue for Portugal as it attempts to hammer out a second emergency package for Greece . Final terms of the Portuguese deal will be unveiled after the meeting of eurogroup finance ministers on Monday. Portugal is expected to be charged an average loan rate of about 5.5pc – cheaper than Ireland's 5.8pc but more expensive than the Greek level of just over 4pc.  Britain will be on the hook for about €4.2bn but George Osborne is expected to declare victory in extricating the country from any future rescues for the single currency bloc. He will join the eurogroup finance ministers in Brussels on Monday as they put the finishing touches to the future European Stability Mechanism, which comes into effect in 2013. The UK will not be part of the scheme. The announcement will be seen as a victory for the Chancellor and Prime Minister, who have fought to remove Britain from the eurozone's woes.

Greece Default Risk Rising With IMF Turmoil, El-Erian Says -- The probability of Greece defaulting or restructuring its debt has increased since the arrest of International Monetary Fund head Dominique Strauss-Kahn, Pacific Investment Management Co.'s Mohamed El-Erian said. "Don't underestimate how important Dominique Strauss-Kahn was in coordinating action" among European nations, El-Erian, the chief executive officer of Pimco, said. "It's the worst possible time to lose your general. You need the IMF to coordinate this global healing." European finance ministers for the first time have raised the possibility of talks with bondholders over extending Greece's debt-repayment schedule, saying that last year's 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Europe would consider "reprofiling" Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday.

In Greece, austerity kindles deep discontent— Already struggling to avoid a debt default that could seal Greece’s fate as a financial pariah, this Mediterranean nation is also scrambling to contain another threat — a breakdown in the rule of law. Thousands have joined an “I Won’t Pay” movement, refusing to cover highway tolls, bus fares, even fees at public hospitals. To block a landfill project, an entire town south of Athens has risen up against the government, burning earth-moving equipment and destroying part of a main access road. The protests are an emblem of social discontent spreading across Europe in response to a new age of austerity. Perhaps most alarming, analysts here say, has been the resurgence of an anarchist movement, one with a long history in Europe. While militants have been disrupting life in Greece for years, authorities say that anger against the government has now given rise to dozens of new “amateur anarchist” groups, whose tactics include planting of gas canisters in mailboxes and destroying bank ATMs.

A Depressing Look At Suicide, Homelessness, And Societal Collapse In Post-Austerity Greece: "We talk a lot about the failure of Greek austerity around here, and the debunked idea that a country in the midst of a depression can get out of its debt hole by cutting spending. But take a step back from the failed math for a moment, and read this piece at NYT by Landon Thomas Jr. on social secay in Greece. As the economy has slowed, suicide hotlines are seeing much more activity. Former professionals are homeless, or seeking social aid, and basically everyone is still in emotion shock. Now, as you know, all of Europe is figuring out how to administer a second dose of the 'medicine' which will involve more cuts. In the end, Europe will probably foist more cash on the country -- because of the banks on the hook for Greek debt -- but you have to wonder how much longer domestic politicians will put up with the failed Eurozone system, that doesn't allow for any other alternative.

Greece: Last Exit To Nowhere? - Looking over towards Athens right now, you can’t help having that horrible feeling of deja vu. Adding to the uncomfortable feeling of travelling backwards rather than forwards in time (oh, I know, I know, when history repeats itself it only piles one tragedy onto another) is the uncomfortable presence of Charles Calomiris, a US economist of Greek origins. I can still remember reading back in the autumn of 2000 an article by Domingo Cavallo published in the Spanish newspaper El Pais where he proudly proclaimed that “it is only a few neurotic US economists who are suggesting that we will default and break the peg”. This, of course, was only a matter of weeks before Adolfo Rodríguez Saá (the man who was President for a mere 8 days) entered both history and the Argentine parliamentary chamber in order to uttered the now immortal phrase “vamos a coger el torro por los cuernos” (we are going to take the bull by the horns) which was obviously one of those Austinian performatives, since at one and the same time as uttering it he effectively ended the peg. Well today Calomiris is with us, and is still hard at work, only this time he is using his insights to prophesy not only Greek default, but sufficient contagion in the wake to bring the whole Euro project to an untimely end.

Greece May Delay Payments Under EU Proposal to Extend $156 Billion Bailout -  European finance ministers for the first time floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Europe would consider “reprofiling” Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday. “We’ll have to see whether we can’t proceed to a soft restructuring of Greek debt,” Juncker, who chaired last night’s meeting of euro-area finance ministers, said at the Lisbon Council in Brussels today. “I am strictly opposed to a large restructuring of Greek debt.” Introducing that prospect marks a break in Europe’s crisis- fighting strategy, with governments potentially shifting some costs to bondholders instead of relying on taxpayer-funded bailouts to stamp out the debt crisis.

EU acknowledges possible Greek debt restructuring - A senior European finance official acknowledged for the first time on Tuesday that Greece may have to restructure its debts, a move which could blow Europe's sovereign debt crisis wide open again. Speaking at a seminar on the sidelines of an EU finance ministers' meeting, Jean-Claude Juncker, the chairman of the 17-country Eurogroup, said there was a need to move towards what he called a "soft restructuring" of Greek debt. He said Greece's first priority had to be to raise 50 billion euros from the privatisation of state assets and use the money to pay down its debts, which are almost equal to 150 percent of GDP. In return, Juncker said, some form of restructuring of Athens' debt might be considered.

Juncker is confusing everybody with his loose talk on “reprofiling” - One of the reasons we always thought that this is the perfect storm for the eurozone is the way finance ministers are handling the day-to-day management. In yesterday’s briefing, we reported about differences between Angela Merkel and Wolfgang Schäuble. Yesterday, Jean-Claude Juncker added further to the confusion when he told journalists at the Ecofin that a “re-profiling” of Greek debt might be possible.  That word, incidentally, does not exist, which shows the alienation these people have in dealing with the crisis. What Juncker means is an exchange offer of short-dated Greek debt maturities against longer-dated maturities. Juncker makes a revealing statement, according to Reuters: the Greeks first had to raise €50bn from privatisations. "If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring," In other words, Juncker sees this as a kind of a gift or reward the EU gives to Greece. How bizarre.

Eurozone sends out confusing signals on debt restructuring - The eurozone’s finance ministers sent massively confusing signals to the financial markets. Yes they rule out a debt restructuring, but a re-profiling was possible, and while Angela Merkel repeat her pledge of no forced debt restructuring until 2013, Wolfgang Schäuble said he wants  the maturity of all Greek debt instruments to be increased by force. Jean-Claude Juncker said a voluntary rescheduling – a debt re-profiling in the EU parlance – was still possible as a last-gap measure. Merkel said in Berlin that a restructuring " would raise incredible doubts of our credibility if we simply were to change the rules in the middle of the first programme." She reiterated her pervious comments that private investors can only be drawn in once the European Stability Mechanism (ESM) comes into force.  That also puts natural limits as to how far a debt reprofiling can go. It is hard to imagine anything more than a voluntary agree among some of the larger banks to extend their Greek debt maturities for a little while, but the financial impact is insignificant. But it seems that Schäuble disagrees.

Greek debt restructuring would do 'massive harm' to eurozone, Jurgen Stark says - Restructuring Greece's debt would have "massive harmful effects" on the embattled country and would not solve its financial crisis, one of Europe's most senior banking officials has warned. In comments designed to boost confidence in financial markets, Jurgen Stark, executive board member at the European Central Bank, said speculation that Greece is insolvent was a 'false assumption'. 'I would warn against underestimating the massive harmful effects a debt restructuring would cause for the country involved and for the eurozone as a whole,' Mr Stark said, according to Reuters reports. Global equity markets have been hit this week on fears that Greece could fail to meet debt repayments terms and be forced to call for a second bail-out. Mr Stark said such a restructuring could lead to contagion. 'It is very well conceivable that the risks for financial market stability could spread to other European countries,'

ECB Rejects Greek Restructuring in Clash With EU Policymakers -- European Central Bank officials ruled out a Greek debt restructuring, clashing with political leaders over a solution to the sovereign financial crisis. “A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi, Greece. Fellow board member Lorenzo Bini Smaghi said in Milan that “a solution for reducing debt but not paying for it will not work.” European Union finance ministers for the first time this week floated the idea of extending Greece’s debt-repayment schedule as the nation struggles to meet the terms of last year’s 110 billion-euro ($156 billion) rescue. EU officials say that Greece won’t be able to return to markets and sell 27 billion euros of bonds next year as scheduled under the bailout, leaving them searching for alternatives to avoid a default.

ECB goes ballistic on reprofiling, and Strauss-Kahn resigns - The confusing debate about “reprofiling” or soft restructuring pays testimony to the sheer incompetence of eurozone’s finance ministers, who are now effectively talking Greece into a damaging, and most likely contagious default. The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest  at Juncker’s proposals to reprofile Greek debt. FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity. (This is something we suspected would happen. A reprofiling would be considered by the rating agencies as a default, which would lead to an instant downgrading of all Greek securities, government and banks, to C, which would make them no longer acceptable to the ECB.) This means that the ECB will effectively boycott Juncker’s silly plan. That, in turn, would force Greece to quit the eurozone within days.)

ECB Asks Court to Bar Greek Swap Disclosure, Cites Market-Disruption Risks - The European Central Bank asked the European Union’s General Court to dismiss a lawsuit seeking the disclosure of documents showing how Greece used derivatives to hide loans and triggered the region’s sovereign debt crisis. The ECB has complete discretion to decide what it should publish in the public interest, according to its defense to a lawsuit filed by Bloomberg News. Releasing the papers could damage the commercial interests of the ECB’s counterparties, hurt the region’s banks and markets, and undermine the economic policy of Greece and the EU, the central bank said. The documents don’t “provide information that would assist in informing the public debate in any meaningful manner,” the ECB said in its lawsuit. The files “contain ECB’s staff assumptions and hypotheses which were intended to feed the internal deliberations,” the ECB said in papers served today. The notes “were as such made on the basis of partial elements available at the time and not fully accurate information.”

Greece's islands will not be offered as loan collateral, warns prime minister - Greece's prime minister has hit out at fellow European nations for demanding 'islands or monuments' as security for bailout loans ahead of a gathering of European finance ministers in Brussels on Monday to discuss the country's ailing finances. Despite the conviction in financial markets that Greece's debts are unsustainable and will ultimately have to be restructured, eurozone ministers appear determined to top up last year's €110bn (£96bn) rescue package while forcing the beleaguered country into an ever tighter fiscal squeeze. Prime minister George Papandreou gave a hint on Saturday of his frustration over the terms being discussed by creditor nations, which include Germany and France, by suggesting that they might demand a mortgage over Greece's historic antiquities – or even a lien over some of the country's Aegean islands. 'I want to add one thing on which we are very sensitive: to ask us for an island or a monument as a guarantee is nearly an insult,' Papandreou told Italy's Corriere della Sera newspaper. 'The people expect our word and our actions are a sufficient guarantee.'

Greece is in a pickle - Rebecca Wilder - There is growing discord between the ECB and national politicians over a 'soft restructuring' of Greek debt. The ECB doesn't want it, while national policy makers grapple over it. And just in case you were wondering what a soft restructuring actually is, Joseph Cotterill at FT Alphaville explains. Beyond the gobbledygook restructuring talk is a simple story of incentives and the outlook for the Greek economy in the face of default. Over at Roubini Global Economics, Edward Hugh inquires just this as 'after default, what next?' Put another way, if the most valid argument against going back to the Drachma always was that this would imply default, now that default is coming, why not allow Greece to devalue? His point is well taken, in my view. The problem is that Greece's manufacturing sector is NOT competitive, nor will it be under even the most severe fiscal austerity measures...not to mention that the fiscal austerity measures make their problems worse by deepening the domestic recession. They need a currency devaluation in order to gain any sort of competitiveness back.

Is the ECB Pushing Greece Out of the Euro-Zone? –Kash - This is not a story that instills confidence in a happy outcome: The ECB goes all-in Central bank brinkmanship in full display this Thursday: FRANKFURT (MNI) – If Greece were to restructure its sovereign debt, its bonds would cease to be accepted as collateral by the European Central Bank, Executive Board member Juergen Stark said Wednesday, according to an ECB spokesman on Thursday. These are the liquidity operations which have acted as a lifeline to Greece in recent months, with Greek bank borrowing from the European Central Bank still hovering around €87bn at the end of March. Or as RBS’s Jacques Cailloux puts it, Stark’s warning is… :“This is the last card in the hands of the ECB in warning about the implications of a restructuring.”It's clear that the ECB is adamantly opposed to any restructuring of Greek debt. It's also becoming increasingly clear that they are willing to sacrifice the Greek banking system if they have to. What's not clear to me is why.A few possible reasons come to mind...

Greece Bond Yields increase as Policymakers Disagree on Restructuring - From the Financial Times: ECB’s political tensions flare over Greece This week, the ECB’s fierce opposition to Greece’s delaying debt repayments has erupted into a full-blown and public dispute. ... Jean-Claude Juncker, the Luxembourg prime minister who also chairs meetings of eurozone finance ministers, floated the idea of a “soft” restructuring ... In response, ECB policymakers accused him of “using meaningless phrases”. From the FT Alphaville: The ECB goes all-in.  Kash Mansori wonders Is the ECB Pushing Greece Out of the Euro-Zone? The yield on Greece ten year bonds increased to a record 16.5% today and the two year yield was up slightly to 25.1%.  Yields for other European countries are not increasing - yet. Here are the ten year yields for Ireland at 10.5%, Portugal at 9.3%, and Spain at 5.5%.

Fitch downgrades Greece to B-plus from BB-plus‎ -- Fitch Ratings on Friday said it downgraded Greece's credit rating to B-plus from BB+ and placed its ratings on Rating Watch Negative, citing the scale of the challenge facing the country as it attempts to secure solvency and lay the foundations of an economic recovery. Risks have risen as the country must undertake further austerity measures in order to meet its deficit goals, while a greater emphasis on privatization increases the risk that aid payments from the European Union and International Monetary Fund may be delayed, they wrote. Fitch said the rating factors in expectations substantial money will ultimately be provided by the EU and IMF and that Greek debt won't be subject to a "soft restructuring" or a "re-profiling." Fitch said it would consider such moves a default and that Greece and its obligations would be rated accordingly.

Fitch Cuts Greece to B+, Says Voluntary Maturity Extension Is Default - Bloomberg - Greece’s credit rating was cut three levels by Fitch Ratings, which said that even a voluntary extension of its bond maturities being studied by European Union policy makers would be considered a default. Fitch cut its rating to B+, four levels below investment grade, from BB+ and said that the country could face a further reduction in its creditworthiness. The yield on Greek 10-year bonds rose 57 basis points to 16.6 percent, more than twice the level of a year ago when Greece accepted an EU-led bailout. “The rating downgrade reflects the scale of the challenge facing Greece in implementing a radical fiscal and structural reform program necessary to secure solvency of the state and the foundations for sustained economic recovery, Fitch said in an e- mailed statement.

Ireland says cheaper aid needed to avoid failure in eurozone (Reuters) - Portugal, Greece and Ireland all need cheaper loans to ensure efforts to rehabilitate them succeed, Ireland's finance minister said, and he pressed for a European to lead the IMF should its current chief leave. Michael Noonan's remarks signal a change of tack in Dublin's so-far unsuccessful bid to win a lower interest rate on aid given to it by euro zone states, by attempting to ally itself with others in a similar position. It also comes amid frustration in Dublin with French demands that Ireland first increase its low corporation tax to win a cut in the interest rate on its loans, demands Noonan described as "not the smartest way of ensuring that programmes succeed"."In the context of the discussions on the programme for Portugal, I made the point very strongly that the pricing arrangement on the programme is too high," Noonan told reporters outside a meeting of European Union finance ministers. "There are issues surrounding the rate which deal with whether programmes are successful or they are a failure.

Eurozone crisis may derail Irish recovery, warns IMF - The International Monetary Fund has warned that Ireland's rescue plans could be blown off course as markets lose confidence in the eurozone's indebted nations and drive up borrowing costs. Without a comprehensive rescue plan covering the eurozone, Ireland could be blocked from borrowing on the international money markets until at least 2013, leading to a prolonged period of public spending cuts and lower growth, the Washington-based organisation said. "Slower growth, and higher unemployment, further ratings downgrades and developments in other euro area countries have contributed to a rise in bond spreads that hinders Ireland's prospects to regain market access on affordable terms in the near future," it said.

Portugal’s $111 Billion Bailout Approved - European finance chiefs endorsed a 78 billion-euro ($111 billion) bailout for Portugal as they stepped up pressure on Greece to do more to win improved aid terms.  Portugal followed Greece and Ireland in seeking emergency loans from the European Union and the International Monetary Fund, bringing to 256 billion euros the aid provided to stamp out the sovereign debt crisis.  Portugal will receive the first tranche of the loan, 18 billion euros, at the end of the month or beginning of June, Portuguese Finance Minister Fernando Teixeira dos Santos told reporters late yesterday after a meeting in Brussels.  The backing for Portugal came during deliberations clouded by the absence of IMF Managing Director Dominique Strauss-Kahn. Europe’s rich countries tied extra money for Greece to pledges that it deepen spending cuts and reap more revenue from asset sales. They also weighed making bondholders share the pain.

Portugal's Golden Dilemma - Earlier this month Frank Schäffler, a senior German parliamentarian, made a point about indebted Portugal that is starting to resonate throughout Europe: "Before risking other people's money, Portugal should first sell its family jewels, especially its gold reserves," Mr. Schäffler, of Germany's liberal FDP party, told the newspaper Bild.  After emergency loans to Ireland and Greece failed to produce the desired result, Europeans' unease over Portugal's €78 billion EU-IMF bailout was to be expected. But Portugal's billions in gold reserves, as Mr. Schäffler notes, combined with recent record-high gold prices, are giving more and more European politicians and commentators cause to wonder why Portugal doesn't simply sell off its gold to pay its debts. Germany has even offered to buy some gold from the beleaguered Portuguese central bank.

Portugal opposition says no need for restructuring talk (Reuters) - Portugal's opposition Social Democrat leader said on Thursday the country has the conditions to avoid any talk of debt restructuring after securing an EU/IMF bailout. "Portugal won't have to hear talk of restructuring its debt and failing to meet its foreign obligations a year from now," Pedro Passos Coelho told a conference. Portugal agreed this month on the terms of a 78-billion-euro bailout from the European Union and IMF -- about a year after Greece became the first euro zone country to need a bailout. Many economists currently say Greece needs to restructure its debts because its total debt load is too large.

Spain May Have Billions Euros of ‘Hidden’ Public Debt, FT Says -- Spain’s regional and local administrations have “hidden” debt, not included in the official accounts, amounting to about 26.4 billion euros ($37 billion), according to research by Freemarket Corporate Intelligence, a consulting firm, the Financial Times reported.  The latest figures from the Bank of Spain show that the country’s 17 autonomous regions have almost doubled their public debt, to 115 billion euros, since 2008, while municipal and provincial debt has risen to 35 billion euros and central government debt stands at 488 billion euros, the newspaper said.  However, public companies owned by local and regional governments also have substantial debt, and in many cases it doesn’t have to be included in the figures under European Union guidelines, the FT reported.

Spanish demonstrations continue around country for fourth day… Just days before local elections in Spain, 15,000 protesters have gathered in the main Puerta del Sol square of Madrid, protesting planned austerity measures.  The Spanish demonstrations have spread across the country to Sevilla, Granada and Valencia, encouraged by youth groups and social media campaigns. The Madrid electoral board banned demonstrations, but thousands defied the prohibition, setting up camp in the square, with more people arriving each day.  Though riot police have been deployed in some cities, they have not intervened in the protests. Simon Hunter at the Spanish newspaper El Pais reported that the Cadiz mayor has said, “If they're demonstrations are independent, they have every right to be there.” The chant has gone up in support of the youth group “Real Democracia Ya,” or True Democracy Now.

Spain's Icelandic revolt - After passively submitting to the crisis, young Spaniards have finally taken to the street. Breaking out on the eve of municipal elections, the protests of recent days have been inspired by those in Iceland that led to the fall of the government in Reykjavik.  Here in Spain, the umbrella organisation for various Spanish movements – Democracia Real Ya (Real Democracy Now) – already lists among its proposals some 40 points ranging from controlling parliamentary absenteeism to reducing military spending through to abolishing the so-called Sinde law (a law restricting on-line infringements of copyright). The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the "alternative globalisation" movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.

Zapatero's Socialists Head for Local Vote Defeat as Spain Protesters March - Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialists are headed for defeat in local and regional elections after a week of street protests and sits- in against his policies, polls show.  Thirteen regions accounting for 60 percent of the economy and more than 8,000 municipalities hold elections on May 22. Polls show Zapatero’s Socialists will be defeated in most regions, including traditional strongholds, and may lose the city of Barcelona for the first time in three decades.  Support for the Socialists has flagged as Zapatero turned his back on traditional allies to push through wage reductions and spending cuts to fight the sovereign-debt crisis. The run-up to the vote, a year before polls to choose Zapatero’s successor, has seen demonstrations against budget cuts, bank bailouts and a 30-year-old democracy that protesters say safeguards entrenched interests.

Italy Outlook Revised to Negative by S&P; Ratings Affirmed - 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. S&P affirmed the country’s A+ long-term rating, the fifth highest, and its top-ranked A-1+ short-term rating, the company said in a statement today. “Italy’s current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering,” S&P said. “Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”The Italian economy expanded 0.1 percent in the first quarter, less than economists forecast, as gains in exports failed to offset weak domestic demand. The euro region’s third- biggest economy won’t return to its pre-recession level for at least another two years, and the $2.3 trillion economy needs to raise productivity, the Organization for Economic Cooperation and Development said this month in a report.

A Loan and a Prayer - Roubini and Mihm - The countries known collectively as the PIIGS – Portugal, Ireland, Italy, Greece, and Spain – are burdened with increasingly unsustainable levels of public and private debt.   Several of the worst-hit – Portugal, Ireland, and Greece – have seen their borrowing costs soar to record highs in recent weeks, even after their loss of market access led to bailouts financed by the European Union and the International Monetary Fund. Spanish borrowing costs are also rising. Greece is clearly insolvent. Even with a draconian austerity package, totaling 10% of GDP, its public debt would rise to 160% of GDP. Portugal – where growth has been stagnant for a decade – is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency. In Ireland and Spain, transferring the banking system’s huge losses to the government’s balance sheet – on top of already-escalating public debt – will eventually lead to sovereign insolvency. The official approach, Plan A, has been to pretend that these economies suffer a liquidity crunch, not a solvency problem, and that the provision of bailout loans – together with fiscal austerity and structural reforms – can restore debt sustainability and market access. This “extend and pretend” or “lend and pray” approach is bound to fail, because, unfortunately, most of the options that indebted countries have used in the past to extricate themselves from excessive debt are not feasible.

IMF warns EU debt crisis may still spread to core (Reuters) - Despite bailouts for Greece, Ireland and Portugal, Europe's debt crisis may yet spread to core euro zone countries and emerging Eastern Europe, the International Monetary Fund said on Thursday. The stark warning came as government sources in Athens said international inspectors checking on Greece's compliance with its EU/IMF rescue package had found problems and were pressing for deeper spending cuts to cover a likely revenue shortfall. "Contagion to the core euro area, and then onward to emerging Europe, remains a tangible downside risk," the global lender's latest economic report on Europe said. A Reuters poll of investors and economists showed an overwhelmingly majority believe Greece will restructure its debt, possibly as soon as later this year. Most fund managers expect Athens to pay back less than half of what it owes.

The European crisis now threatens the EU itself - Denmark, the mighty lion of Europe, has decided to introduce custom checks at its borders again.  While this is definitely a page 16 story in the old world of print newspaper’s, it is a harbinger of the future of Europe. “We have reached agreement on reintroducing customs inspections at Denmark’s borders as soon as possible,” Hjort Frederiksen told reporters. The new controls will enter into force within two to three weeks, he said. The last 60 years has seen a series of steps taken to merge Europe into a united states of Europe.  The ability for commerce & citizens to flow across borders was a core step in the unification process already taken. The government of Denmark, by seeking to stop the flow of intra euro traffic is pointing to the very ugly reality that is developing in the old world. A rise in far right politics is starting to alarm the bureaucrats in Brussels.

Euro area inflation: gaining momentum below the hood - Rebecca Wilder - Today Eurostat released April 2011 inflation for the Euro area. Prices are increasing at a 2.8% annual pace, up from 2.7% in March and very much above the ECB's comfort zone of around but slightly below 2%. Today's report is the second release and includes the cross section of price gains below the headline number. The first 'flash' estimate does not specify the breakdown. April core prices rose 1.6% over the year. The goods-price inflation is flowing into the the service-sector as well - headline service-sector inflation is 2.0% in April, up from its low of 1.2% one year ago. There may be some seasonal distortions here associated with the Easter holiday, but the upward momentum has been established.  2% annual inflation is increasingly ubiquitous for key countries, Periphery and Core core alike. Below is the diffusion of 2% annual price gains, where an index value above 50 indicates that the majority of component prices are rising at a 2% rate. The legend indicates the longer-term average diffusion of price gains.

ECB goes ballistic on reprofiling, and Strauss-Kahn resigns - The confusing debate about “reprofiling” or soft restructuring pays testimony to the sheer incompetence of eurozone’s finance ministers, who are now effectively talking Greece into a damaging, and most likely contagious default. The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest  at Juncker’s proposals to reprofile Greek debt. FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity. (This is something we suspected would happen. A reprofiling would be considered by the rating agencies as a default, which would lead to an instant downgrading of all Greek securities, government and banks, to C, which would make them no longer acceptable to the ECB.) This means that the ECB will effectively boycott Juncker’s silly plan. That, in turn, would force Greece to quit the eurozone within days.)

Unemployment Claims Rise Most Since January 2010 as Recovery Stays Fragile - U.K. unemployment claims rose in April at the fastest pace since January 2010, underlining the fragility of the recovery as government spending cuts and accelerating inflation sap consumer confidence.  Jobless benefit claims increased by 12,400 from March to 1.47 million, the Office for National Statistics said today in London. The median forecast of 24 economists in a Bloomberg News Survey was for no change. Unemployment measured by International Labour Organization methods fell 36,000 to 2.46 million people in the quarter through March.  Prime Minister David Cameron is relying on private companies to create jobs as his government eliminates more than 300,000 public-sector posts to tackle the budget deficit. The economy stagnated in the six months through March and Bank of England policy makers warned today that an interest-rate increase now could damp consumer spending.  “We think the unemployment rate will rise for the next 18 months,”

Against the rally against debt - Today’s “rally against debt” should be called the campaign against the UK’s pension fund industry.  What I mean is that government debt is not just a liability. It is also an asset, and a tremendously useful one.  Imagine that the rally’s aim were to be pushed to its logical conclusion and that government debt did not exist - which, given that that rally thinks such debt is “immoral” is not a wholly unreasonable imputation. Pension funds and insurance companies - who hold £294.1bn of the £994.9bn stock of gilts (pdf)   - would then face an acute shortage of long-term sterling safe assets.  They could not transfer into corporate bonds, as this market is just not big enough.  Nor would cash be a good alternative, as this carries reinvestment risk - the fact that you can’t be sure of its future returns. And of course equities and commodities are just far too volatile.  Institutions which have long-term liabilities - such as pension and insurance companies - would then be in a terrible mess. They would not have the assets which offer a safe match for their huge future liabilities.  Government debt, then, is pretty much necessary for the existence of the pension industry.

Britain’s inflation nightmare becomes worse - If the monetary policy committee of the Bank of England were paid a performance bonus, its members would deserve nothing. The UK’s inflation outcome has been far from target over a long period. So should the MPC raise rates now to make up for its past failures? No. But its position is becoming very uncomfortable. The news that the increase in the consumer price index was 4.5 per cent in the 12 months to April underlined the MPC’s failure. The compound annual rate of inflation has been 4.1 per cent over the past two years and 3 per cent over the past six. This is a dismal performance, particularly given the severity of the recession. But performance has not been hopelessly bad: since the beginning of the 2000s, inflation has been just 2.3 per cent. However disappointing recent performance has been, something extremely dangerous has not happened: inflation expectations have not jumped. The expectations implied by the gap between the yield on conventional and index-linked bonds are even below their average since early 2006. Just as comforting is the fact that the yield on 10-year conventional bonds is 3.4 per cent. Americans worried about the impact of the end of the Federal Reserve’s quantitative easing on US treasury bonds should also take heart. The end of the Bank of England’s similar programme, in early 2010, brought no noteworthy rise in UK bond yields.

Anxiety keeps the super-rich safe from middle-class rage - Why aren't we more angry? Why isn't blood running, metaphorically at least, in the streets? Evidence of how the rich prosper while everyone else struggles with inflation, public spending cuts and static wages arrives almost daily. The Institute for Fiscal Studies reports that last year incomes among the top 1% grew at the fastest rate in a decade. According to the Sunday Times Rich List, the top 1,000 are £60.2bn better off this year than in 2010, bringing their collective wealth close to the record pre-recession levels. FTSE 100 chief executives are on average paid £4.2m annually, or 145 times the median wage – and on current trends will be paid £8m, or 214 times the median, by 2020. In the financial sector, even the CEO can seem modestly rewarded: this year, the top-paid banker at Barclays will get £14m, nearly four times the chief executive's earnings and 1,128 times more than the lowest-paid employee receives. Meanwhile, once inflation is taken into account, most people's incomes are set to fall, after 15 years of virtual stagnation.   Even the increase for those quite near the top of the income scale, better off than 90% of their fellow citizens, was unspectacular.

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