week ending May 7

Fed balance sheet hits new highs - The Federal Reserve’s balance sheet has grown to a record $2.703 trillion (£1.62 trillion), figures for the week ending May 4 show. A report published yesterday reveals that the American central bank’s balance sheet increased from the $2.675 trillion reported the prior week. It shows that the bank’s asset holdings rose from $2.695 trillion to  $2.723 trillion in the week to May 4, while its holdings of American Treasury securities increased from $1.413 trillion to $1.442 trillion. Meanwhile, the bank published new money supply data showing its M2 money stock increased to a seasonally-adjusted $8.98 trillion during March, up from $8.87 trillion in the previous month.

Fed Balance Sheet Grows To $2.723 Trillion - The U.S. Federal Reserve's balance sheet continued to grow last week as the central bank maintained efforts to spur economic growth through asset purchases.  The Fed's asset holdings in the week ended May 4 climbed to $2.723 trillion, from $2.695 trillion a week earlier, it said in a weekly report released Thursday. Holdings of U.S. Treasury securities rose to $1.442 trillion on Wednesday from $1.413 trillion the previous week.  Thursday's report also showed total borrowing from the Fed's discount window slid to $16.28 billion Wednesday, from $16.80 billion a week earlier. Borrowing by commercial banks decreased to $12 million Wednesday, from $13 million a week earlier.  U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, rose to $3.457 trillion from $3.447 trillion.  U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.694 trillion from $2.686 trillion.  Holdings of agency securities rose to $763.02 billion from the previous week's $761.26 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 5, 2011

 Lockhart Sees End To QE2, Will Set High Bar For Another Round - The Federal Reserve plans to end its $600 billion bond-buying as scheduled in June, and will set a "high bar" for another potential round, Federal Reserve Bank of Atlanta president Dennis Lockhart said Wednesday.  Economists have pondered how markets would behave once the Fed ends its unprecedented and highly contentious quantitative easing program in June.  Some have questioned if the central bank would cease its monetary accommodation in 'cold turkey' fashion, depriving the economy of the stimulus designed to jumpstart job creation and growth. Other analysts have mulled whether the Fed would use additional measures. "Despite isolated fears that the Fed might embark on a third round of easing, Lockhart indicated there was a low probability of that happening. He stated that "there will be a high bar" to adding to the Fed's already bloated balance sheet. Lockhart added that theoretical QE3 would have to come with a fixed exit strategy

Fed’s Rosengren Says Recovery Weak, Policy Just Right - Slack labor markets and stable core inflation give the Federal Reserve considerable “flexibility” to maintain its ultra-loose policy bias, Boston Fed President Eric Rosengren said Wednesday, adding that credit conditions remain appropriate even in the face of rising oil and food prices. Rosengren said if fiscal policy is tightened, then monetary policy may have to be more accommodative to offset it and promote economic growth. Rosengren said that while financial markets and the economy have made “significant progress” since the financial crisis, he called the recovery “undesirably slow and anemic.” Rosengren added that the Fed’s monetary policy suits the current economic environment. “Until we make more progress on both elements of the Federal Reserve’s mandate–employment and inflation–the current, accommodative stance of monetary policy is appropriate,” Rosengren said, in an analysis about how the central bank should respond to price pressures driven by external events.

Fed Presidents Signal Record Stimulus Won't Be Removed Soon - Two Federal Reserve regional bank presidents indicated that the central bank won’t remove record stimulus soon, saying the Fed is missing its goal for full employment and inflation isn’t a long-term risk.  Eric Rosengren, president of the Federal Reserve Bank of Boston, and San Francisco’s John C. Williams followed the lead taken by Fed Chairman Ben S. Bernanke, who signaled last week that policy makers will keep stimulus in place after ending large-scale bond purchases in June.  “Right now we’re pretty far away from our targets, and right now we’re keeping monetary policy accommodative,” Rosengren, 53, said yesterday in an interview with Bloomberg News. “It’s very appropriate given how far we are from our targets.”

Fed Watch: Monetary Policy on Autopilot -  The first quarter GDP number was profoundly disappointing. I always look back to the benchmark of the mid-80’s to measure the pace of the recovery, paying close attention to real final sales: The pace of the current recovery pales by comparison. Indeed, even the meager 1.6% average final sales growth is inflated by the blowout 6.7% gain in the final quarter of last year. Excluding that quarter, the average is a miserable 0.9%. Note that if the economy grows 3.5%, the output gap closes by at best just one percentage point, so an the output gap of roughly 4.3% of GDP remains more than two years after the recession ended. This suggests the undercurrent is strongly disinflationary even if the commodity price jump places temporary upward pressure on inflation. It seems inconceivable in this environment, and with the Fed actually still easing, that policymakers are eager to reinforce expectations that tightening is imminent and thus work to nullify the easing before it actually occurs. Yet this is indeed the current state of policy.

An IS-LM Analysis of the Zero-Bound Problem - FRB Dallas - Policy options for stimulating real activity are limited once short-term interest rates have been driven to zero. Monetary policy makers face the difficult challenge of preventing or reversing declines in near-term inflation expectations while preserving confidence in the central bank's commitment to long-term price stability. Fiscal policy makers must commit to a credible plan for maintaining or raising near-term government purchases while minimizing increases in future marginal tax rates.

The Taylor Rule and QE2 - The most common benchmark for the prescribed interest rate is the Taylor rule. In its original form, the Taylor rule states that the federal funds rate should equal 1.0 + 1.5 times the inflation rate + 0.5 times the output gap, the percentage deviation of GDP from long-term potential GDP. Using the measure of inflation favored by the Fed, the core (excluding food and energy) personal consumption expenditure deflator, and the output gap calculated by the Congressional Budget Office, the prescribed federal funds rate has been zero or slightly negative since 2009:Q2, hardly sufficient to justify over $2 trillion in mortgage-backed security and bond purchases. Taylor’s original rule, however, is not what has been used to justify QE1 and QE2. The most common change is to either double the size of the output gap coefficient to 1.0 or, as in Glenn Rudebusch's 2009 and 2010 San Francisco Fed Economic Letters, to use an unemployment gap coefficient consistent with the higher output gap coefficient. John Taylor, in contrast, has consistently argued that his original rule should be used to calculate prescribed interest rates. The effect of this change is shown in Figure 1. Raising the output gap coefficient from 0.5 to 1.0 lowers the prescribed interest rate from about zero to close to negative 4 percent for most of 2009 and 2010.

How QE2 could cause low investment - This is pure speculation (also called theory). I have no respect for economic theory definitely including my own efforts, so the post will all be after the jump. I will write about, sketch and definitely not write out a model in which Fed purchases of 7 year Treasury notes causes low investment. It happens to be a fact that following the Fed's purchases of 7 year Treasury notes investment has been lower than forecast when the purchases began. I don't consider this anything along the lines of evidence, not even weak evidence, and am theorizing for the fun of it. 7 year notes are not completely safe assets. Real returns over the full 7 years depend on inflation. Returns over briefer periods depend on inflation and future shorter term rates. This means that QE2 might have an effect on the economy by removing risky assets changing the risk born by private agents. This is a plausible explanation for the apparent effectiveness of QE1 (the Fed bought mortgage backed securities, commerical paper and made loans to banks). It is one rational for quantitative easing in general. The problem is that removal of a stochastic asset does not necessarily reduce risk.

Liquidity Traps Are Very Unlikely, Even at the Zero Bound - Matt Rognlie takes to task Tyler Cowen for claiming there is no liquidity trap. He makes his case for the liquidity trap and then closes with this statement: This doesn’t mean that all hope is lost: the Fed can still make a difference by shaping expectations of the future trajectory of nominal interest rates, or by making unconventional bond purchases so large that they trigger portfolio balance effects and drive down interest rates on longer-maturity assets...Just don’t go around claiming that 0% isn’t a barrier—because sadly, it is.  Ironically, the above bold phrase is exactly why in most circumstances there is no liquidity trap at the 0% barrier.  To see this, first recall that a liquidity trap is a situation in which the demand for money is perfectly elastic.  That is, no matter what the central bank does it cannot cause money demand to budge.  Monetary policy, therefore, is unable to address the problems created from excess money demand in a liquidity trap. 

Fed Should Raise Rates if Economy Improves as Forecast, Official Says - The Federal Reserve should raise key rates modestly by the end of the year if economic forecasts of rising inflation and an improving employment sector come to pass, a top Fed official said Thursday.The Fed’s commitment to ultraloose policy and easy money should be tightened a bit, said Federal Reserve Bank Of Minneapolis President Narayana Kocherlakota, raising key rates by at least 0.70 percentage point.Core inflation should be 1.5% by the end of the year, Kocherlakota said. “The Fed would then be closer to its price stability mandate — and so should ease the pressure on the monetary gas pedal,” he said.The standard response to such an increase in core PCE inflation would be to raise target rates — which are now near-zero — “by at least 70 basis points,” Kocherlakota said in prepared remarks to the Santa Barbara County Economic Summit. Standard so-called Taylor rule monetary policy would call for a rate rise of 1.05 percentage points, Kocherlakota said. A fall in unemployment — of at least one percentage point by the end of 2011 compared to November 2010 would call for a rise of “even more than the 105 basis points,” he said. Kocherlakota has a vote on the Federal Open Market Committee.

Modest Fed hike needed by year-end: Kocherlakota - A modest rate hike would be appropriate toward the end of 2011, if economic conditions continue to unfold as expected, said Narayana Kocherlakota, the president of the Minneapolis Fed on Thursday. In a speech in Santa Barbara, Ca., Kocherlakota said his call for tightening is based on his own forecast that 2011 will be a better year than 2010, the labor market will slowly continue to heal and inflation will grow slowly from low levels. Kocherlakota is a voting member of the Federal Open Market Committee this year. If there is an upward surprise in inflation, than the rate hike might have to come as early as July or August, he said. Conversely, if inflation slows unexpectedly, then another round of asset-purchases, or QE3, might be needed, he said. Kocherlakota said he favors an old-fashioned rate hike to between 0.50% and 0.75% rather than asset sales, but added he is open to discussing using the Fed's balance sheet instead.

Fed Could Take Gradual Approach to Exit - When the time comes for the Federal Reserve to start unwinding its easy money policies it could decide to move at a very gradual pace, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview with The Wall Street Journal. The first step, before actively raising short-term interest rates, would be to allow its holdings of mortgage backed securities to retire without reinvesting the proceeds and then, perhaps, to do the same for some of its holdings of U.S. Treasury securities. That would allow the Fed’s balance sheet to gradually shrink, which would slightly tighten financial conditions, but it would put off the day of active short-term rate hikes. His comments about the pace of the Fed’s removal of easy money policies sheds some light into an internal debate taking place at the central bank about its exit strategy. Fed Chairman Ben Bernanke made clear in his first ever press conference last week that the Fed was not inclined to start tightening policy any time soon. But officials are debating how to go about tightening policy once the process starts.

Bernanke Meets the Press - Rogoff - Most economists viewed his performance as masterful. But the fact that the dollar has continued to slide while gold prices have continued to rise suggests considerable skepticism from markets. One of the hardest things in central banking is that investors often hear a very different message from that which the central bank intends to send. The Fed, of course, has been forced to turn to “QE,” as traders call it, because its normal tool for fine-tuning inflation and growth, the overnight interest rate, is already zero. Yet US economic growth remains sluggish, and is accompanied by stubbornly high unemployment. QE has been blamed for everything from asset-price bubbles to food riots to impetigo. Everyone from foreign finance ministers to cartoon satirists (check out the video “quantitative easing explained”) to Sarah Palin has ripped into the policy. Critics insist that QE is the beginning of the end of the global financial system, if not of civilization itself. Their most telling complaint is that too little is known about how quantitative easing works, and that the Fed is therefore taking undue risks with the global financial system to achieve a modest juicing of the US economy.

Bernanke: Fed Moving to Promote Stability - The Federal Reserve is still working out how much information to disclose in future banking sector stress tests, central bank Chairman Ben Bernanke said Thursday. “We are not ready to issue proposed rules on that,” Bernanke said, but the Dodd-Frank financial oversight reforms specify “the Fed will release broad information from those stress tests.” Bernanke said he considers Fed-led stress testing, which explored the vulnerabilities of the nation’s largest banks and required remedies to fix trouble spots, to be a major turning point in returning the financial sector to health. The law is “not very specific” and that “gives us some leeway” to think about the issue, “To be honest, we haven’t really come to an internal view what the right point is,” the official said. He doesn’t expect future disclosures to be as detailed as what happened in 2009, but he added, “we are going to have to try to find a way that balances the legitimate business interests and privacy concerns, on the one hand, of the institutions, versus the very important need to provide information that will help investors and markets assess the strength of the banking system.” In his formal remarks, Bernanke said the Fed is already moving forward with its new mandate to promote broad financial stability in the wake of financial oversight reform legislation that instructed it to do so.

Federal Reserve must be held accountable - Financial markets and financial journalists were abuzz last week with the news that Federal Reserve Chairman Ben Bernanke was doing something historic: holding a news conference for the first time in the central bank’s nearly 100-year history. Yet, as with so much about the Fed, this was more myth than reality. As Fed chairman, Paul Volcker held several news conferences to explain his controversial policies. The Bernanke event, meanwhile, was pointless: It revealed nothing the public didn’t already know.  There’s an easy way, however, for the Federal Reserve to lose its aura of undemocratic secrecy. It could release transcripts of its Federal Open Market Committee meetings within one year — or be compelled to do so with a congressional subpoena.  These committee meetings are the real guts of U.S. economic policymaking. You can already get a summary of each meeting within three weeks. But the actual transcripts — the debates among Fed policymakers at those meetings — are released with a minimum lag time of five years.

Frank Introduces Bill to Concentrate Fed Power in DC - U.S. Rep. Barney Frank (D., Mass) Tuesday introduced a bill that would let interest rates be set only by Federal Reserve officials picked by the government, a new attempt to move power away from regional Fed officials chosen by the private sector. The bill would remove from the 12-member policy-setting Federal Open Market Committee the five members who represent regional Fed banks. Only the seven-member board in Washington, which currently has two vacant seats, would get to vote onA interest rates. The congressman said this would make the Fed more democratic and increase “transparency and accountability on the FOMC” by eliminating those officials who are effectively picked by business executives. Frank’s bill faces significant hurdles to clear Congress, where Republicans are likely to resist centralizing Fed powers in Washington. ...Analysts said Frank’s new proposal could hurt the Fed’s independence from Congress.

"Frank Introduces Bill to Concentrate Fed Power in DC" -  Taking a break from conference activities to note that this is a bad idea: Frank Introduces Bill to Concentrate Fed Power in DC, WSJ - I can support - and have advocated -- reforming the way in which regional bank presidents are selected. But this proposal, which removes geographical representation even though recessions do not hit each area of the country equally, is a bad idea (the Board of Governors can already veto the appointment of a regional bank president, though I don't know of any instances where this power has been used). It takes us further away from the populist roots of the Fed's structure, a structure that tried hard to represent all interests in policy. It also furthers the concentration of power in Washington that has been occurring slowly but surely ever since the Bank Reform Acts in the wake of the recession established the Fed's current structure. In addition, it takes another step toward increasing the power of Congress over day to day monetary policy. When I look at how fiscal policy was conducted, the debate over the bank bailouts, the politicization of policy, and the general economic knowledge of those who want to have an increased hand in setting policy, I hate to even imagine how bad things would be if Congress had been in charge of monetary policy.

Refocusing the Fed? - Today, Barney Frank introduced legislation in committee to remove regional Fed presidents from the FOMC: U.S. Rep. Barney Frank (D., Mass) Tuesday introduced a bill that would let interest rates be set only by Federal Reserve officials picked by the government, a new attempt to move power away from regional Fed officials chosen by the private sector.  Do we need regional Fed presidents at the table? After all, in the Great Contraction of 2008, and the ensuing recession, it has been the regional presidents that have provided the voice of hawkishness, even through tumultuous 2009! So when the chips are down, and adequate monetary policymaking is at its highest stakes, these guys were wrong…and being that they largely represent banking interests, they are likely biased against inflation at all costs. This certainly hasn’t been any help to our recovery!  However, while Barney Frank’s motivation is mostly suspect, sometimes even then you stumble upon a good idea…but this idea isn’t good enough. If you are in a position where your legislation has little chance of making it out of committee, my play would be to lay all of my cards on the table: rewrite the Fed charter such that it requires the Fed to set one nominal target, and keep it on a level growth path.

Be Careful Wishing for the Fed’s End - Ben S. Bernanke, the Federal Reserve¹ chairman, faces a crisis of confidence. He is excoriated on the right for debasing the currency, and blasted on the left for failing to stimulate more than he has. It has gotten so bad that last week Mr. Bernanke, who prefers to discuss monetary policy with erudite professors like himself, submitted to the indignity of a news conference². Among the uninvited was Representative Ron Paul³, who is flirting with a presidential run, and who, if he took office in 2013, would like nothing more than to celebrate the Fed’s centennial by ... abolishing it.  And that got me to thinking: What if there were no Fed? Don’t laugh; it has happened before. Established in 1913, the Fed was to be a banker to the nation’s banks, controlling the money supply and, thus, the value of the currency. Without a Fed, someone else would have to handle these (and other) tasks of central banking.  “Money,” observes the Fed historian Allan H. Meltzer, “does not take care of itself.” But who else could regulate the value of money? And regulate its value in relation to what?

Imagine If the Unemployed Helped Run the Fed - Imagine if five of the 12 voting members of the Federal Open Market Committee were selected exclusively by unemployed Americans, instead of the current system of having them chosen by rich bank executives. This could be done. Currently five of the voting members on the FOMC, which sets monetary policy, are presidents of one of the 12 regional Federal Reserve Banks. These presidents are chosen solely by the private banks. There is no reason we can’t have quasi-private regional organizations of only the unemployment and underemployed–instead of Federal Reserve Banks–and just let these people choose five voting members for the FOMC. We would definitely not have Ben Bernanke basically saying the Fed is going to ignore the full employment part of his mandate to instead mainly worry about inflation. There is probably no way the Fed would randomly set a new one percent inflation target with 8.8 percent official unemployment. It is also likely with the unemployed having a say in how the Fed is run that maybe millions of under-qualified low-income Americans would have gotten modest special no-risk, no-interest loans from the Fed window during the crisis. Instead of how it currently works, where the banks and a few unqualified wives of rich bankers get massive special loans.

Fed’s Hoenig: Rates Should Start Rising - Federal Reserve Bank of Kansas City President Thomas Hoenig called Tuesday for the central bank to start raising interest rates, citing mounting fears about inflation and rising values for assets such as farmland. Hoenig made his comments in a speech at a conference held by the Independent Community Bankers of America in Washington and in comments to reporters after the speech ended. The central banker, who is due to retire in October, has been a persistent critic of the Fed’s policies. He isn’t currently a voting member on the interest rate-setting Federal Open Market Committee. Fed policy makers “need to withdraw that excess liquidity slowly from the start so that you don’t shock the economy later,” Hoenig said. “I don’t want the shock to be so significant that we send the economy back into a tailspin.” Hoenig told reporters that he expects economic growth of about 2.5% to 3% for the rest of the year. “My outlook is for the economy to continue to grow,” he said.

Hoenig: Urges Fed hike to calm inflation fears - Kansas City Fed President Thomas Hoenig, speaking to reporters at a banking conference in Washington, urged the Federal Reserve to increase interest rates from a historically low range of 0% to 0.25%. "We need to slowly reverse that to calm inflation fears," Hoenig said. He can't go anywhere without being asked about inflation. "Inflation is being talked about everywhere," he said. He was not concerned about the 1.8% growth rate for the first quarter, saying that special factors limited growth and forecast growth at a modest 2.5% to 3% pace over the course of the year. Hoenig is due to retire from the Fed in October and isn't a voting member of the Federal Open Market Committee.

How Much Will the Second Round of Large-Scale Asset Purchases Affect Inflation and Unemployment? - NY Fed - With the federal funds rate at the zero lower bound, the Fed’s large-scale purchase of Treasury securities provides an alternative tool to boost the economy. In November 2010, the Federal Open Market Committee (FOMC) announced a second round of large-scale asset purchases (LSAP2) with the goal of accelerating the recovery. In this post, we analyze the impact of LSAP2 on the two variables that fall under the Fed’s dual mandate: inflation and unemployment. Our point estimates suggest that the effects will be moderate and delayed, although there is considerable uncertainty attached to these estimates.   For this analysis, we estimate a small-scale Vector Auto-Regression (VAR) model (one that summarizes the historical relationship between variables) that includes two lags of the unemployment rate, core PCE inflation, the real value of the Commodity Research Bureau index, the effective federal funds rate, and the ten-year Treasury yield. The data are at the quarterly frequency, covering the period 1976:Q1–2007:Q2. We use a standard recursive structure—with the variables ordered in the manner described above—to provide an economic interpretation to the shocks in the model.

Is the Equation of Exchange Still Useful? - Matt Rognlie says no.  Nick Rowe says yes and I agree. Nick Rowe argues MV=PY (where (M = money supply, V = velocity, PY = nominal GDP) is useful because it highlights the fact that money is special: it is the only asset on every other market (i.e. it is the medium of exchange) and thus is the only one that can affect every other market.  Money, therefore, is what makes it possible to have economy-wide recessions.  Even in the recent recession where the financial crisis increased the demand for safe assets, it was not the elevated demand for safe assets itself that caused the recession but the fact that this demand for safe assets was met, in part, by going after the safe asset money. I view the equation of exchange as useful because it provides a summary measure of what is causing swings in nominal spending and the role, if any, monetary policy is playing in those swings.  For example, the equation of exchange in its expanded form sheds a lot of light on what caused the crash in nominal spending during late 2008, early 2009.  It also explains why the subsequent recovery  in nominal spending has been sluggish.

The Great Inflation of the 2010s -“I can’t eat an iPad.” This could go down in history as the line that launched the great inflation of the 2010s. Back in March, the president of the New York Federal Reserve, William Dudley, was trying to explain to the citizens of Queens, N.Y., why they had no cause to worry about inflation. Dudley, a former chief economist at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Quick as a flash came a voice from the audience: “I can’t eat an iPad.” Dudley’s boss, Ben Bernanke, was more tactful in his first-ever press conference on Wednesday of last week. But he didn’t succeed in narrowing the gap between the Fed’s view of inflation and the public’s.

Inflation Measurement Gives Us Food for Thought - FRB Dallas - Global food prices are soaring. Since February 2009, the United Nations Food and Agriculture Organization world food price index has risen roughly 67 percent, surpassing the previous peak in June 2008 (Chart 1). The last food price surge, from early 2007 to mid-2008, prompted riots in many countries; the latest rise has also fueled riots and may have been a factor in political unrest sweeping through North Africa and the Middle East.[1] To the extent that the increases have contributed to accelerating inflation rates, they also challenge a number of central banks attempting to balance the goal of stable prices with the desire to support economic recovery. U.S. consumers have—until very recently—been sheltered from this price jump. From February 2009 to December 2010, growth in the personal consumption expenditures (PCE) price index for food was essentially zero. That may be changing. In January and February, the PCE food index increased 1.4 percent, an annualized rate of roughly 9 percent. While the behavior of food prices—with implications for world poverty, geopolitics and monetary policy—is interesting in its own right, food prices are also a useful context in which to think about inflation measurement.

Has the Fed Decided to Fight Inflation Instead of Unemployment?…William Alden writes in a Huffington Post liveblog entitled “Inflation Vs. Jobs”: Bernanke’s argument about inflation isn’t consistent, economist Paul Krugman says. The Fed’s asset-purchase strategy is partially intended to promote maximum unemployment, but some experts are concerned that it will ultimately spark inflation once the recovery takes hold and the system remains awash in liquidity. In this view, there’s a tradeoff between jobs and prices. Bernanke, however, doesn’t take this view: He said in the press conference that core inflation, or, as Krugman says, “inflation inertia,” isn’t a concern — and that expansionary monetary policy doesn’t stoke these forces. But then, Bernanke is also saying that any further expansion would risk provoking inflation, Krugman notes.

Commodity Surge Need Not Boost Total Inflation - Over recent months, there’s been a steady flow of research coming out the Federal Reserve’s regional branches that aims to assess the risks generated by surging food, energy and commodity prices. The latest comes from the Federal Reserve Bank of Boston, and it fits the arc described by much of the existing central-bank writings, which holds that long-run inflation in the U.S. is likely to remain under control despite rising prices for things like gasoline, food, and raw materials used in factories. In the paper released Wednesday, Boston Fed researcher Geoffrey Tootell wrote “evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate.” He noted his conclusions in the paper were drawn from a brief given to his bank’s president, Eric Rosengren, to assist the official in preparing for a recent Federal Open Market Committee meeting. The contention that long-run inflation can indeed remain stable despite a surge in commodity prices is one that’s widely held within the Fed.

A Commodity Peak? - Krugman - WSJ: Commodity Surprise: Some Are Now Heading Down. Good reporting on the slumps in cotton, copper, etc. But why, exactly, is this such a surprise? Real commodity prices — that is, prices relative to the prices of goods that aren’t as volatile — have gotten very high by historical standards: IMF  Some of this probably represents a long-term upward trend, as emerging economies place pressure on limited resources, but even so, you wouldn’t expect continued rapid rises, and in fact you should expect some regression toward normal levels as supplies and to some extent demand respond.The only reason to believe that commodity prices would continue to soar would be if you thought that they were the harbinger of runaway inflation. But they aren’t.

Guest Post: Beware of runaway headline inflation -Yves here. As much as this post makes an interesting observation, note the emphasis on reducing labor bargaining power as the solution to booms and busts, when the era of weak labor bargaining power (which started taking hold in a serious way in the Reagan/Thatcher eras) showed far more financial instability that the preceding period where productivity gains were shared with workers. As a result, consumers didn’t need to resort to debt to compensate for stagnant worker wages. As long as we keep resorting to failed remedies, there isn’t much reason to hope for better outcomes. By Heleen Mees -- March headline inflation (all goods) in the US came in higher than expected at 0.5% while core inflation (all goods minus food and energy) came in lower than expected at 0.1%. Rising gasoline and food prices accounted for almost three quarters of the jump in headline inflation. These latest inflation figures have added fuel to the debate what measure of inflation central banks should aim to control. This column explains the roles of these competing measures and argues that US monetary policymakers should pay close attention to headline inflation. It warns that neglecting headline inflation risks feverish boom-and-bust cycles with prolonged periods of high unemployment.

Headline Inflation and Wages (Wonkish) - Krugman - I suspect that this article by Heleen Mees will get a lot of attention from the inflationistas, who will see in it another reason to worry. So I guess I’d better weigh in to say that the, um, core argument doesn’t seem to make any sense. Mees looks at this picture: and tells us that it shows that “Hourly wages in the US track headline inflation much more closely than core inflation.” Huh? What I see is two sluggish series, core inflation and wages, and one very volatile series, headline inflation. Neither the 2008 surge in headline inflation nor the deflation of 2009 were reflected at all in wages. How is this “tracking”? What Mees seems to mean is that over the whole period wages grew more than core prices. But that’s supposed to happen! We expect real wages to rise over time, as productivity gains are passed on to workers. (There’s been a lot of slippage in the passthrough lately, but that’s another issue.) And when Mees says, That hourly wages increase on average more than headline inflation is mainly due to downward wage rigidity.  you really have to wonder: does she mean that any real wage increase, any time, must be due to wage rigidity?

Resources, Inflation, and Monetary Policy - Krugman - I’ve been getting a number of requests that I say something about the implications of the widely publicized Jeremy Grantham piece arguing that we’ve entered a new era of resource scarcity. I’m broadly sympathetic to this view — in fact, I’ve expressed quite similar views. I am, however, much more optimistic than Grantham seems to be that we can combine a shift toward conservation with continuing economic growth. The immediate question I’m being asked, however, is what all this says about macroeconomic policy in the near term, especially wiht regard to monetary policy. And the answer is, not much — or to the extent there is a moral here, it is to keep interest rates low and focus on employment. Why? Well, even a long-term trend toward higher commodity prices will have surprisingly little effect on overall inflation. Suppose that we believe that commodity prices will double over the next decade — which is a lot. And that’s a rise of 7 percent a year (compounding!)

Fed's Williams expects inflation to peak mid-year, "then edge back downward" - This is San Francisco Fed President John Williams' first policy speech: Maintaining Price Stability in a Global Economy. Excerpt on inflation: I see the real culprit as being global supply and demand. Rising commodity prices can be traced to the rapid rebound in the global economy in the past year and a half, led by robust growth in emerging market economies, which display a ravenous appetite for raw materials. For example, Chinese automakers sold some 18 million vehicles last year, a third more than in 2009 and more than any other country in history, including the United States. At the same time, as demand is rising, we’ve seen supplies of some commodities curtailed by weather or political disruptions. In recent months, turmoil in North Africa and the Middle East has reduced the global supply of oil and likely added a substantial risk premium to the price of a barrel of crude as well. There are several reasons for thinking the inflation bulge will be short-lived....

The Fed's Language Problem on Inflation - The Federal Reserve has made clear that it’s not worried about inflation right now, despite spikes in the price of oil, food and other commodities. It has had a harder time explaining why. Part of the problem is language. The Fed looks for inflation in prices that change slowly, like the cost of cars or clothing. It calls this “core inflation,” which suggests to many infuriated people that the Fed views the cost of food and oil as less important. Actually, the Fed’s point is that short-term changes in food and oil prices don’t predict long-term changes in food and oil prices. The trend line can’t be trusted. The path of other prices is a better predictor. Lately, in a bid to address the language problem, the Fed chairman, Ben S. Bernanke, has stopped talking about “core inflation” and started talking about “underlying inflation.” But the Fed also has a substance problem. It needs to convince skeptics that it’s right — that it can see the future, and that the increases in food and energy prices won’t last.

St. Louis Fed Blames Gasoline for Inflation Swings - Blame gasoline prices for much of the volatility in inflation over recent years. New research from the Federal Reserve Bank of St. Louis says that since 2007, motor fuel is the “special case” in the overall inflation matrix. “Fluctuations in the price of motor fuel (mainly gasoline) have caused most of the monthly noise and year-over-year fluctuations of headline [consumer price index] inflation over the past four years,” bank economist William Gavin wrote in a note published on the St. Louis Fed website. He observed that the core consumer price index, which is stripped of food and energy prices, and the CPI stripped of fuel costs pretty closely track each other over the specified time period. That suggests the volatility in year-over-year change in the overall CPI, which went over 5% in mid-2008, and tipped toward negative 2% in the middle of 2009, is largely a product of the big swings in fuel prices. “Motor fuel prices have been so volatile that they strongly influence overall headline CPI inflation despite their small weight in the overall index,” Gavin wrote.

Inflation Expectations: My Perspective - I  don’t have a target number to report but contrary to many of my colleagues I am beginning to see signs of growing consumer inflation.  One thing to remember is that housing is by the biggest share of the core expenditures. The BLS calculates the cost of housing using rents. For renters it measures the actual rent they pay. For homeowners it measures what you could have rented your home for. That’s because the BLS considers buying a home an investment, not a consumer good. What you consume is “not having to pay rent.”  So, to tell how much that is worth, they try to figure out what your home would have rented for. I see a rental market that is likely to tighten significantly in the next 18 months. This implies increasing inflation rates. If we look at transportation we see similar issues. Core transportation expenses are dominated by the purchase price of vehicles. As sales increase I expect vehicle price increases to accelerate in the coming 18 months. I don’t know much about the apparel supply chain but my naïve hunch is that a significant portion runs through China, which is experiencing rapid wage inflation. These developments set up the prospect for increasing inflation in the 18 months ahead. Now I am currently not alarmed about any of this because I see inflation as too low.

Deflation or Hyperinflation? - The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life's necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

John Williams: Hyperinflation and Double-Dip Recession Ahead - S&P is noting the U.S. government's long-range fiscal problems. Generally, you'll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That's 15 times the gross domestic product (GDP¹). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly. There's good reason for fear about the debt, but it would be a tremendous shock if either S&P² or Moody's Investor Service³ actually downgraded the U.S. sovereign-debt rating. The AAA rating⁴ on U.S. Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With U.S. Treasuries denominated in U.S. dollars and the benchmark AAA security, how can you downgrade your benchmark security? That's a very awkward situation for rating agencies. As long as the U.S. dollar retains its reserve currency status and is able to issue debt in U.S. dollars, you'll continue to see a triple-A rating for U.S. Treasuries. Having the U.S. Treasuries denominated in U.S. dollars means the government always can print the money it needs to pay off the securities, which means no default.

Did the Fed do in Bin Laden? - Yves Smith - In an article in the Telegraph, “How the Fed triggered the Arab Spring uprisings in two easy graphs,” Andrew Lilco argues that ” the Fed seems very clearly to have achieved more in the Arab world in six months than the Pentagon achieved in decades.” The first plank of his argument is a point most readers and many foreign central banks believe is happening but the Fed insists is a collective fantasy, namely, that the Fed’s continued loose money policies and its QE programs have fueled commodities price hikes (note even if you don’t believe strongly in an operational link, you can argue for investor expectations: the Fed looks determined to reflate, and if you believe as many do that the Fed will overshoot, finding inflation hedges is sensible. Why arguing that is depicted as economic Luddism is beyond me). The second point comes from Paul Mason’s blog, that rising food stress increases the odds of revolution: The food stress/revolution point is not new; Clusterstock had a good recap in February of a stab by Nomura of analyzing the vulnerability of various countries to revolution based on youth population and GDP per capita. Note I am pretty certain Clusterstock was asked to revise this post; the version I saw earlier had more countries (IIRC 25) and had two other key metrics: what their food imports/exports were as a percentage of GDP (importers are more vulnerable to commodity price moves) and food as a percent of average household budget (countries with typical citizens living at or not much above survival level are clearly at risk).

Will high oil prices bring a new recession? - Ten of the 11 recessions in the United States since World War II have been preceded by an increase in oil prices. Does the recent surge in oil prices mean we should be looking for recession number 12?<?p>  I've noted before that once energy expenditures get above 6% of average consumer spending, we start to see significant changes in spending patterns. We crossed that threshold in March, when 6.27% of every dollar spent went to energy-related goods and services. For lower-income groups, that expenditure share is significantly larger. And you don't need me to tell you that energy prices have surged dramatically since March.

Commodities Tank -- Yves Smith  - With investors acting as if Uncle Ben would ever and always protect their backs, markets moved into the widely discussed “risk on-risk off” trade, a degree of investment synchronization never before seen. All correlations moving to one historically was the sign of a market downdraft, not speculative froth. And as we are seeing, that means the correlation will likely be similarly high in what would normally be a reversal, and that in turn increases the odds that it can amplify quickly into something more serious. The only way to stem this unhealthy pattern of cross market connection is structural measures, meaning measures to reduce the tight coupling of financial markets which allows developments in one market to propagate quickly to seemingly not so closely related markets. But we are a long way away from seeing the authorities consider, much the less act, to stem the free flow of capital, which has long been depicted as virtuous. The work of Carmen Reinhart and Kenneth Rogoff on financial crises shows the reverse, that high levels of international capital flows are strongly correlated with larger and more severe implosions. But we may have to test the current system to destruction before we can develop the will to fix it.

Risk off - TODAY has turned out to be a rather ugly day for global markets: a risk-off day, as they say, as traders move to relatively safe vehicles. The biggest moves have come in commodity markets. Oil prices are off nearly 10%, agricultural products are down between 2% and 5%, and metals are sinking, too. There's nothing like a risk-off day for the dollar's fortunes; the greenback is up over 2% against the euro. Treasury yields are tumbling.  What's going on? Well, the economic data out of America today is mildly bad, continuing a stream of mildly disappointing releases. Initial jobless claims jumped sharply last week, to 474,000. This seems to be due to temporary factors not accounted for in the seasonal adjustment, but in the previous weeks numbers had been ticking upward in any case. Yesterday's private employment report was good but not great, and it came in a little below expectations. Consumer confidence is down somewhat, and we learned yesterday that service sector activity also disappointed in April. All these signs are indicative of a disappointingly slow recovery, but they don't seem to point to really serious trouble—not yet, at any rate.

What Are Commodity Prices Telling Us Now? - Yesterday's selling wave that slashed commodities prices is a reminder that this is a volatile asset class and so its value is limited as an input for setting monetary policy. Once again, we have a real-world lesson in why central banks focus on core inflation, which strips out food and energy prices. It's hardly reasonable to ignore commodities in monitoring future inflation expectations, but it's easy to go overboard with reading too much into raw materials prices. Recent history surely offers a lesson in humility on this point. Back in mid-2008, when the Great Recession was well under way (even though it wasn't yet obvious to all), the trailing 12-month percentage change in headline consumer price inflation was elevated at north of 5%--more than double the rate from a year earlier. Headline inflation includes food and energy prices, and the message seemed to be that inflation was set for a sustained run higher. In fact, it collapsed shortly after, descending into a bout of deflation.

Commodity Rout Lends Credence to Bernanke’s Inflation Outlook - Federal Reserve

Chairman Ben Bernanke has gotten a lot of grief over recent months for his confidence underlying low inflation rates are likely to prevail despite a surge in commodity and energy prices. The fundamental belief that surging gasoline, food and raw-material prices won’t undo what is at heart a benign inflation environment has earned the Fed chief critics both within and without the central bank. The generalized fear motivating some investors and analysts has been that surging prices for all manner of basic materials will eventually infect price pressures, broadly measured. The Fed risks exacerbating, and may even be contributing to, the problem by keeping monetary policy highly stimulative as growth moves forward the unemployment rate falls, albeit from very high levels.

The Economy Slows - It has long been clear that economists do not see the world the way people experience it. That disconnect is especially pronounced now.  The economy lost steam in the first quarter. Growth in personal consumption — the single largest component of the economy — slowed markedly. Business-related construction cratered and residential construction fell. Exports stumbled. The only unambiguous plus was continued business investment in equipment and software, which is necessary but not sufficient for overall growth. In all, economic growth slowed from an annual rate of 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter of 2011. Not to worry. Ben Bernanke, chairman of the Federal Reserve, called the slowdown “transitory,” a judgment echoed by many economists who believe that the poor performance can be chalked up to bad weather, political unrest and other presumably temporary setbacks. If only. Take jobs: When lauding the economy, Mr. Bernanke and many other economists and politicians point out, correctly, that the unemployment rate has declined from a recession high of 10.1 percent in late 2009 to 8.8 percent now. That would be encouraging news if it indicated robust hiring for good jobs. It does not.

Fed’s Dudley: Economy’s ‘Soft Patch’ Is Temporary - The U.S. economy likely hit a “soft patch” at the year’s start due to rising energy and commodity prices, a top Federal Reserve official said Friday, declining to comment on financial market gyrations seen over recent days. “The weakness of real GDP growth in the first quarter probably will prove temporary,” Federal Reserve Bank of New York President William Dudley said. “There are many reasons to believe conditions are in place for stronger growth in the coming months in the nation and the region,” he said.While Dudley declined to comment on the monetary policy outlook, he noted “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,” which suggests he sees no urgency to move to a more restrictive monetary policy stance.

Feel the Stimulus --Last week's release of first quarter GDP figures for the US confirmed what we already knew -- the government sector of the US economy is shrinking, and this is putting a sharp drag on economic growth. During the first 3 months of 2011 the US economy grew at a rate of only 1.8%. This disappointing figure was substantially the result of cutbacks in government spending. If spending by all levels of government in the US had remained constant, the first quarter GDP growth rate would have been about 2.9% instead. The following picture shows how much government spending has contributed to - or deducted from - economic growth in the US in each quarter since the start of 2009. Do you see that massive and sustained fiscal stimulus? No, neither do I. To put this in context, let's take the longer view. The next chart shows government spending on final goods and services, broken into federal vs. state and local spending, since 2001. The shaded area marks the time since early 2009, when we supposedly were the beneficiaries of fiscal stimulus.

A Mission Not Yet Accomplished - For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter — eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down. Fully 80 percent of people say the economy is in fairly bad or very bad¹ shape, according to a New York Times/CBS Poll last month. More people say it’s getting worse than getting better, the opposite of a few months ago.  White House advisers and Ben Bernanke, the Federal Reserve chairman, argue that the bad news is a merely a blip caused by bad weather, a temporary cut in military purchases and other one-time factors.  But both Wall Street and Washington were also optimistic² around this time last year — too optimistic³. The unfortunate truth is that the recoveries from financial crises have a habit of disappointing.  Crises do so much damage that they leave businesses and households predisposed to believe the worst and to pull back at the first hint of economic weakness.  All this is why the typical financial crisis has caused unemployment to rise for almost five years, according to historical work⁴ by the economists Carmen Reinhart and Kenneth Rogoff.

Marshall Auerback: Get Ready for a Global Growth Slowdown - Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought, and the European economy is overdue for its own slowdown. The new theme in the market seems to be that the Fed, unlike other central banks, will stick with super easy money policies, hence the tendency to push the weak dollar, rising equity prices, and soaring commodity prices. But the news that real GDP growth has fallen sharply in the first three months of 2011 is evidence that the current policy mix, with its emphasis on public spending cuts, is not working. If gasoline prices spike as high as they did in June 2008, they will further weaken an already feeble economy. Consumers did not show up at Walmart at the end of the month because they ran out of money. House prices are still falling. At the same time, the political debate is focused on the public debt limit, which expires in a few weeks. Conservatives are once again threatening not to extend this limit, even though no less a figure than Warren Buffett has said the failure to do so would be the “most asinine act” the U.S. Congress has ever committed.

Pimco’s Gross Says U.S. Economic Growth Isn’t Enough to Sustain Job Market -  Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said U.S. growth isn’t sufficient to support asset and labor markets nor enough to compensate for the nation’s growing debt level.  “The private economy is moving ahead as evidenced by today’s number but at a measured pace,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “Year- over-year real gross domestic product is holding at 2 percent, while nominal GDP is only 3.9 percent. That’s hardly sufficient to support both asset and labor markets in combination, nor is it sufficient to grow our way out of a steadily increasing debt to GDP ratio. It’s not enough.”  While employment growth will be probably be strong the next few months, investors will need to see whether that is sustainable once the Federal Reserve’s policy of quantitative easing ends in June, according to Gross.

Podcast: Jobs, Economics and a Retail Makeover - After the economic slowdown that showed up in the data for first-quarter G.D.P., Friday’s Labor Department report on jobs and unemployment was nervously awaited.  It wasn’t great news, but it was better than many economists had expected. Motoko Rich covered the story for The Times, and she says in the Weekend Business podcast that the total number of jobs created in April — 244,000, up from 211,000 in March — suggests that the United States economy is clearly growing, even if at a modest pace. (It grew at only a 1.8 percent in the first quarter, according to the G.D.P. report.) In April, the unemployment rate moved back up to 9 percent — a painfully high level — from 8.8 percent, and a much faster pace of hiring will be needed to bring the rate down significantly.  It’s quite possible that the American economy’s growth was impeded by what Ben S. Bernanke, the Federal Reserve chairman, has called “transitory” factors, like the supply-chain problems caused by the earthquake, tsunami and nuclear disaster in Japan. In that case, Ms. Rich says, there may be faster growth in the United States later in the year.

Double-dip recession is now undeniable - The evidence of a double-dipping housing market and economy are becoming undeniable, even to those who cling perilously to the notion that government intervention has been a salve instead of a poison.  The main evidence presented on the part of the “permabulls” of a healing economy is that corporate earnings have been good. However, S&P 500 earnings from multinational corporations have been significantly boosted by a U.S. dollar that has lost nearly 15% of its value in the past 12 months. So earnings look great, but they don’t buy you very much, while small-cap domestic businesses suffer under the scourges of inflation and slow growth. But markets have the final say as to where the economy is headed, and investors would do well to listen. The 10-year note’s yield has moved down to 3.19% from 3.72% three months ago, and the 1-year T-bill is now just yielding just 0.17%. In confirmation of the slowing economy, oil prices have dropped $8 a barrel in a week, while copper have plummeted from $4.47 to $4.01 a pound in a month.  Recent economic data confirm the move lower in industrial commodities. Wednesday, we saw the ISM’s service-sector index drop to 52.8 from 57.3 in March. New orders plunged to 52.7, the lowest reading since December 2009,

Americans Agree America's Future Stinks (Duh) - Ah, the stench of American decay. Just a few hours ago, I heard Joseph "Soft Power" Nye--a worthy inaugural recipient of this blog's Carl Spackler Award for Cheneynomic analysis--outline his case that America's demise is much exaggerated. As you'll read below, I take issue with his argument that while the US may be in relative decline, it is not in absolute decline. But let's begin though with some decidedly non-rose-tinted analyses of America's prospects by regular folks. While deficits don't matter-style reasoning is nothing new as far as Americans academics are concerned, it's good to hear what Americans who live outside of ivory towers have to say instead of having USA#1 cheerleaders feed us a steady diet of Bush league bromides. Save it for the next Sarah Palin rally, buddy (as the Yanks would say). Once again demonstrating you don't have to look far for IPE-relevant material, I came across this nugget on the Yahoo! homepage. A few posts back I used "green card" petitions as a gauge of just how much America stinks since skilled migrants are choosing not to go there in droves. No jobs, no future, no go. Well guess what: Americans themselves agree that America stinks. Due to a lack of jobs among other things, today's US youth is resigned to a living standard inferior to that of their parents'. The recent Gallup poll mentioned below is in a long line of polls asking basically same question "Will today's generation be better off than their parents'?" The headline says it all: "In U.S., Optimism About Future for Youth Reaches All-Time Low":

Fears and Failure, by Paul Krugman - From G.D.P. to private-sector payrolls, from business surveys to new claims for unemployment insurance, key economic indicators suggest that the recovery may be sputtering.  And it wasn’t much of a recovery to start with. Employment has risen from its low point, but it has grown no faster than the adult population. And the plight of the unemployed continues to worsen: more than six million Americans have been out of work for six months or longer, and more than four million have been jobless for more than a year.  It would be nice if someone in Washington actually cared.  It’s not as if our political class is feeling complacent. On the contrary, D.C. economic discourse is saturated with fear: fear of a debt crisis, of runaway inflation, of a disastrous plunge in the dollar. Scare stories are very much on politicians’ minds.  Yet none of these scare stories reflect anything that is actually happening, or is likely to happen. And while the threats are imaginary, fear of these imaginary threats has real consequences: an absence of any action to deal with the real crisis, the suffering now being experienced by millions of jobless Americans and their families.

Flashing Yellow - Paul Krugman - A few readers have asked what I make of recent economic indicators. The answer is, nothing good. By my count we’ve had four adverse surprises lately: GDP, private-sector payrolls, service-sector survey, and new claims for unemployment insurance. Since there seem to be a fair number of Charlie Browns out there — people who keep expecting a housing recovery, even though Lucy keeps pulling away the football — I guess we should add weak housing numbers to the mix.It looks like a sputter, not a crash, but it’s definitely not good.The bond market agrees: 10-year rates are back down to 3.17 percent. (S&P? Never heard of them). The tragedy is that even as the real economy disappoints, yet again, Washington is entirely focused on dire events that aren’t happening: fiscal crisis, runaway inflation, dollar collapse.  Lost decade, here we come.

For the US and UK economies, a lost decade looms - Last week, the commerce department released data on GDP for the first quarter that showed the economy growing at just a 1.8% annual rate. This brought the growth rate over the last year to just 2.3%, slightly less than the 2.5% growth rate needed to keep pace with the growth in the labour force.  It might have been expected that this closely watched number set off all sorts of alarm bells about the weakness of the recovery. Instead, it was buried in the business pages with the headlines dismissing the weakness as the result of bad weather. The professional excuse makers seem to rely heavily on the weather. The drop in fourth quarter GDP in the UK was also attributed to the weather. But these folks apparently forgot that weather-related weakness should mean a sharp bounceback in the following period.  With the first quarter growth in the UK just offsetting the fourth-quarter decline, it is clear that weather does not explain economic weakness there, nor can weather explain the poor growth in the United States. The basic problem is that the US economy, like the UK economy, simply lacks much momentum and is likely to weaken further as the impact of the deficit cutting is increasingly felt.

When Does The Government's "Managed Perception" Of The Recovery Become Reality?: "The Federal Reserve and the Federal government are both desperately attempting to 'manage perceptions' of the bogus 'recovery' and of their own legitimacy. Can 'managed perceptions' replace reality? The Federal Reserve is quite open about the ultimate purpose of all its machinations: to 'manage perceptions' so the citizenry believe the 'recovery' is real. The Fed reckons that belief will cause people to start a new debt-consumption orgy that will fuel a self-reinforcing cycle of expansion. Put another way: the Fed is trying to induce a reanimation of 'animal spirits,' i.e. a restored faith in future prosperity that inspires households to load up on more debt and buy, buy, buy. The difference between blatant propaganda and 'managing perceptions' is... well, there isn't any. The Fed and Federal machinery are both engaged in a massive propaganda campaign to obscure the gargantuan risks implicit in their various trillions-dollar campaigns to mask systemic failure and risk and construct a facade of normalcy and 'recovery.' Meanwhile, even the staid MSM flagbearer The Economist is noting that America's 'leadership' hasn't fixed anything, and has no intention of doing so: What's wrong with America's economy?

It May Be a Broken Record, But the Sound Is Still the Best - Earlier this week, reacting to the weak GDP growth rate of 1.8% in the first quarter, David Leonhardt wrote: But our working assumption should be that this recovery will remain at risk for a long time. If it stalls out for a second year in a row, the consequences could be particularly bad. The specter of a “lost decade,” like Japan’s, would become commonplace. Pessimism would feed yet more hesitation from businesses and households. So far, so good.  He then goes on to make the case for short-term stimulus of a particular form, as it is "the only way in which I can imagine Congress taking action to help the economy:" At the end of this year, about $225 billion of temporary tax cuts and emergency jobless benefits are scheduled to expire.  We are nearly forty -- that's right, forty -- months beyond the moment when we should have begun to commit to this level of additional spending per year.  The problem that we are experiencing in Washington is in part due to the absence of the notion that we should be getting long-term value for the spending that we do.  Why do we have to spend $225 billion on temporary tax cuts and emergency jobless benefits?  The answer that we would infer from Leonhardt's column, and the countless other columns like it, is little more than "we have to." 

 A Fistful Of Dollars - Part Two - It is not easy to destroy the greatest empire in the history of mankind. The 20^th Century was the American Century, but as with all empires, the combination of hubris, monetary debasement, imperial overreach and delusional overconfidence have set in motion the inevitable downfall of the American Empire. The policies, decisions, beliefs, and institutions implemented over decades have led the country to the threshold of financial disaster. Based on my observations, a catastrophic combination of demographics, fiat currency debasement, titanic levels of debt, smothering taxation, power in the hands of the few and Wall Street greed have led us to peak Empire. It will be downhill from here as we experience collapse, revolution and ultimately, retribution for the guilty and presumed guilty. I have already addressed the Baby Boomer generation’s contribution to our current plight, to the delight and accolades of Boomers across the land in For a Few Dollars More – Part One. The Boomers were a victim of their size and the timing of their arrival on the scene of empire collapse. Their delusions of debt based wealth and me first attitude could not have been satiated without the creation of the Federal Reserve and the institution of the personal income tax in 1913.

The Dollar: It’s Payback Time! - It’s payback time for Ben Bernanke, the chairman of the Federal Reserve (Fed). In some ways, this should neither surprise, nor scare anyone. Unfortunately, however, it might do both. In any open market, information is absorbed rather quickly into asset prices, including exchange rates. Indeed, exchange rates may be the best pricing source to assess the impact of the relentless involvement of policy makers’ “print and spend” mentality in the markets. When trillions are spent, markets are likely to move. However, an unintended consequence has been that a broad range of assets are now moving more and more in tandem, giving investors fewer options to diversify. Investors should be mindful of this development, as markets do not always go up: where do you hide when the mood turns sour? In fact, why bother buying stocks, thereby taking on corporate risk, when ultimately the reason stocks are moving may have little to do with managerial skill. The U.S. dollar, one might argue, says it all.

Warren Buffett: There's "No Question" The Dollar Will Keep Falling - Warren Buffett and Charlie Munger don't like gold (or silver), and they're not eager to place any FX bets, but Buffett's view on the dollar seems pretty unequivocally negative.  Via Liz Claman, Buffett told the crowd in Omaha: No question that the purchasing power of U.S. dollar will decline over time. Only question is at what rate it will happen. He says he's had fears that it could happen at a quicker rate. All that being said, this isn't necessarily a gloomy pronouncement. Buffett noted how much the dollar has depreciated since he was born, and yet economic progress since then has been remarkable in the US. What's more, all currencies will decline over time (vs. real things), it's just a matter of the pace.

Asia Seeks to Diversify Record Reserves as U.S. Dollar Declines -  Asian nations are pooling funds to strengthen regional investment, in a step toward diversifying record foreign-exchange holdings as the U.S. dollar declines. Ten Southeast Asian nations, along with China, Japan and South Korea, plan to discuss an infrastructure fund to boost investment in roads, ports and utilities at a meeting of finance officials that started today in Hanoi. Policy makers have agreed to look for “new avenues” for reserves, the Philippine central bank chief said last month, urging greater use of China’s yuan.  More than a decade after the 1997-98 Asian crisis depleted reserves and forced countries from Indonesia to South Korea to seek bailouts, the region’s holdings have risen to about $6 trillion, half held by China. With the dollar remaining the dominant reserve asset, the currency’s decline threatens to erode returns on Asia’s stockpile.

Michael Pettis: Is it time for the US to disengage the world from the dollar? - The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago. But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost. Just as importantly as a public good it requires a number of characteristics. At a minimum these include ample liquidity, central bank credibility, flexible domestic financial markets, minimal government or political intervention, and very deep and open domestic bond markets. With the exception perhaps of the euro, which may or may not emerge in the next decade on a more rational basis than it currently exists (albeit with more than one defection), no other currency has the necessary characteristics that will allow it plausibly to serve the needs of the global economy.

The real reasons for the dollar’s decline - Have you seen what’s happened to the dollar of late? It’s hitting all-time lows on a trade-weighted index. Must be Ben Bernanke’s fault: him and his QE2. Except it really isn’t. And Mark Dow, today, does a great job of explaining not only why the monetary-policy theory is wrong, but also what the real reasons for dollar weakness are. For one thing, the dollar is basically just back to where it was before the crisis: the recent weakness is to a large degree an unwinding of the flight-to-quality trade we saw when everybody was worried about the world coming to an end. The real decline in the dollar took place between 2002 and 2008, when it went from 110 to 70 on the trade-weighted index. And there wasn’t any QE2 back then. And if lax monetary policy were the main cause here you’d think that the dollar would be appreciating at the very least against the yen, given how the Bank of Japan is pumping hundreds of billions of dollars into its economy. But in fact the yen is strengthening against the dollar.

Who's afraid of a sinking greenback? - THE dollar has been falling: Does this matter? Well, sure, it matters in some ways. A falling dollar is an important mechanism through which the American economy makes needed adjustments. It increases import prices, which could fuel inflation but which will also reduce import growth. Similarly, it makes American products cheaper abroad, which boosts American export industries. A declining dollar is a natural means through which America's trade imbalances are resolved, and it is the mirror of adjustments in large trading partners, where appreciation is the order of the day. Long-term weakening of the dollar is also likely to accompany efforts to diversify global reserve holdings away from the greenback. Other countries don't like the fact that when it comes to global reserve currencies, the dollar is the biggest game in town. That lack of reserve portfolio diversification leaves countries like China, which holds large reserves of dollar assets, heavily exposed to movements in the greenback. The problem for these countries is that good alternatives are still lacking.

Falling Dollar Phobia - Krugman - I continue to be amazed by the way Very Serious People find ways to worry about everything except devastating unemployment. They’ve now spent two years warning about the bond vigilantes about to pull the rug out from under us any day now; as of right now, the 10-year interest rate has fallen to 3.21 percent on weak economic data. Now there’s suddenly vast alarm about the possibility of a drastic fall in the dollar. OK, first, let’s have some perspective on what has happened so far. Here’s the real effective exchange rate of the dollar since 1979: IMF  What’s got all the VSPs so worried is that little jog at the end, which has brought the dollar roughly back to its pre-crisis level. Why has the dollar fallen lately? The main answer is that while the Fed wants to keep rates low to help fight unemployment, the ECB is signaling that it wants to raise rates, never mind 21 percent unemployment in Spain. This is a difference in economic philosophy, not the decline of empire.

TheEconomist: Forty years of hurt The dollar is at its lowest value in four decades  - THE dollar’s recent decline has taken it to new lows. The chart shows the nominal exchange rate, in trade-weighted terms (ie, against the country’s trading partners). The index is now 30% below its level when the Bretton Woods system was abandoned in the early 1970s and the dollar has halved since 1985, when leading nations adopted the Plaza Accord to drive it lower. There was a rally in 2008 when the dollar attracted “safe haven” flows during the financial crisis, but that now looks like a blip in a 40-year decline. A weak currency should be good news for a country’s exporters, but that hasn’t stopped America from running a persistent trade deficit. And America’s creditors are having to cope with the unappealing combination of holding low-yielding Treasury bonds in a depreciating currency.

Why do we need a state-backed currency?  - My beef with a multi-currency system is the difficulty of ensuring orderly currency issuance. We'll have an economy with so many currencies being issued by different private banks, backed by different assets.  At least, with only one monopoly issuer, we can easily control it by making it more accountable to the people who use the currency it issues (Though this means making central banks more transparent than they are right now). If we have many private banks issuing their own currencies, it would be more difficult to manage. What happened to securitized loans issued by shadow banks could also happen to the currencies privately issued by banks. With no state backing them, privately-issued currencies could just as easily lose value during a run, and we could end up with financial crises even worse than we had in 2008.

US Debt Rating Should Be 'C': Independent Agency (CNBC Video) There have been increasing concerns about the fate of United States' prized triple-A sovereign debt rating. While Standard and Poor's recently downgraded its U.S. debt outlook to negative from stable, implying that a ratings cut could happen in two years, one independent ratings agency has given the U.S. sovereign rating a "C".  "A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday. Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys. The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.

CNBC Hypes Bogus US Debt Rating - The headline that topped the Drudge Report yesterday morning had frightening news for its millions of readers: yet another credit ratings agency downgraded America’s debt, this time to “C”—at or near “junk” status in the letter-rating scales used by the big three ratings agencies, Standard & Poor’s, Moody’s and Fitch. Clicking on the link takes the reader to a CNBC article headlined, “US Debt Rating Should Be 'C': Independent Agency.”   The agency turns out to be not one of the big three but an outfit called Weiss Ratings. Scratch the surface, and it turns out that Weiss Ratings is far from "independent," and the rating, itself, is bogus. Weiss Ratings, headed by Martin D. Weiss, an investment advisor who has more than once run afoul of the SEC, downgraded US debt to “C” (which the article says is equivalent to BBB- or “near-junk” status) despite that the fact that the last time the US defaulted on external and domestic debt obligations was 1790. Even the Economist has acknowledged, “Talk of America defaulting on its debt is just that.”  Meanwhile, CNBC failed to disclose the ratings agency has a content-distribution licensing agreement with TheStreet.com, whose chairman and co-founder is CNBC host Jim Cramer.

China Paying 'Close Attention' to US Debate on Debt Level - China, the biggest foreign holder of Treasury notes, is closely watching the debate over raising the U.S. debt ceiling and wants the Obama administration to do more to curb the deficit, Vice Finance Minister Zhu Guangyao said.  “We are paying close attention to the domestic discussion in the U.S. on debt and deficits,” Zhu told reporters in Beijing today. “We hope the U.S. can take effective measures toward fiscal reorganization just as President Obama suggested.”  His comments came days before about 30 top Chinese officials travel to Washington for an annual meeting on economic and military cooperation. Treasury Secretary Timothy F. Geithner will meet his counterpart Vice Premier Wang Qishan for two days of talks beginning May 9 and press the U.S. case for allowing China’s currency to appreciate further.

Q&A: China Will Not Demand Its Money Back - A deal is taking shape between Congress and the administration on the debt-ceiling vote, and it will likely include some spending cuts in exchange for increasing the amount the government can borrow. As these negotiations play out, we're constantly warned that the debt-ceiling fight has high stakes. Refusing to raise the ceiling will prevent us from paying debts and will destroy the faith our bondholders -- that is, China -- have in us. Or will it? The Prospect talked with James K. Galbraith, the Lloyd M. Bentsen Jr. chair in government/business relations at the University of Texas at Austin, about just how accurate the doomsday predictions really are.

The Constitution and National Security Trump the Debt Limit- The vast majority of those commenting on raising the federal debt limit are certain that Congress will act in time to forestall a debt default, which would occur if the Treasury lacked sufficient cash to pay interest due that day or to redeem maturing securities. The smart money says that Congress could not possibly be so stupid as to permit a default and will raise the debt limit just in time. I disagree with this view. I think there are enough members of Congress who really are that stupid. Over the last several weeks, a number of Republican congressmen have said that they will not vote to raise the debt limit under any circumstances. Some Republican senators have promised a filibuster against a debt limit increase should it pass the House. And Tea Party spokesmen have promised strenuous primary opposition for any Republican voting for a debt limit increase.

U.S. to Take ‘Extraordinary’ Steps as It Nears Debt Ceiling - The U.S. this week will start taking “extraordinary” steps to extend the federal government’s authority to borrow funds as it nears the national debt ceiling, Treasury Secretary Timothy Geithner said Monday.  Further measures would follow May 16. Geithner said he would declare a debt issuance suspension period for the Civil Service Retirement and Disability Fund, which would permit the Treasury to redeem existing Treasurys and suspend issuing new ones. Treasury also would suspend daily reinvestment of Treasurys held as investments by the Government Securities Fund for the federal employees’ thrift plan. Treasury also could later suspend daily reinvestment by the Exchange Stabilization Fund. As of Thursday, total public debt subject to the limit was $14.231 trillion, leaving little headroom for the federal government. After the extraordinary measures are exhausted, Geithner has warned that the government would stop or delay military salaries, Social Security and Medicare payments, interest on the debt and unemployment benefits.

Screw the Deficit: The Long-Anticipated Return of the Bond Market Vigilantes May Not Be What's Been Expected - The bond market vigilantes, the group that according to legend forced Washington in the 1990s to turn its attention to reducing the deficit and whose return has been predicted ever since the red ink came back with a vengeance during the George W. Bush administration, will likely make it's long-anticipated re-appearance in the next few weeks as Wall Street and the budget world turn their attention to the soon-to-be-needed increase in the federal debt ceiling. Except that the bond market vigilantes are likely to be saying some thing completely different from what deficit hawks have been expecting.  Instead of doing what they did before by demanding deficit reductions, today's bond market vigilantes are far more likely to be insisting that the federal debt ceiling be raised whether or not the spending cuts and revenue increases some are saying is the precondition for their vote ever materialize.  In other words, screw the deficit.

The debt-ceiling drama begins - It won’t be topic number one for a few days, or even weeks, yet. But this is the week that the debt limit moves from abstraction to crisis. According to the Treasury Department’s estimates, we will officially hit the debt limit on May 16th. No one anywhere thinks there’s any chance that we’ll pass an increase in the debt limit in the next few weeks. So, as of Friday, Geithner is beginning “extraordinary measures” to delay an actual default.  In a letter to Congress, Geithner detailed the first of these: “On Friday, May 6, Treasury will suspend until further notice the issuance of State and Local Government Series (SLGS) Treasury securities,” he wrote. I’m not going to pretend to be an expert in SLGS securities, but their basic point is to help state and local government smooth out their finances. As Geithner writes, suspending them “is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses.” Sucks for them.

Extra Tax Revenue to Delay Debt Crisis— The Treasury Department¹ will initiate emergency measures Friday to keep the federal government’s total borrowing under the maximum allowed by law, as Congress continues to debate the terms of any increase in the debt ceiling.  Treasury now estimates that the emergency measures will allow the government to meet its existing commitments until the first week in August, officials said Monday, updating an earlier estimate that the government could run short of money by early July.  “While this updated estimate in theory gives Congress additional time to complete work on increasing the debt limit, I caution strongly against delaying action,” Treasury Secretary Timothy F. Geithner² wrote in a letter sent Monday to each member of Congress.  The Obama administration still expects that it will formally reach the debt limit — the maximum amount it is allowed to borrow — on May 16. Current law sets that ceiling at $14.29 trillion.  Once that happens, the law lets Treasury buy additional time through the shuffling of existing debts and the suspension of some programs.

Geithner Extends Debt-Ceiling Deadline to August - Treasury Secretary Timothy F. Geithner said the U.S. will have three weeks more than previously seen before hitting its borrowing limit, giving the White House and Congress more time for a deal to raise the debt ceiling.  The U.S. can borrow until Aug. 2 after reaching the $14.29 trillion limit because of “stronger-than-expected tax receipts” and by taking “extraordinary measures” such as suspending the sale of bonds to finance state and local infrastructure projects, Geithner said in a letter to congressional leaders yesterday. He previously said the deadline would be July 8. Without such measures, the legal limit will be reached May 16, he said.  The Treasury Department will take steps starting this week to provide additional borrowing room, Geithner said in the letter to Senate Majority Leader Harry Reid, a Nevada Democrat, and House Speaker John Boehner, an Ohio Republican. The May 16 date for when the U.S. reaches the limit unless Congress acts is unchanged from an estimate Geithner made last month.

Debt Ceiling Questions in the House - The date a debt ceiling is reached is based on a number of ever-changing factors and, therefore, is virtually impossible to predict with any certainty, but all indications are that it will happen in less than two weeks. That’s when the federal budget game of chicken actually begins and the Treasury will start to implement cash management techniques that it says will be able to stave off default for about two months. There obviously will be lots of moving pieces as the debate continues, but the calculus in getting a debt ceiling increase adopted before the word “default” becomes so commonplace that financial markets wreak havoc with interest rates and stock prices is actually not all that difficult. I see virtually no way tea party folks in the House and Senate will support a debt ceiling increase unless it includes all of their demands. In addition to significant spending cuts, they want the health care overhaul law defunded or repealed outright, a tax cut, and overwhelming changes in the Dodd-Frank financial regulatory reform law. Attaching those extreme requirements to a debt ceiling increase will be unacceptable to many or even most others in the House, Senate and White House. That would be OK if the tea party people had enough votes to pass the bill themselves, but they don’t.

GOP, White House talk deal on debts - GOP leaders and the White House are discussing a deal that would enact strict deficit targets and some spending cuts to win Republican votes for lifting the ceiling on how much the federal government can borrow. The deal would defer contentious decisions about Medicare, Medicaid and taxes until after the 2012 elections. If such an agreement were reached, it would allow both sides to assure financial markets and the public of their commitment to reducing the deficit and then use next year's campaign to lay out their competing visions for the future of major government programs. "We're not going to get a grand slam agreement. We're not going to get a big, comprehensive agreement, because of the political parameters," Rep. Paul Ryan, the Wisconsin Republican who chairs the House Budget Committee told reporters Wednesday. "My hope at this moment is to get a single or a double."

US Treasury to cut issues as May 16 debt cap nears -  The US Treasury said Monday it would begin cutting certain debt issues as it confirmed the government would reach its borrowing ceiling on May 16. With Congress still not agreed on raising the ceiling to permit the government to continue financing its spending, the Treasury said it would stop issuing state- and local-government series securities on May 6, money used for things such as local infrastructure development. While the move appeared aimed at sparking pressure from the states on the legislature, it also would help buy time for a political deal on the ceiling, by extending to August 2 the time the country would be forced to stop borrowing and possibly default on its debt. "Because the United States is very close to reaching the debt limit, Treasury must take this action now," Treasury Secretary Timothy Geithner said in a letter to Democratic Senator Harry Reid, the leader of the US Senate. "However, it is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses," he said.

As Debt Ceiling Isn't Raised, 'Headache' For Cities, States Begins Friday -- As the federal government approaches its legal debt ceiling and scrambles to avoid default, the first losers will be cities and states. Starting Friday, the U.S. Treasury will stop issuing special securities that help state and local governments pay for their debt, Treasury Secretary Tim Geithner announced in a letter to Congress this week. This freeze, the first in a series of 'extraordinary measures' undertaken by the Treasury to avoid a federal default, could pose difficulties for local governments nationwide, making it more complicated for strapped localities to manage their already weak finances. 'I could see it being a real problem for those guys, on top of all the headaches they have already,' said David Johnson, a partner at the Chicago-based ACM Partners, a boutique financial firm that advises struggling municipalities. Congress has been mired in a months-long gridlock, as lawmakers debate proposals to reduce the federal deficit. This stalemate in the highest echelons of American political power nearly shut down the federal government in April, when Republicans and Democrats clashed over a few billion dollars in spending cuts. Now, Republican lawmakers who advocate for budget austerity are saying they will not vote to raise the debt limit unless their demands are met.

Beyond the limit - YESTERDAY, Treasury Secretary Tim Geithner sent Congress a letter: I am writing again to Members of Congress regarding the importance of protecting America’s creditworthiness by enacting an increase in the statutory debt limit.  This letter is to inform you of the extraordinary measures the Treasury Department will begin taking this week in anticipation of the date the debt limit will be reached, and to provide an updated estimate of the Department’s ability to use these measures to preserve lawful borrowing authority without exceeding the debt limit.  In my last letter, I described in detail the set of extraordinary measures Treasury is prepared to take in order to extend temporarily our ability to meet the Nation’s obligations if an increase is not enacted by May 16, when we estimate the limit will be reached.  Because it appears that Congress will not act by May 16, it will be necessary for the Treasury to begin implementing these extraordinary measures this week. Mr Geithner reported that the drop-dead date beyond which these extraordinary measures can keep America current has been pushed back, thanks to stronger than expected tax receipts, to August 2. But beginning sometime in the next fortnight, the government will need to take unusual steps to make sure that its creditors get paid, not because it can't afford to pay those creditors, but because its leaders are unable to agree on whether they should get paid.

Treasury Details Steps to Avoid Default - Treasury Department officials said Monday that they will begin to take extraordinary actions Friday to manage the government's finances so the U.S. won't default after hitting its borrowing limit on May 16. The moves come amid divisions among congressional leaders over how to raise the $14.29 trillion debt limit and avoid a default that Treasury officials say could cause another financial crisis. Treasury Secretary Tim Geithner told lawmakers last month that the U.S. would hit the debt ceiling by May 16 and could default as soon as July 8. Officials now estimate that the actions announced Monday, combined with stronger-than-expected tax receipts, will enable the government to postpone a possible default until Aug. 2. But the longer Congress delays raising the debt ceiling, the greater the risk that markets will fall due to fears that the government won't meet its financial obligations.  In the first emergency step, Treasury on Friday will stop issuing state and local government series securities, commonly known as SLGS. That could make it harder for states and cities to issue debt, because they will have to seek issuers in the private market. If the debt limit hasn't been raised by May 16, the government will begin delaying payments into two government pension funds and redeeming Treasury securities in those funds. It also will suspend its daily investment of Treasury securities into another government employees' retirement plan.

Update on Debt Ceiling Charade -- The WSJ has an update on the charade: GOP, White House Talk Deal on Debt GOP leaders and the White House are discussing a deal that would enact strict deficit targets and some spending cuts ... The deal would defer contentious decisions about Medicare, Medicaid and taxes until after the 2012 elections. Targets that would aim to bring the deficit below 3% of gross domestic product by 2015 ... I find this amusing. First the current CBO projection shows the deficit at 3% of GDP in 2015 - so this is a big yawn, plus a future congress can change the rules. Of course the 3% includes the expiration of the tax cuts at the end of 2012, but that just means another battle after the election. (Note: the tax cuts were really "tax shifts" since they shifted the burden to future taxpayers).  Of course there is a huge battle ahead over the budget for the next fiscal year (the fiscal year starts on October 1st), but the debt ceiling debate is all a charade - although it allows Congress to force Treasury to do some extra work. The only smart vote would be to eliminate the debt ceiling vote in the future, and let the annual budget process automatically set the debt limit. But then there wouldn't be as much camera time ...

Can the President ignore the debt limit? -- Bruce Bartlett argues that President Obama can ignore the debt limit and instruct the Treasury Secretary to sell whatever securities necessary to keep the federal government open for business, regardless of the actions (or lack thereof) of Congress later in May. He argues this is necessary because not doing so would have such dire consequences: The president would be justified in taking extreme actions to protect against a debt default. In the event that congressional irresponsibility makes default impossible to avoid, he should order the secretary of the Treasury to simply disregard the debt limit and sell whatever securities are necessary to raise cash to pay the nation’s debts. They are protected by the full faith and credit of the United States and preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war. Claims the President has Constitutional powers that trump statutory law in this case:

Debt Ceiling Has Some Give, Until Roof Falls In - The federal government will not run short of money to pay its bills on May 16, when the federal debt reaches the legal maximum of $14.3 trillion.  Even after Aug. 2, the deadline the Treasury Department¹ set this week for Congress to lift the borrowing limit, the government might be able to delay a crisis, perhaps even for a few months, through extraordinary measures such as asset sales. But with every passing week of stalemate over the debt ceiling, the risk increases that investors will start to fret that the United States will not pay its debts, and demand higher interest rates for loans to the federal government.  Should that happen, the cost could be vast and the damage difficult to reverse.

GOP Plans to Demand Mandatory Cuts in Social Security, Medicare as Price for Debt Ceiling: It is increasingly clear that the Republicans will demand mandatory cuts in Social Security and Medicare as a price for increasing the debt ceiling later this spring. Of course they won't say they are demanding mandatory cuts in Social Security and Medicare. Over the Easter recess they've had a taste of just how strongly people feel about Medicare. Before they left the Capitol last month House Republicans voted -- almost unanimously -- for the Republican budget that ends Medicare and replaces it with a privatized system of partial support for private insurance premiums. They ran into a town hall buzz-saw of opposition in every corner of the country. The House Republican budget plan authored by Congressman Paul Ryan isn't going anywhere in the Senate. If the 'gang of six' Senators come up with a deficit reduction plan that is acceptable to its three Democrats and three Republicans, that may attract brief interest among the elite media. But such a budget deal would have to involve substantial increases in revenue -- presumably from raising taxes on the wealthy -- and that has exactly zero chance of being approved by the Republican House.

Is there a real risk of the US defaulting? - Binya Appelbaum is on the front page of the NYT this morning with what seems like a pretty standard examination of the effects of hitting the debt ceiling. I think the reason is its alarming headline: “Debt Ceiling Has Some Give, Until Roof Falls In.” I’m not entirely clear what exactly a caving roof comprises — but the general story is clear: there are various cash reserves and other assets that the government can tap, and then spending has to be cut. The Treasury secretary, Timothy F. Geithner, warned Congress in April that once those resources were exhausted, the government would have to default. “A broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds,” he wrote. Among the resources to be exhausted is a whopping $400 billion in gold reserves — that’s the current value of the government’s store of 261 million ounces of gold. Selling at these prices seems like quite a good idea to me: I can’t think of any particularly good reason why the government should be storing $3,500 of gold for every household in the country.

Treasury says roughly $2 trln debt limit increase needed to keep govt. operating through 2012: sources (Reuters) - The Treasury has told lawmakers a roughly $2 trillion increase in the legal limit on U.S. federal debt was needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said. Obama administration officials have repeatedly said that it is up to Congress to decide how much the $14.3 trillion debt limit should be raised. But when lawmakers asked how much of an increase would be needed to meet the government's obligations into early 2013, Treasury officials floated the $2 trillion figure, Senate and administration sources told Reuters. Former Treasury officials have said it is routine for Congress to ask the Treasury Department for guidance.

Keeping a big debt down - THE years immediately prior to the crisis and up to now were characterised by an enormous run-up in sovereign debt across the rich world. This spike in borrowing has had few recent historical precedents; among advanced economies only the growth in debts associated with the Great Depression and the World Wars were comparable. And historically, it has been extremely difficult to address debts of these magnitudes. There are only a few ways to bring down sovereign debt burdens. Growth is one, but growth may be impaired by high debt burdens. Austerity is another, but to cut debts this way requires a long period of painful policy, of the sort that's rarely tolerable to electorates. Default is another way. And rapid inflation is another way still. In the years after the Depression and the First World War, debts were often resolved—painfully and occasionally chaotically—through austerity, default, or inflation. The experience after the Second World War was quite different despite the fact that debt levels were often much higher than they had been in the 1920s and 1930s. Faster growth explains some of the difference in debt outcomes, but not all of it. Rather, say Carmen Reinhart and Belen Sbrancia in a new IMF paper, a fifth option—financial repression—was key to quickly and relativley painlessly addressing large sovereign debts.

Does The US Have A Lot Of Government Debt? -  Simon Johnson - In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in November and December 2010) toward “we must immediately cut the budget deficit.” The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt — and any further significant increase is likely to ruin us all. This way of framing the debate is misleading — and at odds with the fiscal history of the United States. Most of our government spending, now as always, goes to wars and transfers to relatively poor people and to older people. The military spending will come down — if we can end the wars (as we did in the past). The social transfers were constructed in a more open-ended fashion — and our long-term budget forecasts account for this form of future spending in a more transparent and more honest way than we do for the probability of future wars or financial crises. The real budget debate is not about a few billion here or there – for example, in the context of when the government’s debt ceiling will be raised. And it is not particularly about the last decade’s jump in government debt level. Although this has grabbed the headlines, it is something that we can grow out of (unless the political elite decides to keep cutting taxes). The real issue is how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people — and how rising health-care costs should affect those transfers.

Hard Keynesianism -  Krugman - Some readers ask whether Keynes believed that the government should always run deficits — and whether I believe that too. The answer is no on both counts.  If you go back to the debate over the Bush tax cuts back in 2001, Bush and Greenspan were saying that we needed to reduce revenue to get rid of the surplus; I was furiously opposed to that view, and wanted to maintain a surplus as long as times were good. (Following the principle that no good deed goes unpunished, my opposition to deficits in a strong economy is now being held up as evidence that I’m being inconsistent by saying that deficits are OK in a very weak economy. Sigh.) So if you’re a serious Keynesian, you’re for maintaining and even increasing spending when the economy is depressed, even though revenue has plunged; but you’re for fiscal restraint when the economy is booming, even though revenue has increased. This is, of course, the opposite of what Republicans have advocated over the past decade.

Origins of the Deficit - Krugman - Steve Benen gets exercised about the way Republicans place blame for our deficit on excessive spending, when that is very much not the story. I’ve been thinking about ways to make that clear; here’s one effort. What I do in the figure below is look at changes in real revenue and spending per capita. Real, to take account of rising prices; per capita, to take account of rising population. Now, even that adjustment still biases the calculation toward laying blame on spending, since both revenue and spending tend to (and should) grow over time even in real per capita terms; think about the forces driving Social Security and Medicare spending. But it gets us most of the way there. And one more adjustment: as in my Taylor takedown, I distinguish between safety net spending — income security and Medicaid — and the rest. So here’s what I get: CBO, BEA  Even on this crude calculation, it’s obvious that the slump is responsible for the great bulk of the rise in the deficit. Anyone who says otherwise is either remarkably ill-informed or trying to deceive you.

What Drives the Deficit? - Excellent set of charts and analysis from the Pew Fiscal Analysis Initiative breaking down the sources of the deficit: The U.S. will likely owe $10.4 trillion this year, its largest debt relative to the economy since 1950.  However, the Congressional Budget Office (CBO) projected in 2001 that the federal government would erase its debt in 2006 and be $2.3 trillion in the black by 2011 – a $12.7 trillion difference from today’s reality. This fact sheet highlights the extent to which major legislation enacted over the last decade and other factors have contributed to the Great Debt Shift – the difference between CBO’s 2001 projections and actual debt today. Click for larger graphic.

Running in the red: How the U.S., on the road to surplus, detoured to massive debt - The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis. In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses indefinitely. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.  Voices of caution were swept aside in the rush to take advantage of the apparent bounty. Political leaders chose to cut taxes, jack up spending and, for the first time in U.S. history, wage two wars solely with borrowed funds. “In the end, the floodgates opened,” said former senator Pete Domenici (R-N.M.), who chaired the Senate Budget Committee when the first tax-cut bill hit Capitol Hill in early 2001. Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II.

How America went from surpluses to deficits - If we hadn’t just found out that we located and killed Osama bin Laden, I would’ve spent much of the day blogging about this excellent Lori Montgomery piece pivoting off of this excellent Pew report that breaks down, in clearer language, graphs and numbers than I’ve seen anywhere else, how America went from surpluses in the ’90s to mountainous deficits in the Aughts. As Lori writes, “The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.” A series of choices, actually. No policy contributed more to the deficit than the two rounds of tax cuts passed in 2001 and 2003. The wars were also major contributors. The Medicare Prescription Drug Benefit, though its costs will build over time, was not a particularly large part of the story over the last decade. But then our unfortunate choices were compounded by an unexpected crisis. The financial crisis crushed our economic outlook. Revenues plummeted and spending grew. Then there was the stimulus package, which though smaller and much shorter-lived than either the tax cuts or the wars, was nevertheless significant. And as all this debt begins to mount, our interest payments begin to expand, until they’re actually significant as well. You can see a great chart breaking down the changes that drove the CBO’s outlook from surpluses by 2011 to deficits as far as the eye can see:

The cost of Osama bin Laden - Even a very partial, very haphazard, tallying of the costs from 9/11 reaches swiftly into the trillions of dollars. The Afghanistan and Iraq wars, neither of which would’ve been launched without bin Laden’s provocation, will cost us a few trillion on their own, actually. But before such reprisals were even on the table, there was the attack itself, which largely shut down the American economy for a matter of days, and then slowed it for weeks. There was a long period in which Americans avoided the airlines, which pushed them so close to bankruptcy that Congress passed a $15 billion federal bailout, but the costs of that intervention pale in comparison to the price of the endless security theater Americans undergo each time they need to fly, which some experts peg at $8 billion a year — and there’s a good argument that they’re being conservative. We shouldn’t forget the price of oil, which skyrocketed after we invaded Iraq, and the extended period of loose monetary policy, which the Federal Reserve thought necessary first to avert a post-attack recession and then to counter the headwinds of high oil costs, but which Nobel-prize winning economist Joseph Stiglitz considers at least partially culpable for the credit bubble that led to the 2007-2008 financial crisis. The direct costs of 9/11 need to be added into the mix, too: rebuilding the Twin Towers and the Pentagon and paying some of the health costs of first responders, just for starters. We’ve spent billions and billons on new homeland security measures, many of which were probably unnecessary.

Paul Ryan's Moral Barbarism -- Karl Rove's column the other day joined the many conservatives expressing their hurt and anger that President Obama would depict Paul Ryan's budget as harming sick and vulnerable citizens: Mr. Obama likes campaigning more than governing. And for this president, campaigning means knocking down straw men and delivering a steady stream of misleading attacks. It means depicting opponents as indecent, heartless people who take special delight in targeting seniors and autistic children. In fact, Obama has never accused Ryan, or anybody, of having a "special delight" in targetting seniors and autistic children. But he has accused them of pursuing policies that would harm, among others, seniors and autistic children. That's because it's incontrovertably true. The Center on Budget and Policy Priorities delves into the details of Ryan's plan to slash Medicaid by more than a third over the next decade, and in half over the next two decades:

Moment of Falsehood - Krugman - Well, remember how the Ryan budget was supposed to mark our national moment of truth, forcing us into a serious discussion of fiscal choices? Neither do I. For now that the budget has turned out to be both cruel and ludicrous, Republicans have taken to defending it by … lying about it. Jonathan Cohn catches Marco Rubio declaring that the Ryan plan doesn’t cut Medicare funding — when the Medicare cuts were precisely what supposedly made the plan “serious”. (We were supposed to focus on that, not on the huge tax cuts or the plan’s reliance on assuming that discretionary spending could be reduced to Calvin Coolidge levels). So we’re now completely in black-is-white territory. The moment of truth has turned into (yet another) moment of falsehood.

The Republican Descent Into Economic Darkness - Krugman - Ryan Avent listens to Paul Ryan’s ideas on macroeconomic policy, and is appalled: it’s all spending cuts and tight money, which would be a recipe for another recession. I don’t know whether Avent was really surprised by this — if so, he hasn’t been paying attention. 1930-vintage macro has been all the rage in GOP circles for a while now. But not, actually, for all that long. Here’s a snip from the table of contents for the 2004 Economic Report of the  Aggressive monetary policy is good? What would Ron Paul say? And the bit about tax cuts, although it makes a deferential nod to supply side dogma, is mainly a more or less straight Keynesian argument for increasing aggregate demand. To be sure, this is Greg Mankiw writing; but still, look at what he was allowed to say. Some of this is just partisanship: wanna bet that, say, John Taylor would be a lot more sympathetic to expansionary policies if his party held the White House? But the truth — which I suspect that people like Greg aren’t willing to face, yet — is that the intellectual barbarians have completely overrun a party that even a few years ago was still capable of making sense.

The Republican Plan With Lipstick - Republicans figure that if they can’t sell the pig, they’ll just put lipstick on it and find some suckers who will think it’s something else. That’s the proposal emerging in the Senate from Republican Bob Corker of Tennessee and also Democrat Claire McCaskill of Missouri. It would get the deficit down not by raising taxes on the rich but by capping federal spending. If Congress failed to stay under the cap, the budget would be automatically cut. According to an analysis by the Center on Budget and Policy Priorities, the McCaskill/Corker plan would require $800 billion of cuts in 2022 alone. That’s the equivalent of eliminating Medicare entirely, or the entire Department of Defense. Obviously the Defense Department wouldn’t disappear, so what would go? Giant cuts in Medicare, Medicaid, education, and much of everything else Americans depend on.

GOP's Kinder, Gentler Medicaid Gutting  -  After first placing Paul Ryan's drastic Medicaid-slashing proposal on the negotiating table, Republicans are lining up behind a yet another plan to curb the program's benefits and payments—a smaller-scale change that's likelier to pass Congress. Republicans in both houses introduced bills on Tuesday that would eliminate federal regulations that prevent states from trimming their Medicaid rolls or erecting new barriers to enrollment. In February, Mother Jones broke the news that Republicans planned to target these so-called Maintenance of Effort (MOE) requirements, which the federal government put in place after giving states a new injection of Medicaid money in 2009. Now they've made good on their promise. The State Flexibility Act—sponsored by Sen. Orrin Hatch (R-Utah) in the Senate and Reps. Phil Gingrey (R-Ga.) and Cathy McMorris Rodgers (D-Wash.) in the House—would give states significantly more leeway in kicking beneficiaries to the curb, reducing payment to nursing homes, and making other reductions to shrink budget gaps.

Voters Dislike GOP Plan to Change Medicare, Medicaid - Republicans have some selling to do. Changes to Medicare and Medicaid remain wildly unpopular and more than two-thirds of registered voters want to repeal Bush-era tax cuts for households that make more than $250,000 a year, according to the latest Quinnipiac University poll. More than twice as many voters oppose efforts to change Medicare than those who favor limiting benefits under the popular health-care program for seniors. And a distinct majority opposes new limits on Medicaid, the federal-state health program for the poor. What’s worse for the GOP, the numbers don’t change much when voters were told how much federal spending Medicare and Medicaid consume. Quinnipiac told half of the 1,408 registered voters the university polled that Medicare, Medicaid, Social Security and defense spending consume 60% of the budget. The other half weren’t. Among those who were told, 70% opposed efforts to change Medicare, compared with the 75% who weren’t told. For Medicaid, 57% of the first group opposed limits, compared with the 59% of the control group that also opposed changes. The only significant change came on the question of defense spending, with support for cuts increasing by 7% when voters were told how much the government spends on the military.

Republicans in House Signal Retreat on Medicare Plan — House Republicans signaled on Thursday that they were backing away for now from the centerpiece of their budget plan — a proposal to overhaul Medicare¹ — underscoring the political risks of addressing the nation’s long-term fiscal problems.  Republican leaders insisted that they remained committed to the Medicare proposal, put forward by Representative Paul Ryan² of Wisconsin, which has drawn intense attacks from Democrats and liberal groups in recent weeks. But they chose not to proceed with legislation this year, effectively putting the issue off until after the next election.  The debt-ceiling talks were never likely to settle long-term issues like the soaring costs of Medicare. But the decision by Republicans to put the Medicare plan on the back burner was a tacit acknowledgment that the politics of entitlement reform remain volatile, so much so that pressing ahead in the face of intense Democratic opposition made little sense.

Don’t worry about Medicare. Worry about Medicaid - It doesn’t matter whether Eric Cantor says he’s bargaining for the Ryan budget or not. The GOP cannot privatize and voucherize Medicare. They can’t even get close. It’s too easy an issue for Democrats, too dangerous an issue with seniors, and too slipshod a policy even for Michele Bachmann. The attack on Medicaid, however, is another story. That one might actually work. And if it does, it’ll actually be worse. “In in-the-know political circles,” “it’s just assumed Medicaid is going to be hit. No one is going to want to touch Medicare. Medicare is where the political juice is. But we’re going to need savings. So that leads to Medicaid.” There are two reasons Medicaid is more vulnerable than Medicare. The first is who it serves. Medicaid goes to two groups of people: the poor and the disabled. Most of the program’s enrollees are kids from poor families, though most of the program’s money is spent on the small fraction of beneficiaries who are disabled and/or elderly. These groups have one thing in common, however: They’re politically powerless. The second is who pays. Medicare is a federal program. Medicaid is a state-federal match, and it kills states during recessions, as unlike the federal government, states can’t run deficits, and so they find themselves with increased costs because they have more people in need but decreased revenues.

Paul Ryan's roadmap to recession - Mr Ryan began his remarks this morning by saying that a growing body of evidence supported the idea that America's recovery has been weak primarily because of activist government policy. He repeated this assertion about the growing body of evidence toward the end of his comments, this time providing an actual citation: this piece of commentary by former Fed Chairman Alan Greenspan. His paper, Mr Ryan noted, contained an "impressive regression". And that was it; as far as we were made aware, the growing body of evidence consisted primarily of a short, lazy piece of analysis by a Fed chairman who's most famous previous involvement in the regulatory system was his failure to rein in a dangerous explosion in irresponsible mortgage lending. Mr Ryan then proceeded to lay out his four pillars for a strong recovery. First up were spending cuts. Government spending is generating uncertainty among investors, as are increases in the debt, he argued, and this problem must be tackled immediately.  Pillar number two is regulatory reform. Big companies and banks are being choked by new regulations, many of which were put in places by new pieces of legislation some of which contained an alarming number of pages. This all must be stopped. Regulations must be rolled back.

Why I Hate Budget Caps - They are arbitrary and beg to be gamed. It is irresponsible to make one that is absolutely unbreakable, even in the face of an economic depression or other national catastrophe. Yet even the most well-intended exception will open the door to wholesale abuse.Caps–and the triggers needed to enforce them– are supposed to be a last resort for legislators. Yet, they perversely encourage stalemate by providing an easy fallback in the face of gridlock. By mindlessly but automatically slashing spending or raising taxes across-the-board, they permit Congress to avoid setting national priorities though, last I looked, this is why lawmakers are here.     Mostly though, caps only work during those rare moments when Congress wants to be fiscally responsible. When Congress prefers profligacy—which is most of the time—they become little more than an inconvenience. And it is never good for democracy when lawmakers routinely ignore the law.

Federal Budget Deficit Totals $871 Billion in the First Seven Months of 2011 - CBO Director's Blog - The federal government incurred a budget deficit of $871 billion in the first seven months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review, roughly $70 billion more than the deficit incurred in the same period in 2010. That deficit would have been higher if not for the larger-than-expected payments with individual income tax returns filed near the end of the spring tax-filing season. Receipts in April totaled $289 billion, $44 billion (or 18 percent) more than collections last April. Nonwithheld receipts of income and payroll taxes, largely from filings of income tax returns, rose by about $35 billion (or 27 percent) to their highest level for the month of April since 2008.

Addison Wiggin: We Can't Afford the Solutions Needed To Reverse Our Decline - "Everything is out of whack. We can’t be the policeman to the world and provide a safety net for all citizens if we don’t have the tax rates or the income to the government that supports all that. It seems like common sense, and it should be common sense. But something happens when you take it from a discussion that you and I might have to the political level, which is often just driven by emotion and public speech. Somehow the desire, the continued promising that the government can solve all problems, meets with jubilation and boasts. And people want to just keep going, and they never want to actually accept that at some point the unsustainable has to end. I mean, that’s the nature of the world.  It gets frustrating to think that we’re at a point where politicians are really going to have to work together to come up with solutions that are going to be unpopular to anyone - and I struggle to think that we’re even capable of putting together a set of solutions that will work. It might be too late." So states Addison Wiggin, executive publisher of Agora Financial and executive producer of I.O.U.S.A.  Click the play button below to listen to Chris' interview with Addison Wiggin (runtime 41m:50s):

How to Shrink the Deficit - It annoys me that Republicans argue against elimination of special tax benefits for anyone, calling it a tax increase. The tax code needs to be cleaned up, as do subsidies.  It is not the proper place of government to be handing out special favors.  If the Republicans want to do what is right they need to trade — eliminate a subsidy/tax break that some of their constituents like in exchange for eliminating a subsidy/tax break that the Democrats like.  Rinse, lather, repeat, until we are back to something like the Tax Reform Act of 1986, or better. Look, I am for cutting the Defense budget bigtime, because it is offense, not defense; we do not need so much to defend us.  Fold Homeland Security into Defense.  Also cut Social Security and Medicare — we can’t afford them at the level indicated, but not promised… remember that these programs are statutory and not guaranteed. After that, go after the discretionary budget, and eliminate whole departments.  Why do we need an energy department when prices are beyond control?  Why do we need an agriculture department when food prices are high, and likely to remain so?Education department?  Things have gotten worse since its creation — eliminate it.  HUD, HHS — great big wastes, eliminate them.  Commerce, Treasury, Labor, State, Interior, Transportation, Veterans Affairs — cut them in half, and see how they adapt.  Make the Fed shrink by 90% or more… what does it take to do monetary policy? The deficit can be cut.  It is all a question of will.

The Trouble with “Brute Force” Budget Processes - As a Concord Coalition issue brief (written by my colleague, Cliff Isenberg) explains, they’re just not very “forceful”:Process proposals such as caps, commissions, points of order and constitutional amendments are often appealing solutions for politicians because they frequently leave out the specifics of politically difficult decisions necessary to meet the targets. For elected officials, it is far easier to discuss a cap than it is to tell voters that their Social Security or Medicare benefits will be cut or a favorite tax deduction will be eliminated.As a means of actually reducing deficits, the benefits of process proposals are less clear. In the past, similar proposals have had a mixed track record because they have frequently been poorly designed and weakened with exemptions. For a process proposal to have a meaningful effect on trillion-dollar deficits and our $14 trillion debt, these mistakes of the past must be avoided. An effective budget process proposal should limit exemptions, consider the entire federal budget to be on the table for deficit reduction, include realistic targets, and be accompanied by a bipartisan commitment both to enforce the targets and support the specific spending and revenue policies necessary to meet them.

In Defense of Muddling Through - The idea of grand bargains, big deals, and come-to-Jesus moments where our leaders get serious about the deficit are sexy but they are not realistic and quite frankly not smart. Big ideas make for big narratives and great stories to tell your grandkids but the history of ideas is that most of them suck and hanging your hat on any one of them is the surest route to ruin.  Ezra Klein outlines the real endgame None of the major deficit deals in recent decades has subtracted more than $500 billion from the cumulative deficit over a five-year period,” the authors note. When Ronald Reagan had to reduce the deficit, he raises taxes multiple times over a course of years and  In the 1990s, there were three separate deficit-reduction bills: George H.W. Bush passed one in 1990, and Bill Clinton passed follow-ups in 1993, 1995 and 1997. The wish for a grand bargain that’ll take care of the deficit all at once is probably just that: a wish. The likelier outcome is a slew of deficit-reduction measures passed over the next decade or so. Bit-by-bit we make our way. That’s how the future is built.

Budget talks: Republicans offer to seek common ground with Democrats - Senior Republicans conceded Wednesday that a deal is unlikely on a contentious plan to overhaul Medicare and offered to open budget talks with the White House by focusing on areas where both parties can agree, such as cutting farm subsidies. On the eve of debt-reduction talks led by Vice President Biden, House Majority Leader Eric Cantor (Va.) said Republicans remain convinced that reining in federal retirement programs is the key to stabilizing the nation’s finances over the long term. But he said Republicans recognize they may need to look elsewhere to achieve consensus after President Obama “excoriated us” for a proposal to privatize Medicare. That search could start, Cantor said, with a list of GOP proposals that would save $715 billion over the next decade by ending payments to wealthy farmers, limiting lawsuits against doctors, and expanding government auctions of broadcast spectrum to telecommunications companies, among other items.

Bipartisan effort to reach deal to control national debt stalls - A bipartisan effort to rein in the national debt stalled Tuesday, as members of the Senate’s so-called Gang of Six signaled that an agreement is unlikely to come this week in time for the start of White House-led budget talks. The absence of a deal deprives policymakers of a bipartisan centerpiece that could smooth the way toward agreement in the contentious battle ¹between Democrats and Republicans over the appropriate size and shape of government.  Members of the Gang of Six said Tuesday that they are continuing to meet daily and that a deal is still possible. However, one of the six, Sen. Tom Coburn (R-Okla.), left town abruptly Tuesday because of a family emergency, leaving lawmakers and the White House as they begin negotiations over whether to allow the government’s debt to keep rising².

The People's Budget: Cutting the Deficit the Progressive Way - In previous posts, I have discussed bipartisan attempts to find a fiscal policy compromise (here and here), and also Republican plans for closing the budget gap through spending cuts alone (here and here). Today's post turns to the less widely publicized People's Budget from the Congressional Progressive Caucus. What is there to like about the progressive fiscal plan, and what not to like? First what I like. On the spending side, the People's Budget does not limit itself to swinging a meat-ax at tiny targets like NPR and AmeriCorps within the 12 percent of the budget that is made up of discretionary nondefense spending. Instead, it goes after some really juicy chunks, including defense. Not just at waste, fraud, and abuse in the military budget, either. It comes right out and proposes an orderly but swift end to the military adventure in Afghanistan, thereby saving something between $400 billion and $1.6 trillion, depending on what baseline you compare it to. Next, the People's Budget takes aim at the nation's infrastructure deficit. As I argued in an earlier post, cutting infrastructure investment below what is needed to cover depreciation, as has been done in many areas, is an illusory way of improving the national balance sheet. What is saved in terms of reduced financial liabilities is offset by more rapid depreciation of real assets like bridges, dams, and power lines. In fact, since deferral of needed maintenance almost always means greater spending later when something breaks, cuts to infrastructure spending often end up making the nation's consolidated balance sheet weaker, not stronger.

What Do You Mean We, White Man? Deficit Edition - Krugman - Whenever I read pieces like David Brooks’s column this morning — pieces that attribute our budget deficits to the public’s irresponsibility and lack of realism — I find myself wondering how so much recent history went down the memory hole. To be fair, polling on budget questions does suggest a popular demand that we repeal the laws of arithmetic — that we not raise taxes, not cut spending on any popular program, and balance the budget. But if we look at actual policy changes, it’s hard to see that too much democracy was the problem.Remember, we had a budget surplus in 2000. Where did it go? The two biggest policy changes responsible for the swing into deficit were the big tax cuts of 2001 and 2003, and the war of choice in Iraq. And neither of these policy changes was in any sense a response to public demand. In fact, the only budget-busting measure undertaken in recent memory that was driven by popular demand as opposed to the agenda of a small number of powerful people was Medicare Part D. And even there, the plan was needlessly expensive, not because that’s the way the public wanted it — it could easily have been simply an addition to traditional Medicare — but to please the drug lobby and the anti-government ideologues.

Tax Promises That Need to Be Broken - Both parties are stuck in their own tax policy trenches: Republicans in their “don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP” trench; Democrats, including President Barack Obama, in their “raise taxes on households making over $250,000 a year” trench… To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with “supply-side” economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy… To those on the left who are holding fast to the president’s promise not to raise taxes on households with incomes below $250,000 a year, here’s your paradox: Limiting the pool of households to tap for revenue increases means limiting the revenue-side strategy for deficit reduction.

Lucky Duckies Waddle Onto the WSJ News Pages - The Wall Street Journal has a poor story today reporting that “High-Earning Households Pay Growing Share of Taxes.” The paper’s editorial page has long pushed this issue, notoriously referring to folks who pay no income taxes as “lucky duckies.” You know, lucky enough to be so poor that they don’t have to pay taxes. At least we got a comic strip out of that: The Journal’s story would have you believe that the rich are shouldering almost all of the tax burden. But the federal income tax is just part of the overall tax burden, and the paper barely mentions that fact, while it conflates income taxes and overall federal taxes.

The WSJ’s dubious fiscal reporting - I’m not impressed with the fiscal reporting of John McKinnon, whose WSJ story, headlined “High-Earning Households Pay Growing Share of Taxes”, appears in the paper’s ostensibly impartial news pages, as opposed to its wing-nut editorial page. Here’s the lede: As President Barack Obama pushes to raise income taxes on high earners, opponents are seizing on data that indicates these U.S. households already pay a large and growing share of taxes, even compared with high-tax European countries. The context is clearly laid out in the opening words: the big debate on income taxes which is going on right now between the White House, which is pushing — um, hang on a sec. What debate? What push?  After all, it’s only a few months since President Barack Obama extended the Bush tax cuts on people earning more than $250,000 a year..

Who Pays No Income Tax? It is the Wrong Question - Would you rather get a tax cut of $1,000 or $1.4 million?  I thought so.  Would you change your answer if taking the smaller tax cut allowed you to avoid paying income tax entirely? That is exactly the focus of the endless squabble over the half of American households who pay no federal income tax. This factoid has become a source of outrage for anti-taxers ever since they got wind of some estimates by my Tax Policy Center colleagues. But framing the debate as being about who pays tax and who doesn’t misses the point. The question we should be asking is who benefits most from more than $1 trillion in tax preferences  that litter the tax code. And the answer is clear: While nearly everyone takes advantage of these breaks, the highest income households do best—by far—even though they are still likely paying some tax after taking those deductions and exclusions. 

Voluntary Taxes - Via this Greg Mankiw post I am pointed to a post by Steven Landsburg that argues, the Obamas paid $450,773 in taxes, taking full advantage of the Bush tax cuts. I think it is fair to ask: If the President believes that people like him ought to be paying more, then why didn’t he pay more? There is absolutely no rule against sending in more money than you owe. Landsburg goes on to argue that while the extra contributions from the Obamas would be small, so would their sacrifice, since they are only one family as opposed to many. Indeed, the Obama sacrifice would give more bang for the buck since it would go to the most underfunded areas of the government. What this highlights is a breakdown in the way we talk about taxes. Its convenient to make simply moral plays – the rich should pay more taxes. Where in this case we use the word should like we do when we say you should call your grandmother more often. That is, the rich have a moral obligation to help the country by paying more taxes.

There Will Be Taxes, Ctd -- Orin Hatch (R-UT) has a somewhat confusing statement on taxation With the income tax base so narrow, meaningful reductions in our deficits would require far more than taxes on the rich.  Those tax increases would squarely hit the middle class, which the President and others have said is off limits. In short, the quest for social equality results in fewer resources and worse outcomes for the nation as a whole and the poor in particular. I’d like to make a couple of notes because I think many of my friends on the right, for their own sake, are going down the wrong road on this one.

1. The narrowness of the base depends on the share of income going to the taxed. If say only the top 400 households in America paid income tax but they took 90% of the income then the base would be fairly broad. Its just important to remember that we arguing that the budget cannot be balanced on taxes on the rich. It depends on how rich they are.
2. Letting the income tax wither and die is in the long run interests of reducing the impact of taxation on growth. As is strengthening Social Security through payroll tax increases. It is already almost the case that the majority of US federal revenue come from a flat tax on labor. Imagine that, do you think you could ever convert the income tax to a flat tax on labor? Yet, the mechanics are making that happen on their own.
3. Raising taxes for the rich by ending the cap on the payroll tax is the quickest way to move the US even further down the road towards a flat tax nation.

Opposing view: Rich take home more, pay less - The American people value hard work and responsibility. We know that we must all work hard to succeed, and we ask much of our fellow citizens: that we become informed voters, that we act as responsible consumers and business leaders, and that we pay our fair share of taxes. High-income households have benefited disproportionately from recent economic growth. Between 2002 and 2007, the top 1% of earners, those currently making more than $378,000 a year, captured a whopping 65% of economy-wide income gains. Those in the top 1% now take home around 20% of the nation's total income, and control over one-third of all wealth in the country.Tax policies of the past decade also excessively benefited the rich, who now pay relatively low taxes by historical standards. For example, the top 400 households, with an average income of over $350 million, saw their taxes fall to just under 17% in 2007, down from an average of 26% in 1992. This is just a couple percentage points above the rate for middle-income families and less than the economy-wide average.

Raise Taxes, but Not Tax Rates - REDUCING the budget deficit and stopping the explosion of our national debt will require more tax revenue as well as reduced government spending. But the need for more revenue needn’t mean higher tax rates.  As the bipartisan fiscal commission appointed by President Obama stressed last year, tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name.  Tax credits for buying solar panels or hybrid cars are just like government spending to subsidize those purchases. Similarly, the exclusion from employees’ taxable incomes of employer payments for health insurance is no different from subsidizing the purchase of those insurance policies. The deduction for interest on residential mortgages, probably the best-known tax expenditure, amounts to a giant subsidy for homeownership.  At their worst, such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care.  Tax expenditures collectively increase the budget deficit by more than all other nondefense spending combined, other than Social Security and Medicare.

Martin Feldstein says raises taxes, but not rates - While figuring out tax incidence-who actually bears the burden of the tax--is difficult, my guess is that his proposal, which would limit all deductions to two percent of adjusted gross income, would raise revenue, simplify the code, reduce deadweight losses (i.e., economic inefficiency), and produce a more progressive tax code.  It is the last of these that I am not sure about, but if we also raised the top rates to their Clinton-era levels, then one gets a more progressive code too.  I have seen no evidence that raising the top marginal rate from 35 to 39 percent would produce substantial deadweight loss. I think such a proposal would need to be phased in--it would be a shock to lots of different markets, but I like the thinking behind it. 

Small Business Owners Demand Repeal Of Bush Tax Cuts For The Rich - Tax cuts for the wealthy, according to Teahan, will do nothing to bolster his firm. They won’t affect his hiring decisions, they won’t encourage him to buy new equipment or help him move into a bigger warehouse. He says all of those decisions -- the nuts and bolts of actually running a small company -- depend on the his customers' economic conditions, not his personal tax rate. "What we do in business, how we spend our money, how we allocate our resources -- that has very little to do with tax policy," Teahan says. "I map my business based on my customers, and what my customers want to buy, and what they can afford to buy." It’s a common complaint from small business owners. While congressional Republicans and entrenched corporate lobbying groups like the U.S. Chamber of Commerce -- which is holding a Wednesday meeting on small business priorities -- and the National Federation of Independent Business (NFIB) have been pushing hard to preserve the Bush tax cuts for the wealthy by touting the interests of small firms, much of the small business community is demanding that those very tax cuts be repealed. The tax breaks for the wealthy will add $700 billion to the debt over the next 10 years, according to the White House's Office of Management and Budget. And many small firms say that money would be better spent on direct aid to the middle class.

Chart of the Day: 9% of Americans Are Millionaires in 2011 - How many millionaires do you know? The answer to this probably depends on your occupation, location, and whether or not you have your own reality show. But as explained in an earlier post, there are quite a few millionaires in the U.S. -- there will be 10.5 million in 2011 according to the Deloitte Center for Financial Services. That might not sound like too many, but this number is expressed in households, not individuals. And there are only about 118 million households in the U.S. So really, a fairly large -- if not surprisingly large -- portion of U.S. households belong to the millionaire club.  In 2011, using the Deloitte estimate, around 9% of all U.S. households will be millionaires, if you estimate that households will grow this year at approximately the same rate they did in 2009 and 2010. Using millionaire estimates from the recent Deloitte report and the number of households according to the Census Bureau, here's how that percentage has changed over the past decade:

An Empty Offer From the Super-Rich - It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he’s in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett’s blood boiling when the Facebook founder declared himself “cool” with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two. Bartlett, a former member of the Reagan White House, isn’t against the wealthy paying higher taxes. He’s that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It’s a hollow gesture to say the federal government should raise the tax rate on the country’s top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.

Ask Mr Grammar Person - What is wrong with this sentence ? It is true that making the headline corporate income tax rate lower would be a good idea since that might give us a less distortionary tax code,, but in light of the long-term budget crunch that means we need to make up for any rate cuts by closing dividends. Yes I write about grammar partly as a joke (I don't joke about spelling -- it is too painful). But I am serious. Matthew Yglesias draws a very definite conclusion in the italicized indicative from a claim in the subjunctive. It is always a mistake to say that something "is" true because something else "might" be true. This point is too elementary to be elementary logic. I think I have something medium serious and almost worth reading on the corporate income tax after the jump.

U.S. Business Has High Tax Rates but Pays Less - The United States may soon wind up with a distinction that makes business leaders cringe — the highest corporate tax rate in the world.  Topping out at 35 percent, America’s official corporate income tax rate trails that of only Japan, at 39.5 percent, which has said it plans to lower its rate. It is nearly triple Ireland’s and 10 percentage points higher than in Denmark, Austria or China. To help companies here stay competitive, many executives say, Congress should lower it.  But by taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less¹ — than their competitors abroad and at home. A Government Accountability Office study² released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.  The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance,”

Evidence Overwhelmingly Against Another Tax Amnesty for Overseas Corporate Profits - Today’s Washington Post story on the doings of the Washington “influence industry” (as the headline puts it) spotlights the massive lobbying campaign underway to convince Congress to grant large multinational corporations a temporary tax holiday for overseas profits they bring back to this country.  This sets up a classic Washington battle of influence versus evidence.  Here’s some evidence (more here):

• A similar tax holiday enacted in 2004 proved to be a complete policy failure.
• Repeating the tax holiday would increase incentives to shift income overseas. Many companies responded to the 2004 holiday by shifting even more profits overseas. If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future.   
• There’s no free lunch — corporate tax amnesty would add to deficits. One lobbyist in the Post story advances the line that the holiday would “cost taxpayers next to nothing.”  In reality, the Joint Tax Committee estimated in 2009 that a similar proposal would cost $29 billion over ten years (see chart) — an expensive lunch even by Washington standards.

Reihan on Public and Private Investment - He starts It is widely believed that shifting the tax base towards consumption, through, for example, a progressive consumption tax, would have a large and significant impact on investment levels. And the beauty of this kind of decentralized private investment is that it involves risk-takers (and risk-bearers, ideally!) making bets with their own money. I agree that decentralized decision makers making bets – though not necessarily with their own money – are likely to stumble across innovation. However, scale matters, which is why most folks in the innovation business are actually playing with someone else’s money – sometimes twice removed. A start-up gets money from a venture capital fund which is in turn supported by a hedge fund which in turn is playing other people’s money. This leveraging process is powerful and important for creating things. Its also why the government can accomplish amazing things. It has the ability to more or less leverage its entire taxing authority if wishes too. The problem I see is more subtle. That to leverage in the private world you have to convince folks you have a good idea and deliver. Leveraging the political process is a complex mixture of power monopolies, political incumbency and an electorate with limited attention.

Needed: A Clearer Crystal Ball, by Robert Shiller - THERE were relatively few persuasive warnings during the 1920s that the Great Depression¹ was on its way, and few argued convincingly during the last decade that the most recent economic crisis was near. So it’s easy to conclude that because we didn’t see these events coming, nothing could have been done to prevent them.  In fact, some people view the recent crisis as just another “black swan event,” one of those outliers, as popularized by Nassim Taleb, that come out of the blue. And it’s clear that a lot of smart people simply didn’t see the housing bubble, the instability of our financial sector or the shock that came in 2007 and 2008.  But the theory of outlier events doesn’t actually say that they cannot eventually be predicted. Many of them can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life.

Are We Getting The Data We Need? Maybe Not. - In following the Great Recession and its ongoing aftermath,  I’ve had the nagging anxiety that somehow we’ve lost our ability to derive reasonably accurate data about financial transactions.  Not just transactions in the US, but even more so globally.  My first exposure to this problem came when I looked at the volume of derivatives, and their notional value, over at the Bank for International Settlements (BIS). BIS listed, are you ready, more than $600 trillion in derivates in 2008!  This is a multiple of the world’s entire annual production.  Some of the TBTF banks involved in creating the financial meltdown had as much as $10 trillion on their balance sheets!   And other than the BIS listing, almost none of this activity falls under regulatory scrutiny.   Credit default swaps were more than $54 trillion in 2008 and this is the third largest category. No wonder the world’s banking system almost collapsed.  Nobody knew the value of these instruments, only that the purported value was probably vastly overstated.  Small wonder banks wouldn’t even lend overnight funds to each other.

Geithner Exempts a $30 Trillion Derivatives Market From Regulation and Oversight - On Friday, the witching hour of government press releases they want no one to read, the Treasury Department announced they will block regulation of large classes of derivatives: Treasury is today issuing a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards. This proposed determination is narrowly tailored. FX swaps and forwards will remain subject to Dodd-Frank’s rigorous new trade reporting requirements and business conduct standards. Additionally, the Dodd-Frank Act makes it illegal to use these instruments to evade other derivatives reforms. Importantly, the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps, and non-deliverable forwards. These other FX derivatives will be subject to clearing and exchange requirements. The entire press release is almost burying the announcement for no regulation of FX swaps and forwards. Multinational corporations use FX swaps to hedge on currency fluctuations. According to Better Markets, this will bring out the financial engineers for some sort of derivative trickery fiction:

Derivatives Craziness And Political Corruption - This is a follow-up to my April 23rd post Derivatives Craziness And The Next Bailout.  As predicted, Timmy Geithner has proposed exempting FX swaps and forwards from regulation as specified in the Dodd-Frank financial "reform" bill. Under the requirements of the Dodd-Frank legislation, all FX swaps and forwards are supposed to be reported to a swap data repository or, if there wasn't one, to a regulator like the U.S. Commodities Futures Trading Commission (CFTC). The regulator is supposed to investigate irregular activity. Foreign exchange forwards and swaps represent about $50 trillion in nominal value of a total derivatives market of almost $600 trillion. Unfortunately, Congress gave some leyway to the U.S. Treasury to exempt some derivatives from regulation. If the U.S. Treasury has its way, FX swaps and forwards will not be regulated, and trillions of dollars of interest rate swaps and OTC forward contracts are almost certainly going to be restructured into the form of FX swaps and forward contracts, defeating the purpose of Congress.

Financial Regulatory Reform: How Does It Help, How Does It Hurt? - (video)There was a lot of disagreement about what needed to be done, the ideological divide was basically between those who said it our problems came from too much government involvement in the economy and those who said it was from not enough (including ineffective government, e.g. on the regulatory front). But this year the recession and particularly the responses to it are largely taken as given and all but complete, and it's more about how things have changed, which of the changes will survive, and how to thrive in the new environment. Unfortunately, in my view the problems are still with us -- for example, we need to build on the weak regulatory foundation that Dodd-Frank gave us, not weaken it further -- but most eyes seem focused on the future rather than on the big problems that are still with us. I hope that doesn't come back to haunt us when the next large shock hits the financial system: Speakers:

• Kenneth Griffin, Founder and CEO, Citadel
• Raymond McDaniel Jr., Chairman and CEO, Moody's Corp.
• Jim Millstein, Chairman, Millstein & Co. LLC; former Chief Restructuring Officer, U.S. Treasury Department
• Thomas Wilson, Chairman, President and CEO, Allstate; Deputy Chairman, Federal Reserve Bank of Chicago

Money Talks, Regulation Walks - Krugman - The Times editorial page is outraged at the proposal to exempt foreign-exchange swaps from regulation — and rightly so. Have we learned nothing from the crisis? And I’m afraid I understand what’s going on. It’s this: The Obama people are surely eager to recapture some of that money for 2012; I can’t think of any other good reason to go so limp on this issue. But if you ask me (which they won’t), this is a losing game. Wall Street knows who will (slavishly) serve its interests; Democrats, who won’t buy in to the notion that it was all the government’s fault, and that we need to be nice to those fine upstanding bankers, just can’t win a battle for their affections. All that Obama and co. can do is confuse voters, who by and large don’t realize who is really on the side of bankers and bailouts. So what happens here is that Obama loses a potentially useful populist issue, but the big money keeps going to the other side anyway. Of course, you could say that this is the whole story of the Obama administration. Name your issue — fiscal policy, Social Security, financial regulation, foreign policy, Guantanamo — and the administration has effectively caved in to the other side’s framing.

When will the Fed start caring about bank regulation? -- Jesse Eisinger has a great column today on the way in which the Fed is failing to embrace its crucially-important role as America’s top bank regulator. The Fed is “the most powerful banking regulator in the world,” he writes, but doesn’t act that way: In the years before the financial crisis, the Fed was a miserable failure in that role, a creature of the banks, not a watchdog…Under the giant Dodd-Frank package, the Fed was given an expanded regulatory role. The new consumer financial products regulator is housed within the central bank. The Fed also now officially oversees investment banks, which it had to rescue during the crisis. Congress broadened the Fed’s remit to cover nonfinancial institutions deemed “systemically important.” Congress created a new role, the “vice chairman of supervision,” to raise the prominence and importance of its responsibility. (It remains unfilled.) Perhaps most important, the Federal Reserve is supposed to play a major role in taking over big banks that fail.

Why the Fed won’t be good at bank regulation - Kindred Winecoff has an informed view of the question raised by Jesse Eisinger this week — whether central banks should also be bank regulators. He wrote his thesis on the topic — he’s promising to put it online soon — and importantly he didn’t just look at the question on a theoretical basis, he also ran the empirical numbers. And the results, he says, are clear: I find that where monetary authority and regulatory authority were split, banking systems had higher capital ratios than when they were unified. The coefficients are substantively large and statistically significant at the usual levels. The results are robust to the inclusion of controls and alternative specifications. The takeaway is that institutional design is important here. If you give one institution conflicting mandates — one to act counter-cyclically, and one to act pro-cyclically — then at the relevant margin one of those two has to give. The counter-cyclical mandate, of course, is monetary policy — if a country is plunging into recession, the central bank will cut rates to boost the economy and help banks make more money. But bank regulation is pro-cyclical: if banks look as though they’re running into trouble, a tough regulator will ask them to raise more capital, which in turn hurts their profitability.

The illusion of bank capital - Vox EU - How much capital should banks hold to cover their risk? That question has been thrown back and forth among policymakers, bankers, and academics for years – and now, with the global crisis still lingering, the debate is more intense than ever. This column argues that the preoccupation with capital rules misses a more fundamental concern. No amount of feasible regulatory capital can be an appropriate substitute for robust asset selection and valuation standards of banks.

Regulating the Shadow Banking System - “Extra time granted” on over-the-counter derivative reform in response to dealer complaints, so reports the FT. At stake, and at issue, is the Dodd-Frank call to move OTC derivatives into clearing arrangements for reasons of pricing transparency as well as safety. And it is not just the dealers pushing back, but also the European Commission and the U.S. Treasury. What is going on? ... A credit default swap can be used to hedge credit risk, and an interest rate swap can be used to hedge interest rate risk. The shadow banking system made extensive use of these swap contracts. That is why OTC derivatives reform is at the very center of any attempt seriously to grapple with the problem of regulating shadow banking. Dodd-Frank deserves credit for putting the issue on the table whether or not one agrees that the Dodd-Frank proposed solution is the answer.

Springtime for Bankers - Krugman - Last year the G.O.P. pulled off two spectacular examples of bait-and-switch campaigning. Medicare, where the same people who screamed about death panels are now trying to dismantle the whole program, was the most obvious. But the same thing happened with regard to financial reform.  As you may recall, Republicans ran hard against bank bailouts. Among other things, they managed to convince a plurality of voters that the deeply unpopular bailout legislation proposed and passed by the Bush administration was enacted on President Obama’s watch.  And now they’re doing everything they can to ensure that there will be even bigger bailouts in years to come.  So what’s the solution? The answer is regulation that limits the frequency and size of financial crises, combined with rules that let the government strike a good deal when bailouts become necessary.

Financial crisis? What financial crisis? - It has been less than three years since the global financial system nearly imploded, and even now much of the global economy has not fully recovered. Which makes it all the more shocking that a collective amnesia has already set in about what we’ve just been through and why it happened. Having succeeded in beating back the more radical ideas for limiting its size, its pay and its speculative excess, the financial services industry is now waging a campaign to undermine what is left of the reform process. Flush with windfall profits from the Federal Reserve’s loose monetary policy and riding a convenient wave of anti-government sentiment, it aims to weaken new regulations and intimidate those who enforce them.  That’s not to say a number of the industry’s concerns are not valid. But their declarations of good-faith negotiation are undercut by the cynical and intellectually dishonest way in which they have chosen to play the Washington game.

How to Avoid the New Bailout Authority - John Taylor - Title II of the Dodd-Frank bill, which creates a new orderly liquidation authority for financial institutions, has recently come under fierce attacks from a variety of perspectives. Paul Ryan writing in the Wall Street Journal on April 5 argues that we should get “rid of the permanent Wall Street bailout authority that Congress created last year.” Then, after reading an FDIC report on how Title II would have worked in the case of Lehman, Simon Johnson in effect agrees with Ryan arguing that any Treasury Secretary, at least one in the Paulson-Geithner mold, would go right around Title II and simply bail out the creditors of large financial firms as in 2008. Recently Stephen Lubben has piled on in The FDIC’s Lehman Fantasy and Michael Krimminger (FDIC General Council) finally replied. Missing from the recent debate is the role of a possible amendment to the bankruptcy code to deal with large financial firms.  One such amendment has been proposed called “Chapter 14,” because this is currently an unused chapter number in the U.S. Code on Bankruptcy. Last week we (I'm a member of the group) presented the idea to Michael Krimminger at the FDIC and to the legal staff at the Fed which is responsible for a mandated study of the bankruptcy code. The idea is explained here.

Tri-party repo reform will not avert 2008-style panic - JP Morgan Chase and Bank of New York Mellon are making good progress in protecting themselves from the tri-party repo risk that threatened their survival in 2008, but little progress is being made in protecting taxpayers who may have to pick up the tab once more if the tri-party system seizes again. That’s the RepoWatch takeaway from tri-party reports released by the Liberty Street Economics team at the New York Fed April 11 and the Securities Technology Monitor May 2.  Efforts to protect JP Morgan and BONY Mellon are proceeding on schedule, and bankers expect to issue a report within the next month detailing the progress in reforming the tri-party market on several fronts, bank officials told Securities Technology Monitor reporter Chris Kentouris. But no one has figured out a way to successfully counteract the run on the repo market that caused the credit crisis in 2007 and 2008 and could do so again the next time a major borrower like Countrywide Financial, Bear Stears or Lehman Brothers defaults, Liberty Street economists said.

Preventing the Next Flash Crash - ONE year ago, the stock market took a brief and terrifying nose-dive. Almost a trillion dollars in wealth momentarily vanished. Shares in blue-chip companies were traded at absurdly low prices. High-frequency traders, who use computers to look for microscopic price differences in stocks on different exchanges and other trading venues, stopped trading, while others immediately sold whatever they bought, mainly to each other, in what has been called “hot potato” trading.  We haven’t had a repeat of last year’s “flash crash,” but algorithmic trading has caused mini-flash crashes since, and surveys suggest that most investors and analysts believe it’s only a matter of time before the Big One. They’re right to be afraid. They’re right to be afraid. The top cop for our financial markets remains inexcusably blind to the activities of high-speed computer trading. 

Lawmakers Demand Definition of Too Big to Fail - On Wednesday, Treasury Secretary Timothy Geithner said that regulators’ identification of which large financial firms pose a risk to the financial system “in some ways [is] the central choice at the heart of financial reform.” But Treasury, along with the other federal regulators charged with deciding which nonbank financial firms could threaten the entire financial system if they got into trouble, is coming under heavy criticism for not providing any real detail yet on what criteria they’ll use to make its choices. Now, two top lawmakers on the House Financial Services Committee — one Republican, one Democrat — are demanding federal regulators provide more detail on what criteria they will use to determine which firms qualify as systemic and that they give the industry another chance to comment on those proposed criteria. Designated firms would be subject to stricter capital standards and regulation than before

American Bankers Association Now Backs Warren - A few years back there was a person who used to write for Credit Slips named Elizabeth Warren. She left the blog, and we had heard she took a government job in Washington, DC. Now, word comes via our friends at the CL&P Blog that the American Bankers Association is backing her candidacy to head the Consumer Financial Protection Bureau. This is great news, and I hope it breaks the political logjam against her nomination. President Obama could not pick a better person to head the CFPB.

Warren Seen as Likely Pick for CFPB By Bank Trade Groups - Camden Fine, President and CEO of the Independent Community Bankers of America, says that Elizabeth Warren will be selected as the head of the Consumer Financial Protection Bureau shortly.“I think the president is going to feel like he needs to give her a shot,” said Mr. Fine said in an interview at a conference held by his trade group in Washington. He told a crowd of around 1,000 bankers gathered to lobby on Capitol Hill this week that he expects the nomination to come within two weeks. The bureau must have a director in place by July 21 to get a slate of broad powers to attack fraudulent and abusive financial practices. Ms. Warren’s candidacy likely would trigger a contentious Senate confirmation battle, and Mr. Fine added that any nominee –even someone other than Ms. Warren – would face harsh resistance"

Oops. Does he or doesn’t he back Warren for CFPB? - The head of the American Bankers Association flip-flopped today on a key question: Whether he'd support the possible nomination of Elizabeth Warren to head the new Consumer Financial Protection Bureau. First the American Banker reported his support: — Frank Keating, the head of the American Bankers Association, said Tuesday he would back Elizabeth Warren as director of the Consumer Financial Protection Bureau, if nominated by the president. "If she is the nominee, we would be fully support of her," said Keating, who, like Warren, hails from Oklahoma. But barely an hour and a half later, the ABA officially backtracked - with a pointed reference to its support for a House Republican plan to make sure that no actual director be appointed to head the new agency - and especially not Warren, the Harvard bankruptcy scholar and middle-class advocate who dreamed up the idea of a single agency to protect consumers from risky financial products.

Republicans to Consumer Financial Protection Bureau: Drop Dead - Yves Smith - In a new effort to guarantee the continued right of banks to loot and pillage, 44 Republican senators have written to Obama saying that they won’t approve of any head of the Consumer Financial Protection Bureau ex what these Ministers of Truth choose to call a “restructuring” of the agency.  The arguments made against the agency strain credulity. As the New York Times reports:“This is about accountability,” said Senator Richard Shelby of Alabama, the ranking Republican member of the Senate Banking Committee. “The bureau, as currently structured, lacks any semblance of the checks and balances inherent in the Constitution. Everyone supports consumer protection, but we should never entrust a single person with this much power and public money.” Shelby’s blustering is about the CFPB’s budget, which is to be 12% of the Fed’s total. That would make it roughly half the size of the not terribly effective SEC. But Congress controls the SEC’s funding, and there is a direct relationship between what a joke the agency has become and regular threats to cut off its air supply (particularly from the senator from Hedgistan, Joe Lieberman). By contrast, the far more effective FDIC (which has a bigger budget than the SEC) and the CFTC keep their fees and don’t have to go begging to Congress..  And if he really is worried about rich, powerful, rogue financial regulators, why isn’t he taking aim at the Fed first and foremost? It fits his profile far better than the CFPB does.

Regulators Ask Congress for More Money - Financial regulators asked lawmakers on Wednesday for more money to enforce dozens of new rules and oversee Wall Street.  Although the Commodity Futures Trading Commission¹ and the Securities and Exchange Commission² received some additional money in April, the agencies say they are still hurting for cash. Now, the regulators are adopting a refrain more familiar to disappointed sports fans than powerful regulators: wait till next year.  Gary Gensler³, the Commodity Futures Trading Commission’s chairman, and Mary L. Schapiro⁴, the S.E.C.’s chairwoman, told a Senate appropriations subcommittee that they needed hundreds of millions of dollars in 2012 to prevent another financial crisis. “In 2008, both the financial system and the financial regulatory system⁵ failed the test for the American public,” Mr. Gensler said in testimony before the subcommittee that doles out money to financial regulators. In the wake of the crisis, Congress passed the Dodd-Frank Act, which requires Mr. Gensler and Ms. Schapiro to oversee the $600 trillion swaps market, an industry at the center of the financial crisis. “An investment in the C.F.T.C. is warranted, because, as we saw in 2008, without oversight of the swaps market, billions of taxpayer dollars may be at risk,” Mr. Gensler told the subcommittee. The panel is weighing whether to increase regulatory budgets during the government’s fiscal year 2012, which starts on Oct. 1. Ms. Schapiro said any cuts would have a “profound impact” on her agency.

The Global Economy’s Corporate Crime Wave - Sachs – The world is drowning in corporate fraud, and the problems are probably greatest in rich countries – those with supposedly “good governance.” Poor-country governments probably accept more bribes and commit more offenses, but it is rich countries that host the global companies that carry out the largest offenses. Money talks, and it is corrupting politics and markets all over the world. Hardly a day passes without a new story of malfeasance. Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs. A massive insider-trading ring is currently on trial in New York, and has implicated some leading financial-industry figures. And it follows a series of fines paid by America’s biggest investment banks to settle charges of various securities violations. There is, however, scant accountability. Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail. When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return. Even today, the banking lobby runs roughshod over regulators and politicians.

You Call That Tough? - The only thing missing from Preet Bharara’s press conference was the blaring of trumpets. It was Tuesday, and the U.S. attorney in Manhattan was proudly unveiling a lawsuit against Deutsche Bank... Bharara spoke sternly about how the bank had defrauded the Federal Housing Administration. Listening to Bharara, one could easily think that prosecutors were finally — finally! — getting tough on the bad behavior that helped bring about the financial crisis. Alas, it was mainly an illusion. ... To give him his due, Bharara has brought serious insider-trading charges against Raj Rajaratnam, the hedge fund manager... But that case doesn’t have anything to do with the events that led to the financial crisis. He also put Bernie Madoff in prison, though that didn’t exactly require heaving lifting.  As for the big fish, they’re all walking away unscathed

Why Eliot Spitzer Still Thinks He's Right - For decades, the New York Attorney General's office gave Wall Street a free pass.On April 8th, 2002, New York's then-AG Eliot Spitzer shattered precedent by bringing a fraud case against Merrill Lynch. Calling for broad reform throughout the financial services industry, he alleged that the broker fostered dangerous conflicts of interest and intentionally misled its investors for profit. In the Merrill suit, and subsequent cases, the Spitzer administration invoked a forgotten 1921 state statute called the Martin Act, which gives the Attorney General wide latitude to regulate and prosecute consumer fraud cases. By late 2002, when 60 Minutes ran a laudatory profile that dubbed Spitzer "The Sheriff of Wall Street," a star had been born. As everyone knows, Spitzer's fortunes have changed since then. His political future is, at best, uncertain. But his regulatory career will continue to serve him well: The practices he decried during his tenure—subprime loans, predatory lending, conflicts of interest—are the same misdeeds that sparked 2008's financial meltdown.

Will “False Claims” Lawsuit Against AIG, Goldman, Deutsche, BofA, SocGen on Fed Funding Lead to New Round of Embarrassing Revelations? - Yves Smith - Litigation may be slowly doing the job missed or only partially completed by various governmental investigations into the financial crisis. The Valukas report on the Lehman bankruptcy was revealing, and numerous foreclosure defense attorneys have opened cans of worms that the powers that be would rather pretend simply don’t exist. The New York Times reports tonight that a case filed last year was unsealed last week. It plumbs a continuing sore point with the public, namely the generous terms of the AIG bailout, both to the company (which defied the government and insisted on remaining largely intact when the plan had been to sell its various units to repay the government funding) and to its credit default swap counterparties. The litigation has the potential to be revealing, particularly if it goes into discovery (various depositions are likely to become public in pre-trial jousting, um, motions). The Times gives an overview: The lawsuit, filed by a pair of veteran political activists from the La Jolla area of San Diego, asserts that A.I.G. and two large banks engaged in a variety of fraudulent and speculative transactions, running up losses well into the billions of dollars. Then the three institutions persuaded the Federal Reserve Bank of New York to bail them out by giving A.I.G. two rescue loans, which were used to unwind hundreds of failed trades.The loans were improper, the lawsuit says, because the Fed made them without getting a pledge of high-quality collateral from A.I.G., as required by law.

Senate Report Accusing Goldman of Deception Referred to DOJ, SEC - A U.S. Senate report that said Goldman Sachs Group Inc. misled clients about mortgage-linked securities was formally referred to the Justice Department and the Securities and Exchange Commission, which are reviewing its findings.  Senators Carl Levin and Tom Coburn, the Democratic chairman and senior Republican on the Permanent Subcommittee on Investigations, have signed a referral letter asking the agencies to examine the panel's report, Levin said today in an interview. The results of the investigation, made public by the committee April 13, pinned much of the blame for the credit crisis on Wall Street banks that earned billions by enticing clients to buy the risky bond deals.  “If something comes up that needs to be reviewed by some agency, it gets referred,” said Levin. “That's the way we do it.”  The scrutiny is a setback for Goldman Sachs, which hired lawyers, lobbyists and public relations specialists to monitor the two-year investigation and tamp down any controversy that arose from the subcommittee's conclusions.

UBS Agrees to Pay $160M in Muni Bond Settlement— Switzerland's biggest bank UBS AG has agreed to pay $160 million to settle charges that it rigged the bidding process for investment contracts with cities and towns in 24 states and the District of Columbia.  Federal and state officials announced the settlements Wednesday. UBS admitted and accepted responsibility for illegal, anticompetitive conduct by former employees from 2001 through 2006, the Justice Department said.  The local governments were looking to invest their proceeds from municipal bond sales. Former UBS employees manipulated the bidding process to win contracts to sell investments, the Justice Department and the Securities and Exchange Commission said. UBS also acted as a bidding agent for municipalities and rigged bids for the benefit of other financial firms, according to the authorities. UBS at times "facilitated" the payment of kickbacks to other bidding agents, who collect proposals for government business, they said.  In every case, UBS made fraudulent misrepresentations or omissions and deceived the municipalities, the government said.

Deutsche Bank Sued by Department of Justice for Over $1 Billion on FHA Loans: Sound and Fury Signifying Not Much - - Yves Smith - If you were to read the news headlines and the fierce-sounding lawsuit filed by the Department of Justice against DeutscheBank on it “egregious” violations of FHA lending standards, you might be persuaded that Team Obama was getting serious about mortgage abuses.  Think again. FHA lending was only a small portion of mortgage lending prior to the crisis and did not play a meaningful role in the implosion. A bit over $1 billion in possible charges ($386 million in losses and triple damages), even with treble damages, is a mere cost of doing business relative to the profits earned on mortgages in the bubble era. Moreover, as Marshall Auerback noted via e-mail: God forbid they should sue an American bank. Because, of course, Wells Fargo and JP Morgan would never dream of introducing the kinds of “reckless” lending practices of the kind practised here by Deutsche Bank. And indeed, the mortgage industry experts I’ve consulted confirm that there is no reason to think Deutsche was worse than other lenders. And Bill Black points out this is a civil, not criminal suit.

AIG Profit Falls 85% to $269 Million on Quakes, Bailout Costs - American International Group Inc. (AIG), the insurer bailed out by the U.S. government, said first-quarter profit slumped 85 percent on costs tied to repaying its rescue and claims from the earthquakes in Japan and New Zealand.  Net income dropped to $269 million from $1.78 billion a year earlier, the New York-based insurer said yesterday in a regulatory filing. Shareholders’ equity, a measure of assets minus liabilities, fell 0.3 percent to $85 billion from $85.3 billion on Dec. 31.  Chief Executive Officer Robert Benmosche, 66, is relying on AIG’s property-casualty unit to deliver a greater portion of profit after the insurer struck deals to divest more than $50 billion in assets since its 2008 bailout. As part of its plan to repay taxpayers, AIG sold the non-U.S. life insurance businesses that previously had cushioned losses from natural disasters such as earthquakes and hurricanes

Who's Over-leveraged Now? - Krugman - When I wrote the first edition of The Return of Depression Economics, I was reacting in large part to the Asian financial crisis, which I thought could presage similarly difficult crises here in America. Sadly, I was right. But what made Asia so vulnerable then but not so vulnerable now? Even then, the best available stories (pdf) focused on issues of balance sheets and leverage. And it’s now standard to focus on household leverage as a key part of what went wrong in 2008: But what’s happened to those crisis economies of the 1990s? Their leverage problems were largely concentrated in the corporate sector — and they were deleveraging as we were leveraging up (pdf): It’s a stark contrast — and it explains a lot of what’s going on in the world right now.

Fed Survey: Big Banks Ease Lending Standards - Big banks eased lending standards and businesses sought more loans in the first quarter of the year, though consumers remained wary of mortgages and other new debt, the Federal Reserve said Monday. “Several large banks eased lending policies on credit card and auto loans, and the net fraction of banks that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994,” the Fed said in its quarterly Senior Loan Officer Opinion Survey. Big banks were most likely to ease conditions, though consumers weren’t always willing to take up offers. About one-quarter of banks reported that demand for auto loans had strengthened, but demand for credit card and other consumer loans remained flat, the Fed said.Demand for residential mortgages continued to decline, the Fed said. Rising demand for commercial and industrial loans, meanwhile, came predominantly from large and middle-market firms, the Fed said.

JPMorgan Joins Bank of America in Perfect Record for First-Quarter Trading -  JPMorgan Chase & Co. (JPM), the second- largest U.S. bank by assets, joined Bank of America Corp. (BAC) in reporting a perfect trading period in the first quarter. JPMorgan’s revenue linked to market risk was higher than $160 million on seven of the period’s 64 trading days, the New York-based lender said today in a filing with the U.S. Securities and Exchange Commission. The average daily revenue was $112 million, according to the filing. The firm, led by Chairman and Chief Executive Officer Jamie Dimon, 55, had $6.64 billion in sales and trading revenue in the first quarter, second only to Goldman Sachs Group Inc. (GS) among the biggest U.S. banks. JPMorgan posted perfect trading periods in three of four quarters last year.

Unofficial Problem Bank list at 983 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 6, 2011. Changes and comments from surferdude808:  After many changes last week, activity was muted this week with two removals and one addition to the Unofficial Problem Bank List.  The list stands at 983 institutions with assets of $422.1 billion. Removals are the failed Coastal Bank, Cocoa Beach, FL ($133 million) and an action termination against Southwestern National Bank, Houston, TX ($319 million).

Banks Whittle Away at CRE Assets While Waiting To Jump Back Into Lending –- Coming out of the first quarter, most U.S. banks still view commercial real estate as an anathema to be further banished from their books, or at least kept off their rolls. However, for the first time in a long time, they have started talking about the day when that won't be the case. And that day could come sometime in the second half of this year.  In a review of first-quarter banking results and earnings conference calls, banks said they're looking toward the second half of the year for a return to CRE lending. For now, though, banks fall into one of three general categories with regard to commercial property loans: still clearing the books, maintaining existing customers, or ready to jump back in. The number in the first two categories is probably about equal and makes up the vast majority of banks, which has left an opening for the third group.

Debt Week on Marketwise – and – CRE Less Than 15% of Non-current Loans -This is Debt Week on Marketwise.  All week we’ll be looking at various debt metrics and what they might tell us about the market and the economy.  It’s a little bit like Shark Week, except lame.   The graph below has been created using data that can be easily downloaded from the FDIC website.  It shows the percent of non-current loans attributable to three real estate types: residential 1-4 units (including home equity), construction and development, and non-farm non-residential (read commercial real estate).  Note this is only data for FDIC insured institutions and so would omit RMBS, CMBS, and real estate loans held by insurance companies.

Looking to buy property? The federal government has at least 12,000 to choose from - The federal government owns at least 12,000 structures it no longer needs, and the White House is unveiling plans today that could eventually save taxpayers about $15 billion by getting rid of them.   If enacted by Congress, the Obama administration’s proposal would establish a panel of seven experts modeled on the military’s Base Closure and Realignment Commission to review the thousands of addresses. Officials with the Office of Management and Budget are scheduled to share more details with reporters later Wednesday. The federal government is the nation’s largest land owner, with an annual building operation and maintenance budget running more than $20 billion, according to the White House.  As part of the plan, the feds are publishing a new database that allows users to search down to the street level to locate extra buildings the government is ready to sell or divest.

Ten million dollar Downtown skyscraper sells for $1700  A $10.1 million aluminum skyscraper sold in under a minute on yesterday — for less than $2,000. First Commonwealth Bank — which held the mortgage — was the lone bidder on the 31-story Regional Enterprise Tower and two adjoining Downtown properties, including the Allegheny-HYP Club, a historic set of buildings at William Penn Place and Strawberry Way. The price: $1,706.46, or the amount it cost the Allegheny County Sheriff's Department to post and advertise the property sale. The Southwestern Pennsylvania Commission, which filed Chapter 11 bankruptcy on March 29, defaulted on a $10.4 million loan on the property. The 60-year-old building at 425 Sixth Ave. originally was the headquarters of Alcoa Inc., which turned the building over to the commission in 1998 for $1. It was intended for use by nonprofit agencies dedicated to stimulating economic development, but lease revenue decreased dramatically when tenants began moving out last year. Its assessed value is $10.1 million

Banks Should Pay for Foreclosures - The epidemic of foreclosures that began in 2008 has been devastating America’s families, communities and the state economy. Nowhere is this more true than in California, where one in five U.S. foreclosures has taken place. Since 2008, more than 1.2 million Californians have lost their homes, and the number is expected to exceed 2 million by the end of next year. More than a third of California homeowners with a mortgage already owe more on their mortgages than their homes are worth. As a result, home values in the state are estimated to plummet by $632 billion. That translates into a loss of more than $3.8 billion in property taxes. One foreclosed home in a neighborhood can reduce property values for the rest of the houses in the neighborhood, and a cluster of foreclosed houses compounds the physical, economic, and social devastation. And just as local governments are starving for revenues, they are asked to deal with the increased costs - estimated at $17.4 billion over four years - caused by the foreclosure mess. These include public safety, maintenance of abandoned and blighted properties, inspections, trash removal, sheriff evictions, unpaid water and sewer charges, and the provision of emergency shelter.

Mortgage Fraud: Will Wall Street finally have to pay for its misdeeds? - Wall Street may soon have to finally pay for its folly. Earlier this week, the US Attorneys office of the Department of Justice sued Deutsche Bank for allegedly tricking a government insurance program into backing mortgage loans that were much riskier than they were portrayed. Many of those loans have defaulted causing nearly $400 million in losses for the government program already, and potentially much more. The question is what other big banks were also abusing government home loan programs during the housing bubble and after. Of course, we have known for a while that banks and mortgage lenders were busy during the housing bubble passing off bad loans as good. That was in part what the $500 million Goldman Sachs settlement with the Securities Exchange Commission last year was about. Even when there wasn't direct fraud, investment banks were using complex mortgage derivatives to make their home loan deals look safer than they were. What's different is that for the first time since the financial crisis, it looks like the government is going to try to make Wall Street and big banks pay up for their poor and deceptive lending practices. So which banks will the government go after next?

GAO Report Confirms Our Criticism of “Foreclosure Task Force” Review - Yves Smith  - We’ve taken a dim view of the “worse than stress tests” review by Federal regulators of foreclosure practices late last fall. This was an obvious effort to alleviate concerns in the wake of the robosigning scandal. When the bank-friendly OCC released the results of the review, the guts of which was a look at 2800 seriously delinquent loans from all the major servicers, it confirmed our reservations. The GAO has just released a useful report that gives an overview of servicing, describes how regulation of it is fragmentary and incomplete, and recommends that the CFPB develop a plan for how to regulate servicers and that banking regulators look more seriously at documentation risk. The GAO also discussed the famed foreclosure task force review, and its commentary bore out some of the charges we made. They noted that the files chosen were a small sample, clearly chosen to be a mix. The GAO refrained from using language critical of the process, but reading between the lines, made it clear that this selection process was not rigorous, but was an informally designed but hopefully indicative sample.

Banks Illegally Foreclosed On Dozens Of Military Borrowers, Federal Investigators Say - Two of the nation's largest mortgage firms illegally foreclosed on the homes of "almost 50" active-duty military service members, according to a Thursday report by the Government Accountability Office. The report does not identify the two mortgage companies. GAO investigators attributed the finding to federal bank regulators, who recently completed a three-month probe into allegations of improper foreclosures carried out by the nation's 14 largest home loan servicers. The GAO report, which focused on problems in the mortgage industry and the lack of federal oversight, is the first official study to feature a partial tally of military families whose homes have been illegally seized. The 50 or so wrongful foreclosures were discovered during regulators' review of only about 2,800 loans that experienced foreclosure last year. Millions of other foreclosures in recent years have not been reviewed by regulators. More than 2.8 million homes received a foreclosure filing in 2009, and nearly 2.9 million residences got one last year, according to RealtyTrac, a California-based data provider.

The Loving and Merciful Act of Foreclosure - I missed this howler from a few months ago, but it's so outrageous that I've got to comment on it, even thought it's stale.  I'm amazed that this didn't get much more press.  In the course of a CNBC interview (full show here, foreclosure discussion runs from 4:07 to 5:23), JPMChase CEO Jamie Dimon stated that:    "Giving debt relief to people that really need it, that's what foreclosure is."   As he explained: "[Homeowners] are probably better off going somewhere else, becuase they get releived almost 100% of the debt through foreclosure." For real?  It's debt relief?  Why not just go old school with "let them eat cake"?    "Debt relief" requires a forgiveness of debt. It's a gift, not an exchange. There's no quid pro quo. In foreclosure, however, the homeowner gives up the house, and doesn't necessarily get any debt relief. If the mortgage is recourse, there could still be a deficiency judgment. Does Dimon mean that JPMChase is forgoing all deficiency judgments?  I doubt it. And even if so, there's an exchange of debt for house. That's hardly debt relief.

Jamie Dimon Says Banks Are Being Nice to You When They Take Your House -  Yves Smith - Jamie Dimon has finally managed the difficult feat of making Lloyd Blankfein look good. When Blankfein said Goldman was “doing God’s work,” as offensive and laughable as that sounds, it’s an arguable position. If you look at the God of the Old Testament, he’s a really cranky and often capricious character. On another level, by not getting specific about what exactly Goldman does (the firm is engaged in a lot of activities), so this could be an effort to sanctify trickle-down. Even though these efforts at deconstruction are a bit of a stretch, it’s even harder to paint lipstick on this pig from Jamie Dimon. As Adam Levitin writes:  In the course of a CNBC interview (full show here, foreclosure discussion runs from 4:07 to 5:23), JPMChase CEO Jamie Dimon stated that:  “Giving debt relief to people that really need it, that’s what foreclosure is.”  As he explained: “[Homeowners] are probably better off going somewhere else, because they get relieved almost 100% of the debt through foreclosure.”  We’ve hit the point where people in positions of power make no bones about the fact that corporate persons get a better deal than the flesh and blood kind. Dimon would never dream of saying, “Yes, it’s good when weak companies fail and we sell factories for scrap value.” It’s taken as a given that it’s always better for both the borrower and lender to restructure the loan, ideally out of court.

Guest column: Iowa’s Miller should return big banks’ donations - Des Moines Register - Attorney General Tom Miller should return the $261,445 he received from big-bank lawyers and lobbyists in 2010, the same year Miller announced he would lead a 50-state attorneys general investigation into the fraudulent foreclosure crisis caused by big banks like Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase and Wells Fargo. "Nearly half of the money Miller raised in 2010 - $338,223 of $785,103 - was donated after the Oct. 13 announcement that he would be coordinating the 50-state attorneys general investigation," the National Institute on Money in State Politics reported on April 21. The foreclosure fraud scandal is one of the biggest national news stories in the country. Big banks have cost Americans more than $6.5 trillion in lost housing value, foreclosed on more than 10 million families and brought more than a quarter of all mortgage loans in this country under water. Our economy will never recover unless we reset the housing markets and crack down on big bank greed and corruption. Iowans shouldn't have to wonder if the national attorneys general settlement with the big banks is being unduly influenced by campaign contributions to Miller, the investigation's top dog.

LPS filed motion for sanctions in bad faith, foreclosure defense attorney alleges - A foreclosure defense attorney suing Lender Processing Services says the firm filed a motion seeking sanctions against him in bad faith and said LPS is trying put a stamp of confidentiality on records that are in the public realm.Alabama attorney Nick Wooten has asked the court to dismiss LPS' motion. He filed his response Monday to an April 25 motion by LPS seeking sanctions and/or an injunction against him for allegedly violating protective and confidentiality agreements in cases he has pending against LPS. "The filing of this motion is pure gamesmanship by LPS and Fidelity," Wooten's motion alleges, adding that he has "in every instance honored his agreements regarding protective orders," noting that no court has ever found he violated any protective order or awarded sanctions against him.

Los Angeles Accuses Deutsche Bank of Being a Slumlord -- Yves Smith - This week seems to be open season on Deutsche Bank. The Department of Justice suit on them over FHA loans was singling them out when a lot of US banks are every bit as guilty. Now we have a Los Angeles prosecution over Deutsche acting as a slumlord, with the city attorney looking to launch cases against other major securitization trustees, namely HSBC, US Bank, and Bank of New York.  We have pointed out, that banks (more accurately, securitization trustees and servicers) are awful property managers, as anyone who lives in a neighborhood with foreclosed properties will attest. This inattention becomes disastrous in densely populated areas. The story in the Los Angeles Times is about as gripping as real estate gets: Los Angeles officials say the bank has been a dreadful landlord and neighbor. Prosecutors say that during a yearlong investigation, they found evidence that Deutsche Bank had illegally evicted some tenants, let others live in squalor and allowed hundreds of unoccupied properties to turn into graffiti-scarred dens for squatters, gang members and other criminals.

Judge Allows Redlining Suits to Proceed -Two lawsuits accusing Wells Fargo¹ of discriminatory lending practices have been allowed to move forward, a victory for plaintiffs that have accused the bank of steering African-Americans toward predatory loans.  In one lawsuit, brought by the city of Memphis and Shelby County, Tenn., Judge S. Thomas Anderson of Federal District Court for the Western District of Tennessee on Wednesday denied a motion from Wells Fargo to dismiss, partly on the grounds that the suit was too broadly drawn. Both jurisdictions accused the lender of improperly steering African-Americans toward loan products that ultimately led to foreclosures, vacancies and increased government costs.  “The City of Memphis and Shelby County have not alleged that Wells Fargo lending practices resulted in a host of social and political ills plaguing entire sections of the community,” Judge Anderson wrote in a 32-page order. “Rather plaintiffs contend that defendants have targeted individual property owners with specific lending practices (reverse redlining), resulting in specific effects (foreclosures and vacancies) at specific properties, which in turn created specific costs (services and tax revenue) for local government.”

Heroic Registers of Deeds Battling Mortgage Fraud - Federal regulators simply aren’t that interested in investigating foreclosure fraud and laying down the appropriate punishments. Tom Miller is too busy deflecting criticism about massive campaign contributions from the banking sector to run a proper state-based investigation. So it’s actually come down to the registers of deeds – the unassuming public servants working in county recorder’s offices across the country and carefully recording the transfers of land titles – to step up and deliver some measure of accountability on the banks for violations of law. So far, precious few registers of deeds have taken on this seemingly impossible task. But Jeff Thigpen in Guilford County, a county of about 465,000 in the center of North Carolina (the biggest city is Greensboro), has delivered the goods.  Thousands of mortgage documents in Guilford County could potentially be fraudulent, the county’s register of deeds said. Jeff Thigpen said his office noticed signature discrepancies in more than 4,500 mortgage and foreclosure documents submitted between August 2006 and April 2010. While the same name was signed to documents, the signature characteristics were found to be different, Thigpen said. I was left infuriated, rooted in what I believe is a betrayal of public trust,” Thigpen said.

Closings canceled on some bank-owned homes after court rules against MERS - Local Realtors say title companies are canceling closings on some bank-owned homes after a recent Michigan Court of Appeals decision made it more risky to insure them. Late last month, the court ruled the Mortgage Electronic Registration System lacks authority to foreclose by advertisement in Michigan. The system is an electronic record-keeper of mortgages. Foreclosures on two homeowners in Grandville and Jackson are on hold because of the ruling. The ruling could also impact thousands of foreclosures that have already been sold to other buyers, industry experts say. Raymond DeBates, president of Colonial Title in St. Clair Shores, said that he has not had to cancel any closings yet, but he has put some files aside and is waiting for underwriters to indicate whether the deals can close or not. "This invalidates every foreclosure where MERS was involved," DeBates said. "They could set aside all these MERS transactions. It would be a catastrophe. And that's what we have."

Mortgage demand falling, says Fed - Demand for US mortgages is still falling even though banks are no longer tightening their lending conditions, according to the latest survey of senior bank loan officers by the Federal Reserve. Forty-five per cent of banks said demand for prime residential mortgages fell in the last three months, compared with only 11 per cent that said it increased, according to the quarterly survey, a leading measure of US credit conditions. “Demand for closed-end loans has now declined for three consecutive quarters,” the Fed said. More than 90 per cent of banks said they had not changed their mortgage lending standards. That suggests damage to bank capital from losses during the financial crisis – which made them less willing to lend – is no longer the main factor holding back the housing market. Instead, the steady fall in house prices means many consumers do not have enough equity to refinance mortgages, and an overhang of properties threatened with foreclosure gives little incentive to buy.

Foreclosures nationwide began to climb again in March - National foreclosure inventories rose to an all-time high and foreclosure starts spiked in March, signals that bank freezes on foreclosures are finished and mass processing is resuming. Jacksonvillle-based Lender Processing Services announced that foreclosure inventory at the end of March was 2.2 million — a record-setting mark — and foreclosure starts had risen by 33 percent from the end of February. Also signaling and end of bank foreclosure freezes was the fact that foreclosure sales had increased, LPS noted in its “March Mortgage Monitor” report. At the same time delinquencies — the number of homeowners behind on their mortgage payments but not yet in foreclosure — continued a declining trend in March, dropping by 11.6 percent month-to-month. That statistic is down 19.4 percent from March 2010 and hit its lowest point since 2008, LPS noted, but whether that was due to homeowners recovering from delinquent status or slipping into foreclosure wasn’t determined.

A Red Flag On Reverse Mortgages - It is the saddest of paradoxes: a government-backed financial maneuver intended to free up extra money for struggling older people turns out to have left some widows and widowers on the brink of foreclosure. This week, AARP sued¹ the Housing and Urban Development Department² over a handful of reverse mortgages³ gone awry. Lenders, following the letter of one of HUD’s rules, are requiring newly widowed people who want to stay in their homes to pay off the balance of their loans⁴ quickly, even if it is much more than the value of the home. Because they can’t (or won’t), the lenders are foreclosing. This is happening only to a small number of people who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.

Lawler: Monthly Report to Commissioner Suggests Serious REO Inventory Problem at FHA - Note: The FHA released the February Monthly Report. The report shows the FHA REO inventory was at 68,801 at the end of February, up 54.2% from February 2010! From economist Tom Lawler: HUD finally got around to releasing the February Monthly Report to the FHA Commissioner, and while the report clearly continued to have “data reporting” problems, the REO section of the report – IF correct – suggests that FHA has some serious REO inventory management problems. Here are data from various monthly reports on FHA-insured SF property “conveyances,” property sales, and SF REO properties. According to this report, the pace of FHA property sales began to slow significantly last November, was virtually at a crawl in December and January, and remained shockingly low given the inventory levels in February. As a result, the reported inventory of FHA REO has exploded upward to 68,801 at the end of February from 54,609 at the end of October and 44,605 at the end of last February.'

Total Fannie, Freddie, FHA REO inventory declined in Q1, Fannie and Freddie REO Sales at Record Levels - Because of late reporting at the FHA, this graph only includes FHA REO through February. Also see: Lawler: Monthly Report to Commissioner Suggests Serious REO Inventory Problem at FHA The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA decreased to 287,184 at the end of Q1 (see FHA special note above) from a record 295,307 units at the end of Q4. The REO inventory increased 37% compared to Q1 2010 (year-over-year comparison). This graph shows the REO inventory for Fannie, Freddie and FHA through Q1 2011 (FHA through Feb 2011). The REO inventory for the "Fs" increased sharply in 2010, but may have peaked in Q4 2010. The pace of foreclosures is picking up, but so is the pace of REO sales. Freddie Mac noted REO sales were at record levels in Q1:  We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO. So Fannie and Freddie sold over 90,000 REO in Q1, and their combined inventory only declined by 16,185. The are foreclosing at record levels, but they are finally selling REOs faster than they acquire them.

MBA: Mortgage Purchase application activity increases slightly, Mortgage Rates lowest in 2011 - The MBA reports: Latest MBA Weekly Survey Shows Increase in Mortgage Applications, Driven by Refinances The Refinance Index increased 6.0 percent from the previous week. The seasonally adjusted Purchase Index increased 0.3 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages decreased for the third consecutive week to 4.76 percent from 4.80 percent, with points decreasing to 0.76 from 1.00 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest 30-year fixed contract rate since December 3, 2010.   This graph shows the MBA Purchase Index and four week moving average since 1990.  Refinance activity increased as mortgage rates fell to the lowest level since December 2010.

Goldman estimates 3.5 million Excess Vacant Housing Units - Goldman Sachs put out an estimate yesterday of 3.5 million units based on the HVS: "Based on data from the Census Bureau, we estimate that about 3.5 million housing units currently sit vacant, above and beyond normal seasonal and frictional vacancies." They calculated a range of 2.5 to 4.5 million units based on different assumptions.  Recently economist Tom Lawler took a long look at the 2010 Census data, and estimated there were about 2 to 3 million excess vacant housing units as of April 1, 2010. With the record low number of housing units delivered last year, Lawler estimated that as of April 1, 2011 the excess “would be somewhere in the range of 1.45 to 2.45 million units – with the latter almost certainly too high”. With another record low number of units added to the housing stock this year, the excess will be in the 750 thousand to 1.7 million range next April (with the latter “certainly too high"). This suggests the excess supply will be gone sometime between early 2014 and 2016.

US housing: what happened to the underlying demand? - The US housing crash rolls on, with the Case-Shiller house price index showing prices fell in 19 of the 20 city markets it surveys in February. According to the Case-Shiller index, US home prices are now down 3.3% from a year ago (see below chart) and have fallen by around one-third since the housing bubble burst in 2006. However, the broader FHFA national index, which measures home prices across 50 US states, has shown lower levels of volatility. This is because the US housing bubble/bust has been confined mostly to a minority of cities, as illustrated by the below chart, which compares the narrower 10-city Case-Shiller Composite Index against the FHFA 50-state House Price Index. As you can see, the US housing bubble/bust has been most pervasive in the cities making up the Case-Shiller 10-city Composite Index, namely: Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.. As a group, the remaining US markets have experienced smaller increases/decreases in prices.

Shadow demand steps out from the shadows - READERS may be aware that I'm somewhat sceptical of the more pessimistic outlooks for housing prices. This is one reason why: Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.In recent years, many households have doubled-up as a result of hard economic times. Individuals that might normally have rented or purchased their own place have moved in with parents or children to save money. As economic conditions improve, many of these households will split back up as members seek to reestablish their independence.Combine an end to record low household formation with a period of record low housing construction and you have substantial support for both housing prices and rents.

Household Formation and the "Big L" - From Bloomberg: New Households Forming at Fastest Rate Since ’07 Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. First, the 357,000 number is probably based on the Census Bureau's HVS (or perhaps the ACS) and those surveys are not designed to track household formation in real time. However I agree that household formation will probably increase sharply this year. “Most guys who live at home beyond some young age walk around with a great big L on their forehead. It is just not acceptable. As soon as these young adults get a job and keep it for some reasonable period, they are gone. As more young people feel they will be able to keep a job, bingo, they are gone.” Many people doubled up or moved in to their parents' basements during the recession, and this is pent up demand for housing - well, once these people find jobs.

Renting v. Buying: New Evidence Emerges & Informs Housing Policy - The basic premise behind the panoply of government policies aimed at stimulating home construction and financing – the mortgage interest deduction, Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA) loans, down payment assistance, among others – is that homeownership yields huge societal benefits in the form of improved neighborhood aesthetics, reduced crime, and more civic attachment. The purported benefits of homeownership could actually be a classic case of reverse causality, as higher income households less likely to commit crime and more attached to the community tend to also be more likely to own homes. However, even if these social benefits are only imaginary, the basic economic proposition of “owning” a home is often assumed to be so far superior to “renting” that government policies to allow the marginal household to buy a home make sense –simply because they provide an avenue towards wealth creation. The sense that homeownership was an essential building block to household wealth was a key psychological driver of the mortgage boom. As much as government policy was to blame for getting people to purchase homes that they otherwise wouldn’t, it is important also to acknowledge the role played by “societal coercion.”

Housing Prices Dip Below March 2009 Lows - If we didn't know it before, we do now. We are officially in a double-dip housing recession.A report from Clear Capital shows the average U.S. home price nationwide has dipped below the low recorded in March 2009. A combination of foreclosures and short sales attracted bargain-conscious buyers in recent months, many paying in cash and making low-ball offers. Also skewing the results is the fact that low-priced, distressed properties are selling faster than more expensive homes, so the average price per sale has fallen. The results are not good news for homeowners, who are seeing their equity melt away month after month. The Clear Capital Home Data Index Market Report shows the national average home price is down 0.7 percent from the March 2009 low.

Prices Double Dip and Keep Falling - Not only did April data confirm the double dip in home prices nationally, real estate markets now have entered “uncharted territory” with the absence of a tax credit incentive for the first time in three years and are still falling.  That’s the bottom line from Clear Capital, whose latest report foundd that national quarterly home prices fell 4.9 percent while year-over-year national prices declined 5.0 percent.  “A note of caution to those looking for a strong end to 2011,” said the report.  “The last time no incentives were in place and distressed inventories were this high, home prices fell sharply.”National home prices have fallen 11.5 percent over the previous nine-month period, a rate of decline not experienced since 2008.  All the nation’s major Metropolitan Statistical Areas (MSA) tracked in this month’s report showed quarter-over-quarter price declines.   A major factor is the price free fall is the national REO saturation rate, which reached reaches 34.5 percent after it declined to near 20 percent in mid-2010. The report noted that 2008 saw REO saturation grew similarly from the near 20 percent early in the year to 32 percent by the end of 2008.

Home Prices Have Officially Double-Dipped: Clear Capital - The national home price index from Clear Capital has officially entered double-dip territory. The company says data through the end of April has pushed its reading of national home prices 0.7 percent below the prior low recorded in March 2009, as markets have become saturated with bank-owned properties. Clear Capital’s report shows prices have fallen 11.5 percent over the previous nine-month period. A rate of decline this rapid has not been seen since 2008. All the major metropolitan statistical areas tracked in Clear Capital’s report showed quarter-over-quarter price declines. The company says it’s a “sign of the continued volatility and fragility of home prices.” At the regional level, home prices in the West, Northeast, and South regions have all crossed into double dip territory to record their lowest prices since the downturn began.  Clear Capital says the fact that the Midwest is the only region yet to double dip is largely a reflection of magnified gains it experienced during the last two years of tax credit activity

Clear Capital Home Price Index shows Double Dip - This is one of several house prices indexes I follow in addition to Case-Shiller and CoreLogic. This is especially interesting this month for two reasons: 1) the index is showing a double dip in house prices, and 2) the graph showing house prices and REO saturation. From Clear Capital: Clear Capital® Reports National Double Dip Clear Capital (www.clearcapital.com) today released its monthly Home Data Index™ (HDI) Market Report, and reports prices have double dipped nationally 0.7 percent below prior lows experienced in March 2009. These graphs from Clear Capital show their home price index and the percent REO saturation. We know that a higher percentage of distress sales put downward pressure on house prices, and these graphs make that relationship pretty clear. From Clear Capital:  This comparison leads to concern over home price declines through the rest of 2011.

Shadow inventory will keep housing recovery at bay for three to four years - A full housing recovery is three to four years off as the nation grapples with a shadow housing inventory of 4.5 million distressed properties, Fratantoni said a phenomenon is now surfacing in housing that is essentially a "tale of two cities" where home prices are beginning to stabilize in economically viable parts of the country, while other areas are paralyzed by high unemployment and large shadow inventories. "We are going to see different housing market recoveries," . "You will find new homebuilding stronger in markets in Texas and around Washington D.C.," he said. Meanwhile, the shadow inventory that is driving down prices in parts of the U.S. is stalling an overall national recovery even though most of the distressed inventory is concentrated in Florida, California, Illinois, New York and New Jersey

Lawler: Census Releases Demographic Profile of 12 States and DC: Confirms Bias of HVS - The Census Bureau is releasing the demographic profile data for every state this month. Many analysts use the quarterly Census HVS to track the homeownership rate - and to calculate the excess supply of housing units. Important: Estimates using the HVS appear to overstate the excess supply. When all the data is released (by the end of May), we will probably have a better estimate of the excess supply as of April 1, 2010.From economist Tom Lawler: The Census Bureau released the “Demographic Profile” from Census 2010 for 12 states and DC today, and the release confirmed several of the biases I have noted in the Census’ quarterly Housing Vacancy Survey. As I’ve shown before, the HVS showed higher homeownership rates than either the 2000 decennial Census or the American Community Survey, and that overstatement continued for 2010. Below is a comparison of the homeownership rate from the decennial Census for April 1, 2010 with the HVS average homeownership for the first half of 2010. (The HVS quarterly data are monthly averages). Also shown are the homeownership rates for April 1, 2000 from Census 2000.

Construction Spending increased in March - The Census Bureau reported this morning that overall construction spending increased in March compared to February (seasonally adjusted).  [C]onstruction spending during March 2011 was estimated at a seasonally adjusted annual rate of $768.9 billion, 1.4 percent (±1.6%)* above the revised February estimate of $758.6 billion. The March figure is 6.7 percent (±1.8%) below the March 2010 estimate of $824.0 billion.  Private construction spending also increased in March: Spending on private construction was at a seasonally adjusted annual rate of $476.1 billion, 2.2 percent (±1.4%) above the revised February estimate of $466.0 billion.  This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. Residential spending is 66% below the peak in early 2006, and non-residential spending is 40% below the peak in January 2008.

There’s Stinky Gas Inside Of This Mini-Housing Bubble, You Don’t Want To Be Around When It Pops! - Yesterday, I revisited the US employment vs  inflation situation, which itself was an extension of my warnings on Employment and Real Estate Recovery. In the second post, I included the story from a BoomBustBlogger who was an investor of a large multi-familyproperties. As a BoomBustBlogger, he uses math to make decisions and the math simply doesn’t pan out. Of course, due to .gov bubble blowing, unintended consequences often occur and this time around it is a bubble within a bubble burst in multi-family housing. The dilemma is, do you pull the trigger m/f investments that have increasing net effective rents even though we are almost certain to have higher interest rates (see Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate), more of a depression in housing (In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse), stagflation (Inflation + Deflation = Stagflation ~ Lower Real Estate Values!) and most importantly… obvious activity that is indicative of rampant speculation that goes against the fundamentals…

Remember "The American Dream?" What A Bunch Of Crap - The central idea of America, which has invigorated the country for more than 240 years, is that anyone who wants a better life can come here and make one. Unlike other countries, in other words, where 'class' and 'birth rank' and other luck of the birth-draw determine one's station in life, America is different. America is the land of self-determination. Work hard in America, this story goes, and you'll get rewarded for it. In America, your station in life is all about you. Just look at Andrew Carnegie! Bill Gates! Steve Jobs! This self-determination 'American Dream' is deeply important to the American psyche. It has helped the country build the most vibrant economy in the world. It has made millions of Americans rich. It has also, unfortunately, allowed us to justify inequality that is appalling to just about every other developed country in the world. So what if the richest 1% of Americans control a third of the country's wealth, this story goes--they deserve to. The other 99% are just a bunch of lazy bastards with their hands out. If that were actually true--if the riches of the richest Americas were entirely a product of their own efforts and value to society--America's increasing inequality might be more tolerable. But, increasingly, it isn't.

The Anti-Consumer Agenda - I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon.  In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues:

Fed: Banks more willing to make consumer loans - From the Fed April 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices:  The April survey indicated that, on net, bank lending standards and terms generally had eased somewhat further during the first quarter of this year, and that the demand for commercial and industrial loans (C&I) and for commercial mortgages increased, while that for residential mortgages continued to decrease. Regarding changes in standards and terms on loans to households, several large banks eased lending policies on credit card and auto loans, and the net fraction of banks that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994. Moderate net fractions of banks reported a net easing of the spreads of auto loan rates over their own cost of funds, and roughly similar fractions of large banks also eased several other terms on such loans.

I, Consumer? - Where have all the people gone? Not to mention the citizenry, human beings, neighbors, inhabitants, individuals, men, women, adults, children, workers, employees, employers? Suddenly, everywhere, gone, all of them. Their places taken by consumers.  It was not a matter of right or left. National Public Radio (NPR), the staunchest of middle-of-the-roaders,used the term. In testimony before Congress, the liberal Economic Policy Institute (EPI) reported that consumer incomes were down. And Fox News reported that not "people" or "humanitarians," but rather, consumers - had been deceived by criminals in the act of giving charity to those suffering from natural disasters. There is a truth in the term consumer, but, to be honest, consumers we are as well as consumed. Fox, NPR, EPI and all the rest have called us out. We are what we consume. That is increasingly clear. Today, our only relationship with other beings and other things is to consume them. From one end of the country to the other, we have all been harnessed together into a great devouring machine, consuming plants, animals, vistas, beauty and resources of every sort with no worries for the future, for our children and grandchildren or for our descendants for millennia to come.

Consumers Increase Credit-Card Debt - US consumers in March increased their credit-card debt for the second time since the financial crisis flared, giving a sign of hope that consumer spending could boost an economic recovery that has lost some steam.In its monthly report Friday on borrowing, the Federal Reserve also said overall consumer credit outstanding rose, up $6.02 billion to $2.426 trillion. The increase, the sixth in a row, was bigger than expected. Economists surveyed by Dow Jones Newswires had forecast a $4.8-billion rise in consumer debt during March.The gains came amid mixed signals about the U.S. economy’s strength. For instance, government data Friday said private sector payrolls grew by the most in five years. And yet the same report showed the jobless rate rose to 9.0%.On Wednesday, the Institute for Supply Management said U.S. service sector activity in April slowed to its weakest since last summer. A report this week on April chain-store sales was strong, with warehouse club Costco Wholesale Corp. posting a 12% rise despite being closed on Easter.

Wal-Mart -- It's Alive! How the Company Is Terrorizing the Country With its Corporate 'Personhood' - What is Wal-Mart -- in a strictly taxonomic sense, that is? Based on size alone, it would be easy to confuse it with a nation: In 2002, its annual revenue was equal to or exceeded that of all but 22 recognized nation-states. Or, if all its employees -- 1.4 million in the U.S. alone -- were to gather in one place, you might think you were looking at a major city. But there is also the possibility that Wal-Mart and other planet-spanning, centi-billion-dollar enterprises are not mere aggregations of people at all. They may be independent life-forms -- a species of super-organisms. This, anyway, seems to be the takeaway from the 2010 Citizens United decision, in which the Supreme Court, in a frenzy of anthropomorphism, ruled that corporations are actually persons and therefore entitled to freedom of speech and the right to make unlimited campaign contributions. You may object that the notion of personhood had already been degraded beyond recognition by its extension, in the minds of pro-life thinkers, to individual cells such as zygotes. But the court must have reasoned that it would be discriminatory to let size enter into the determination of personhood: If a microscopic cell can be a person, then why not a multinational corporation?"

April Sales: How Retailers Fared - Many large retailers reported their April sales numbers this week, with most of them coming out the morning of Thursday, May 5. Results were generally boosted by the shift of Easter into April in 2011. The holiday fell in March last year. Increases were reported across the board, though some were stronger than others. Click here for a chart sortable by company name, category, change in total or same-store sales, and total sales.

Squatter Rent’ May Boost Spending as U.S. Mortgage Holders Bail -  Melissa White and her husband stopped paying their mortgage in May 2008 after it reset to $3,200 a month, more than double the original rate. That gave them extra cash to pay off debts and spend on staples until their Las Vegas home sold two years later for less than they owed.  Millions of Americans have more money to spend since they fell delinquent on their mortgages amid the worst housing collapse since the Great Depression. They are staying in their homes for free about a year and a half on average, buying time to restructure their finances and providing an unexpected support for consumer spending, which makes up about 70 percent of the economy.  So-called “squatter’s rent,” or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that’s equal to about half the estimated savings generated by cuts to payroll withholding in December’s bipartisan tax plan.

Restaurants Lift Prices as Inflation Hawks See Fed Behind Curve - Dining out will cost more this year as U.S. restaurants take advantage of the nearly two-year long expansion to boost prices on food and drinks.  Higher-priced menus reflect growing confidence by eateries that consumers can afford to pay more to eat out. Restaurants are emboldened in part by the success of U.S. airlines, which have raised fares almost 10 percent since a year ago, according to Dean Maki, chief U.S. economist at Barclays Capital in New York.  “The fact that the airline industry was able to pass along cost increases signals that the pricing environment has become somewhat more favorable than it was during the heart of the recession,” Maki said. “It’s more likely restaurants will be able to pass along price increases now relative to the last few years.”  Higher food and fuel costs are spurring menu changes, which are reflected in the food-services category of the personal- consumption-expenditures price index.

In Case You Were Wondering...  Current dollar spending per person in the United States is still below its pre-crisis peak.  In 2008:Q2 domestic spending per capita was $50,081.  In 2011:Q1 it reached 49,808.  So 11 quarters later, the U.S. economy has yet to even return to its pre-crisis peak, let alone get anywhere near a reasonable pre-crisis trend. Time to adopt a nominal GDP level target.

Gas prices reach new record in six states - Gas prices have gotten so high that in six states they’ve reached a new record above the levels set in 2008. Prices in West Virginia inched above their 2008 record today, with the average price for a gallon of regular gasoline edging above $4.15, according to AAA’s Daily Fuel Gauge Report. Four Great Lakes states – Illinois, Indiana, Michigan, and Ohio – topped their 2008 records yesterday. Hawaii first exceeded its all-time high April 20. Two other Great Lakes states – Minnesota and Wisconsin – are within an eyelash of beating their 2008 records. The rise in prices nationally, of course, has been instability in the Middle East. But the Midwest’s rise has been caused by a confluence of events closer to home over the past week: production problems at two midwestern refineries; tornado-driven power outages at seven refineries in Texas, Alabama, and Pennsylvania; flooding along the Mississippi River and elsewhere that has kept barges from reaching the upper Midwest; and the seasonal switchover from winter-blend to summer-blend fuels.

$4 Gas: Get Used To It - In China, there's one car or truck for every 14 people. In the U.S., the ratio is nearly one to one. But China's catching up. The country is now the world's biggest car market, and the the number of civilian vehicles in the country grew by an astonishing 19 percent last year. As a result of this kind of growth, demand for oil is shooting up in China and other developing countries. And it's likely to keep rising in the years years to come.But the world's big oil-producing regions may be unable or unwilling to increase production fast enough to keep up. The combination of long-term increases in demand and sluggish growth in supply means we should get used to higher prices for oil — and, by extension, higher gas prices. It's true that the most recent spike in oil prices was precipitated by unrest in the Middle East and North Africa. So if things settle down in the region, the price of oil and gasoline will likely fall in the short term.

Oil Prices Plunge: Why Gas Might Not Kill the Recovery -  According to the oil price spike of 2008, whenever gas prices hit $4 a gallon, the economy flips out. Sticker shock at the pump cuts deep into fuel demand, as consumers scrap superfluous driving. Americans opt for ‘staycations' in lieu of far-flung family adventures, and they swap out gas-guzzling trips to the mall for evenings at home with their TV. The shifts in consumer behavior add up to bad news for big box retailers, whose sales drop as their stuff gets pricier because of higher input costs and consumers staying home. Not so this time around. Pump prices around the country have been approaching the $4 mark this week, averaging $3.985 nationally today. Gas prices tend to lag oil price swings by a few weeks, but if the oil price drop is temporary (which is likely, given rising demand from emerging markets and steady oil production in non-OPEC countries), high gas prices may stick around. And yet consumer spending hasn't flinched. Big retail chains today reported an 8.9% surge in sales in April versus a year ago, which ties with March as the largest monthly gain on record over the past 11 years.

Gas Prices Continue to Rise While Oil Drops Below $100 a Barrel - Gas prices continue to rise -- even while the oil used to make it drops in price, say analysts.  The national average price for gas this week is $3.96, according to the Department of Energy.  Hawaii still has the nation's most expensive gasoline as of today, but the nation's heartland is catching up. In Illinois, the average price is $4.32 a gallon, according to AAA's Daily Fuel Gauge Report. That's even higher than the average in California, $4.27, which is known for its high pump prices.  Indiana is catching up with an average of $4.24 for regular gas. At least drivers in those states are facing cheaper prices than those in Alaska. At one gas station in that state, gas was selling for $6.79 a gallon.

U.S. Light Vehicle Sales 13.2 million SAAR in April - Based on an estimate from Autodata Corp, light vehicle sales were at a 13.17 million SAAR in April. That is up 17% from April 2010, and up 0.8% from the sales rate last month (March 2011). This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for April (red, light vehicle sales of 13.17 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate.  This was above the consensus estimate of 13.0 million SAAR.  Note: The Japanese supply chain disruptions will impact sales over the next several months and I expect sales to be below this level for the next 6 months or so.

ISM Manufacturing at 60.4 in April - PMI at 60.4% in April, down from 61.2% in March. The employment index was at 62.7 and new orders at 61.7. All slightly slower than in March, but still very strong. From the Institute for Supply Management: April 2011 Manufacturing ISM Report On Business®  "The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month. The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Here is a long term graph of the ISM manufacturing index.

ISM Non-Manufacturing Index indicates sharply slower expansion in April - The April ISM Non-manufacturing index was at 52.8%, down from 57.3% in March. The employment index indicated slower expansion in April at 51.9%, down from 53.7% in March. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. From the Institute for Supply Management: April 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in April for the 17th consecutive month, say the nation's purchasing and supply executives. "The NMI registered 52.8 percent in April, 4.5 percentage points lower than the 57.3 percent registered in March, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 6 percentage points to 53.7 percent, reflecting growth for the 21st consecutive month, but at a slower rate than in March. The New Orders Index decreased substantially by 11.4 percentage points to 52.7 percent. The Employment Index decreased 1.8 percentage points to 51.9 percent, indicating growth in employment for the eighth consecutive month, but at a slower rate

Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders Collapse, Prices Firm - The April 2011 Non-Manufacturing ISM plunged 4.5 points to 52.8 from 57.3 The drop was below expected range of all 73 economists in a Bloomberg ISM Survey. The range of economists' forecasts in the Bloomberg survey was 54.5 to 59 with the median forecast up a tick to 57.4. Tellingly, new orders collapsed by 11.4 points from 64.1 to 52.7. Employment, one of the weaker measures and up only 8 consecutive months fell to 51.9. One more reasonably bad month and services employment will contract. Please consider the April 2011 Non-Manufacturing ISM Report On Business®

ISM Indexes and BLS Payroll Employment - Here are two scatter graphs showing the relationship between the ISM employment indexes for manufacturing and service, and monthly changes in BLS payroll employment.  This graph shows the relationship between the ISM manufacturing employment index and the change in BLS manufacturing employment (as a percent of the previous month employment). The yellow dot is a forecast for April based on the ISM employment reading of 62.7. This suggests about 50,000 manufacturing jobs added in April (although there is plenty of noise, and R-squared is 0.62. The second graph shows the relationship between the ISM non-manufacturing employment index and the change in BLS private service employment (also as a percent of the previous month employment). This is also noisy (R-squared is 0.68), but a reading of 51.9 suggests an increase of about 110,000 service sector payroll jobs in April (blue dot on graph). So the ISM reports suggests private sector job growth in April of close to the 179,000 reported by ADP this morning.

Survey: Small Business Hiring in April "Disappointing" - The National Federation of Independent Business (NFIB) will release their April survey on Tuesday, May 10th. Here is a pre-release of the employment results from NFIB: NFIB Jobs Statement: Hiring Trends Inconsistent and Disappointing  “Four months into 2011, the trajectory for small-business hiring appears inconsistent and disappointing. February and March gave us some hope, but in April, the average number of net new jobs slipped from 0.17 per firm to 0.04. This graph shows the net hiring plans for the next three months. With fewer increases in new hires and more reports of shrinkage in workforces, we can expect the April job numbers to be a disappointment. Drilling down into the (seasonally adjusted) numbers:
• 8 percent of those surveyed increased employment;
• 15 percent reduced employment; and,
• 14 percent reported unfilled job openings, down 1 point from last month.

As The bin Laden News Has Come And Gone, El-Erian Reminds Us What The Real Issues Are -  In his virtually daily oped, which comes from Time today, Pimco's El-Erian looks at the transitory impact from the bin Laden news, and how even as it has come and gone, nothing has really changed. Unemployment remains stubbornly high. Youth joblessness is at alarming levels, with too many of the country's teenagers getting close to the point where they go from being unemployed to being unemployable. Various budget constraints have limited the scope for easy solutions, even if these were desirable. The debt and deficit dynamics are bad and deteriorating at both state and federal levels. A major rating agency, Standard & Poor's, has already taken the previously unthinkable step of placing the country's AAA credit rating on negative outlook. And Americans can no longer rely on their central bank for yet another round of imaginative pump priming to buy them time, options and flexibility. In effect, America can't buy itself out of its economic problems, nor can it again kick the can down the road for much longer. Meanwhile, the rest of the world continues to outpace the U.S. in growth, competitiveness and wealth creation.

Sleepwalking through America’s Unemployment Crisis -  Mohamed El-Erian -  This is much more than a problem for the here and now. High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse. This is a crisis. Let us start with the facts:

• ·         At 8.8% almost three years after the onset of the global financial crisis, America’s unemployment rate remains stubbornly (and unusually) high;
• ·         Rather than reflecting job creation, much of the improvement in recent months (from 9.8% in November last year) is due to workers exiting the labor force, thus driving workforce participation to a multi-year low of 64.2%;
• ·         If part-time workers eager to work full time are included, almost one in six workers in America are either under- or unemployed;
• ·         More than six million workers have been unemployed for more than six months, and four million for over a year;
• ·         Unemployment among 16-19 year olds is at a staggering 24%;
• ·         With virtually no earned income and dwindling savings, the unemployed are least able to manage the current surge in gasoline and food prices, they are effectively shut off from credit, and many have mortgage debt that exceed the value of their homes.

Learning about Long Term Unemployment (I) On Thursday, we brought together an impressive array of scholars to discuss the causes and consequences of, and policy responses to, long term unemployment, including Prakash Loungani, Advisor in IMF’s Research Department, Kenneth Scheve, Professor of Political Science at Yale, Phillip Swagel, Professor of Public Policy at the University of Maryland, and a former Assistant Secretary of Treasury for Economic Policy, Rob Valletta, Research Advisor at the Federal Reserve Bank of San Francisco, Dan Aaronson, Director of Micro Research at the Chicago Fed, and Kenneth Troske, Professor of Economics from the University of Kentucky. And that was in addition to the researchers from the University of Wisconsin-Madison (more on them below). For me, this was a tremendous learning experience. But like all good conferences, by the end I understood that I knew less than I thought I knew about long term unemployment. In today’s post, I will discuss the presentations and papers by Prakash Loungani and Rob Valletta; in the next post, I'll cover the findings of Ken Scheve and Phillip Swagel and Ken Troske.

The Snapshot: The Public’s Top Priority Is Still Jobs — Conservatives have assiduously cultivated the idea that America’s main problem is the budget deficit and national debt. They have managed to carry much of the media with them and dominate the political conversation. But they haven’t convinced the public, whose main priority is still jobs. In the latest CBS/New York Times poll, a plurality of 39 percent say the economy/jobs is the most important problem facing the country compared to just 15 percent who say the deficit/debt is the main problem. Nor does the public believe that reducing the federal budget deficit is somehow going to solve the jobs problem. In the same poll a mere 29 percent think cutting the deficit will create jobs compared to 29 percent who believe a major reduction in the annual budget will actually cost jobs and 27 percent who think there will be an effect on jobs.

Fed’s Lockhart Says Employment Recovery May Take Three Years - Federal Reserve Bank of Atlanta President Dennis Lockhart said the nation’s workforce may be three years away from returning to its pre-recession size.  “There is virtually no net job creation resulting from new business formation in recent quarters,” Lockhart said in the text of remarks given in Atlanta today. The economy has shown “relatively muted employment growth” that “in part reflects businesses’ continued reliance on higher productivity of existing workers rather than on workforce expansion,” he said.  The Federal Open Market Committee last week pledged to spur the recovery by finishing its $600 billion bond-purchase program in June and holding interest rates low for an “extended period.” U.S. companies in April added the fewest employees in five months, and service industries expanded at the slowest pace since August, according to reports today.  Lockhart predicted average monthly job growth of about 200,000 for the rest of 2011. He said productivity gains have been “substitutes for job creation” and that the “absence of net growth in the small-business segment of the economy is troubling.”

Job Creation Hits Post-Recession High in April - Gallup's Job Creation Index reached a new high of +13 in April. This does not differ much from the +12 of the prior two months, but well exceeds the +5 of April 2010. Survey Question: Based on what you know or have seen, would you say that in general, your company or employer is --
1) hiring new people and expanding the size of the workforce
2) not changing the size of its workforce
3) letting people go and reducing the size of its workforce
The long-suffering job markets in the Midwest appear to be benefiting from continuing improvements in the manufacturing sector, and one of the benefits of the weak U.S. dollar has been to make U.S. exports more attractive globally. As a result, this region has the lowest firing in the nation and, along with the East, shows the most year-over-year improvement.

Rasmussen Employment Survey: 19% of Workers Report Their Firm is Hiring, 25% Laying Off - In contrast to a Gallup poll that shows more companies are hiring than firing, a Rasmussen Reports poll shows the opposite. Please consider Rasmussen Employment Index 19% of Workers Report Their Firm is Hiring, 25% Laying Off - The Rasmussen Employment Index, which measures workers’ perceptions of the labor market each month, regained five points in April after falling to a recent low in March. At 74.9, the Employment Index is up two points from a year ago and 11 points from two years ago. Yet despite April’s gain, confidence in the Labor Market is still down from the beginning of 2011. Just 19% of working Americans now report that their firms are hiring while 25% say their firms are laying workers off. Those numbers are little changed from the month before. It has been nearly three years since the number reporting that their firms are hiring has topped the number reporting lay-offs

Weekly Initial Unemployment Claims sharply higher - The DOL reports on weekly unemployment insurance claims:  In the week ending April 30, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 43,000 from the previous week's revised figure of 431,000. The 4-week moving average was 431,250, an increase of 22,250 from the previous week's revised average of 409,000.  This graph shows the 4-week moving average of weekly claims for the last 40 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week to 431,250. Note: There were special circumstances last week, via MarketWatch:  A Labor official attributed much of the increase to temporary layoffs in the auto sector and in the state of New York, where workers in the educational field such as bus drivers are eligible for compensation during the week of spring break.

Initial Jobless Claims Surge To 8-Month High - The news in this morning’s update on new weekly jobless claims is bad. In fact, it’s the worst report for this series since the recession ended in mid-2009. The Labor Department argues, according to Bloomberg, that the unusually big jump in claims was due to “auto-plant shutdowns and other unusual events that seasonal variations failed to take into account.” In any case, new filings for unemployment benefits surged last week by a seasonally adjusted 43,000--the biggest weekly jump in more than two years. As a result, claims hit 474,000 for the week through April 30, the highest since last August.Dismissing this as meaningless volatility isn't going to be easy until (or if) we see much lower numbers in the weeks ahead. One reason for reserving judgment is the disturbing trend over the past month for this series. For all the talk that the latest number is an outlier, there’s no getting around the fact that the trend over the last several months hasn’t been kind for thinking optimistically. As the chart below reminds, initial claims have been more or less rising since the end of February—steeply and sharply so since early April. The four-week moving average, which filters out a fair amount of the weekly noise, has taken wing as well and is now at its highest since last November.

Weekly Unemployment Claims Soar to 474,000; Bogus Excuses Offered - The number of people filing initial unemployment claims soared to 474,000 this week, surpassing the most bearish forecast of all 46 economists in a Bloomberg economic survey. Please consider the Department of Labor Unemployment Insurance Weekly Claims Report for the week ending April 30, 2011.  In the week ending April 30, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 43,000 from the previous week's revised figure of 431,000. The 4-week moving average was 431,250, an increase of 22,250 from the previous week's revised average of 409,000. Weekly Claims and 4-Week Average Up 3 Consecutive Weeks. Bogus Excuses Offered.  Please consider U.S. Jobless Claims Unexpectedly Jump on Auto Shutdowns The number of claims for U.S. unemployment benefits unexpectedly rose last week, pushed up by auto-plant shutdowns and other unusual events that seasonal variations failed to take into account, the Labor Department said

Without Jobs, U.S. Consumers Have No Strength -Jobs are to U.S. consumers what hair was to Samson. A surge in jobless claims Thursday adds more urgency to the already important payroll number, due out Friday. The median forecast is that April payrolls grew by a modest 185,000 jobs. The month-long rise in claims creates an asymmetric risk: the number could more likely disappoint rather than delight.  Most forecasts had expected U.S. labor markets to improve, perhaps even accelerate, in 2011. Stronger job markets, along with a tax cut, would help consumer spending power by creating a virtuous cycle of demand and job growth. The recent rise in jobless claims raises questions about that outlook. If consumers don’t have jobs, they have no financial muscle for spending.To be sure, the U.S. Labor Department was quick to explain Thursday’s unexpected 43,000 jump in end-April jobless claims, including (honestly) spring break in New York State schools. But the increase in claims was not a one-week deal. New filings have been trending higher throughout April. They are back up to their highest level since August

ADP: Private Employment increased by 179,000 in April -- ADP reports:  Employment in the nonfarm private business sector rose 179,000 from March to April on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from February 2011 to March 2011 was revised up to 207,000 from the previously reported increase of 201,000. April’s ADP Report estimates employment in the service-providing sector rose by 138,000, marking 16 consecutive months of employment gains. Employment in the goods-producing sector rose 41,000, the sixth consecutive monthly gain, while manufacturing employment rose 25,000, the seventh consecutive monthly gain. In April, employment in the construction industry increased 9,000, only the second monthly increase since June 2007. Note: ADP is private nonfarm employment only (no government jobs).

ADP: April Private Payrolls Rise, But At Slowest Pace In Months -- It’s still growing, but job creation slowed last month, according to today’s release of the ADP Employment Report. Nonfarm private jobs rose by 179,000 in April on a seasonally adjusted basis--down from March's gain of 207,000. That’s strong enough to offer convincing evidence that the labor market is still expanding with enough forward momentum to keep the party going in the months ahead. But it’s also true that last month’s gain was the smallest since last November’s tepid 122,000 rise. Nonetheless, the labor market has expanded for 15 straight months, based on ADP numbers. Private-sector employment is higher by more than 1.6 million since the end of January 2010. That’s a lot of jobs in the abstract, although it’s still a small fraction of the 7.8 million jobs lost in the Great Recession, as per ADP’s reckoning.

April Employment Report: 244,000 Jobs, 9.0% Unemployment Rate - From the BLS:  Nonfarm payroll employment rose by 244,000 in April, and the unemployment rate edged up to 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in several service-providing industries, manufacturing, and mining. The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate increased to 9.0% (red line).  The Labor Force Participation Rate was unchanged at 64.2% in April (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio decreased slightly to 58.4% in April (black line). The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. The dotted line is ex-Census hiring.  The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

EMPLOYMENT REPORT (w/ 5 charts) The headline number of payroll jobs was strong and the markets are reacting strongly to the report that 224,000 jobs were created last month. Moreover, the job gains were widespread with the only secctors to show an employment drop were temporary jobs and government. Private payroll employment rose 268,000, the largest increase this cycle. But the household survey reported an employment drop of some 190,000. The unemployment rate is based on the household survey so the unemployment rate ticked back up to 9.0%. On balance, this employment report showed essentially the same news as the last several reports of weak employment gains that are well below historic norms. However, by the standards of the recent jobless recoveries this cycle continues to underperform the 1990s cycle and show stronger growth than the 2000s cycle. The workweek was unchanged so that despite the large increase in private payrolls aggregate hours worked only rose 0.2 from 100.5 to 100.7. This is about the same that we have seen for the past several months. Average hourly earnings rose rose from $19.32 to $19.37, or 0.2%. The year over year gain in average hourly earnings remains at 1.9%, where it has been for several months.

Strong Job Report Shows U.S. Economy Gaining Steam - The United States economy added far more jobs than expected in April as the recovery continued to pick up steam. The Department of Labor said Friday that 244,000 jobs ¹were added last month after a gain of a revised 221,000 in March. The unemployment rate rose to 9 percent in April from 8.8 percent in March. As has been the case for several months, all of the increase came from private employers, which added another 268,000 jobs last month on top of the revised 231,000 in March, the monthly report said. Results of the previous two months were revised to show an additional 46,000 jobs were added. Governments, struggling to balance budgets as they deal with shrinking revenues and growing deficits, cut 24,000 jobs last month. Most of the drop came at the local level, where 14,000 jobs were lost in April after a decline of 15,000 in March.

April Job Growth Improves As Jobless Rate Ticks Up - This morning’s update on nonfarm payrolls for April brings some good news. Job growth accelerated last month to a net rise of 268,000 (seasonally adjusted) vs. March’s 231,000 gain. In fact, April’s pop was the best monthly increase in payrolls since the recession ended. The news is all the more satisfying in the wake of Wednesday’s weak ADP jobs report, and yesterday’s rising trend in jobless claims. Economists were surprised as well: the consensus forecast called for a gain of 200,000, according to Briefing.com. Jim O’Sullivan, chief economist at MF Global opines that there's a fair amount of growth momentum to consider. “The recovery has progressed into the self-propelling stage, where it’s less vulnerable to short-term swings in sentiment,” he tells Bloomberg. Perhaps, but we should be cautious with today’s jobs report for several reasons. One is that most of the surprisingly good news comes via a sharp revival in retail employment. In March, retail jobs suffered a rare retreat, dropping by a seasonally adjusted 3,200 on a net basis. The dip was temporary, however, and last month the sector added more than 57,000 positions—the biggest monthly gain by far in more than three years.

Perking up - AMERICA'S recovery has not been an easy one for workers. For months, the economy expanded without doing much at all to create jobs and bring down unemployment. And recently, the economy has shown signs of faltering yet again, raising the possibility that in 2011 recovery would once more fail to bring meaningful gains to workers. The Bureau of Labour Statistics has given American workers a big reason to hope, however. This morning, the BLS released payroll employment numbers that show a labour market growing progressively stronger. American firms added 244,000 jobs in April, and the private sector added 268,000. Payroll figures for February and March were both revised upward. Over the past three months private-sector employment has risen by an average of over 250,000 jobs per month. Since the employment bottom in February of 2010, the economy has added 1.8m jobs and the private sector has added 2.1m. Most of those jobs were created in the past year, and about a third of them in the last three months. This is not yet the hiring pace one would hope to see after so deep a recession—there are still 13.7m unemployed workers and nonfarm employment remains nearly 7m jobs below the pre-recession peak. But this is better than anything the American economy has seen in years. The last time the private sector added this many jobs in a month was February of 2006—more than five years ago.

The Empoyment Report: Better Than Some Expected, But Still Not Good Enough - The jobs numbers are out this morning, and they show the unemployment rate increasing to 9.0 percent, and the creation of 244,000 new jobs (the private sector added 268,000 will government jobs fell by 24,000 — the net figure of 244,000 was better than many analysts expected). This does add jobs over and above the 100,000-150,000 needed each month to keep up with population growth. But remembering that we have millions and millions of people out of work, at this rate it will take more than five years to get back to full employment (job growth during the recoveries from previous recessions was much stronger than this). Many analysts are hailing this report as good news, and it’s certainly true that net job growth of 100,000 or so is better than losing jobs (the labor force participation rate was unchanged at 64.2 percent, and the employment-population ratio decreased slightly to 58.4 percent). But the recovery remains sluggish, and with recent indicators showing that the economy is sputtering — GDP growth was not as robust as hoped, new claims for unemployment have been trending upward, business investment has not been as strong as needed, etc. — there’s no sign of that changing anytime soon.

BLS Jobs Report: Nonfarm Payroll Headline Number Looks Good, Beneath the Surface, Awful - On the surface, this was the third consecutive solid jobs report, not as measured by the typical recovery, but the best back-to-back reports we have seen for years. The Payroll Survey Establishment Data showed employment up by 244,000. At that pace of hiring, the unemployment number would ordinarily drop, but not fast. Instead, the unemployment rate ticked up. The reason is beneath the surface, employment fell by 190,000 according to the Household Survey. According to the Household Survey, the number of unemployed rose by 205,000. Another 131,000 dropped out of the labor force or the unemployment rate would have been even higher. Which survey to believe? It is hard to say on one month's data. However, during a recovery the household survey is supposed to lead. Moreover, the household survey is more consistent with three recent reports.

1. Weekly Unemployment Claims Soar to 474,000; Bogus Excuses Offered
2. Oil Consumption Demand Destruction vs. Speculative Futures Positions
3. Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders Collapse, Prices Firm

Jobs data sends mixed messages - April was another strange month of mixed messages in the labor market. The payroll survey came in surprisingly strong, with 244,000 jobs added. Excluding temporary hiring for the 2010 census, this is the largest monthly gain in five years. The household survey, however, went in the opposite direction, with the unemployment rate increasing from 8.8% to 9.0% -- and the increase in unemployment was not due to formerly-sidelined workers deciding to look for work, as the labor force increased by only 15,000 in April (not nearly enough to keep up with working-age population growth). The rule of thumb when the surveys go in opposite directions is to put more weight on the payroll survey, since it is much larger and less volatile month-to-month. And while net jobs growth of 244,000 is relatively good news, this country has nearly 14 million unemployed, and millions more who have given up even trying to find work. At April’s job growth rate, it would take until the fall of 2016 to get back to the prerecession unemployment rate.

Why Did the Unemployment Rate Rise? - The economy added 244,000 jobs in April but the unemployment rate skipped from 8.8% to 9%. What gives? The number of jobs added comes from a survey of establishment payrolls. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. That volatility is a big reason why economists usually, but not always, pay much more attention to the establishment report. In April, the household survey registered a loss of 190,000 jobs, while the labor force — the number of people working or looking for work, stayed about the same. And so the unemployment rate went up. The household survey also includes workers that don’t show up in the establishment survey, like farmers, the self-employed and people who work without pay in the family store. In April, that difference apparently accounted for a lot.

NFP Ex McDonalds And Birth Death: +7k - Today's BLS of 244K is great... until you exclude the 62K from McDonalds hirings, and 175K from the Birth Death Adjustment, and end up with.... +7K jobs. And yes, the "McDonalds factor" is to be included. Per Goldman: McDonald’s Corporation said that it hired 62,000 people during an April 19 promotional event. Despite the striking number, we do not expect a major effect on nonfarm payroll employment. Last year, the industry referred to in the payroll statistics as “limited service restaurants” added 209,000 jobs during the seasonal upswing in employment from March through June in seasonally adjusted terms. Given that McDonald’s has a 17% market share of the US fast food market (as of 2009), around 35,000 of the new hires can be accounted for by seasonal variation. A history of Birth Death adjustments which ultimately get washed out in the annual massive downward NFP revision which nobody really ever cares about though.

Who 'Ya Gonna Believe? (Employment) From the Bureau of Lies and Scams (BLS): Nonfarm payroll employment rose by 244,000 in April, and the unemployment rate edged up to 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in several service providing industries, manufacturing, and mining.  (chart serires)  That sounds good.  The unemployment rate edged up as allegedly more people came back into the workforce: Oh, and they revised last month up by 41,000 jobs too. So what's going on with the household data? The rate of change remains positive - but annualized (that is, removing seasonal variations) it is flagging, although remaining in positive territory. The claim in the mainstream media is that "more people are re-entering the workforce and looking for work."  Really?  When why is the "Not In Labor Force" number rising? and why is the rate (not-in-labor force number as compared against population) flat and not falling?

Ham and Eggs in the Jobs Report - Lets start by assuming ham and eggs. Here are private non-construction jobs gained or lost each month for the last 10 years.  What you see is a private non-construction recovery stronger than anything we saw during the 2000s. The absolute level of gains looks better than almost any month, the gains are increasing and they are solid month to month.  Lets take a closer look at something that a few of old cranks also find interesting and that’s mining, utilities and manufacturing: the traditional industrial heart of the economy. We don’t see huge gains but given that massive losses are the norm, the numbers are strong. Clearly they are better than anything that has happened in the last decade. Now lets turn to retail and hospitality. These are the sponge industries.  These are jobs like cashier, wait staff, line cook, etc. Not blowout performance but not horrible either. Lets briefly turn to the golden children: education, health, professional services, business, finance, insurance and real estate.  This is quite solid performance. So what are we missing, Ham and Eggs naturally. Government and Construction

Don’t Credit McJobs for Payrolls Gains - Some are crediting the McDonald’s hiring binge with artificially boosting this month’s payrolls numbers, but it likely played no role in this month’s report. (This was noted earlier this morning by our MarketBeat colleagues.) Pimco‘s Anthony Crescenzi explains it best. Many wish to “fry” today’s jobs report by contending the payroll gain had “special sauce” that gave it extra “shake.” The spin is that the 62,000 people McDonald’s hired on April 19th inflated today’s payroll print. There are many reasons why the bears will have to concede and say “have it your way” on this one and why the bulls can keep saying “I’m lovin’ it.” First, McDonald’s has said it normally hires an amount close to the tally it hired this year. Therefore, seasonal factors adjusted for a large portion of the gain. Second, as Goldman Sachs notes, many new employees will not have earned a paycheck for the pay period included in today’s report, which was for the pay period ending April 16th. Third, Goldman notes also that McDonald’s hasn’t been adding a significant amount of restaurants, which means that some of McDonald’s hires replaced existing workers. Finally, even after allowing for a modest impact, the face of the data are not changed, so bulls can “relish” in the data regardless of what the way the “hamburglar” is attempting to do with the data.

Correcting the Picture on Jobs - This is one of those months when it’s impossible to tell a consistent story about the jobs report. Job growth was unexpectedly strong last month. The unemployment rate rose to 9 percent, from 8.8 percent, its biggest one-month increase in more than a year-and-a-half. Which of the two numbers should you believe? The short answer is the job-growth number. The labor market appears to be improving. The rise in the unemployment rate is mostly a reflection of the fact that the rate fell by an artificially large amount over the previous several months.  It doesn’t actually mean unemployment rose last month. Instead, it reflects a kind of statistical catch-up. The old picture of the job market, as presented by the household survey, had been too optimistic. (Did anyone really believe that the job market recently improved at its most rapid two-month pace since the 1950s, as the unemployment rate suggested?) Today’s report helps correct the picture. This is simply the nature of surveys: they have noise in them.  With all this being said, the rise in the jobless rate is not irrelevant.

A Chart to Explain Confusion on Jobs - The Labor Department does two different surveys of the job market, as I mentioned in an earlier post. A survey of employers produces the estimate of job growth. A survey of households produces the unemployment rate. Since the recession began, the survey of households has been offering a more optimistic picture of the labor market than the survey of employers. That’s why the blue line in the chart is above the red line: the blue line — which represents the household survey — shows less job loss. The chart begins when the recession did, in December 2007.But now look at the very end of the chart. Do you see how the blue line dips, leaving it closer to the red line? That is today’s jobs report. It doesn’t mean unemployment actually rose last month. There is still a dark lining here, as that earlier post mentioned. During economic recoveries, the household survey is typically more optimistic than the employer survey — and typically more accurate, too, in part because the employer survey misses jobs created by start-up firms. Over the past three and a half years, the household survey has again been more optimistic.

More Good News On Manufacturing in Jobs Report, But Long Way To Go - Some more good news on manufacturing in Friday’s jobs report:

• –The manufacturing sector has now strung together six straight monthly employment increases on a seasonally adjusted basis, the first time that has happened since 1998. And it is up 11 times in the past 13 months.
• –In all, manufacturing employment is up 1.9% from a year earlier, the biggest year-over-year percent change since 1998. It is up 250,000 from its December 2009 low, also the biggest gains since 1998.
• –Manufacturing workers are getting 3.3 hours of overtime work per week, up from a recession low of 2.1 hours two years ago. Production workers are getting 41.4 hours of work a week on average, the kind of hourly workweek that’s normal in an expansion.
• –Average weekly earnings for manufacturing workers are up 2.6% from a year ago to $956.27.
• The bad news: Overall manufacturing employment, at 11.7 million, is down 7.8 million, or 40%, from its 1979 peak and remains down 32%, or 5.6 million, from where it stood at the beginning of the new millennium.

The impact of education and age on manufacturing employment (Dept of Commerce) Before getting into the numbers from today's employment release (check back for the forthcoming blog post on them), I want to dig a little deeper into the underlying data and examine what has been happening to a critical sector of the U.S. economy—manufacturing.   First, the manufacturing sector has become more competitive.  From the beginning of the recession through 2010, labor productivity in manufacturing increased a whopping 12.3 percent.  That means that we need one-eighth fewer worker hours to produce the same amount of output as compared to three years ago.  Second, the manufacturing sector has steadily been “up-skilling,” meaning it’s been building a labor force of higher-educated and higher-skilled workers.  Figure 1 below shows that the share of manufacturing employment accounted for by those with at least some college education has been increasing over time and exceeded half of the overall manufacturing labor force during the last few years.  The comparable crossover for private non-manufacturing employment occurred in 1991.

“CEOs at the Nation’s Largest Companies Were Paid Better Last Year Than They Were In 2007, When … Unemployment Was Roughly Half What It Is Today” - CNN Money points out:  Just 22% believe the country is on the right track, Rasmussen tells us. According to a new Gallup poll, more than half of us say the economy is in recession or depression, despite the fact that output has been expanding since the summer of 2009. In fact, more of us (29%) say the country is in a depression than say the economy is growing (27%). There’s a good reason for this: As inflation surges at the store and the gas pump, the economy is stalling. And the heart of the problem could very well be the Federal Reserve’s $600 billion “QE2″ money-printing initiative, which was implemented last November to great fanfare on Wall Street and is set to end in June. Yes, the stock market has posted impressive gains since the idea of QE2 surfaced….But stock ownership is concentrated among the wealthy:  Indeed, the government’s policies have been geared towards redistributing wealth upwards. See this, this, this, this, this and this.

Do Good Jobs Numbers Equal a Good Economy? - Is it time to  stop worrying about the recovery? In April, the economy added 244,000 jobs. That was more than double the 93,000 workers companies boosted their payrolls by  just six months ago, and it was far more than expected. After a string of weak economic data, and drop in the price of oil yesterday, many thought the jobs report would disappoint as well. But, at least in terms of jobs, that didn't happen. And it wasn't just one sector of the economy. Pretty much every industry is improving. Retail added 57,000 jobs. Business services added jobs. Entertainment and leisure services was up as well - 151,000 jobs in the past three months. Even manufacturing was up. rising an average of 35,000 jobs a month since the beginning of the year. That's up from a pace of just 9,000 last year. The two disappointments were that government jobs continued to drop, and so did temp hires. And the reaction on Wall Street was pure giddiness. When stocks opened for trading at 9:30, the market was quickly up 150 points.

Charting America's Transformation To A Part-Time Worker Society (Part 2) And Parting Thoughts On The Household Survey - Before we finally leave the topic of today's NFP data, we wanted to point out one last thing. While the total payroll number increased by 244K, the household survey indicated a drop of 190K. While this may be simply due to a calendar shift in which the Household survey catches up with the Establishment Survey, we wanted to bring readers' attention to one other fact. Observing the Household data breakdown into full time and part time workers, we see that the drop was actually more pronounced: while the March full time (112.755 MM) and part time (27.087MM) total summed nicely to the total headline number of 139,864, off by just 2K, the April data indicated that the component breakdown highlighted a much more pronounced drop in the headline number than the 190K indicated. Summing up the components adds to 139.572 MM, 102K less than the total 139.674 MM disclosed. In other words, the true drop when summed across components was not 190K, but 290K. And next, for the focus of this post, we look at whether this drop occurred in full time or part time jobs. To our complete lack of surprise, of the 290K drop, 291K was from full time jobs. As for part time jobs, you guessed it, increased by 1,000 in April. As the attached chart shows, since the start of the depression, America has lost 9.1 million full time jobs, offsetting this by a gain of 2.3 million part time jobs. No need to outsource to Asia any more: America now outsources jobs to temp agencies.

Employment: A dirty little secret and more graphs - First, anyone who adds (or subtracts) the Not Seasonally Adjusted (NSA) birth/death model numbers from the headline SA payroll employment is clueless. Someone sent me this "analysis" today: "... you exclude the 62K from McDonalds hirings, and 175K from the Birth Death Adjustment, and end up with.... +7K jobs". That is complete nonsense. The key issue with the birth/death model is it misses turning points; otherwise it is an important part of the monthly estimate. Second, I was reminded of a "dirty little secret" when I read Paul Krugman's column this morning. Krugman wrote about how the "D.C. economic discourse is saturated with fear" of "invisible monsters", but that no one seems to care about the very real plight of the millions of unemployed.  Actually it really isn't much of a secret that Wall Street and corporate America like the unemployment rate to be a little high. But it is "dirty" in the sense that it is unspoken. Higher unemployment keeps wage growth down, and helps with margins and earnings - and higher unemployment also keeps the Fed on the sidelines.

Long Time No Work - As it happens, I was at an event yesterday where Ed Lazear, the former economic advisor to President Bush, was discussing employment and the budget.  With a graph much like this one (except more recently updated) he took us through what has been happening in the job market: What it shows is that job openings are constantly being created and filled, and they tend to roughly match the number of people leaving their previous jobs over the long run, and even the not-so-long run. Even at the nadir of the recession, a whole lot of people were getting hired.  Unfortunately, a whole lot of people were also being fired, laid off, or "let go".   The people leaving jobs weren't doing so because they had a better opportunity elsewhere.  They were there involuntarily. And many of them have stayed there for a long time.  As Lazear pointed out, the longer you stay out of the workforce, the more human capital you lose.  At some point, many people simply exit the labor market entirely--they take early retirement, decide to stay home with the kids, or what have you.  There's nothing wrong with doing either if that's what you hoped and planned.  But when it's a result of being forced out of the labor market, that's a problem.  Human beings should not become obsolete.

Older Workers Without Jobs Face Longest Time Out of Work - After reaching record highs month after month, the typical length of time a jobless worker in the United States has been unemployed finally fell in April, to “only” 38.3 weeks. But the outlook is looking bleaker for the nation’s older workers. Sure, older workers are much less likely to be unemployed than their younger counterparts. Here’s a look at unemployment rates by age: As you can see, the older you are, the less likely you are to be unemployed. The unemployment rate for people over age 65 is about 6.5 percent, taken on a 12-month moving average. The unemployment rate for teenagers is nearly four times that. But if older workers do lose their jobs, their chances of finding another job are extraordinarily low. Here’s a look at the average duration of unemployment (on a 12-month moving average), broken down by age of the unemployed:

How Many Jobs Should We Be Adding Each Month? - How many more jobs does the country need to get back to full employment? The short answer: as many as possible. The longer answer: It depends on how quickly you think Baby Boomers are retiring. There are 6,955,000 fewer nonfarm payroll jobs today than there were when the recession officially began in December 2007. If the pace of job growth from April (244,000 jobs added) continues each month going forward, it will take 29 months before we have the same number of jobs as we had when the recession began. And we should have more jobs than we had before the recession began. After all, the population is growing, and more and more Americans reach working age each month. Exactly how quickly the size of the labor force is growing, or will continue to grow, is a matter of some debate, however. Right now the labor force participation rate — that is, the share of people over age 16 who are either in a job or actively looking for one — is at 64.2 percent, where it has been stuck for four months. That is unusually low:

Comparing Recoveries: Job Changes - The United States added 244,000 nonfarm payroll jobs on net in April, the Labor Department reported today, up from a gain of 221,000 jobs in March. The April employment number showed the fastest growth since last spring, when the federal government was adding hundreds of thousands of temporary jobs for the decennial census. Nearly every sector added jobs last month. Some of the biggest gains were in retail, professional and business services, leisure and hospitality, and manufacturing.  The losers were state and local governments, which have been struggling with budget issues. Even most of the winners, though, have a long way to go before returning to their prerecession levels, if they ever do. The chart above shows economy-wide job changes in this last recession and recovery compared with other recent ones, with the black line representing the current downturn. Since the downturn began in December 2007, the economy has shed, on net, about 5 percent of its nonfarm payroll jobs. And that does not even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the start of the recession.  In the previous post, the graph showed the job losses aligned at maximum job losses. In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII. . The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) increased to 8.6 million in April from 8.43 million in March. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 15.9% in April from 15.7% in March. This is very high. This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 5.839 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.122 million in March. This remains very high, and is one of the defining features of this employment recession.  So far the economy has added 854,000 private sector jobs this year, or 213,500 per month. There have been 768,000 total non-farm jobs added this year or 192,000 per month.

The Economist on Innovation and Jobs - This week’s issue of The Economist has an article on innovation and job creation: “Still full of ideas, but not making jobs“. Here’s a quote: America’s ability to innovate and raise productivity remains reasonably healthy. The problem is that the benefits of that innovation and productivity have become so narrowly concentrated that workers’ median wages have stagnated.The article seems to imply that this is a temporary problem, and that we just need the right kind of innovation — something that will “share the benefits of innovation more widely.” The article also echos the conventional wisdom on the need for more education, saying: “Americans once led the world in educational attainment, but this is now barely rising while other countries have caught up (see article). ” Yet, the evidence on the ground shows that college graduates (even those with degrees in technical fields) are seeing increasing unemployment and underemployment, even as student debt levels soar. The article completely ignores the issues I’ve been writing about here:

Is offshoring behind U.S. employment's current problems? - Atlanta Fed's macroblog -The significant lag between gross domestic product recovery and employment recovery has been particularly extreme in the wake of the most recent recession, but this pattern was a characteristic of the previous two recessions as well. You know the facts: In the post-WWII recessions up to 1989, the average time it took to regain recession-generated job losses was 10 months. The recovery time expanded to 23 months and 38 months in the recoveries following the 1990–91 and 2001 recessions. And we are on track to shoot past those records this time around.  Explanations abound, but one popular belief is that the answer hides somewhere within the somewhat ambiguous phenomenon labeled "globalization." A few weeks back, David Wessel of the Wall Street Journal provided some pretty compelling facts:  "U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.

Super Sad True Jobs Story - Once upon a time, economic recovery led to expanded employment of the United States population. Not anymore. The percentage of adults employed has declined sharply during the last two recessions and failed to increase much in their aftermath.As Alan Krueger of Princeton pointed out, the employment-to-population rate remains at about 58 percent, about the same as in December 2009 and far lower than the peak of 65 percent achieved before the 2001 recession.The unemployment rate does not provide as clear an indicator of employment trends, because it is strongly affected by individuals’ decisions to drop out of the labor force (which includes only those who are working for pay or seeking paid employment).As Catherine Rampell reported in a recent Economix post, more than 45 percent of those unemployed in January reported they had been looking for jobs for 27 or more weeks. Many other workers in this situation simply give up and stop looking for paid employment – and thus are not counted as unemployed.

The GOP Jobs Plan That Wasn't - It’s been over three months since Republicans took control of the House of Representatives and strengthened their caucus in the Senate. The central premise of the GOP midterm campaign was that it could create badly needed jobs—the Republican National Committee drove a bus through the lower 48 states emblazoned¹ with the slogan: “Need a Job? Fire Pelosi!” Now, after focusing its initial legislative efforts on repealing² “ObamaCare,” pushing Tea Party-backed dreams like a balanced budget amendment³, and fighting to strip⁴ regulatory agencies of their authority, the GOP has finally released a job plan…that consists of a balanced budget amendment, the repeal of Obamacare, and several assaults on regulatory authority.

The GOP Still Doesn’t Like the Unemployed - At an event in his Texas district this week, Rep. Blake Farenthold (R) explained how he perceives those Americans struggling to find work. "We've gotta, you know, nobody wants to starve anybody. Everybody wants to help folks out. But we've got a system where you can stay on unemployment for an awfully long time. And I think we need to create a system of decreasing benefits over time to encourage you to get a job. I think anybody who's had an alcoholic in their life or somebody with a drug problem, realizes that until things get bad enough there's no incentive to change." Republican media personalities continue to make similar remarks. I mention this in part because it's so offensive, and in part because it speaks to a larger truth. We can talk about Republican opposition to job creation, and we can marvel at the GOP's "so be it" attitude when told that the party's economic agenda would make unemployment worse.

Black and jobless in America - MATT YGLESIAS posts a chart: Mr Yglesias goes on to make an interesting point about the relationship between awareness of the seeming effect of failing to complete high school and the decision to drop out of high school. If more teens knew the employment cost of dropping out, the thinking goes, a few more would stick around to finish. Maybe so, or maybe there are selection bias issues at work; performance among high school drop-outs may be particularly bad, because the characteristics that lead someone to drop out also contribute to bad labour market outcomes. I'm interested in a different aspect of this dynamic, namely, the racial aspect. In an old piece at Vox, economics Nobelist James Heckman reported on America's falling high-school graduation rate: Especially striking are the comparisons in graduation rates between minorities and whites. Our estimated black graduation rate is 15 percentage points higher than the 50% rate reported in some recent studies, but it is also 15 points lower than the official completion rate. About 65% of blacks and Hispanics leave secondary schooling with a diploma.

Distressed States -

The unemployment rate for some minority workers is significantly higher than that for white workers in a number of states, including Louisiana, Texas, New Mexico, Michigan, Mississippi, and North Carolina.

• Distressed Louisiana: Recovery uneven as unemployment remains high among African Americans
• Distressed Texas: Unemployment high among African Americans and Hispanics in an uneven jobs recovery
• Distressed New Mexico: An ongoing and uneven unemployment crisis
• Distressed Michigan: Unemployment rate for African Americans more than double that of whites
• Distressed Mississippi: Unemployment rate for African American workers is signifi cantly higher than that for whites
• Distressed North Carolina: Unemployment rate higher for African Americans in uneven jobs recovery

A chart can be worth a thousand words (or at least 300) - Woodstock Institute recently released a report called Paying More for the American Dream V:  The Persistence and Evolution of the Dual Mortgage Market in collaboration with six other research and advocacy organizations from around the country.  The report is the fifth in an annual series that looks at systematic inequalities in the housing finance system and their impact on lower-income neighborhoods and communities of color.  I pulled data used in this report to create the chart below.  To me, this chart, more than perhaps any other data visualization I’ve seen, illustrates the different directions in which America’s white communities and its communities of color are headed. The chart uses data reported under the Home Mortgage Disclosure Act and looks at the change in conventional mortgage refinance originations in the Chicago region between 2008 and 2009 (the most recent year for which data is available).  It breaks these changes out by the race and ethnic composition of the census tract in which the loan was originated.  The chart shows that in predominantly white communities (those less than 10 percent minority), conventional refinance originations more than doubled between 2008 and 2009.  It also shows that in communities of color (those greater than 80 percent minority) conventional refinance originations declined by 41 percent over the same period of time. 

The Stark Facts of Race and Bankruptcy - The Woodstock Institute in Chicago has a fantastic new report entitled, "Bridging the Gap II: Examining Trends and Patterns of Personal Bankruptcy in Cook County's Communities of Color." The results are ugly for anyone who believes in equal access to economic opportunities and justice.It should be required reading for anyone working with bankruptcy and credit. The basic findings from Cook County:

• Personal bankruptcies are concentrated in African-American communities
• African-Americans are much more likely to file chapter 13
• Women make up a larger share of individual bankruptcy filers, and a dramatically larger share in African-American communities, than men do

The challenges facing communities of color - Yesterday, I posted a chart highlighting changes in refinance lending in Chicago between 2008 and 2009.  It showed lending doubling in predominantly white communities but dropping by over 40 percent in communities of color. To me, this chart illustrates my concerns about the directions in which these respective communities might be heading in the wake of the foreclosure and economic crisis. Whatever the reasons are behind the drop in conventional lending to communities of color, it ultimately means that they will face significant challenges to recovery.  As some noted yesterday in the comments to my post, these trends should not be surprising.  Communities of color in Chicago and across the country have been devastated by the foreclosure and economic crisis.  They have seen disproportionately high concentrations of foreclosure activity which affects neighborhood property values and likely puts a substantial portion of non-delinquent homeowners underwater. 

A test of racial bias in capital sentencing - This paper proposes a test of racial bias in capital sentencing based upon patterns of judicial errors in lower courts. We model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant free. We define racial bias as a situation where the relative weight on the two types of errors is a function of defendant and/or victim race. The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the combination of defendant and victim race. We test this prediction using an original dataset that contains the race of the defendant and of the victim(s) for all capital appeals that became final between 1973 and 1995. We find robust evidence of bias against minority defendants who killed white victims: In Direct Appeal and Habeas Corpus the probability of error in these cases is 3 and 9 percentage points higher, respectively, than for minority defendants who killed minority victims.

Racism in the criminal justice system -- I have not read this new NBER working paper on racism in sentencing, but the abstract is both provocative and sadly unsurprising: This paper proposes a test of racial bias in capital sentencing based upon patterns of judicial errors in lower courts. We model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant free. We define racial bias as a situation where the relative weight on the two types of errors is a function of defendant and/or victim race. The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the combination of defendant and victim race. We test this prediction using an original dataset that contains the race of the defendant and of the victim(s) for all capital appeals that became final between 1973 and 1995. We find robust evidence of bias against minority defendants who killed white victims: In Direct Appeal and Habeas Corpus the probability of error in these cases is 3 and 9 percentage points higher, respectively, than for minority defendants who killed minority victims.

Food Stamps Went to Record 44.199 Million in February, USDA Says - The number of Americans receiving food stamps rose to a record 44.199 million in February, up from 44.188 million in the previous month, the government said.  Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 12 percent from a year earlier, the U.S. Department of Agriculture said today in a statement on its website. Participation has set records every month since December 2008. Increases have slowed in recent months as unemployment levels declined.

About 1 in 7 Americans Receive Food Stamps - The number of food stamp recipients was essentially flat in February, the most recent month available, with 44.2 million Americans receiving benefits, according a new report from the U.S. Department of Agriculture. (See a sortable breakdown of the data here.) The food stamp program ballooned during the recession as workers lost their jobs or saw their hours and income reduced. The rise in recipients has begun to flatten in recent months, which may mean that as the economy is improving fewer Americans are seeking to join the program. Enrollment in the program is still high though, with 11.6% more people tapping benefits in February than the same month a year earlier. Food stamp numbers aren’t seasonally adjusted though, meaning a variety of factors could influence the monthly tallies and the program could grow again in coming months. Mississippi and Oregon were among the states with the largest share of the population utilizing food stamps in February: At least one in five residents in each state were receiving benefits.

  As Food Stamp Recipients Hit New Record, 400 Americans Account For 10% Of Capital Gains - Today SNAP released the most recent food stamp numbers. Not surprisingly, we just saw another all time high 44.2 million poverty-level Americans relying on government funding for day to day sustenance. Granted the number appears to be plateauing, so all those who bought the change if not the ho[y]pe, can rejoice as it may start declining next month: a development that is sure to be herald for Obama a 4th Putin-esque term. That said, another number that has to be kept in perspective and for which we have to thank none other than Pauly-K is that offsetting these 44.2 million of impoverished Americans who can get a tax refund for writing off the American dream, are 400 Americans who accounted for 10%, or $91 billion of total, in capital gains taxes, or said otherwise, 400 US taxpayers account for 10% of all capital gains in 2007! We are currently going through old issues of Pravda to see if the Communist empire ever achieved this kind of social disparity between the nomenklatura and the proletariat (it didn't). If we find confirmation we will post it, and lose a sizable bet which will certainly deny us any possibility of every being among the abovementioned 400.

As economic downturn lingers, help runs out for the unemployed - As the economic downturn lingers and unemployment rate hovers around¹ 9 percent, the number of jobless residents who reach the 99-week maximum for unemployment compensation continues to skyrocket. Every week about 600 people's unemployment benefits expire, the Connecticut State Department of Labor reports. That number was 500 people a week at the beginning of last year²."This is an issue we've never had to deal with before. This is a new phenomenon," said Glenn Marshall³, the commissioner for the DOL. Statewide, 43,791 people had their unemployment benefits expire during the last 10 months. Workforce development groups estimate that number is expected to rise⁴ to almost 76,000 by the end of the year.

Oregon's Unemployment Extension Going Fast - Oregon's unemployment extension attracts more people than expected.  More than 22-thousand out-of-work Oregonians have qualified for the 30 Million dollars in extension benefits that were approved last week.  Craig Spivey of the state employment department says they are being proactive with all of them, "Our worksource centers around the state are receiving a list of these individuals and contacting them making sure that their job search is up to code basically."   He says there's nothing in the works for another extension.  Right now, it looks like the benefits will be exhausted by the end of next week. The state had hoped that they wouldn't be exhausted for six weeks.

States to Tax Businesses to Shore Up Unemployment Insurance - States are turning to tax increases on businesses this year to shore up their unemployment insurance programs and pay interest on loans they’ve borrowed from Washington. Unprepared for such a deep economic downturn with stubbornly high unemployment, many states exhausted their unemployment insurance funds and turned to the federal government for loans. In an effort to replenish state funds and pay the interest on their government loans, states are now turning to tax increases, according to a survey from the National Association of State Workforce Agencies. “This recession was deeper and longer than the recessions we’ve experienced in the post World War II period,” said Richard Hobbie, executive director of the association. “The system really was not designed to handle such a severe recession.” Some 35 states said they expect their unemployment tax revenue to rise this year by about 16.5%. While part of the rising tax revenue could come from an improving economy, most states said they expect it to come from higher taxes on employers.

Bill Would Allow States to Use Unemp. Funds for Other Purposes - House Republicans unveiled a bill on Thursday that would give state governments greater leeway in how they spend federal funds earmarked for benefits for long-term unemployed people. The legislation, introduced by House Ways & Means Committee Chairman Dave Camp (R., Mich.), would enable states to use the funds for other purposes including investing in job creation programs, repaying money already owed to the federal government through the program, providing tax breaks for employers, or continuing to pay jobless benefits to long-term unemployed people. The tax deal struck in December between Democrats and Republicans also included a continuation of up to 99 weeks of benefits for long-term unemployed Americans through the rest of the year. Most of those weeks, 73, were federally-funded. The GOP bill would allow state governments to use those funds, pegged at $31 billion, for the other stated job-related reasons. It would still require state legislatures to pass a law granting the flexibility. (See how much money each state would receive.)

Massachusetts Dems vote to strip public unions of bargaining rights - Weren't Democrats supposed to be in favor of collective bargaining rights? Well, maybe not. Welcome to bizarro world. The Democratic-controlled Statehouse in Massachusetts voted earlier this week to strip public employee unions of their collective bargaining rights, as part of the state's budget measure. It passed by a vote of 157 to 1. That's precisely the same action taken by Republicans in Wisconsin, where it sparked a massive democratic outcry and weeks of rowdy protests. The Massachusetts legislation would allow local municipalities to make unilateral changes to agreed-upon benefits, like health care, bypassing the need for union approval. It would, however, leave open a 30-day window where unions may be consulted on changes to benefits. According to The Associated Press, the budget also cuts $800 million from the state's Medicare-like program MassHealth, and strips more than $65 million in aid to state agencies and municipalities. Another $200 million would be withdrawn from the state's 'rainy-day fund' to help close their spending gap for this fiscal year.

Measure to abolish North Dakota property taxes on ballot — A proposed constitutional amendment to abolish property taxes in North Dakota has been approved for the ballot.  Secretary of State Al Jaeger said Friday the initiative had enough petition signatures to qualify for the June 2012 primary election. It will be listed as Measure 2.  Supporters of the proposal needed almost 27,000 petition signatures. Jaeger says more than 28,000 valid signatures were turned in.  The amendment says North Dakota and its local governments may not impose property taxes after Jan. 1. It says the Legislature will have to figure out a way to provide replacement revenue to cities, counties and other local governments.

Indiana Approves Tax Changes, Including Corporate Tax Rate Reduction - Indiana's legislature adjourned Friday after approving a budget that now goes to Gov. Mitch Daniels (R). The $28 billion two-year budget includes a $1 billion surplus. Included in the budget and in other bills enacted this session are several tax provisions:

• Automatic Taxpayer Refund. When the state's rainy day reserves exceed 10% of budgeted spending (about $1.4 billion), the money will be split 50-50 between the teachers' pension stabilization fund and refunds to taxpayers via an income tax credit.
• Corporate Income Tax Reduction. From the current 8.5% rate, the rate will drop in steps to 6.5%, by ending a tax credit for the purchase of out-of-state municipal bonds.
• Ends net operating loss carrybacks after 2011.
• Modifies the tax on smokeless tobacco to be at a lower rate than the tax on cigarettes, better reflecting the risk associated with the product relative to cigarettes.
• Reduces unemployment insurance benefits by 25 percent to forestall a tax increase and begin repaying $2 billion in loans from the federal government.

Connecticut Raises Taxes a Record $2.6 Billion for Budget -  Connecticut Governor Dannel Malloy signed a $40.1 billion two-year budget that raises taxes by $2.6 billion, the biggest increase in state history, according to Republicans who fought the plan.  The budget passed by the House of Representatives and Senate yesterday raises taxes on incomes of more than $50,000 a year. It boosts the retail-sales levy to 6.35 percent from 6 percent while broadening it to cover previously exempt goods and services. The rate becomes 7 percent on “luxuries” such as $1,000-plus clothing and boats above $100,000.  “Unlike so many other states which have seized the opportunity to restructure government and make it sustainable, we continue on a bender,” Senator Andrew Roraback, a Goshen Republican, said before voting against the budget backed by Malloy, a Democrat elected in November. “We’re going to be spending more next year by taxing people,” Roraback said.

Illinois tax hike boosts April revenue by 34 percent (Reuters) - Illinois' tax revenue jumped nearly 34 percent in April compared with the same month in 2010, fueled by a big income tax rate hike enacted in January, a state legislative commission reported on Wednesday. Individual income tax collections totaled $1.8 billion last month, a $628 million jump from April 2010, while corporate income tax revenue of $395 million was $119 million higher than a year ago, the Commission on Government Forecasting and Accountability reported.But while base general fund revenue was up $1.93 billion on a fiscal year-to-date basis, about $888 million of that amount resulted from a tax amnesty program or from inter-fund borrowing, the commission said. Illinois' widening structural deficit, huge unfunded pension liability, inability to pay bills on time, cascading bond ratings, and its propensity to borrow its way out of financial problems have made the state a top concern in the $2.9 trillion U.S. municipal bond market.

Quinn wants to withhold cities' money as pressure to borrow billions - Gov. Pat Quinn wants to stop nearly $100 million in monthly payments to Chicago, the suburbs and other Illinois towns if lawmakers won't let him borrow billions of dollars to pay overdue bills, according to a confidential memo the Tribune obtained Thursday. The proposal, outlined in the memo and quietly distributed to top legislators, represents a pressure tactic by the Democratic governor. He hopes mayors from Zion to Cairo will squeeze their town's lawmakers to help get him the loan he wants.Acknowledging the backlash from cities, Quinn budget director David Vaught said mayors and other community leaders should "come help us get the debt restructured, and then you would get paid.  It's not, it's not a hostile message. … We have a cash crunch here, and we need your help getting out of it." Chicago would be hit hardest, with the city getting about $220 million in the last budget year from that pot of money. Mayor-elect Rahm Emanuel already faces a money shortfall that could total $1 billion in day-to-day expenses and employee pension costs

Quinn Looks at New Plan to Keep Money From Local Government - Despite pleading from local governments, Gov. Pat Quinn wants to suspend payments of their share of state taxes so Illinois can pay off $4.5 billion of debt.According to Illinois Statehouse News, Quinn has floated a new way to pay off the $4.5 billion the state owes to schools, social service providers, doctors and others. The plan would suspend paying municipalities part of the Local Government Distributive Fund, a cut of many state taxes.Lawmakers would have to give the state permission to suspend local payments, but this solution would avoid earlier plans Quinn had to borrow as much as $8.5 billion. “Our goal is to pay the bills and we need the General Assembly's support to make this happen,”

Meredith Whitney Doubles Down On Her Call For An Epic Muni Catastrophe - We're already in May, and so suddenly people are wondering: Where are all the muni market disasters we're supposed to be getting this year? Why has it been so quiet. Why haven't munis fallen, like Meredith Whitney said they would?  Fear not: she hasn't given up. Speaking today at the Milken Conference in LA, she doubled down on her call for hundreds of billions of dollars worth of defaults saying, according to Bloomberg: "This municipal issue, you can criticize me for anything you want, I’m numb to it, because I have more conviction on this than I’ve had on any single thing in my career.” We say hats off to Meredith Whitney for being numb to criticism, and having the courage of her convictions. There are all kinds of reasons one might change their mind, but people telling you "your stupid" or "you don't get this industry" is not one of them.

Low Census counts will cost big cities precious funds - Atlanta provides merely the most dramatic example of one of the true puzzles of the 2010 Census. The Bureau found far fewer people in many major cities than its own estimates had found a year earlier. Now the Census Bureau and cities are debating which numbers are closer to the truth. No one knows for sure—and no one may ever know for sure. While it won’t be easy, Atlanta and other cities are talking about challenging the counts. That’s because the discrepancy isn’t just a question of civic pride. Atlanta and other cities will have far less state and federal political representation and state and federal aid in coming years than they would have if the Bureau had found more people. How is it possible that one count for Atlanta’s population could be 420,000 and another could be 540,000—that 120,000 people might or might not exist? The basic answer is that the decennial Census and the Bureau’s annual estimates rely on very different approaches.

Detroit's exodus will continue without a revival - For over a month, Detroit has been reeling from new census numbers that showed the city lost more population in the last 10 years than anyone realized -- 230,000 or about 25 percent. City officials are trying to get the estimate increased, arguing that thousands of residents went uncounted. More troubling is the outlook for the city's next 10 years. Rather than a rebound, which community leaders are publicly talking up, demographers are projecting losses of another 100,000 to 200,000 people, leaving the city somewhere between Tucson, Ariz., and Memphis in size:- 500,000-plus, only without much of a middle class. "I can safely say the population there shows no sign of bouncing back any time soon," said Mark Mather of the Population Reference Bureau, a Washington, D.C.-based nonprofit that analyzes national population, health and environmental data. "Most demographers would suggest a continuation of the decline we've seen unless there is a dramatic turnaround in the economy and revitalization of parts of the city."

American Hellholes - The U.S. economy is dying and we are heading for the next Great Depression.  The talking heads in the mainstream media love to spin the economic numbers around and around and they love to make it sound like the economy is improving, but the truth is that it doesn't take a genius to see what is happening to the U.S. economic system.  All over the nation many of our greatest cities are being slowly but surely transformed into post-apocalyptic wastelands.  All over the mid-Atlantic, all along the Gulf coast, all throughout the "rust belt" and all over the entire state of California cities that once had incredibly vibrant economies are being turned into rotting, post-industrial hellholes. In many U.S. cities, the "real" rate of unemployment is over 30 percent. There are some communities that will start depressing you almost the moment that you drive into them. It is almost as if all of the hope has been sucked right out of those communities.  If you live in one of those American hellholes you know what I am talking about.  Sadly, it is not just a few cities that are becoming hellholes.  This is happening in the east, in the west, in the north and in the south.  America is literally being transformed right in front of our eyes.

Providence Budget Bombshell: $40M in New Taxes - The 2012 budget proposed by Mayor Angel Taveras last night calls for as much as nearly $40 million in new taxes to help close what was estimated to be about a $110 million structural deficit. The budget also includes a series of new cost-cutting measures—ranging from carving $12 million out of the fire and police departments to closing schools and firing some teachers. After saying he had cut as much as he could in spending, Taveras said he had to turn to higher taxes as a last resort. “Shared sacrifice is more than a phrase,” Taveras said. “Shared sacrifice is the realization that everyone must help in order to save our city. Every citizen, every city worker, every taxpayer, every business, and every organization including tax exempt institutions must share part of the burden of saving our city.”

Rural Homes being Attacked - “Yes we had 3 houses robbed, all next door to eachother just 2 doors down. Luckily they broke the pattern and went somewhere else.” I guess what worry’s me the most is that we live out of town 10 miles. I guess criminals are getting less lazy usually they’ll stay in town where it is easy pickens. That and the fact they came in on one of the homeowners and killed her. That’s pretty unfortunate. I didn’t predict anything that wasn’t already happening in dangerous parts of the world, and has happened before. Just common sense actually.  Its only American survivalist folk to think that criminals are too stupid to get into a car and look for a nice profitable isolated target that can be picked clean without concerns of neighbors reporting it and authorities responding to the incident. As I said many times, the ubiquitous survival retreat half a gas tank away from town works very well when there’s NO real threat to worry about.

Bloomberg to Lay Off Thousands of Teachers - Mayor Michael R. Bloomberg¹ said Friday that he intended to eliminate 4,100 teaching jobs through layoffs, and about 2,000 through attrition, the first significant layoffs of teachers since the fiscal crisis of the 1970s.  The job cuts are part of Mr. Bloomberg’s effort to slice an additional $400 million from various city agencies. He needs to plug a multibillion-dollar deficit in his $65.6 billion spending plan for the fiscal year that begins July 1. That budget is about the same size as the current one. The deep cuts to the city’s schools are similar to what the mayor proposed in February, though the number of layoffs is slightly less.  Mr. Bloomberg, during his budget presentation at City Hall, faulted the state for the necessity of layoffs among the 75,000 teachers. In 2008, he said, the state paid 45 percent of the city’s education costs; next fiscal year, he said, the state would pay 39 percent.  “I understand the frustration that parents and teachers feel; I feel it too,”

Educators Declare “State of Emergency” for California Schools - With budget negotiations between Gov. Jerry Brown and California legislators at a standstill, educators have declared a state of emergency for California public schools. “They’re really talking about sacrificing this generation of students,” said Charmaine Kawaguchi, president of the New Haven Teachers Association. “We want them to be thoughtful and put the students of California first. The children aren’t the problem. They didn’t cause this.” The California Teachers Association began holding rallies last month to raise awareness about the growing concerns over the state’s education crisis. Beginning May 9, the NHTA in Union City will join the CTA for a “State of Emergency” week of action. The weeklong event will include a series of activities, including a sit-in at the state Capitol, to inform residents about local impacts of the the state budget and to demand that the Legislature pass a budget that protects schools.

Shorter Year For California Schools? - Sacramento City Unified Superintendent Jonathan Raymond says he intends to hold the line on shortening the school year, callling the idea "a cop-out"  Raymond responded Wednesday to talk that the state's budget crisis may lead some districts to shorten the school year.  "We intend to tighten the schedule and make other adjustments," Raymond said, in order to keep the district's school year at 180 days.  Some authorities said the year could be shortened by 20 days, which is about a month of school. The current school year of 175 days is mandated by the state.  California Watch reported that Michael Kirst, president of the state education board, said districts face three options: increasing class sizes, cutting salaries of staff and slashing the school year.

If Supermarkets Were Like Public Schools - Suppose that groceries were supplied in the same way as K-12 education. Residents of each county would pay taxes on their properties. Nearly half of those tax revenues would then be spent by government officials to build and operate supermarkets. Each family would be assigned to a particular supermarket according to its home address. And each family would get its weekly allotment of groceries—"for free"—from its neighborhood public supermarket. No family would be permitted to get groceries from a public supermarket outside of its district. Fortunately, though, thanks to a Supreme Court decision, families would be free to shop at private supermarkets that charge directly for the groceries they offer. Private-supermarket families, however, would receive no reductions in their property taxes. Of course, the quality of public supermarkets would play a major role in families' choices about where to live. Real-estate agents and chambers of commerce in prosperous neighborhoods would brag about the high quality of public supermarkets to which families in their cities and towns are assigned

Has spending on public schools risen too high? - EPI research associate Richard Rothstein recently debated the Cato Institute's Adam Schaeffer on "Has Spending on Public Schools Risen Too High?"   Read the full debate     This debate appears as part of a CQ Researcher report on school reform, published on April 29, 2011. The report covers the promotion of market-based ideas, such as expanding school choice and basing teachers’ pay on measurable data such as test scores, promoted by venture philanthropists like Microsoft founder Bill Gates; and the reaction of teachers and many education scholars who argue that these reformers seek a simple fix for a complex problem because low-performing students are concentrated in the lowest-income districts, where poor funding, difficulty retaining teachers, and the ravages of poverty make educating students to top achievement more difficult than many realize.

Homeless, but Finding Sanctuary at School - The bus ride from the homeless shelter to Fern Creek Elementary School¹ was, as usual, raucous. A hundred times, Doretha Brown, the bus driver, had to yell for everyone to sit down. “This noise is what holds us up every morning and evening!” Ms. Brown shouted, although the Collins girls — Brianna, 8; Tamara, 7; and Sydney, 6 — could barely hear her above the din.  This is the sisters’ second stay at a shelter, so they are becoming accustomed to being homeless. Roxanne Schreffler, a kindergarten teacher, was struck by Sydney’s arrival at Fern Creek in February. “She walked into kindergarten in the middle of the day and sat right down,” Ms. Schreffler said. “She’d immediately adapted to her new situation. There was no time integrating her into the class; she was ready to go.”  Twenty percent of Fern Creek’s students are homeless², and school is the best part of the day for many of them. All eight members of the Collins family — Brianna is the oldest of six children, including three who are too young for school — live in a 13-foot-by-15-foot windowless room and share three bunk beds. It is a great relief getting out in the morning and off to school.

$48.5 million in unpaid bills await new Detroit Public Schools manager -  The new emergency manager for Detroit Public Schools will be met with a pile of unpaid bills and a system spending a third of its money to repay short-term loans. The district has accumulated about $45.8 million in unpaid invoices dating to 2009, despite heavy short-term borrowing to help cover costs, according to documents from the DPS Office of Accounting. If the bills aren't paid by June 30, the district's deficit of $327 million could go up. That also could hurt the district's ability to borrow, experts said. The unpaid bills reported to the state include those for $10,000 or more, as of March 31. DPS is not required to report bills for less than that amount. The total is up from $34 million as of Jan. 31. The bills will be the problem of Roy Roberts, the retired General Motors executive who is taking over this month as the new emergency manager. He replaces Robert Bobb, emergency manager since 2009.

Report: Nearly Half Of Detroiters Can’t Read « CBS Detroit…According to a new report, 47 percent of Detroiters are  ”functionally illiterate.” The alarming new statistics were released by the Detroit Regional Workforce Fund on Wednesday. WWJ Newsradio 950 spoke with the Fund’s Director, Karen Tyler-Ruiz, who explained exactly what this means. “Not able to fill out basic forms, for getting a job — those types of basic everyday (things). Reading a prescription; what’s on the bottle, how many you should take… just your basic everyday tasks,” she said.“I don’t really know how they get by, but they do. Are they getting by well? Well, that’s another question,” Tyler-Ruiz said. Some of the Detroit suburbs also have high numbers of functionally illiterate: 34 percent in Pontiac and 24 percent in Southfield.   “For other major urban areas, we are a little bit on the high side… We compare, slightly higher, to Washington D.C.’s urban population, in certain ZIP codes in Washington D.C. and in Cleveland,” she said.

Illiteracy and Testing - Here is Matt Yglesias who is always sensible and worth reading on education policy: Something that I think drives at least some of my disagreements with other liberals about education policy is that I think a lot of middle class liberals implicitly underestimate the extent of really bad learning outcomes. Take this report (PDF) from the Detroit Regional Workforce Fund which notes “that 47% of adults (more than 200,000 individuals) in the City of Detroit are functionally illiterate, referring to the inability of an individual to use reading, speaking, writing, and computational skills in everyday life situations” and also that “within the tricounty region, there are a number of municipalities with illiteracy rates rivaling Detroit: Southfield at 24%, Warren at 17%, Inkster at 34%, Pontiac at 34%.” Under those circumstances, I find it difficult to be seized with worry that schools are going to be ruined by teachers “teaching to the test” too much. It is true that school districts that have started taking testing more seriously now need to step up and also take the possibility of outright cheating more seriously. But the fact that huge numbers of kids are passing through school systems and not learning basic literacy drives home the fact that districts also need to take checking to see if the kids are learning anything more seriously.

Testing and Teaching - The spate of cheating stories on the web has pretty naturally given rise to a spate of people who oppose high-stakes testing saying "See?  Testing's bad!"  I think this response from Matt Yglesias is spot on: I spend a lot of time fighting over school reform, and even so, when I go to report stories on this, I'm still blown away by the poor quality of the education that many kids receive.  I frequently feel like when I'm arguing education with people, we end up talking about middle class peoples' concerns about their own schools.  We argue about whether the teachers are happy, dedicated professionals; whether "teaching to the test" is causing teachers to stint on crucial subjects, or robbing students of creativity and critical thinking skills.

The drop-out crisis (II) - We've talked about "wicked problems" before -- problems that involve complex social processes, multiple actors, and murky causal pathways (link, link). A particularly important example of such a problem currently confronting the United States is the high school dropout crisis. The crisis is particularly intense in high-poverty areas, but it is found in all states and all parts of urban, suburban, and rural America. (Here is an earlier discussion of these issues; link.) The consequences of this crisis are severe. More than a million high school students a year drop out of high school. Over 50% of these dropouts come from fewer than 20% of high schools. These young people have virtually no feasible pathways to a middle class life or a job in the 21st-century economy. And this in turn means a permanent underclass of unemployed or underemployed young people. This in turn has consequences for crime rates, social service budgets, incarceration rates, and a serious productivity gap for our economy as a whole.  Changing this current situation requires change of behavior on the parts of many independent parties -- teenagers, parents, teachers, principals, elected officials, and foundation officers, to name only some of the most obvious participants.

Dimming Optimism for Today's Youth - Maybe it has to do with sky-high levels of youth unemployment. Maybe it’s because student loan levels are climbing. Maybe it’s because today’s young’uns will someday be stuck supporting so many of their elders. Whatever the reason, for the first time on record, most Americans said they did not believe today’s young would have better lives than their parents, according to new survey data from Gallup. In an April poll, only 44 percent expressed that view. Several polling organizations — including The New York Times — have been asking the question intermittently since 1983. The specific wording is: “In America, each generation has tried to have a better life than their parents, with a better living standard, better homes, a better education, and so on. How likely do you think it is that today’s youth will have a better life than their parents — very likely, somewhat likely, somewhat unlikely, or very unlikely?”The measure peaked in December 2001 at 71 percent, shortly after the terrorist attacks.

The High Cost of Low Teacher Salaries - WHEN we don’t get the results we want in our military endeavors, we don’t blame the soldiers. We don’t say, “It’s these lazy soldiers and their bloated benefits plans! That’s why we haven’t done better in Afghanistan!” No, if the results aren’t there, we blame the planners. We blame the generals, the secretary of defense, the Joint Chiefs of Staff. No one contemplates blaming the men and women fighting every day in the trenches for little pay and scant recognition.  And yet in education we do just that. When we don’t like the way our students score on international standardized tests, we blame the teachers. When we don’t like the way particular schools perform, we blame the teachers and restrict their resources.  Compare this with our approach to our military: when results on the ground are not what we hoped, we think of ways to better support soldiers. We try to give them better tools, better weapons, better protection, better training. And when recruiting is down, we offer incentives.  We have a rare chance now, with many teachers near retirement, to prove we’re serious about education. The first step is to make the teaching profession more attractive to college graduates. This will take some doing.

Law Students Lose the Grant Game as Schools Win - The Golden Gate University School of Law¹ in San Francisco had admitted her, the letter stated, and it had awarded her a merit scholarship of $30,000 a year — enough to cover the full cost of tuition.  To keep her grant, all that Ms. Leumer had to do was maintain a grade-point average of 3.0 or above — a B or better. If she dipped below that number at the end of either the first or the second year, the letter explained, she would lose her scholarship for good.  Her grades and test scores were well above the median at Golden Gate, which then languished in the bottom 25 percent of the U.S. News and World Report annual rankings of law schools.  How hard could a 3.0 be? Really hard, it turned out. That might have been obvious if Golden Gate published a statistic that law schools are loath to share: the number of first-year students who lose their merit scholarships.  At Golden Gate and other law schools nationwide, students are graded on a curve, which carefully rations the number of A’s and B’s, as well as C’s and D’s, awarded each semester. That all but ensures that a certain number of students — at Golden Gate, it could be in the realm of 70 students this year — will lose their scholarships and wind up paying full tuition in their second and third years.

Number of the Week: Class of 2011, Most Indebted Ever - $22,900:

Average student debt of newly minted college graduates. The Class of 2011 will graduate this spring from America’s colleges and universities with a dubious distinction: the most indebted ever. Even as the average U.S. household pares down its debts, the new degree-holders who represent the country’s best hope for future prosperity are headed in the opposite direction. With tuition rising at an annual rate of about 5% and cash-strapped parents less able to help, the mean student-debt burden at graduation will reach nearly $18,000 this year, estimates Mark Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org. Together with loans parents take on to finance their children’s college educations — loans that the students often pay themselves – the estimate comes to about $22,900. That’s 8% more than last year and, in inflation-adjusted terms, 47% more than a decade ago.

Positives of For-Profit Higher Education -- For-profit schools have taken a beating in the last few years. They have become the whipping boy for many of our economic problems, including excessive student debt. But what many people overlook in the discussion is the many economic virtues that For-Profit colleges introduce. In her NY Times article The Merits of For-Profit Colleges, Judith Scott-Clayton points out three main ways that For-Profit schools are making higher education better:

• 1. Better job of securing financial aid for low-income students
• 2. Online innovation / Technological advance
• 3. Disrupting the status quo.

US pension agency seeks increase in premiums  The government agency that backstops the private pension plans of 44 million Americans is $23 billion in the hole and wants a $16 billion infusion from U.S. employers over the next decade.  "Premiums have to go up,"  "They are going to be raised. The question is, are they going to be raised in a way that actually encourages responsible behavior or penalizes it?"  The Obama administration has asked Congress to rework the way PBGC assesses pension insurance premiums, which it collects from employers, to avoid big premium spikes when pension investments fall short, and encourage companies to be responsible.  The PBGC also wants premiums to reflect the financial health of companies — meaning that companies with non-investment grade credit ratings, such as many in the auto sector, could be charged more.

The Trillion Dollar Public Benefits Gap Widens - State governments are looking at a cumulative shortfall of at least $1.26 trillion needed to pay for pension and retirement health care services, The Pew Center on the States reported in a study published last week. Read 24/7 Wall Street’s take on the report and a breakdown on 10 states where pensions are in jeopardy. —The Pew Center on the States: In the midst of the Great Recession and severe investment declines, the gap between the promises states made for employees’ retirement benefits and the money they set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year.  State pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap, according to an analysis by the Pew Center on the States. Retiree health care and other benefits accounted for the remaining $604 billion, with assets totaling $31 billion to pay for $635 billion in liabilities. Pension funding shortfalls surpassed funding gaps for retiree health care and other

The Underfunding of State and Local Pension Plans - The recent financial crisis and economic recession have left many states and localities with extraordinary budgetary difficulties for the next few years, but structural shortfalls in their pension plans pose a problem that is likely to endure for much longer. According to the Public Fund Survey of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6 trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension payments. Thus, unfunded liabilities (the amount by which liabilities exceed assets) amounted to roughly $0.7 trillion; in other words, assets covered less than 80 percent of liabilities. That share was the lowest percentage in the past 20 years.   Estimating the value of a plan’s liabilities is not straightforward, however. The benefit payments that it is obligated to make span many years and depend on a variety of factors, including the duration of people’s employment, their salary in years near retirement, how long participants live, and the magnitude of any required cost-of-living adjustments  In addition, an estimate of liabilities requires the conversion of a projected stream of benefits over many years into a single number, their present value, through the use of a discount rate. Today, CBO released an issue brief that discusses two approaches to calculating the present value of a plan’s liabilities.

Human Resource thought....fire to retire? - I have been around a long time, and have worked with and taught many people, so I get calls from people on career and workplace advice (I also have done expert witness work on certain aspects of employment practices). In the past two weeks I have received 4 contacts from people 55 - 64 years old wondering about being "reorganized" (gracefully fired) from their managerial jobs.Now I am certain people in that age group are having trouble being hired, but I wonder if fire-to-retire is going to become more common place. Bad economy paranoia? Smart intuition? Coincidences or trends?

Americans 45 and older are new voting-age majority - For the first time, Americans 45 and older make up a majority of the voting-age population, giving older Americans wider influence in elections as the U.S. stands divided over curtailing Medicare and other benefits for seniors. Along with the information about the growing influence of older adults, preliminary census estimates also show a decline in the number of married couples with children, slight growth in household size and a rapid rise in the number of Mexicans. The findings, based on the latest publicly available government data, offer a preview of trends that will be detailed in the next round of 2010 census results being released this month that focus on age, household relationships and racial subgroups. As a whole, the numbers point to a rapidly graying nation driven largely by the nation's 78 million baby boomers, who are now between the ages of 46 and 65 and looking ahead to retirement.

That Sinking Feeling – Krugman - Administration officials haven't yet admitted that they will break their promise to protect the Social Security surplus, but their allies in the media and the think tanks are already preparing the fallback position -- that everything is O.K. as long as the federal budget as a whole is in surplus. Let me pretend for a moment that the truth matters, and point out that real conservatives, who respect the lessons of the past, would disagree with the proposition that balancing the budget is enough. Why? Because the Social Security ''lockbox'' is the modern equivalent of a time-honored institution, the ''sinking fund.''A sinking fund was a sum of money that the government undertook to set aside each year to pay down its debt. Alexander Hamilton, our first Treasury secretary, established such a fund in 1795, and thereby made the fledgling United States creditworthy.

Private Accounts Can Save Social Security -- Although many American retirees now enjoy a comfortable lifestyle financed by a combination of Social Security, private pensions and personal savings, many other retirees are far from financially secure. Someone who retires now after earning average wages all his life will receive Social Security benefits of less than $20,000 annually—not enough to maintain the middle-class standard of living that he had during his working years.  Without meaningful reform in Washington, things will only get worse. There are now three employees paying Social Security taxes to finance the benefit of each retiree. That number will fall over the next three decades.  With just a 3% payroll deduction, a 67-year-old retiree who earned $50,000 a year could double his current Social Security benefit.

Americans See Medicare, Social Security "Crisis" Within 10 Years - Two out of three Americans (67%) believe Social Security and Medicare costs are already creating a crisis for the federal government (34%) or will do so within 10 years (33%). The vast majority believe the programs will create a crisis at some point, with 7% believing the programs' costs will not create a crisis for the foreseeable future. These results are based on an April 20-23 USA Today/Gallup poll that asked Americans what they see as the major cause of the deficit and which approach they favor for addressing the problem. Because Medicare, Medicaid, and Social Security make up a huge portion of the federal budget, it will be difficult to significantly reduce the deficit without addressing their costs. High healthcare inflation and a growing number of senior citizens in the population have helped increase costs. Americans largely seem to recognize that the costs of these programs are going to have a significant impact on federal spending and on the government's ability to address other priorities within the next decade.

Thomson Reuters Healthcare Spending Index: Costs Climb 5.8 Percent for Employers in 2010 - The cost of healthcare for people with employer-sponsored health insurance rose 5.8 percent in 2010, according to the Thomson Reuters Healthcare Spending Index for Private Insurance. The index tracks healthcare costs for individuals whose coverage is provided by self-insured employers - a segment that represents about 25 percent of U.S. healthcare expenditures. It is the timeliest indicator of healthcare inflation available. While the index rose 5.8 percent in 2010, the overall rate of healthcare inflation slowed versus the 6.6 percent growth rate in 2009.   The index tracks key healthcare spending components such as hospital care, physician services, and prescription drugs.  Hospital costs showed the steepest climb in 2010, increasing 7.9 percent annually.  Physician costs reflected a 4.9 percent hike, and drug costs increased 1.0 percent.

Prostate Exam Deaths From Superbugs Spur Cancer-Test Inquiry - Among the millions of men tested for prostate cancer around the world each year, doctors are detecting an alarming trend: An increasing number of patients are getting sick from potentially lethal, drug-resistant infections.  Studies emerging during the past year have uncovered that a small, yet growing percentage of those undergoing routine needle biopsy tests are becoming critically ill and dying from bacterial infections. Infectious complications including sepsis, the condition Greenstein had, from prostate biopsies have more than doubled in less than a decade, studies from three countries show. Nine out of 10,000 men whose tests were negative died within a month, researchers in Toronto reported in the Journal of Urology in March last year.

Shortages of key drugs endanger patients - Doctors, hospitals and federal regulators are struggling to cope with an unprecedented surge in drug shortages in the United States that is endangering cancer patients, heart attack victims, accident survivors and a host of other ill people. A record 211 medications became scarce in 2010 — triple the number in 2006 — and at least 89 new shortages have been recorded through the end of March, putting the nation on track for far more scarcities. The paucities are forcing some medical centers to ration drugs — including one urgently needed by leukemia patients — postpone surgeries and other care, and scramble for substitutes, often resorting to alternatives that may be less effective, have more side effects and boost the risk for overdoses and other sometimes-fatal errors.

Pass the shaker: eating less salt doesn't cut heart risks - People who ate lots of salt were not more likely to get high blood pressure, and were less likely to die of heart disease than those with a low salt intake, in a new European study.The findings "certainly do not support the current recommendation to lower salt intake in the general population," study author Dr. Jan Staessen, of the University of Leuven in Belgium, told Reuters Health. Current salt guidelines, including those released by the U.S. government in January, are based on data from short-term studies of people who volunteered to be assigned to a low-salt or high-salt diet, Staessen said. The U.S. guidelines recommend that Americans consume less than 2,300 milligrams of salt daily - 1,500 mg in certain people who are more at risk for high blood pressure or heart disease. While previous trials suggested a blood pressure benefit with lower salt intake, research has yet to show whether that translates into better overall heart health in the wider population.

US Appeals Court Opens Federal Funding for Stem Cell Research - The U.S. Federal Court of Appeals has overturned an August 2010 ban on federal funding of embryonic stem cell research, paving the way for broader exploration of how stem cells function and how they can be harnessed to treat a wide range of currently incurable diseases. The ruling has been welcomed by the Obama Administration, which attempted to lift the ban in 2009, and by the nation's top researchers in the field, "This is a victory not only for the scientists, but for the patients who are waiting for treatments and cures for terrible diseases," Kriegstein said. "This ruling allows critical research to move forward, enabling scientists to compare human embryonic stem cells to other forms of stem cells, such as the cell lines which are derived from skin cells, and to pursue potentially life-saving therapies based on that research." Kriegstein said the ruling will make a significant difference for stem cell research in general, including at UCSF, where the majority of stem cell investigators receive some funding from the National Institutes of Health for their research, as well as from private sources and from the state.

Guest Post: No, a Little Radiation Is NOT Good For You - Government scientists and media shills are now “reexamining” old studies that show that radioactive substances like plutonium cause cancer and arguing that exposure to low doses of radiation is good for us (a theory called “hormesis”). It is not just bubbleheads like Ann Coulter and pro-nuclear hacks like Lawrence Solomon are saying it as well. In virtually every discussion on the risk of nuclear radiation, someone post comments arguing that a little radiation makes us healthier. However, the official position is that there is insufficient data to support the hormesis theory: As Wikipedia notes: The notion of radiation hormesis has been rejected by the National Research Council’s (part of the National Academy of Sciences) 16 year long study on the Biological Effects of Ionizing Radiation. “The scientific research base shows that there is no threshold of exposure below which low levels of ionizing radiation can be demonstrated to be harmless or beneficial. See this, this, this and this.

Unsafe At Any Dose - SIX weeks ago, when I first heard about the reactor damage at the Fukushima Daiichi plant in Japan, I knew the prognosis: If any of the containment vessels or fuel pools exploded, it would mean millions of new cases of cancer in the Northern Hemisphere.  Many advocates of nuclear power would deny this. During the 25th anniversary last week of the Chernobyl disaster, some commentators asserted that few people died in the aftermath, and that there have been relatively few genetic abnormalities in survivors’ offspring. It’s an easy leap from there to arguments about the safety of nuclear energy compared to alternatives like coal, and optimistic predictions about the health of the people living near Fukushima.  But this is dangerously ill informed and short-sighted; if anyone knows better, it’s doctors like me. There’s great debate about the number of fatalities following Chernobyl; the International Atomic Energy Agency has predicted that there will be only about 4,000 deaths from cancer, but a 2009 report published by the New York Academy of Sciences says that almost one million people have already perished from cancer and other diseases. The high doses of radiation caused so many miscarriages that we will never know the number of genetically damaged fetuses that did not come to term. (And both Belarus and Ukraine have group homes full of deformed children.) Nuclear accidents never cease. We’re decades if not generations away from seeing the full effects of the radioactive emissions from Chernobyl.

China Controls Our Food Supply - China currently has a production stranglehold over a critical chemical compound that helps keep food fresh — ascorbic acid.  We use this to preserve almost all the food that is on the store shelves.  It’s essential to keep food on America’s tables, and we don’t have any control over its production or distribution. “It was first synthesized by an American scientist, it was first mass produced by an American company.  100% of our ascorbic acid or vitamin C now comes from China,” says Barry.  “In terms of pricing,  just about to the day that the Chinese finished capture and control over our supply of Vitamin C, ascorbic acid, they jacked up the price by 400%,” says Barry. Monopolistic supply chains, because of their single-source distribution system, can easily fail during a catastrophic event.  ”When that monopoly vendor decides to buy all of some good or import us some good from some place offshore, if there is any break in trade, then you don’t get “that thing” — and that thing might be really important. It might be an ingredient that goes in your food supply — a really vital ingredient.

Witnessing Weather History - April 2011 - As we head into May it’s becoming apparent that agriculture will take a big hit because of saturated soils that are keeping farm equipment out of the fields, and excessive moisture that can damage seeds trying to germinate if you did manage to get them in the ground…and we’re talking about farms from the Ohio Valley north across much of Ohio, west across all of Indiana, south across all of Kentucky and then further west into Illinois, Iowa and Missouri.  All of these areas have had flooding and above normal rainfall in the past month but the Ohio Valley has been hardest hit.  There are saturated soils and flooding in the Dakota’s and parts of Nebraska as well, so nobody is dealing with ideal conditions for planting crops right now…and I see some frost or freezing weather headed for the Upper Midwest in the next week!

Farmers' corn planting delayed by soggy April, but it’s not a disaster yet - Farmers in Northwest Indiana are biding their time, waiting for the ground to dry up enough to get planters into the fields. “We try to start by April 20,” said Lowell farmer Tom Keithley, president of the Lake County Farm Bureau. ‘‘Last year we were planting corn April 15.” To get an optimum yield, area farmers have to have all their corn in the ground by May 10, Keithley said. “It’s unusual to be this wet now. There’s a lot of ponding going on,” Keithley said. “Fortunately, it was a dry winter, but the ground is getting saturated now.” According to the National Weather Service, Lowell has had 19 days of rain in April, as of Thursday, with a total of 6.96 inches, compared to the average rainfall of 3.68 inches. Valparaiso reported 18 days of rain with a total of 6.11 inches and the Indiana Dunes National Lakeshore reported 15 days of rain with 5.35 inches. “If it would quit raining, we still wouldn’t be able to start planting for at least another week, everything is so saturated,”

Wet spring creates anxiety in Midwest farm country‎ - Experts say it's too early for farmers and backyard gardeners to worry about the wet spring that's drenched the Midwest, but anxiety seems to be growing among those frustrated by the muddy fields. "Yeah, there's a few people starting to sweat," said Kevin Baird, who grows corn, soybeans, tomatoes and other crops in southern Indiana and usually has been out in the fields for weeks by now. "Last year at this time they were almost wrapping up here." Corn and soybean prices are high, driven by low stockpiles and demand for livestock feed and ethanol, making farmers especially eager to begin work with the hope of a profitable season. Their ability to bring in big harvests ultimately will ripple throughout the country because corn and soybeans play key roles in determining how much everything costs from T-bones, eggs and chicken breasts to a tank of gasoline. Those crops are often used as livestock feed and corn is used to produce most ethanol, which is blended with gasoline

Indiana farmers waiting for rain to stop‎ - Parts of southern Indiana have seen three inches of rain in just the past three days. Farm fields were already drenched from last week's rain, and the weather is starting to take a toll on farmers. April 2011 was the fourth wettest on record, and so far, May hasn't let up. Fields resemble mud bogs right now, and it will be at least a few more weeks before they can plant - assuming the weather stays consistently dry. The weather has been a source of concern and even irritation for those in the agriculture industry. "We're nervous. We're not to critical yet. Most of the farmers, with modern equipment and the size of the operations, if we can get the dry weather and field conditions right, most guys can get their crop in the ground in a week to ten days. But we're a week to ten days away from being able to start," said Marten.

Planting frustration grows‎— The rain may appear like it will never stop long enough for fields to dry out and planting to begin, but all farmers know it will. Just when that will happen is the question, and what plans need to be changed in order to get the best yield from the shortened season. One thing to note is that Ohio, Pennsylvania and even West Virginia farmers are not alone in the pain they are feeling not being able to get into the fields. It is an issue for much of the United States at this point. Even states that traditionally are ahead are behind, such as Indiana, Illinois and even Iowa. Once the time is right, there are some things producers can do to improve the growing season. Peter Thomison and Robert Mullen, Ohio State University Extension specialists, remind farmers to be patient. This means don’t jump into the fields as soon as the sun finally comes out. “…care should be taken to avoid tillage and planting operations when soil is wet,” the experts said in a prepared release.” Yield reductions resulting from ‘mudding the seed in’ are usually much greater than those resulting from a slight planting delay.”

Excess Moisture Slowing Planting‎ - Everywhere in Illinois, it's been too wet for farmers to work. That's the gist of the latest crop progress report from the USDA in Illinois. Ten percent of the state's corn crop has been planted, unchanged from a week ago. But Brad Schwab, head of the Illinois field office for the USDA's National Agricultural Statistics Service, says there is no need to worry.  "In 2009 (at this time) we were at 4.7 percent. The point is: we're certainly not in a panic situation; we just need the weather to turn around and be cooperative."

Weather continues to slow South Dakota field work - South Dakota farmers made some headway in spring field work in the past week, but progress in planting small grains and corn remains well behind the five-year average. The Agricultural Statistics Service said in its weekly report that only 2.1 days were suitable for field work in the past seven days. Cool temperatures continue to delay germination of seed already in the ground. Planting progress is 30 percent for oats, compared to the five-year average of 60 percent, and 22 percent for spring wheat, compared to 68 percent normally by this date. The service said 2 percent of the corn has been planted, behind the five-year average of 15 percent. Twenty-eight percent of the corn crop was in the ground by this time a year ago.

USDA says spring planting in Nebraska still slow - Cool temperatures and more rain are keeping spring planting at a slow pace in Nebraska. The U.S. Department of Agriculture says as of Sunday, corn planting was 15 percent complete. That compares to 44 percent a year ago. The average is 35 percent. Soybeans, which are just now being planted, are 1 percent complete. A year ago, it was 7 percent. The average is about 4 percent. The USDA says field work picked up at the end of the week as strong winds dried the soil. Soil temperatures increased, but cool weather kept the corn from emerging. About 81 percent of the oats are planted, behind the average of 90 percent. About 47 percent of the wheat crop is good or excellent, below the average of 63 percent.

Crop report shows small planting progress - The latest U.S.D.A. crop and weather report shows farmers were able to get some corn planted last week but not much. The report says eight percent of the corn acreage was planted, compared to 82% last year and 48% for the five-year average for this time of year. State Climatologist Harry Hillaker 15 of the last 16 days of the month were colder than normal, making a downward trend that goes against the usual upward trend of warmer days at the end of April when the days grow longer. He says there were lows of 24 degrees in Sheldon on April 24th and 25 degrees in Waterloo on April 29th. Hillaker says wet conditions also contributed to the problems faced by farmers. He says the one surprise in the month was the snowstorm on April 19th. Hillaker says there was snow accumulation in about the northern one-third of the state, as much as 6.5 inches in Dorchester. He says it was the widest spread snow we’d had in the state that late in the year going back to 1982.

Farmers race against the clock--- Northeast Iowa farmers are playing a three-day game of beat the clock. Corn planting is way behind thanks to wet and cold conditions. Fields finally dried and warmed up enough Sunday --- the first time in more than a week --- for field work to resume. Planting could come screeching to a halt again locally by mid-week. The National Weather Service says there's a 50 percent chance of showers Wednesday night, and the possibility of more rain Thursday and Friday. In other words, it's go time. Monday's U.S. Department of Agriculture Crops and Weather Report said only 8 percent of Iowa's corn crop is in the ground, compared to 82 percent last year and the five-year average of 48 percent. According to the report, the key thought is "stay out of the way" as farmers hit the fields hard to get spring work and planting done.

Corn Futures Advancing Due To Continual Rains - For the second day in a row, corn futures advanced because of concerns raised from the persistent rains that have pounded the growing regions of the US. The rain is continuing to delay planting which could potentially lower yields. Corn for July delivery rose to $7.3625 per bushel, a gain of 0.9%, as of Wednesday at 2:41 p.m. Singapore time on the Chicago Board of Trade. In fact, the contract with the highest activity has almost doubled within the past year and, on April 11th, soared to its highest price since June of 2008, to $7.8875. Continual rains in US’ Northern Plains are hampering the planting of spring wheat, soybeans and corn. More rain is expected to fall next week, which will further delay fieldwork. According to the US Department of Agriculture data, global corn inventory predictions were estimated to be about 14.6% of demand before harvesting this year. This inventory is the smallest in 37 years. According to the USDA, approximately 13% of the US’ corn crop was planted as of May 1st. This is the slowest pace since 1995s 10% planting in the same week. The USDA’s data further indicated that, between 2006 and 2010, the average was about 40% planted for the same time frame.

Memphis Police Issue Flood Evacuation Warnings - Police officers went door to door Friday urging Memphis residents to leave nearly 1,000 homes expected to be inundated by a near-record flood of the Mississippi River and its tributaries. Emergency workers handed out bright yellow fliers in English and Spanish that read, "Evacuate!!! Your property is in danger right now." All the way south into the Mississippi Delta, people faced the question of whether to stay or go as high water kept on rolling down the Mississippi and its tributaries, threatening to soak communities over the next week or two. The flooding has already broken high-water records that have stood since the 1930s

Corn, Soybeans Drop as Investors Bet Demand Will Dry Up on Higher Prices - Corn, wheat and soybeans fell in Chicago as investors sold commodities on speculation higher prices and weaker economic growth will curb demand for raw materials, including those used to make food.  Corn surged 88 percent in the past year, wheat gained 49 percent and soybeans rose 38 percent as demand increased and stockpiles dwindled, pushing up food costs that were partly blamed for riots in the Middle East and North Africa. Investors are ignoring wet weather that’s slowing planting in the U.S., which supplies 29 percent of the world’s corn.  Global corn stockpiles probably will fall 16 percent to the lowest in four years by Aug. 31 as consumption rises 37 percent, USDA data show.  Production estimated on April 8 at 814.9 million tons may be revised lower when the U.S. government releases its next supply-and-demand report, Dewing said. Because of the wet weather, 13 percent of the U.S. corn crop was seeded as of May 1, down from a five-year average of 40 percent, USDA data show.  “There’s no way the U.S. is going to write that the crop is up,” Dewing said. “The weather is not going away. They’re not getting the corn in the ground.”

U.S. Corn Outlook‎ - Earlier in the week, we noted that the US corn planting conditions have been suboptimal, with planting pace significantly behind both last year and the five year average for this date. Cold wet weather has slowed field activities, particularly in the northern and central growing regions. The USDA Crop Progress report for the week ending May 1st underdscores this point (see table below). For the primary growing states, 13% of the intended acres were in the ground vs. 66% in 2010. For potential yield modelers, we recommend using a 'late-plant' scenario for 2011. This does not mean that the US cannot make a decent crop this year, but it will highlihght the need for better post-germination weather. We are looking at the cooler weather to give way to a milder and drier pattern over the next few days into next week, so we are expecting some of this gap to be closed over the next two weeks.

Corn Planted, Selected States (table)

Midwest Senators Aim to Extend Ethanol Tax Credit -  Several U.S. senators from Midwest states, as part of a bipartisan coalition, have introduced the 'Domestic Energy Promotion Act of 2011,' a bill that would slowly reduce the tax credit incentives for ethanol -- but still extend them for another five years, reports Reuters. Currently, the United States has an ethanol tax credit officially named the Volumetric Ethanol Tax Credit (VEETC), which has a 45 cent-per-gallon incentive. However, VEETC expires at the end of this year. The Domestic Energy Promotion Act of 2011 is being spearheaded by Sen. Charles Grassley, a Republican from Iowa, which is currently the largest ethanol-producing state in the entire nation. Grassley introduced the bill as a response to senators, including Dianne Feinstein (D-Calif.) and Tom Coburn (R-Okla.), who wanted the tax credit to be cut completely after this year. The bill would reduce the ethanol tax credit in 2012 and 2013 to 20 cents and 15 cents, respectively. The rates between 2014 and 2016 would be a variable tax incentive and dependent on the price of crude oil, in which ethanol is added in order to make an ethanol-oil blend gasoline product. Currently, the United States' ethanol industry receives billions of dollars in tax incentives in order to help with the costs of ethanol production.

Triage: Record floods cause Army Corps to blow up levee, inundate 130,000 acres of farmland to save small town  - Snow melt from this winter’s record snow pack across the Upper Mississippi River has formed a pulse of flood waters that is moving downstream on the Mississippi. This pulse of flood waters passed St. Louis on Saturday, where the river is now falling. The snow melt pulse arrived on Monday at Thebes, Illinois, about 20 miles upstream from the Mississippi/Ohio River junction at Cairo. The Mississippi River crested yesterday at Thebes at 45.52′, which beats 1993 as the 2nd highest Mississippi River flood of all-time at Thebes. This floodwater pulse is headed south to Cairo, Illinois, and will join with the record water flow coming out of the Ohio River to create the highest flood heights ever recorded on a long stretch of the Mississippi, according to the latest forecasts from the National Weather Service. Along a 400-mile stretch of the Mississippi, from Cairo to Natchez, Mississippi the Mississippi is expected to experience the highest flood heights since records began over a century ago at 5 of the 10 gauges on the river. The records are predicted to begin to fall on May 1 at New Madrid, end progress downstream to Natchez by May 15. Areas that are not protected by levees can expect extensive damage from the flooding.

NASA: Flooding in Wake of Levee Breach (satellite photos)

The US Intervention in Cairo (No, Not That One) The Mississippi River is expected to exceed its highest water level in nearly a century, and has already forced thousands of residents to head for higher ground. At the epicenter of this disaster is the embattled city of Cairo, Illinois (as in Care-o or Kay-ro), which sits at the confluence of the Mississippi and Ohio Rivers and is ringed on all sides by protective levees. The river's height outside Cairo is at 61 feet, which is totally nuts, and the town has been evacuated. To alleviate some of the pressure and save Cairo from being washed out, the Army Corps of Engineers decided the best course of action was to blast a hole in a levee further downstream in Missouri, which would leave 130,000 acres of farmland underwater. After a failed legal challenge by Missouri, the Corps blasted the levee last night, reducing the water level at Cairo by a foot. But that plan of action has, unsurprisingly, stirred some strong feelings. Here's what Missouri State Rep. Steve Tilley, the Republican Speaker of the House, had to say last week: When Tilley was asked Tuesday whether he would rather see Cairo or the farmland underwater, he told reporters, "Cairo. I've been there, trust me. Cairo."

Monsoon in the Midwest: Records fall as Mississippi floodwaters rise - Behind the flooding occurring along the Ohio and Mississippi Rivers – which on Monday necessitated blasting away portions of a Mississippi River levee in order to save Cairo, Ill., and other towns – is the extraordinarily wet spring that parts of the Midwest are having, with rainfall totals in many areas around four times average. To put it into perspective: In the past month, Paducah, Ky., has seen nearly 22 inches of rain, compared with an average of 5.4 inches. Louisville, Ky., has also had an April that’s four times wetter than normal: 17.3 inches of rain compared with an average of 4.3. Farther north, the Cincinnati area has seen nearly four times as much rain as in a typical April, and to the south, in Memphis, Tenn., last month was two-and-a-half times wetter than usual. In one three-day period last week, the city had more than 7 inches of rain. “A lot of times you have heavy rain events that affect a small area,” . “What has been so amazing about the pattern that has set up here is that these areas have had heavy rainfall that is so persistent, affecting the same places. It’s really ended up dumping a lot of water into those river basins.”

Ohio River Sets New Record, Mississippi Waters Still Rising…The Ohio River is at record heights even as it has begun to fall in Cairo, Illinois, and shipping in the area is drifting to a stop, according to federal officials.  The river reached a crest of 61.72 feet late yesterday, more than 2 feet above the previous record of 59.5 set in February 1937, according to the National Weather Service.  The U.S. Army Corps of Engineers yesterday blew up a levee downstream from Cairo, relieving pressure from the rising waters in the city where the Ohio joins the Mississippi. “We’re at near-historic levels all along the Ohio,” Humphrey said. “This is wet season. Spring flood happens every year, but not like this.” Parts of the Ohio, Cumberland, Tennessee and Mississippi rivers are currently closed to shipping because of safety concerns or because the locks and dams along the waterways have shut down, said U.S. Coast Guard Commander Doug Simpson.

Record floods on Mississippi River, Lake Champlain; 3rd EF-5 tornado verified - The Ohio River at Cairo, Illinois continues to fall today, with a level of 59.3', 2.5' below the all-time peak of 61.8' set on Monday night. On Monday night, the Army Corps of Engineers was forced to intentionally destroy a levee at Birds Point on the west bank of the Mississippi, just downstream from Cairo, Illinois, in order to relieve pressure on the levees in Cairo and save that city from a billion-dollar levee breach. The destruction of the Birds Point levee also helped slow the rise of the Mississippi River just south of its confluence with the Ohio River, but the river is still rising slowly, and has now set all-time records at New Madrid, Missouri, Tiptonville, Tennessee, and Caruthersville, Missouri--a 70-mile stretch of river downstream from Cairo. Currently, the Mississippi is expected to reach its 2nd highest level on record at Memphis on May 10, cresting at 48.0'. The all-time record at Memphis occurred during the great flood of 1937, when the river hit 48.7'. Downstream from Memphis, flood waters pouring in from the Arkansas River, Yazoo River, and other tributaries are expected to swell the Mississippi high enough to beat the all-time record at Vicksburg, Mississippi by 1.3' on May 20, and smash the all-time record at Natchez, Mississippi by six feet on May 22, and by 3.2 feet at Red River Landing on May 23. Red River Landing is the site of the Old River Control Structure, the Army Corps' massive engineering structure that keeps the Mississippi River from carving a new path to the Gulf of Mexico. I'll have a detailed post talking about the Old River Control Structure next week. Its failure would be a serious blow to the U.S. economy, and the great Mississippi flood of 2011 will give the Old River Control Structure its most severe test ever. Also of concern is the forecast for the Mississippi to crest at 19.5 feet in New Orleans on May 24. The levees in New Orleans protect the city for a flood of 20.0 feet--that is not much breathing room.

Mississippi Delta sees flooding from mighty river – Parts of the Mississippi Delta are beginning to flood, sending white-tail deer and wild pigs swimming to dry land, submerging yacht clubs and closing casino boats, and compelling residents to flee from their homes. The sliver of land in northwest Mississippi, home to hardship and bluesman Muddy Waters, is in the crosshairs of the slowly surging river, just like many other areas along the banks of the big river. To points much farther north, thousands face the decision of whether to stay or go as high water kept on rolling down the Mississippi and its tributaries, threatening to soak communities over the next week or two. The flooding is already breaking high-water records that have stood since the 1930s.

Drought worsens in U.S. Southwest as floods hit Midwest (Reuters) - The severe drought ravaging Texas and other parts of the U.S. Southwest is getting worse, weather experts said Thursday, and little respite is in sight for farmers, ranchers and others whose livelihoods and properties are suffering. The latest report from a consortium of national climate experts dubbed the Drought Monitor said while Texas remained the epicenter for devastation, "exceptional drought," which is the worst category, expanded not only there but through parts of Oklahoma, Kansas, New Mexico and Louisiana. In March, rainfall totals were the lowest ever for Texas, and in April they were the fifth driest on record, according to state climatology data. The seven months from October through April marked the driest seven consecutive months on record for Texas going back to 1895, according to the National Climatic Data Center. "Whether this ends up being a historical drought or no worse than the droughts of 2005-6 and 2008-9 depends on how long it lasts, but a lot has to go right with the weather quickly," said John Nielsen-Gammon, Texas state climatologist.

Areas of drought expanded in Oklahoma -  More areas of Oklahoma are now considered to be in exceptionally bad drought conditions, and more parts of southwestern Oklahoma and the Panhandle are included in the expanding areas.  In the southwest, all of Tillman County, as well as portions of Jackson, Harmon and Kiowa Counties are considered to be in an exceptional drought, the U.S. Drought Monitor reported Thursday morning.  "The western half of the state is in pretty dire straits," said Gary McManus of the Oklahoma Climatological Survey. "As we get further and further into the warm season the impacts of this drought will continue to worsen exponentially."

Survivor of Dust Bowl Now Battles a Fiercer Drought - While tornadoes and floods have ravaged the South and the Midwest, the remote western edge of the Oklahoma Panhandle is quietly enduring a weather calamity of its own: its longest drought on record, even worse than the Dust Bowl, when incessant winds scooped up the soil into billowing black clouds and rolled it through this town like bowling balls.  With a drought continuing to punish much of the Great Plains, this one stands out. Boise (rhymes with voice) City has gone 222 consecutive days through Tuesday with less than a quarter-inch of rainfall in any single day, said Gary McManus, a state climatologist. That is the longest such dry spell here since note-keeping began in 1908.  The Dust Bowl of the 1930s, caused in part by the careless gouging of the earth in an effort to farm it, created an epic environmental disaster. Experts say it is unlikely to be repeated because farming has changed so much. But this drought is a reminder of just how parched and unyielding life can be along this wind-raked frontier, fittingly called No Man’s Land, and it is not clear how many more ups and downs Boise City can take.

Parched Kansas Wheat Crops Boosting Cost of Panera Bread, Wheaties Cereal - Wheat production in Kansas, the second-largest U.S. grower, probably will drop as dry weather persists, threatening to increase costs for breadmakers and restaurants that are already boosting prices.  The state’s winter-wheat crop was in the worst shape in 15 years as of yesterday, after drought across the Great Plains dimmed prospects for the harvest that starts in June, government data show. Less output would erode inventories already expected to drop 14 percent in the U.S., the world’s biggest exporter.  Wheat futures are up 57 percent in the past year after adverse weather cut output from Russia to Canada in 2010, spurring companies including Grupo Bimbo SAB, the world’s largest breadmaker, to pass on higher costs to consumers. Panera Bread Co., a St. Louis-based restaurant chain, and General Mills Inc., the maker of Wheaties, plan to raise prices.

Europe Wheat Harvest to Fall on Drought, May Be Catastrophic, Agritel Says -  The European Union wheat harvest, which accounts for a fifth of world production, will fall this year as drought cuts yields in France and Poland, said Michel Portier, general director of Paris-based farm adviser Agritel.   “We already know that the 2011 harvest will be below 2010, both in France and in Europe.”  The wheat situation in Europe “will be catastrophic” if the drought continues for another 10 days, and no significant rain is forecast for northern Europe for the period, Portier said. For now the outlook for Black Sea region production is “alright,” which is keeping wheat prices in check, he said.  France, the EU’s largest wheat grower, just had its second- hottest April since 1900 and one of the driest since 1953, the country’s Agriculture Ministry reported this week.

Drought to Persist in China, U.S. Europe Wheat Areas, U.K. Forecaster Says -  Drought conditions may persist in wheat-growing areas from China, the world’s largest grower and consumer, to the U.S. and Western Europe, hurting crops and lifting prices, British Weather Services said.  The La Nina event is likely to continue to block rain from moving into the wheat-growing regions in the U.S. and China through mid-May, while the North Atlantic Oscillation will curb significant rainfall in France, Germany and the U.K., preventing the replenishment of soil moisture, Jim Dale, a senior risk meteorologist at British Weather said.  Dry weather may curb grain output, further boosting world food prices that rose to near a record in April and adding to pressure on central banks from Beijing to Brasilia to increase interest rates. About 44 million people have been pushed into poverty since June by the “dangerous levels” of food prices, World Bank President Robert Zoellick said in February.  “A lot of things are going in the wrong direction, with areas that don’t usually get rains getting more rainfall, while those areas where you’d expect rains, having drought,”

Declining crop yields - There are many reasons for high commodity prices.  But recent data from FAO shows a pretty rapid slowdown in productivity growth.  The price spike in 2008 occurred in a particularly bad year in which yields declined on a worldwide basis for three of the four largest food commodities.  In 2009 all four of the majors saw yield declines, something that hasn't happened since 1974.  2010 couldn't have been much better and was probably worse, given how bad things were in the U.S, the world's largest producer and exporter (worldwide data for 2010 isn't available yet). Here's the picture: The yield slowdown comes at a particularly unfortunate time, with accelerating demand from emerging economies like China and subsidy-driven expansion of ethanol.  Keep in mind: we need productivity growth to accelerate considerably to keep up with projected demand growth.  FAO says we need 70 percent higher yields by 2050. 

Why the slowdown in agricultural productivity growth? - Global Warming. Well, there may be more to it.  Like reduced public research and pathogens like wheat stem rust. But new research by my colleagues David Lobell and Wolfram Schlenker, along with Justin Costa-Roberts shows that warming has hurt corn and wheat yields on all continents except North America: Farms across the planet produced 3.8 percent less corn and 5.5 percent less wheat than they could have between 1980 and 2008 thanks to rising temperatures, a new analysis estimates. These wilting yields may have contributed to the current sky-high price of food, a team of U.S. researchers reports online May 5 in Science. Climate-induced losses could have driven up prices of corn by 6.4 percent and wheat by 18.9 percent since 1980.  In my view, what's ominous here is that we're probably already seeing noticeable effects from climate change even though the world's biggest producer and exporter---the United States--hasn't seen any negative consequences.  Yet.  From the projections I've seen, that's mainly good luck.  It's been cooler here than in the past.  If (er... when) it warms here as projected, then we'll really feel the yield drag.

World Food Prices Rise to Near-Record High as Inflation Speeds Up, UN Says - World food prices rose to near a record in April as grain costs advanced, adding pressure to inflation that is accelerating from Beijing to Brasilia and spurring central banks to raise interest rates.  An index of 55 commodities rose to 232.1 points from 231 points in March, the United Nations’ Rome-based Food and Agriculture Organization said in a report on its website today. The gauge climbed to an all-time high of 237.2 in February before dropping 2.6 percent in March.  The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March, the same month in which Chinese consumer prices rose by the most since 2008. The European Central Bank raised interest rates on April 7, joining China, India, Poland and Sweden in a bid to control inflation partly blamed on food costs. Costlier food also contributed to riots across northern Africa and the Middle East that toppled leaders in Egypt and Tunisia this year.

April Food Prices Steady Near Recent Highs - The FAO monthly food price report came out yesterday.  Levels were about the same as March, down very slightly from the recent peak in February.  It will be interesting to see if the selloff in commodity markets in the last few days causes this to go down in April. For context, it's important to understand that the peaks in food prices in 2008 and 2011 are not that large compared to past food price spikes.  However, the FAO index didn't exist back then

Food prices and crop yields - The day’s commodities focus understandably has been on the big oil sell-off, but earlier today the Food and Agriculture Organization also released its April tally for world food prices. The short story: Grains, and maize in particular, were up big as bad weather has depressed stocks; but sugar and dairy were down considerably while oils/fats and meats were mostly unchanged. The longer version:

• » The FAO Food Price Index (FFPI) averaged 232 points in April 2011, virtually unchanged from the revised March estimate, 36 percent above April 2010, but 2 percent below its peak in February 2011.  A sharp increase in international grain prices in April more than offset declines in dairy, sugar, and rice, while oils and meat prices were mostly unchanged.
• » The FAO Cereal Price Index averaged 265 points, up 5.5 percent (14 points) from March and 71 percent from April 2010. Unfavourable weather and planting delays resulted in international prices of grains to rebound after a decline in March, with wheat and maize prices gaining 4 percent and 11 percent respectively. However, large export supplies kept rice prices under downward pressure.
• » The FAO Oils/Fats Price Index, which had fallen by 7 percent in March, was nearly unchanged in April. The stabilization of prices stems primarily from a strong recovery in production and rising inventories of palm oil in Southeast Asia. Meanwhile, soybean oil prices remained unchanged as concerns about plantings in the United States were compensated by reports of ample harvests in South America.

U.N. Forecasts 10.1 Billion People by Century’s End - The population of the world, long expected to stabilize just above nine billion in the middle of the century, will instead keep growing and may hit 10.1 billion by the year 2100, the United Nations¹ projected in a report² released Tuesday morning.  Growth in Africa remains so high that the population there could more than triple in this century, rising from today’s one billion to 3.6 billion, the report said — a sobering forecast for a continent already struggling to provide food and water for its people.  The new report comes just ahead of a demographic milestone, with the world population expected to pass 7 billion in late October, only a dozen years after it surpassed 6 billion. Demographers called the new projections a reminder that a problem that helped define global politics in the 20th century, the population explosion, is far from solved in the 21st.

The Surge In Land Deals: When Others Are Grabbing Their Land - THE farmers of Makeni, in central Sierra Leone, signed the contract with their thumbs. In exchange for promises of 2,000 jobs, and reassurances that the bolis (swamps where rice is grown) would not be drained, they approved a deal granting a Swiss company a 50-year lease on 40,000 hectares of land to grow biofuels for Europe. Three years later 50 new jobs exist, irrigation has damaged the bolis and such development as there has been has come “at the social, environmental and economic expense of local communities”, When deals like this first came to international attention in 2009, it was unclear whether they were “land grabs or development opportunities”, to quote a study published that year. Supporters claimed they would bring seeds, technology and capital to some of the world’s poorest lands. Critics, such as the director of the UN’s Food and Agriculture Organisation, dubbed them “neo-colonialist”.  Most judgments are damning.

How Goldman Sachs Created the Food Crisis - It took the brilliant minds of Goldman Sachs to realize the simple truth that nothing is more valuable than our daily bread. And where there's value, there's money to be made. In 1991, Goldman bankers, led by their prescient president Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).  For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sowed or reaped. Then, in 1999, the Commodities Futures Trading Commission deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food.

The Scam Behind The Rise In Oil, Food Prices - Speculators and free market believers may argue that they are not to blame, they are simply trying to make money by following the trends and not holding onto cash, as the Fed is busily debasing the U.S. Dollar. There is some merit in that argument, but that doesn't solve the problem.   Addressing the problem begins with identifying the underlying causes - what is enabling and encouraging so much speculation? What kind of regulation might be reasonable (should this game have rules because people's lives are being turned upside down)?  Who are the biggest speculators? I submit that the problem originates with Federal govt's failure to govern itself and promote a healthy economy, the Federal Reserve's policy of Quantitative Easing, and the lack of intelligent regulation.

Glencore: the most powerful company you've never heard of - If it were listed on the U.S. stock exchange, Glencore would be valued among the top 50, alongside names like Visa, 3M and Home Depot. With $145 billion in 2010 revenues, Glencore would have ranked sixth on the Fortune 500 list, ahead of AT&T, Ford and ConocoPhilips. But Glencore isn’t a public company. It’s a private business, based in picturesque Baar, Switzerland, a discreet village in the northern lap of the Alps, in a district known for its low taxes. The firm’s 500-odd owners are reputed to be brilliant. They work extraordinarily hard, and are well rewarded for their efforts, earning multi-million dollar bonuses that would make Wall Street traders blush. More importantly, the company they have built since 1974 is valued at $60 billion. That means the average partner’s stake is worth $120 million. Glencore is the world’s biggest commodities trader, according to Reuters. There’s a decent chance you’ve recently bought something, perhaps many things, that have crossed its trading desks."

Are commodity prices heading down? - THE Wall Street Journal reports that some high-flying commodities have gone into retreat in recent weeks: Cotton has pulled back 17% from the all-time record set in early March, and sugar is down 34% from its multidecade high in February. Lead and zinc have tumbled in recent weeks after shooting up in the second half of 2010. Copper has shed 6% this year. The declines came amid a wild April in which other raw materials continued to climb. U.S. oil prices rose 7% for the month, while gold set fresh records in nominal terms 13 times and silver neared its all-time high. The wild ride continued early Monday, when spot silver suffered one of its worst drops on record, falling 12% in 11 minutes at its most severe.What to make of this? Paul Krugman notes that real commodity prices were near historical highs and writes:Some of this probably represents a long-term upward trend, as emerging economies place pressure on limited resources, but even so, you wouldn’t expect continued rapid rises, and in fact you should expect some regression toward normal levels as supplies and to some extent demand respond.

Commodity Corrections - As we close in on the one year anniversary of the flash crash, there are some fireworks on display in the commodities markets:Commodities plunged the most since 2009, led by oil and silver... The Standard & Poor’s GSCI index of 24 commodities sank 6.5 percent... and has lost 9.9 percent this week. Oil tumbled 8.6 percent, the most in two years, to $99.80 a barrel. Silver dropped 8 percent, extending the biggest four-day slump since 1983 to 25 percent... Selling swept commodities markets as investors sold positions following gains of more than 23 percent in 2011 through April 29 by silver, oil, gasoline, coffee and cotton... John Kemp observes in an excellent post, it's impossible to understand the plunge without first recognizing that prices in speculative asset markets can become disconnected from fundamental values from time to time: It will be entertaining to read the thousands of gallons of ink spilled over the next couple of days as journalists and analysts try to rationalise the sudden turn around and identify that one or few factors that were the “tipping point.”In reality, commodity prices and other assets rise because investors and hedgers anticipate further gains. The market needs a steady stream of net buying orders to keep rising. But at some point the risk of a setback outweighs the prospect of further gains. Long liquidation offsets fresh buying orders, and the process heads into reverse as the length cascades out of the market.

Commodities: 'epic rout' or the new normal? - The "epic rout" in commodity markets in recent days has left some traders and investors in a state of shock. But, if the damage turns out to be localised, Ben Bernanke will consider it useful - and we probably should as well. The fall in prices - which has pushed the main US benchmark price of oil below $100 a barrel and saw the biggest ever one day fall in the price of Brent crude - has been linked to fears about the pace of the global recovery. That isn't good news. But nor is it strictly news.  The economic statistics have been showing signs of weakening in the real economy in the US and Europe for several weeks. The question is whether falling commodity prices make the situation better, or worse. Again, assuming there's limited collateral damage to the broader financial system, the answer ought to be better, for two reasons.

The depressing politics of climate change -  Why has the Obama administration failed utterly to get anything at all done with respect to climate change? The issue was a major part of Obama’s 2008 platform, but it seemed to disappear as soon as he got elected, and the consensus on the climate change panel today was that there’s essentially zero chance that a cap-and-trade bill will become law in the foreseeable future. One of the reasons is party-political: “Republicans chose to equate climate change with taxation,” said Milken’s Peter Passell, “and a well-financed campaign made climate change denial almost a litmus test for conservative orthodoxy”. Obviously, if you don’t believe in climate change, or if you say you don’t believe in climate change, then you’re never going to be remotely helpful with respect to crafting any kind of bill designed to address it. But more profoundly — and the reason that the Democrats don’t seem particularly eager to get anything done on this front either — there’s the fact that climate-related legislation is one of those things which will create a large mass of winners with relatively little present-day political clout (us, our children, and our children’s children), alongside a small number of losers with extremely deep pockets and extensive lobbying arms.

More fatalities predicted from heat waves caused by climate change: study - Climate change might cause more heat waves which may in turn lead to more fatalities in U.S. cities in the coming decades, a new study has found. For the study, researchers at the Johns Hopkins Bloomberg School of Public Health developed three climate change scenarios for 2081 to 2100, which were based on estimates from seven global climate change models and from mortality and air pollution data for the city of Chicago from 1987 to 2005.The data were limited to the warm season from May to October of each year. The researchers calculated that the city of Chicago could experience between 166 and 2,217 excess deaths per year attributable to heat waves using three different climate change scenarios for the final decades of the 21st century.

Tornado forecasting saved countless lives this week. Too bad Congress, including Alabama’s entire delegation, voted against maintaining forecast quality - On Thursday, as the search for survivors continued in devastated communities across Alabama and other southern states pummeled this week by massive, terrifying tornadoes,  President Obama said “we can’t control when or where a terrible storm may strike, but we can control how we respond to it.” Unfortunately, thanks to the spending bill orchestrated by the GOP-controlled House of Representatives, he couldn’t say we are doing everything in our power to protect Americans from future extreme weather events.The Associated Press characterized the number of fatalities from these storms –more than 340 as of Saturday — as something that “seems out of a bygone era, before Doppler radar and pinpoint satellite forecasts were around to warn communities of severe weather. Residents were told the tornadoes were coming up to 24 minutes ahead of time, but they were just too wide, too powerful and too locked onto populated areas to avoid a horrifying body count.” It is precisely those “pinpoint satellite forecasts” that Congress, including every member of Alabama’s delegation, decided were luxuries America cannot afford when it passed the continuing resolution to keep the government operating for the remainder of the fiscal year.

Tornadoes, extreme weather, and climate change - April appears to set record for tornadoes in any month and in any 24-hour period. But why?  - The Effect of Climate Change on Tornado Frequency and Magnitude:  “There is an obvious increase in tornado frequency between 1950-1999. This could be due to increased detection. Also this could be due to changing climatic conditions.” For decades, scientists have predicted that if we kept pouring increasing amounts of heat-trapping greenhouse gases into the atmosphere, we would change the climate.   They specifically predicted that that many key aspects of the weather would become more extreme — more extreme heat waves, more intense droughts, and stronger deluges.As far back as 1995, analysis by NOAA’s National Climatic Data Center (led by Tom Karl) showed that over the course of the 20th century, the United States had suffered a statistically significant increase in a variety of extreme weather events, the very ones you would expect from global warming, such as more — and more intense — precipitation. That analysis concluded the chances were only “5 to 10 percent” this increase was due to factors other than global warming, such as “natural climate variability.” And since 1995, the climate has gotten measurably more extreme.

Record 178 tornadoes from South storms - At least 178 tornadoes were part of the severe weather that raked 14 states April 27-28, making it the largest tornado outbreak in U.S. history, the National Weather Service said Wednesday. The number of twisters surpassed the previous record of 148 tornadoes April 3-4, 1974, the Weather Service said. The April 27-28 outbreak caused 327 deaths, making it the 3rd deadliest tornado outbreak in U.S. history, behind outbreaks in 1925 and 1932, with 747 deaths and 332 deaths respectively.

April's tornado outbreaks the two largest in history - The largest tornado outbreak and greatest one-day total for tornadoes in history occurred during last week's historic super tornado outbreak, said NOAA in a press release on Wednesday. They estimate 190 tornadoes touched down during the 24-hour period from 8:00 a.m. EDT April 27 to 8:00 a.m. EDT April 28 (132 tornadoes have already been confirmed, with several weeks of damage surveys still to come.) NOAA's estimate for the number of tornadoes during the three-day April 25 - 28, 2011 Super Outbreak, is 305. This is nearly double the previous record for a multi-day tornado outbreak of 155 tornadoes, set just two weeks previously during the April 14 - 16, 2011 outbreak. There were tornado outbreaks in May 2004 (385 tornadoes) and May 2003 (401 tornadoes) that had more tornadoes, but these outbreaks occurred over an eight-day and eleven-day period, respectively, and were not due to a single storm system. Prior to April 2011, the most tornadoes in a 24-hour period, and in an outbreak lasting less than four days, was the 148 tornadoes in the Super Outbreak of April 3 - 4, 1974. The Tuscaloosa-Birmingham tornado is likely to be the most expensive tornado of all-time, and damage from the April 25 - 28 outbreak is the most expensive tornado outbreak in history. Insured damages have been rated at $2 - $5 billion, and uninsured losses will be several billion more. The previous most expensive tornado outbreak in history was the $3.5 billion price tag, in 2005 dollars, of the April 3 - 4, 1974 Super Outbreak .

Seas Could Rise Up to 1.6 meters by 2100  - Quickening climate change in the Arctic including a thaw of Greenland's ice could raise world sea levels by up to 1.6 meters by 2100, an international report showed on Tuesday. Such a rise -- above most past scientific estimates -- would add to threats to coasts from Bangladesh to Florida, low-lying Pacific islands and cities from London to Shanghai. It would also, for instance, raise costs of building tsunami barriers in Japan. "The past six years (until 2010) have been the warmest period ever recorded in the Arctic," according to the Oslo-based Arctic Monitoring and Assessment Programme (AMAP), which is backed by the eight-nation Arctic Council. "In the future, global sea level is projected to rise by 0.9 meters (2ft 11in) to 1.6 meters (5ft 3in) by 2100 and the loss of ice from Arctic glaciers, ice caps and the Greenland ice sheet will make a substantial contribution," it said. The rises were projected from 1990 levels. "Arctic glaciers, ice caps and the Greenland ice sheet contributed over 40 percent of the global sea level rise of around 3 mm per year observed between 2003 and 2008," it said.

Arctic Assessment bombshell: “Global sea level is projected to rise by 0.9–1.6 meter by 2100″ - A major new multi-country scientific assessment of the Arctic has concluded that on our current greenhouse gas emissions path, we face 3 to 5 feet of sea level rise — far greater than the 2007 IPCC warned of.  This is fully consistent with several recent study (see “Sea levels may rise 3 times faster than IPCC estimated, could hit 6 feet by 2100“). The Arctic Monitoring and Assessment Programme — formed in 1991 to advise the eight Arctic countries on threats to the Arctic from pollution — has released the Executive Summary of their Snow, Water, Ice and Permaforst in the Arctic (SWIPA) assessment on their website [big PDF here].  SWIPA “brings together the latest scientific knowledge about the changing state of each component of the Arctic cryosphere.” The report notes that, “The observed changes in sea ice on the Arctic Ocean and in the mass of the Greenland Ice Sheet and Arctic ice caps and glaciers over the past ten years are dramatic and represent an obvious departure from the long-term patterns.” 

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

California’s right to exceed federal auto emissions standards is upheld - California’s authority to enact automotive air pollution standards that are stricter than federal law has withstood legal challenge after a U.S. Court of Appeals ruled that the U.S. Chamber of Commerce and the National Automobile Dealers Assn. did not have legal standing in the case. Under the 1970 Clean Air Act, California may request waivers of federal standards to enact its own, stricter laws — a right granted because the state had its own pollution laws before the federal government’s. However, the George W. Bush administration refused to grant California a waiver after it enacted a 2004 law to curb planet-heating carbon dioxide emissions from cars. The Obama administration issued the waiver in 2009, but it was challenged by the chamber and the auto dealers. Fourteen other states had adopted the California standard. The three-judge panel of the D.C. Circuit found that “Because the Chamber has not identified a single member who was or would be injured by EPA’s waiver decision, it lacks standing to raise this challenge.” The dealers too, it said, had failed to prove economic harm.

Hundreds of Miles of Wind Farms, Networked Under the Sea - Offshore wind power has significant advantages over the onshore variety. Uninterrupted by changes in terrain, the wind at sea blows steadier and stronger. Installing turbines far enough from shore that they’re invisible except on the very clearest days lessens the possibility of not-in-my-backyard resistance. The challenge is getting the electricity back to land, to the people who will use it. The Maryland-based transmission-line company Trans-Elect proposes to do just that with a $5-billion undersea power grid that would stretch some 350 miles from northern New Jersey to southern Virginia. The Atlantic Wind Connection (AWC) would provide multiple transmission hubs for future wind farms, making the waters off the mid-Atlantic coast an attractive and economical place for developers to set up turbines. The AWC’s lines could transmit as much as six gigawatts of low-carbon power from turbines back to the coast—the equivalent capacity of 10 average coal-fired power plants

Quebec's Wind Power Potential Is Enough To Supply North America Three Times Over - Potential of wind energy in Quebec: 4 million megawatts, enough to supply both Canada and the United States three times over.  Canada’s wind energy industry took another step forward in 2010 with the addition of 690 MW of installed wind energy capacity, positioning Canada in 9th place globally in terms of new installed capacity and 9th for overall cumulative installed capacity, according to the Global Wind Energy Council’s (GWEC) recently released ‘Global Wind Report 2010’. “Wind energy is well established in many European countries and has a long history in the United States, but it’s still a relatively new contributor to Canada’s electricity supply,” said Robert Hornung, president of the Canadian Wind Energy Association (CanWEA). “With the continued growth of wind energy we see the evolution of a new and vibrant industry that is delivering manufacturing jobs, revitalizing rural economies, and generating emissions-free power. The results from 2010 are encouraging, but we look forward to even greater growth in 2011 and beyond.”

The Race for Space-Solar Energy - The failures of the General Electric nuclear reactors in Japan to safely shut down following the 9.0 Tahoka earthquake, following in the wake of the catastrophic Deepwater Horizon oil spill in the Gulf of Mexico and the deadly methane gas explosion in Massey's West Virginia coal mine, now conclusively demonstrate the grave dangers current energy production methods pose to human society. Presently, only the top industrialized nations have the technological, industrial and economic power to compete in the race for space-solar energy. In spite of, and perhaps because of, the current disaster, Japan occupies the inside track, as it is the only nation that has a dedicated space-solar energy program, and which is highly motivated to change directions. China, which has launched astronauts into an earth orbit and is rapidly become the world's leader in the production of wind and solar generation products, will undoubtedly become a strong competitor. However, the United States, which should have every advantage in the race, is most likely to stumble out of the gate and waste the best chance it has to solve its economic, energy, political and military problems.

Energy Information Agency Feels Budget Ax - The federal government’s ability to gather and analyze energy data and produce market forecasts will be significantly impaired by the recently enacted budget cuts, the administrator of the Energy Information Administration said. The agency’s 2011 funding levels were cut by 14 percent, or $15.2 million, in a short-term budget deal signed into law earlier this month. Since the fiscal year is more than half over, the cuts will effectively run twice as deep. Critics of the cuts say that at a time of acute concern over rising oil and gasoline prices, scaling back data collection and analysis of domestic crude and natural gas reserves and the role of financial speculators in energy markets is a mistake. “Congratulations to those policy makers who thought that cutting the E.I.A. budget would be wise: You’ve managed to lose a few ounces of weight by removing a small sliver of your brain,”

Badges? We Don't Need No Stinkin' Badges! - Yesterday an interesting item from The Oil & Gas Journal was delivered to my inbox. Allow me to quote from EIA cancels 2011 US reserves compilation as it cuts budget. The acronym "EIA" stands for Energy Information Administration, which is the data-gathering/research wing of the Department of Energy.  The US Energy Information Administration will not prepare or publish US oil and gas reserves data for 2011 as it cuts $15.2 million, or 14%, from its budget, the US Department of Energy information and analysis agency said on Apr. 29. The reductions are part of Congress’s latest continuing resolution (CR) that was signed into law by US President Barack Obama on Apr. 15.  “The lower fiscal 2011 funding level will require significant cuts in EIA's data, analysis, and forecasting activities,”  Well, of course, I thought, this makes perfect sense. Of what possible use could knowing the nation's oil and natural gas reserves be? Those misguided souls (like me) who have closely followed various kinds of EIA data in the past should just move on. It's clearly a matter of "Drill, Baby, Drill" or, failing that, surely we're just a few successful science experiments away from converting switchgrass or poplar trees into diesel fuel of such high quality that refining will become a thing of the past.

Group says Pa. governor advisers tied to shale problems (Reuters) – An environmental group said on Wednesday that nearly half of the violations in the Marcellus Shale natural gas formation last year were committed by companies whose representatives sit on Governor Tom Corbett's Marcellus advisory commission. "It is top heavy with exactly the people who are doing the drilling," said Tom Hoffman, the Western Pennsylvania director of the environmental activist group Clean Water Action. The Clean Water group issued a report this week saying there were 1,200 well violations last year, and more than one in six of the state's 2,498 wells had violations that included illegal dumping of toxic wastewater and failure to properly seal wells.It also said nearly half the violations were committed by companies whose representatives sit on the drilling commission. Of the commission's 31 members, 14 are either from the gas industry or pro-business chambers of commerce, said Clean Water state director Myron Arnowitt.

TEPCO’s Updated Radiation Map -  The Tokyo Electric Power Company (TEPCO) released a new map today showing radiation “hot spots” at the crippled Fukushima Daiichi nuclear power plant (FDI). While the radiation levels at some hot spots have declined since the first map was made on April 23rd, others have remained the same or increased. The increases are likely due to movement of already contaminated materials rather than to new leaks.

“URGENT: Radiation leaks from fuel rods suspected” at Japan’s Tsuruga nuclear plant — Radioactive Xenon up 75,000% - Leaks of radioactive materials from fuel rods have been suspected at a nuclear power plant in Tsuruga, the Fukui prefectural government said Monday, citing a rise in density of the toxic substances in coolant water. [...] According to Japan Atomic, 4.2 becquerels of iodine-133 and 3,900 becquerels of xenon gas were detected per cubic centimeter Monday, up from 2.1 and 5.2 becquerels, respectively, during previous measurements conducted last Tuesday.

Japanese Government Raises ‘Safe’ Radiation Limits So Children Can Legally Attend Schools That Have Been Covered in Fallout from Fukushima Nuclear Disaster - Furious parents in Fukushima have delivered a bag of radioactive playground earth to education officials in protest at moves to weaken nuclear safety standards in schools. Children can now be exposed to 20 times more radiation than was previously permissible. The new regulations have prompted outcry. A senior adviser resigned and the prime minister, Naoto Kan, was criticised by politicians from his own party. Ministers have defended the increase in the acceptable safety level from 1 to 20 millisieverts per year as a necessary measure to guarantee the education of hundreds of thousands of children in Fukushima prefecture, location of the nuclear plant that suffered a partial meltdown and several explosions after the earthquake and tsunami on 11 March. It is estimated that 75% of Fukushima’s schools may have radiation levels above the old safety level of 1 millisievert. The local authorities in Koriyama have tried to ease the problem by digging up the top layer of soil in school and day centre playgrounds, but residents near the proposed dump site have objected.

Japan Plans Tsunami Wall At Nuclear Plant - THE operator of Japan's Fukushima nuclear plant will build a wall to defend it against future tsunamis, reports say, as public confidence slipped in the government's handling of the disaster.  Tokyo Electric Power Company (TEPCO) also plans to triple from about 1000 to 3000 the number of staff nuclear workers and subcontractors handling the crisis to reduce each individual's radiation exposure.Emergency crew have been battling for eight weeks to stabilise the six-reactor plant which was damaged by the March 11 quake and tsunami, and which has since been hit by explosions, leaking radiation

Report Instruction regarding Improvement of the working environment inside the reactor building of Unit 1, Fukushima Daiichi Nuclear Power Station Tepco Press Release

Workers enter damaged Fukushima reactor - The recovery team began a project to lower radiation levels by installing six ventilation machines that would absorb isotopes from the air in the No. 1 reactor ... Tomikawa said it should take two or three days to put in the ventilation system. He estimated that the work to install the reactor's new cooling system could begin as soon as May 16. ... The company plans to add cooling equipment for reactors Nos. 2 and 3 sometime in the next two months. Under a two-phase plan, the company expects to spend three months cooling the reactors and plugging radiation leaks. ...During the second phase, which is expected to take about six months, Tepco hopes to put the reactors into a stable state ... but deactivating the reactors could take years to complete.

Japan shuts down more nuclear reactors - Japan’s government has demanded that a controversial nuclear power plant south of Tokyo be shut down while its defences against earthquakes and tsunamis are upgraded, in what would be first forced plant closure in the country since the accident at Fukushima Daiichi in March. Naoto Kan, prime minister, said on Friday that he had asked Chubu Electric Power, operator of the Hamaoka atomic power station, to shut down its two operational reactors and keep a third one that had been closed for inspection offline He characterised the move as a request rather than a legally binding order, but given the government’s strong hand in regulating utilities, it would be extremely difficult for Chubu could refuse to comply.  Hamaoka has for years been a special target of Japanese anti-nuclear campaigners, owing to its location atop a major earthquake fault plane. Katsuhiko Ishibashi, a former nuclear adviser to the Japanese government, has described it as the “most dangerous” atomic plant in the country. Seismologists say a magnitude 8 or larger quake is more than 80 per cent likely to strike the area in the next 30 years.

Berkshire May Have Underwriting Loss on Disasters, Buffett Says - Warren Buffett said natural disasters led by the Japan earthquake in March eroded first-quarter profit at Berkshire Hathaway Inc. and may lead to the company’s first annual insurance underwriting loss in nine years. Net income dropped to $1.51 billion from $3.63 billion a year earlier, Berkshire said yesterday in a statement. The insurance segment posted an underwriting loss of $821 million. The Japan earthquake cost the firm $1.06 billion, a temblor in Christchurch, New Zealand $412 million, and flooding and a cyclone in Australia $195 million.  Berkshire benefited last year after the U.S. escaped major damage from hurricanes. “We probably had the second-worst quarter for the insurance industry in terms of catastrophes around the globe,” Buffett said yesterday at Berkshire’s annual meeting in Omaha, Nebraska. “Normally the third quarter of the year is the worst because that’s when the hurricanes tend to hit.”

Aberdeen After Oil: Seeking The Next Wave - Although there are still thought to be around 20 billion barrels of the black stuff under the waters off Aberdeen, extracting it is getting ever more difficult and costly. Britain’s North Sea production peaked in 1999 at 4.5m barrels a day, and will decline to just 2m by 2016, according to Oil & Gas UK. Giants such as Shell and Exxon Mobil are drifting away, lured by more bountiful reserves in Africa and the Americas. Of the 440,000 workers Britain’s hydrocarbons industry supports, one-tenth are based in Aberdeen itself, so it is highly vulnerable to any decline in oil-related activity. However, a new generation of smaller producers is taking over fields left by the oil giants, seeking to squeeze the last drops out of them. Ithaca Energy, a Canadian company, now operates in four North Sea fields off the British coast. Xcite Energy, owned by former employees of ConocoPhillips, is headquartered in Aberdeen and working the deepwater Bentley field.

Shell and Cairn Energy announce 'risky' drilling plans in Arctic - A new battle between environmentalists and Big Oil over drilling in the Arctic was triggered today when Shell unveiled "risky" plans for the Beaufort Sea while a Cairn Energy rig set sail for Greenland. Shell, Europe's largest oil group, has submitted plans to the US government for permission to drill 10 exploration wells in the Beaufort and Chukchi seas off the north coast of Alaska in 2012 and 2013. Previous plans to start this summer were halted first by the moratorium imposed after the Deepwater Horizon disaster last April and then by a ruling from the Environmental Protection Agency. But Shell said it was now confident that it could offer regulators the reassurances that should enable it to proceed with a programme said to have cost it $2bn to lease the acreage and possibly an additional $4bn in planning. "Shell was one of the original offshore explorers in Alaska," said a spokesman. "As in years past, Shell remains committed to employing world-class technology and experience to ensure a safe, environmentally responsible Arctic exploration programme in 2012 – one that has the smallest possible footprint and no negative impact on traditional substance-hunting activities of the people of the North Slope."

Shell Tries to Calm Fears on Drilling in Alaska — Shell Oil² will present an ambitious proposal to the federal government this week, seeking permission to drill up to 10 exploratory oil wells beneath Alaska’s frigid Arctic waters.  The forbidding ice-clogged region is believed to hold vast reserves of oil, potentially enough to fuel 25 million cars for 35 years. And with production in Alaska’s North Slope in steep decline, the oil industry is eager to tap new offshore wells.  Shell has led the way, working for five years to convince regulators, environmentalists, Native Alaskans and several courts that it could manage the process safely, protect polar bears and other wildlife, safeguard air quality for residents and respond quickly to any spill in the region. But BP’s Deepwater Horizon disaster a year ago put a chill on new offshore drilling³. Shell’s renewed application will pose a test for President Obama, who promised to put safety first after the BP spill. But he has also reiterated his support for offshore drilling amid voter worries about rising gasoline prices.

Energy Resources Deep waters 'indispensable,' says BP - Oil and natural gas exploration in deep-water reserves is "indispensable" to future world energy demands, said a BP official in Houston. Proponents of offshore drilling look to the U.S. continental shelf as a means to decrease reliance on foreign oil. Critics, however, point to the giant oil spill in the Gulf of Mexico last year as an indication of the risks. Lamar McKay, the chief executive of BP's gulf coast restoration organization, told an offshore energy conference in Houston that deep waters could be the future of energy. "(T)he deep water is indispensable to the world's energy future," he said. "Indeed, we estimate that the percentage of world oil production coming from the deep water will rise to around 10 percent by 2020." Oil demand, he added, should increase from 85 million barrels per day to more than 102 million bpd by 2030 despite the overall transition to a low-carbon economy

Offshore drilling bill ‘decreases safety, increase Big Oil profits’ - As gas prices reach $4 per gallon, the House passed legislation Thursday that would allow offshore drilling to expand, but an environmental watchdog says the bill will not help bring down gas prices and would weaken government oversight. "It’s astounding enough that the House would even consider expanding offshore drilling before implementing any of the recommended safeguards to prevent another disaster like the BP Deepwater Horizon spill," Frances Beinecke, president of the Natural Resources Defense Council, said. "But doing so under the false premise that more drilling will somehow help consumers struggling with high gas prices today is simply misleading and wrong." It would take at least seven or eight years before new drilling projects in the Gulf of Mexico or offshore Virginia had an effect on gas prices, according to the Associated Press.

The Effect of Oil Prices on Oil Drilling in the U.S. - I want to look at the relationship between the price of oil and the number of oil rigs, and how that relationship has changed over the last couple of decades or so. Oil rigs, of course, are the machines that dig oil wells; once a well is completed and has begun production, the rigs are removed and either go into storage or move on to drilling another well. Data on the number of oil rigs in operation in the United States used in this post comes from Baker Hughes. Regular readers know I normally do not use data from private sources, but Baker Hughes data are as close to "official" as possible, as the figures you'll find the Dep't of Energy's website on rigs originate with Baker Hughes. Rig count data comes out weekly and begins in mid-1987. I've taken annual averages beginning in 1988. Price data are annual averages from Table 5.18 of the 2010 Annual Energy Review put out by the Department of Energy. That data runs through 2009.

Gas Prices Reach Highest Springtime Level Ever - The U.S. Department of Energy reported late Monday that gasoline prices at the pump averaged $3.96 a gallon nationwide, up a little over 8 cents from a week ago. The price hit $4 a gallon or higher in 12 states plus the District of Columbia. AAA and other market watchers said they expect $4 to become the norm nationwide by the end of this week.  Petroleum expert Andrew Lipow, speaking with ABC News, said the price of crude fell by two dollars immediately following the President's announcement, then, by mid-morning, had climbed 50 cents. He attributed the initial drop to concerns that al Qaeda might stage reprisals.

Michigan gas prices hit new record of $4.21; Flint, Lansing rise is sharpest - The good news is car sales are rising briskly, unfazed by spiraling gas prices. The bad news is Michigan drivers are paying more than ever to drive. The state’s average price of regular gasoline soared to $4.22 a gallon Monday, surpassing the previous record set in summer 2008. Prices in all major Michigan cities spiked between 5 cents and 20 cents a gallon late Monday and early today. Nationwide, gas prices averaged $3.97 a gallon, still 15 cents from the record set in July 2008. The increase came despite declines today in the price of crude oil and wholesale gasoline. The increase came despite crude oil prices falling $2.54 a barrel Tuesday, and wholesale gasoline prices dropping about 2 cents to $3.33 a gallon. 

Chart of the Day: National Gasoline Prices - After initially selling off on the bin Laden news, Oil prices have rallied back to new highs. Since we are about to enter the prime driving/gasoline consumption period fo the year, let’s have a closer looks at Gasoline Prices across the US:

Gas prices lift small-car sales - Americans are going for smaller cars as gas prices march higher. New models that get 35 miles per gallon or more, including the Chevrolet Cruze, Hyundai Elantra, and Ford Focus, led most major automakers to stronger April sales. Even buyers of pickup trucks chose more efficient engines. The shift was good news for Detroit and for Korean automakers, which have plenty of small cars in stock. But Toyota, struggling with supply shortages since the March 11 earthquake and tsunami in Japan, reported weak sales. Overall, US sales rose 18 percent from April of last year, to 1.16 million. It was the third straight month that sales hit an annual rate of 13 million or more. While sales remain below their peak of 17 million in 2005, the gains were another sign of recovery. Two years ago, Americans bought just 10.4 million vehicles.

Economic Studies of Biofuels Paint Opposing Pictures in Gas Price Wars - Both sides in the debate over government biofuels support are looking to bolster their arguments with numbers, as new, warring economic studies present differing figures on the role that ethanol production plays in gasoline pricing.A paper by two economists published by the Center for Agricultural and Rural Development (CARD) at Iowa State University argues that ethanol production has reduced wholesale gasoline prices by 25 cents per gallon on average over the past 10 years, with recent price impacts in certain markets reducing the cost by as much as $1.37 per gallon. That study — funded by the ethanol industry group Renewable Fuels Association — also warned that in the unlikely scenario that domestic ethanol production should be quickly and completely stopped, gas prices could skyrocket.But a competing study by the Energy Policy Research Foundation Inc. (EPR Inc.), an energy economics group supported by petroleum and energy companies, argued in a paper attacking the federal renewable fuel standard that rising corn costs make ethanol more expensive than gasoline and increase the overall cost of fuel for consumers.

Big Oil to Obama: Hands off our tax breaks - The oil industry launched another assault Tuesday in the battle to protect favorable tax rates for energy producers. The industry’s chief lobbyist in Washington, Jack Gerard, president and chief executive of the American Petroleum Institute, said raising taxes on the oil and gas companies would stifle job growth and do nothing to lower gasoline prices. He said the recent push to eliminate industry tax breaks is “a red herring” designed to distract attention from the “ineffective energy policies” of the Obama administration. President Obama and Democrats in Congress are pushing to end $4 billion in subsides, saying that oil companies are profitable enough to bear the burden, while the government is in serious need of additional revenue.

US becomes net exporter of fuel - The US has become a net exporter of fuel for the first time for nearly 20 years as drivers struggle with high petrol prices. Energy department data show the world’s largest oil consumer in February shipped out 54,000 barrels more petroleum products each day than it purchased on the global market After a five-year decline in net imports, the US became a net exporter in late 2010, a trend analysts say is confirmed by the latest data. The shift comes as Washington confronts voter frustration over petrol prices that have soared 36 per cent in the past year to nearly $4 per gallon, the highest level since mid-2008. The American Petroleum Institute, an industry group, reported US refined product exports rose 24.4 per cent in the first quarter of 2011 from a year ago, to 2.49m barrels per day. Imports declined 14.4 per cent to 2.16m b/d. The export increase is led by diesel and finished petrol, data from the Energy Information Administration show.For years the US was not only a net importer of crude oil but also of refined fuels. But oil demand of 19m b/d, while on the rebound, remains 2m b/d below pre-recession levels.

Complaining about mosquito bites while a crocodile bites our leg - Last week, in a repeat of 2008, reports of fat earnings from the oil majors were met with blame and outrage from American consumers, who are stressed from $4+ gas prices and strapped finances. Exxon Mobil, the 18th-largest oil company in the world, with about 3% of world production (~4million barrels of oil equivalent per day), reported quarterly earnings of $10.7 billion dollars. Americans are upset because they envision such hefty profits as direct transfers from their thin pocketbooks to Exxon, itself the recipient of government oil and gas subsidies to boot.  I am not an oil industry apologist, but recognize that I live in an oil-centric world, own a car, enjoy air travel and partake in the daily smorgasbord of food, services, and novelty made possible in the cheap energy age. To me, given the problems our country and government face, blaming Exxon for high gasoline prices and excessive tax subsidies is akin to complaining about a mosquito bite on your arm when a crocodile has your leg in its mouth.

Energy Prices and US Recessions - The other day, I was arguing: We are in an era where the availability of natural resources is not sufficient to support the wealth levels that the developed world has grown accustomed to, along with the speed of growth with which the developing world is trying to approach those same levels. So, this is represented by oil prices rising (along with food and other commodity prices more generally). But the effect of this is not to place a uniform drag on growth, because the global mind has not accepted this truth yet. Instead, the global economy keeps trying to grow in a way that is inconsistent with the resource constraints, and then some part of the system tears and gives way. So, in 2007/2008 the sector that gave way was the American subprime consumer, along with a significant chunk of the financial system that was predicated on the idea that poor Americans could continue to take on more and more debt indefinitely. Instead, rising gas and food prices eventually destabilized the finances of that sector of consumers, they started to default, then their lenders started to default, financial contagion set in, and the situation was only stabilized with massive extraordinary interventions by sovereign governments. That worked, but left a lot of the sovereigns in significantly weaker condition than before.

Energy Prices and US Recessions (II) - Yesterday, I explored the changes in energy prices before and during US recessions from 1926 on using the Producer Price Index for energy goods (PPIENG).  One obvious problem with that analysis is that it confounds changes in energy prices with changes in the general price level, and the latter were larger in the 1970s than they have been since. So to address that issue, and just to illuminate the subject from a different angle, I tried dividing out the PPIENG by a measure of broad inflation.  One obvious possibility is to use the consumer price index for all goods and services exclusive of energy (since we ideally don't want energy price changes in both the numerator and the denominator).  However, that series only goes back to 1957.  So before 1957, I use the regular CPI.  Just to give you a feeling that this is reasonable, here's the two from Fred again.

Where To Find The Biggest Oil Reserves In The World slide show

Oil Declines in Longest Losing Streak Since March on Stockpiles, U.S. Jobs - Oil declined for a third day in New York, the longest losing streak since March, as rising U.S. supplies and signs of slowing job growth stoked speculation fuel demand may weaken in the world’s biggest crude consumer.  Futures dropped as much as 0.7 percent today after the American Petroleum Institute said crude inventories climbed for a fifth week. Stockpiles probably increased from the highest since November, according to a Bloomberg News survey before an Energy Department report today. Data this week may show the U.S. generated fewer jobs in April than in March.  “We’re still continuing to see the builds” in inventories, said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted oil will average $100 this year. “The litmus test will be the employment data due out on Friday.”  Crude for June delivery fell as much as 82 cents to $110.23 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $110.58 at 3 p.m. Singapore time. Yesterday, it decreased $2.47, or 2.2 percent, to $111.05, the biggest drop since April 18. Prices have advanced 34 percent in the past year.

Fat tail of the day, oil edition - This is what a fat tail looks like: crude oil is down 8.8% today. According to my colleague John Kemp, who knows everything, the standard deviation of oil prices, on a daily basis, is 1.64%. Which means that today’s price movement is equal to 5.4 standard deviations. In a normally-distributed world, 5-standard-deviation moves never happen. In this world, however, such moves can happen even when there’s no news at all. (Reuters, for what it’s worth, blames “concerns about economic growth and monetary tightening”, which is code for “we have no idea why this is happening, or whether there even is a reason”.) Clearly there’s no fundamental reason to explain this move: most likely the market was just very long oil, and does what it always does in such situations, which is to move in the direction which causes the greatest pain to the greatest number.

Was the commodity sell-off good news? - WAS the sharp sell-off in commodities that took place yesterday good news for the global economy? It potentially could be, given that higher resource prices act as a tax and sap consumer disposable income. But whether they ought to greeted with a smile or frown depends on the nature of decline. If prices fall due to a weakening growth outlook, that's bad; the impact of slower growth may more than offset the benefit from falling prices. If prices drop because of new supply or innovation, that's clearly good. It's also good news if prices fall due to the collapse of a speculative bubble. So which was this? Buttonwood writes: Ole Hansen of Saxo Bank says the sell-off began when the first quarter GDP numbers from the US were weaker-than-expected; yesterday's higher-than-expected weekly jobless claims exacerbated the trend. However, one of the main bullish arguments for commodities was that emerging market demand was now driving prices; that was why prices had rebounded so quickly even though the developed world recovery was still pretty weak. There is no evidence, as yet, that the Chinese economy is faltering. Given those fundamentals, the case for arguing that commodity prices have been driven to excess by speculators looks rather stronger.

Social Spending in Mideast Speeds Rise of Oil Prices - There’s no mystery in why all the unrest in North Africa and the Middle East would cause oil and gasoline prices to soar. Libya’s high quality sweet crude is almost off the market entirely, and it’s anyone’s guess when the next oil producer is going to suffer a revolution that could cripple production. But PFC Energy, a leading strategy advisory firm, has come up with another reason why political developments in several OPEC countries are driving prices higher, despite Saudi Arabia’s assurances that the kingdom will boost production to make up for any gaps. In a report this week, PFC calculated that populist spending policies are contributing to the need for higher revenues from oil sales. “Saudi Arabia and the U.A.E. (i.e. Abu Dhabi) are now seeing a rising share of total expenditures accounted for by higher government salaries, subsidies and housing allowances, and payoffs to the religious establishment,” a private report offered to the firm’s clients says. “Today’s high oil prices facilitate the financing of the expansive spending packages that [Saudi] King Abdullah has recently announced to prevent outbreaks of popular unrest within the country."

Gulf Nations’ Social Policies Playing Role in Oil Price Rises, Report Says - The generous social benefits being doled out by Saudi Arabia and other oil-rich Persian Gulf nations are contributing to high oil prices, according to a report by the energy advisory firm, PFC Energy. The report said that populist spending programs, which have recently become even more generous in an effort to ward off the social unrest that has swept much of the Middle East, are forcing some Arab OPEC countries to keep oil prices high to pay for generous social policies. Such policies include high government salaries, direct payments to citizens, “payoffs” to the religious establishment, housing allowances, and large subsidies to keep gasoline prices low. “Today’s high oil prices facilitate the financing of the expansive spending packages that [Saudi] King Abdullah has recently announced to prevent outbreaks of popular unrest within the country,” said the report, prepared for the firm’s private clients.

Uneven Prospects for the Arab World - The popular uprisings across the Arab world are defining a new order in the region. But as the transition continues, the area’s economies are diverging sharply, posing added challenges to leaders as they seek to cultivate greater stability. A new report on Tuesday by the Institute of International Finance, whose members include the world’s largest commercial and investment banks, shows the magnitude of what lies ahead. As the upheavals add to a jump in the price of oil, oil-producing Arab countries — including Iraq — are expected to experience double-digit growth this year, feeding an already significant fiscal surplus. Economic growth among Gulf oil exporters is expected to expand by an average of more than 5 percent, elevated by higher oil production and a surge in government spending. It’s little surprise, then, that countries that must import oil from their neighbors are faring worse. The study shows that Egypt, Tunisia and Syria in particular are all looking at deep contractions this year before returning to growth in 2012, assuming any new demonstrations do not lead to a downward spiral.

Time to Sever the Saudi Ties That Bind - Apparently, King Abdullah of the House of Saud (the man with the unseemly title "Custodian of the Two Holy Mosques") got his feelings hurt that America objected when the totalitarian theocracy whose despot he is sent troops into a neighboring country to massacre peacefully protesting civilians. That the United States did indeed object to the deployment is news to those of us who had read the New York Times'report that "the United States did not object to the deployment."  Even a protestation so paltry that it escaped the Times' notice was enough to get Abdullah's knickers in a twist, and so it was that Defense Secretary Robert Gates made the trip all the way to Riyadh to grovel and make propitiations. It seems the Gates-Abdullah tête-à-tête sufficed where our recent $60 billion arms sale to the Saudis did not, Sec. Gates assessing that US-Saudi relations are now "in a good place."  Perhaps, thanks to Gates's efforts, Michelle Obama needn't fear the withholding of gifts from Abdullah, who once lavished her with a ruby-and-diamond set valued at $132,000, or what the Saudi royals call "chump change."

Iraqi oil production cutback plan adds to global supply fear - IRAQ is preparing to halve its official oil production target, forcing companies including BP and Shell to renegotiate their contracts.  The country's Oil Ministry, with backing from the Prime Minister Nouri al-Maliki, will set a new target to produce between 6.5 million and 7 million barrels per day by 2017, down from original plans to pump 12 million barrels, according to industry insiders. Iraq, which is a member of the OPEC cartel that pumps 40 per cent of the world's oil, produces about 2.68 million barrels a day, barely higher than under Saddam Hussein. It had been hoped that with a huge injection of foreign investment, it would be able to challenge Saudi Arabia as the world's biggest oil exporter this decade.

Where will China find the oil to power its economy? - With OPEC tapped out, where will China find the oil to power future economic growth?  The obvious answer is it will take a big chunk out of the 19 million barrels the U.S. economy burns every day. And China doesn’t have to build a blue water navy or engage in an arms race to take a big slice of the U.S.’s energy pie . All it has to do is stop showing up at the U.S. Treasury auction, and Washington’s massive budget deficit will do the rest.  Despite all the bashing China takes in Congress, it’s big bad China that finances Washington’s massive 1-trillion-dollar-plus budget deficit. It has for some time. Almost two thirds of the Peoples Bank of China’s $2.85-trillion foreign reserves are in U.S. dollar assets. These investments have not been an act of benevolence towards U.S. taxpayers. China’s central bank felt compelled to become the largest holder of U.S. Treasury bonds to keep its yuan from rising and undermining the competitiveness of Chinese exports in the U.S. marketplace. But that was in a world of cheap oil.

Oil prices to keep rising as peak production reached in 2006 -  THE AGE of cheap oil is now over – and that’s official. For the first time, the International Energy Agency has conceded that global crude oil production has already peaked and that the commodity will become more and more expensive. In the Catalyst programme broadcast last night on Australia’s ABC1 television, the agency’s chief economist, Fatih Birol, said “peak oil” was reached in 2006. He said that he expected oil prices to rise by 30 per cent over the next three years. “The existing [oil] fields are declining so sharply that in order to stay where we are in terms of production levels in the next 25 years, we have to find and develop four new Saudi Arabias,” Dr Birol said. “It is a huge, huge challenge that we continue to underline.” Only five years ago, the agency – an independent, inter-governmental agency formed in the wake of the 1973 oil crisis – was confidently forecasting that crude oil production would increase to 120 million barrels a day by 2030. Dr Birol said one of the conclusions the agency had come to was that the age of cheap oil was over. Yesterday, light crude was trading at $113 per barrel and forecast to rise to $130 per barrel.

The Problem With Humans - This week I will be analyzing Jeremy Grantham's recent newsletter Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever (pdf). I will look at Grantham's reasonable thesis in more detail over this next few days. This being Sunday, always a slow day on DOTE, I will comment on Grantham's question Why So Little Fuss? I believe that we are in the midst of one of the giant inflection points in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution. The unprecedented broad price rise would seem to confirm this. Grantham has adopted the view that high and rising commodity prices are here to stay, including energy prices. In taking this view, he talks about "peak oil" and global oil prices. As the head of GMO LLC, which manages a $100 billion investment fund, Grantham is used to being listened to. But now that he's living on the wrong side of the tracks, and no longer believes in inevitable, limitless economic expansion, he's finding out that people are unwilling to take his views seriously. Welcome aboard, Mr Grantham!

The Great Paradigm Shift In Commodity Prices - This is the second in a series of articles on Jeremy Grantham's Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever. Yesterday's The Problem With Humans was the first. Grantham's thesis is straightforward: Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period.

Oil Scarcity and its impact on the Global Economy - In the latest edition of the International Monetary Fund's World Economic Outlook publication, the IMF dedicates a chapter entitled "Oil Scarcity, Growth and Global Imbalances" to an examination of the world's oil markets and the impact of growing oil scarcity on the world's economy.  In this document, the IMF seeks to answer the current status of oil scarcity, how oil scarcity will impact the global economy and how oil scarcity will impact economic policies around the world. The authors of the report believe that the world is, in fact, reaching a point of increasing oil scarcity.  Demand from emerging economies is acting in concert with decreasing levels of growth in supply resulting in increasing tension in the world's oil markets.  The IMF distinguishes between an absolute drop in supply (decreasing absolute daily oil production level) and a drop in the level of oil supply growth.  If oil supply growth were to drop by one percentage point, annual global economic growth would slow by an annual rate of one-quarter of a point over the medium to long term.  On the other hand, a steady decline in absolute oil supply levels would have a much greater negative impact on the global economy even if there is an increase in substitution of other energy sources in the place of oil.

The Peak Oil Crisis: Peak Oil Elasticity - Earlier this week the U.S. Department of Energy announced that the average national price for regular gasoline in the U.S. was now $3.96 a gallon. Don’t feel too bad though; last week the Kremlin banned gasoline and diesel exports from Russia to alleviate domestic shortages sending gasoline prices in Germany to a record $9.10 a gallon. Gasoline prices have been rising steadily since last October, and given that the summer driving season is still a few weeks away are likely to keep rising for at least a while longer. One would think that with an increase in gasoline prices of over a dollar a gallon in the last year sales of gasoline would be slipping – and indeed they have, but not very much. With U.S. gasoline consumption running around 9 million b/d in last couple of years, consumption has only fallen by about 150,000 barrels a day, or 1.6 percent, compared with last year. Three years ago during a similar price spike, U.S. gasoline consumption fell by closer to 400,000 b/d. So far this year’s drop in consumption has not been enough to stem the rise in prices which in recent weeks have become more closely tied to the global supply/demand balance and the falling U.S. dollar.

The context of Hubbert’s Peak in world oil forecast - Recently when I was reading some of the papers M. King Hubbert wrote, one thing struck me was the context in which he made his forecast regarding how world oil supply would peak and decline. He made this forecast in the context of having plenty of other fuel supply from other sources already developed, to offset this decline. The three graphs shown in this paper are from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels. Based on Figure 30, it is clear that he expected nuclear energy to raise total energy production to a very high level, even before fossil fuels began to decline. In his 1962 report, Energy Resources - A Report to the Committee on Natural Resources, Hubbert writes about the possibility of having so much cheap energy that it would be possible to essentially reverse combustion–combine energy plus carbon dioxide and water to produce new types of fuel plus water. If we could do this, it would be possible to fix our high CO2 levels and produce lots of fuel for our current vehicles, even without fossil fuels.

A Common Thread Between Horse Manure and Peak Oil  - Anyone recall the massive economic plight wrought by the Great Horse Manure Crisis of 1894? It’s ok if you don’t because it turned out to be…well…a pile of manure. And no, this isn’t made up. In the late 19th century, growing global urbanization led many to extrapolate then-present trends into the future ad infinitum and ad ridiculum. At the time, most local transport was horse powered—cabs, buggies, and wagons conveyed the bulk of goods intra-city. Seeing this, many who failed to fathom the power of human ingenuity believed London and New York would, in a handful of years, be buried in nine feet of dung. It’s easy to look back now and realize the flaw. But underpinning those beliefs was a Malthusian, doomsday-ish belief in a finite world to which we humans, as a group, are susceptible even today. Here’s one example: Peak Oil.

A Refuge for 2008 Peakists - For those who would like to continue to believe that oil has already peaked, I did find a data series that will support you in that belief, at least for now.  The Oil and Gas Journal maintains statistics on crude oil production.  I paid my $75 for the latest version of the data, which goes through January 2011, and lo, at that point it had not exceeded the 2008 peak (above). At this point, with the US economy apparently wavering, and uncertainty over whether Saudi Arabia can/will raise production, it's unclear to me whether oil production will continue to rise further or not in coming months.  So it is at least conceivable that this particular series will have an all-time peak in 2008 (though far from certain). However, I would argue that this is not the most sensible thing to look at.  It excludes Canadian syncrude production for example, which is certainly every bit as usable as any other kind of crude.  It presumably also excludes condensate (though I haven't been able to confirm that, as the spreadsheet lacks any definitions or notes).  If so, that's also pretty restrictive.

OUR TAKE: Looming Energy Trade Wars - I covered the trade battles between America and Japan. Japan kept its markets largely closed, satisfied an insatiable American appetite for its cars and electronic gadgets and bought up a swath of America - from Hawaiian golf courses to Manhattan trophy real estate. That all eventually ran its course, with Japan getting mired in a decade-long economic downturn. The 21st-century energy technology trade conflicts may bedevil us for a much longer period of time and have sweeping, enduring consequences.  "China, India and others are cleaning America's clock in virtually all areas of green technology," Prestowitz writes. "China, and to a lesser degree, India, make it difficult for foreign companies to export to their markets. . The result of all this is that America has pretty much lost the green-tech game before it has even started to play." Ever since the dawn of the industrial age, the world has moved through several eras. Countries' fortunes surged and ebbed based on how they caught each wave. Now that wave is a revolution in energy technology.

Part 7 The relationship between global population and global petroleum production - Based on my analysis of regional petroleum production trends presented in part 2 and part 3, I was able to make some predictions in part 6 about peak oil and total recoverable oil (Q_∞), for the seven regions studied: (Middle East, ME; Former Soviet Union, FS; Africa, AF; South America, SA; Asia-Pacific, AP; Europe, EU and North America, NA), as well as global (WO) production, peak oil and Q_∞. Here in part 7, I examine the correlation between global population and petroleum consumption and consider the merits of two possible scenarios for population change in light of declining petroleum production. I want to make clear at the outset that I am neither advocating for or against population control. It doesn’t really matter what I think, and, nothing I do or say will influence the outcome. I am just watching for trends and relationships, and considering different scenarios, in the hopes that this information might help people better understand and prepare for the hard times that I believe are ahead.

Oil heads for biggest weekly loss on record - Oil erased early gains and turned negative in late afternoon trade as the dollar rose, extending Thursday's shock-inducing collapse, when Brent fell as much as $12, a record, in a furious, high-volume session that saw waves of selling as key technical levels were broken. Selling pressure on oil and other commodities came on several fronts this week, with investors weighing factors from the death of Osama bin Laden to the impact of higher fuel and commodity costs on the economies of consumer nations to monetary policy in major economies. Brent crude fell $1.37 to $109.43 a barrel by 2:56 p.m. EDT in heavy trade, with volumes twice the 30-day moving average. The contract was down $16.25 a barrel for the week, on track for its largest weekly decline ever.U.S. crude futures settled down $2.62 at $97.18 a barrel, after trading at $102.38 following the release of supportive U.S. jobs data. U.S. crude ended down $16.75 for the week, the biggest weekly drop since the contract began trading in 1983

Oil's Drop Tests Russia's Budget - Russia's ability to balance its $375 billion budget has come under threat after a sharp drop in crude prices, especially since the Kremlin plans on boosting spending during a year of parliamentary elections and preparations for the 2012 presidential vote. Russia's annual budget is expected to lose $36 billion from Brent crude's $18 drop from a recent high of $127.02 a barrel, assuming prices don't rebound. The crude drop threatens to put the budget into deficit, since Finance Minister Kudrin has said the budget needs an average 2011 oil price of $115 to balance, although many economists say the crucial oil price is somewhat lower. 

Oil plunge hints at end of commodities boom - Price slump of nearly $10 a barrel drags down precious metals, lead and tin as Glencore float looks like top of the market. The price of oil tumbled by nearly $10 a barrel today – dragging silver, gold, copper, lead and tin with it – as mounting concerns about the US economy fuelled speculation that the commodities boom may be ending. As traders questioned whether the £36bn flotation of commodity trading giant Glencore marked the top of the market, most of the world's key resources suffered another day of substantial declines. Brent crude fell by $9.99 to $111.24 a barrel – last week it was $126 –as investors fretted that a surge in US unemployment claims showed that the high oil price has damaged the economy and will lead to a decline in demand for energy. Oil inventories rose by 3.4m barrels last week, well above the expected 2m increase in part because Americans have cut down on their driving as petrol prices have risen to more than $4 a gallon.

The commodity-price speed limit - À PROPOS of my earlier post on the impact of commodity prices on growth, have a look at this interesting chart from hedge-fund manager Jeremy Grantham (via Joseph Romm): I'm actually fairly optimistic about the global economy's ability to grow over the long-term despite slowing growth rates in the supply of various commodities. It's the medium-term that's likely to prove difficult. Over a third of the world's population resides in rapidly growing emerging-market economies. Moving most of those individuals from dire poverty to something like rich-world resource-consumption patterns in the space of just a decade or two is going to stress resource supplies. Excess capacity will quickly be exhausted, prices will then rise, and rising prices will ration scarce resources by limiting growth, until we all manage to innovate our way around these limitations.

The commodity-price speed limit, cont. - TYLER COWEN comments on the Jeremy Grantham analysis I discussed on Wednesday, concerning the "paradigm shift" in resource-price trends: Of course China won’t be devoting fifty percent of its gdp to investment for much longer.  Furthermore, a new technological platform will arise and commodity prices will fall once again.  The question is — when?  It doesn’t have to be soon.  Catch-up growth boosts commodity demands and catch-up growth can outrace TFP-based extraction productivity growth for extended periods of time.  That’s why China can grow at ten percent for decades but we have no real chance of doing the same.  Progress is harder at the frontier.  Julian Simon wrote about how high commodity prices create incentives for new discoveries but he never compared those potential TFP gains to the power of catch-up growth to boost demand and thus high prices; keep in mind The Ultimate Resource first came out in 1981. Meanwhile, Mark Thoma publishes this chart, from a Michael Roberts post in which Mr Roberts suggests that falling agricultural productivity may be a long-term phenomenon

Steelmakers Turn to Price Triggers as Iron-Ore Costs Rise - U.S. steelmakers, grappling with rising iron-ore prices, are increasingly putting stiff clauses in sales contracts that allow them to automatically raise prices on customers such as auto and appliance makers, which could pressure them to boost prices in turn.  AK Steel Holding Corp. CEO James Wainscott says the steelmaker won't sign a long-term contract without such an "escalator" clause for iron-ore prices.  "We've taken it on the chin for billions of dollars in costs," he told investors and analysts last week. "Today, we won't do a deal...without one of these agreements in place."

Lower Commodity Prices? - Three weeks ago there were a couple of articles in the WSJ about lower prices for steel and copper. Here is another more general article: Commodity Surprise: Some Are Now Heading Down Cotton has pulled back 17% from the all-time record set in early March, and sugar is down 34% from its multidecade high in February. Lead and zinc have tumbled in recent weeks after shooting up in the second half of 2010. Copper has shed 6% this year. The declines came amid a wild April in which other raw materials continued to climb. U.S. oil prices rose 7% for the month, while gold set fresh records in nominal terms 13 times and silver neared its all-time high. Lower commodity prices would definitely help, but unfortunately the one that matters the most for the U.S. economy - oil prices - are still high (WTI futures are at $113.56 per barrel, and Brent Crude is at $125.56). High oil and gasoline prices are one of the key downside risks for the economy.

China may face power shortage by mid-2011 - China ‒ the world’s fastest-growing major economy ‒ may face a power shortage of 30 million kilowatts during its summer in mid-2011, as the country’s total supply lags behind the increasing growth in demand.  “Some regions are facing shortfalls that are bigger and earlier than last year,” the China Electricity Council said in a report on its website. “Supplies in provinces in the north, east and south will be tight,” the report added. China’s power use may increase 12% to 4.7 billion megawatt-hours this year, while generation capacity may gain 9%, the council said. Demand rose 13% to 1.1 billion megawatt-hours in the first quarter, according to the council.  “The power shortage is worse compared with the previous couple of years, but has yet to have a material impact on the real economy,” . “The country may need to consider speeding up generation capacity expansion to stop power shortages from worsening next year.”

China set to unearth shale power - China has spent tens of billions of dollars buying into energy resources from Africa to Latin America to slake the unquenched thirst for fuel from its growing industry and burgeoning cities. But China may have more energy riches under its own soil than policy makers in the world’s second-largest economy ever dared imagine.Just over a year ago, Beijing awakened to a technology revolution that has unlocked massive reserves of gas trapped within shale rock formations in the United States.Once deemed too costly to extract, shale gas has turned around U.S. dependence on foreign gas imports. Just a few years ago, the United States was building scores of expensive facilities to import liquefied natural gas (LNG), looking at booming long-term demand forecasts and wondering which countries would supply the huge volume of imports it needed.Instead, the United States is turning import facilities into export terminals, because its shale gas reserves are estimated to be big enough to meet domestic demand for 30 years. This is an American dream that China wants to emulate.

Supplies Squeezed, Rare Earth Prices Surge - Rare earth¹ prices are reaching rarefied heights.  World prices have doubled in the last four months for rare earths — metallic elements needed for many of the most sophisticated civilian and military technologies, whether smartphones or smart bombs.  And this year’s increases come atop price gains of as much as fourfold during 2010.  The reason is basic economics: demand continues to outstrip efforts to expand supplies and break China’s chokehold on the market.  Neodymium, a rare earth necessary for a range of products including headphones and hybrid electric cars², now fetches more than $283 a kilogram ($129 a pound) on the spot market. A year ago it sold for about $42 a kilogram ($19 a pound).  Samarium, crucial to the manufacture of missiles, has climbed to more than $146 a kilogram, up from $18.50 a year earlier.

Ponzi Financing Involving Copper Trade Gone Wild In China - Mish - Courtesy of Michael Pettis at China Financial Markets, please check out the insane way some companies in China obtain credit. Via Email, Pettis writes ...In this week’s newsletter I will argue that in spite of the rising wages, appreciating currency, and interest rate hikes we’ve seen in recent months, China is not actually rebalancing. Instead it is creating a change in the structure of the industrial base that may, unfortunately, be the opposite of what Beijing says it is aiming for. But before getting into why, I want to bring up once again the goings-on in the commodity markets. Since January I’ve been writing about – and trying to figure out – the strange happenings in the Chinese copper market. The issue has been a regular topic of conversation in my central banking seminar at Peking University, where much of the most imaginative analysis I’ve seen has been done. China had been importing for many months far more copper than was needed for real use – and this in spite of a huge surge in domestic infrastructure and real estate development which has boosted the demand for copper. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax. Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses. Why? One possibility of course was pure speculation. If you think domestic Chinese copper use is going to soar, and with it prices too, then it might make sense to buy copper and hoard it. But there seemed to be a lot more hoarding than normal, and anyway with London prices often above the tax-adjusted Shanghai prices, why would anyone want to speculate on foreign copper when it could be bought more cheaply domestically?

Are the Chinese Hoarding Certain Commodities to Obtain Cheap Funding? - Yves Smith - As much as it may sound barmy to stockpile commodities to obtain better terms on financing, Michael Pettis claims that’s one of the factors behind what looks to be unduly aggressive purchases of copper by the Chinese. An excerpt from his latest newsletter, courtesy Michael Shedlock: China had been importing for many months far more copper than was needed for real use…. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax.Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses. Why? One possibility of course was pure speculation… It turns out, that the copper purchases were not entirely, or even mainly, speculative. They were part of a financing scheme for companies that….were having trouble accessing bank credit. Credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical copper (or warehouse receipts, I guess) as collateral for domestic borrowing. The financing was continually rolled over. Buying copper was just a way to borrow for companies that needed loans and were otherwise unable to get them. There is more on Mish’s blog, and as he indicates, even more in the underlying Pettis newsletter. Note that there have been reports for some time of stockpiling of base metals as a popular investment among private business owners. So any recent hoarding, whether for investment or to obtain funding, presumably is in addition to these uncertain but presumably not insignificant hidden reserves.

China's currency under pressure — For years, the chief source of tension between the world’s two biggest economies has been Washington’s concern that China undervalues its currency to bolster trade. Suddenly, it’s become Beijing’s concern, too. Inflation is bubbling and consumer unhappiness is rising, as the price of imports chugs higher as measured in China’s currency, the yuan. At the same time, international investors are wary of the yuan because of the government’s close management of the currency. The result: a shift in the discussion inside the Chinese government, where advocates of export-led development have typically held sway. The change could make it tougher for those advocates to fend off U.S. pressure.  All that political pressure, however, has yielded only modest change in a country where tens of millions of workers depend on an industrial complex built around churning out cost-competitive goods, be they blue jeans, bicycles or iPods.

The Outlook for China's Currency - Laura D’Andrea Tyson - The demand for tough action by American policy makers fails to recognize that the renminbi has already appreciated significantly relative to the dollar, exaggerates the benefits of a stronger renminbi for the United States and overlooks the benefits of a stronger renminbi for China itself. Some important facts are obscured by the threatening rhetoric and name-calling. Since last summer, when China returned to its prefinancial-crisis exchange-rate system that allows the renminbi to fluctuate against the dollar within a managed band, the Chinese currency has appreciated about 5 percent relative to the dollar in nominal terms. The pace of appreciation has quickened since the beginning of this year, and at the end of April, the renminbi hit its highest level relative to the dollar since it began trading in 1994. Measured in real terms, the appreciation of the renminbi has been much larger.  According to calculations by The Economist, since 2005, when China  adopted its managed-band system, the renminbi has appreciated about 24 percent in nominal terms and about 50 percent in real terms relative to the dollar.

China loses $271 bln from debt holdings -  China's newly-added foreign exchange reserves since 2003 have lost about $271.1 billion by the end of 2010 as a result of the depreciation of the US dollar, said a senior analyst with the National Development and Reform Commission (NDRC) . And the country is likely to lose $578.6 billion if the US currency's exchange rate slips to six yuan a dollar, Securities Daily quoted Zhang Anyuan, head of the fiscal and financial policy research division of the NDRC's Institute of Economic Research, as saying on Thursday. While making attempts to further diversify the allocation of its US$3 trillion foreign exchange reserve, China remains the largest foreign holder of US securities by June 30, 2010, a recent survey released by U.S Department of the Treasury shows.China's foreign reserves had increased by $197 billion to more than $3 trillion for the first time. By the end of March, an increase of 24 percent from a year ago, despite the first quarterly trade deficit in seven years during that same period.

UBS’s Magnus Warns of Risk of Chinese Minsky Moment - Yves Smith - Given that Magnus was one of the few prior to the financial meltdown (and not too long before either) to see the possibility of a generalized credit contraction, as opposed to, say, a “contained” subprime crisis, his warning on China is worth considering. He highlights, as other commentators have, that China’s dependence on investments, now 47% of GDP, is unprecedented, particularly in a large economy. In addition, half that total is in property investments, which is not necessarily productive.  But what troubles Magnus most about Chinese investment is the degree to which it depends on lending. From the Financial Times: But a more immediate worry is the growing credit intensity of China’s economy. What China calls “total social financing” – conventional bank loans and most other external sources of finance – was still 38 per cent of GDP in the first quarter of 2011, almost as high as in 2009 when China implemented a credit-centric stimulus programme. The credit intensity of growth, or the amount of new credit generated for each unit of GDP growth, has risen from 1-1.3 before 2009 to 4.3 in 2011.

Guest Post: China is Different - We need a new framework for understanding and interpreting what is happening in China. As a friend recently commented to me, there should be three categories of economies: developed, developing and China. China may struggle, but it will struggle in a uniquely Chinese way, and inevitably pose deep questions about the future of capitalism. Pundits, especially of the bearish persuasion, are fond of deriding the comment that “this time it is different”. But are things always the same? Analytics should match the subject matter (methodology should match ontology), and what has happened in China already is very different to anything yet seen. It has been the most sustained wealth creation in history, largely unpredicted. Two recent comments reported on MacroBusiness, one by Michael Pettis and the other by Nouriel Roubini reveal the problem. Both pundits focus on China’s extremely high levels of investment, which is about half GDP, instead of about a tenth in most developed economies. Viewing China through the lens of a developed economy, they argue there is trouble ahead. But Pettis also sees the frameworks used for developed economies start to fail:

China’s Manufacturing Grows at Slower Pace, Survey Shows - A Chinese manufacturing index fell after the government raised interest rates and lenders’ reserve requirements and allowed gains in the yuan to pick up pace.  The Purchasing Managers’ Index was at 52.9 in April from 53.4 in March, China’s logistics federation and the statistics bureau said in an e-mail today. That was below a median forecast of 53.9 in a Bloomberg News survey of 20 economists.  China’s economic expansion, a driver of global growth, may moderate as the government counters the fastest inflation since 2008 and cools a real-estate market that has been at risk of price bubbles. Credit Suisse Group AG says a fifth increase in benchmark interest rates since the global financial crisis may come as early as tomorrow, a Chinese holiday, less than a month after the previous move.  “Growth has been cooled a bit but inflationary pressures have not been meaningfully alleviated,”

Japan's power problems raise fiscal uncertainty: Moody's (Reuters) - Japan's power supply disruptions after the Fukushima nuclear crisis and possible government assistance for the plant operator are big sources of uncertainty for the nation's fiscal health, a senior official of Moody's Investors Service said on Tuesday. While economic costs for disaster relief and reconstruction following the March 11 earthquake and tsunami are likely to be about 3 to 5 percent of Japan's gross domestic product (GDP), "there is uncertainty attached to that," Senior Vice-President Tom Byrne said on Tuesday. "A big source of uncertainty is from the power supply situation and that has not stabilized. There could be further costs," he told Reuters in an interview in Hanoi."The unstable situation about radiation coming from the nuclear power plant is a big wild card for economic costs as well as fiscal costs." He added the government has not been explicit on its likely assistance for Tokyo Electric Power, the operator of the crippled Fukushima Daiichi plant, and said the company's liability "could migrate to the government balance sheet and be reflected in budget deficits or government debts."

Economy took bigger hit than estimated - The economy took a bigger hit from last month's disaster than anticipated, with factory output falling the most since at least the end of Allied Occupation, underscoring calls for the Bank of Japan to add stimulus. Factory output dropped a record 15.3 percent from February and household spending plunged 8.5 percent from a year earlier, government reports showed Thursday. Retail sales fell the most in 13 years, according to data released the previous day. The economy's deterioration makes harder Prime Minister Naoto Kan's task of sustaining confidence in government debt after Standard & Poor's on Wednesday downgraded its outlook for the nation's rating. The BOJ was expected to detail an emergency lending program later in the day for banks in the devastated Tohoku region as a group of lawmakers and former Cabinet ministers presses for more purchases of government bonds.

Japan's economy struggles for air - With the arrival of the first real Japanese data since the Tsunami struck the immensity of the tragedy which Japan is passing through is only now gradually becoming apparent. Exports were down by a seasonally adjusted 7.7% in March over February, while imports were only fell by a much more modest 1.4%, with the inevitable consequence that the trade surplus which forms the lifeline for Japan’s fragile economy shrank sharply. In particular car production was badly hit, with output at Toyota plunging 62.7% during the month, while Nissan reported a drop of 52.4% and Honda put the shrinkage in its Japanese domestic production at 62.9% adding that output would be at 50 percent of its former projections until at least the end of June. In fact March output across the whole of Japanese industry fell at a record monthly pace of 15.3%, while household spending declined at the record annual rate of 8.5%.

Japan: Kan, “Will Study the Possibility of Setting Up an Alternative Capital to Take Over Tokyo’s Role in an Emergency” - Kan said measures were not taken despite previous accidents and warnings, and that he must admit that the utility and the government failed to fully deal with the situation. He also suggested that he will study the possibility of setting up an alternative capital to take over Tokyo’s role in an emergency, saying that measures must be taken to secure the continuity of the capital’s central functions.

Rich and poor, growing apart - THINK income inequality growth is primarily an American phenomenon? Think again: American society is more unequal than those in most other OECD countries, and growth in inequality there has been relatively large. But with very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia. This suggests that while national factors can influence the degree of inequality growth and can mitigate (or not) the negative impacts of that growth, there seem to be broader, global forces pushing inequality up across countries. The OECD report linked above focuses on a few: First, a rapid rise in trade and financial markets integration has generated a relative shift in labour demand in favour of high-skilled workers at the expense of low-skilled labour. Second, technical progress has shifted production technologies in both industries and services in favour of skilled labour...

Inequality Rising Across the Developed World - America isn’t the only rich country dealing with a rise in inequality. Most of the developed world is, too. A new report from the Organization for Economic Cooperation and Development finds that most of its member countries have seen their richest citizens get much, much richer in the last few decades, leading to a widening income gap.  Source: OECD Income Distribution and Poverty Database. Note: Data for mid-1980s refer to early 1990s for Czech Republic and Hungary. Today, across developed countries, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, with much bigger multiples in Israel, Turkey, the United States, Chile and Mexico. In these last two countries, the income ratio is 27 to 1. So what accounts for the growing gulf? Changes in capital income — which primarily affects wealthier people — have contributed to rising inequality, although the impact has been relatively modest when compared to changes in labor income, the report says. As lower-paid workers have seen their incomes stagnate or even fall, the highest-paid workers have gotten steep raises.

Inequality is growing around the world - A new OECD reports concludes that "inequality is on the rise in most OECD countries" and that: In a large majority of OECD countries, household incomes of the top 10% grew faster than those of the poorest 10%, leading to widening income inequality. Differences in the pace of income growth across household groups were particularly pronounced in some of the English-speaking countries, some of the Nordic countries and Israel. In Israel and Japan, real incomes of people at the bottom of the income ladder actually have fallen since the mid-1980s. As The Economist summarizes that data as follows: American society is more unequal than those in most other OECD countries, and growth in inequality there has been relatively large. But with very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia. Technology and globalization are likely the primary causes of the recent changes, although the institutions, culture and government policies can also make a difference. Here's a chart from the Economist.

A Run on Grameen Bank’s Integrity - Bangladesh’s once-legendary banking environment is now fatally polluted. The rot is spreading so fast and far that the entire global microfinance industry is threatened. Controversy ranges far beyond poisonous local politics, the factor most often cited by those despondent about Grameen Bank’s worsening crisis. True, at first glance we see an oppressive state’s persecution of a courageous academic-turned-entrepreneur and 2006 Nobel Peace Prize laureate, a man passionate about uplifting poor women’s socio-economic status through unsecured credit and group borrowing: Muhammad Yunus. On April 5, the Bangladeshi Supreme Court confirmed that notwithstanding huge aid inflows he catalysed for one of Asia’s poorest countries – based on Bangladesh’s world-leading 25% microfinance market penetration rate – Yunus must be ousted from Grameen Bank’s leadership. At second glance, observe that the notorious corporation Burson-Marsteller (B-M) is spin-doctoring for Yunus, and as MSNBC television social critic Rachel Maddow has observed, “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial.”

The IMF’s Switch in Time -The crisis showed that free and unfettered markets are neither efficient nor stable. They also did not necessarily do a good job at setting prices (witness the real-estate bubble), including exchange rates (which are merely the price of one currency in terms of another). Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact. And the US Federal Reserve’s “quantitative easing” (QEII) made the demise of the ideology of unfettered markets inevitable: money goes to where markets think returns are highest. With emerging markets booming, and America and Europe in the doldrums, it was clear that much of the new liquidity being created would find its way to emerging markets.  The resulting surge of money into emerging markets has meant that even finance ministers and central-bank governors who are ideologically opposed to intervening believe that they have no choice but to do so. Indeed, country after country has now chosen to intervene in one way or another to prevent their currencies from skyrocketing in value.

Tom Keene and Nouriel Roubini: Thinking Globally - Thinking Globally With Nouriel Roubini. Speaker: Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics; Professor of Economics and International Business, Stern School of Business, New York University. Interviewer: Tom Keene, Editor-at-Large, Bloomberg News; Host, "Surveillance Midday," Bloomberg TV

The century of old age - As mentioned previously, the 21st century will be the century of old age, where declining birth rates meet longer life expectancies. This ageing of the population will affect many areas of the international economy, from consumption and growth to asset valuations. The impacts from ageing will likely be most acute in Western Nations, although some developing countries, most notably China, will also be negatively affected. Over the past 25 years, the global economy has benefited from a demographic ‘sweet spot’, whereby there has been a high proportion of working age people supporting only a small pool of dependents.This ‘sweet spot’ has come about from two main factors:

1. The Baby Boomer generation – defined by the Australian Bureau of Statistics (ABS) as those born between 1946 and 1965 and comprising around 25% of Australia’s population - has been at working age; and
2. Declining birth rates from the mid-1970s.

This fall in the dependency ratio - defined as the ratio of the non-working population, both children and the elderly, to the working age population – is clearly evident by the below chart showing dependency ratios in key Western Nations.

The re-balancing of trade within the Euro area: some improvement but not enough - Rebecca Wilder - I thought that the whole point of fiscal austerity was to turn the balance of trade and capital flow within the Euro area: debtors becoming savers and capital flows out of the Periphery and into to the core. We're seeing the outset of such a shift; but it's probably too slow in the making. The chart below illustrates the trade balance (exports minus imports) within the Euro area (17) for key austerity - Ireland, Greece, Spain, and Italy - and core - Germany, France, and the Netherlands - countries. The data span the last six months and are normalized by the European Commission's 2010 GDP estimate for each country (listed on the Eurostat website).  It should be noted that this is an incomplete picture, since there are 17 Euro area countries. However, the following point is worth noting: the balance of trade is arduously improving in Spain and Greece at the cost of just a small share of surplus in the core. To me, policy makers are grasping at straws when they stick to the 'exports will grow the Periphery out of their debt problems' story.

Fiscalization and Hellenization -- Kevin O’Rourke leads us to a good complaint by Colm McCarthy about the ECB’s handling of the eurozone crisis. McCarthy tells us that it is dispiriting to have to listen to lectures from ECB officials who appear to regard the European banking crisis as essentially a morality play about fiscal policy. By confusing fiscal and banking crises in the public mind, the ECB is also fuelling anti-EU sentiment in the core, since core taxpayers understandably resent the notion that they should subsidize feckless peripheral taxpayers.   Indeed. The fiscalization and Hellenization of the crisis — the insistence by European officials that it’s all about fiscal irresponsibility, and that Greece is the exemplar of everything that went wrong — is a sight to behold, and not a pretty one. Let’s look at debt levels and deficits on the eve of crisis: Yes, Greece had big debts and deficit. Portugal had a significant deficit, but debt no higher than Germany. And Ireland and Spain, which were actually in surplus just before the crisis, appeared to be paragons of fiscal responsibility

Greece Suggests EU/IMF Repayment Extension - Greek Finance Minister George Papaconstantinou suggested on Monday that the EU and the IMF give Greece more time to repay its bailout funds, and at a cheaper rate, to allow it to exit its severe debt crisis. In an interview with French daily Liberation published a day ahead of an inspection visit by the lenders, Papaconstantinou became the first Greek official to float the idea of a further easing of conditions on the 110 billion rescue. The EU cut the interest rate and rescheduled repayments on the bailout in March to give Athens some breathing space. Reiterating that Greece ruled out a restructuring of its debt, despite markets increasingly betting it will eventually have to do so, Papaconstantinou said: "It would be better that we further lengthen the repayment schedule of the 110 billion euros that our partners have lent us and that we further lower interest rates.That way, we could meet our other repayments."

Will Europe socialize Greek losses? - Guggenheim’s Scott Minerd, speaking at the big morning panel discussion which kicked off this year’s Milken conference, laid out a simple case for how the next crisis could arise: When you look at Greek assets, about 55% of bank capital in Portugal is exposed to Greece. And 83% of bank capital in Ireland is exposed to Greece. So it’s pretty clear that if we restructure Greece, we will severely damage the banking systems of Ireland and Portugal. And the big exposure to Ireland and Portugal is in Spain. Ireland represents 138% of the capital of the Spanish banking system, and Portugal represents 133%. And if we take out Spain, Spain represents 94% of the capital of the German banking system. And I’m not adding these numbers up. You see how it’s very easy to get a scenario going in Europe where the dominoes start to fall and it causes a crisis. Greece is going to restructure, and when that happens (not if), creditors are going to take some kind of haircut. The buffer in Minerd’s scenario is Ireland: since the banks have all been nationalized anyway, their debt won’t necessarily get downgraded just because their capital is wiped out.

ECB Official: Extension of Greek debt maturities possible - From Reuters: ECB official open to extending Greek debt maturities  European Central Bank policymaker Nout Wellink said on Monday that he was open to the idea of extending maturities on Greek debt ...  Wellinck said: “Restructuring is essentially saying: 'Send me the bill. We feel sorry for you.' You shouldn't do that. Paying the bill hurts.  “It may sometimes take longer than expected. It can sometimes lead to a restructuring - but not in the way some advocate it to be - that ... leads to a longer maturity of debt .” This isn't the official position, but some sort of restructuring seems priced in with the yield on Greece ten year bonds at 15.7% today and the two year yield up to 25.9%.

Government Revenues and Spending - One of the problems that plaugues discussion of the Irish public finances is there is a fairly widespread confusion over how much the government takes in as revenues and how much it spends.  Many people know that the figure for “tax revenues” has been about €30 billion in recent years, via press coverage of the monthly exchequer returns. (See here for the 2010 end of year exchequer returns showing €31.7 billion in tax revenue.) Many people also know that we have run deficits of close to €20 billion in recent years.  Together, these two facts have lead to the wide repetition of statements along the lines of “we are taking in €30 billion and spending €50 billion.” It turns out however that a more accurate description of the Irish public finances has been the government has been taking in about €50 billion and spending about €70 billion. This pattern is hard to assess from looking at the Exchequer statements because, for example, they do not count the €11.4 billion in “social contributions” such as PRSI as taxes

Irish default now more likely after gloomy economic news - Ireland’s financial woes are getting worse instead of better with a default more likely that ever – but Prime Minister Enda Kenny has again vowed not to cut public sector pay at any cost. Latest figures show that cuts of up to €5billion – and not the forecast €3.6billion – will be needed in the December budget. Growth rates for the Irish economy in 2011 have now been slashed to less than 1% while the government’s tax take is also down on expectations. Leading economists are warning that an Irish default on the EU-IMF bailout is far more likely according to the Sunday Independent. The paper also reports that a confidential memorandum sent to all government departments this weekend features Kenny’s pledge not to cut pay for civil servants

Irish Deficit Widens 41% to 9.9 Billion Euros on Bank Costs -  Ireland’s budget deficit widened by 41 percent in the four months through April from a year-earlier period on bank-recapitalization costs.  The deficit of 9.9 billion euros ($14.7 billion) compared with a shortfall of 7 billion euros a year earlier, the Finance Ministry in Dublin said in a statement on its website today. Tax revenue increased 6.7 percent on the year.  The increase in the deficit was primarily due to 3.1 billion euros in payments to Anglo Irish Bank Corp. and Irish Nationwide Building Society, the ministry said.  Ireland’s government last week raised its estimate for the general government deficit this year to 10 percent of gross domestic product from 9.4 percent.

State pension fund sells off investments to help cover bailout costs - THE National Pensions Reserve Fund (NPRF) was forced to sell some of its investments in the past few months to help cover the costs of the €85bn bailout, it emerged yesterday. The pension fund reported it held only €5.3bn in its so-called discretionary portfolio at the end of April. This was down from €9.8bn in assets a month earlier, as it liquidated investments to help cover the cost of bailing out the banks. Up to €10bn is to be put up by the pension fund as part of the bailout deal agreed with the European Union and IMF last November. The NPRF also said the value of its so-called directed portfolio, which includes €7.9bn the Government has provided in aid to AIB and Bank of Ireland in return for shares in the lenders, was €13.4bn at the end of March. There was €5.5bn in cash, representing liquidated investments to help the State meet its contribution to the EU/IMF bailout. The total fund size at March 31 was €23.2bn."

Geithner Blocked IMF Deal to Haircut Irish Debt - Yves Smith - Was the US Treasury Secretary’s deep sixing of a plan by the seldom-charitable IMF to give the Irish some debt relief Versailles redux? By that I mean the Treaty of Versailles, the agreement at the end of World War I devised by the victors to dismember the German economy. Bear with me as I tease out this conceit.  When most people think of the punitive deal, which most see as the cause of economic and social dislocation in Germany that fueled the rise of the Nazis, they focus on the unrealistic reparation payments without looking at the specific provisions intended to strip Germany of assets and productive capacity. Geithner is as doctrinaire and short-sighted a defender of bankers’ privileges as the Allied Powers were of their rights to make Germany pay for the costly and bloody Great War.  We had noted that the Irish could have stared down the EU and held out for a bailout of its banks only, and were mystified at the quick capitulation. Consider this section of a very instructive op-ed by Ireland’s highly respected economist Morgan Kelly in the Irish Times:

Morgan Kelly writes from Ireland - The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.” The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

Portugal needs over 100 billion euros in aid - report - - Portugal needs over 100 billion euros (89 billion pounds) in EU/IMF loans, including up to 10 billion euros for its banks, but there are doubts whether Brussels will allow the bailout to exceed its initial target of 80 billion euros, Diario Economico newspaper said on Tuesday. The business daily said the technical team from the European Commission, European Central Bank and International Monetary Fund working in Lisbon had concluded that the country needed more funds than initially stipulated by Brussels.  It did not cite any sources. The newspaper said the banking sector required 5.3 billion euros to cover a hole left by failed bank BPN, as well as additional funds to help banks raise their capital ratios. BPN was nationalised in 2008.

Portugal Agrees on Aid Plan With Wider Deficit Targets - Portugal reached an agreement with officials preparing its European Union-led bailout that will provide as much as 78 billion euros ($116 billion) in aid and allow more time to reduce the country’s budget deficit.  The three-year plan set goals for a budget deficit of 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013, Prime Minister Jose Socrates said in Lisbon today. The government in March targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.  “The government was able to obtain a good agreement,” Socrates said in comments broadcast live from his official residence. “Naturally there are no programs of financial assistance that are not demanding and that do not imply a lot of work. That does not exist.”

Portugal’s leading politicians endorse austerity package as part of $115 billion bailout plan -  Portugal’s three main political parties have given their blessing to new austerity measures in return for a €78 billion ($115 billion) bailout. The parties, which together are forecast to collect around 80 percent of the vote in next month’s election, say ailing Portugal has no other choice.Authorities have said the country won’t be able to meet debt repayments due in June. The International Monetary Fund and Portugal’s European partners are putting up the money as they did for Greece and Ireland. The center-right Social Democratic Party and Popular Party gave their consent to the bailout package late Wednesday. The outgoing Socialist government had already accepted it.

Portugal's workers rally against IMF intervention - Tens of thousands of Portuguese held two large rallies here on Sunday, protesting against what they called the intervention in their country by the International Monetary Fund (IMF). The General Confederation of Portuguese Workers (CGTP) and General Workers Union (UGT) rallied in Lisbon separately amid the economic crisis in Portugal, which has requested IMF's financial aid to avoid bankruptcy. Manuel Carvalho da Silva, secretary-general of the left-wing trade union federation CGTP, announced another two rallies to be held against the IMF measures that will cut social expenses. "We invite the workers, the youngsters, and the retired people for the rallies that we organize against these measures they want to impose on us,"

Portugal reportedly negotiates bailout - Portugal has negotiated an international bailout worth 78 billion euros ($116 billion) over a three-year period, according to reports published Tuesday. The bailout includes aid for Portugal's "cash-strapped banks," the Associated Press reported. Portugal is the third euro-zone member, after Greece and Ireland, to be forced to negotiate a bailout as a result of crippling debt. The Wall Street Journal reported that Prime Minister José Sócrates said the bailout deal will not require the privatization of Portugal's social security.

Surely this will solve the problem - PORTUGAL'S government has agreed a €78 billion bail-out deal with the European Union and the IMF that will buy the country (a little) time. The funding will be dispersed over quarterly over a three-year period, provided that Portugal meets its stated goals for deficit reduction. The money will be used to refinance debt that's due to come due over the period and to shore up Portugal's banks. The need for the deal was made abundantly clear by a short-term debt sale this morning. Yields on the debt rose from the last sale, in April, and demand for the issuance fell. This, despite the promise of a deal. Longer-term yields have come down a tad in the wake of the agreement, but still remain unsustainably high. And no surprise: Portugal's economy will likely contract this year and next, which will make the closing of the deficit gap incredibly difficult

Third time lucky for Portugal - and the eurozone? - What's the difference between a developing country financial crisis and a European one? The answer is that emerging market crises are usually done and dusted in a matter of weeks - whereas in Europe they really like to drag things out.  Watching the eurozone these past two years has been like watching a car crash in really, really slow motion.  It was more than two years ago that senior policy makers - on both sides of the Atlantic - started worrying about a European "leg" of the financial crisis that peaked in the autumn of 2008. European policymakers were urged to think long and hard about the state of their banks, and the deep financial and economic imbalances that had built up in the first 10 years of the single currency - and how they would respond, if and when, these vulnerabilities came to a head.  Now Portugal is the third eurozone country to be asked to resolve the single currency's contradictions the hard way.  Unlike the other countries in the mix, Portugal does at least have recent experience of negotiating with the IMF. This will be its third emergency loan from the Fund in the past 34 years.

Portugal brags about EFSF terms -- The big news story this morning is that Portugal agreed a €78bn bailout with the European Union and the IMF yesterday. Details will follow today, after the other parties have been informed. What is clear already is that the deal gives Portugal more time to reduce its deficit: The three years plan sets out Portugal's new deficit targets of 5.9% of GDP this year, 4.5% next year and 3% in 2013 (The existing plan was 4.5% this year, 3% next year and 2% in 2013). According to Reuters, the interest rate would be set by EU ministers on May 16.  José Sócrates said in a television address on Tuesday night the deal was demanding, but indicated that the terms were not as tough as those agreed with Greece and Ireland. The EU and IMF had recognised that “the situation in Portugal is far from being [as serious] as in other countries,” he said according to the FT. “Knowing other external assistance programmes, Portugal can feel reassured.” (So he is presenting this ass a contest about the best terms. The Greeks and the Irish will certainly not be delighted. Other renegotiation claims are sure to follow.)

Portugal agrees asset sale in return for €78bn bail-out - Portugal has agreed to sell off the government's stakes in some of its best-known companies in exchange for a €78bn (£70bn) bail-out provided by the European Union and International Monetary Fund.  Stakes in companies including TAP, the national airline; Galp, the oil giant; EDP, the utility firm; and REN, the electricity grid operator, will all be sold over the next two years. BPN, the failed Portuguese bank, will be sold with no minimum price set by the end of July.  The conditions of the package, that were revealed on Wednesday following the agreement announced late on Tuesday night by José Sócrates, Portugal's caretaker prime minister, also focused on rescuing the banks. About €12bn of the total €78bn must be pumped into the banking sector and to boost core tier one capital levels from 8pc to at least 10pc over the next 18 months. The EU and IMF will provide the funds in the form of loans which will run until 2013, after which Portugal is expected return to markets to finance itself. The interest rate on the loans will be set by European finance ministers at a meeting within the next couple of weeks.

Portugal Says Economy Is Poised to Contract 2% This Year Under Added Cuts - Portugal’s economy will shrink twice as much as forecast this year as the government implements additional austerity measures to qualify for an international aid package of as much as 78 billion euros ($116 billion).  Gross domestic product will decline 2 percent both in 2011 and 2012, Portuguese Finance Minister Fernando Teixeira dos Santos forecast today at a press conference in Lisbon to announce the bailout agreement with the European Union and the International Monetary Fund. That compares with the government’s March projection that GDP would shrink 0.9 percent this year and expand 0.3 percent in 2012.  Portugal resorted to the EU-led bailout after parliament rejected the government’s latest round of spending cuts and tax increases to tackle the budget deficit, prompting early elections. The budget measures, which include freezing public- sector wages and cuts in pensions and jobless benefits, have sparked protests, with public workers planning another one-day strike tomorrow.

Has Socrates misrepresented the agreement? The actual memorandum suggests harsh tax increases, and a two year economic contraction. - The Financial Times has seen a copy of the agreement, which apparently includes a freeze on public sector pay and pensions until 2013, and a special tax on pension of €1500 or more. The memorandum also includes a forecast of an economic contraction of between 1.5 and 2% in each 2011 and 2012 (a sudden emergence of some realism after the crazily optimistic projections for Greece and Ireland). The paper said that Socrates’ relatively upbeat interpretation was entirely due to the forthcoming election, and that Portugal would face a very hard adjustment under the programme. A large part of the agreement focuses on economic reforms to raise the country’s low productivity. The measures include cuts in dismissal pay from 30 days per year worked to 10 days, and welfare benefits would also be subject to tax.  A privatisation programme is to raise over €5bn over three years. Municipal taxes will also rise.  Reuters has the story, based on a comment from an EU source that some details of Portugal's EU/IMF bailout are still being finalised, and that the final package will be between €75bn and €90bn. The precise amount would depend on how much assistance the banks need. Portuguese PM Jose Socrates announced previously that Portugal would receive €78bn, with €12bn earmarked for the banks.

Portugal learns terms for $115 billion bailout -  Portugal will get IMF loans at rates similar to those granted to Greece and Ireland, officials said Thursday, but Lisbon is still waiting for fellow European countries to decide how much they'll charge for their slice of a euro78 billion ($115 billion) bailout. The interest rates on the huge loan are a crucial aspect as the ailing country struggles to get free of its massive debts, and Portuguese officials were keen to avoid bailout terms that might thwart economic growth needed to create jobs. Both Greece and Ireland, the two other debt crisis victims, chafed at what they complained were punitive rates on their bailouts agreed last year. They said the payback terms and deep spending cuts were hurting attempts to restore their fiscal and wider economic health. Portugal will have to pay interest rates between 3.25 percent and 4.25 percent for the International Monetary Fund's portion of its euro78 billion ($115 billion) bailout, a senior IMF official said. Those are close to the ones provided to Athens and Dublin.

Ways of Treading Water: Eupdate Portugal - Every so often, I want to blog about something other than the EU debt/banking/ fiscal/political crisis, but the continuing loopiness leaves me little choice but to launch a series:  Welcome to Eupdate. Two things have happened in the Eurozone since my last pre-Eupdate update:  Portugal has asked for and negotiated a rescue package, and Greek restructuring rumors have gotten out of control.  Both nicely fit into the dominant theme of treading water, but present interesting variations on the theme.  I elaborate on Portugal below; I address Greece in a separate post. Portugal asked for help when its banks staged a buyer's strike at a government debt auction on April 6.  The timing was awkward, since the government in power has no capacity to make policy commitments pending an election it is likely to lose on June 5.  The day the news broke, headlines blamed greedy banks.  I poked around to see what they had been doing for the past year or so--turns out they were busy loading up on government debt, so much so that the banking system's holdings of said debt doubled since the start of the crisis.  Treading Water 1.

Mr. Draghi, Mind the Periphery - President Jean-Claude Trichet is stepping down and the appointment of a new President (likely Mario Draghi) is focusing attention on the big question of what exactly the ECB – as an institution – is mandated to do. While the ECB has so far resisted calls to emulate the Fed’s program of quantitative easing, it has taken part in a number of controversial credit operations. As Desmond Lachman notes, the ECB’s interventions have gone well beyond its mandate of price stability, and have extended to propping up insolvent European “peripheral” countries, as well as the banks lending to these countries.The ECB has purchased over $100 billion dollars in European peripheral sovereign debt, and has recently been working to establish a European Stability Mechanism designed to push more fiscal resources in the event of further crisis (e21 has discussed that fund here). However, as Lachman points out, the ECB has also lent over $550 billion dollars to struggling countries like Ireland through its discount facilities. These funds represent risks that are ultimately backstopped by European taxpayers, but have been approved without the support of any national parliamentary body.

Merkel’s quid pro quo for Draghi -- Der Spiegel has the story that Angela Merkel’s silence on Mario Draghi’s candidacy for the ECB presidency is explained by heavy horsetrading behind the scenes. The German chancellor wants to extract substantive concessions for supporting the Italian central bank governor. First she would like Jörg Asmussen, Wolfgang Schäuble’s influential state secretary at the finance ministry to head the Economic and Finance Committee (EFC), the powerful steering committee for the Eurogroup and Ecofin meetings. Secondly she wants Jens Weidmann, who is officially inaugurated as the Bundesbank president today, to succeed to Draghi as the chairman of the Financial Stability Board (FSB). Thirdly she wants to impose a very restrictive line in the ongoing technical discussion surrounding practical matters at the ESM such as what majorities are required to take what kind of decisions and whether the ESM can create new rescue instruments for troubled Euro states in its own authority.

Weidmann ascends to the throne - The main eurozone news of the day was the inthronisation of Jens Weidmann as president of the Bundesbank. The new central banker made it clear in his first speech that he will not deviate from the Bundesbank’s stability culture. Adressing “dear Wolfgang Schäuble” the new president announced that he would soon participate in the government’s discussion on the draft budget 2012 where he would have all his attention focussed on the fact, that the government uses “the very good economic and budgetary developments for a speedy reduction of the deficit”. While acknowledging that financial stability had become an important aim for central banks after the crisis he stressed that the primary goal remained prize stability. “On this point there must not be any compromises for central banks”, he stressed. According to Weidmann the crisis had created the wrong incentives and therefore the exit from the special measures and the normalisation of monetary policy remains a priority.

Will the ECB be ahead of the curve or behind it? - HERE'S the big economic news out of Europe today:Factory-gate prices in the euro region jumped 6.7 percent from a year earlier, the fastest since September 2008, after a 6.6 percent gain in February, the European Union’s statistics office in Luxembourg said today. Economists had projected a March increase of 6.6 percent, according to the median of 13 estimates in a Bloomberg news survey. In the month, prices advanced 0.7 percent. European companies are trying to pass on higher input costs, including a 31 percent oil-price jump in the past year, just as the economic recovery appears to be faltering. That has helped push consumer-price inflation above the ECB’s 2 percent limit. The central bank last month raised interest rates for the first time in almost three years. The ECB has already raised rates and is strongly signaling that additional rate increases are likely. Europe's central bankers seemingly hope to get ahead of the inflation curve; while the Fed and the Bank of England have been reluctant to tighten amid economic weakness, the ECB has not, and so while the Fed and the Bank of England may eventually face serious inflation problems, the thinking seems to go, the ECB will not.

More Reasons to Say "Eeh" When You Learn About the ECB - Krugman -- Kevin O’Rourke directs us to a very good post that refers to evidence from the gold standard era on the advantages of a little inflation for a currency union — and the problems with tight money.  The post is in German, but Google Translate does a good enough job for you to follow the argument — and I actually sort of like how it comes out: What follows all this for today? The ECB may solve the euro crisis easier or more difficult to make, depending on the accommodative or restrictive in its monetary policy.…But (according to the inflation target of the Bank of England) at an average euro-zone inflation of 2.5 percent would wage freezes in Greece, Ireland and Portugal allow nearly twice as fast real depreciation as at 1.5 percent-that is, these countries develop their competitiveness could double the quickly recover. . I said much the same thing a while back. There’s a fairly strong argument to the effect that the creation of the euro was a mistake, because it left no good way to respond to asymmetric shocks. What’s definitely clear is that the mistake, if there was one, is compounded by saddling the eurozone with a tight-money-biased central bank.

Europe Is Running A Giant Ponzi Scheme - One of the pillars upon which the euro was established was the principle of “no bail-out”. When the sovereign debt crisis hit the eurozone this principle was ditched. As Greece, Ireland and Portugal were unable to service their unsustainable levels of debt, a mechanism was instituted to supply them with the financing necessary to service their obligations. This financing was provided, supposedly, in exchange for their implementing measures that would make their, now higher, debt burdens sustainable in the future. Yet the mode adopted to resolve the debt problems of countries in peripheral Europe is, apparently, to increase their level of debt. A case in point is the €78bn ($116bn) loan to Portugal. It is equivalent to more than 47 per cent of its gross domestic product in 2010, possibly increasing Portugal’s public debt to about 120 per cent of GDP. It could be claimed that this mechanism is helping the countries involved since the official loans, although onerous, carry better conditions than the ones that need to be serviced. But the countries’ debts will increase (as a percentage of GDP the debts of Greece, Ireland, Portugal and Spain are expected to be higher by the end of 2012 than at the start of the crisis). The share of debt owed to the official sector will also increase (in addition to the bond purchases by the European Central Bank, which reportedly owns 17 per cent of these countries’ bonds with a much higher percentage held as collateral).

Greek 'Soft Restructuring' to Precede 'Hard' One - A request for an extension to the repayment period on Greece’s bailout loan from the International Monetary Fund and the European Union could be a precursor to the full restructuring of the country’s debt, analysts say.  George Papaconstantinou, Greece’s finance minister, told a recent press conference that his government had no intention of restructuring its debt or negotiating a haircut on outstanding bonds.  But in an interview published on Monday in Liberation, the French newspaper, he called for an extension to the repayment period and a reduction in the interest paid on the 110 billion ($160 billion) loan from the International Monetary Fund and European Union that rescued the country from bankruptcy in May 2010. The country has already been given one extension – from three to seven and a half years – and a one percentage point average cut in the interest rate, down to four percent, in March.  Analysts say that, despite assertions to the contrary, an extension is likely to be a precursor to a full restructuring.

Greek measures may push default pain into 2012 -- Investors anticipating a Greek default may be waiting into 2012. Greek policymakers are unlikely to ask bondholders to take writedowns in the next six to 12 months to avoid losses at banks and triggering contagion, said Pavan Wadhwa, the London-based head of global interest-rate strategy at JPMorgan Chase and Co. They may opt instead for less disruptive measures such as lengthening the repayment period, according to analysts at Deutsche Bank AG and Rabobank International."None of the options Greece has in front of it are costless, and the most likely scenario is that it muddles along for now," Wadhwa said. "The cost of restructuring its debt is unknown and could be large, compared with the cost of bailing it out further."Greek bond yields and the cost of insuring the country's debt against default rose to records last week, rekindling speculation that a debt write-off or extension of repayment timelines will be the way out of the country's fiscal quagmire.

Greek Debt Talks Widen Divisions in the Euro Zone - Divisions in the euro zone are deepening over how to handle Greece's suffocating debt burden, with German officials open to a voluntary restructuring of Greek bonds but a majority of euro-zone policy makers fearful of the consequences. Europe's line has been that Greece will slash its outlays and repay all of its debts. But investors and, in private, some European governments increasingly doubt the country can. In that case, Greece will need more aid and, many believe, will have to restructure its debts. The debate in the euro zone is about whether and how to restructure.

Five ways to correct the Greek debt crisis - By Mohamed El-Erian This piece is the English version of the one that appeared in Handelsblatt. The opinions expressed are his own.  Not a day goes by without a flood of comments on Greece and its debt problems. They seem to come from everywhere. Some are later denied while others are left to stand, accompanied by a continuous string of worrisome data. In the process, even greater disorder is gaining hold of the country’s debt markets, with credit spreads exploding in an ever more alarming fashion. There is a risk that all this could serve to confuse rather than illuminate the key issues that should be on the radar screen of many, whether they are policymakers or normal citizens. I can think of five such issues.

The problems with a Greek “light dusting” -- According to Christopher Whittall, “a consensus has grown among market participants that authorities will look to avoid triggering CDS when restructuring Greek bonds”. Recall the inimitable language of Lee Buchheit, in his latest paper on how Greece might restructure: The EU’s post-Deauville assurance that there will never be a restructuring of an existing Eurozone sovereign debt instrument (at least until 2013) presents something of an obstacle to any pre-2013 restructuring of Eurozone sovereign debt instruments. The face-saving solution may be linguistic. A voluntary liability management transaction undertaken by the debtor country before 2013, the argument goes, is not a “restructuring” as that term was used in the post-Deauville assurance. Restructuring, it may be claimed, connotes a degree of coercion on the affected creditors. But if the creditors themselves elect voluntarily to participate in a liability management transaction to improve the creditworthiness of their debtor, who in the official sector can or should gainsay that decision? This is pretty much the same idea underlying the cunning plan to restructure without triggering CDS:

Greece Debt Restructuring Would Be A Disaster, Officials Warn: "Greece insisted on Tuesday any restructuring of its debts would be a disaster for the economy, but financial markets continue to view it as likely and are betting that the euro zone debt crisis will worsen. In Portugal, European Union and International Monetary Fund experts pursued negotiations over a bailout with Lisbon's caretaker government, with one newspaper that the headline figure could end up being substantially higher than expected. A year and a day since the EU and IMF agreed to extend Greece 110 billion euros ($163 billion) in loans in exchange for deep structural adjustments to its economy, the finance minister again dismissed growing suggestions that Athens will have to restructure its debts, which are set to hit 150 percent of annual output, or around 340 billion euros, this year. 'A restructuring, haircuts on debt, would be a huge mistake for the country,' Finance Minister George Papaconstantinou told state television as EU and IMF inspectors began a new visit to assess if the government's austerity plans are sufficient. 'It would have a very big cost and we would not have the benefit, we would stay out of markets for 10-15 years, the wealth of Greek pension funds would suffer writedowns, we would have problems in the banking system and hence the real economy.'

Ways of Treading Water II: Eupdate Greece - A year ago, back when the Greek government debt crisis officially became the Eurozone gestalt crisis, I speculated that Greece would not launch a debt restructuring any time soon.  I hereby officially change course.  There may well be a restructuring, and it will do no one any good.  I am skeptical not because I thought then, or think now, that Greece is solvent.  I had and have no idea, though Greek debt numbers look worrisome by most conventional metrics.  Rather, I am skeptical because the dominant proposal on the table--a lengthening of maturities with no net present value reduction (a "light dusting")--does precisely what EU politicians can do and have done perfectly all by themselves:  Tread Water. To be sure, there are elegant legal ways about it, which will be matched by investment bankers doing their own elegant thing--but both need a theory of the case.  If Greece is insolvent, reduce the debt and recapitalize the banks that hold it.  If it is illiquid, keep giving it EU/IMF Lender of Last Resort money.  Is it really the Finns? For all its light benefits, a light dusting would come with nontrivial institutional costs:  for one, getting central banks formally involved in a debt restructuring.

PIG out? -  I DON'T yet know what to make of this, but Der Spiegel has a scoop here: Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency. Alarmed by the attempt, the European Commission has called together a crisis meeting in Luxembourg on Friday night. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles. Greece is insolvent, and it clearly needs to restructure its debts. Even as it does this, it runs a deficit, which means that absent access to capital markets (and it will lack access to markets for the forseeable future) it must continue with austerity. Fearing a potentially ugly restructuring, some depositors have been pulling money from Greek banks, threatening the system with dissollution.

Athens Mulls Plans for New Currency: Greece Considers Exit from Euro Zone - SPIEGEL ONLINE - News - International: "The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night. For reasons of data protection and privacy, your IP address will only be stored if you are a registered user of Facebook and you are currently logged in to the service. For more detailed information, please click on the 'i' symbol. Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency. Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

Is This It? Implications of Greece Leaving the Eurozone - Der Spiegel says Greece is about to restructure its debt and leave the eurozone: And here's one political dynamic: The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least 40 billion euros ($58 billion) "Given its 27% share of ECB capital, Germany would bear the majority of the losses," the paper reads. In short, a Greek withdrawal from the eurozone and an ensuing national default would be expensive for eurozone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged 110 billion euros ($159.5 billion) in aid to Athens - half of which has already been paid out. "Should the country become insolvent," the paper reads, "eurozone countries would have to renounce a portion of their claims." In other words, now that Greece has received funds from the EFSF there is domestic political pressure from citizens in the eurocore to keep them in the monetary union, if only to get their money back. Interesting. I've blogged a lot about this recently. In the past week or so I've written about it here, here, here and here. Near the end of the most recent of those I summarized some IPE research on fiscal crises, fixed exchange rates and propensity to devalue/default and concluded:

-Greece denies may quit euro, European ministers meet (Reuters) - A small group of European finance ministers was meeting on Friday to discuss the euro zone debt crisis, official sources told Reuters, as Greece denied a media report that it was considering whether to leave the bloc. European official sources told Reuters that finance ministers from a handful of the largest euro zone countries were meeting privately in Luxembourg to talk about issues including the severe sovereign debt problems of Greece and Portugal. German Finance Minister Wolfgang Schaeuble and his deputy Joerg Asmussen were at the meeting, a source in Germany's ruling coalition said. The meeting was not publicly revealed in advance, and the identities of the other officials attending were not known. Germany's Spiegel Online reported the ministers would discuss the possibility of Greece withdrawing from the 17-member euro zone, as well as the idea of Athens restructuring its 327 billion euro ($470 billion) sovereign debt.

The beginning of the end of the beginning - Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night. Story here, and I do believe this rumor.  For the pointer I thank the excellent Catherine Rampell.  Here is my recent column on this issue, it applies very directly.  Unless this rumor ends very quickly, it means a run on a number of different countries.

Euro Whacked by Reports that Greece May Leave the Eurozone? - Yves Smith - The Euro has fallen from roughly 1.49 to the dollar to 1.43 in a mere two days, which is a huge move. Many pundits have argued that the ECB’s newly accommodative stance is the trigger, but there may be additional forces at work. Most experts have deemed the idea that any eurozone member would exit the currency to be simply inconceivable, that it would be too costly and disruptive. But with the hair shirt that Greece is being asked to wear, all bets may be off. As of this juncture, this reports in Der Spiegel does not appear to have gotten traction among the Usual Suspects in the MSM. Headline: “Greece Considers Exit from Euro Zone”   So what will they do if Greece refuses to observe niceties and bolts anyhow? Send in tanks? I’m curious as to what punishments might be visited on Greece if it chooses to exit. Iceland had a very rocky six months when its banking system failed but it is now on track for a solid recovery. This example cannot have been lost on Greece.  This “you’ll never borrow again” threat is greatly exaggerated. In fact, investors like borrowers who have cleaned up their balance sheets. That’s why Chapter 11 works. Argentina’s default and end of dollarization proved salutary, with the country now performing better on virtually every economic indicator than its Latin American peers.

Here’s How Much German Banks Are on the Hook To The Periphery For -  The rumours out of Germany that Greece is considering withdrawal from the euro-zone are being denied vigorously by EU and Greek officials. But, where there is smoke, there is fire. Clearly, it is in Greece's best interest to allow these rumours to persist. Not only has it savaged the single currency, it also gives the Greeks leverage in terms of negotiating a better bailout package. Win Thin is right when he writes:it seems more likely that Greece may be playing a game of chicken with euro zone policy makers in order to negotiate a more favorable aid package, with perhaps an extension of duration on its debt, or loosening up of tough austerity measures. In other words, Greece is using the threat of a potential collapse of the euro zone as a means to get concessions from the core euro zone in attempt to quell the rising complaints of the Greek people. Both Greece and the euro zone will be worse off if they choose the scorched earth solution. From a game theory perspective, the question is whether the two sides can come up with a cooperative solution.

Ministers Meet to Study Fixes on Greek Debt - New moves to prevent the huge burden of Greek debt from overwhelming the country’s economy were discussed Friday during an unannounced meeting of a small group of European finance ministers, including those from Germany, France and Greece¹.  After the private gathering, the prime minister of Luxembourg, Jean-Claude Juncker, who heads the group of euro-area finance ministers, said that Greece’s financial assistance program “does need a further adjustment” and that it would be discussed at the group’s next meeting on May 16.  Mr. Juncker told reporters that European Union² officials were “excluding the restructuring option which is discussed heavily in certain quarters of the financial markets,” according to Bloomberg News. France, Germany, Italy and Spain were represented at the meeting in Luxembourg, which also included the president of the European Central Bank³, Jean-Claude Trichet⁴, and Olli Rehn, the European commissioner for economic and monetary affairs, Mr. Juncker said.  A spokesman for the Greek finance ministry did not respond to questions about the nature of the talks.

The Pain in Spain -- Krugman - Martin Wolf directs us to Paul de Grauwe (pdf) on the eurozone — a paper I wish I had written (there is no higher praise). De Grauwe focuses on the contrast between the UK and Spain. If all you knew about was debt and deficits, you would have concluded that Spain’s fiscal position was better than Britain’s: But the reality is that Spain is under serious market pressure, while Britain is not: The explanation, de Grauwe says, is that Spain is stuck in the euro straitjacket. As I’ve pointed out on a number of occasions, e.g. here and here, the collapse of the housing bubble has left peripheral European countries faced with the need to deflate relative to core nations; this means years of stagnation plus intensified debt problems.  De Grauwe adds an additional problem: the possibility of a liquidity crisis for a government that doesn’t have its own currency.

Trichet Signals Rate Move After June, Says ECB to Monitor Risks - European Central Bank President Jean- Claude Trichet signaled the bank will wait until after June to raise interest rates again, wrong-footing some investors who had expected a quicker move to fight inflation. The euro plunged. “We are never pre-committed and we can increase rates whenever we judge it appropriate,” Trichet said at a press conference in Helsinki today after the ECB left its benchmark interest rate at 1.25 percent. He refrained from using the phrase “strong vigilance” that would have signaled a June rate increase, saying only that the ECB will monitor inflation risks “very closely.”

Euro nations falter ahead of expected rise in interest rates - Europe's north-south divide has worsened as figures show Spain and Greece faltering, with rising unemployment and plummeting retail sales. Meanwhile the European Central Bank (ECB) is preparing to raise interest rates on the back of a booming German economy. Spain's unemployment rate jumped to a European record of 21.3% last month while Greece's retail sales dropped more than 10% year-on-year as both countries demonstrated the difficulties of spurring economic growth while implementing severe public spending cuts. Almost five million workers are out of work in Spain, according to official statistics, despite efforts by the socialist-led government to kick-start the economy and generate jobs. Youth unemployment remains above 40%. The gloom in Madrid was reinforced by retail sales data for March, which showed the country's sharpest decline for more than two years. Despite the problems facing Spain, Greece and other troubled eurozone nations, the ECB is expected to raise interest rates, possibly as early as next week, after inflation climbed to 2.8%. The inflation figure, published by Eurostat, the EU statistics agency, was up from 2.7% in March."

ECB: Clearing the way for an Italian hawk? - Jean-Claude Trichet was more dove-ish than expected in his press conference today after the European Central Bank's (ECB) latest meeting. The city was surprised, but Mario Draghi may come to be grateful.  You might not have taken Trichet for a dove, listening to his stern words about the "upside" risks to inflation. But in the strange world of ECB-watching these days, it's not what is said, but the precise words that are used to say it. To give a sense where this has got to, let me quote part of a note from Barclays Wealth, explaining why the ECB president's opening statement suggested that a June rate rise was not on the cards after all. (This is no dig to the author - I've received plenty of similar emails since Mr Trichet sat down.)  "The ECB's introductory statement did not include the phrase "strong vigilance". It did refer to conditions being "still accommodative". We had expected "very" accommodative to be used (as opposed to plain "accommodative" last time), and were not (on balance) expecting use of the phrase "strong vigilance".

Decoded the message is: not so fast - THE European Central Bank’s governing council held its main policy rate at 1.25% when it met today. That was no surprise given that the ECB had raised it, by a quarter of a point, just a month ago. What markets wanted to know was how soon the next rate increase might come. Working that out is an exercise in deciphering various code words used by Jean-Claude Trichet, president of the ECB. "Vigilance" signals an early move, "strong vigilance"—used in March—makes it all but certain the ensuing month. Describing the current stance of monetary policy as "very accommodative" suggests that a rate increase may be on its way before too long. Instead Mr Trichet chose to describe policy merely as "accommodative". What this suggests is that a follow-up rise in June is now unlikely and that one in July may be less certain than previously anticipated. There are two reasons why the ECB might wish to raise rates only gradually: the strength of the euro and the troubles of peripheral economies like Greece, Ireland and Portugal whose sovereign-debt woes have required bail-outs.

Not vigilant, with risks finely balanced - What happened at the ECB? There was no code-worded pre-announcement of a June rate rise, as the rhetoric of some central bankers seemed to suggest. No strong vigilance, once a desire to monitor inflation closely, which means that a rate rise is still at least two months away. The euro fell sharply on the news, and is now down from a peak level of over $1.49 to a little over $1.45 this morning. Apart from the lack of vigilance, the statement seemed less hawkish than some analysts had assumed. For example, Mr Trichet said the risks to growth and inflation were finely balanced, which suggests that the ECB is becoming more cautious. On the other hand, he said the risks of small peripheral countries play no role in the decision making process.  Mr Trichet did not come commit himself to a “normalisation” of interest rates, and made a pointed reference to the fact that he had not used such a word (in contrast, for example, to Jens Weidmann, the new president of the Bundesbank, who said that the only question about normalisation was not if, but when).

A peek into one of the deepest little cesspits in Europe - A squib from Bloomberg, quoting the German Newspaper Sueddeutsche Zeitung,"Munich prosecutors plan to file embezzlement charges against all members of Bayerische Landesbank’s former board...."Having the words "all former members" and "embezzlement charges" in the same sentence just makes my day. Ever since the worlds' banks told us they were suddenly short of liquidity, the authorities who were supposed to oversee them, have been even shorter on balls than the banks were on cash. In fact regulators in several countries appeared to have had theirs removed almost as a requirement for getting the job.        So the Bloomberg headline is a thing to behold. The only other thing the article says is that Beyerishe LB lost 3.7 billion euros as a result of acquiring, in 2007, the Austrian bank, Hypo Alpe Adria. Which economy of reporting covers over a manhole which leads down into what is one of the deepest little cesspits in Europe.

Goldman Cheats and Wins Again: Gets Special Treatment in UK Tax Abuse Settlement -  - Yves Smith - How does Goldman get away with it again and again? Is it simply bribery? Well, we don’t call it bribes in advanced economies, since big fish typically have more complicated and indirect ways of rewarding people who help them out, but it amounts to the same thing. Or do they have the five by seven glossies on people in key positions of influence? The latest sighting is in Private Eye, courtesy Michael Thomas. This is comparatively penny-ante stuff compared to other instances of Goldman winning at the expense of the general public. Here, the firm engaged in what is politely called a tax avoidance scheme: The scheme concerned an offshore “employee benefit trust” used to pay bonuses to Goldman’s London bankers, who for secrecy reasons are employed by a British Virgin Islands company called Goldman Sachs Services Ltd. In London they legally work on secondment to UK-based Goldman Sachs International. The trust, it was planned, would enable the bank and its bankers to avoid national insurance running to £23m through a convoluted share purchase arrangement. 21 other companies tried the same trick. HM Revenue & Customs got settlements from all of them in 2005 in large measure because court decisions on employee benefit trusts came down in favor of the government.

The Washington Post Confuses Economic Recovery with Fears of Insolvency: The Washington Post told readers that when interest rates on UK debt rose from 3.0 percent in 2009 to 4.2 percent: It was a sign that the country’s creditors were beginning to get nervous that the nation’s debt was becoming unsustainable." It doesn't tell readers how it made this determination. The more obvious explanation is that the UK economy had come out of the free fall that it and other major economies were in. During this free fall UK government bonds were one of the few trusted assets, which meant that they paid extraordinarily low interest rates. A 4.2 percent interest rate, which is less than 2.0 percent in real terms, is still extremely low by any historical standard. For example, the real interest rate on U.S. government debt was 2-3 percent in the late 90s when the government was running budget surpluses. Lenders usually demand far higher interest rates on assets to which they attach considerable risk...

Why British fiscal policy is a huge gamble - “I find the idea of expansionary fiscal contraction in the context of the world in which we now live to be every bit as oxymoronic as it sounds ... [I]f Britain enjoys a boom over the next two years ... I would be required ... to be quite contrite about the seriousness of the misjudgments that I am making. You can make a judgment – those of you who know me – how big a risk I would take of putting myself in a position of great contrition. You might therefore conclude that I am fairly confident this experiment is not going to work out well.”  Thus did Lawrence Summers, former chief economic adviser to Barack Obama, respond to a question on fiscal policy in an interview I conducted at the recent conference organised by the Institute for New Economic Thinking, in Bretton Woods, New Hampshire. Recent data on the UK support his scepticism, as Jonathan Portes of the National Institute for Economic and Social Research has also noted. This week’s preliminary data on gross domestic product in the first quarter of 2011 support my long-standing scepticism. UK growth of 0.5 per cent (2 per cent annualised) might seem tolerable compared with the US rate of 1.8 per cent. But the latter’s followed annualised 3.1 per cent growth in the fourth quarter of 2010, while the UK’s followed an annualised 2 per cent contraction. In the first quarter of 2011, UK GDP was much the same as in the third quarter of 2010. Worse, it was 4 per cent below its pre-crisis level, while US GDP was 0.6 per cent higher. The UK economy is in recession; the US has surpassed its pre-crisis peak.

If Austerity Weren't Enough, The UK Housing Market Is Starting To Slide Again: "It just keeps getting worse, and worse for the UK. More weak economic data this morning, with the Nationwide house price index showing a 2% decline in prices in the month of April. That follows two months of positive price growth. From Nationwide economist Robert Gardner: The price of a typical house fell by 0.2% in April, which left prices 1.3% lower than the same period of 2010. The three month on three month measure of house prices, a better measure of the underlying trend, showed a modest rise of 0.6%. Since November 2010 house prices have increased in three months and fallen in three months. However, it is not unusual to see a pattern of modest monthly increases and decreases when the market is fairly static, as has been the case since last summer. Continuing... Together with continued low interest rates, a gradual improvement in the labour market should help to provide support for housing demand, while limiting the number of forced sales. Nevertheless, a strong rebound in the market remains unlikely as the recovery is still expected to remain modest by historic standards. In our view, the most likely outcome is that house prices will continue to move sideways or drift modestly lower through 2011.