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

Saturday, June 4, 2011

week ending Jun 4


Fed balance sheet grows to record $2.79 trillion -  The Federal Reserve's balance sheet expanded to a record $2.792 trillion in the week ended June 1 from $2.78 trillion in the prior week, the central bank said Thursday. The Fed balance sheet continues to set weekly records as the central bank completes its plan to purchase $600 billion in Treasurys by the end of June.  Fed officials have begun to discuss how to shrink the bloated balance sheet, according to the minutes of their April meeting. Fed officials eventually want to return to holding only Treasurys and get the balance sheet back to pre-crisis levels, but some Fed officials believe the process could take five years. The Fed's assets and liabilities were only $870 billion in December 2007. The report shows that the Fed's holdings of Treasurys rose to $1.532 trillion from $1.519 trillion in the previous week. The Fed's holdings of mortgage-backed securities remained steady at $917.9 billion. Bank reserves rose slightly to $1.590 trillion from $1.589 trillion in the prior week.

US Fed Total Discount Window Borrowings Wed $13.72 Billion -The Fed's asset holdings in the week ended June 1 climbed to $2.793 trillion, from $2.779 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.532 trillion on Wednesday from $1.519 trillion. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window fell to $13.72 billion Wednesday from $14.27 billion a week earlier. Borrowing by commercial banks grew to $66 million from $7 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts increased to $3.439 trillion, from $3.429 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.695 trillion from $2.685 trillion in the previous week. Holdings of agency securities declined to $743.27 billion from the prior week's $743.42 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 2, 2011

Libor, Swap Spreads May Rise After Fed's QE2 Ends, Nomura Says‎ - -- The end of the Federal Reserve's Treasury purchases may cause U.S. subsidiaries of foreign banks to seek alternative means for dollar funding, boosting the London Interbank Offered Rate and widening interest-rate swap spreads, according to Nomura Holdings Inc.  Foreign banks with branches in the U.S. accounted for more than half of the increase in reserves during the so-called QE2, according to Fed data tracked by Nomura. From the start of the latest round of debt purchases last fall through February, foreign branches' reserves rose by $236 billion, while U.S. chartered bank reserves increased by $86 billion, according to Nomura. "It looks like the Fed is providing funding, indirectly, to foreign banks in what was once provided by the shadow banking system through the low funds rate and excess reserves," "The end of QE2 has the potential to reverse some of the financial accommodation in the system, which could result in higher Libor fixings and wider swap spreads."

Fed May Signal Balance Sheet Will Stay at Record Amid Slowdown - A wave of surprisingly weak data on the U.S. economy may spur Federal Reserve policy makers to support growth by making it clear they’re in no hurry to shrink the central bank’s record balance sheet.  There’s a “strong possibility” that the Federal Open Market Committee will say following the June 21-22 meeting that it will keep reinvesting proceeds from maturing debt for a while, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (JPM) in New York. Previously, the FOMC has said it will keep the benchmark interest rate near zero for an “extended period” without a similar pledge about its balance sheet.  Yesterday’s reports showing manufacturing grew at the slowest pace in more than a year in May and employers added fewer jobs than forecast prompted Feroli to cut his estimate for second-quarter economic growth. The slowdown may push policy makers to consider what options are left after their second $600 billion round of asset purchases sparked a Republican backlash. Saying the balance sheet won’t shrink immediately could dispel any notion that the Fed is about to push up borrowing costs.

Fed’s Pianalto: Policy Will Remain Accommodative --The economy will continue to travel a path of "gradual recovery" as the Federal Reserve keeps policy decidedly on the supportive side, a U.S. central bank official said Wednesday.  "The current accommodative stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the FOMC's dual mandate of stable prices and maximum employment," Federal Reserve Bank of Cleveland head Sandra Pianalto said.  She said she expects to see "annual growth just above 3% a year," and added "it could take about five years for unemployment to reach its long-run sustainable rate of 5 1/2 to 6%." Pianalto also said "I believe inflation will be temporarily elevated this year due to developments in oil and food prices, but I expect inflation to fall back below 2% in the next couple of years."

Fed’s Fisher: Additional Easing Isn’t Warranted - The Federal Reserve has done enough to spur economic growth and new steps to boost the economy aren’t warranted, Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview with The Wall Street Journal. His comments come amid speculation in financial markets that the Fed might decide to begin a new round of Treasury securities purchases following economic reports that suggest a slowing U.S. economy. “One would be very hard pressed to argue that we need to provide more,” Mr. Fisher said. “The Fed has done its job.” If the economy needs additional stimulus, he added, “it is going to have to come from someplace else.”

Kansas City Fed's Hoenig Sees Need to Lift Rates - A top Federal Reserve official says it is time to raise interest rates to avoid causing inflation and economic problems.Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in a CNN interview broadcast Sunday said the U.S. should learn lessons from the last decade when low interest rates ended up discouraging savings in the U.S. and causing economic problems."We have to think forward from here. And that is, what is the consequence of an extended period of zero interest rates for future years?" Mr. Hoenig said on CNN's Fareed Zakaria GPS. Mr. Hoenig cited inflation, but "imbalances in the economy" as problems that could arise from continuing low rates. Federal Reserve Chairman Ben Bernanke earlier in May outlined a plan to gradually raise its benchmark interest rate and take other actions to tighten credit. But the Fed hasn't signaled any plan to raise key interest rates soon. The Organization for Economic Cooperation and Development last week called on the Federal Reserve and other central banks to raise interest rates as inflation rates increase.

Taylor Rule Recommends Raising Rates - John Taylor - Over at Market Beat:'s inside look at the markets, Mark Gongloff reports that Standard Chartered’s David Semmens says that “Based on a strict Taylor-rule calculation, the first effective fed-funds rate increase shouldn’t come until the first quarter of 2013.”  And over at Business Insider, Art Cashin of UBS reports that Jim Brown of Premium Investor says that “the Taylor rule says the Fed funds rate should be -1.65%” suggesting the need for a QE 2.5. But no calculations are provided in either report. Over here at Economics One, I can report that the Taylor Rule says that the fed funds rate should now be 1 percent, and I can provide the calculations. Available data (through the 1st quarter) show that the inflation rate is about 1.6 percent (GDP deflator smoothed over four quarters) and the GDP gap is about 4.8 percent (average of San Francisco Fed survey). This implies an interest rate of 1.5 X1.6 + .5X(-4.8) + 1 = 2.4 - 2.4 +1 = 1.0 percent. I am not sure why other reports differ, but at least the coefficients and numbers are here to see and check.

Watching the Fed - I WOULD not have guessed that we'd be replaying last year's script here in 2011, but the similarities to the recovery and policy dynamic this year and last are striking. Last year, early signs of a strong recovery fizzled amid external shocks, and a long waiting game ensued as writers watched for hints of a Fed response while the economy slowly deteriorated. This year, early signs of a strong recovery seem to be fizzling amid external shocks, and writers are beginning to wonder whether the Fed will respond again. There are a couple of key differences, however. One is that the American recovery is better established this year than it was last year. The labour market, while still very slack, has been improving steadily.  The other key difference is the inflation environment. While core inflation in America is dormant and long-run inflation expectations actually fell from April to May, a rise in commodity prices pushed up headline inflation figures early in the year, leading some economists to call for tightening. At the New York Fed, Gauti Eggertsson says the Fed won't repeat the mistakes of 1937:

Is QE2 A Savior, Inflator, Or A Dud? - The Federal Reserve’s experiment with a second round of quantitative easing is nearing an end. Did it achieve its goal of lowering interest rates and stimulating the economy? Should we remember QE2 as a brilliant innovation, a central piece of the Fed’s future recession and deflation-fighting toolkit? Or is it the first step toward hyperinflation? When the Fed stops buying government bonds, will interest rates rise sharply because no one else is buying? The chart attached to the left shows how interest rates behaved through the QE2 episode.  In fact, QE2 didn't stimulate the economy, as the left had hoped, nor will it lead to the inflationary or bond-market disaster feared by the right. QE2 did basically nothing. But that is a deep and unsettling lesson: The Fed is essentially helpless in the current situation.

Economists predict no immediate end to government debt purchases - The latest incarnation of quantitative easing is ending at the end of June. However, economists say the Federal Reserve's $600 billion Treasury debt buying program, called QE2, may not be the last federal liquidity injection into the nation's monetary supply. Further, they say the removal of QE2 is not necessarily going to be a dramatic turning event. Economist Roger Meiners, a professor with the University of Texas at Arlington, says the day of reckoning has already come in a sense and some economists believe the government will have to continue buying debt regardless of whether or not it is referred to as quantitative easing. Several market observers say they expect a third round of government debt purchases. In an interview with HousingWire, Princeton economist Paul Krugman said he believes there should be a QE3, and that it should focus on private market debt purchases. "I'm in the boat the Fed isn't doing remotely enough," Krugman said. Both Krugman and Meiners expect any new government debt program to likely be much larger than previously seen.

Prepare for More Money Printing: Analyst - Investors should prepare themselves for a third round of quantitative easing, Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday. “The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”  What’s interesting in the bond markets over the last couple of sessions is, you’ve seen human traders trying to step in and call this turn in the market the same way that equities have done … and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up,” added Maughn. Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

John Taylor: "Next Year Is Going To Be Truly Miserable" And QE 3 Will Come - As usual, FX Concept's John Taylor (not the guy with the inflation rule, or the guy with the bass guitar) does not sugarcoat his views, and as disclosed by his latest outlook on the world, things, especially if there is no QE3, are about to get much worse: 'Next year is going to be pretty miserable.' The reason: the same one that caused us to predict, correctly, late in 2010 when we mocked Goldman's call for a US economic renaissance, namely that with the Fed blowing its wad on QE2 at a time when fiscal 'consolidation' was about to become the norm in Washington, that the impact of monetary policy would have an increasingly less pronounced impact. We are surprised by how few people still get it: that cutting deficits at the same time as monetary easing is ending, will be an unmitigated disaster for the economy, and, yes, eventually the markets: 'I'm afraid that the cutting the deficit means cutting final demand. It means the economy is going to slow. It might not be a bad thing to cut the deficit, but unfortunately, when you cut the deficit, you're going to get a slowdown. The more you cut the deficit, the worse it's going to be.' As a reminder, DC hopes to cut up to $4 trillion in future deficits. And this is happening as the president is entering the fight for his second term. Basically, his only reelection chance, now that Europe is fully austere and China is tightening is some miracle out of Japan (which will not happen), or, cue surprise, the Fed, and QE 3. Ironically, the only hope left for the administration is that "this time it is different" and the Fed can get it right. Which it can't. But it won't stop it from trying. Taylor agrees: "QE 3 will start or not? No. No more? Well, eventually it will start I would argue. I think the fed has to really see the economy printing minus numbers first."

Michael Pento: QE3 Is Inevitable (Video) Michael Pento makes a number of interesting points about the Federal Reserve’s balance sheet and the possibility of QE3 in this video.  Some of the points he makes include:

  • The Fed can’t aggressively sell it’s mortgage backed securities, they won’t be able to get the money back they paid for them.  This means the money they pumped into the system will probably just stay in the system.
  • Bernanke will likely wait to construct QE3 until economic data gets worse (which is already starting to happen)
  • The Fed has no easy way out of this.  If they tighten they risk deflation but if they continue to print we will eventually suffer massive inflation.
  • The total debt in the system between government, businesses, and households has never been higher in the history of this country.  This includes as a percentage of GDP and in nominal terms.  When you pay down that debt you get deleveraging and a shrinking economy.

Fed very unlikely to launch QE3: JP Morgan Chase - The Fed is "very, very unlikely" to launch another round of asset purchases because of the potential negative political fallout, Michael Feroli, economist at JP Morgan Chase, said Tuesday. Many members of Congress were incensed over the Fed's second asset purchase program of $600 billion in Treasurys that ends on June 30, with many members concerned the central bank's innovative policy would only lead to inflation. "The potential political fallout is so great that the Fed would be extremely reluctant to purchase more assets," Feroli said in a note to clients. This leaves the Fed with little ammunition to support the economy if growth falters, he said. The Fed would likely try to jawbone the markets by announcing that it was putting off plans to shrink its balance sheet or promising to keep interest rates low for longer, Feroli said. But the impact of these steps would be "quite limited" because the market already thinks the Fed is on hold, he said.

El-Erian: Why Fed Is Unlikely To Have Third Round of Easing - Today’s data releases confirm that the US economy has undoubtedly hit another soft patch. It is not the only one.  Other economies are also slowing or contracting—some as a result of budget austerity and others because they are tapping their monetary policy brakes to counter mounting inflationary pressures (China and other emerging economies).  With such broad-based economic slowing, and with unemployment stuck at very high levels and becoming more structural (and therefore protracted) in nature, market participants are asking whether the US authorities will again try to turbo-charge the economy.  So, will there be a QE3 program?   Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3. This view is based on an assessment of economic, political and international factors. As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference a few weeks ago, policy measures should be judged in terms of the expected balance of benefits, costs and risks.

To QE3 or Not to QE3 and Does it Matter? - There has been a lot of talk about whether the Fed will discontinue Quantitative Easing (QE) and let the economy stand (or fall) on its own legs this summer. As we explore this question, it’s important to keep in mind the Fed will continue reinvesting principal payments from mortgage-backed securities and maturing Treasury holdings to keep the Fed’s balance sheet in excess of $2.5T. Before the 2008 crisis, the Federal Reserve maintained a portfolio of between $700 billion and $800 billion of Treasury securities—an amount largely determined by the volume of dollar currency that was in circulation. The increased size of the Fed’s balance sheet is an attempt to support the ever-growing debt held within both the public and private sectors. If you understand this in the context of the bigger picture, it will help you anticipate future Fed actions.

Breaking News! QE II is not ending! -Tonight's subject is how QE II really works and why it is not ending. I realize that there are many other questions -- the effect of market perceptions, the apparent, but deceptive correlations, and even the effect of misperceptions.  I will take up these questions in due time.  For the moment, you can check out a summary of my past QE II articles. Let me start with a simple and more traditional illustration of Fed policy -- cutting interest rates.  As the Fed reduced rates, we would say that it was a cycle of easing.  If the Fed kept rates at a very low level, we would describe it as a continued easy money policy, not the end of easy money. The quantitative easing programs took place when the Fed had already exhausted the traditional rate cutting at the short end of the yield curve.  The Fed will complete the planned purchase of $600 billion in Treasuries by the end of June.  The purchases are the equivalent of interest rate easing.

QE-II MMMCLXXVI - Another edition of my diatribe on QE-II. Here I reply to Noah in comments who discussed debt deflation and also explain my guess about what happened going beyond the evidence. Why does expected inflation matter (so that we should be pleased at an increase in nominal interest rates not matched by an equal increase in real rates) ? I can see how the real interest rate matters (no sign of an effect -- literally I can't guess if the change is up or down). I can see how actual inflation can make a difference. But how does expected future inflation make a difference. One way is if someone has a 30 year fixed interest rate mortgage without the option to repay immediately (or a substantial penalty for early repayment). That person will consume less if expected inflation falls because the expected present value of interest payments will rise and they can't refinance.  I am sure that there is at least one such mortgage somewhere (there is at least one of everything). I'm not so sure there are a thousand. My understanding is that there are two possibilities -- fixed rate with option to repay and refinance and floating rate.

Did Unconventional Policy Responses to the Crisis Work? Evidence from a Cross-Country Analysis - NY Fed - The 2008-09 global recession produced a significant loss of output and a deflationary scare in many countries. The depth, scale, and duration of the crisis triggered monetary and fiscal policy actions that were “unconventional” in terms of their size and scope, leading to an ongoing debate over the role that these policy responses played in the stabilization process. How and to what extent were these policies effective? In this post, we examine cross-country experiences and find evidence consistent with the idea that the policies contributed to the stabilization process through their effect on expectations of output and inflation.   Why look at expectations? The three charts (below) show that although inflation expectations and output growth expectations deteriorated sharply in the aftermath of the Lehman collapse in September 2008, they did show signs of stabilization around March 2009. Furthermore, stocks and other risky assets experienced a rebound around that same time.

Wages, Expectations, and Prospects for Inflation - Cleveland Fed - Over the past six months, food and energy prices have risen at an annualized rate of 17 percent, prompting speculation of a possible price-wage spiral that will result in rampant inflation. A wage-price spiral occurs when wage earners start to demand higher nominal wages just to keep up with rising inflation (trying to hold real incomes constant). In turn, these wage increases raise the costs of production, which squeezes margins and induces business owners to raise prices. These even-higher prices then push wage earners to try and negotiate even higher wages, which again prods businesses to raise prices, and so on…resulting in a rapid run-up in inflation. For some, this argument may be a nonstarter, given that a wage-price spiral usually requires competitive (or “tight”) labor markets. In the absence of a tight labor market, the wage-earner will not hold enough bargaining power to be able to force the firm to acquiesce. With an unemployment rate at 9.0 percent and an employment-to-population ratio that has barely edged up from its current cyclical low, it would be hard to argue that labor markets are anything close to “tight.” Nevertheless, we have some data that might help spot this inflationary pressure, should the pace of economic activity quicken and labor market slack dissipate.

Should we even read the monthly inflation report? Maybe not. Then again...- Atlanta Fed's macroblog - In a recent issue of Economic Synopsis, our colleague Dan Thornton of the St. Louis Fed questions the usefulness of the traditional core inflation statistics—the consumer price index (CPI), or the personal consumption expenditure price index that strips out food and energy costs. Specifically, Dan asks whether the core inflation statistic is a better predictor of future inflation over the medium term (say, the next two or three years), than the headline inflation statistic. His conclusion is that: "[F]or the most recent period, there is no compelling evidence that core inflation is a better predictor of future headline inflation over the medium term." Well, of course neither writer of this blog post is on the FOMC, and equally obvious is the fact that we don't speak for anyone who is. Moreover, we're not very big fans of the traditional core measures, and we much prefer trimmed-mean estimators of inflation when thinking about recent price behavior. Nevertheless, we'd like to attempt an answer to Dan's call, even if it wasn't aimed at us.

Core Madness (Wonkish) - Krugman - Lorenzo Bini Smaghi has a spectacularly wrong-headed piece in today’s FT, offering some very badly framed arguments for using headline rather than core inflation to drive monetary policy. Among other things, as Brad DeLong points out, LBS seems confused about the difference between levels and rates of change. As it happens, the excellent David Altig has just posted some very useful analytics on core versus headline inflation. His question is, which backward-looking inflation measure should you look at if you want to predict headline inflation over the medium term, defined as the next 36 months. Here’s his graph:  This says that if you want to predict inflation over the next three years, you really don’t want to look just at inflation over the past 3 months or 6 months; you really want to look at inflation over the past three years. And if for whatever reason you want to use a shorter historical period — say, because you think there may have been some big policy shifts — you should use core inflation, not headline.

No, Atlanta and St Louis Feds, you can't test whether core is useful that way - Nick Rowe - This is frustrating me. People (e.g. the Atlanta Fed Macroblog, the St Louis Fed Economic Synopses (pdf)) still aren't getting it. What can I do to attract attention to my simple point? You can't test whether core inflation is a useful indicator for a central bank to look at just by seeing whether core inflation forecasts future total inflation (or whatever the bank is targeting). You can't test whether anything is a useful indicator for central banks to look at that way. Everything ought to look useless by that test, if the bank is doing it right. What you are testing is whether the bank is doing it right. If a central bank is targeting (say) 2% total inflation at a (say) 2-year horizon, and if it's doing it right, then deviations of total inflation from 2% ought to be uncorrelated with anything that the bank knew 2 years ago. This means that nothing (i.e. nothing in the bank's information set) should forecast 2-year ahead total inflation, if the bank is reacting correctly to those indicators. Core should fail to forecast future total inflation. Total inflation should fail to forecast future total inflation. Trimmed mean inflation should fail to forecast future total inflation. Unemployment should fail to forecast future inflation. Everything should fail to forecast future total inflation.

Rising Housing Rents Risk U.S. Inflation - For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation’s 38 million rented residences.  Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April. That share has grown as falling home prices shake Americans’ confidence in housing as an investment.  Federal Reserve Chairman Ben S. Bernanke and his colleagues say they will hold interest rates at record lows for an “extended period,” based on an assessment that slack in the economy from 9 percent unemployment will help subdue core inflation and any threat of accelerating prices likely will be “transitory.” Not everyone agrees with that judgment.

On Rising Rents - Karl Smith at Modeled Behavior notes Bloomberg’s story on rising rents, summarizing it with: In any case the point is that rents are rising, and rents are hefty portion of inflation. It seems to me that the story has two parts. The first is, as Smith notes, that upward pressure on rents will put upward pressure on inflation. No problem there. The second part of the story is the message that the Fed is missing the importance of rising rents, and thus we are on the verge of runaway inflation:Federal Reserve Chairman Ben S. Bernanke and his colleagues say they will hold interest rates at record lows for an “extended period,” based on an assessment that slack in the economy from 9 percent unemployment will help subdue core inflation and any threat of accelerating prices likely will be “transitory.” Not everyone agrees with that judgment. “They should have looked at rents,” “They’re putting too much weight on the ‘slack is all that matters’ theory. It matters but, for heaven’s sake, it’s not all that matters.”

There Will Be Inflation - Bloomberg’s Joshua Zumbrun smells what’s cooking: For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation’s 38 million rented residences.Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April. That share has grown as falling home prices shake Americans’ confidence in housing as an investment. The last sentence doesn’t quite make sense. Perhaps, the author doesn’t realize that Owner Equivalent Rent is also in the BLS inflation measure. That’s not meant disparagingly. Lots of folks get tripped up on this stuff. In any case the point is that rents are rising, and rents are hefty portion of inflation

Fed sees froth but no asset bubbles: Yellen - The Federal Reserve has detected a few markets exhibiting signs of froth that will require close scrutiny in coming months, but there are no signs of any significant asset bubbles at the moment, said Janet Yellen, the vice chairwoman of the U.S. central bank, in a speech in Tokyo on Thursday morning.  “At present, we see few indications of significant imbalances, despite some recent developments warranting close attention, including signs of valuation pressures in some markets and a moderate increase in leverage provided to dealers,”  A copy of her prepared remarks were released by the Federal Reserve in Washington.  Yellen’s remarks appeared to signal a new assertiveness at the Fed to publicly discuss concerns over market developments. The Fed has been widely criticized for not having spoken more forcefully about the U.S. housing-market bubble.

Yellen Says Fed Watching Rise in Leveraged Loan Demand for Imbalance Risk - Federal Reserve Vice Chairman Janet Yellen said an increasing demand for leveraged loans warrants monitoring as a possible emerging “imbalance” that the Fed would curb if necessary through regulation.  The central bank will “continue to watch conditions in the leveraged loan market closely in the coming months, and we will speak out forcefully if we perceive pressures continuing to build,” Yellen said today in a speech in Tokyo. “Strong demand has been pushing prices higher in the syndicated loan market” and “inflows into this asset class have indeed been robust and prices have been rising quite rapidly.”  Yellen said in a brief discussion of the U.S. economy that the “current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.”

The New Decline In The Inflation Forecast - The Treasury market’s inflation forecast has been falling for nearly two months, sending a warning sign that the economy is headed for a slowdown. The change for the worse in this indicator first caught our attention several weeks ago and the risk is even higher now. The basic problem is that the a sharp fall in inflation expectations is a sign of trouble for an economy that’s only been growing modestly, and unevenly. As a result, economic updates in recent days seem to confirm that disinflation/deflationary forces are on the rise again.  That’s certainly the message in the implied inflation forecast based on the yield spread between the 10-year nominal and inflation-indexed Treasuries. As of yesterday, the inflation outlook on this basis was 2.26%, down sharply from the post-recession peak of 2.64% set on April 8. A low-2% inflation outlook is hardly troubling per se; rather, it’s the rapid decline that’s disturbing.

Subsidies on Interest to increase Aggregate Demand - It is generally agreed that an increase in expected inflation will increase Aggregate Demand. That's true for example in a standard ISLM model; expected inflation sticks a vertical wedge between the IS and LM curves, so the ISLM equilibrium is to the right of the point where IS and LM intersect. It's also true in New Keynesian models, where the policy instrument is a nominal interest rate rather than the nominal money supply; expected inflation lowers the real interest rate for any nominal interest rate set by the central bank. The intuition, for a monetary disequilibrium theorist anyway, is that expected inflation is like a tax on holding the medium of exchange, so it creates an excess supply of the medium of exchange, which means people will want to spend their money. A tax on holding money would be a good way to increase Aggregate Demand, except it's not very practical. And some economists doubt that central banks have the credibility to increase expected inflation by simply promising to increase inflation. OK, let's accept those assumptions, for the sake of argument.

Trends, Doom, and Gloom - A few negative pieces of information seem to have put the usual people in a funk. DeLong is panicing, Krugman invokes the D-word, and David Leonhardt wants something done NOW. Mark Thoma is more restrained, but wants us to "fix" the deficient demand problem he perceives. Thoma shows us some pictures from one of Lucas's talks, one of which shows the US real per-capita GDP time series going back to 1870. The key feature of the time series, as most people know, and as I point out to my undergraduate students, is that it hews very closely to a 2% growth trend, excluding the Great Depression and World War II. What we find compelling about this is that it conforms roughly to the behavior of a standard neoclassical growth model subject to a constant rate of growth in total factor productivity (TFP). Of course, while the neoclassical growth model tells us a nice simple story about trend growth, it does not have much to say about the Great Depression, what was going on in World War II, or what causes fluctuations about trend. As we know, those issues get us into various kinds of stochastic shocks, frictions, heterogeneity among economic agents, etc., that we add to the basic framework.

Will The Fed Act? - As it stands, the US economy is poised to disappoint in the second quarter. The quick summary from the Wall Street Journal: After a disappointing first quarter, economists largely predicted the U.S. recovery would ramp back up as short-term disruptions such as higher gas prices, bad weather and supply problems in Japan subsided. But there's little indication that's happening. Manufacturing is cooling, the housing market is struggling and consumers are keeping a close eye on spending, meaning the U.S. economy might be on a slower path to full health than expected. To what extent will incoming data impact monetary policy? At this point, I think policymakers are still in “wait and see” mode. To be sure, they cannot ignore the spate of weak data. I think it has to be a topic in upcoming speeches. But they can continue to view it as a temporary blip. Moreover, I think it has been made clear that there is a high bar for QE3 – especially as the commodity-induced inflation mouse passes through the belly of the snake. Which means that while the specter of inflation remains alive and well on Constitution Ave., we should expect at most talk of pushing back the eventual policy tightening. But I think we would need to see a serious downgrade of the 2012 forecast to push the Fed into another round of asset purchases.

The Fed's summer of discontent - QE2 is almost over. Our long economic nightmare? Not so much: It is starting to sink in that the U.S. economy simply is carrying too much debt, and consumers making too little money, for a robust recovery to take root any time soon. Weak economic numbers, ranging from soft jobs gains to signs of a manufacturing slowdown, say the Federal Reserve failed to move the needle with its soon-to-be-completed eight-month course of easier money -- known in financial circles as QE2 for quantitative easing, second edition. The Fed can hardly shoulder all the blame, of course. But the latest growth downgrade leaves an uneasy truce in which investors and workers await the opportunities afforded by a recovery, without any reason to believe they are coming any time soon. "People are starting to see that this sort of malaise is not just going to go away no matter what you do,"

1937 in 2011? - Krugman - Gauti Eggertsson has a nice piece on the New York Fed blog about the great monetary/fiscal mistake of 1937, which sent the Great Depression into a second downward leg. As he notes, the underlying situation bore a significant resemblance to current events: unemployment still high (actually under 10 percent if measured by modern standards, so quite similar to now), but with rising prices thanks to commodity shocks. Where I part with Gauti here is his assertion that modern economists won’t make the same mistake. The research staff at the NY Fed won’t; but the ECB very probably will, and the Board of Governors is under a lot of political pressure to raise rates. We’ve learned a lot less these past 74 years than you might have imagined — or rather, we learned some stuff, but have spent the last few decades unlearning it.

The Fed Already Repeated the "Mistake of 1937" - Gautti Eggertson has an interesting post where he compares current economic conditions to those that prevailed leading up to the recession of 1937-1938. Here is his description of developments in 1937:(1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.The Federal Reserve responded at this time by tightening monetary policy.  Fiscal policy also was tightened. These policy moves turned what had been a robust recovery between 1933 and 1936 into the second recession of the Great Depression. As a result, a full economic recovery was postponed several more years.

The Mistake of 2010, by Paul Krugman -  Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that prolonged the Great Depression. As Gauti Eggertsson points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?  Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data.  To be sure, things could be worse — and there’s a strong chance that they will, indeed, get worse.  Back when the original 2009 Obama stimulus was enacted, some of us warned the effects of the stimulus would start fading out in 2010 — and given the fact that financial crises are usually followed by prolonged slumps, it was unlikely that the economy would have a vigorous self-sustaining recovery under way by then.

Will there be a US “Double Dip”? Parts One and Two - videos - Prof Steve Keen

Goldman downgrades U.S. growth again - How tepid is the U.S. economy? So lukewarm that economists at Goldman Sachs last week cut their economic growth forecast for the second time in a month, only to warn a few days later that "we already see downside risk to that estimate."Goldman now sees the U.S. economy struggling to limp forth at a 3% pace in the second quarter, down from 3.5% just three weeks ago and 4% at the start of the year. The firm expects the economy to have added just 150,000 jobs in April – down from 244,000 in March and well below the 178,000 CNNMoney forecast. Economist Zach Pandl rounds up the usual suspects, blaming high oil prices, manufacturing disruptions triggered by the earthquake in Japan and various other temporary factors (such as tornadoes in the South and a drop in defense spending). But those alone can hardly account for all the slack in what was supposed to be a reasonably vigorous recovery by now, he says. All signs point toward a broad-based slowdown, rather than one tied to temporary factors.

Chicago PMI Plummets From 67.6 To 56.6, Biggest Monthly Drop Since Lehman Bankruptcy - The May Chicago PMI is out and contrary to the herd of clueless Wall Street idiots, better known in polite circles as economists, it came at 56.6 on expectations of 62.0, a collapse drop from the 67.6 before. This is the worst monthly drop since the economy imploded back in October 2008, and the second largest two month drop since 1980! A quick look at the New Orders index indicates it was the lowest since September 2009. But the good news: the economy is still in expansion... for about 1 more month. The release says it all: 'NEW ORDERS and PRODUCTION posted their largest declines in several years...but remained positive' and 'INVENTORIES accelerated buildup' - thank god for artificial economic expansion. And from the respondents: 'Fuel cost are going to have a major impact on business activity in a negative way that will slow recovery to a crawl.' Uh, what recovery? Just you wait until QE3 is announced in 3 months. And elsewhere, the May consumer confidence completed the trifecta of bad news, coming at 60.8 on expectations of 65.4, and down from 66.6." 

Economists Downgrade Prospects for Growth - A growing number of forecasters are downgrading their predictions for economic growth, the Wall Street Journal notes, which "raises a deeper question about the economy's health: Has it emerged from the financial turmoil of 2008 and 2009 with a chronic growth problem?" "Since the recession officially ended in mid-2009, the economy's annualized growth rate has averaged 2.8%. That's no better than its performance after the much-milder 2001 recession, and far worse than the 7.1% growth rate after the similarly deep 1982 recession."

The Economy Is Going Nowhere Fast - The BEA's second guess at Gross Domestic Product (GDP) was not revised up, so the annual growth rate in the first quarter remained at 1.8%. Rick Davis of the Consumer Metrics Institute tells us the real rate of growth would have been worse had they used a more realistic GDP deflator. In calculating the "real" GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA's sister agencies. The mathematical implications of the deflator are simple: a lower deflator creates a higher "real" GDP reading. If April's CPI-U (as reported by the Bureau of Labor Statistics) of 3.2% year-over-year inflation is used as the deflator, the reported 1.84% annualized growth rate shrinks to a 0.56% annualized rate, and the "real final sales of domestic products" is actually contracting at a 0.63% rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7%), the "real" GDP would be shrinking at a 1.82% annualized rate, and the "real final sales of domestic products" would be contracting at a recession-like 3.01%.

Three Economic Reports, Three More Reasons To Worry - A trio of economic reports released this morning bring fresh clues about the outlook for the macro trend, but all three offer only more reason to wonder if the economy can maintain positive momentum in the months ahead. Let’s start with the S&P Case-Shiller home price index. There was no great surprise here in learning that prices are still falling. The 10-city index dropped 0.1% for March and the 20-city index was down by 0.2%. More discouraging is the fact that the trend remains deeply negative. As the chart below shows, the brief bounce has long since faded and prices continue to slump on a year-over-year basis.  The news isn’t any better in the Conference Board’s consumer confidence index for May. A sharp drop in the index suggests that consumers have turned gloomy once more. Meanwhile, a big drop in a measure of business conditions for the Chicago region adds to the anxiety. A hefty drop in the monthly pace of growth for new orders was the culprit. Although the Chicago Purchasing Managers Index is still at levels associated with expansion, the fact that new orders—a leading indicator—slowed the most in several years isn’t encouraging.

Two More Warning Signs For The Economy - Here we go again: Another batch of economic updates and another round of disappointment. That sums up the latest numbers released this morning via the ADP Employment Report and the ISM Manufacturing Index. In both cases, the trend has taken a turn for the worse. The bad news arrives on the heels of yesterday's discouraging trio of economic reports. Stepping back and considering the latest updates suggests that we've entered a nasty pattern for macro news. Let's take a closer look at today's data releases, starting with ADP's estimate of private payrolls for May. Although the labor market continued to expand last month, it did so by the thinnest of margins, according to ADP. May's nonfarm private payrolls rose by a net 38,000 on a seasonally adjusted basis—the smallest gain since last September and a huge drop from April's 177,000 increase. Moving on to today's update of the ISM Manufacturing Index presents a similar case of expecting trouble as May's economic updates are released later this month. The ISM Manufacturing gauge is among the first out of the gate each month and this time it's signaling a new bout of weakness in the macro trend.

Economic Outlook Darkens - The drumbeat of bad news about the U.S. economy got louder on Wednesday, rattling financial markets and driving stocks to their biggest drop in a year. The U.S. factory sector, which has been an engine of the recovery, notched its biggest one-month slowdown since 1984 as companies hit the brakes on hiring and production. Another report showed private-sector hiring dropped precipitously in May, prompting economists to ratchet down their expectations for the closely watched nonfarm payrolls report due on Friday.  Economists predict some problems now hampering growth, including soaring gasoline prices and supply-chain disruptions caused by Japan's tsunami, will moderate in months ahead. But with unemployment high, the housing market moribund and ongoing financial turmoil in Europe, the slowdown could turn into something more ominous."It definitely makes me more nervous about the outlook," says Morgan Stanley economist David Greenlaw. "The economy can't withstand much more than a temporary slowing at this point."

U.S. economy: Bad, but no worse than expected. In recent weeks, virtually every indicator has headed south. The only consolation, if you can call it that, is that such setbacks are hardly unexpected. Let's start with housing, which accounts for about 20 percent of the national GDP. This week, the most-watched housing index confirmed that prices have dropped to a new recession-era low, down in 19 of the 20 biggest metro regions from a year ago and confirming a double dip. The National Association of Realtors also reported a sharp 12 percent drop in pending home sales for April—meaning that further price declines are likely.  Then there's the abysmal labor market. This week, ADP, a private payrolls firm, announced that the private sector added an anemic 38,000 jobs in May. That works out to just 760 jobs per state and is the worst growth since last September. (In April, by comparison, private employers added 177,000 jobs.) On top of that, initial unemployment claims—a leading indicator, suggesting where the unemployment rate is headed—are climbing back up. That has stoked fears that the May unemployment rate, which the Labor Department will announce Friday, might rise from last month's 9 percent.

A weakening economy - Incoming data over the last two weeks paint a consistent picture that the U.S. economy, which had been growing at a disappointingly slow rate, has weakened further. The national income and product accounts updated last week by the BEA suggested that first quarter GDP growth was even weaker than previously indicated. GDP can be calculated in two ways, by summing up data on either what gets produced or the income generated by that production. Conceptually (and by definition) the two numbers should be exactly the same, but in practice you don't come up with quite the same number using different methods. Jeremy Nalewaik has argued that the income-based measure of GDP (referred to as gross domestic income, or GDI) may be a slightly better indicator of business cycle turning points. For example, GDI gave a clearer signal than GDP of a weakening economy in 2007. GDI had been showing a little stronger growth than the GDP indicator in early phase of the current recovery (2009:Q4-2010:Q2), but has been signaling weaker growth than GDP for the most recent quarters (2010:Q3-2011:Q1). The latest BEA numbers report that total U.S. real output was growing at a 1.8% annual rate in 2011:Q1 according to the GDP measure but at only a 1.2% rate according to GDI.

Can We Please Stop Pretending the GDP Is "Growing"? - Charles Hughes Smith - The Federal government borrowed and spent $5.1 trillion over the past four years to generate a cumulative $700 billion increase in the nation's GDP. That means we've borrowed and spent $7.28 for every $1 of nominal "growth" in GDP. In constant dollars, GDP is flat: we got no growth at all for our $5.1 trillion: zip, zero, nada. In constant dollars, the GDP in 2011 might return to the 2007 level, if the economy continues "growing" at the same pace reached in the first three months of 2011. If not, then the GDP will actually be lower than pre-recession levels. If you borrowed $7 to get $1 in your pocket, would that strike you as a good deal?How long do you reckon you could borrow $7 to get $1 of "growth" in your finances?

A Brief Note on Slower Growth - Someone asked me to comment on the recent reports that suggest the already not-fast-enough growth rate of the economy may be slowing. I’ve got two words for you: excess capacity.  Lo0k at the figures in that post, and I’ve got more coming in a forthcoming study I hope to get out soon for the CBPP. And I got four numbers for you: 1-9-3-7 as in don’t make the mistake of going for fiscal and monetary contraction too soon.   While there’s no reason not to plot the path toward fiscal sustainability today, the target right now must be the jobs deficit, not the budget deficit. Finally, I’ve got one other number for you: 2.96–yesterday’s closing yield on the 10-year Treasury bond.  That is a very low number.  It means a) budget deficits are not leading to higher interest rates, b) investors are worried about growth, not deficits, c) the cost of borrowing is telling us budget math supports the jobs target noted above (DeLong has the details).

Manufacturing slowdown the latest sign the recovery is faltering - Just a few months ago, the economy seemed poised to finally strengthen. Business confidence was rising, and extensive government efforts to foster growth were underway. But those hopes are being dashed. Forecasters who once projected economic growth of 3.5 to 4 percent for the year have slashed their estimates with each round of disappointing numbers. Instead of accelerating, the U.S. economy is puttering along at a growth rate of 2 to 3 percent — barely enough to bring down joblessness, if at all. The weak expansion comes despite government efforts to boost it: a payroll tax cut that took effect in January and an initiative by the Federal Reserve to pump $600 billion into the ailing economy by buying Treasury bonds. But the Fed is unlikely to take further action, and Congress is focused on reducing the budget deficit1 instead of tax cuts or new spending that might spur economic activity. The worsening economic prospects reflect, in part, the effects of the Japanese earthquake and tsunami in March, which caused disruptions for some U.S. manufacturers, and a spike in oil prices this year. On Thursday retailers reported only a slight uptick in sales for May as consumers cope with higher gas and food prices.

Supply-Side Factors and the Soft Patch - The weakness in the US economy over the past few months has been disappointing, to say the least. But I've been wondering whether it's possible that the palpable slowdown in growth could be directly the result of two potentially significant events that have certainly had a negative impact on the US economy in recent months: the sharp rise in oil prices, and the earthquake in Japan. Could this spring's sudden slowdown in the US economy simply be due to these suppply-side shocks? So I did a little back-of-the-envelope estimation to see whether we can explain the "soft patch" as simply the result of expensive oil and horrible earthquakes. The table below shows my calculations. I make a couple of assumptions to arrive at these estimates. First, I use as a rule-of-thumb the formulation that a $10/bbl increase in the price of oil translates into a roughly 0.3% fall in GDP over the course of a year. (That figure is based on a number of discussions about the impact of the price of oil on the US economy, including by Dean Baker and Roubini and Setser (pdf).)

Back towards a US double-dip - Robert Reich The US economy was supposed to be in bloom by late spring, but it is hardly growing at all. Expectations for second-quarter growth are not much better than the measly 1.8 per cent annualised rate of the first quarter. That is not nearly fast enough to reduce America’s ferociously high level of unemployment. The labour department will tell us on Friday whether the jobs situation improved in May, but there has been no sign of a surge in hiring. Nor in wages. Average hourly earnings of production and non-supervisory employees – who make up 80 per cent of non-government workers – dropped to $8.76 in April. Adjusted for inflation, that’s lower than they were in the depths of the recession.  Meanwhile, housing prices continue to fall. They are now 33 per cent below their 2006 peak. That is a bigger drop than recorded in the Great Depression. Homes are the largest single asset of the American middle class, so as housing prices drop many Americans feel poorer. All of this is contributing to a general gloominess. Not surprisingly, consumer confidence is also down.  The recovery has stalled. It is unlikely that America will find itself back in recession but the possibility of a double dip cannot be dismissed.

We Are On the Verge of Great, Great Depression - That is according to Peter Yastrow.“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.“We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake.”  “We’re on the verge of a great, great depression. The [Federal Reserve] knows it. I think at the very least the idea of a “double dip” is much more of a possibility now than it was a few months ago. Dave Schuler has three posts (here, here and here) about the weakness of the recovery. Dave notes the anemic job growth even though the recovery is almost a year old. On top of it there is this interesting post by Prof. James Hamilton about when the economy reaches “stall speed”. Much like an airplane when an economy’s growth rate drops below a certain threshold (yet is still positive) it strongly suggests the economy is about to go into a decline.

Yastrow: “We Are on the Verge of a Great, Great Depression” - The news that frequent CNBC guest Peter Yastrow of Yastrow Origer (and formerly with DT Trading) told CNBC that “We’re on the verge of a great, great depression. The [Federal Reserve] knows it” is going viral today.  But this is not news to anyone who has been paying attention. I provided details last month:As I noted in January, the housing slump is worse than during the Great Depression.  As CNN Money points out today: Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.” Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.Lately, they’re “running out of money” at a faster clip, he said.“Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.

Mining the safe harbour - America is joining in the broad global economic deceleration which appears to be underway. Emerging markets have been tightening rapidly to tame inflation, and the effects are now apparent. Chinese industrial figures are showing an easing in activity, and India's economic growth slowed sharply in the first quarter. All signs in Europe point to deceleration, threatening to exacerbate the euro zone's crisis. Things should—should—turnaround as the year progresses.  One thing seems clear: America's government is making its economic road harder than it needs to be. Debt problems loom, but there is no immediate fiscal crisis and no need for drastic short-term cuts. When debt issues came up during my trip to China, officials had a consistent message: China is a patient investor. It wants America to take steps toward fiscal sustainability, but it's happy to have this happen over a 5- to 10-year period. By cutting drastically now, America is undermining its economy for no good reason.

Quick International Finance Note #1 - Brad DeLong directs us to Ryan Avent, whose conclusion I agree with: If Congress called into question the safety of the one safe asset for which markets have an almost unlimited appetite, all hell would break loose. Washington is making the recovery harder than need be. My only quibble is with this characterization: When debt issues came up during my trip to China, officials had a consistent message: China is a patient investor. It wants America to take steps toward fiscal sustainability, but it's happy to have this happen over a 5- to 10-year period. This characterization maintains the myth that China is doing the US a favor by being an “investor” in the US economy. As Michael Pettis explains, China would not want to be the recipient of their own gift: But what about the benefits to the US of reserve currency status? A lot of analysts argue that the predominance of the dollar gives the US two important advantages. It reduces the cost of imports to American consumers and it lowers US government borrowing costs. But both arguments are seriously flawed, I think.

Quick International Finance Note #2- For those that missed them, Paul Krugman and Felix Salmon have good pieces on the slow motion disaster that is the Eurozone. Krugman concludes with:If you ask me, the water level has now dropped so far that the fuel rods are exposed. We really are in meltdown territory. Salmon concludes with: …it’s easy to see how Europe’s politicians and central bankers are doing everything they can to kick the can down the road and put off the moment that they have to make a big decision. But the longer they wait, of course, the more momentous and more difficult any such decision is going to be. Just how much risk are Europe’s central banks going to take on, before they draw the line and say no mas? Reminds me of something Michael Pettis said back in November: This has been said before, but in a way this crisis is the European equivalence of the American Civil War. Once the dust finally settles Europe will either be a unified country with fiscal sovereignty firmly established in Berlin or Brussels, or it will be fragmented with little chance of reunion.

The Yield Curve - The slope of the yield curve has gained the reputation for being a simple forecaster of economic growth. Reading the forecast is simple; an inverted yield curve (short term rates above long term rates) indicates a recession is roughly four quarters away, a steep upward sloping yield curve (short term rates below long term rates) indicates strong economic growth, and conversely, a very flat curve indicates, weak growth.   Each of the last seven recessions followed an inversion of the yield curve roughly four quarters prior. The yield curve inverted in August 2006, five quarters before the recession started in December 2007. In the spring of 2007, the yield curve was predicting a 40 percent chance of a recession in 2008, an aberration in forecasts at the time. The financial crisis in fall 2008 showed up in the yield curve as investors fled to quality. The 3-month rate dropped from .07 percent down to .02 percent for the week of December 12. It was the lowest level since the Treasury constant maturity series started in 1982. The 10-year rate dropped from 3.38 percent to 2.67 percent.

The Unkillable Yield Curve Fallacy (Wonkish) -Krugman - This morning I read the FT telling us that bond markets are signaling worries about growth, as indeed they are; but I also see Caroline Baum telling us not to worry, because the yield curve is upward-sloping. I’ve written about this repeatedly. Just to reprint the argument:The reason for the historical relationship between the slope of the yield curve and the economy’s performance is that the long-term rate is, in effect, a prediction of future short-term rates. If investors expect the economy to contract, they also expect the Fed to cut rates, which tends to make the yield curve negatively sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve positively sloped.But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down.

Philip Pilkington: Economics as morality play – Why commentators and politicians treat economics as a subjective enterprise - Recently I came across a roundtable discussion with some of the US’s leading proponents of Modern Monetary Theory (MMT). In the discussion they talk about how the US economy might pull itself out of the rut it is in. Warren Mosler points out that this can be done from either a conservative ideological position – by cutting the payroll tax – or from a more liberal ideological position – by increasing government spending. Soon the discussion turned to why policymakers refuse to listen to such suggestions. And that’s where things get really interesting. Mosler believes that most economists in key positions – such as Fed chairman Ben Bernanke – understand why unbalancing the budget is necessary and yet they continue to go in front of congressional hearings calling for deficit reduction. Mosler is quite clear that this behaviour is nothing short of deranged. He attributes it to political pressure. If Bernanke were to call for higher deficits he would by wantonly attacked by elected officials for being irresponsible. He might not even keep his job. But this is strange, almost topsy-turvy. It is as if the politicians are telling the economists what they can and cannot think. Shouldn’t it be the other way around?

Reserve Currency Mysticism - Krugman - Oh, my. Even though it was a personal attack on me, I didn’t get around to reading Steil and Hinds on why we must be totally freaked about the role of the dollar. But Brad DeLong did; and it turns out that it’s quite a piece of work. The authors seem to think that only reserve currency countries can sell debt denominated in their own currency to foreigners. I have no idea why they believe that; I do know that it’s flatly untrue. All advanced countries, and a growing number of emerging economies, are able to sell local-currency debt to foreigners.And much of the article also seems to assume that the US would have no monetary policy if the dollar weren’t a reserve currency:  The Federal Reserve would now be forced to operate under external constraints comparable with those imposed by the classical gold standard, under which the US needed more gold to create more dollars. Under a “euro standard”, the Fed would need more euros to create more dollars … Wow. Have these guys ever talked to anyone in Sweden, which doesn’t need euros to create more kronor, or Britain, which doesn’t need euros to create more pounds?

Pace of Dollar Decline Reflects Currency Market’s QE3 Bets, Citigroup Says - The dollar’s drop over the past week suggests currency traders may be speculating that the Federal Reserve will implement a third program of asset purchases, known as quantitative easing, Citigroup Inc. said.  “The pace of dollar weakening during the past week is noteworthy,” Greg Anderson, a senior currency strategist at Citigroup Inc. in New York, wrote in a research report today. “It certainly supports the notion that foreign-exchange markets are beginning to price in QE3.”  The Dollar Index has dropped 2 percent in the past week. It was 0.2 percent lower as of 6:53 a.m. in London today, at 74.408.

U.S. Dollar May Weaken on Debt Ceiling Breach, Citigroup Says (Bloomberg) -- A breach of the U.S. debt ceiling may affect the dollar more than Treasuries because international holders of the debt may view the risk of permanent losses greater than domestic investors, according to Citigroup Inc. "The foreign exchange reaction to a debt ceiling breach would be sharper and probably more permanent," Steven Englander, the head of Group of 10 foreign-exchange strategy in New York at Citigroup, wrote in a note today. "It would legitimately tax foreign investor patience and lead to further dollar dumping whenever the opportunity arises." Foreign investors who don't hedge against swings in the value of currencies with strategies such as options can't be guaranteed that prices will recover if volatility climbs as lawmakers fail to reach agreement on extending the legal amount the U.S. can borrow, Englander said. Congress has until Aug. 2 to find a way to avoid default after the amount the government can borrow was reached May 16.

Gross Believes Not Raising Debt Ceiling Would Crush Dollar - PIMCO's Bill Gross appeared on CNBC's Squawk Box Friday morning. In his appearance, he echoed statements made by Treasury Secretary Timothy Geithner, President Obama, and Federal Reserve Chairman Ben Bernanke, stating that if the U.S. defaults on any future debt payments--even for a period of just six days--there will be disastrous consequences for the dollar. Warning that such an event would amount to a default on the U.S. dollar, he predicted that if the debt ceiling is not raised, the world will switch to a different reserve currency in short order. Republicans in congress have been stalling a debt ceiling extension bill, refusing to raise the borrowing limit unless there is a comprehensive, long-term, deficit reduction plan in place. Gross does not believe such reform will come until the 2012 election.

With 10-year yields down to 3%, Bill Gross warns again - Yields on 10-year treasury notes fell to 3% Wednesday on another dismal jobs report and as signs grow that the U.S. economy is slowing sharply. Employment in the nonfarm private business sector rose a seasonally adjusted 38,000 in May, well below the 175,000 increase expected by economists. Yields on 10-year notes, which were as high as 3.59% in early April, touched 3% Wednesday. PIMCO’s Bill Gross, who’s been underweight treasurys for months, is back out Wednesday with a note that talks a lot about frogs and Mark Twain before finally hitting the big point: …existing Treasury yields fail to adequately compensate investors for the risk of holding them.Gross argues that should buy cheap bonds with safe spreads — floating rate notes, investment grade corporates, and even emerging market related notes.

The Strength of a Failing Euro (Wonkish) - Krugman - I’ve gotten a lot of requests — some genuinely curious, some belligerent — about how one can reconcile grim views about the prospects of the eurozone with the strength of the euro against the dollar. There really isn’t any contradiction — but to see why, we need to think a bit about what determines exchange rates. For rough-and-ready exchange-rate modeling, I and many others turn to some version of the “anchor model”. This posits that there’s a long-run equilibrium exchange rate that investors believe is appropriate, which is determined by trade flows, purchasing power parity, etc.. In the short run, however, the exchange rate can vary from this long-run equilibrium rate, with the deviation reflecting interest rate differentials. Suppose US interest rates are low compared with eurozone rates; then the dollar will fall relative to the euro until it is far enough below its long-run value that people expect it to rise in future at a rate that provides capital gains offsetting the interest differential.

China Has Done Study On Converting US Debt To Equities: Press - The Chinese government has completed a study on converting at least some of its U.S. debt holdings, including U.S. Treasury securities, into equities, the official Economic Information Daily reported, citing a former central bank researcher.  Jing Xuecheng, formerly deputy head of the Research Department under the People's Bank of China, told the newspaper that a research report on the debt-equity conversion issue has been submitted to relevant government authorities for review.  "We need to safeguard and increase the value of our investments in America. Debt holdings in this case means all kinds of bonds, including U.S. Treasury bonds," said Jing.  Talk has intensified within Chinese policy circles about how to diversify and get better returns from China's huge foreign exchange reserves, which totalled $3.0447 trillion at the end of March. The debt-to-equity conversion study is one of a series of research efforts on the subject.

Should We Panic Over the Level of Federal Debt? - Glenn Hubbard thinks our Federal debt problem is worse than it was at the end of World War II: Our chart shows the federal debt held by the public (DHP) to GDP ratio as well as total Federal Debt (TD) relative to GDP from 1939 to 2011 (projected) as reported in table B.79 of the Economic Report of the President 2010. Note that this 90% projection for DHP/GDP in 2020 is not as high as the ratio for 1945 but it is entirely possibly that TD/GDP will reach 120%.Why would the Federal debt problem be more difficult now or even in 2020? This topic has received substantial attention of late – with a couple of mentions to Paul Krugman and the CBPP . Paul talks about debt arithmetic, which is reminiscent of Sargent and Wallace’s Unpleasant Monetarist Arithmetic . Let’s pessimistically assume that by 2020 we have a steady state real interest rate equal to 4% and real growth equal to 3%. If we could obtain a non-interest surplus to GDP ratio equal to or greater than 1.2%, then we could avoid a debt explosion and in fact might even see the debt ratio decline over time.

Inviting Chaos: The Perils of Toying With the Debt Ceiling…A game of Russian roulette is being played with the national debt ceiling. Fire the wrong chamber of the gun, and the result could be the second Great Depression.  The first Great Depression led to totalitarian dictatorships, war to consolidate power and concentrations of capital in the hands of a financial elite. The trigger was a default on the global reserve currency, in that case the pound sterling. The US dollar is now the global reserve currency. The concern is that default could create the same sort of global panic today. Dark visions are evoked of the president declaring a national emergency, the Federal Emergency Management Agency (FEMA) plans locking into place, camps being readied for protesters and the secret government taking over. This may all just be political theater, but do we really want to get close enough to the economic precipice to find out? The conservative ideologues toying with the debt ceiling are doing it to force cuts in the budget, a budget that was already approved by Congress. Congress is being held hostage by a radical minority pushing a risky agenda, one that is based on an economic model that is obsolete. 

House sets vote on debt, to focus on budget talks with White House - Setting the stage for a long summer of heated negotiations, the House is expected to reject a proposal Tuesday that would increase the nation’s ability to borrow money without also making major cuts in federal spending. A day before they huddle with President Obama at the White House, Republicans will vote on the administration’s initial request that the nation’s $14.3 trillion debt ceiling be lifted without any accompanying spending reductions. Both sides now recognize that such a request is politically impossible, given the electorate’s disapproval of runaway federal deficits1. GOP House leaders timed the vote Tuesday night to demonstrate that point before all 241 members of the Republican conference visit Obama on Wednesday. It will be his first meeting with the entire group since the party won the House majority in the November midterm elections.

The Dirty Secret About Today's "Clean" Debt Ceiling Vote - The House Republican leadership wants everyone to think that the expected large “no” vote this evening on a “clean” debt ceiling will demonstrate that there’s no support for increasing the government’s borrowing limit unless deficit reductions are attached.  That’s simply not true.   As my column below from today’s Roll Call explains, a debt ceiling increase with deficit reductions attached would also very likely…if not certainly…be rejected.  In other words, just because a debt ceiling increase that doesn’t include spending cuts or revenue increases can’t be adopted doesn’t automatically mean that, as the leadership wants us to believe, a bill with them will pass.

Hoyer Urges Democrats to Oppose ‘Clean’ Debt-Ceiling Increase -House Minority Whip Steny Hoyer told reporters he’ll suggest that fellow Democrats oppose a “clean” increase in the nation’s debt ceiling in a vote this evening, even though many Democrats have called for such a measure. I’m going to advise my members that they shouldn’t subject themselves to the demagoguery that would surely follow,” the Maryland Democrat said Tuesday.  The GOP leadership is holding Tuesday’s vote knowing it will fail, with every Republican and many Democrats voting no. That is prompting Democrats to deride the vote as political theater. GOP leaders hope to put Democrats on the spot. The vote also could make it easier for GOP lawmakers to vote for a debt limit hike later, if it’s tied to spending cuts, since they’ve opposed the “clean” increase. Mr. Hoyer dismissed all of this as empty maneuvering, saying the reputation and credit of the U.S. government should not be treated lightly. The Treasury Department says the government will begin defaulting on its obligations if the debt ceiling isn’t raised by Aug. 2, but some economists predict the markets will not wait until then to reflect their anxiety.

Pressing Obama, House Bars Rise for Debt Ceiling - The House on Tuesday overwhelmingly rejected a measure to increase the government’s debt limit1, acting on a vote staged by Republican leaders to pressure President Obama to agree to deep spending cuts.  Republicans brought up the measure, which was defeated 318 to 972, to show the lack of support in the House for raising the $14.3 trillion debt ceiling without concrete steps to rein in chronic budget deficits. The preordained outcome followed several acts of odd political theater on the House floor: Republicans urged the defeat of their own measure, while Democrats — who not long ago were seeking just such a vote to raise the debt ceiling without attaching spending cuts — assailed Republicans for bringing it up, saying its certain defeat might unnerve the financial markets.  Just in case, Republican leaders scheduled the vote for after the stock market’s close, and in the preceding days called Wall Street executives to assure them that the vote was just for show, to show Mr. Obama that he would have to make concessions in budget negotiations if a debt-limit increase is to pass Congress.

In Showdown Over Debt Ceiling, Neither Party Is Blinking — In a bit of political stagecraft, House Republicans plan to bring to a vote on Tuesday evening a measure that President Obama and the Democrats were demanding not so long ago: a clean increase in the national debt ceiling1, unencumbered by any requirement that spending be cut.  Given that all Republicans and more than a few Democrats oppose any debt-limit increase that is not accompanied by some commitment to future fiscal restraint, the measure is doomed to fail. And for all the talk of economic crisis should Congress fail to raise the debt ceiling by August, the financial markets are likely to yawn at this vote — if only because Republican leaders have privately assured Wall Street executives that this is a show intended to make the point to Mr. Obama that an increase cannot pass absent his agreement to rein in domestic programs.  But beyond this week, Wall Street has reason to be nervous as Congress nears the actual deadline on Aug. 2 to raise the $14.3 trillion borrowing ceiling, said people in both parties and in finance, some of whom asked not to be identified given the sensitivity of the issue.

The Debt Ceiling as a Bargaining Chip - Krugman - How bad will it be if we don’t manage to raise the debt ceiling in the United States? And what should President Obama’s negotiating strategy be? A few thoughts. The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy. It’s not clear to me whether there would be some wiggle room through the accumulation of arrears — say, not actually paying workers and contractors, but promising to make it up when sanity returns. But it would be ugly indeed. What might make it even worse would be indirect effects, of two kinds. First, government debt plays a special role in the American financial system: Treasury bills are the universal safe asset, the ultimate collateral. That’s why, during moments of financial stress, the interest rate on T-bills has actually gone negative. Make that safe asset suddenly unsafe, and it might cause vast disruption. Second — and I don’t think this is getting enough attention — failure to raise the debt limit could act as a terrible signal about the American political system.

Democrats: No pay for lawmakers if U.S. defaults - Raise the debt ceiling or don't get paid. That's essentially what Senate Democrats are saying in the latest act of political theater surrounding the nation's debt ceiling. Sens. Barbara Boxer and Bob Casey sent a letter to Treasury Secretary Tim Geithner on Tuesday, urging him to include lawmaker compensation in the list of things he will have to stop paying if Congress fails to raise the debt ceiling by Aug. 2. "There is no reason that members of Congress and the president should be free from the pain that would be felt by our nation if the government were to default on its obligations," the letter states. "If we cannot do our jobs and protect the full faith and credit of the United States, we should not get paid."

Battle rages over raising of debt ceiling - (TV interview) James Hamilton says if you or I were to say our plan is to spend more than we earn, but not run up any more debt, people would say we're crazy. "That's exactly what Congress is doing," said Hamilton, an economics professor at UCSD. "They've already passed legislation that they're going to spend more than they take in as taxes, and they're pretending they're not going to have to borrow any more to do that." Hamilton says the real problem here, which you won't hear anybody talking about, is that the government separates legislation on spending, on taxes and on the debt as if they're three different decisions. "They're really not," says Hamilton. "What we're facing now is a conflict between those three, and something's got to give. And it's not totally clear how that's going to be resolved." The Republicans vow not to raise the debt ceiling without significant spending cuts.

More People Are Open To Technical Default In The Debt Ceiling Fight - It was just in early April that were shocked to hear Chris Whalen argue for an intentional technical default on US debt. At the time this seemed like an obviously out-there viewpoint, but in just a matter of weeks, the Whalen view has moved a lot closer to the mainstream. Just a quick rundown of some others on this bandwagon: Bank Of America's Jeffrey Rosenberg has made the 'case for default'. Hedge funder Stan Druckenmiller has made the case for a technical default now to clean up our house. In our interview with him, Jeff Gundlach has said a technical default would be okay. Fiscal expert Rep. Paul Ryan thinks a short-term technical default would not be a problem. And those are just some very notable names. This shift was acknowledged in a note this morning from Citi's Steven Englander: A breach of the credit ceiling is priced in neither fixed income nor FX markets to any significant degree now. Even two months ago there was a virtual consensus that a debt ceiling breach would be an unmitigated disaster for US asset markets. Confidence in Treasuries as the ultimate safe haven would be destroyed and there would very likely be spillovers into other asset markets. If investors or business were counting on using coupons or redemptions to meet obligations, there would also be the possibility of a series of business or investors defaults tied to delayed Treasury payments.

Treasury Continues To Dip Into Retirement Accounts, Prepares To "Take Out" $66 Billion Chunk To Make Room For New Bond Issuance - Today, very quietly, the Treasury released its latest refunding announcement, in which it disclosed it would issue another $66 billion in 3, 10 and 30 Year notes next week. The irony of course is that the US is and continues to be at its debt ceiling limit (or just $25 million short of it), at a total of $14,293,975 million. Furthermore, as was also disclosed by the Treasury, this gross issuance will also be the net amount added in marketable debt, as upon settlement on June 15, there will be no redemptions of maturing bonds. Which simply means that the continued "disinvesting" (which is merely a polite word for plundering) from intragovernmental debt, also known as retirement accounts, is about to kick into high gear. As a reminder, the only solution that Geithner currently has to run the government, at least until August 2 when even this runs out, is to slowly drain the debt in non-marketable accounts, in the form of Suspension of G-Fund and ESF reinvestments, as well as the Redemption and suspension of of CSRDF Investments, measure which when combined will provide a short-term buffer of $232 billion. Yet for all practical purposes, what is happening is that retirement accounts are now being seriously plundered, and if the unthinkable were to happen, and the debt ceiling would not rise, not only would the US be in technical default, but various retirement funds, which already are underfunded, would find themselves even more severely in the Red.

Treasury reiterates borrowing authority end Aug. 2 - The Treasury Department on Wednesday reiterated its projection that its borrowing authority will be exhausted on Aug. 2 as it urged Congress to raise the debt ceiling. In a largely symbolic vote, the House of Representatives overwhelmingly voted against a "clean" increase of the debt ceiling last night. House Republicans are due to meet President Barack Obama to negotiate about the debt ceiling increase, which Republicans want to marry with spending cuts.

Geithner meets with skeptical House Republicans amid new warning on debt ceiling - Timothy F. Geithner, armed with a warning from Wall Street, appealed Thursday to House Republicans2 to raise the nation's debt ceiling soon or face grim economic consequences. Geithner spoke to House Republican freshmen, a group skeptical of his warnings. But a report from Moody's3 Investors Service gave him fresh evidence of Wall Street's increasing pessimism over prospects for a quick resolution to the standoff over government debt. The debt rating firm said it would consider downgrading U.S. credit if it did not see progress in negotiations by mid-July.Moody's had fully expected "political wrangling" over the issue, the firm said in a statement. But it added: "The degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default."  Geithner called the Moody's report a "warning sign," participants said. House Speaker John A. Boehner4 (R-Ohio) said it was evidence that "the White House5 needs to get serious" about deficits.

John Boehner calls for debt deal in a month - House Speaker John Boehner said he doesn’t want to run up against an August deadline for boosting the nation’s debt limit — fearing that it could unnerve Wall Street — but he’s refusing to back away from his calls for major spending cuts in return for a debt deal with the White House. And Boehner, for the first time, said he wants to raise the limit within one month’s time. “I just think we’re now in June, this really needs to be done over the next month if we’re serious about no brinksmanship, no rattling investors,” the Ohio Republican told a group of reporters in his Capitol office suite on Wednesday. “But I will reiterate something I’ve said many times before: The biggest risk we face as a country is doing nothing.”

John Boehner: Raise debt ceiling by July - Speaker John Boehner said Wednesday that the debt ceiling “needs to be” raised in the next month, the clearest timeline the House leader has set for increasing the nation’s borrowing capability. “I just think we’re now in June, this really needs to be done over the next month if we’re serious about no brinksmanship, no rattling investors,” the Ohio Republican told a group of reporters in his Capitol office suite. “But I will reiterate something I’ve said many times before: the biggest risk we face as a country is doing nothing.” Boehner and the House Republican Conference met with Obama Wednesday at the White House in a session that was centered on the debt limit. Boehner said he told Obama that “the sooner we deal with” the debt limit, the “better off we are.” “The president agreed,” Boehner said.

How to Get Washington’s Attention, by Robert Reich - Never underestimate the power of Wall Street and big business to set the terms of the economic debate in Washington. The current disconnect between Washington’s obsession with long-term budget deficits, on the one hand, and the frailty of the nation’s economy right now, is scary. The question is whether today’s stock market wipe-out, coupled with the plunge in housing prices, discouraging news about economic growth, and what’s likely to be a paltry jobs report Friday, will be enough to force Washington to give up – or at least postpone – its games over the budget and debt ceiling, and take immediate action. Maybe – especially now that Wall Street and big business have to face reality. The stock market is beginning to feel the effect of an American middle class at the end of its rope. Even if Wall Street and big business don’t care about plummeting housing values, they do care about plunging stock prices. ... [T]hose who take a slightly longer view clearly worry the economy is running out of steam – and they’re right.

U.S. Faces Credit-Rating Review From Moody's - A second credit rating agency has threatened to put the US under review for a possible downgrade unless politicians put their squabbles aside and agree to raise the statutory debt limit.  Moody's said the world's biggest economy's AAA-rating is under threat because the country will run out of money unless policymakers agree to increase the limit on the national debt above the current $14.3 trillion.  The US treasury department has warned that the government risks default if Congress does not authorise more borrowing by August.  Republicans are demanding spending cuts be brought into line with tax revenues as a condition of raising the limit, in the face of President Obama's pledge to protect costly social programmes.

‘Moody’s alarm on debt limit is a show‘ (interview & transcript) US President Barack Obama attempted to pass a bill that would have allowed the United States to increase its debt limit by $2.4 trillion, but it was rejected on May 31 after Republicans lined up against it.  Press TV has interviewed Dr. Paul Craig Roberts, the former assistant secretary of US Treasury, who says the announcement by Moody's is just a theater [performance] to help Wall Street achieve its end of privatizing public pensions and public healthcare.

How Innocuous Is a Treasury Default? - Steven Englander, Global Head of G-10 FX strategy for Citi is not very sanguine about a Treasury default, especially as it pertains to foreign holders of Treasurys. From an email today (not online): We argue below that the impact of a debt ceiling breach may be larger and more permanent on the dollar than on fixed income markets. So it is worth going through the analysis, even though the dollar has so many immediate problems that it seems unnecessarily rude to bring up a problem that may not emerge for another couple of months.  House Majority Leader Cantor has a different view: Cantor said he wasn’t concerned about a negative reaction by the bond market if talks between congressional leaders and President Barack Obama continue closer to the date Treasury says it can no longer borrow money to pay U.S. obligations. As does Representative Toomey a few days ago: The “Full Faith and Credit Act” introduced by Toomey in the Senate would shift responsibility for a potential default onto the shoulders of Democrats and the White House by calling on the Treasury Department to make only principal and interest payments past the Treasury Department’s Aug. 2 deadline.

Citi On The "Disastrous" USD Implications From A Debt Ceiling Breach - Much has been speculated about what the possible impact on the fixed income market may be if the debt ceiling is breached. Few, however, have wondered about the impact of what the lack of a debt ceiling resolution would be on a market that one could argue is even more important: FX. Citi's chief currency strategist Stephen Englander takes a preliminary look at the implications of what this would look like. Englander admits that "a breach of the credit ceiling is priced in neither fixed income nor FX markets to any significant degree now", and proceeds to speculated that it is foreign exposure (recall that China has over $4 trillion in foreign financial assets) that would be most impacted by such an adverse development. To wit: "Our expectation is that the FX reaction to a debt ceiling breach would be sharper and probably more permanent that the FI reaction, because unhedged foreign investors will see another layer of risk that can not be 'fixed' in the way that cash flows from Treasuries can. The FX market reaction may not be catastrophic, given the limit to the fixed income damage that is likely to be permitted to emerge, but it would legitimately tax foreign investor patience and lead to further USD dumping whenever the opportunity arises."

What, Me Worry? - —In this graying, ex-factory town on the Ohio River, residents worry a lot about what’s coming out of Washington.  But if you ask people here how much they worry about raising the federal debt ceiling—the battle now raging in Congress—the most common answer boils down to … not much. Even the most politically attuned civic and business leaders don’t know how heavily to weigh the implications of a possible federal debt default. So, instead, they add that risk to a deep bucket of anxieties about dysfunction in Washington and economic struggles at home. Few residents say they’re spoiling for a showdown over raising the ceiling; equally few are panicking over the threat of default. They know it’s an issue, but they’re not sure how dangerous it is. They want federal lawmakers to buckle down, set things straight, and let everyone else get back to the day-to-day challenges of earning a living and raising a family.

The US is living below its “means” - The US press was awash with claims over the weekend that the US was “living beyond” its “means” and that “will not be viable for a whole lot longer”. One senior US central banker claimed that the way to resolve the sluggish growth was to increase interest rates to ensure people would save. Funny, the same person also wants fiscal policy to contract. Another fiscal contraction expansion zealot. Pity it only kills growth. Another commentator – chose, lazily – to be the mouthpiece for the conservative lobby and wrote a book review that focused on the scary and exploding public debt levels. Apparently, this public debt tells us that the US is living beyond its means. Well, when I look at the data I see around 16 per cent of available labour idle in the US and capacity utilisation rates that are still very low. That tells me that there is a lot of “means” available to be called into production to generate incomes and prosperity. A national government doesn’t really have any “means”. It needs to spend to get hold off the means (production resources). Given the idle labour and low capacity utilisation rates the government in the US is clearly not spending enough. The US is currently living well below its means. But the US government can always buy any “means” that are available for sale in US dollars and if there is insufficient demand for these resources emanating from the non-government sector then the US government can bring those idle “means” into productive use any time it chooses.

America’s misunderstood hero: the federal deficit - Take a scary idea that sounds reasonable, repeat it often enough, and people begin to take it as truth. Unfortunately, current beliefs about US Treasury debt and deficits are a prime example of this principle: the US is being scared into seeking exactly the wrong sort of policy. Many opinion leaders claim: “America is on the road to becoming the next Greece or Ireland,” “The deficit is destroying our children’s future,” or “We need to sharply cut the deficit now before it’s too late.” All wrong! In fact, the US economy needs big deficits now, and we are nowhere near too late to act. The country can safely run big federal deficits for the next several years without them leading to default, inflation, a collapsing dollar, slower economic growth or onerous taxes on our children. Even if the government tries to sharply reduce its fiscal shortfall over the next few years, it will almost inevitably run big deficits anyway. While Washington needs to get to work on long-term fiscal reform, attempts to cut the deficit sharply in the short term will damage the economy and prove self-defeating. Without large deficits, corporate profits would plunge, leading to skyrocketing unemployment and another Great Depression.

Stephanie Kelton: What Happens When the Government Tightens its Belt? - Yves Smith  - Yves here.  Note that Kelton does not address under what circumstances it is desirable to have the government run a surplus versus a deficit, merely what the implications are. Imagine two people sitting on opposite ends of a 15-foot teeter-totter. The laws of physics dictate that the seesaw will balance if the product of the first mass (w1) and its distance (d1) from the fulcrum (i.e. the balancing point) is equal to the product of the other mass (w2) and its distance (d2) from the fulcrum. Thus, the physicist can show that the teeter-totter will be in balance when the fulcrum is placed 6 feet from the end holding a 150lb person and 9 feet from the end holding a 100lb person. Moreover, the laws of physics ensure that an imbalance will arise if the mass or the relative position of one of the people is changed.  The laws of accounting allow us to demonstrate that similarly powerful concepts apply to the science of economics.

Philip Pilkington: Debt, public or private?: The necessity of debt for economic growth - Apart from debt, there is perhaps one other economic phenomenon that generates exceptionally large amounts of emotive nonsense both on the internet and in real life – and that is government. So it’s quite unsurprising that when government debt is the discussion of the day, passions flare, accusations are hurled and the coming apocalypse is invoked. It would be interesting to undertake a psychological study of modern man’s aversion to government and to debt. If I were to guess I would say that many people tend to associate government with authority and debt with obligation. Authority and obligation – surely in our era of selfish hedonism no other potential restraints are so terrifying to so many. These phenomena intrude rudely on one of our most cherished contemporary ideological myths: individualism. More specifically, that outlandish individualism conjured up by marketing men to flog their wares and crystallised in novels and narratives written by lonely and isolated individuals like Ayn Rand. It is, of course, a fantasy individualism; one that few truly adhere to in their day-to-day lives – but it is, like the religions of days gone by, an important determinate in the messages people choose to accept and those they choose to reject.

Congress Mulls Cuts to Food Stamps Program Amid Record Number of Recipients - Congress is under pressure to cut the rapidly rising costs of the federal government’s food stamps program at a time when a record number of Americans are relying on it. The House Appropriations Committee today will review the fiscal year 2012 appropriations bill for the Department of Agriculture that includes $71 billion for the agency’s “Supplemental Nutrition Assistance Program.” That’s $2 billion less than what President Obama requested but a 9 percent increase from 2011, which, critics say, is too large given the sizeable budget deficit. A record number of Americans -- about 14 percent -- now rely on the federal government’s food stamps program and its rapid expansion in recent years has become a politically explosive topic. More than 44.5 million Americans received SNAP benefits in March, an 11 percent increase from one year ago and nearly 61 percent higher than the same time four years ago. Nearly 21 million households are reliant on food stamps. Opponents of the program argue that money from the food stamps budget -- with what they call its increasingly lax requirements -- needs to be shifted to other programs such as education and child nutrition.

One Year of Food = One Week of Tax Cuts. What's Wrong With This Picture? - The numbers continue to astound. The GOP House plan to slash over $900 million from three federal nutrition programs could deprive up to 500,000 women, infants and children - and they threw in some seniors for good measure - of the food they need. Most of that - $833 million - is equivalent to one week’s worth of Bush tax cuts for the rich. It would reduce the federal deficit by less than one-tenth of a percent. They call this 'righting the ship.' Positively Orwellian.

Disaster relief must be offset - Rep. Eric Cantor (R-Va.) continued to stress Sunday that disaster relief funds for tornado-ravaged Missouri would have to be offset in the federal budget with cuts elsewhere.  The House majority leader added on CBS’ “Face the Nation” that there was a certainly a federal role in helping to rebuild Joplin, Mo., and that Congress would move after getting a request from President Obama.  But, he said, the government needs to act in this case like a family who faces an unforeseen expense and has to cut elsewhere.“Because families don’t have unlimited money,” Cantor said. “And, really, neither does the federal government.” Cantor began calling for offsets last Monday, the day after the tornado that has killed well over 100 struck Joplin. On Tuesday, a House appropriations subcommittee found a $1.5 billion offset to help finance an aid package.

Budget for Millennial America | Roosevelt Campus Network - The Roosevelt Institute Campus Network’s Budget for a Millennial America is a rigorous plan that makes the essential investments in education, health care, infrastructure and green energy needed to ensure a robust 21st century economy, while reducing the federal debt to a sustainable level.  The plan reflects the views of a cross-section of some three thousand Millennials. It was created democratically through the Campus Network’s unique model of student engagement with members and nonmembers alike. The budget addresses the root causes, not just the symptoms, of the federal debt by ending Too Big to Fail and addressing rising health care costs. Its strengthens the social safety net by making it more responsive to crisis and recession through automatic stimulus and stronger worker retraining programs. The Budget for Millennial America is the only citizen-produced deficit reduction plan – by young, old or middle-aged –being given serious consideration in the public debate. Overview | Budget | Videos | Press Release | Commentary

Millennials Solve Federal Budget Puzzle - According to a recent AP-GFK poll conducted May 5-9, 2011, 70 percent of Americans said Social Security is “extremely” or “very” important to their financial security, and 72 percent said so for Medicare. Sixty-two percent said that both programs are extremely or very important.But with the national debt and deficit in focus, people are very concerned about the future of these programs–a little more than a third think that the programs will remain intact in the future. Perhaps these pessimists should peruse the awesome work that the Roosevelt Institute Campus Network has conducted. The Budget for Millennial America is the only citizen-produced deficit reduction plan and it comes from the generation of Americans that is likely to pay the highest price for the country’s profligate ways: the Millennials (ages 18 to 24). The Roosevelt Institute Campus Network drew from some 3,000 students to develop a federal budget plan that reduces the deficit without cutting Social Security and saves money on government health care costs, which would certainly appease the worries of those surveyed by AP!

Bribes Work: How Peterson, the Enemy of Social Security, Bought the Roosevelt Name - Yves Smith - Bribes work. AT&T gave money to GLAAD, and now the gay rights organization is supporting the AT&T-T-Mobile merger. La Raza is mouthing the talking points of the Mortgage Bankers Association on down payments. The NAACP is fighting on debit card rules. The Center for Budget and Policy Priorities and the Economic Policy Institute supported the extension of the Bush tax cuts back in December. While it seems counter-intuitive that a left-leaning organization would support illiberal extensions of corporate power, in fact, that is the role of the DC pet liberal. This dynamic of rent-a-reputation is greased with corporate cash and/or political access. As the entitlement fight comes to a head, it’s worth looking under the hood of the DC think tank scene to see how the Obama administration and the GOP are working to lock down their cuts to social programs. And so it is that the arch-enemy of Social Security, Pete Peterson, rented out the good name of Franklin Delano Roosevelt, the reputation of the Center for American Progress, and EPI. All three groups submitted budget proposals to close the deficit and had their teams share the stage with Republican con artist du jour Paul Ryan. The goal of Peterson’s conference was to legitimize the fiscal crisis narrative, and to make sure that “all sides” were represented.

Can the Gang of Six Become the Gang of 535? - The co-chairs of the President’s fiscal commission–Alan Simpson and Erskine Bowles–sure hope so.  From today’s Washington Post: To be sure, we are encouraged by the positive tone of the bipartisan negotiations being led by Vice President Biden. Those discussions have the potential to produce an agreement on a substantial down payment on deficit reduction… But even under the most optimistic scenario, it seems unlikely that those discussions will yield savings large enough to truly stabilize our debt, let alone make the structural reforms to our entitlement programs and tax code that we so desperately need… We understand that what the Gang of Six is working on is obviously no one’s first choice. Both House Budget Committee Chairman Paul Ryan and President Obama have presented plans — and those plans have certainly pushed the debate forward. But as the budget votes last week proved — producing a soapbox for heated rhetoric but no progress — those proposals are not going to cut it. Both plans have come under intense criticism from the opposing party, and it is clear that neither can earn the type of broad bipartisan support necessary to enact and sustain a credible fiscal plan.

CBO Testified on Several Topics Related to the Government’s Mortgage Programs - CBO Director's Blog - In September 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into federal conservatorship, and the Treasury entered into agreements with the GSEs to provide sufficient capital to keep their net worth from falling below zero. Under those agreements, the government made net payments to the GSEs of $130 billion through March 2011. In return, the government has received preferred stock and warrants that make the Treasury the effective owner of the Fannie Mae and Freddie Mac. This morning CBO’s Assistant Director for Financial Analysis Deborah Lucas testified before the House Budget Committee on several topics related to the government’s mortgage programs, including:

  • CBO’s estimates of the budgetary cost of the government’s takeover and continuing operation of Fannie Mae and Freddie Mac; 
  • How the budgetary treatment of those two enterprises differs from that of the Federal Housing Administration (FHA) and other federal mortgage programs and the potential problems those inconsistencies cause; and
  • Alternative options for the future role of the federal government in the secondary mortgage market.

CBO: Fannie, Freddie Guarantees to Cost Government $42 Billion - Mortgage guarantees made by Fannie Mae and Freddie Mac in the coming decade are expected to cost the government another $42 billion, the Congressional Budget Office said Thursday. The mortgage giants were seized by regulators and placed into a federal conservatorship in September 2008 as housing prices tumbled nationwide and foreclosures climbed. Through the end of March, the government provided about $154 billion in capital to Fannie and Freddie, while the two government-sponsored enterprises paid out more than $24 billion in dividends to the government — resulting in a net cost of about $130 billion so far, according to Deborah Lucas, CBO’s assistant director for financial analysis. Ms. Lucas’ comments came in remarks prepared for a House Budget Committee hearing.

CBO Testified on the Value of the Department of Defense’s Annual 30-Year Shipbuilding and Aviation Plans - CBO Director's Blog - Every year, the Congress is asked to approve the procurement of one year’s worth of expensive items such as ships and aircraft. Yet those decisions have long-term implications. Well-constructed 30-year acquisition plans for major weapon systems can provide information about those implications. This morning CBO senior analyst Eric Labs testified before the U.S. House Armed Services Committee’s Subcommittee on Oversight and Investigation to discuss the value of the Department of Defense’s (DoD’s) annual 30-year shipbuilding and aviation plans. The 30-year ship and aircraft plans benefit Congressional oversight and decisions about funding in at least three different ways:

  • Thirty-year plans may reveal cumulative long-term effects of annual appropriation decisions that may not be apparent from a shorter perspective.
  • Such plans may also reveal imbalances between long-term objectives for inventories and projected budgetary resources.
  • The plans provide information on DoD’s assumptions about the service lives of major weapons systems and how those assumptions may affect its inventory goals.

Mysterious fund allows Congress to spend freely, despite earmark ban - The defense bill that just passed the House of Representatives includes a back-door fund that lets individual members of Congress funnel millions of dollars into projects of their choosing. This is happening despite a congressional ban on earmarks -- special, discretionary spending that has funded Congress' pet projects back home in years past, but now has fallen out of favor among budget-conscious deficit hawks. Under the cloak of a mysteriously-named "Mission Force Enhancement Transfer Fund," Congress has been squirreling away money -- like $9 million for "future undersea capabilities development," $19 million for "Navy ship preliminary design and feasibility studies," and more than $30 million for a "corrosion prevention program." So in a year dominated by demands for spending cuts, where did all the money come from? Roughly $1 billion was quietly transferred from projects listed in the president's defense budget and placed into the "transfer fund." This fund, which wasn't in previous year's defense budgets (when earmarks were permitted), served as a piggy bank from which committee members were able to take money to cover the cost of programs introduced by their amendments. And take they did.

The Virtues of Investing in Transportation - Laura D’Andrea Tyson - Years of underinvesting in the nation’s transportation infrastructure are apparent in congested roads, freight bottlenecks, airport delays and overcrowded or nonexistent public transit operations. Yet the heated debate in Washington about how much and how fast to slash government spending is overlooking how a significant, sustained increase in infrastructure investment would create jobs and strengthen the nation’s competitiveness. Infrastructure spending, adjusted for inflation and accounting for the depreciation of existing assets, is at about the same level it was in 1968, when the economy was one-third smaller. Public investment on transportation and water infrastructure as a share of gross domestic product has fallen steadily since the 1960s and now stands at 2.4 percent, compared with 5 percent in Europe and more than 9 percent in China.  The American Society of Civil Engineers, for example, estimates that we need to spend an additional $110 billion a year to maintain the transportation infrastructure at current performance levels. The Congressional Budget Office reported in May that simply maintaining the current performance of the system would require the federal government to increase its annual spending on highways by about one-third.

Our Infrastructure Deficit: This Time, It’s Personal - For the second day in a row, there is no power in the building which houses my employer, the Center on Budget and Policy Priorities (the CBPP website is still up, though).  Apparently, a number of buildings in that part of town are out.   OK, so let’s get this straight.  We’ve got major infrastructure deficits in this country, including an electricity grid that’s demonstrably unreliable.  I get that systems come down, but a city block…for two days!  That’s a little scary. And my situation is, of course, a microcosm of a larger, known problem.  Check out the 2009 Report Card from the American Society of Civil Engineers: There’s the demand.  Where’s the supply?  Um…how about 20+ million un- or underemployed, including construction workers, whose unemployment rate is about 18%.

What's Wrong With The Deficit Debate - Listening to today’s debates, one might think that the United States faces a budget deficit. Not so. America faces two budget deficits. The first challenge is near term. Once the economic recovery is well-advanced, we must find a way to cut spending or raise taxes to prevent government debt from rising faster than income. The second challenge is dual: to slow the growth of health care spending, in general, and Medicare spending, in particular, and to decide whether to make cuts to Social Security. Treating the two budget challenges as one, however, just hampers efforts at finding an adequate solution to either. To understand why the debate about the role and size of social insurance is largely independent from the debate about closing the near-term deficit, consider the proposals advanced by House Budget Committee chairman, Representative Paul Ryan. The Medicare conversion he proposes would not take effect until 2023. The plan makes no mention of Social Security. In the past, Ryan has proposed pension cuts, but only after a delay of seven years. Likewise, various budget commissions have endorsed long-term changes in Social Security. None, however, has suggested changes that would save more than a pittance over the next decade.

Who Created This Mess? - Not us, say the Republicans. “We didn’t create this mess,” a Republican said to Tim Geithner in a meeting recently, referring to the national debt and the need to raise the debt ceiling this summer. Yet, as the Times continues “Independent analyses have shown that more than half of the $14.3 trillion debt is from policies enacted during the past decade when Republicans controlled both the White House and Congress, and much of the rest from lost revenues and stimulus spending and tax cuts since Mr. Obama took office at the height of the financial crisis and recession.” I did one of those “independent analyses” myself a few months ago.To summarize, I looked at five Congressional votes in the past decade that contributed a total of $3.1 trillion to the current national debt. And the fact is that, on a dollar-weighted basis, current Republican senators voted for that debt 67 percent of the time (typically the 2001 tax cut, the 2003 tax cut, Medicare Part D, and the 2010 tax cut), while current Democratic senators voted for it 50 percent of the time (typically the 2009 stimulus and the 2010 tax cut

Awesome Wrongness - Krugman - About a year and a half ago, all the Very Serious People said that it was time for a pivot in economic policy. Recovery was underway, so no more efforts to stimulate demand; the big threat was the bond market vigilantes, so it was urgent to slash the deficit now now now. So, here’s what has happened to employment, which I show since the beginning of the recession to indicate how much ground needs to be made up: And here’s the 10-year bond rate from the the beginning of 2010 until last week — it was below 3 percent yesterday: Yes, all the attention has been focused on the wrong problem.

What A Drag - Krugman - From Goldman Sachs, an estimate of the federal budget impact on growth. The gray line shows the direct impact, the blue line includes the induced “multiplier” effects. Notice that this shows the rate of change, not the level effects. I explained the difference a while back. What you can see is that the unwinding of the stimulus is a growing drag on growth. The GS economists warn that depending on how the budget battle plays out, things could be even worse.

Liquidity Preference and Loanable Funds, Still (Wonkish) - Krugman - More than two years have passed since the big debate over the effect of budget deficits on interest rates in a liquidity trap. The original argument of the anti-stimulus types was that large-scale government borrowing would drive up interest rates even in the face of high unemployment, and that this would hurt the economy. At that time the argument was framed in terms of simple crowding out, not solvency. And I argued that the whole thing represented a failure to understand basic macroeconomics. The apologists offer a series of special explanations; it was the Greek debt crisis driving investors into the dollar safe haven; it’s the Fed’s purchases; whatever. But this was as close to a clean test of a proposition as history ever offers. And liquidity preference won, hands down.

Financial Repression - Krugman - I’ve been getting questions about Carmen Reinhart’s new paper on financial repression (pdf) in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the US and UK, in particular, dealt with their war debts. On a first read, I have some problems with the methodology, which is based on lopping off any years in which the real interest rate on government debt was negative. It’s easy to think of ways this could go wrong, when you have fluctuating annual inflation and debt of relatively long maturity. But leave this aside, and look at broader economic performance during the period in which financial repression was supposedly a big factor: why are we supposed to think of what happened as a bad thing? Here’s the log of real median family income (I use a log so that equal proportional changes are equal in height) since 1947: The first half of this figure is, according to Reinhart, the era of financial repression. It’s also, as you can see, the era of the great postwar boom. Surely one’s response to this history should be “Yay financial repression!”

Contractionary Fiscal Policy and the US Job Market -The BLS released its estimates of employment and the unemployment rate for May. Unsurprisingly, it was a weak report, showing a marked slowdown in the US's net job creation in the private sector in May compared to preceding months. The government sector of the economy continued to make the jobs picture worse. May was the seventh month in a row during which government layoffs undid some of the work of the private sector in creating jobs. Since January 2009, government employment has shrunk in 21 of 29 months -- and without temporary hiring for the Census, it would probably have shrunk in 25 of the last 29 months. This steady reduction in government employment is a form of contractionary fiscal policy.If government employment were simply keeping up with population growth in the US, we would expect to see about 17 to 18 thousand more state and local government jobs each month. Instead employment has shrunk by an average of 15 thousand jobs per month since the start of 2009. The following chart shows what the monthly employment report would have looked like over the past 8 monthsif government employment had simply kept up with the rate of population growth:

US economy: out of ammo? - The US employment numbers for May seemed to surprise the markets, but in fact they confirmed what we already knew from a string of earlier data releases, which is that the economy has slowed very markedly in recent months. The debate now is whether this slowdown has been triggered mainly by transitory factors – the fallout from the Japanese earthquake, stormy weather, and a spike in gasoline prices above $4/gallon – or whether it reflects a more fundamental malaise in the economic recovery. I am not usually disposed towards pessimistic nightmares about the US economy, but I am worried about the all-too-easy assumption, which is often heard from investors, that the Fed will automatically ride to the rescue if there are signs of a double dip recession. In fact, I have been told several times this week that QE3 is already a “done deal”... Since QE2 was launched, real GDP growth has slowed markedly, while inflation and commodity prices have risen. Rightly or wrongly, another dose of the same medicine would certainly be a hard political sell. And that is the source of my nightmare. If the present downward momentum in the economy were (unexpectedly) to continue, where would the rescue come from?

Apologies – we need a toxic rethink on the economy - The subject of this article has become taboo but sometimes nice people find themselves in nasty situations – such as monthly job growth of only 54,000 two years into a recovery – and a certain flexibility is needed.  That is why I want to talk about economic stimulus: stimulus, billions of dollars of it, fiscal and monetary. If that does not make you sick to the sacrum then we can talk about bail-outs as well. After the deficit spending and quantitative easing used to revive the economies of the advanced world in recent years these topics are toxic. But yesterday’s jobs report was toxic as well. Almost every sector of the economy was weak, and the unemployment rate rose to 9.1 per cent. It points to a stumble in the US recovery – and where the US goes the world follows. The revulsion caused by talk of stimulus is understandable. The tax cuts, spending increases and bank bail-outs used to fight the recession of 2007-09 have left behind huge budget deficits and sovereign debt crises in countries such as Ireland; in the US, UK and Japan interest rates are still at or close to zero. People want to fix these problems and get back to normal, not take more crisis measures. But to rule out all further stimulus would be extremely dangerous.

Jobs Fix Deficits -- Polls show that the American Majority is much more concerned about jobs than deficits. So why is DC talking only about deficits instead of jobs, when jobs are the medicine for deficits? And why is DC only talking about budget cuts as a path to fixing the deficits, when the deficits were caused by tax cuts and lack of jobs? In fact most of the “deficit cures” being discussed in DC don’t make the deficit better, they make deficits worse because they kill jobs. Now that the stimulus is running out, so is any sign of a jobs recovery. The stimulus stopped the economic freefall that was occurring under the prior administration, and restored at least some job growth. It worked, but it was not big enough. Much of it was wasted on tax cuts that leave behind only debt, and it is running out. At the same time, state and local government cutbacks are working against any current economic rebound. For the longer term, badly-needed restructuring of trade deals, development of a national industrial policy and removal of the plutocratic tax and regulatory changes that led to intense concentration of wealth have not occurred, keeping the economy from moving forward. See for yourself in the following chart:

The Lonely Crowd(ing Out) - Krugman A few commenters have suggested, in response to my post on the utter failure of the claim that budget deficits would drive up interest rates even in a liquidity trap, that things might look different if we looked at real rather than nominal rates. Well, no. Thanks to inflation-protected securities, we can look at real rates directly — and here they are: There was a bump in real rates in the months following Lehman’s failure — that was caused by a flight to liquidity, which meant that only plain-vanilla Treasuries were wanted. But since then real rates have dropped to extraordinarily low levels: less than 1 percent on 10-years, negative on 5-years. A corporation would see borrowing costs this low as a strong incentive to borrow more and invest. In Washington, however, all you hear is fear of deficits.

Fatal Fatalism -  Krugman - Our current economic discourse is pervaded by fatalism. Leave aside the people who insist that somehow Obama has destroyed capitalist incentives by passing Mitt Romney’s health care plan and threatening to raise tax rates to Clinton-era levels. Even among people who should be sensible, you hear many assertions that run something like this: historically, recovery from financial crisis is usually slow, so we have to accept a slow recovery this time around too. Actually, that’s more or less what Obama has been saying. This fatalism is deeply destructive — because there’s no good reason we need to experience many years of high unemployment. What historical experience shows isn’t that there’s no answer to post-crisis slumps, it only shows that most governments have responded to such slumps with the same kind of fatalism and learned helplessness we’re showing now. We are not, after all, suffering from supply-side problems. We don’t have high unemployment because workers lack the necessary skills, or are stuck in the wrong industries or the wrong locations; the hypothesis that we’re mainly suffering structural unemployment has been repeatedly shot down by evidence. This is a demand-side slump; all we need to do is create more demand.

Morgenson Runs Peterson Institute Propaganda Against “Entitlements” Meaning Medicare and Social Security - Yves Smith - I’m generally a Gretchen Morgenson fan, since she’s one of the few writers with a decent bully pulpit who regularly ferrets out misconduct in the corporate and finance arenas. But when she wanders off her regular terrain, the results are mixed, and her current piece is a prime example. She also sometimes pens articles based on a single source, which creates the risk of serving as a mouthpiece for a particular point of view. And the one she chose to represent tonight is one that is in no need of amplification, that of the Peterson Foundation’s well-funded campaign to gut Social Security and Medicare.  The Peterson Institute paper she relies upon, by former Fed and Treasury economist Joe Gagnon and Peterson Institute research associate Marc Hinterschweiger, is about the government deficits and the need to take Serious Measures to get them under control, which of course means reducing entitlements, in particular Social Security and Medicare.

Splitting Difference Would Reduce Federal Spending By $4 Trillion - When the Senate voted down the House Budget Resolution (the Ryan budget) by a vote of 40-57, it also voted down an Obama Administration budget (submitted in February) by a vote of 0-97. But the Obama Administration had already discarded that budget when President Obama outlined in general terms a new budget in his speech on April 13. The chart below shows the discarded budget and an estimate of the current budget based on the speech. (The chart is adapted from my April 22 Wall Street Journal oped) The White House responded to last week’s votes by saying that “both sides will need to give some ground in order to reach a bipartisan agreement on meaningful deficit reduction.” That is, of course, true. But what should be the starting point for the negotiations? What would splitting the difference mean?

Discretionary Truthiness - Krugman - I keep hearing Republicans say that Obama has increased nondefense discretionary spending by 80 percent; it’s one of those “facts” that apparently everyone on the right knows. So where does that come from? Well, it turns outhat Politifact is on the case — but gets it wrong, too, although not as wrong as the Republicans. The number comes from taking nondefense discretionary spending as reported — which rose 26 percent from 2008 to 2010 (Table 8.7) — and then adding the entire discretionary spending part of the stimulus. Politifact says that this is misleading because not all of the stimulus funds were spent in 2010. But it’s much worse than that: stimulus spending is already in those discretionary spending numbers. If you look at the table, you’ll see bulges in spending on education and ground transportation that go away after 2011; that’s the stimulus. So this GOP talking point is a complete fraud; it’s based on counting the same spending several times over.

Orszag: Ryan Budget Would Increase Total Health Care Spending - In a new Bloomberg column, former OMB Director Peter Orszag explains how House Budget Committee Chairman Paul Ryan’s plan to privatize Medicare would increase total health care spending.  I made the same point recently; below is the chart in my post. To some extent, the Ryan plan would shift health care costs from Medicare to the program’s beneficiaries.  But as Orszag’s column emphasizes, that’s only part of the story.  The much bigger news is that Ryan’s plan would increase total health spending for the elderly — the beneficiaries’ share plus the government’s share — by upwards of 40 percent, according to the Congressional Budget Office (CBO). There are two reasons why.  First, private insurance plans have much higher administrative costs than Medicare.  Second, private plans have less bargaining power with health care providers and are unable to negotiate payment rates that are as low as Medicare’s.

Medicare Vouchers Won’t Reduce Health Spending - The House Republican plan to replace Medicare with vouchers could lower national health spending in only one of two ways: Either seniors would respond to higher out-of-pocket costs by using less—or more efficient–health care, or private insurance companies would ration their care for them. In effect, insurance company bureaucrats would replace those government bureaucrats so disparaged by House Republicans.   If neither happens, the GOP plan will fail to reduce overall health spending. The proposal to give those turning 65 in 2022 a subsidy to buy their own insurance would merely shift those costs from government to the elderly. Unfortunately, there is no evidence that either of these strategies would reduce total medical expenses, at least based on what we know about past experiments. Today, Medicare beneficiaries pay about one-quarter of the program’s cost. Under the House plan, proposed by Budget Committee Chair Paul Ryan (R-WI), seniors would pay about 60 percent in 2022 and nearly 70 percent by 2030. What would happen if they paid more?

Health Care Rationing for Beginners - But there’s a theme that is surfacing that goes something like this: OK, Ryan’s plan is extreme and has no chance. But we all know we spend too much on health care, and we have to spend less, which means that we have to ration care one way or another. Ryan does it by scrapping Medicare in favor of indexed vouchers; Obama does it by reducing Medicare payment rates and, more ominously, with “a 15-panel board to ration Medicare by unelected bureaucrats.” On one level this seems true. We are projected to spend too much on health care, and we need to reduce those projections. And in one sense, we can call that “rationing.” As you learn in Economics 101, economics is about the allocation of scarce goods and primarily about using markets to allocate scarce goods. If you define rationing as the allocation of scarce goods (where everyone can’t get everything she wants), then obviously we have to ration health care. But just as obviously, we ration it already: we ration health care by denying most of it (except emergency care) to poor people, people without good jobs, people with preexisting conditions, and so on. So the statement that we have to ration care is unexceptional to the point of being meaningless.

The Facts Have A Liberal Bias, Again - Krugman - Steve Benen watches an entire panel on Meet the Press condemn Democrats for accurately describing the Ryan plan: I’m at a loss to understand what, exactly, Ruth Marcus, David Brooks, and their cohorts would have Dems do. Congressional Republicans have a plan to end Medicare and replace it with a privatized voucher scheme. The proposal would not only help rewrite the social contract, it would also shift crushing costs onto the backs of seniors, freeing up money for tax breaks for the wealthy. The plan is needlessly cruel, and any serious evaluation of the GOP’s arithmetic shows that the policy is a fraud.Which part of this description is false? None of it, but apparently, Democrats just aren’t supposed to mention any of this. When the gaping holes in the Ryan plan were revealed, I expected the Very Serious People to move on and find a new GOP daddy to idolize. Instead, however, they’ve mostly dug in, condemning anyone who points out that the plan is a piece of junk as being somehow out of bounds.

(Imaginary) Conversations Between Paul Ryan and the President - Len Burman and Ruth Marcus have both dreamed up their own fantasized versions of “adult conversations” between House Budget Committee Chairman Paul Ryan and President Obama–or as they both refer to them “Paul and Barack.”  Check them out.  If only our policymakers could be so openly and honestly communicative with each other. (I maintain this is one important way in which policymaking probably would go differently–and I believe better–if we had more women in charge.  Note that Len’s version, while more truthful than the real conversations, is still more “tit-for-tat” compared with Ruth’s “heart-to-heart” version.)

Putting the Doc-Fix in Play - I say that a doable Medicare fix is simply to not do another doc-fix and allow physician fees for Medicare to fall by 30 percent on January 1, as required by current law. Even staunch conservatives like Veronique de Rugy think such a cut is too much. Space prevented me from explaining my proposal more thoroughly. I was trying to do two things. First, I wanted to call the Republicans’ bluff. They keep saying that deep Medicare cuts are their price for raising the debt limit – as if they would be doing Obama and the Democrats a favor by preventing a default on the debt – by laying a specific Medicare cut on the table. Since it’s already in law, it’s going to happen unless Congress takes positive action to prevent it. So Republicans will have to either allow doctors’ fees to be slashed or come up with a pay-for to do another doc-fix and put the problem off for another year.

Who's to Blame for the Deficit? The Poor!   - That pesky deficit is becoming a real bother. If the government could only get some more money, we could fix it. Last week Congress held a hearing on one way to get more money. Go after a tax credit program designed to help the working poor. Now that’s the ticket!As reported by Tax Notes Today, IRS official Steven Miller told a House subcommittee that the IRS will soon require tax return preparers to justify the earned income tax credit (EITC) claimed on tax returns they prepare for working poor clients. According to Miller, more than 60 percent of returns claiming the EITC are prepared by paid tax return preparers (which is a whole other disturbing problem in itself). Lawmakers agreed. More needs to be done about (or is that to?) the working poor.

Greenspan 'Scared' Over Deficit; Debt Ceiling Must Rise - In an interview with CNBC, the former central bank chief described himself as a "small government, free-market economist" who nonetheless believes that in order to raise revenue and close the debt gap, 1990s-era taxes must be reinstituted.It's a measure, he said, of how serious the problem has become. "The fact that I am in favor of going back to the Clinton tax structure is merely an indicator of how scared I am of this debt problem that has emerged and its order of magnitude," he said. The marginal tax rates fell in the early 2000s under former President George W. Bush, who instituted sweeping cuts that last year were renewed in a deal between President Barack Obama and congressional Republicans. But the rates, particularly those on Americans earning more than $200,000 a year, have been the focus of intense debate and are considered in peril depending on how next year's elections go. Congressional Democrats see higher taxes as a key to raising revenue to close the budget gap.

Are Taxes in the U.S. High or Low? - Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product. By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984. In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

Federal Taxes At Lowest Rate Since 1950 - Bruce Bartlett, former adviser to President Reagan, runs some numbers on taxes in the United States and finds a result that is counter-intuitive given the state of debate: Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product. By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Officeestimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan‘s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

GOP Can’t Handle The Truth: Taxes Are Lower Under Obama Than Reagan - President Obama met with House Republicans today at the White House to discuss ways to move forward on negotiations regarding the nation’s debt ceiling and the budget. During the discussion, talk evidently turned to taxes, and when Obama noted that taxes today are lower than they were under President Reagan, the GOP, according to The Hill, “engaged in a lot of ‘eye-rolling’“:Republicans attending a White House meeting on Wednesday didn’t take kindly to President Obama telling them tax rates were higher during the Reagan administration. GOP members engaged in a lot of “eye-rolling,” according to a member who was on hand to hear Obama, who invited House Republicans to the White House for discussions on the debt ceiling. [...]“[The President] made a comment like the tax rate is the lightest, even more than (under former President) Reagan,” Rep. Lee Terry (R-Neb.) told The Hill following the meeting. House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) joked that during the meeting, “We learned we had the lowest tax rates in history … lower than Reagan!”

The Age of Greed: Opposing Tax Cuts - The current public discourse over cutting the federal budget is not about economics, but politics. Nothing is so striking as the fact that those seriously disturbed by a rising budget deficit and a growing debt-to-GDP level have so little to say about raising taxes—or if they do, it is with little conviction. To the contrary, most of the officially sanctioned plans include tax cuts as a major component. How can this be? Surely, the great advocates of reducing budget deficits, such as the Committee for a Responsible Federal Budget, should be highly visible advocates of tax increases. If they are not—and they are not—they should justify their position. More economists should be up in arms about the budget balancing proposals, not merely of Paul Ryan - whose plan is both ridiculous and an outrage - but of Simpson-Bowles, Rivlin-Domenici, and the Obama plan. All demand more cuts in government spending than they do increases in taxes—though Rivlin-Domenici only slightly more. Some suggest that federal spending should be capped at a specific level of GDP. Bowles-Simpson argues it should be 21 percent. Ryan wants to reduce it to 19 percent, and going down.

IRS Must Step Up Efforts To Close $345 Billion Tax Gap -Report - The Internal Revenue Service must step up its efforts to close the $345 billion gap in unpaid or late taxes, according to a Treasury Department report Thursday. To reduce the $345 billion tax gap in missing or late taxes, the IRS must develop better methods to ensure widespread compliance, the Treasury Inspector General for Tax Administration said in its semi-annual report to Congress, concerning the period between October 1, 2010 and March 31, 2011. During that time, audits conducted by the inspector general found continuing problems with contractors who owe back taxes to the government, and that the IRS must invigorate its examination of individual tax returns with rental real- estate activity. Increasing its scrutiny of individuals filing a loss from rental real-estate activity could help the IRS bring in as much as $27.3 million in new taxes over five years, the report estimated.

If we need taxes, why not pollution taxes? - Let's start with the obvious: Most Democrats (and, for that matter, most of the bipartisan deficit panels that are churning out endless white papers right now) agree that we can't tackle our long-term debt issues through spending cuts alone. Some sort of tax reform that raises revenue will have to get thrown into the ring. So why not do that through a tax on carbon pollution or other assorted environmental unpleasantries? After all, if we have to raise revenue, we may as well slap higher taxes on behavior we'd like to discourage (like pollution and congestion) rather than, say, labor, no?At least in rarefied think-tank circles, that idea's gaining favor. Four of the six groups that recently sketched out deficit-reduction plans for the Peter G. Peterson Solutions Initiative ended up advocating a new carbon tax as part of their proposals — including, note, the conservative American Enterprise Institute. And here's another reason to consider a shift: According to a new IMF paper the United States gets, by far, the lowest percentage of revenue from environmental taxation of any OECD country... [C]ompared with the rest of the world, we vastly undertax pollution. And changing this doesn't have to cripple the economy: Congress could always do things in a revenue-neutral manner, swapping in higher taxes on greenhouse gases (say) in exchange for lower payroll taxes.

Carbon Taxes: The Levy (Some) Conservatives Love - You know the Washington Rule: Liberals will never support spending cuts and conservatives will never back tax increases. Yet, there is one new levy that at least some on the right do support—a carbon tax. Backing for this idea has popped up in some interesting places. Most recently, the American Enterprise Institute included it in a deficit reduction plan it prepared for the Peterson Foundation. In recent years, conservative luminaries such as columnist George Will and economist Art Laffer have also talked up the idea. I am by no means suggesting a carbon tax would be an easy sell, especially given the checkered political history of energy taxes. But, in contrast to other tax increases, this one has sprouted a few green shoots on the conservative side of the fence.

Study finds many corporations pay tax rate of effectively zero - A number of U.S. corporations had an effective tax rate of less than zero in recent years, a new study has found. Citizens for Tax Justice (CTJ) released an examination on Wednesday that said that a dozen major companies had, between them, an average effective tax rate of roughly -1.5 percent between 2008 and 2010 — well below the top marginal corporate rate of 35 percent. The liberal-leaning group’s analysis comes more than a quarter-century after it released a similar report that is widely credited with adding momentum to the push for the last successful overhaul of the tax code, which was completed in 1986. Robert McIntyre, CTJ’s director, said that he hopes the center’s effort has a similar impact this time around, especially given the country’s current fiscal situation. CTJ is among the groups calling to eliminate corporate tax credits and deductions and use the profits to help pay down deficits. “Now we’re even more desperate to get money out of these guys,”

Effective Corporate Income Tax Rates and the Corporate Tax Yield - On the heels of numerous House Republican proposals to reduce corporate tax rates, there has been a trend among the fiscal policy punditry to claim that US corporate tax burdens are already minimal and that the economic burden of high marginal tax rates is exaggerated. Such was the nature of Tuesday's post by Bruce Bartlett in the Economix blog, which reported that US corporate tax revenue as a share of GDP was a meager 1.8% for 2008 (this according to the OECD; CBO reports 2.1% for the same year). But because this statistic was relayed amidst a discussion of "effective tax rates," it is important to clarify that 1.8% does not represent or approximate the average effective tax rate for US corporations.The argument that low corporate tax revenue as a share of GDP directly indicates a low effective tax rate ignores that corporate earnings make up a minor share of GDP. Quite obviously, corporate profits-the base of corporate taxation-do not total the entirety of US GDP, and therefore 1.8% is not a figure that should be tossed around in the discussion of effective tax rates.

Concentration, Manipulation and Margin Calls - Over the past 25 years the financial markets of the world have become highly concentrated in the intermediation of a handful of firms, and regulation has been harmonised in the interests of these few firms. Sadly, these few global firms have been for some time in "a conspiracy against the public", and have subverted the organs of public governance and the infrastructure of the financial markets to their purposes. Regulators and legislatures have done what they were asked to do in rubber stamping the policies that promoted further concentration, assured the whole time that it would result in "efficient markets", when the reality has been entirely otherwise.  Four global banks are intermediaries in 85 percent of OTC derivatives transactions. The same banks dominate prime brokerage. The same banks own large equity interests in the now demutualised exchanges, clearinghouses and even warehouses of the global markets. Naturally, the same banks dominated underwriting of securitised assets. The implications have scarcely been grasped of what this portends in terms of the information asymmetries and the opportunity to manipulate markets without risk

Congressional Research Service Confirms Big Banks Borrowed Cash For Next To Nothing, Then Lent It Back to the Federal Government at Much Higher Rates - As I’ve noted for years, the government has been guaranteeing that the big banks make money at taxpayer expense by loaning money at very low interest rates, and then letting the banks loan the money back to the government at much higher interest rates. For example, as I pointed out in January:  Bloomberg notes: “The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” “It’s a transfer from savers to banks.”  The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter. The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18. Harry Blodget explains: None of the big four banks had a single day in the quarter in which they lost money trading..

what network science has to say about large universal banks - I have just come across an intriguing paper published by a group of scientists out of the New England Complex Systems Institute (NECSI), called “Networks of Economic Market Interdependence and Systemic Risk.” This paper studies the dynamic network of relationships among corporations that underlie what are termed “cascading economic failures” (cascading failure being common to many complex systems). The economic risks associated with cascading financial losses are normally ignored by conventional economic analysis, which tends to take into account only linear exogenous events.  Using network analysis, the authors present research that strongly confirms what many of us have thought all along, namely that the clustering of financial services in the wake of the repeal of Glass-Steagall in 1999, and the rapid rise of universal banks in the wake of that repeal, made our financial system much more vulnerable to collapse.

Basel spatwatch, EU vs US edition - In both the eurozone and the US, unemployment is proving stubbornly immune to monetary policy. And on the regulatory side of things, the global nature of the banking system means that you need to get all major countries on the same page. Which is proving all but impossible, as the latest little spat between EU and US regulators proves. The FT has all the details, starting with Peter Spiegel’s story yesterday that Michel Barnier, the European commissioner in charge of financial markets, had sent a strongly-worded letter to Tim Geithner, complaining that the US has historically been very slow on adopting Basel standards, and that its attempts to regulate bankers’ pay are toothless and ineffectual. All of this is true. Today, the FT follows up with the US response, which concentrates on the fact that the US is ahead of Europe on matters such as central clearing and derivatives trading, and hinting that Europe is more likely to backslide on the Basel III timetable than America is. These, too, are reasonable points. Treasury also pushes back on the matter of banker pay, saying it has no real interest in prescribing how much people get paid, just how much risk they’re incentivized to take. That one makes less sense.

Battle to regulate banks has just begun - Bankers on both sides of the Atlantic are lobbying furiously against stronger regulation. Authorities in different countries are reluctant to strengthen regulation as if the crisis never happened. The European Commission even hesitates to fully implement Basel III. In this debate, many argue that global competition requires a “level playing field”. Following this argument, and concerned about the City’s competitiveness, the Interim Report of the UK’s Independent Commission on Banking avoids proposing tougher regulation for investment banks. These “level playing field” arguments are invalid. If banks impose costs and risks on a country’s economy, the country is better off with rules that limit the risks and costs even if others are not doing the same. The global economy is not a sporting event where a country’s athletes are expected to win as many medals as possible, but a system for the exchange of goods and services. In this system, the competitive successes of banks and the competitive failures of firms in other industries are two sides of the same coin. A country exports financial services and imports other products according to its comparative advantage.

The Earth is Flat (and Regulation is Easy) -As a philosopher, I’m often at pains to remind people of the distinction between ethics and law. But there’s also no denying that there are important interrelationships between ethics, on one hand, hand law (and the regulations pursuant to various laws) on the other. When done well, regulations are shaped by good ethical reasoning, aimed at promoting the public good while at the same time respecting individual and collective rights. And it’s very likely that ethical standards are, in turn, influenced by existing legal/regulatory standards. Regulation of course attracts a lot of attention — arguably a lot more than ethics does — both from industry and from critics, as well as from all points on the political spectrum. It’s a frustrating topic for just about everyone. Just about everyone can name regulations or regulatory agencies that they think are dumb or ineffectual or too powerful or not powerful enough.The problem — and the reason that makes knee-jerk criticism of particular regulations or regulators perilous — is that regulation is in fact incredibly difficult.

Gundlach on another crisis: “How much currency do you have?” - Joe Weisenthal sat down with bond manager Jeffrey Gundlach at Business Insider’s headquarters in New York. Below is a clip of that conversation. His views on the lack of financial regulation and derivatives financial weapons of mass destruction mirror the concern we have heard from Carl Icahn and Mark Mobius. Whereas those two see another crisis as likely as a result, Gundlach does not mention the word ‘crisis’; however, he does conclude: “We’re setting ourselves up for yet another one of these experiences where people wake up and they realize that they thought that they had wealth but it was all in some sort of funny land.” His take: Forget about gold for the time being. Investors need to own cash - currency, simply as a hedge against the risk of another derivatives mess down the line. Basically, Gundlach is saying your grandmother’s trick of hiding currency under the mattress works.

Mobius Says Financial Crisis ‘Around The Corner’ - Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.  “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said  “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”  The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.  The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008.

The Next Financial Crisis Will Be Hellish And It's On Its Way - "There is definitely going to be another financial crisis around the corner,” says hedge fund legend Mark Mobius, “because we haven’t solved any of the things that caused the previous crisis.” We’re raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out.  We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world’s major banks are tangled up.Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius’ guess of 10 times the world’s annual GDP. “Are the derivatives regulated?” asks Mobius. “No. Are you still getting growth in derivatives? Yes.” In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.

Is There an Echo in Here? - The deputy governor, financial services of the Bank of England, Paul Taylor, gave a speech warning of the dangers inherent in clearinghouses. All of his major points were raised in my ISDA discussion paper (and which I’ve been flogging in my research and here on SWP for going on 3 years now).  Most notably, he highlighted the dangers of procyclical margins, and the very real possibility of a CCP failure and the devastating consequences such a failure would have. Been there, said that. Such realism is good to hear, but as I said when Bernanke echoed similar concerns, it would have been a damn sight better had people like Mr. Taylor piped up before the clearing mandate train left the station with Congressional and Parliamentary Casey Joneses at the throttle. But here’s the truly ironic part.  As I did in my ISDA piece, Taylor grapples with how to resolve a failed CCP:

Banks May Need More Capital - Large U.S. financial institutions might be forced to sharply increase their capital cushions as part of a plan discussed by the Federal Reserve to help prevent another financial crisis. In a speech on Friday, Federal Reserve governor Daniel Tarullo suggested institutions could be ordered to hold capital ranging from 8% to 14% of assets, adjusted for the amount of risk they pose.  No decision has been made, but in some extreme cases that would be twice as high as the 7% agreed to last year by global policy makers in Basel, Switzerland.

Why Dodd-Frank is Dud-Blarney - It is a shame that Christopher Dodd  did not become a lobbyist earlier, before he teamed up with Barney Frank to sponsor the Dodd-Frank Act. Mr. Dodd first helped set into motion a fast-expanding web of obscure bureaucratic dicta for almost all financial activity, then took a lucrative job as Hollywood lobbyist. As Richard Epstein writes in National Affairs, the new financial law is notably vague and broad, granting vast discretion to government bureaucracies, giving them the wherewithal to waive or soften requirements for some parties while riding hard on others.   Thus the rulemaking to implement Dodd-Frank created immense opportunities for influence peddlers—they might celebrate the great contribution Mr. Dodd made to their bottom line before he joined their ranks. The WSJ reports that Dodd-Frank rulemaking by various agencies has already resulted in more than three million words in the Federal Register, though most of the 387 mandated sets of rules have not even been put forth.  Behind the mass of almost incomprehensible decrees are impenetrable deals that favor the politically connected and savvy. 

Why Bankers Need to Be Put Into Little Boxes - There's a beguiling little moment in the financial-crisis documentary Inside Job where hedge fund billionaire George Soros describes the principles of oil tanker design. If a tanker consisted of one big tank of oil, the sloshing liquid would soon capsize the vessel, Soros explains. So tankers are comprised of lots of smaller, separate tanks, which keeps the sloshing in check and the ships afloat. Financial markets are like that, Soros goes on. If they're compartmentalized, the risk of crisis is much lower than if all sorts of financial products and institutions are allowed to mix together in a giant sloshfest. It's a nice analogy. That doesn't mean it perfectly describes the workings of financial markets (it's an analogy), but it certainly gets at some aspects not hinted at in the general equilibrium model that long dominated financial economics — in which more "complete" and intertwined financial markets are supposed to lead to better economic outcomes. To mainstream economists the Glass-Steagall Act that separated the banking and securities industries looked like a competition-restricting, innovation-damping anachronism. To those knowledgeable about oil tankers, its repeal in 1999 must have been far more disturbing.

Volcker Named to Panel That Will Advise on Too-Big-to-Fail - Former Federal Reserve Chairman Paul Volcker and former Citigroup Inc. (C) co-chairman John Reed have been named to a Federal Deposit Insurance Corp. panel that will help the agency map strategy for unwinding too-big-to-fail financial firms when they collapse.  Volcker, who advised President Barack Obama during negotiations over what became the Dodd-Frank Act, was named to the FDIC’s 18-member Advisory Committee on Systemic Resolutions along with Reed and current executives including BlackRock Inc. (BLK) fixed-income chief Peter Fisher. The panel’s first meeting is set for June 21.  “Congress has given the FDIC a tremendous amount of responsibility to ensure that financial organizations formerly deemed too big to fail will no longer receive taxpayer funded bailouts,” FDIC Chairman Sheila Bair said today in a statement. “The Advisory Committee we created brings together some of the best and brightest minds to augment the groundwork that the FDIC has already put into place.”

Rosengren warns on vulnerability of funds— Federal Reserve Bank of Boston president Eric Rosengren said US money-market mutual funds may be vulnerable to Europe’s debt crisis. Money-market funds “have sizeable exposures to European banks, by virtue of holding the banks’ short-term debt,’’ Rosengren said yesterday in a speech. Some funds “are potentially sensitive to a disruption in the European banking system, should one arise from the fiscal and sovereign-debt problems we are seeing.’’ Concerns that money funds could hurt stability haven’t been adequately addressed by Congress or regulators to prevent a recurrence of the outflows after the bankruptcy of Lehman Brothers Holdings Inc. in 2008, Rosengren said. The Dodd-Frank Act passed last year mandated the Fed to monitor emerging risks to financial stability in the wake of the US recession that ended two years ago. “The set of issues surrounding’’ money funds “is in sum a vulnerability that needs to be addressed,’’

Regulate Banks More Tightly, not Money Market Funds - I think that the powers that be do not like a low-cost superior source of liquidity that is outside of the banking system.  Why else would there be such regulatory pressure against money market funds, when their losses over their existence would be less than .o1% of yield?  Let the banks compete there… they have lost far, far more.  Which is more badly regulated? Besides there are simpler ways to fix the problem without adding new charges or bureaucracy.  Let money funds invest as they will, and loosen their credit and maturity constraints.  They would earn better yields on average, and credit events would become a normal aspect of money market funds.  That would bring discipline to the market in a way that regulators rarely bring.  Funds that have credit events would be avoided by investors, but there would be no death spirals, because a run on the fund would improve the NAV.

The Bank Lobby Steps Up Its Attack on Elizabeth Warren - On May 24 Elizabeth Warren was back on Capitol Hill testifying before Congress, defending her brainchild, the new Consumer Financial Protection Bureau, a key element of the 2010 Dodd-Frank financial reform legislation. The room was packed with reporters, consumer advocates and lobbyists. GOP Representative Patrick McHenry, who chaired the House Committee on Oversight and Government Reform hearing, could barely hide his disgust for the CFPB and Warren, accusing her of lying to Congress and frequently interrupting her answers. “In a few short weeks,” McHenry warned ominously, “the bureau will become a powerful instrument in the hands of progressive regulators.”  In part because it’s one of the strongest aspects of Dodd-Frank, the CFPB has become a favorite target of Republican attacks, right up there with George Soros, ACORN and Planned Parenthood. It’s been called “one of the greatest assaults on economic liberty in my lifetime” (Representative Jeb Hensarling) and “the most powerful agency ever created” (Representative Spencer Bachus). The Wall Street Journal opinion page denounced Warren and the bureau three times in one week in March. And the bureau hasn’t even officially launched!

Why it makes no sense for Warren to leave - Faced with a Congress of such monumental doltishness, what is the White House to do? It can stick to its guns and try to put in place the very best policies for America that it can. Or it can randomly detonate various such policies, even if doing so would achieve precisely nothing, on some kind of inchoate principle that the occasional public sacrifice might somehow mollify an unknown number of lamebrained legislators. That seems to be the philosophy of Bill Cohan, who has decided that Elizabeth Warren must resign from the nascent Consumer Financial Protection Bureau, on the grounds that Congress won’t confirm her. But Cohan’s argument doesn’t even make internal sense: By Cohan’s own account, then, any nominee would face exactly the same fate as Warren — even a Republican. It’s the bureau that these senators don’t like, and they’re not going to confirm anybody to run it unless and until they also get the authority to hobble it. Throwing Warren to the sharks would just give them a taste for blood, and make them even more optimistic about their chances of getting exactly what they want.

Democrats Voice Support for Elizabeth Warren -A group of Democratic lawmakers urged President Obama on Thursday to appoint Elizabeth Warren to lead the Consumer Financial Protection Bureau, a plea that further escalated the bitter partisan battle over the fledgling agency’s future. The collection of 89 Democrats — led by Representatives Carolyn B. Maloney of New York, Brad Miller of North Carolina and Keith Ellison of Minnesota — said that Ms. Warren was well suited to run the bureau after spending several months getting it off the ground. When President Obama selected Ms. Warren to set up the bureau in September, he stopped short of nominating Ms. Warren, a noted consumer advocate and Harvard law professor, to be its official leader. “We can think of no better person to be the first director of this incredibly important consumer financial protection regulator,” the Democrats said in a letter to Mr. Obama. Mr. Ellison, speaking at a news conference on the steps of the Capitol, added that Ms. Warren “needs to be confirmed without further delay.”

Why I Support Elizabeth Warren and the CFPB » When I was young, in the ’60s, I rarely lacked for great causes to support. Today, it often feels that I spend most of my time pushing back against ideas and policies infected by passionate zeal and stunning, ahistoric illogic. Now comes an opportunity to act for, not against. I’ve been watching the current struggle in and out of Congress to preserve the Consumer Financial Protection Bureau as a national commitment to restoring a strong middle class with a financial system that is robust but accountable and transparent. The fight, of course, also involves the gifted Elizabeth Warren. Imagine, we could let a woman of great intelligence, vision, wit, warmth and common sense run the institution she first proposed and then helped create. And oh yes, she actually knows the field — as a Leo Gottlieb Professor of Law at Harvard, she’s written many scholarly articles and texts on commercial transactions and debtor creditor issues. But she is no stuffed shirt.  She’s published two popular books, including the “Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke.”  What matters is that Obama’s naming of Warren means someone who can do a great job gets to do that job.

Banker Derangement Syndrome I: Lawyers Offer to Get Rid of Their Profession to Save the TARP Banks - Yves Smith - Banker Derangement Syndrome occurs when someone who might once have been sensible is acting as a mindless mouthpiecs of particularly rancid banking industry propaganda. Note that financial services industry employees by definition do not qualify; they are simply engaging in the time-honored industry practice known as “talking your book” when they say something that is patently ridiculous and self serving. No, Banker Derangement Syndrome occurs when an independent party say something so blatantly and embarrassingly wrong in support of the banking industry, whether to curry favor or via having taken an overdose of its Kool Aid, so as to do severe damage to their credibility. In other words, if the questionable behavior could be explained as an over-zealous effort to win points with our new financial overlords, it backfired big time. The initial example comes in a Wall Street Journal story which finally caught up with what we have been discussing on this blog for a year, namely, that the originators and packagers of residential mortgage securities on a large scale, perhaps pervasive basis, quit complying with the requirements of their own securitization agreements as far as how the borrower notes (the IOUs) were conveyed to the securitization vehicle (a trust). This relatively short statement in the Journal article is so mind-numbingly awful as to serve as the gold standard for Banker Derangement Syndrome:Laurence E. Platt, a banking-industry lawyer at K&L Gates in Washington, concedes that banks may have been sloppy. But he says “the real assault on the legal system” are efforts by judges and local officials to strip lenders of their rightful ownership and make foreclosures impossible.

Banker Derangement Syndrome II: William Cohan Can Give No Reason for Not Appointing Warren, Except Some People Don’t Like Her - Yves Smith - William Cohan wrote a particularly wretched piece for Bloomberg on why Elizabeth Warren should do everyone a favor and put herself on the next train out of DC. There is a decent case to be made against having Warren head the CFPB, but that’s not what Cohan provided. He instead made a weak argument (if you can even call it that) and got screechy to cover for it. Felix Salmon already kneecapped it on substantive grounds. Cohan perversely says that Warren would not be approved and then ‘fesses up that those nasty Republicans won’t permit anyone to head the CFPB. 44 Republican Senators wrote a letter saying they won’t approve of any nominee from either party unless the CFPB is gutted reformed.  So as much as Cohan huffed and puffed about Warren, this isn’t about Warren at all, it’s about the CFPB and the elephant in the room, how this country is to be run. The Republicans have turned the page back to the Richard Nixon playbook, in which he has Kissinger promoted the view that the president was unstable and therefore needed to be treated with kid gloves. Now of course, the kabuki goes several layers deeper here.

A Better Way to Make Bankers Pay for Crises? - - Yves Smith  - Since the crisis, there has been lots of debate on what to do about incentives in the financial services industry with little in the way of action. That’s because we maintain the fiction that major capital markets firm are private sector companies. Despite the fact that they enjoy subsidies vastly in excess of other industries, we can’t possibly treat them like the welfare queens they are and ride herd on their compensation levels.  But it’s still worth pondering the issue of what ought to be done, since pretty much every investor I know expects another big crisis in two to five years. We had better get it right next time.  The germ of a very interesting idea came in a VoxEU paper last March which I had wanted to highlight and somehow let slip. One of the problems with the big end of financial services industry is that it is highly interconnected, so if one firm gets in serious trouble, it is likely to bring the whole network down. Yet because bankers have perverse incentives (annual pay cycles and business unit level pay for most producers, both of which encourage narrow views of risks), banks routinely try to shift risk onto their counterparites, which is fine in normal times, but a destructive posture when markets become risky (the blow up of AIG and the monolines is a classic example).

Geithner and Goldman, Thick as Thieves - What was Timothy Geithner thinking back in 2008 when, as president of the New York Fed, he decided to give Goldman Sachs a $30 billion interest-free loan as part of an $80 billion secret float to favored banks? The sordid details of that program were finally made public this week in response to a court order for a Freedom of Information Act release, thanks to a Bloomberg News lawsuit. Sorry, my bad: It wasn’t an interest-free loan; make that .01 percent that Goldman paid to borrow taxpayer money when ordinary folks who missed a few credit card payments in order to finance their mortgages were being slapped with interest rates of more than 25 percent.  It was merely one small part of that reckless policy of throwing mad money at the banks while ignoring the plight of homeowners whom the banks had swindled, a plan pursued by both the Bush and the Obama administrations that set the stage for the current slide into a double-dip recession. With housing in deep trouble there can be no rebound of consumer confidence or job creation, and the first-quarter growth rate was an anemic 1.8 percent even as Wall Street profits and bonuses flourished. Wages are stagnant, unemployment claims have recently risen and, as The Wall Street Journal headlined on Tuesday, “Economists Downgrade Prospects for Growth.” That same edition of the Journal reported that 44.6 million Americans now survive on food stamps, an 11 percent increase in that misery index over the past year, while Geithner’s friends at Goldman are doing quite well.

Goldman Subpoenaed Over Levin Committee Hearing Findings - Yves Smith - On the one hand, this is just a subpoena of Goldman from the Manhattan DA’s office, but on the other, after all the crisis investigations, we finally have a prosecutor somewhere deciding to take some abuses during the crisis seriously enough to see if they add up to a legal case. (Yes, the SEC did file a suit against Goldman on one synthetic CDO, one transaction out of 25 in its Abacus program, which Goldman settled for $550 million, but this was litigation on one deal, not on broader patterns of misconduct). And it came not out of the splashy but designed not to accomplish much FCIC, but the quieter and more tenacious Senate’s Permanent Subcommittee on Investigations. I hardly ever do media briefings, but I was on the blogger call for both reports, and the contrast was night and day. The FCIC briefing was softball PR, with Phil Angelides and Brooksley Born (who by definition had not done the work and therefore were not big on detail) leading the call. The Senate call was led by staffers who demonstrated impressive command of the products and industry economics and transmitted information at a very high bit rate.  Not surprisingly, the information request comes from a local prosecutor. The DoJ continues to be missing in action.

Goldman Sachs 'Issued With Subpoena' Over Actions During Credit Crisis - Manhattan's top law enforcer is believed to have issued subpoenas to Goldman Sachs as he investigates the firm's activity during the credit crisis. Manhattan district attorney Cyrus Vance Jr is pursuing claims made by an official senate investigation into Wall Street's role in the housing market collapse. The report, published in April, singled out Goldman Sachs for particular criticism, accusing the bank of misleading buyers of mortgage-linked investments. The bank encouraged buyers to invest in mortgage-related securities even as it was betting heavily against the mortgage market, according to the report. Senator Carl Levin, a persistent critic of the bank, accused Goldman executives, including chief executive Lloyd Blankfein, of giving "misleading and inaccurate" evidence to the committee. Goldman said its executives' testimony was "truthful and accurate". The report was referred to the US department of justice and the financial watchdog the Securities and Exchange Commission (SEC), which are also investigating.

Rational Irrationality: Will Lloyd Blankfein End Up In The Dock? - What to make of today’s news that the Manhattan district attorney’s office has issued a subpoena to Goldman Sachs relating to its activities in the market for subprime securities? In one sense, it comes as no surprise. Back in April, the Senate’s Permanent Subcommittee on Investigations issued a blistering report about Wall Street’s role in the credit crisis, claiming to have unearthed a “financial snake pit rife with greed, conflicts of interest, and wrongdoing.” Those were the words of Carl Levin, the Michigan Democrat, who forwarded his six-hundred-page report to the Justice Department with the recommendation that it look into prosecuting Lloyd Blankfein and other Goldman bigwigs. Attorney General Eric Holder and Cyrus Vance, Jr., the Manhattan D.A., wouldn’t be doing their jobs if they didn’t take Levin’s allegations seriously. The issuing of subpoenas indicates that the government’s investigation is still at an early stage, and there is little, as yet, to suggest that Blankfein or any other Goldmanites will end up in the dock. Indeed, from what we know now the most likely outcome is that they won’t

Goldman Sachs ‘Too Big’ to Face Criminal Prosecution -- Goldman Sachs Group Inc. won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co. The U.S. Department of Justice, which is reviewing a Senate subcommittee report that alleged Goldman Sachs misled clients before the financial crisis, will avoid jeopardizing the fifth- largest U.S. bank by assets because it’s viewed as “too big to fail,” Hintz wrote in note to clients today. “If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” Hintz wrote. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.” Stephen Cohen, a spokesman for New York-based Goldman Sachs, declined to comment on Hintz’s note. Laura Sweeney, a spokeswoman for the Justice Department in Washington, didn’t immediately reply to requests for comment.

Who Benefits From Bogus Oil Prices? - Regular readers know that I am disturbed by the influence of speculative trading (paper barrels) on the price paid for actual oil (aka. wet barrels). If you could watch only one video on the subject, I recommend Aaron Task's interview with Duquesne University's Kent Moors (below). Duquesne is a small Catholic university here in Pittsburgh. I will be doing my biweekly Saturday Oil Report tomorrow, so I will postpone any discussion of the current state of the oil markets until then. I would like to bring to your attention the Wall Street Journal's Big Banks Cash In on Commodities. I have skipped part of the text to remove Wall Street Journal propaganda. Read it and weep.Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks' profits. A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter,  J.P. Morgan has emerged as one of the biggest beneficiaries of the commodities boom sweeping Wall Street. The bank's commodities unit made more money during the first quarter than through all of last year.

European Finance Regulator Criticizes U.S. on Banker Bonuses… The European Union’s top official for banking regulation has accused the Obama administration of being too lax on bonuses for bankers and not putting in place capital rules fast enough. Michel Barnier, the European commissioner for the internal market and services and a former foreign minister of France, warned that a failure to unify financial regulation in Europe and the United States could give some banks an unfair advantage over their foreign rivals.“The level playing field must be a reality, not an empty slogan,” Mr. Barnier wrote in a letter to the Treasury secretary, Timothy F. Geithner, whom he is to meet in Washington on Thursday. At the meeting, Mr. Barnier indicated that he planned to discuss the difference in progress between the United States and the European Union in tightening financial regulation and to urge Mr. Geithner to bring American rules closer to those of Europe.

Is Insider Trading Here to Stay? - SAC Capital Advisors, one of the world's biggest hedge funds run by zillionaire Steven Cohen, is finally under the gun for insider trading, according to the Wall Street Journal. The issue is over trades made in an account Cohen oversees, which were suggested by former fund managers of his who've already pleaded guilty to insider trading. With more and more news circulating about fruitful government snooping on insider trading, it seems like Main Street's dreams of bringing down Wall Street corruption could finally come true. A victory against Cohen would make the Feds' nabbing of Galleon's Raj Rajaratnam for insider trading last month look small fry. But here's the problem: The securities filings regulators and prosecutors have to draw on are only quarterly snapshots of a hedge fund's positions. Those can change daily, hourly, by the minute. That's especially true for SAC, which has returned an unbelievable 30% a year on average through the rapid-fire trading that made Cohen famous (and very, very rich).

S.E.C. Case Stands Out Because It Stands Alone - At the height of the housing boom, hundreds of Goldman employees worked closely in teams, devising mortgage-based securities — billions of dollars’ worth — that were examined by lawyers, approved by management, then sold to investors like hedge funds, commercial banks and insurance companies. At one trading desk sat Fabrice Tourre2, a midlevel 28-year-old Frenchman who was little known not just outside Goldman but even inside the firm. That changed three years later, in 2010, when he achieved the dubious distinction of becoming the only individual at Goldman and across Wall Street sued by the Securities and Exchange Commission3 for helping to sell a mortgage-securities investment, in one of the hundreds of mortgage deals created during the bubble years. How Mr. Tourre alone came to be the face of mortgage-securities fraud has raised questions among former prosecutors and Congressional officials about how aggressive and thorough the government’s investigations have been into Wall Street’s role in the mortgage crisis, “it’s impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities,”

Unofficial Problem Bank list at 997 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 3, 2011. (new format) Changes and comments from surferdude808:  It was a quiet week for the Unofficial Problem Bank List as there was only one removal and one addition. Thus, the institution count remains unchanged at 997 but assets increased by $1.3 billion to $416.7 billion.

Are commercial property values rising or falling? -This might seem like a simple question.  But it is not. The Moodys/REAL Commercial Property Price Index (CPPI), produced at MIT, says they are still falling: Green Street's Commerical Property Price Index says they are rising:  Which one is correct matters.  If Green Street is right, and prices are only 12.6 percent off peak, then commercial properties by-and-large have equity (loan-to-value ratios rarely exceeded 80 percent on commericial properties).  If MIT is right, we are still in deep trouble.  Both sources do a good job explaining their methods: (1) MIT looks only at transactions, whereas Green Street looks at current negotiations; (2) MIT's valuation model gives equal weight to all properties, while Green Street's valuation gives greater weight to expensive properties than to cheaper properties; and (3) MIT has a much broader sample, because REITs would rarely buy properties as inexpensive as $2.5 million. So which index is correct?  It all depends on context.  While I would be a little leary of using "negotiated price" as an indicator of value (as opposed to closed transactions), the timeliness of Green Street's data does give it an advantage.  For REIT's trying to determine strategy, the Green Street index is probably better.  For banks making loans to smaller properties--or for individual investors thinking of buying small office buildings--the MIT index is more relevant. 

Mortgages doomed without U.S. backing - Everyone knows that the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can’t continue as they are presently. But, no one knows what will come next. That uncertainty hangs over the housing market right now and is part of what is holding it back. I have authored a unique plan to completely dismantle the old GSE system consisting of Fannie Mae and Freddie Mac and replace it with a private sector mortgage finance system that both protects the American taxpayer and gives the marketplace assurance that 30-year fixed rate mortgages will be available in the future on a consistent basis. The Housing Finance Reform Act (H.R. 1859) will shield taxpayers from liability, encourage private sector involvement in the mortgage market, establish certainty for potential homebuyers, and provide confidence for reinvestment in housing.

The Real Assault on the Legal System - Nick Timiraos has a great piece in the WSJ about the state of play on foreclosure defense litigation. It quotes Larry Platt, a bank-industry lawyer at K&L Gates (which lost Ibanez). It's worth pausing for a second to consider what Platt said.  Although Platt concedes that banks may have been sloppy... [he claims that]... "the real assault on the legal system" are efforts by judges and local officials to strip lenders of their rightful ownership and make foreclosures impossible. Platt's view, it seems, is that everyone understood the mortgage deal and that the paperwork doesn't really matter. That's a very problematic view for any attorney to take, much less one with a background in real estate, secured lending, and securitization. (A less charitable interpretation of Platt's comments is that the proper outcomes has nothing to do with law.  Instead, it's paperwork and intent be damned, we're the banks so we should win by right.)

VOICE Demands Immelt, GE, Bank of America, JP Morgan Address Foreclosure Crisis - Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS, sent this video compilation from VOICE, a large interfaith group here in the state of Virginia that works for the betterment of local communities. He asks:Although these stories are from Manassas, they could be from any of hundreds or thousands of communities across the United States. If you find it as disturbing and powerful as I did then please share it broadly. (video)

Fortune Confirms Pervasive Defects in Bank of America Mortgage Documents - Yves Smith - As we wrote last year: As we indicated back in September, it appeared that Countrywide, and likely many other subprime orignators quit conveying the notes to the securitization trusts sometime in the 2004-2005 time frame. StopForeclosureFraud provides the first bit of concrete proof. The key section: As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affIXed to the note. She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents. Countrywide tried, in a thoroughly unconvincing manner, to retreat from the damaging testimony.  Abigail Field, an attorney who has regularly written on the mortgage mess at Daily Finance, published an article at Fortune that looks into whether DeMartini was simply being truthful and the notes were not conveyed correctly, which would mean Bank of America has a very big mess on its hands. Her conclusions are damning: Fortune has examined dozens of court records that corroborate the employee’s testimony. And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out…..

Feds look to give trustees more power - Federal legislation introduced last week is giving credence to a battle being fought in Middle Tennessee by bankruptcy trustee Henry "Hank" Hildebrand. Hildebrand was the subject of a Friday story related to a growing movement across the country: Judges and debtors who force mortgage companies to produce a physical note before foreclosing on a home. Because in Tennessee judges aren't involved in the foreclosure process, it's been bankruptcy trustees here who have been fighting that battle instead.In Middle Tennessee, Hildebrand said he's had about 60 cases this year where a lender couldn't produce the actual note, though he is seeing some movement towards compliance. The legislation, introduced by Sen. Patrick Leahy, D-Vt., would give the U.S. Trustee Program, the arm of the Justice Department that oversees foreclosures, the power to sanction servicers and lenders who submit false claims, overstate what's owed or don't produce proper documentation.

Oregon Judge Blocks Seizure of Home, Questions Non-Judicial Foreclosure - U.S. District Judge Owen Panner believes that two wrongs do not make a right and, in keeping with this philosophy, has blocked the foreclosure on a Medford, Oregon home[1]. “While I recognize that [the owners] have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law,” he ruled. Bank of America, MERS and a trustee, Northwest Trustee Services, were involved in the foreclosure process. Panner believes that since “MERS makes it much more difficult for all parties to discover who owns the loan,” modification attempts are too difficult. Given the difficulties associated with MERS and with non-judicial foreclosures, Panner questioned whether any foreclosures should be allowed to proceed without the courts, given the consistently poor process evident in court-reviewed cases. In this particular case, the borrower’s mortgage note had been sold by GN Mortgage to Wells Fargo and then Bank of America. They were issued notice of default in May 2010 and sued to block the foreclosure in September of that year. The foreclosure had been canceled at least once due to “documents recorded out of order,” and four days before the original default notice was issued, “three MERS executives signed mortgage documents to other parties all in the same day.” Panner said that this led him to question how carefully the documents were reviewed, and added that since the same notary public witnessed all three executives signing the documents, the process “appears rushed.”

MERS foreclosure amendment dies in Oregon House committee - A late attempt by the finance industry to waive Oregon mortgage recording laws in most foreclosures is dead. The Oregon House Judiciary Committee voted today to approve Senate Bill 519 without an amendment sought last week by loan servicers, title companies and credit unions. The amendment would have relieved lenders of ensuring a property's ownership history is properly recorded in public records before foreclosing outside a courtroom. The committee voted with no debate to send the bill to a floor vote without the amendment. Afterward, co-chair Jeff Barker cited a public outcry over the amendment as reason for its failure and described an intense back-room negotiations to do so. Document recording and signing issues have hung up foreclosures across the nation, and many of them have involved the Mortgage Electronic Registration System, or MERS. Federal judges in Oregon have blocked such foreclosures, saying MERS failed to record underlying documents properly as required by Oregon law in out-of-court foreclosures.

Today’s New… “But, You Didn’t Make Your Payment” Exemption to the Law - If you came to repossess my car, then you were required to be the person or entity that held the pink slip to my car, or you had to be working for the person or entity that held the pink slip to my car.  If you were not the person or entity holding my pink slip, then you couldn’t come repossess my car. In fact, if you came and repossessed my car but were NOT the person or entity holding my pink slip, then we had a phrase to describe that occurrence as well … you were STEALING MY CAR. And don’t let any of the attorneys that may be reading this around you try to make it more complicated, because it’s not.  It is that simple… you can’t repossess someone’s car unless you’re the person or entity that holds the pink slip, or title, to that car… or are working for that person or entity, of course. That’s the same way it’s supposed to work where houses are concerned.  If you don’t make your mortgage payments, that doesn’t mean that everyone in the country is allowed to throw you out of your home… only the person or entity that holds your mortgage is supposed to be able to do that, right?  Of course that’s right, silly. 

New Rule Pushing Big Down Payments Could Make Homeownership Unaffordable: "Among the most hotly contested ideas bank regulators have proposed to reduce the risk of another financial crisis is rule making a 20 percent down payment mandatory on some new home loans. Consumer advocates, civil rights groups and lending industry groups alike have said the proposed rule would deter many families from ever buying a home. A new survey by the National Foundation for Credit Counseling could shed light on the actual effects of the proposal: The survey found that half of the 1,000 people contacted thought they would never be able to put together a 20 percent down payment to buy a home. And the situation that would be created by the proposed rule, introduced by the the Federal Deposit Insurance Corporation in March, might end up being even worse than the survey suggests. 'Since prices for homes are at historic lows, the necessary down payment represents a lower dollar amount than would typically be necessary,' Gail Cunningham, a spokesperson for the NFCC, said in a statement. 'Nonetheless, consumers still do not feel capable of meeting the requirements.' Almost 40 senators asked bank regulators to modify the proposed rule last week, Reuters then reported. The senators described the proposed rule as hazardous to homebuyers, families and the housing market all at the same time."

Advocates and Bankers Join to Fight Loan Rules — The weight of the mortgage crisis fell heavily on lower-income and minority communities, where first-time home buyers often fell victim to the predatory lending practices that resulted in an explosion of defaults and foreclosures.  That left consumer advocates and civil rights groups frequently at odds with bankers, mortgage lenders and their lobbyists during the debate over the financial regulation1 act last year, which aims to rein in the subprime mortgage excesses that inflated the housing bubble.  Now, as banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P.2 and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans. The growing alliance between civil-rights organizations and banking lobbyists could extend beyond the current round of financial rule-making. If Congress turns its focus to restructuring Fannie Mae and Freddie Mac, for example, the same groups could voice similar concerns over anything that restricts the availability of credit for first-time home buyers.

Affordable Housing Groups Once Again Acting As Human Shields For Banksters - Yves Smith - A New York Times article tries to convince readers that affordable housing advocates and mortgage financiers playing on the same team is a new development. Huh? Per the Times:The weight of the mortgage crisis fell heavily on lower-income and minority communities…..That left consumer advocates and civil rights groups frequently at odds with bankers, mortgage lenders and their lobbyists during the debate over the financial regulation act last year, which aims to rein in the subprime mortgage excesses that inflated the housing bubble. Now, as banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans… “I think everybody agrees that the enthusiasm for promoting home ownership went way too far,” “But now the risk is that we go too far the other way. So let’s parse the obfuscation, which the Times repeats uncritically, and see what is really going on here. Everyone with an operating brain cell understands that having creditors make sounder loans than they did in the runup to the great financial meltdown means they will make fewer loans. That means home ownership will in theory be less affordable not just to lower income types, but for everyone.

Even After Mortgage Modification, Shoddy Bank Practices Hurt Homeowners - After years of sending and re-sending documents, waiting on hold and attending court hearings to avoid foreclosure on her Staten Island home, Chanel Rosario finally received a much-needed reduction on her mortgage.. After months of making payments, Rosario called the bank handling her mortgage, Chase Home Finance, and found out Chase was still reporting her as delinquent, damaging her credit score and putting her home in jeopardy. Despite months of trying to get an explanation with the help of a legal-aid attorney, she still doesn't know why Chase isn't abiding by the agreement.  It's a disturbingly common occurrence, say consumer advocates: Many homeowners have been granted a hard-fought mortgage modification1 only to have their mortgage company effectively pull a bait and switch. The problems range from homeowners being hit with unexpected extra charges to the bank simply ignoring the signed agreement.

Housing Prices Fall to New Post-Bubble Low as More Rent  - Housing prices fell in March to their lowest point since the downturn began, erasing the last little bit of recovery from the depths plumbed two years ago, according to data released Tuesday. The Standard & Poor’s Case-Shiller Home Price Index for 20 large cities fell 0.8 percent from February, the eighth drop in a row. Prices are now down 33.1 percent from the July 2006 peak. “Home prices continue on their downward spiral with no relief in sight,” said David M. Blitzer, chairman of the S.& P. index committee. Housing is in persistent trouble, industry analysts say, not only because so many people are blocked from the market — being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage — but because even those who are solvent are opting out.

Case Shiller: National Home Prices Hit New Low in 2011 Q1 - S&P/Case-Shiller released the monthly Home Price Indices for March (actually a 3 month average of January, February and March). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities), plus the Q1 2011 quarterly national house price index. From S&P:National Home Prices Hit New Low in 2011 Q1 The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.8% from the peak, and down 0.1% in March (SA). The Composite 10 is still 1.6% above the May 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 31.6% from the peak, and down 0.2% in March (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is down 2.8% compared to March 2010. The Composite 20 SA is down 3.5% compared to March 2010.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  Prices increased (SA) in 7 of the 20 Case-Shiller cities in March seasonally adjusted. Prices in Las Vegas are off 58.3% from the peak, and prices in Dallas only off 7.7% from the peak.

S&P/Case-Shiller index shows home prices at lowest since housing collapse - Today’s release of the S&P/Case-Shiller (CSI) home price indices for March reported that the non-seasonally adjusted Composite-10 price index declined 0.62% since February while the Composite-20 index declined 0.77% over the same period falling to the lowest level seen since the Great Housing Collapse commenced in 2006 further indicating that housing is continuing slump into a double-dip. The latest CSI data clearly indicates that the price trends are continuing to slump and, as I recently pointed out, the more timely and less distorted Radar Logic RPX data is continuing to capture notable price weakness nationwide. Further, both composite indices are now showing notable year-over-year declines, a weak sign indeed. The 10-city composite index declined 2.91% as compared to March 2010 while the 20-city composite declined 3.61% over the same period. Topping the list of regional peak decliners was Las Vegas at -58.61%, Phoenix at -55.91%, Miami at -51.12%, Detroit at -47.21% and Tampa at -46.63%. Additionally, both of the broad composite indices show significant peak declines slumping -32.98% for the 10-city national index and -33.10% for the 20-city national index on a peak comparison basis" 

US home price double dip erases post-crisis gains - US house prices are in a double dip that has erased all of their bounce since the recession and threatens to derail a stuttering economic recovery. The S&P/Case-Shiller house price index fell by 4.2 per cent in the first quarter of 2011, breaking through a 2009 low to hit its weakest level since 2002. Declining house prices may cause households to rein in both consumption and home buying plans, leading to further falls in house prices and overall weakness in the economy. House prices are now 33 per cent below their peak in 2006 – a sharper fall than the 31 per cent drop recorded during the Great Depression, according to analysts at Capital Economics. Prajakta Bhide, an analyst at Roubini Global Economics in New York, reiterated a forecast of a year-on-year fall in house prices of about 8 per cent for 2011, but said that “we have to be worried about prices overshooting on the downside”.

Home Prices in 20 U.S. Cities Decline to Eight-Year Low, Case-Shiller Says - Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery. The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent from March 2010, the biggest year-over-year decline since November 2009, the group said today in New York. At 138.16, the gauge was the weakest since March 2003. A backlog of foreclosures poised to reach the market means prices may stay depressed, dissuading builders from taking on new-home construction projects. Unemployment at 9 percent and stricter lending conditions are signs that any recovery in housing may take years. “The risk that housing will resume the vicious cycle seen at the depths of the recession is still present,”

Case-Shiller Index Officially Double-Dips - Data released this morning by Standard & Poor’s show that the S&P/Case-Shiller national home price index declined by 4.2 percent in the first quarter of 2011, after having fallen 3.6 percent in the fourth quarter of 2010.  The national reading hit a new recession low with the first quarter’s data and posted an annual decline of 5.1 percent versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels. “This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation,” said David M. Blitzer, chairman of the index committee at S&P Indices. “The national index, the 20-city composite and 12 MSAs [metropolitan statistical areas] all hit new lows with data reported through March 2011”Blitzer continued, “Home prices continue on their downward spiral with no relief in sight. Since December 2010, we have found an increasing number of markets posting new lows.”According to S&P’s latest report, home prices in 12 cities covered by the index fell to their lowest levels of the current housing cycle: Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland, and Tampa.

Why are House Prices are Double Dipping? - The housing market has been looking like it was headed for a double dip for some time. On Tuesday, we got confirmation that it happened. According to the S&P/Case-Shilller housing index, home prices hit a new low since the beginning of the bust in the first quarter of the year. According to Case-Shiller, houses now cost about what they did in 2002, erasing much of the gains of the 2000s housing boom. In the past year alone, residential real estate has fallen 5%, and prices have now dropped nearly a third from their peak five years ago. People have been predicting that housing prices would rebound for a while. Most of those predictions have to do with affordability. Home prices have fallen by a third since the top of the bubble. Incomes, though, on average, have risen slightly. And interest rates have come way down. That's made buying a house more affordable than it has been in decades. Yet, housing prices continue to fall. Why would that be?

Housing’s Double Dip: Is Government to Blame? - The S&P Case-Shiller home price data for the first quarter of 2011 are so dreadful that nearly everyone agrees that the U.S. housing market is in the midst of a “double dip.” Curiously absent from many of these analyses is the role played by the federal government in helping to engineer a double-dip with its ill-devised homebuyer tax credit. Originally aimed only at first-time homebuyers and set to expire at the end of November 2009, the tax credit was later extended through the end of June 2010 and expanded to all homebuyers below certain income levels. The extension and expansion was attributed to the early “success” of the program, evidence for which consisted of nothing more than households’ willingness to accept free money from the government. As explained here, the homebuyer tax credit never made any sense in the first place. For every homebuyer motivated to make a purchase by the credit, there are several more that would have made the purchase anyway. For this second category of homebuyers, the tax credit is pure windfall. For the first category, the true marginal sales made possible by the credit are likely to be far fewer than those who likely would have purchased a home in the near future but decided to expedite the purchase process to capitalize on the credit.

Real House Prices and Price-to-Rent: Back to 1999 - Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income.  Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 1999/2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2011), and the monthly Case-Shiller Composite 20 SA (through March) and CoreLogic House Price Indexes (through March) in nominal terms (as reported). In nominal terms, the Case-Shiller National index is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is slightly above the May 2009 lows (and close to June 2003 levels), and the CoreLogic index is back to January 2003.  The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter).  In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to October 2000, and the CoreLogic index back to November 1999.

US has 14.3m vacant year-round homes and home ownership has dropped to 1998 levels - Pending home sales fell in April with regional variations following increases in February and March, with unusual weather and economic softness adding to ongoing problems that are hobbling a recovery, according to the National Association of Realtors (NAR). The Pending Home Sales Index, a forward-looking indicator based on contract signings with completion expected within 2 months of signing, dropped 11.6% to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5% below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

Case-Shiller Nominal and Real Housing Declines Since Peak; Home Prices Best in 25 Years, Better Prices Still Coming - Here are some charts showing nominal and real (CPI inflation-adjusted) housing declines in 20 Case-Shiller metro areas. Charts are grouped by 10 least expensive and 10 most expensive areas. Additional tables show housing declines from the peak. An explanation follows the charts.  The charts show that all 20 metros are down from the peak prices between -10.7% (Dallas) and -58.6% (Las Vegas). Note that 13 of 20 cities tracked are presently at the lowest point in the cycle, while 7 cities are presently higher than their early 2009 low. Of particular interest is the "Price Level" column which displays how far back prices have reverted. For example, you can see that Atlanta has reverted back to April 1999 prices (and keep in mind this is nominal!). Three-fourths of the US is at the lowest point in the cycle, while 1/4 is up modestly and most likely temporarily. The fourth chart is of March 2011 real (inflation adjusted) data. It is sorted identically to chart one and again shows that all 20 metros are down from their peak prices with again Dallas in the best shape (-21.6%) and Las Vegas the worst (-63.2%). It also shows that in real terms only 2 of 20 metros are actually higher than their early 2009 low and that both are only up +2.7% (and both still have huge declines of -47.4% and -35.3%).

Housing Prices, Falling and Falling Some More - The latest Case-Shiller data are out, and the news is not pretty.  From The Washington Post yesterday: The Standard & Poor’s Case-Shiller index shows that single-family home prices fell 4.2 percent nationally in the first quarter from the previous quarter, leading analysts to conclude that prices have fallen by more than they did during the Great Depression. The article goes on to discuss that a rebound might come, eventually, when the backlog of foreclosures are worked through the system.  I am more pessimistic -- we are seeing these housing price declines in an interest rate environment that is designed to prop up prices through low mortgage rates.  Mechanically, when those rates begin to rise, there will be even further downward pressure on prices.  This ride is far from over.

Are U.S. Homebuyers Factoring In The Risk Of A Detroit-Like Decline?… The continuing decline of U.S. house prices has been in the news lately, along with articles about how people love to rent. In some parts of the country, buying is definitely cheaper than renting, especially when you consider the 4-5 percent interest rates being offered. Can it be rational under those circumstances to rent?   If you’re a working-age renter, by definition your apartment is near a job and within a reasonably functional economy. Otherwise you wouldn’t be there paying rent! Between 1970 and 2008, a home buyer probably would not think to discount a house for the possibility that an entire city or state economy would essentially fall apart. The potential home buyer today has seen pictures of Detroit, with former neighborhoods being gradually reclaimed by Nature or plowed under into farmland. Recognizing that his or her own city could become like that in 20 years time, the buyer will factor that into the price he or she is willing to pay. In the event of a Detroit-style decline, the house becomes worthless and the cost of ownership for 10 years or so effectively tripled (10 years x 5 percent is approximately equal to 50 percent of the home’s value, then add another 100 percent for the cost of throwing the house away).

CoreLogic: Home Price Index increased 0.7% between March and April - Case-Shiller is the most followed house price index, but CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of February, March, and April (April weighted the most) and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Shows First Month-over-Month Increase since mid-2010 CoreLogic today released its April Home Price Index (HPI) which shows that home prices in the U.S. increased on a month-to-month basis by 0.7 percent between March and April, 2011, the first such increase since the home-buyer tax credit expired in mid-2010. However, national home prices, including distressed sales, declined by 7.5 percent in April 2011 compared to April 2010 after declining by 6.8 per cent in March 2011 compared to March 2010. Excluding distressed sales, year-over-year prices declined by 0.5 percent in April 2011 compared to April 2010.

A Look at Case-Shiller, by Metro Area (May Update) - S&P/Case-Shiller home-price data indicated a clear double-dip for housing, as a tax-credit-induced bump last year was erased and national prices fell back to mid-2002 levels. The composite 20-city home price index, a broad gauge of U.S. home prices, posted a 0.8% drop in March from a month earlier and fell 1.1% from a year earlier. The broader national index, which is published on a quarterly basis, dropped 4.2% in the first quarter from the fourth and was down 5.1% from a year earlier. Nineteen of 20 cities in the index posted month-to-month and annual declines in March — just Washington notched increases. On a seasonally adjusted basis, which aims to take into account the slower winter selling season, six cities — Los Angeles, Miami, Phoenix, San Francisco, Seattle and Washington, D.C. — posted monthly increases. Tampa prices were flat on a seasonally adjusted basis. Twelve markets — Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland and Tampa — hit their lowest points since home values started dropping more than four years ago. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Cities that weathered housing bust now suffering - Even cities that weathered the housing market crash with relatively little damage are suffering now. Severe price declines have spread to Dallas, Denver, Minneapolis and Cleveland, which had mostly withstood the bust in housing since 2006. The damage has now gone well beyond cities hit hardest by unemployment and foreclosures, such as Phoenix and Las Vegas. "We didn't enjoy the highs and the lows like other cities," said Kay Weeks, a Realtor with Ebby Halliday in Dallas, where prices fell nearly 1 percent in March and are expected to keep falling. "But when we get bad news nationally, people take notice and cut back on spending and buying homes." Home prices in big metro areas have sunk to their lowest since 2002, the Standard & Poor's/Case-Shiller 20-city monthly index showed Tuesday. Since the bubble burst in 2006, prices have fallen more than they did during the Great Depression. The index, which covers metro areas that include about 70 percent of U.S. households, is updated every quarter and provides a three-month average. The March data is the latest available.

Like a Virus, Falling Home Prices Spread the Pain - The troubles in housing feel like the summer cold you just can’t shake. The latest sniffles came from Tuesday’s S&P/Case-Shiller report. It showed national home prices dropped 5.1% in the year ended in the first quarter. Prices have lost all the gains made in 2009 and 2010 when home buyers received federal tax credits. The index is back down to readings of 2002. Calling this month’s report a “confirmation of a double-dip in home prices,” David M. Blitzer, chairman of the S&P Index Committee said that “prices continue on their downward spiral with no relief in sight.” The second down leg of home prices will keep housing from making any meaningful contribution to real gross domestic product growth this year.The drag on the outlook doesn’t end there, however. Dropping home values will be a big problem for small businesses, local-government finances and consumer confidence, which is already tumbling thanks to high gasoline prices and worries about paychecks.

Housing Tumbles (or, Why the US is Headed Towards a Bond Market Disaster) - There has never been an economic recovery without a rebound in housing. Of course, we don't really have an economic recovery now; it's more of a statistical mirage, thanks to trillions in thin-air money printing.  And we don't have a recovery in housing. I have written extensively on the housing topic over the years because a rebound in housing will be an important signpost that some sort of stable economic recovery is actually underway.   In the Crash Course chapter on bubbles, I suggested that if the housing bubble behaved like other bubbles throughout history, then 2015 would be a reasonable place to begin looking for a rebound. The evidence is now beginning to support that rough guess.

Fear and Loathing in the Housing Market – The Greedy and the Clueless Flail Around Looking for Answers - Continuing the recent run of bad economic news, an S&P/Case Shiller report on Tuesday confirmed that U.S. home prices in most major markets have resumed falling after stabilizing for a couple of years thanks to countless billions of dollars carelessly thrown at the problem by Congress and the Obama administration. This should really not have been a surprise to anyone who has been paying attention to the state of the real economy these past few years. And yet, in the CNBC story about the Shiller Report, we get this little nugget:  "Just about everybody agrees we're going to miss the seasonally strong period in 2011, which we should be at the very beginning of right now with May, but nobody thinks that will make any difference," says S&P's David Blitzer. "Everybody's now keeping their fingers crossed for 2012 and wondering whether people just don't want to own homes anymore."  I have no idea who David Blitzer is, but presumably he gets paid a lot of money to think about and analyze what’s going on in the economy—the housing market in particular. Sadly, like many people who get paid to pontificate in our mainstream media, he either doesn’t have a clue or he is deliberately concealing the truth

The Excess Vacant Housing Supply - Last week economist Tom Lawler looked at the national excess vacant housing supply by using the Census 2010 data and comparing to the 2000 and 1990 census data. I've been looking at the same data, but on a state by state basis. As Tom noted, trying to determine the excess supply as of April 1, 2010 requires an estimate of the normal vacancy rates. Some states always have high vacancy rates on April 1st because of the large number of second homes - like Maine - so what we need to do is compare the 2010 state vacancy rates to the previous census vacancy rates.The columns are sortable in the following table. My guess is the excess inventory was above 1.8 million on April 1, 2010, and that the excess is probably several hundred thousand units lower now. Tom Lawler thought the excess was in the 1.6 to 1.7 million range on April 1, 2010, and is probably in the 1.2 to 1.4 million range now. It is no surprise that Florida has the largest number of excess vacant units and that Nevada has the largest percentage of excess vacant units. What might be a surprise to some is that California is below the U.S. average.

Lawler: Census 2010 and the US Homeownership Rate - Economist Tom Lawler points out that the homeownership rate in April 2010 was significantly lower than previously thought. Tom also notes that the age adjusted homeownership rate was lower in April 2010 than in April 1990!  While the data released for Census 2010 on households and housing was probably the most important “macro” housing data released by Census over the last several years, media coverage was surprisingly scant. (I am not including blogs in my definition of “media.) Many newspapers and other media that religiously report on the quarterly Housing Vacancy Survey data, especially the homeownership rate, failed to run stories highlighting that the homeownership rate last April was in fact substantially lower than previous HVS estimates had suggested, and was significantly below the homeownership rate in 2000. Indeed, a Bloomberg/Business Week story today entitled “Rising Rents Risk U.S. Inflation as Fed Restraint Questioned” noted that “the rate of homeownership has fallen to 66.4 percent, the lowest since 1998, data from the Census Bureau show,” citing HVS estimates for Q1/2011, but it failed to mention that new Census 2010 data indicated that the US homeownership rate in the middle of the first half of last year was 65.1%, far below the HVS estimate of 67%.

Are There Too Many Homes in America, Ctd - Bill McBride and Tom Lawler are still digging through the Census data on homeownership and vacancy If 2010 headship rates and homeownership rates for each age group had been the same as in 1990, the US homeownership rate would have been 66.7% instead of 65.1%. If 2010 headship rates and homeownership rates had been the same as in 2000, the US homeownership rate would have been 67.3%! In fact, the aggregate data suggest that in 2010 the homeownership for most age groups was probably below 1990 rates!!!  Last week’s report, then, was clearly the BIGGEST STORY ON US HOMEOWNERSHIP in many, many years.. . . CR Note: This indicates that the age adjusted homeownership rate has fallen below the 1990 homeownership rate. All my previous analysis was based on the HVS data, and now that Census 2010 data has been released, the previous analysis is unfortunately incorrect (I need to think about the implications)

Is California's Housing Problem too Many Houses? - No. Below is a chart of residential vacancy rate by state from the 2010 US Census. California has the second lower vacancy rate among the 50 states and DC.  California builders may have built the wrong kind of housing in the wrong places, but overall, they did not build too many houses.   Note that Florida and Arizona have very high rates, but their rates are always high, because so much of their housing stock is seasonal--I suspect vacation homes drive a lot of what is happening in Maine, Vermont and Alaska as well.  Nevada has had the largest increase in vacancy over the past 20 years, rising from about 10 percent to 14 percent. 

Builders feeling hopeful, opening lots for sale  The North San Diego County and Southwest Riverside County housing markets are glutted with bank-owned houses and short sales, which put a drag on local house prices. ... Yet builders opened 18 new communities in San Diego County in the first three months of 2011, five more than in the same period of 2010, and 16 opened in Riverside County, six more than during the same period last year, according to MarketPointe Realty Advisers.Builders spent 2010 snapping up cheap land from banks or from developers desperate to sell. Lower land prices translate to lower housing costs for buyers, especially with a bevy of energy- and water-efficiency improvements many builders now include on their models.Builders have also been able to slash costs: Many have laid off staff and found ways to become more efficient, and they're able to take advantage of reduced prices from contractors desperate to stay in business. ... Developers acquired unfinished communities at fire-sale prices from banks and desperate sellers. "Every piece of property that we've bought in the last two years has been a distressed sale of some kind or another,"

Construction Spending increased 0.4% in April - Census Bureau reported that overall construction spending increased in April:  [C]onstruction spending during April 2011 was estimated at a seasonally adjusted annual rate of $765.0 billion, 0.4 percent (±1.6%) above the revised March estimate of $762.1 billion. The April figure is 9.3 percent (±1.6%) below the April 2010 estimate of $843.1 billion. Private construction spending also increased in April: Spending on private construction was at a seasonally adjusted annual rate of $483.0 billion, 1.7 percent (±1.4%) above the revised March estimate of $474.7 billion. .This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. The small increase in non-residential in April was mostly due to power. Office and lodging construction spending declined. Residential spending is 65.7% below the peak in early 2006, and non-residential spending is 39.4% below the peak in January 2008.

Arizona Land Sells for 8% of Price Calpers Group Paid at Peak - A 10,200-acre (4,100-hectare) desert site in Arizona sold for $32.5 million this week, five years after a group with investors including the California Public Employees’ Retirement System paid $400 million for the land.  Arcus Property Solutions LLC, a private-equity fund with about $100 million under management, paid cash for the property in Goodyear, about 60 miles (97 kilometers) southwest of Phoenix, said Kent Kleinman, a spokesman for the Gilbert, Arizona-based company. The site, now called Amaranth Land LLC, had been planned for a 42,000-home community by the Calpers- financed group when it was purchased in 2006.  The deal shows how property investors are taking advantage of a plunge in values after the real estate bubble burst in Arizona. A group of lenders, led by Goldman Sachs Group Inc. (GS), seized control of the Amaranth site in 2009 after the bust halted development, said Jeff Garrett, owner of Garrett Development Corp., the land’s manager after the foreclosure.  “Five, six years ago, people were spending $200 million or $300 million or $400 million,” Garrett said in a telephone interview. “This just sold for about eight cents on the dollar.”

More than 500 cities see more homes become rentals - (table embedded) In the aftermath of the nation's housing-market collapse and recession, more than 500 midsize and large cities have seen a rise in the share of homes that are rented rather than owned, according to a USA TODAY analysis of Census data.  Almost 4 million homes have been lost to foreclosures in the past five years, turning many former owner-occupied homes into rentals. The shift to rental housing is potentially long-lasting and portends changes for neighborhood stability and how people build wealth, economists say. "The changes are big but glacial," says Mark Zandi, economist at Moody's Analytics.

Housing price collapse: why it's good news that more Americans are renting rather than buying homes. - Today's news that national housing prices have double-dipped to a new recession-era low is grim for homeowners, home sellers, banks, builders, and the president. Prices are down in 19 of the 20 biggest metro regions—Washington, D.C., is the exception. And given the 1.9-million-house backlog in the foreclosure pipeline, nobody expects prices to rebound any time soon. But these data can be interpreted another way. The American economy is making a significant shift from buying to renting, and that may ultimately be good news. According to a USA Today analysis of Census data released this weekend, since 2006, the number of households that rent has grown by about 700,000 a year, while the number of households that own has fallen by about 200,000 a year. One reason is macroeconomic. The unemployment rate remains high and wages are down, meaning many people simply cannot afford to buy a house. Plus, nobody wants to take the risk of selling into a down-market. But there are also indications that Americans are electing to rent—and that is a very good sign.

Falling House Prices and Jobs, Jobs, Jobs - Yes, the decline in house prices continues. The Case-Shiller index of house prices for March 2011 was released yesterday, and confirmed that prices in many major markets in the US continue to fall. The average of house price indexes for the 20 largest cities in the US looks like this: There is some variation in how local markets are doing, however. A few cities like Washington DC and Boston have seen house prices increase a bit over the past year, while in others the decline in prices continues as a rapid rate. Part of the explanation is that there are differences in how local and regional economies are doing. The table at right compares the change in house prices against the local unemployment rate for a group of major US cities. In general, cities with lower unemployment rates in 2010 tended to have better-performing housing markets. A notable exception to that general correlation are the cities in California; for some reason, despite very high unemployment in California, housing prices seem to have remained roughly stable there in 2010. But overall, it's not at all surprising that regions and cities that had better job markets in 2010 tended to also have better real estate markets.

Housing Market to Economy: "I'll Stop When You Stop" -  New data on home prices show that in the 20 largest cities in the United States, prices plunged in March to their lowest point since the housing bubble burst in 2007. According to the Standard & Poor's Case-Shiller Index, home prices are worth a full third less than they did at their peak in April 2006, eliminating nearly all the real gains in home prices since early 2000. Prices continue to fall because of a glut of available homes, but also because of a paucity of jobs. With nearly one-in-ten workers still unemployed -- and many more working fewer hours than they would like -- families do not have the income or available credit to buy a house, even at the current bargain rates. And of those who already own one, a near-record high of 23.1 percent of them are sitting on a house that's "underwater" -- that is, the value of the mortgage is greater than the value of the house.  At this point, with much of the bubble popped, falling home prices are a direct consequence of the lack of jobs recovery. .

Spitzer: Home prices continue to fall, as the Dow rises; who’s helping the middle class? - Today’s number of the Day is 32.7 per cent. That is how much home prices have fallen from their peak 5 years ago, and in the most recent quarter, they dropped another 1.5 percent, year over year, bringing them to a post bubble-bust low. So reports the S&P/Case-Shiller index on Tuesday. Put simply: the housing market is still going the wrong way and it is hard to understand how the economy for most Americans will turn around until the housing market recovers. The fascinating dichotomy is with the stock market—which has nearly totally recovered from the swoon of ’08. This division reflects the reality that profits are way up due to greater efficiencies and international market growth for companies traded on the New York Stock Exchange. But as we all know, the recovery of jobs and middle class incomes has not happened yet. Remember those 100 of billions we gave to the banks to clean up their balance sheets?

Madison Ave. Declares ‘Mass Affluence’ Over - The American middle class, concludes a new study from the ad industry’s top trade journal, has essentially become irrelevant. In a deeply unequal America, if you don’t make $200,000, you don’t matter. Madison Avenue has now come full circle. The rich no longer rate as a niche. Marketing to the rich — and those about to gain that status — has become the only game that really counts. “Mass affluence,” as a new white paper from Ad Age, the advertising industry’s top trade journal, has just declared, “is over.” The Mad Men 1960s America — where average families dominated the consumer market — has totally disappeared, this Ad Age New Wave of Affluence study details. And Madison Avenue has moved on — to where the money sits.

U.S. consumer confidence declines in May -The nonprofit Conference Board said its consumer-confidence index fell to 60.8 in May — the lowest reading in six months — from a revised 66 in April. Economists polled by MarketWatch had forecast an increase to 67.5. Most economists were surprised by the decline. Some attributed the drop to the cost of gas, a downward spiral in housing prices, recent weakness in the economy, and even to a series of tornados and floods wracking parts of the U.S. The expectations index, which measures the view of consumers six months out, fell to 75.2 from 83.2 last month. It’s the lowest reading since last October.The percentage of consumers who say jobs are plentiful increased to 5.6% from 5.1% in April, although the percentage who say they are hard to get also rose slightly to 43.9%. The consumer-confidence index remains low by historical standards. In a healthy economy, the index averages about 95 points.

Quelle Surprise! Consumer Confidence Falls on Oil Prices, Housing, Job Outlook - Yves Smith - Is the latest consumer confidence release yet another example of elite disconnect? One of the things that has become striking is the degree to which the chattering classes in New York and Washington DC seem utterly unaware of what is happening in the rest of the country. New York City is doing reasonably well based on the heroic efforts by the officialdom to prop up the major capital markets firm; DC is recession immune and more recently awash in lobbying funds. The influences range from visual signals to continued Administration cheerleading. And since major media stories about the economy are driven by sources in these two cities, it feeds into business reporting.  We’ve had seven weeks of initial jobless claims over 400,000, unemployment stable only by virtue of more exits from the workforce, high oil prices, rising food prices, and housing prices in pretty much every area of the US continuing to fall with no prospect of relief. The Bloomberg story on the latest consumer confidence figure managed to separate the degree of the miss by supposed experts. This bit comes a full sixteen paragraphs into the story: Estimates for consumer confidence ranged from 60 to 71 in the Bloomberg survey of 68 economists. The measure averaged 98 during the expansion that ended in December 2007.

The New Keynesian confidence fairy multiplier - Nick Rowe - The graphs from the University of Michigan's Survey of Consumers (HT Mark Thoma) show something that isn't supposed to happen in New Keynesian macroeconomics. In particular, we need to start thinking about the confidence fairy multiplier in New Keynesian macroeconomics. Lets start with the graphs.The second graph shows a big quick drop in US expected income growth in 2008. Prior to 2008, people had been expecting around 2.5% income growth over the next 12 months. That dropped to barely above 0% from 2009 onwards. Expected income growth fell by over 2.0% in 2008.  Presumably the survey participants interpreted the question to mean nominal income. But the first graph shows survey data on expected inflation over the next 12 months. Expected inflation jumps around a lot (less so for a 5 to 10-year horizon) but does not show consistently lower expected inflation after 2008 compared to before 2008. I conclude that expected real income growth also fell in 2008, by around the same 2.0%.

May Sales: How Retailers Fared - Many large retailers reported their April sales numbers this week, with most of them coming out the morning of Thursday, June 2. Retailers that sold gas or high-end merchandise had the strongest results. Click here for a chart sortable by company name, category, change in total or same-store sales, and total sales. Click here for April’s chart.

Recession Sobers America's Once Free-Spending Teens - Guess what the recession hath wrought: A little teen sobriety. According to the just-released 2011 Teens & Money Survey from Charles Schwab & Co. (SCHW), nine out of 10 teens say they were 'affected by the recession,' causing major shifts in perspective that include a greater appreciation for what they have and an increased awareness of financial hardship. Most said that, as a result of the recession, they are more grateful for what they have, less likely to ask for things they want, and have a greater appreciation for their parents' hard work. 'It seems clear that the great recession has changed the mindset of teens. It has given these 'Recession Generation' youth a deeper appreciation for what they have and how hard their parents work,' said Carrie Schwab-Pomerantz, senior vice president of Schwab Community Services, in a prepared statement. 'This may be the silver lining to the economic downturn since it gives parents and educators an enhanced opportunity to communicate critical lessons about financial decision-making. That sounds good, especially for parents of teens like me, who know that their favorite sentences always begin with either, 'I want, I need, Can I?'

Gas tanks are draining family budgets - There's less money this summer for hotel rooms, surfboards and bathing suits. It's all going into the gas tank.  High prices at the pump are putting a squeeze on the family budget as the traditional summer driving season begins. For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal.  Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Families now spend more filling up than they spend on cars, clothes or recreation. Last year, they spent less on gasoline than each of those things. Jeffrey Wayman of Cape Charles, Va., spent Friday riding his motorcycle to North Carolina's Outer Banks, a day trip with his wife. They decided to eat snacks in a gas station parking lot rather than buy lunch because rising fuel prices have eaten so much into their budget over the past year that they can't ride as frequently as they would like.

Oil and Gasoline Price Update - Oil and gasoline prices are probably the biggest downside risk to the economy right now. Oil prices are off slightly today, from the WSJ: Oil Prices Ease The front-month July Brent contract on London's ICE futures exchange was recently down 35 cents, or 0.3%, at $114.68 a barrel. The front-month July contract on the New York Mercantile Exchange was trading lower 43 or 0.4%, at $100.16 per barrel. Looking at the following graph, it appears that gasoline prices are off about 18 cents nationally from the peak. This graph suggests - with oil prices around $100 per barrel that gasoline prices will fall into the $3.50 - $3.60 per gallon range in the next few weeks. However that just takes us back to March pricing - and that was already a drag on consumer spending. I'll have more on the overall economy later. (see interactive graph)

Is the own-price demand elasticity for gasoline increasing? - One thing that we always say is that, while the short run gas price elaticity is low, about 0.10, the long run gas price elasticity is higher as persistent high gas prices will cause consumers to shop for smaller cars, buy houses closer to work, etc. Maybe we've moved into the long run? Nearly one in four vehicles sold in the United States in April was a compact or subcompact car, compared with one in eight a decade ago. Of the small cars sold in April, about 27 percent were American models, compared with 20 percent a year earlier. ... Rising fuel prices have prompted a steady migration away from bigger vehicles since the spring of 2008, when gas hit $3.50 a gallon. Industry analysts and company executives say the shift is likely a permanent one, as consumers flock to small cars packed with features like heated leather seats, Internet access and voice-activated entertainment systems

Gas Prices: My Mental Battle Over Two Views - Last Friday, I was talking gas prices and their impact on family budgets and the wider economy on MSNBC with host Matt Miller and economist Peter Morici. I was again struck by the two competing views that I, and I suspect others, hold in their heads on this issue. Even though I’m one of those economists who see market failures hiding around many corners, I still think it’s extremely important to pay attention to price signals. And when gas prices rise as much as they have over the past year, the market is sending an important price signal that we need to get serious about conservation, alternative (renewable) energy sources, and so on.  I believe we should heed this signal and act accordingly. But then there’s this: middle and low-income households are getting stung by higher energy prices at a particularly bad time, and it’s pinching their already constrained family budgets.  This hurts them and it hurts the fragile economic recovery.  Neither is it realistic to believe that everyone can conserve their way out of this, by quickly changing their driving habits or shifting to higher mileage, or even electric, vehicles (check this out).

U.S. Light Vehicle Sales 11.8 million SAAR in May  - Obviously the Japanese supply chain disruption impacted auto sales significantly in May. This has also negatively impacted manufacturing overall, and at least partially explains why the ISM manufacturing index was down sharply in May. The ISM employment index was still fairly strong, suggesting many manufacturers view this as a short term issue. The good news is the supply issues are being resolved ahead of schedule. Based on an estimate from Autodata Corp, light vehicle sales were at a 11.79 million SAAR in May. That is up 1.5% from May 2010, and down 10.2% from the sales rate last month (April 2011). This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for May (red, light vehicle sales of 11.79 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967.   This was well below the absurd consensus estimate of 12.8 million SAAR. As mentioned above, it is difficult to tell how much of the decline is due to supply chain issues - but my guess is we see a bounce back over the next few months.

With Deals Turning Scarce, Car Buyers May Want To Wait - The era of cut-rate financing, generous cash- back offers and big discounts is coming to an end. With the effects of the earthquake in Japan rippling through the industry and causing shortages, prices are rising for both new and used cars, and fewer models and options will be available come summer, especially for the hybrids and fuel-efficient vehicles that Japan produces.  That's prompted many experts to voice something rarely said in the sales-happy auto industry: With consumers facing the toughest market in recent memory, if you can, put off purchases until things sort out, probably early next year.  "If you don't have an immediate need, you are probably better to wait and figure out where the market is headed," said Jesse Toprak, an analyst with auto information company  Toprak concedes his reluctance to give such advice. TrueCar collects referral fees for new-car sales to visitors to its website.

Obama to Tout Auto Bailout’s Trickle-Down Benefits - President Barack Obama isn’t just visiting a Chrysler auto plant today as he highlights his own role in helping revive the domestic auto industry. In Toledo, Ohio,  he’ll stop by at least one small business to make the case that bailing out Chrysler helped dry cleaners, grocers, hardware stores and other businesses that depend on auto workers’ patronage. “Even though they don’t work at Chrysler [they] have significantly benefited from the turnaround at that company,” White House spokesman Josh Earnest said aboard Air Force One, en route to Toledo. “This is a broader story we’re telling about the American economy.” The trip, on a day that began with a bleak jobs report for May, is the latest in a series of events and remarks aimed at highlighting the White House decision to rescue Chrysler Group LLC and General Motors Co. and help them emerge from bankruptcy protection. The bailouts are unpopular in much of the country, but voters in states like Ohio that depend on domestic auto makers credit the moves with saving the companies.

Chicago manufacturing gauge nosedives - A Chicago-area manufacturing gauge dropped by the largest amount in nearly two-and-half years in May, in a further sign that the rise in oil prices and the Japanese earthquake have affected activity. The Chicago PMI fell to a reading of 56.6% in May, the lowest reading since Nov. 2009, from 67.6% in April. While that reading is still significantly above the 50-line indicating growth, the eleven-point drop is the biggest one-month deceleration since Oct. 2008 and was worst than the 60% reading that economists polled by MarketWatch anticipated. Indexes for production, new orders and order backlogs each dropped by double digits. Inventories jumped, which in this case is more likely an indication of unplanned gains due to a lack of sales than stocking up in anticipation of better times ahead.

ISM Manufacturing index declines to 53.5 in May - PMI was at 53.5% in May, sharply down from 60.4% in April. The employment index was at 58.2 and new orders at 51.0. All lower than in April. From the Institute for Supply Management: May 2011 Manufacturing ISM Report On Business® . "The PMI registered 53.5 percent and indicates expansion in the manufacturing sector for the 22nd consecutive month. This month's index, however, registered 6.9 percentage points below the April reading of 60.4 percent, and is the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. Slower growth in new orders and production are the primary contributors to this month's lower PMI reading. Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs." Here is a long term graph of the ISM manufacturing index.

May manufacturing activity cooled to 20-month low - U.S. manufacturing activity expanded in May at the slowest pace in 20 months, the latest sign that a sharp rise in energy prices is hampering economic growth. The Institute for Supply Management, a trade group of purchasing executives, said Wednesday that its index of manufacturing activity fell to 53.5 percent in May from 60.4 in April. While that marked the 22nd straight month of growth, the slowdown was the biggest since 1984. Any reading above 50 indicates growth. Separately, the Commerce Department said builders began work on more home-remodeling projects to boost construction spending for the second straight month. But the 0.4 percent increase in April barely lifted spending above its lowest level in more than a decade.

Jobs and factory slowdown add to recovery fears - Companies hired far fewer workers than expected in May and output in the manufacturing sector slowed to its lowest level since 2009, adding to concerns that the recovery is running out of steam. Economists slashed their forecasts for Friday's U.S. payrolls report, considered the best barometer of the world's biggest economy, after private-sector job growth tumbled to just 38,000, its lowest level in eight months. Wednesday's reports were the latest signals that U.S. economic growth remained sluggish in the second quarter after hitting a soft patch in the first months of the year. "This is all consistent with the notion that we've hit a bump in the road when it comes to growth,"

Factory Orders Join Parade Of Economic Misses; Inventories Of Manufactured Durable Goods At Highest Ever - And another miss. Factory orders dropped 1.2% in April, down two of the last three months, to $40.4 billion, following a material March revision from 3.0% to 3.8%. The drop was greater than expected, missing consensus of -1.0%, and indicative that the transition from Q1 GDP strength to Q2 GDP weakness is, as expected, going to be acute. Elsewhere, inventories of manufactured durable goods in April, up sixteen consecutive months, increased $3.3 billion or 0.9 percent to $350.6 billion, unchanged from the previously published increase. This was at the highest level since the series was first published on a NAICS basis and followed a 1.7 percent March increase. Look for inventories to be the swing factor once again in Q2 GDP. Inventories rose 1.3% in April, shipments down 0.2% higher, and unfilled orders were up 0.3%. The inventory-to-shipments ratio was up to 1.32 in April from 1.30 in March.

U.S. Factory Orders Fell 1.2% in April, Most Since May 2010 - Orders placed with U.S. factories fell in April by the most in almost a year as demand for aircraft waned and Japan’s earthquake restrained auto-related supplies.  Bookings for manufacturers’ goods dropped 1.2 percent, the biggest decrease since May 2010, after a revised 3.8 percent gain in March, figures from the Commerce Department showed today in Washington. Economists projected a 1 percent decline in April, according to the median forecast in a Bloomberg News survey. Orders for durable goods fell 3.6 percent. Estimates of the 67 economists surveyed by Bloomberg ranged from a decline of 3 percent to a gain of 1.5 percent. Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, fell 2.3 percent, the most since January. March capital goods orders rose 5.4 percent.

ISM Non-Manufacturing Index indicates slightly faster expansion in May - The May ISM Non-manufacturing index was at 54.6%, up from 52.8% in April. The employment index increased in May at 54.0%, up from 51.9% in April.  From the Institute for Supply Management: May 2011 Non-Manufacturing ISM Report On Business®   "The NMI registered 54.6 percent in May, 1.8 percentage points higher than the 52.8 percent registered in April, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 0.1 percentage point to 53.6 percent, reflecting growth for the 22nd consecutive month, but at a slightly slower rate than in April. The New Orders Index increased by 4.1 percentage points to 56.8 percent. The Employment Index increased 2.1 percentage points to 54 percent, indicating growth in employment for the ninth consecutive month and at a faster rate.

Chart of the Day: The Death of Small Businesses - Like me, you've probably been hearing for years that small businesses are the engine of job creation in the United States. But that's an outdated view. The number of new startup businesses has declined sharply since the beginning of the recession, while the number of jobs created by startup businesses has been declining for over a decade. As this chart from the BLS shows, the number of jobs created by new businesses peaked in 2000, began declining at the start of the Bush administration, and has been plummeting ever since: The number of new establishments for the year ending in March 2010 was lower than any other year since the series began....The number of jobs created by establishments less than 1 year old has decreased from 4.1 million in 1994, when this series began, to 2.5 million in 2010. This trend combined with that of fewer new establishments overall indicates that the number of new jobs in each new establishment is declining. ....The number of jobs created from establishment births peaked in the late 1990s and has experienced an overall decline since then. The decrease in birth-related employment during the latest recession is the largest in the history of the series, followed closely by the period of “jobless recovery” after the 2001 recession.

The U.S. Economy's 'You First' Problem - Companies won't hire because customers won't spend. Customers won't spend because companies won't hire. This stare-down has been going on since approximately December 2007, when the worst slump since the Great Depression took hold. Many Americans would like someone to make a move so they can get back to prosperity. Yet they've lost confidence in the actions that were designed to build confidence and restore growth—namely, near-zero overnight interest rates, the bailout of the financial system, a weakening dollar, and stimulus measures that add to the federal budget deficit and the national debt.  The latest downer: Housing prices in 20 big U.S. metropolitan areas fell in March to their lowest level since 2003, according to the S&P/Case-Shiller Index released on May 31. "I wouldn't be surprised to see prices continue to fall this year and maybe into next year," . The Conference Board announced on May 31 that its measure of consumer confidence fell to 60.8 in May from 66 in April. (It was more than 100 before the recession.) Manufacturing growth is slowing, too, according to the latest data released on June 1. The factory index of the Institute for Supply Management fell in May by the most points since 1984.

USPS Report Says Total Collapse is Imminent  - The United States Postal Service is headed off a cliff, and – according to the US Government Accountability Office - few are even giving its demise a second thought. That’s the same USPS, by the way, that was once a great source of national pride, that united America’s coasts and transmitted vital information at incredible speeds, that kept families connected across rivers and valleys, and that inspired the unofficial creed “neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.” Ignore the fact that the creed actually refers to the couriers of the ancient Persian Empire – people believed that the USPS embodied these words, and many postmen and women did their best (maybe) to live up to them. So, what happened?

Labor Mobility: Starting to Increase - From the Financial Times: US job relocation activity picks up sharply. Companies that specialise in corporate relocations said they were seeing double-digit increases in their businesses compared with the same period a year ago. They added that corporate relocations ... are far outpacing more modest gains in other types of moves such as those by members of the military or government employees. This may be increasing, but it is from a very low level. Challenger, Gray & Christmas tracks manager mobility each quarter. In 2010, there were a record low percent of job seekers who relocated for a new position (percent of those who found jobs). The percentage picked up a little in Q1 2011, but it is an easy comparison to last year.  Here is the quarterly data from Challenger, Gray through Q1 2011. Mobility has been trending down for some time, but collapsed in 2010. It appears the lower mobility was related to the housing market. The Financial Times notes that the first question many companies ask when interviewing out-of-area potential hires is: "What do you owe on your house?"

The Truth About The Middle Class - The central tenet of this blog is that America is an Empire in decline. I date the beginning of the fall to the early 1980's. Despite an enormous amount of economic data supporting this view, and the existence in plain sight of "intangibles" or other conditions supporting this view—dysfunctional political theater, crumbling infrastructure, gambling as economic activity, news as entertainment, music as corporate marketing, the cult of personality & celebrity, Hollywood superhero FX movies geared to adolescents in world where adults are stuck in adolescence, cage-fighting on TV, anything on TV, astonishing ignorance about the world and the abject failure of our public education—most Americans refuse to acknowledge the gradual decline in our standards & quality of life. This is not surprising. One must study the data or actually remember the way things used to be to sense the change. If you went to college when getting a degree was affordable, and didn't require you to take on a boatload of debt, and now have kids of your own for whom college is a risky proposition, it is easy to see the problem. As I've written before, people adapt to gradually deteriorating conditions in such a way that what is "normal" now is worse than what was "normal" last year. This goes on year after year. Few notice the race to the bottom.

Building Things In America: Notes on Manufacturing and Stroll Through the Construction Data - At Ezra’s place I talked a little about what a big story deal manufacturing has been over the last decade. The persistent weakness the way that creates a negative undercurrent in the US job market.  I think this is also key to growing inequality as the forces that contribute to the hollowing out of US manufacturing jobs may also be the forces that are contributing to record profits on Wall Street.  In short, strong demand for US financial assets is matched against weak demand for US tradable goods.  One result is US financial institutions who can borrow artificially cheaply and use that leverage advantage to make higher than expected profits. In finance we sometimes talk about the Fed put. That’s the idea that the US financial system is ultimately backstopped by the Federal Reserves refusal to allow a collapse. I am also interested, however, in the China Put. The idea that leverage is backstopped by the fact that there is always an enormous buyer for some form of dollar denominated debt.

Against Learned Helplessness - Krugman - Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. ... Nor is the situation showing rapid improvement. This is a continuing tragedy, and in a rational world bringing an end to this tragedy would be our top economic priority.  Yet a strange thing has happened to policy discussion: on both sides of the Atlantic, a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead of a determination to do something about the ongoing suffering and economic waste, one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility.  So someone needs to say the obvious: inventing reasons not to put the unemployed back to work is neither wise nor responsible. It is, instead, a grotesque abdication of responsibility.

Shoulds Versus Coulds - Jared Bernstein - As I wrote the other day, it’s essential to turn the conversation back to what we should be doing on the jobs front, so I was glad to see Paul Krugman thinking along those lines this AM.  But I was struck by this ‘graf: “For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners.” Especially re the WPA-idea, this got me thinking about the relative value of important voices like Paul’s promoting what we should do right now as opposed to what, given political constraints, we could do. And I think now is a good time to emphasize the latter. Let me be clear.  I totally agree that we mustn’t let “political realism” shut down our thinking on the best way out of this mess.  And while that kind of writing sometimes feels academic to me, if done well (as Paul does it), it can slowly but persistently set the stage for actually doing the right thing when the political landscape shifts. 

Shoulda Coulda Woulda - Krugman - Jared Bernstein has a thoughtful response to today’s column; oh, and by the way, people should be reading his blog. As he says, the Obama administration faced severe political constraints even before it lost the House. WPA-type programs probably couldn’t have passed even in February 2009; mortgage relief, while it might have been doable (and still might be), would cause howls of complaint that the undeserving are being rewarded; and, of course, any talk of useful inflation gets the Zimbabwe treatment. What I would say in reply is, first of all, this wasn’t an “Obama must …” column; it was aimed more at the broader discourse, as well as the closed-door-off-the-record stuff I’ve been hearing from men in suits. Really bad analysis is posing as wisdom, and it needs to be called out. But on the Obama issue, I still think that the administration has made four serious misjudgments.

On Should Level Disagreements Motivating Could Level Disagreements - Jared Bernstein has an interesting proposition for progressive/liberal economic writers. We should talk less about what the administration and Democratic leader should do and more about what they could do: Especially re the WPA-idea, this got me thinking about the relative value of important voices like Paul’s promoting what we should do right now as opposed to what, given political constraints, we could do. And I think now is a good time to emphasize the latter….There will be no WPA-type programs in our near future. There was no appetite for them in the Obama admin in the midst of the worst recession since the Great Depression and there’s a lot less now. Paul Krugman, Brad Delong, and David Dayen all post interesting responses. With all due respect to Bernstein, I’m on team “should.” Nobody has said this directly, so I will: It’s not clear the problem is that the administration agrees with Krugman/Delong style economic liberals on what needs to be done but disagrees on tactics.

Jared Bernstein Lets Slip Interesting Info About WH Economic Views - Paul Krugman had a good column today on how America needed to end its “learned helplessness” on the jobs crisis. He cited multiple options of things the government could do right now to create jobs, which would of course increase government revenue and over time reduce the deficit. Among them were such ideas as a WPA-type program of public works jobs, repairing roads an rebuilding infrastructure; a dedication to increasing inflation, which would reduce the debt burden; or a “serious program of mortgage modification” that would reduce private debt from homeowners and allow them to spend in a more productive capacity. Jared Bernstein had a very interesting response. As you know, Bernstein used to be Joe Biden ‘s chief economist, and was involved in most of the economic policymaking of the first Obama term: There will be no WPA-type programs in our near future. There was no appetite for them in the Obama admin in the midst of the worst recession since the Great Depression and there’s a lot less now. The reasons for that are interesting and I’ll speak to them another day. But it ain’t happening.

Economics, politics, and distraction from productive activity: Since the recession began, Arnold Kling has been trumpeting a very non-traditional way of thinking about the economy. At first this went by the name of "recalculation," but Kling has now settled upon "PSST," which stands for "Patterns of Sustainable Specialization and Trade."... I'll let Kling sketch the idea in his own words: Regular readers know that I am trying to nudge them toward a different paradigm in macroeconomics. I want to get away from thinking of economic activity as spending, and instead move toward thinking of it as patterns of sustainable specialization and trade.... I believe that trying to describe economic activity using an aggregate production function is a mistake.... The advantage of the aggregate production function is yields an aggregate supply curve. This allows macro to be presented using the familiar tools of supply and demand.... Instead, I think that the right tools to use for macro are the two-country, two-good models of international trade.... At full employment, both countries are taking advantage of specialization and trading with one another. When something happens to adversely affect the pattern of trade, some workers shift from market activities to non-market activities, mostly in the form of involuntary unemployment. Gradually, new patterns of specialization and trade emerge, and full employment returns. That is what I have been calling the Recalculation Story....

Shared Capitalism - How could public policies promote and expand this shared capitalism? Public policies already offer companies tax benefits for setting up employee stock-ownership plans, and these could be increased. It would also be relatively easy to encourage companies to offer more workers incentive pay based on company performance. In a report published by the Center for American Progress in March, Professors Freeman, Blasi and Kruse point to a strange anomaly in current tax policy: Companies are allowed to write off costly stock options that represent incentive pay for top executives, despite a lack of evidence that such incentives lead to improved company performance. Why not restrict the tax benefits to companies that provide the same type of incentive pay for all full-time employees, stipulating that the value expended on the bottom 80 percent of employees by salary must equal at least that expended on the top 5 percent? Similar restrictions have long been in effect for employee retirement and health plans. The costs of these programs are not tax-deductible unless they are offered in a nondiscriminatory way to all workers. 

Apple, China, and the class war - Karl Smith has been doing some very interesting blogging on the compositional effects of the recession in America. He concludes a post documenting the dramatic decline in manufacturing employment over the past decade by writing:The lesson is that it seems unlikely this trend was caused solely by the financial crisis or housing collapse. The job loss that began in 1999 has continued at a greater or lesser pace ever since. More likely this is the result of globalization. He elaborates here: Suppose that I have a factory with 1,000 workers who produce $1 million worth of goods. Now, suppose I restructure my factory so that I outsource half the work to China or India. I keep my 500 most skilled employees and have them focus on the most value-intensive work.  My new reorganized factory produces $1.5 million in output, of which $500,000 comes from outsourced workers. If you were to simply read the statistics, you might say, well, trade contributed somewhat to those 500 job losses, but it looks like the real driver was an increase in worker productivity. Yet, it is trade that facilitated that increase in worker productivity.

The Truth About the American Economy - Robert Reich - How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery? Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure. Government could have enforced the basic bargain. But it did the opposite. It slashed public goods and investments — whacking school budgets, increasing the cost of public higher education, reducing job training, cutting public transportation and allowing bridges, ports and highways to corrode. It shredded safety nets — reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor than of the well off.

ADP: Private Employment increased by 38,000 in May - ADP reportsEmployment in the nonfarm private business sector rose 38,000 from April to May on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from March 2011 to April 2011 was revised down slightly to 177,000 from the previously reported increase of 179,000....May’s ADP Report estimates employment in the service-providing sector rose by 48,000, marking 17 consecutive months of employment gains while employment in the goods-producing sector fell 10,000 following six months of increases. Manufacturing employment fell 9,000 in May following seven consecutive monthly gains. This was well below the consensus forecast of an increase of 178,000 private sector jobs in May. .

Economists rush to mark down payrolls estimates - Reflecting one of the largest one-day mood swings in recent memory, the downward revisions now place last month’s job growth at 125,000, the weakest since the 68,000 positions created in January and down from the average of 233,000 over the past three months. As the sun rose on a steamy Wednesday in Washington, economists polled by MarketWatch had been looking for growth of 175,000 in nonfarm payrolls for May, a consensus figure representing a decline from a healthy 244,000 in April but still passing for strength. The nation’s unemployment rate was expected to reverse April’s slight uptick and fall to 8.9%. First-time claims for unemployment benefits rocketed to 474,000 in late April — the highest level in nine months — from under 390,000 earlier in the month. Claims have since fallen back, coming in at 424,000 for the latest week. Analysts tended to dismiss the claims data as an aberration. They saw continued strength in hiring, and some were hopeful that more than 50,000 jobs created by McDonald’s Corp. might offset any weakness in other sectors.

The Thundering Herd Of Wall Street Lemmings Begins To Move: NFP Forecast Cuts Galore - And so the thunderous herd of highly overpaid and always wildly inaccurate Wall Street lemmings better known as "economists" starts moving. Yesterday it was that paragon of the 0.000 batting average Joe LaVorgna who cut his NFP forecast from 300,000 to 225,000 (a number we expect will be cut to about 155,000 today, or indicative that little Joey was off by about 100% as usual), and today Morgan Stanley has already fired the reactionary salvo, trimming its NFP forecast for this Friday's number from 175,000, accompanied by Credit Suisse which cuts from 185,000 to 120,000. And these lemmings are paid 7 digit salaries why again? So far the most resilient is Goldman's Jan Hatzius, who just threw up all over the ADP number, but has so far refused to cut his NFP prediction of 150,000. We give him at most 48 hours before he does following today's upcoming abysmal CPI number. From Goldman: ADP employment +38k in May, vs. median forecast +175k.

Scary signs for jobs - Psssh. That's the sound of the air being sucked out of the job recovery. All eyes in the financial world are on the government's monthly labor report due Friday, hoping to see that the job market continued to grow in May.  But after several indicators pointed to a recent slowdown in job growth, the glass is now looking closer to empty than full. "You could call it a soft patch, but it's the second or third soft patch we've seen in the recovery," said Paul Ashworth, chief U.S. economist with Capital Economics. "For a recovery that is less than two years old, it's troubling to say the least." While the job recovery has -- let's face it -- been far from robust, it had at least shown some improvement earlier this year. For three months straight, the U.S. economy has added more than 200,000 jobs per month. But more recent data, including two labor reports released Wednesday, show that momentum has since slowed.

ADP’s Job Data Reliability? Not Great . . . First off, the economy is slowing. At least, the 2nd derivative rate of growth is throttling back, from over 3% GDP in several 2010 Qs to under 2% now. That much we know, and it lends some credence to the belief that QE3 is inevitable. I am far more uncertain about QE3; it really depends how slow things get and how much the Fed panics. But we do know QE2.5 — the reinvestment of the rolling maturities of QE2 — is a done deal, and that is somewhat supportive of equity prices. Second, we also know the ADP numbers are suspect at best (See this, this and this). They seem to do better at forecasting BLS numbers later in the economic cycle when job creation is dominant at established, larger firms — their client base — than in the early parts of the cycle when it is the new start-ups driving job creation. ADP also does better following the revisions and benchmarking — suggesting that they may be more accurate than they appear when the payroll numbers are first released. 

New Jobless Claims Post A Modest Decline Last Week - Initial jobless claims dropped last week by a modest 6,000 to a seasonally adjusted total of 422,000. That’s a sign that the labor market isn’t poised to deteriorate further, but the still-elevated pace of new applications for unemployment benefits also suggests that job growth is still struggling. In one respect, we dodged a bullet--for now. But let's be clear: nothing less than robust job growth will suffice to offset what looks to be a new summer slowdown in the offing. It's still too early to talk about a new recession, but the risk is inching higher. That threat remains small, but the change in trend isn't encouraging. The recently stalled decline in new jobless claims is particularly worrisome in the wake of yesterday’s news from 1) ADP on the sharp slowdown in job creation last month and 2) the downshift in manufacturing activity for May.

May Employment Report: 54,000 Jobs, 9.1% Unemployment Rate - From the BLSNonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent. Job gains continued in professional and business services, health care, and mining.  The change in total nonfarm payroll employment for March was revised from +221,000 to +194,000, and the change for April was revised from +244,000 to +232,000. The following graph shows the employment population ratio, the participation rate, and the unemployment rate.The unemployment rate increased to 9.1% (red line).  The Labor Force Participation Rate was unchanged at 64.2% in May (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 was unchanged at 58.4% in May (black line). The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

EMPLOYMENT SITUATION (6 charts) The employment report came in much as the ADP report had suggested it would. Payroll employment was little changed at 54,000. This is considerably weaker than over the last few months and is in line with other data that suggest the economy has weakened significantly. The household survey reported that employment rose by 105,000 while the civilian labor force grew by some 272,000. Consequently the unemployment rate ticked back up to 9.1% from 9,0%.Even with the uptick in the unemployment rate my fed policy index is still calling for a fed funds rate of 1.0%. This implies that the Fed should not renew QE II as the current easing ends. The workweek was unchanged at 34.4 hours. So with the small gain in employment aggregate hours worked was only up 0.1% Average hourly earnings rose by 0.3%, but the year over year gain in average hourly earnings is only 1.8% -- a near record low. With weak hourly earnings and only a 0.1% gain in hours worked average weekly wages are only up 2.7 % from a year ago. With the CPI at 3.1% as of April it should be no surprise that the economy is weak.

Job Growth Weakens, Unemployment Rate Jumps To 9.1% - After several months when it seemed like the jobs market was turning around, today’s May report from the Bureau Of Labor Statistics is really quite depressing: U.S. employment rose far less than expected in May to record its weakest reading since September, while the jobless rate rose to 9.1 percent as high energy prices and the effects of Japan’s earthquake bogged down the economy.Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000. Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated.Economists still believe the lull in activity will be temporary. They cite high gasoline prices, bad weather and disruptions to motor vehicle production because of a shortage of parts from Japan as factors weighing on growth.

Job Creation Slows Sharply In May - Today’s employment report for May wasn’t good. It wasn’t enough close to being good. But it wasn’t surprising. After ADP reported on Wednesday that its estimate of private payrolls suffered a big slowdown in growth last month, today’s disappointing news from the Labor Department was expected, as we discussed two days ago. The question now is deciding if the slump in job creation is temporary or something with legs.  It’s too soon to throw in the towel on expecting the recovery to muddle through, but make no mistake: We’re looking at the biggest threat to growth in, well, since this time last year. Yes, the prospect of another summer slowdown has returned. Actually, the slowdown is already here, as indicated by last month’s downshift in private-sector job creation. Private nonfarm payrolls advanced by a net 83,000 in May—far below April’s 251,000 rise and the smallest gain since June 2010, according to the government's establishment survey. The main culprit in the reversal of fortunes last month is the dramatic slowing of job creation in the service sector, which minted just 80,000 new positions last month vs. 213,000 in April. Retail trade was especially sluggish, shedding more than 8,000 jobs last month after generating 64,000 previously.

Employers added 54,000 jobs in May, fewest in 8 months; unemployment rate rose to 9.1 pct  -- Employers in May added the fewest jobs in eight months, and the unemployment rate inched up to 9.1 percent. The weakening job market raised concerns about an economy hampered by gas prices and the Japanese nuclear disaster. The key question is whether the meager 54,000 jobs added last month mark a temporary setback or are evidence of a more chronic problem. That total is far lower than the previous three months' average of 220,000 new jobs per month. Private companies hired only 83,000 new workers in May -- the fewest in nearly a year. Among the deepest job cuts were in local governments, which cut 28,000 jobs last month, the most since November. Nearly 18,000 of those jobs were in education. Cities and counties have cut jobs for 22 straight months and have shed 446,000 positions since September 2008.

Not again - AMERICAN labour markets are faltering, and the script looks distressingly familiar. In the spring of 2010, a strong American economic recovery finally seemed imminent. In the three months to May of last year, private employers added over 400,000 workers and the future looked brighter still. But a crisis in Europe shook market confidence. As investors fled to safety, firms grew nervous and hiring slowed. Only in the fall of last year—not long after the Federal Reserve announced a new round of stimulative asset purchases—did activity pick up. And in 2011? In the three months to April, private employers added over 700,000 jobs, and conditions again seemed to be improving. But the global economy has suffered one disruptive shock after another. Bad weather dragged down activity early in the year and political instability in North Africa and the Middle East boosted oil prices. A devastating disaster in Japan seems to have had a bigger impact on the Japanese economy, and on global trade, than was initially expected. Big emerging markets—primary sources of global growth in recent years—have been working to slow their economies to tamp down rapid inflation. And Europe's crisis continues to worsen.

Video: Weak Jobs Report for May - In May, the nation’s unemployment rate ticked up to 9.1% as only 54,000 jobs were added, far less than the 160,000 expected. The Journal’s Kelly Evans, Dennis Berman, Sudeep Reddy and Phil Izzo discuss the implications.

Unemployment rises, recovery remains on pause - As a reminder of what a healthy unemployment rate looks like: four years ago (May 2007) the unemployment rate stood at 4.4%, and 11 years ago (May 2000), the unemployment rate was 4.0%.  This morning’s release of the May 2011 Employment Situation report by the Bureau of Labor Statistics revealed a recovery losing steam with an unemployment rate of 9.1%.  In May, only 54,000 payroll jobs were added, which is less than a quarter of the 220,000 added each month on average for the prior three months and not even enough to keep pace with normal growth in the working-age population.   The U.S. workforce needs the pace of job growth to accelerate dramatically, but the recovery is sputtering.  The highest the unemployment rate ever got in the two recessions prior to the Great Recession was 7.8% (in June 1992).  We have now been above that rate for two years and four months. Wage growth is low.  Average hourly wages were relatively flat in May (up 6 cents), and have grown at a 1.8% annualized rate both over the last three months and over the last year, which is far below the growth rate in the period before the recession started (see chart below).  There is absolutely no sign in these data of an elevated inflation risk.

The Disappointing Employment Report - The jobs report is very disappointing. The BLS reports: that employment grew by 54,000 and the unemployment rate ticked up from 9.0 to 9.1 percent. Remember that we need between 100,000 and 150,000 jobs per month just to keep up with population growth, and even more than that to reabsorb the millions who are out of work. So, the employment numbers mean that instead of making up lost ground, we lost additional jobs.And, as Calculated Risk notes, if that’s not bad enough, the numbers in previous reports were adjusted downward: The change in total nonfarm payroll employment for March was revised from +221,000 to +194,000, and the change for April was revised from +244,000 to +232,000 The labor force participation rate was unchanged at 64.2 percent, and the employment to population ratio was also unchanged at 54.8 percent. Thus, two other key measures of labor market performance remain stagnant and below their historical averages. The numbers are even worse for minority groups and unskilled workers, with the employment population ratio for teens reaching a low for this cycle, and the ratio for African Americans hitting a new low.

Grim news from the jobs front - There is only one good thing that can be reported about the news that the U.S. economy added only 54,000 jobs in May: At least the number was positive -- the economy is still gaining jobs. But everything else in this report is grim. From February through April, the economy had been averaging 220,000 new jobs a month. Not only do the May numbers represent an abrupt change in trend, but the Bureau of Labor Statistics also reported downward revisions for both March and April. The dire implications of a host of economic indicators in May are confirmed: The U.S. economic recovery is stalling out. The unemployment rate rose from 9.0 to 9.1 percent, but not because of a rush of previously discouraged workers looking for jobs -- something you would expect to happen if the economy was improving. The labor-force participation rate and the employment-population ratio were both unchanged, indicating an essentially stagnant labor market. The number of long-term unemployed -- people jobless for 27 weeks and over -- increased by 361,000 to 6.2 million.

Job Numbers Disappoint: Time for New Stimulus? - In May, the number of people employed in America rose by just 54,000. In addition, the unemployment rate rose for the second month in a row to 9.1%. Worse, the time it's taking unemployed people to find a job rose to a new high of 39.7 weeks, or nearly 10 months. There was bad news in May's jobs report, and then there was worse news. Yes, the economy created jobs, but far fewer than most economists, who were predicting the economy would produce nearly 4 times as many jobs in May just a week ago, and far fewer than the 200,000 needed just to keep up with population growth. It was also far fewer than the 235,000 jobs the economy created a month ago. And it was the slowest pace of job growth in eight months.Right now, graduates, immigrants and others will start looking for work for the first time. They will be competing with the 15 million people who are already in the labor force and have been looking for work for months. Right now, it seems few will find jobs. Last week, the government said the economy grew at 1.8% in the first quarter.  Worse, today's report suggests that unless the government does something about it - new tax cuts, stimulus, QE3 perhaps - it doesn't look like the situation is going to improve anytime soon

Household Survey: Private Sector Gains 373,000 Jobs in May, Public Sector Loses 417,000 Jobs - The chart above shows monthly employment levels for private-sector workers vs. government workers, based on data from the BLS household survey (private sector employment is calculated by subtracting government employment from total nonagricultural employment). From the peak high in late 2008, government payrolls have decreased by more than 1.2 million workers through May, while the number of private sector workers has increased by more than 2.5 million since the peak low in late 2009.  In May alone, there was a decrease of 417,000 government jobs, following losses of 132,000 in April and 75,000 in March, totaling 549,000 for the last three months, and that's really the main source of labor market weakness - it's mostly in the public sector, not the private sector.  Based on the household measure of private sector employment, there was a 373,000 job increase in May, following a 11,000 decrease in April and 370,000 increase in March.  In comparison, private payroll jobs increase by only 83,000 in May, following increases of 251,000 in April and 219,000 in March.   Year-to-date, one million jobs have added in the private industries according to the household survey, slightly higher than the 908,000 jobs added according to private payroll data. 

The Return of the Blue-Collar Downturn - For much of 2010, the slumping economy was affecting white-collar, highly educated workers almost as much as it was affecting less educated and blue-collar workers. That’s no longer the case. In recent months, the economy has once again been easier on college graduates than it has on everyone else, much as it was during nearly all of 2008 and 2009. The overall result is that the recession and its long aftermath have widened the portion of inequality that stems from education. Last month, the share of four-year college graduates with jobs jumped to 74 percent, from 73.5 percent in April and 73.2 percent in January, according to Friday’s jobs report. That is the only educational group whose employment percentage is higher than it was in January. Among people who attended college but do not have a four-year degree, 64.1 percent were employed last month, down from 64.6 percent in January. Among high-school graduates who never attended college, 54.6 percent had a job in May, unchanged from January; 38.5 percent of high-school dropouts were employed, down from 38.7 percent in January.

Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - There were few jobs created (only 54,000 total and 83,000 private sector). The unemployment rate increased from 9.0% to 9.1%, even though the participation rate was unchanged at 64.2%. The average workweek was unchanged at 34.4 hours, and average hourly earnings increased slightly. "In May, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents, or 0.3 percent, to $22.98. Over the past 12 months, average hourly earnings increased by 1.8 percent."  There are a total of 13.9 million Americans unemployed and 6.2 million have been unemployed for more than 6 months. Very grim numbers. From the BLS report: The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged in May at 8.5 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. These workers are included in the alternate measure of labor underutilization (U-6) that decreased slightly to 15.8% in May from 15.9% in April. This is very high.This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 6.2 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 5.839 million in April. This remains very high, and long term unemployment is one of the defining features of this employment recession.

Average Length of Unemployment at All-Time High - The average unemployed person in America has been looking for work for 39.7 weeks, or more than nine months. That is the longest average unemployment spell since the Labor Department started keeping track in 1948: Now, the Labor Department changed the way it calculates this number in January. But even under the old methodology (shown in the teeny pink line at the far right of the chart), workers still had the longest average spells of unemployment on record this May. The growing length of joblessness is particularly worrisome because it tends to be self-perpetuating. The longer a person is unemployed, the less employable he or she becomes because of factors like stigma and skill deterioration. That means that the longer it takes to get Americans back to work, the further behind they will fall. The social safety net for these workers is also fraying. Many of the long-term unemployed — who now constitute about 45 percent of all unemployed workers — have already had their jobless benefits run out. In some cases states (like Arizona) have neglected to make the legislative changes necessary to receive additional jobless benefits paid for with federal money.

Birth/Death Model and Unemployment by Duration and Education - Here is a post I wrote last month Employment: A comment on the Birth/Death Model. The key point is that the Birth/Death model minimizes the primary sampling error due to employment growth generated by new business formations. The model does miss turning points, but the BLS is now updating the estimation quarterly, and this should minimize the errors.  This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. In general, all four categories are trending down, although the "27 weeks and over" category increased sharply this month.  This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down, although only "High School Graduates, No College, 25 yrs. & over" decreased in May.  The BLS diffusion index for total private employment was at 53.6 in May, and for manufacturing, the diffusion index decreased to 54.9.  Think of this as a measure of how widespread job gains are across industries.

Comparing Recessions and Recoveries: Job Changes - The United States added just 54,000 nonfarm payroll jobs over all in May, the Labor Department reported Friday, after having added an average of 220,000 in each of the three prior months. The May jobs report showed the slowest private-sector hiring in a year. After hopes had risen that the economy was picking up steam, hiring was lackluster across the board. The biggest gains were in professional and business services and in health care (which has been charging forward in good times and bad anyway). The losers were state and local governments, which have been struggling with budget issues. They are expected to continue shedding workers in months to come.The chart above shows economywide 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.

US Has To Create 250K Jobs A Month For 66 Months To Return To December 2007 Unemployment By End Of Obama's Second Term - It was difficult rerunning this chart with a straight face, make that near impossible, but here are the results. Following the most recent NFP disappointment, the simple math indicates that for the US to return to its December 2007 unemployment, when factoring in the natural growth of the labor force of 90k people a month, the economy will need to add 250k jobs a month for the next 66 months or until the end of Obama's now very implausible second term. Then again, considering what the alternatives are, we can guarantee that the 2012-2016 period in terms of job creation will definitely not look like what is presented on the chart below.

Half of Last Month's New Jobs Came from a Single Employer — McDonald's -  According to the unemployment data released this morning, the economy added only 54,000 jobs, pushing the unemployment rate up to 9.1 percent. However, this report from MarketWatch suggests data is much worse than that:   McDonald’s ran a big hiring day on April 19 — after the Labor Department’s April survey for the payrolls report was conducted — in which 62,000 jobs were added. That’s not a net number, of course, and seasonal adjustment will reduce the Hamburglar impact on payrolls. (In simpler terms — restaurants always staff up for the summer; the Labor Department makes allowance for this effect.) Morgan Stanley estimates McDonald’s hiring will boost the overall number by 25,000 to 30,000. The Labor Department won’t detail an exact McDonald’s figure — they won’t identify any company they survey — but there will be data in the report to give a rough estimate.  If Morgan Stanley is correct, about half of last month's job growth came from the venerable fast-food chain. That is hardly the sign of a healthy economy.

Drop in Jobless Rate Partly Tied to End of Benefits - Some of the drop in the joblessness seen since the unemployment peak nearly two years ago is tied to the exhaustion of extended jobless benefits. New research from the Federal Reserve Bank of Chicago, released Tuesday, argued the end of these benefits “contributed modestly” to the drop in unemployment seen between October 2009, when it peaked at 10.1%, and January 2011. They note the former date lines up with when many jobless started losing their extended benefits.

More job seekers give up, reducing unemployment - The labor force — those who have a job or are looking for one — is getting smaller, even though the economy is growing and steadily adding jobs. That trend defies the rules of a normal economic recovery. Nobody is sure why it's happening. Economists think some of the missing workers have retired, have entered college or are getting by on government disability checks. Others have probably just given up looking for work. "A small work force means millions of discouraged workers, lower output in the future and a weak recovery," . "Those are unhealthy signs." By the government's definition, if you quit looking, you're no longer counted as unemployed. And you're no longer part of the labor force. Since November, the number of Americans counted as employed has grown by 765,000, to just shy of 139 million. The nation has been creating jobs every month as the economy recovers.

Number of the Week: Profits Rise, but Unemployed Ranks Don’t Shrink - 58.4%: Percentage of U.S. population employed. Nearly two years into the economic recovery, the U.S. has made troublingly little headway in putting people back to work. If the animal spirits needed to create jobs don’t return, the country could soon be facing a renewed crisis. Even as private businesses have added hundreds of thousands of jobs, the percentage of the population gainfully employed has hardly budged. As of May, it stood at 58.4%, a percentage point lower than at the bottom of the recession in mid-2009. That compares to a peak of 62.7% in December 2007.The discrepancy reflects a number of problematic trends. The average rate of job creation in recent months isn’t much more that what’s needed to offset population growth. A lot of people have given up on finding jobs, and so aren’t included in the official count of the unemployed. The aging of the population also means more old folks out of the work force.

The Post Goes Negative on the Economy, by Dean Baker - The May jobs report was bad news, but it was not as bad as the Washington Post and many other news outlets made it seem. When we get monthly data it is always important to remember that we are pulling out a snapshot from a longer period of time. Firms do not make their hiring and firing decisions over a single month. They have general impressions of how many people they need and they adjust their workforce accordingly. For this reason it is important to take the 54,000 jobs created in May against the backdrop of 234,000 jobs added in April. Employers who hired many workers in April were likely to add few or none in May. For example, the retail sector reportedly added 64,000 jobs in April. It lost 8,500 in May. Food manufacturing added 6,300 workers in April, it lost 7,000 in May. It is more likely that the April numbers overstated the underlying rate of job growth in the economy and the May numbers understate it, than there was some huge shift in the economy between the two months. Still, the average rate of job growth over the last three months was just 160,000.

The Silent Jobless?, By Robert B. Reich - The American economy is trapped in a vicious cycle. Those who are unemployed can't afford to buy much more than bare necessities, while people who are working are getting skimpier paychecks. This means consumers don't have much purchasing power, which has made companies reluctant to hire more employees or raise the wages of those they have. You'd think the American public would be demanding government action: a new WPA for the long-term unemployed, a second stimulus to make up for the shortfall in purchasing power, stronger safety nets. But we're not hearing much clamor for any of this. One reason is that those who remain unemployed have little or no political clout.  Who are they? Women who lost their jobs are having a harder time getting back to work than men.  Construction is still in the doldrums, but manufacturing and transportation have picked up, so men are starting to be rehired. But women who fill the ranks of teachers, public health professionals and social workers are in bad shape. These jobs continue to be slashed by state and local governments.  Unmarried mothers are having a particularly difficult time getting back jobs because their work was heavily concentrated in the retail, restaurant and hotel sectors.

Dean Baker, "Weak Job Growth Leads to Further Rise in Unemployment": "The unemployment rate edged up again in May, reaching 9.1 percent, as the rate of private-sector job growth slowed to just 83,000. There were also downward revisions to the prior two months data, which lowered the average for the last three months to 160,000, approximately 70,000 more than what is needed to keep pace with the growth of the labor force. Some of the weakness in May probably stemmed from quirks that exaggerated April job growth. For example, the retail sector reportedly added 64,000 jobs in April. It lost 8,500 in May. Health added 36,700 jobs in April, compared with an increase of just 17,400 in May. Food manufacturing added 6,300 jobs in April, it lost 7,000 in May. These are most likely quirks of seasonal adjustments, not sharp shifts in the economy itself. Taking a longer, three-month snapshot, there is not much that is very encouraging. A loss of 5,000 jobs in manufacturing brings the average gain over the last three months to 13,000. Construction added 2,000 jobs in May, bringing its average gain to 4,000. Job growth in retail has averaged 16,700 over the last three months. Health care has added an average of 28,000 jobs since February. The rate in restaurants has been 23,000.

US unemployment unacceptably high, White House advisers admit - The White House admitted on Friday that unemployment in the US was "uncomfortably high" after the latest set of figures for the American labour market showed only 54,000 new jobs were created by the world's biggest economy last month.Amid signs that growth has slowed markedly during the first half of 2011, the closely watched figures for non-farm payrolls showed an across-the-board weakening in hiring during May. The report from the US labour department was the weakest since last September. Private-sector jobs grew by 83,000, the smallest rise since June 2010, while government payrolls fell by 29,000. Employment growth in March and April was revised down by a total of 39,000, while the jobless rate rose in May from 9% to 9.1%.

This is why the United States is doomed - The GOP response to the jobs report: The Earth is flat and two plus two equals five. The Hill reports the House Republican response to Friday morning's distressing jobs report. Obama administration's "over-taxing, over-regulating and over-spending" has stifled economic growth."One look at the jobs report should be enough to show the White House it's time to get serious about cutting spending and dealing with our ailing economy," Speaker John Boehner said. How many blatant untruths can a Republican speaker of the House stuff into one sentence? Quite a few!

  • 1) President Obama has cut taxes. His stimulus bill included tax cuts for 95 percent of all American working families. He signed off on the extension of the Bush tax cuts, while throwing in a new payroll tax cut for good measure.
  • 2) Over-regulating? Let's just take a look at the two biggest signature pieces of legislation signed into law by Obama -- the Affordable Care Act and the Dodd-Frank bank reform act. According to this morning's jobs report, the healthcare sector has averaged 24,000 news jobs a month over the past year -- and accounted for almost a third of May's overall 54,000 gain. Meanwhile, Wall Street had its fourth most profitable year ever in 2010.
  • 3) Private economic forecasters, the kind of profit-minded companies that make their money by analyzing economic trends for business clients, generally agree that without Obama's stimulus spending, unemployment would be higher.

Is this what ended the American Dream? - As often as I repeat and document (here, for example) the fact that real incomes for middle- and low-income Americans plateaued in February 1973 (and incomes for middle- and low-income families and households before the end of the 1970s), I’m still puzzled as to why that happened.  Rick Perlstein offers an explanation in today’s NYT.  His narrative seems to be that in the 1970s, after the shellacking of George McGovern by Nixon in 1972 and the re-writing of the Democratic delegate selection process that gave Carter the nomination in 1976, liberalism in the Democratic Party changed its agenda.  It became less about the bread and butter issues of economic security and shared prosperity and more about civil rights, the environment, getting out of Vietnam, and honest and transparent government.  The Humphrey-Hawkins legislation in 1978, which nominally requires the Fed to keep both inflation and unemployment low, was so watered down that the Fed has never let itself be influenced in the slightest by the unemployment half of the mandate.  Humphrey-Hawkins, like Pickett’s Charge, marks the end of an era instead of a consolidation of gains.

Adjusting Wage Disparities for Cost of Living - Last week, Real Time Economics took a look at a Labor Department report that compared occupational pay across 77 metro areas. Many readers rightly pointed out that that Labor Department doesn’t adjust pay for cost of living.  The Labor Department doesn’t produce or endorse cost of living comparisons, but we went to the Council for Community and Economic Research, which produces a commonly used cost of living index, to see how the figures matched up.The metro areas that the council uses don’t align perfectly with what the Labor Department used. The Labor Department combines San Francisco, San Jose, and Oakland into one, giant metropolitan area, for example, and concluded that workers there earn 20% more than the average American. The larger metro area also includes some lower-wage surrounding areas that can bring down the average. The CCER, understandably, provides different cost of living adjustments for each city, and found that residents pay 62% extra in San Francisco, 44% extra in Oakland, and 52.4% more in San Jose. Suffice it to say that the premium workers earn in that metro doesn’t seem to make up for the premium they pay to live there.

Will Labor Costs Return to Trend? - Paul Krugman notices a Bloomberg story on accelerating wage growth: First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments.Yes, 2 percent is hardly anything to be concerned about. As Krugman notes, this is just productivity growth. It is the next issue I struggle with – should we care if, at least in the short run, wages accelerate at a rate faster than productivity growth? Note the path of unit labor costs since 1983: Further note how far below trend we are: To return to trend, unit labor costs would need to accelerate at a rate greater than trends. That this might come at the expense of corporate profits does not upset me. It will, however, upset the Fed, who will tighten policy in response, as they will assume – not without reason – that profits will not suffer.

Online Job Ads Jump - WSJ - While economists surveyed by Dow Jones Newswires dropped their estimates for May job growth to 160,000 from 183,000 on the back of weak data today that indicate the job market’s still struggling, one facet of the market has already recovered to pre-recession levels.In a report released today, The Conference Board Inc. found that the number of online job ads hit almost 4.5 million in May, its highest point since April 2007, when adjusted for seasonality. The number of ads online in May was 148,800 higher than in April. The biggest online ad growth occurred in computer and math jobs and in management positions, according to The Conference Board, with around 25,000 extra ads posted in each occupation. The only occupation to shrink was health-care practitioners and technical, with 3,400 fewer ads posted in May.

More jobs available, but at lower wages - Employers are hiring again, with solid payroll gains in the nation and California during the first three months of the year. But workers are getting by on less money than they did just a few years ago, government data show, because employers are keeping a tight rein on salaries and because costs of fuel and food have risen sharply. National pay figures on rank-and-file workers, who hold 80% of nongovernmental jobs, show a steady rise in earnings from the mid-1990s through 2008 — and then a significant drop the past two years. In April, average hourly earnings for production and non-supervisory employees was $8.76 an hour when adjusted for inflation, down from $8.93 two years ago.In California, private-sector employees saw an average 2% increase in pay from April 2010 to April 2011 — but those gains are not adjusted for the cost of goods and services, which rose 3% during the period. And in some regions, wages have fallen sharply. In the Inland Empire, which includes Riverside and San Bernardino counties, wages for private workers plunged 9% from their peak in April 2008, to $21.53 an hour in April 2011.

We're in Dire Straits When the Only Employment Sector Catching Fire Is in Unpaid Internships - Here's a particularly nasty sign that the economy is still weaker than Donald Trump's presidential run was: The United States still counts a depressing 24 million unemployed currently hunting for a full-time job, and the only employment sector really catching fire is unpaid jobs and internships, which have steadily increased to fill the undignified void. Whether you're a new college graduate or an unemployed veteran of the pre-recession employment landscape, you're now either fighting for a shrinking pool of new low-paying positions or plenty of gratis gigs where you won't ever see a dime for your earnest blood, sweat and tears.

10 Year Real Wage Gains Lower Than During Depression -- Yves Smith - The New York Times yesterday made the an observation that seems to be lost on Team Obama, that high unemployment levels and second Presidential terms do not go together. We’ve predicted that the Osama bin Laden bounce won’t last long. Bush I, after all, had 91% approval ratings right after the invasion of Iraq and he still lost the reelection thanks to the state of the economy. Another factor weighing on the collective psyche, and thus voter attitudes, is the inability of most people to get ahead in real economic terms. Reader Francois T pointed out an article in Investors Business Daily that highlighted that real wage gains in the last ten years are even worse than during the Great Depression: The past decade of wage growth has been one for the record books — but not one to celebrate.The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economywide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation). Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market. Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show. To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25% with one exception: the period ended in 1982-83, when the jobless rate spiked above 10% and wage gains briefly decelerated to 16%.

A Decade Makes All the Difference - A couple of weeks back I wrote about the job market for recent college grads, based in part on data from the labor economist Andrew Sum. His figures now include data for October 2010 through March 2011, the most recent six-month period for which numbers are available. He found that during this period, 74.4 percent of college graduates under age 25 had jobs. Of this same demographic group, 45.9 percent had jobs that actually required a college degree. The rest of this group were in lower-skilled jobs like bar tending or waiting on tables; pounding the pavement looking for work; or out of the labor force altogether, perhaps because they were back in school. Lest you think such low employment rates are due to this generation’s laziness, take a look at what the employment numbers were like exactly a decade ago for under-25 college grads (who are technically members of the same generation): As you can see, a higher share of college graduates under age 25 were employed in 2000 than in 2010 — 81 percent versus 74.4 percent. And a higher share of this demographic was employed in jobs that required college degrees a decade ago than last year — 59.7 percent versus 45.8 percent.

New Data on High Unemployment Among Recent Veterans - Much has been said about the high unemployment rate among veterans from the post-9/11 wars, but a new Congressional study offers some fresh insights into the nature of the problem, which does not appear to be going away anytime soon.  The report, citing data from the Bureau of Labor Statistics, shows that the unemployment rate for post-9/11 veterans was 10.9 percent in April. Although that is more than 2 percentage points lower than a year before, it is significantly higher than the rate for all veterans, 7.7 percent, or for the nonveteran population, 8.5 percent. Theories abound on why the rate remains stubbornly high, including that employers do not fully appreciate the ways that military skills might translate into nonmilitary jobs.But the report, by the chairman’s staff of the Congressional Joint Economic Committee, suggests a fairly straightforward reason: the typical work experiences of recent veterans are best suited to the very industries which were particularly hard hit by the recession.

Easing Out the Gray-Haired. Or Not. - Norman Levine, the managing partner of a Los Angeles law firm, says nothing is harder than telling fellow partners that their best days are past.   Nothing, he said, is as tough as telling fellow partners that their best days are behind them. “I’ve always joked that I wish I could have these conversations by phone,” Mr. Levine said. “If someone wants to stay and you don’t want them to, that’s the hardest. It’s like going to your parents and telling them they can’t handle their affairs anymore.”  Even as old notions of professional courtesy and obligation erode, so too has the quiet acceptance of traditional, mandatory retirement5 ages. Twice in recent years the Equal Employment Opportunity Commission6 has sued top law firms, accusing them of discriminating against older partners, and a closely watched case now under way could make it even harder for firms to dislodge aging lions.

A Crackdown On Employing Illegal Workers - Obama administration officials are sharpening their crackdown on the hiring of illegal immigrants by focusing increasingly tough criminal charges on employers while moving away from criminal arrests of the workers themselves. After months of criticism from Republicans who said President Obama1 was relaxing immigration2 enforcement in workplaces, the scope of the administration’s strategy has become clear as long-running investigations of employers have culminated in indictments, convictions, exponentially increased fines and jail sentences. While conducting fewer headline-making factory raids, the immigration authorities have greatly expanded the number of businesses facing scrutiny and the cases where employers face severe sanctions.

More labour, less family - According to the latest OECD Migration Outlook, America received 1,107,000 permanent immigrants in 2008. About 73% of them came for family re-unification, which often means they are unskilled. About 15% came as refugees, and only 7% were labour migrants, meaning they came for work. There were also 340,700 temporary migrants who came on student visas. So much family and refugee migration makes sense for humanitarian reasons, but does it make sense economically? The American economy would benefit from more skilled workers, so why do they make up such a small fraction of migrant flows? Most OECD countries take more family than labour migrants. But in America labour migrants make-up an exceptionally small share. In Australia and Britain, labour migrants make up more than a quarter of annual flows. The low fraction of labour migrants in America is due to the few work visas available. Most labour migrants must have an American employer sponsor them. Most skilled workers initially come as temporary migrants under an H1-B visa. The H1-B is also how many foreign students stay and work after finishing their studies. After a few years, if your employer sponsors you, this can be converted into permanent residency. There are only 65,000 available H1-B visas each year, plus another 20,000 for advanced degree holders (that totals about one tenth the number of visas granted for family reunification).

Federal Workers, Feeling Threatened, Unionize -- Conventional wisdom says American unions are wheezing. But at the largest union representing federal workers, there has been nothing but steady growth during recent years and months. From 2007 through 2010, the American Federation of Government Employees saw its number of active, dues-paying members swell from 216,000 to more than 268,000, according to figures provided by the union. What's more, officials there say they've witnessed a significant spike in workers' interest in unionizing over the last few months as the salaries and benefits of public-sector employees have come under heavy fire from the right. AFGE president John Gage says the union added 1,300 dues-paying members in April alone and has typically been seeing gains of about 600 per month recently. The AFGE doesn't have the full collective-bargaining rights of most private-sector unions -- federal workers cannot strike or bargain directly over pay -- but in its limited capacity the union represents workers throughout the federal sector. Many of the union members added in April, Gage points out, came from the Department of Defense, a workforce whose conservative leanings traditionally don't jibe with the more liberal politics of labor unions.

1100 Cook County health workers face layoffs - While County Board President Toni Preckwinkle continues to push for the closure of Oak Forest Hospital, as many as 1,100 county health workers are facing layoffs, according to union officials. The affected workers, members of Service Employees International Union Local 73 employed by the Cook County Health and Hospital System, received layoff notices early last month, SEIU Local 73 Communications Director Adam Rosen said. SEIU represents about 4,000 county employees, including about 2,000 that work in the health system. Of those receiving notices, Rosen said about 200 work at Oak Forest Hospital.

State starts sending out 36000 pink slips - The state of Minnesota will start sending out lay-off notices to nearly 36,000 state employees tomorrow in preparation for a state government shutdown.  Minnesota Management and Budget says this week it will notify 800 members of the Minnesota Law Enforcement Association that they could be laid off on July 1 if Governor Dayton and the Legislature fail to pass a two year budget. Finance officials say they will send out lay-off notices to another 35,000 state workers on June 10.  The notices will be sent to every state employee, but some of those workers will be required to continue their duties if a judge deems their work "essential." A state government shutdown could be averted if Governor Dayton and the GOP controlled Legislature reach a budget deal before July 1.

State tab for jobless loan: $912 million - California will have to pay the federal government an estimated $912.3 million in interest over the next two years for money the state has borrowed to pay unemployment benefits. The first payment comes due Sept. 30 — for $319.5 million. The high cost of the state's unemployment was spelled out Wednesday in the state Employment Development Department's semi-annual report1 on the status of the Unemployment Insurance Trust Fund.California's trust fund, which is made up primarily of employer contributions, has been in the red since 2009, when the state paid out $11.3 billion in unemployment benefits but only collected $4.8 billion in receipts. So the state has been borrowing from Uncle Sam to make the payments. As of May 6, California owed the federal government $10.9 billion. A lot of other states are in a similar boat. Thirty states and the Virgin Islands owe the federal government a total of $44.1 billion for money they borrowed to pay unemployment benefits over the last three years. But California's $10.9 billion tab is by far the greatest. Pennsylvania is a distant second at $3.8 billion.

States to the Unemployed: Drop Dead - There was a news story published a couple of days ago reporting that many states are now in the process of cutting back unemployment benefits even as the nation is still mired in the worst employment downturn since the Great Depression.On the surface this is another one of those stories that most people, if they take the time to read it at all, will just shrug their shoulders and think, “no big deal--once the economy gets rolling again those who stand to lose their benefits will be fine.” That’s, of course, if they are of a charitable mindset. Those who are less charitable and who perhaps have been known to masturbate while reading a dog-eared old copy of Atlas Shrugged will more likely cheer the idea that so many “deadbeats” and “parasites” are being banished from the public dole. So what is ultimately to become of the unemployed when their benefits run out? That is the great tragedy that will be unfolding all across America over the next few years even if we are lucky enough not to see economic collapse accelerate before then. I really wish there were possible solutions I could propose as to how we can reverse this slowly unfolding humanitarian crisis. Unfortunately, as long as we as a people remain collectively hypnotized by what the late Joe Bageant used to call the American Hologram of the mainstream media, no realistic solutions will ever receive any kind of public hearing, and the downward spiral for millions of former blue collar and middle class workers will continue unabated.

20 Facts About U.S. Inequality that Everyone Should Know, The Stanford Center for the Study of Poverty and Inequality: Click an image to learn more about a fact... Here's a list of the images/links: Wage Inequality, CEO pay, Homelessness, Education Wage Premium, Gender Pay Gaps, Occupational Sex Segregation, Racial Gaps in Education, Racial Discrimination, Child Poverty, Residential Segregation, Health Insurance, Intragenerational Income Mobility, Bad Jobs, Discouraged Workers, Wealth Inequality, Intergenerational Income Mobility, Deregulation of the Labor Market, Job Losses, Immigrants and Inequality, Productivity and Real Income.

When does greater inequality lead to greater redistribution? - Henry Farrell reports: Noam Lupu and Jonas Pontussen (PDF) have a piece on the relationship between inequality and distribution in the new American Political Science Review. There is a lot of debate about whether the level of economic inequality in society leads to greater or lesser distribution – what Lupu and Pontussen suggest is that the structure of inequality (that is – the more particular relationships between different segments in the income distribution, rather than some summary index) is more important. More particularly they argue that if one tries to hold racial and ethnic cleavages constant, the key factor determining redistribution is the income gap between middle income voters and lower income voters. Where this gap is low, middle class people feel some degree of solidarity with the poor and exhibit what Lupu and Pontussen describe as “parochial altruism.” That is, they are more likely to support income redistribution because they feel that the poor are in some sense, ‘like them.’ When the gap is high, middle class people will have a much weaker sense of solidarity with the poor, and hence be less supportive of redistribution. Lupu and Pontussen suggest that the US is an outlier, with weaker solidarity than the structure of US inequality would suggest. They argue that the explanation for this is straightforward – “it is clearly attributable to the high-concentration of racial-ethnic minorities in the bottom of the income distribution.” More bluntly put – middle class Americans feel less solidarity with the very poor because the very poor are more likely to be black

Share of Population on Food Stamps Grows in Most States - Click here to see an interactive map. - After a temporary plateau in February, the number of Americans receiving food stamps ticked up again in March. Nearly 44.6 million received food stamps in March, up more than 11% from the same time a year ago, the Department of Agriculture said Tuesday.The share of the population receiving food stamps nationwide has also risen as households struggle with high unemployment and stagnant wages. Some 14.4% of Americans relied on food stamps in March, up 1.4 percentage points from a year earlier. All but three states reported a larger share of the population relying on food stamps compared to March 2010. And those states that saw the largest increases in recipiency were scattered across the country.

Time To Celebrate The Recovery: Food Stamp Usage Hits Fresh Record - That average monthly benefit of $133.24 for 44.199 million people will help with the purchase of one third of a very edible iPad. Food stamp participation chart presented without further commentary.

Gas Prices Threaten Meals On Wheels - Philadelphia has one of the largest elderly populations in the country. Many need help with the basics like getting food to eat every day, but that service may be in jeopardy because of high gas prices. But organizations like aid for friends and the Klein Jewish Community Center have both seen a 20 percent drop in their volunteers because of high gas prices.  A lot of volunteers who want to help out by bringing the elderly food have had to bow out because they can't afford to fill their tank to drive over food. Money spent on drivers means less money for food. Not just their life, but their spirit. That could be devastating for the homebound.

Crime spikes in cities with police layoffs - In the months following massive police layoffs in Camden, N.J., the county prosecutor’s office documented a 19 per cent spike in violent crime and a 259 per cent increase in aggravated assaults with firearms. In nearby Newark, law enforcement officials reported a jump in carjackings and shootings after more than 160 officers — about 10 per cent of the force — was laid off to help close a $150 million funding gap.  Across the United States, cities still reeling from the recession, with depleted reserve funds and dwindling property and employment tax revenues, are looking for ways to save in places that in past years had been off limits.Jim Pasco, executive director of America’s largest police union, said he estimates more than 100 U.S. cities and towns are currently considering police layoffs to balance their books.  This race to slash public safety funding is a new phenomenon that began toward the end of 2010, he said.

Police layoffs in Cleveland deplete specialized units - Of the 321 Cleveland employees laid off, 123 of them are police officers. The layoffs caused many officers to be reassigned and specialized units to be depleted.

  • - Every district will now operate with one less two-person patrol car and one less one-person car.
  • - 11 members of the narcotics unit have been reassigned to patrol cars. That unit will continue with 16 officers.
  • - The five officers making up the joint task force have all been reassigned. The joint task force worked directly with federal law enforcement and acted as a liaison between organizations like the FBI and city police.
  • - One officer from each detective bureau has been reassigned to a patrol car.
  • - One officer from each vice unit has been reassigned to a patrol car.
  • - The community services unit will also lose officers.

Swimming pools dry up after draining city budgets - On those summer days when the temperature soars into the 90s and the haze blurs the horizon, city pools across the U.S. have beckoned people from all over to take a cool dip. But as the Great Recession has drained city budgets across the country, it also has drained public pools for good. From New York City to Sacramento, Calif., pools now considered costly extravagances are being shuttered, taking away a rite of summer for millions. It's especially hard for families that can't afford a membership to private pool or fitness club and don't live in a neighborhood where they can befriend with someone with a backyard pool. Hard times haven't always meant cutbacks. An author who studied the role swimming pools played in 20th century America found more than 1,000 municipal pools were built as public works projects during the Great Depression.

Some Regions Of US Completely Abandoned - Austerity measures have gutted parts of the national budget and are about to go farther. Parts of the defense budget may disappear. Billions could be cut from federal discretionary spending over the next few years. What is sometimes forgotten in the austerity process is that it is not just defense and school programs that are cut. Also gone is aid to parts of the US which are actually disappearing–economically. The media recently provided broad coverage of the plight of Michigan’s Upper Peninsula. It is a large region geographically, larger in square miles than some smaller states. Its tiny population makes it easy to forget, at least politically.Michigan is a study in contrasts and a microcosm of the trouble which has arisen as federal and state budgets have been reduced sharply. In the southeast corner of the state is Detroit, which has lost half of its population in the last century. Large parts of the city are abandoned. The situation is so dire and complex that it has been suggested that some of these areas be converted to urban farms.  However, these farms would be impractical because they would need to be defended by an army of security officers against vandalism, which is a huge problem in the city.  What is left of Detroit is a city inside a wasteland, a problem so vast that it is too costly to address.

Instead of signs of recovery, a sucker punch for state budgets - Many states have announced higher-than-expected tax revenue — the first upbeat news to come out of beleaguered state budget offices since 2007. But the windfall is largely the result of smoke and mirrors. Revenue estimates for this year were set at ultra-low levels, leaving plenty of room for good news.The reality is that state budget problems are the worst they’ve been since the start of the recession. State tax revenue is more than 10 percent below their 2008 levels, and 44 states and the District of Columbia have scrambled to close a collective $112 billion budget shortfall for fiscal 2012, which for most states begins July 1. The budget gap is dwarfed by1 last year’s $191 billion shortfall, but this is the first year since 2008 that states have to balance their budgets without federal aid. Stimulus under the American Recovery and Reinvestment Act, which pumped $137 billion into state budgets over the past three years, has essentially dried up for 2012. “Many one-time maneuvers to generate cash or delay expenditures have been used, so the budget gaps that have to be filled are now very real numbers,”

States' rising bills may outpace revenue: survey (Reuters) - States are projecting slightly higher revenue collections in fiscal 2012, but the slow pace of the economic recovery is leaving many with deficits and mounting spending pressure for health care and education, according to a fiscal survey released on Thursday. "We don't expect revenue to keep pace with bills coming in," Fiscal 2012 budgets proposed by governors included $655.6 billion of general fund tax revenue, a 2.1 percent increase over fiscal 2011. Even with a 5.9 percent revenue increase over fiscal 2010 levels in fiscal 2011, which ends on June 30 for most states, fiscal 2012 revenue would lag fiscal 2008 collections by $24.6 billion, the survey found. Meanwhile budget gaps, which totaled nearly $230 billion between fiscal 2009 and 2011, persist, with 33 states reporting a collective $75.1 billion deficit for fiscal 2012 and 21 projecting a $61.8 billion imbalance in fiscal 2013. The survey attributed the nagging deficits to the end of billions of dollars that flowed to states from the federal stimulus act and slow recovery in state tax revenue.

Illinois on track to end fiscal year owing $8 billion (Reuters) - Illinois is still on track to push about $8 billion of unpaid bills and obligations incurred this fiscal year into the next year in the wake of its newly passed state budget, the state comptroller said on Thursday. Comptroller Judy Baar Topinka said while the state legislature passed a slimmed-down budget this week, it will take some time before the cash-strapped state gets under control overdue payments to schools, hospitals, social service agencies and others. "(Lawmakers) made some cuts. I think they still have to make some more," Topinka told Reuters. "If we can do that for a few years, we can work our way out of this situation." The General Assembly on Monday passed a $59.1 billion all-funds budget for the fiscal year that begins July 1 which includes a $33.4 billion general fund -- about $2 billion less in general fund spending than Governor Pat Quinn proposed in February. A package of bills that would have let Illinois issue $6.2 billion of seven-year general obligation bonds to pay bills did not muster enough support in the Senate.

Texas Legislature Passes Budget That Cuts Billions - Texas lawmakers adopted a state budget Saturday night that cuts billions from public schools, state universities and health care for the elderly, sending the measure to Gov. Rick Perry for final consideration. Facing a massive revenue shortfall, lawmakers crafted the $172 billion budget by making cuts and using deferrals rather than raising taxes or dipping into the $10 billion reserve fund. In all funds, the plan for 2012-2013 is $15 billion less than the current budget, but that doesn't account for the costs of providing services to new population. For public schools, the budget is at least $4 billion short of what districts would be owed for basic operations under current funding formulas. To accommodate the lower spending, the Legislature also is working on a companion measure that would change the formulas so the reduced funding levels are legal. That debate comes Sunday, the day before the Legislature adjourns.

Census reveals plummeting U.S. birthrates - Children, the mainstay of suburbia and residential neighborhoods across the nation for more than a half-century, are fewer and increasingly sparse in many places. The share of the population under age 18 dropped in 95% of U.S. counties since 2000, according to a USA TODAY analysis of the 2010 Census. The number of households that have children under age 18 has stayed at 38 million since 2000, despite a 9.7% growth in the U.S. population. As a result, the share of households with children dropped from 36% in 2000 to 33.5%.There are now more households with dogs (43 million) than children.

School superintendent requests school be turned into prison… Education funding is being slashed left and right, and in states like Michigan that have been feeling the big hurt for a long time, that isn’t surprising since there’s only so much money going around, right? Well, Nathan Bootz, a school superintendent wrote a letter to the governor of Michigan requesting that his school be turned into a prison where the state’s funding shortage isn’t having quite the impact it’s having on his schools.

18 Signs That Life In U.S. Public Schools Is Now Essentially Equivalent To Life In U.S. Prisons - In the United States today, our public schools are not very good at educating our students, but they sure are great training grounds for learning how to live in a Big Brother police state control grid.  Sadly, life in many U.S. public schools is now essentially equivalent to life in U.S. prisons.  Most parents don't realize this, but our students have very few rights when they are in school.  Our public school students are being watched, tracked, recorded, searched and controlled like never before.  Back when I was in high school, it was unheard of for a police officer to come to school, but today our public school students are being handcuffed and arrested in staggering numbers.  When I was young we would joke that going to school was like going to prison, but today that is actually true. The following are 18 signs that life in our public schools is now very similar to life in our prisons....

Palm Beach County school board starts work on $2.5 billion budget that cuts 745 positions, creates one unpaid furlough day - Palm Beach County School Board members got their first look tonight at next year's proposed budget, which would cut about $35.2 million, eliminate 745 positions and give all employees a one-day unpaid furlough. Superintendent Bill Malone called the budget, which totals about $2.5 billion, significant "not for the heartache it caused, but for the heartache it avoided."  His initial proposed budget eliminated 766 positions, some of which were already vacant, but the budget advisory committee recommended restoring several positions, including six of eight school psychologist positions and all 14 school police officer positions that were slated to be cut.  Board Member Karen Brill said the district should restore all eight psychologist positions because it has a backlog of evaluations and tests . Other board members also supported restoring the two psychologist positions.  Chief Financial Officer Mike Burke said the district plans to shut down for one day next year when students are not in class and give all employees a one-day unpaid furlough that day, which would save about $5 million

The Offensively Defensive Ideology of Charter Schooling - There now exists a fair amount of evidence that Charter schools in many locations, especially high performing charter schools in New Jersey and New York tend to serve much smaller shares of low income, special education and limited English proficient students (see various links that follow). And in some cases, high performing charter schools, especially charter middle schools, experience dramatic attrition between 6th and 8th grade, often the same grades over which student achievement climbs, suggesting that a “pushing out” form of attrition is partly accounting for charter achievement levels. As I’ve stated many times on this blog, the extent to which we are concerned about these issues is a matter of perspective. It is entirely possible that a school – charter, private or otherwise – can achieve not only high performance levels but also greater achievement growth by serving a selective student population, including selection of students on the front end and attrition of students along the way. After all, one of the largest “within school effects on student performance” is the composition of the peer group.

American Winter: The Right’s War on Birth Control and Education - It’s a shocking historical juxtaposition. The pro-democracy movement known as the Arab Spring is in significant part a consequence of rising literacy and declining birth rates in the Mideast. Meanwhile, in the U.S., the Right is mounting a direct assault on education and a renewed war on contraception. This ought to tell us something. It may be spring in the Mideast, but a chill wind is howling in America as America’s Right puffs its cheeks like Old Man Winter. Education and the personal freedom to control one’s body and sexual life fuel powerful democratic movements.  What kind of movement then is America’s Right engaged in? French social scientist Emmanuel Todd is explicit about the democratizing power of literacy and reproductive freedom. They lead to…the transformation of the political system, a spreading wave of democratization and the conversion of subjects into citizens. But the American Right seeks the opposite, the conversion of citizens into subjects. That they do so while speaking of liberty is just more authoritarian “denying and distorting of information” in the words of Italian humanist, Auschwitz survivor and anti-fascist Primo Levi.

Public schools' 'pay to play' fees: By the numbers - In the face of budget cuts and rising costs, public schools across the country are making ends meet by nickel-and-diming students. In some financially struggling school districts, students have to pay fees to participate in extracurricular activities... or not participate at all. Public schools are supposed to be free. But faced with budget cuts, rising staff costs, and declining tax revenues, many are instituting "pay to play" fees, charging students extra for everything from electives to after-school sports — and even some required classes, like French and basic sciences. Here, a brief guide, by the numbers, to these "controversial" fees

A Generation of Slackers? Not So Much - This month, college graduates are jumping into the job market, only to land on their parents’ couches: the unemployment rate for 16- to 24-year-olds is a whopping 17.6 percent.  The reaction from many older Americans? This generation had it coming.  Generation Y — or Millennials, the Facebook Generation or whatever you want to call today’s cohort of young people — has been accused of being the laziest generation ever. They feel entitled and are coddled, disrespectful, narcissistic and impatient, say authors of books like “The Dumbest Generation” and “Generation Me.”  And three in four Americans believe that today’s youth are less virtuous and industrious than their elders, a 2009 survey1 by the Pew Research Center found.  In a sign of humility or docility, young people agree. In that 2009 Pew survey, two-thirds of millennials said older adults were superior to the younger generation when it came to moral values and work ethic.

8% of Florida students default on school loans - Forget term papers and roommate conflicts. For many students, the biggest college stress comes after they leave school. Six months after graduation, those first student loan bills start arriving and for a Florida student in 2009, the average amount owed was about $21,000, according to the California-based Institute for College Access & Success. In this market, many graduates are unable to get the high-paying jobs needed to pay that debt. Student loan debt nationwide now tops $913 billion and surpassed credit card debt for the first time last year, a study from college financial aid website FinAid has found. The situation is so tough that 85 percent of college graduates expect to live with their parents, said consultant Twentysomethings Inc.

Big student debt could limit schools' aid access -- The government is moving forward with its crackdown on the country's for-profit schools, aiming to protect students from taking on too much debt to attend schools that do nothing for their job prospects. The Department of Education has finalized its "gainful employment" rule, which will ban for-profit schools like DeVry University or Apollo Group Inc.'s University of Phoenix from accessing federal financial aid dollars if too many of their graduates are unable to find jobs that pay enough to allow them to afford their student loan payments. If graduates owe too much relative to their income, or too few former students are paying back their tuition loans on time, schools stand to lose access to Pell grants and federal student aid. Such a loss would seriously crimp schools' ability to attract students."We're asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective," Duncan said.

CNNOpinion: College is a waste of time - I have been awarded a golden ticket to the heart of Silicon Valley: the Thiel Fellowship. The catch? For two years, I cannot be enrolled as a full-time student at an academic institution. For me, that's not an issue; I believe higher education is broken. I left college two months ago because it rewards conformity rather than independence, competition rather than collaboration, regurgitation rather than learning and theory rather than application. Our creativity, innovation and curiosity are schooled out of us.  Failure is punished instead of seen as a learning opportunity. We think of college as a stepping-stone to success rather than a means to gain knowledge. College fails to empower us with the skills necessary to become productive members of today's global entrepreneurial economy. College is expensive. The College Board Policy Center found that the cost of public university tuition is about 3.6 times higher today than it was 30 years ago, adjusted for inflation.

Debating The Value Of College In America - My first job as a professor was at an Ivy League university. The students were happy to be taught, and we, their teachers, were happy to be teaching them. Whatever portion of their time and energy was being eaten up by social commitments—which may have been huge, but about which I was ignorant—they seemed earnestly and unproblematically engaged with the academic experience. If I was naïve about this, they were gracious enough not to disabuse me. At a certain appointed hour, the university decided to make its way in the world without me, and we parted company. I was fortunate to get a position in a public university system, at a college with an overworked faculty, an army of part-time instructors, and sixteen thousand students. Many of these students were the first in their families to attend college, and any distractions they had were not social. Many of them worked, and some had complicated family responsibilities.  I assigned my new students the same readings I had assigned the old ones. I understood that the new students would not be as well prepared, but, out of faith or ego, I thought that I could tell them what they needed to know, and open up the texts for them. Soon after I started teaching there, someone raised his hand and asked, about a text I had assigned, “Why did we have to buy this book?”

The mathematics generation gap - Some students struggle with economics because they do not fully understand the mathematical tools economists use. Profs do not know how their students were taught mathematics, what their students know, what their students don't know - and have no idea how to help their students bridge those gaps.The arithmetic gap is the most obvious one: profs over a certain age (and some immigrant profs) were drilled in mental math; Canadian students under a certain age haven't been. Some implications of the arithmetic gap are familiar: profs who can't understand why students insist on using calculators; students who can't understand why their profs are so unreasonable.But the mental arithmetic gap has more subtle implications. Mental calculations often require intuition about, and comfort with, the use of fractions. Pre-calculator: 1/3+1/3=2/3. Calculator era: 0.3333....+0.3333....=0.6666.... Pre-calculator: "To multiply by twenty-five, divide by four and add two zeros (25*Y=1/4*100*Y)" Calculator: Multiply by twenty-five. Back in the day, fractions were easier than - or at least not much more difficult than - decimals. Calculators make fractions obsolete.

Panel to seek solutions for Kansas PERS underfunding - A 13-member bipartisan commission has been created to address underfunding at the $13.29 billion Kansas Public Employees Retirement System, Topeka.  Gov. Sam Brownback signed a bill last week establishing the commission, which will consider how to handle the roughly $7.7 billion in underfunding at the state retirement system.  The commission, tasked with considering alternative retirement plans, must present its report to the Kansas Legislature by Jan. 6, 2012. If the commission meets the deadline, that will trigger a number of reforms included in the bill already signed by Mr. Brownback. Those reforms include increasing the employer contribution by 0.1 percentage points every year beginning in 2014 until the employer contribution totals 1.2%. The current rate is 0.6%. Employees will also have the option of increasing their contribution or reduce the multiplier used to determine their final benefit. The details differ between different tiers of employees.

Mich. seniors plotting costs of pension income tax - Charnley, 61, is now looking at paying an additional $1,400 a year in state income taxes that wasn't in her retirement budget. Starting Jan. 1, public pensions that were totally exempt from state taxes and other retirement income that was partially exempt will be taxed as regular income for those born after 1945, with the exception of Social Security payments and military pensions. That has many senior scrambling to figure out how much they're going to have to shell out. The changes are expected to bring in $330 million for the 2012 tax year, according to Treasury spokesman Terry Stanton. That's an average of $870 per tax return filed by retirees, although the amount will vary by income.

$100000 pension club of public retirees in California is booming - The $100,000 pension club is growing fast. Almost 9,000 retirees in the California Public Employees' Retirement System receive at least $100,000 in annual benefits, more than quadruple the number getting that much during 2005, according to a Bee review of CalPERS data. Collectively, these pensioners will receive about $1.1 billion in benefits this year – roughly triple the general fund budget of the Sacramento City Unified School District. Such payouts are a hot topic as leaders float competing pension reform plans at the state Capitol. Those who want to curtail big pensions say they are a root cause of huge unfunded liabilities – and the growing pension bill presented each year to taxpayers. Others say large pensions are straw men brandished as a tool to cut the modest benefits of most government workers.

Bruce Ramsey and the Seattle Times Can Say Untrue Things About Social Security Because the Government Cannot Sue for Libel - Bruce Ramsey, a columnist for the Seattle Times, apparently thinks it is really cute to call the U.S. government bonds held by Social Security "IOUs." That is the only possible explanation for using this unusual term for government bonds in a column that is completely incoherent. Ramsey apparently thinks that he is giving his readers news by telling them that they don't have a constitutional right to Social Security. This is of course true, but people do not have a constitutional right to many things that they can reasonably depend on, such as drinkable water, roads they can walk and drive on, not having their income taxed at a 90 percent average rate. Congress could change laws tomorrow and make it so that we no longer enjoy any of these items, the constitution will not prevent them. But the serious inconsistency problem arises when Ramsey talks about the government bonds held by the Social Security trust fund:

States Pour Money Into Medicaid-- States are gearing up to spend nearly 19% more of their money on Medicaid as enrollment rises and federal stimulus funds dry up.  Governors have proposed spending $15.9 billion more on Medicaid in fiscal 2012, according to a survey released Thursday by the National Governors Association and the National Association of State Budget Officers.  At the same time, they are slashing spending on higher education by $5 billion, on public assistance by $3.5 billion and on K-12 education by $2.5 billion.  State officials have been wrestling with rising Medicaid costs since the Great Recession began driving more people to the government assistance program. Enrollment is projected to rise 3.8% in fiscal 2012, which would represent a 17.3% increase over a three-year period.  Since early 2009, federal stimulus money has helped states cope with the steep downturn in tax revenue. All told, states used $135 billion in emergency stimulus support.  But that funding is now ending, leaving states to shoulder their Medicaid burden alone.

State facing unexpected $45 million Medicaid shortfall, officials say - Florida hospitals are being dealt more budgetary woes, this time through an unexpected letter from the state Medicaid program. In May 24 correspondence, the state Agency for Healthcare Administration told hospitals an additional $45 million needed to be found, and quickly, to meet obligations for drawing down additional federal Medicaid dollars. Hospitals and local governments use an “intergovernmental transfer” program to tap additional federal Medicaid dollars to help cope with the increasing number of poor people who rely on the government insurance for medical care. The letter said the state agency was looking to hospitals that would voluntarily help address the $45 million shortfall by a May 31 deadline. After that, reimbursement rates would have to be adjusted immediately.

Scott Walker Gives Wisconsin Nursing Homes a Virtual Green Light to Abuse Granny and Grandpa - Apparently, Scott Walker doesn't care much about stopping granny or grandpa from being abused in nursing homes. Walker recently signed the euphemistically named, "The Wisconsin Omnibus Tort Reform Act." Provisions in the law would prohibit lawyers from using state investigations of abuse in legal cases. According to Lu Dubose of the Washington Spectator, Walker is also protecting nursing homes from being criminally charged: ncident reports have also been placed beyond the reach of the Wisconsin Department of Justice, which conducts criminal investigations and prosecutions of nursing homes and assisted living centers. "This is payback time," Bremer Muggli said. "The governor is settling the score with trial lawyers who didn't support him. And he's taking care of his donors, the for-profit nursing home operators, especially the big ones like Kindred."

Mental health experts warn against pace of incapacity benefit cuts - The government's changes to the welfare system are having a "devastating" impact on hundreds of thousands of people with mental health problems and have driven some of the most vulnerable to try to take their own lives, according to charities and medical experts. A letter published in Wednesday's Guardian brands the government's drive to reassess 1.5 million people receiving incapacity benefit as "deeply flawed" and warns that the rapid pace of change is having dire consequences. "We've found that the prospect of incapacity benefit reassessment is causing huge amounts of distress and tragically there have already been cases where people have taken their own life following problems with changes to their benefits," the letter, signed by leading mental health charities and a senior consultant from the Royal College of Psychiatrists, states.

Medicare Privatization Will Increase Health Care Spending - I’ve made this point before, but now courtesy of the Center on Budget and Policy Priorities we get it in convenient chart form. Not only does privatizing Medicare push a larger share of health care costs onto patients, but because Medicare uses market power to bargain down unit prices total health care spending actually goes up dramatically under a privatization scenario: Now of course at some point in the further future, the Ryancare vouchers will be so stingy that out of pocket costs will be so high that middle class seniors genuinely can’t afford them (especially since Medicaid will have been previously gutted) at which point inability to pay will become some kind of binding constraint on total spending. But in the real world, the combined political clout of the elderly, health care providers, and health insurance companies is going to prevent this from happening. The cost of the subsidies to insurance companies will have to bear some relationship to the price of health care services and it’ll be adjusted upward. Patients will spend dramatically more out of pocket, taxpayers will see few if any savings, health care providers will be able to charge higher prices, and insurance companies will make a tidy profit skimming off the top.

Medicare Doublethink - Krugman - Robert Pear has an interesting report today about how reforms in Medicare payments under the Affordable Care Act, designed to provide incentives for more cost-effective care, are drawing opposition from hospitals: For the first time in its history, Medicare will soon track spending on millions of individual beneficiaries, reward hospitals that hold down costs and penalize those whose patients prove most expensive.  The administration plans to establish “Medicare spending per beneficiary” as a new measure of hospital performance, just like the mortality rate for heart attack patients and the infection rate for surgery patients. Hospitals could be held accountable not only for the cost of the care they provide, but also for the cost of services performed by doctors and other health care providers in the 90 days after a Medicare patient leaves the hospital.

Ryancare Versus Obamacare - Krugman - Some commenters have asked a good question, albeit in a belligerent tone: how does the Ryan plan differ from the Affordable Care Act? After all, in both plans people are supposed to buy coverage from private insurers, with a subsidy from the government. Well, the answer is that the ACA is specifically designed to ensure that insurance is affordable, whereas Ryancare just hands out vouchers and washes its hands. Specifically, the ACA subsidy system (pdf) sets a maximum percentage of income that families are expected to pay for insurance, on a sliding scale that rises with income. To the extent that the actual cost of a minimum acceptable policy exceeds that percentage of income, subsidies make up the difference. Ryancare, by contrast, provides a fixed sum — end of story. And because this fixed sum would not grow with rising health care costs, it’s almost guaranteed to fall far short of the actual cost of insurance. This is also why Ryancare is NOT premium support; it’s a voucher system. No matter how much they say it isn’t, that’s exactly what it is.

Yes, Medicare Is Sustainable In Its Current Form - Krugman - I keep seeing people say that Medicare in its current form is not sustainable, as if that were an established fact. It’s anything but. Other countries have single-payer systems that are much cheaper than ours — and also much cheaper than private insurance in America. So there’s nothing about the form that makes Medicare unsustainable, unless you think that health care itself is unsustainable. What is true is that the U.S. Medicare is expensive compared with, say, Canadian Medicare (yes, that’s what they call their system) or the French health care system (which is complicated, but largely single-payer in its essentials); that’s because Medicare American-style is very open-ended, reluctant to say no to paying for medically dubious procedures, and also fails to make use of its pricing power over drugs and other items. So Medicare will have to start saying no; it will have to provide incentives to move away from fee for service, and so on and so forth. Of course, what the people who say things like “Medicare is unsustainable” usually mean is that it must be privatized, converted into a voucher system, whatever. The thing is, none of those changes would make the system more efficient — on the contrary.

"We Have No Idea What the Inflation Rates for Health Expenditures Really Are" - The driving force behind fears of growing debt in the future is rising health care costs. That's what's behind all the scary projections about future debt burdens. I've said many times that if we solve the health care cost problem, the rest of the budget problem will be relatively easy to fix. And, conversely, if we don't fix the health care cost problem, the other things we do to the budget won't help much at all (while cutting other parts of the budget doesn't fix the debt problem, i.e. the benefits are small, the loss of services could have large costs). But how much confidence should we have in the health care cost inflation estimates? Is the increase in costs due to quality improvements, which is not inflation, or pure price increases without the accompanying quality changes, which is? Mark Bils, an expert on "the intricacies of price measurement," says we really aren't sure but the problem may not be as bad as we think. In either case -- quality changes or pure price increases -- we still have to consider the impact of rising health care costs on the budget.

Subsidies and Shortages - The news from America's hospitals, as recorded by the Associated Press (AP), sounds dire: A growing shortage of medications for a host of illnesses — from cancer to cystic fibrosis to cardiac arrest — has hospitals scrambling for substitutes to avoid patient harm, and sometimes even delaying treatment.  "It's just a matter of time now before we call for a drug that we need to save a patient's life and we find out there isn't any," The problem of scarce supplies or even completely unavailable medications isn't a new one but it's getting markedly worse. The number listed in short supply has tripled over the past five years, to a record 211 medications last year. While some of those have been resolved, another 89 drug shortages have occurred in the first three months of this year.  Let's do some math, shall we? If the number of medications in short supply has tripled over the past five years to 211 last year (2010), then that means that there were approximately 70 medications that were counted as being in shortage in 2005.

Why pharma's patents are a drug on the market - Drugs are cheap. There are few drugs that would sell for more than $5-$10 a prescription in a free market. However, many drugs in the United States sell for hundreds of dollars per prescription and, sometimes, several thousand dollars per prescription. There is a simple reason for this fact: government-granted patent monopolies. The government gives patent monopolies to provide an incentive for drug companies to carry through research. This is an incredibly backward and inefficient way to pay for research. It leaves us paying huge amounts of money for cheap drugs. It also often leads to bad medicine.  We can do better – and Senator Bernie Sanders has proposed a way. He has introduced a bill to create a prize fund that would buy up patents, so that drugs could then be sold at a free market price. Sanders's bill would appropriate 0.55% of GDP (about $80bn a year, with the economy's current size) for buying up patents, which would then be placed in the public domain so that any manufacturer could use them at no cost. This money would come from a tax on public and private insurers. The savings from lower-cost drugs would immediately repay more than 100% of the tax.

In defense of health care regulation - In two posts on this [Ezra Klein's] blog, Karl Smith wrote that the supply side of health care has a lot to do with the rising cost of care. We agree. Health-care costs will not be tamed without addressing the provision of care. One issue Smith raised is whether that should be done by loosening regulation in health care. [T]he current health-care system is riddled with regulation, litigation and occupational and pharmaceutical licensing. We have levels heaped upon levels of protection against bad drugs, bad doctors and bad health-care consumers.  It is no doubt true that regulation limits innovation. However, “innovation” is not unambiguously welfare increasing, and this fact is not confined to health care. For example, what do we now make of the lightly regulated innovations in the financial sector over the last decade or so?  Similarly, in a recent NBER paper,Charles Jones pointed out that if the Cuban Missile Crisis had ended in nuclear war, as it very well could have, we would have a decidedly different view of the atomic and nuclear innovations that had occurred in the preceding 30 years.

Americans still avoiding doctors, insurers say (Reuters) - Americans' use of medical services has not yet rebounded during the weak economy, health insurers say, in a trend that keeps the companies' costs down and could bolster their profits further this year. Low healthcare utilization was a major reason behind the health insurers posting first-quarter profits well above analyst forecasts earlier this year. The companies have been factoring increases into their pricing for their plans, but executives at an investor conference this week said utilization continued to stay low. "Medical costs have not come back to trend levels we anticipated," UnitedHealth Group Inc CEO Stephen Hemsley told the conference, held by Sanford Bernstein. Hemsley, whose company is the largest U.S. health insurer by market value, said UnitedHealth continued to believe that medical cost trends will return "to more normal levels." "But to date whether it's driven by economic trends or whatever, the medical costs continue to trend to be more moderate," Hemsley said.

More on the activity/inactivity canard in the ACA litigation -  This particular post was by Georgetown law prof. Randy Barnett, who is a veritable font of rightwing legal theory and suggestions for rightwing laws and legal arguments.  Barnett recounted an exchange between acting Solicitor General Neal Katyal, who was arguing the appeal on behalf of the government, and panel judge Diana Gribbon Motz, a Clinton appointee. To refresh your memory from two weeks ago, all three of the panel members are Dem appointees, the other two of them appointed by Obama. Also to refresh your memory, the main challenge to the constitutionality of the ACA is that the Constitution’s Commerce Clause does not give Congress the authority to regulate inactivity. To which the government has responded that the decision to not buy health insurance and to instead rely upon the largess of the government, hospitals and ultimately those who do pay health insurance premiums to get emergency medical treatment, is activity. And that in any event, under the Supreme Court’s longtime Commerce Clause jurisprudence, that Clause coupled with the Necessary and Proper Clause gives Congress the power to regulate markets and that therefore there is no activity/inactivity distinction for Commerce Clause purposes.

New wrinkles in the ACA litigation – Part II - Okay, well, now y’all know from reading Part I that under the Constitution’s Article III requirement that plaintiffs in lawsuits have some “particularized” (and ya know what that means, from reading Part I) injury or be in imminent danger of suffering one, and that the imminent danger can, theoretically, be hardship due to the anticipated violation of the plaintiffs’ rights. So you’ll be able to sail right through the federal-court-jurisdiction questions in the Civil Procedure section of the multi-state part of the bar exam.  You’ll also be able to understand what happened last Friday in the ACA case scheduled for oral argument on Wednesday in the Sixth Circuit federal appellate court.

Doctors and dentists tell patients, “all your review are belong to us”  - When I walked into the offices of Dr. Ken Cirka, I was looking for cleaner teeth, not material for an Ars Technica story.  The receptionist handed me a clipboard with forms to fill out. After the usual patient information form, there was a "mutual privacy agreement" that asked me to transfer ownership of any public commentary I might write in the future to Dr. Cirka. Surprised and a little outraged by this, I got into a lengthy discussion with Dr. Cirka's office manager that ended in me refusing to sign and her showing me the door. The agreement is based on a template supplied by an organization called Medical Justice, and similar agreements have been popping up in doctors' offices across the country. And although Medical Justice and Dr. Cirka both claim otherwise, it seems pretty obvious that the agreements are designed to help medical professionals censor their patients' reviews. The legal experts we talked to said that the copyright provisions of these agreements are probably toothless. But the growing use of these agreements is still cause for concern. Patients who sign the agreements may engage in self-censorship in the erroneous belief that the agreements bar them from speaking out. And in any event, the fact that a doctor would try to gag his patients raises serious questions about his judgment.

Two-thirds of newly diagnosed cancer patients unable to obtain oncology appointments -  Newly diagnosed cancer patients frequently face hurdles in obtaining an appointment for care with an oncologist, according to new research from the Perelman School of Medicine at the University of Pennsylvania... Even callers with private health insurance had difficulty scheduling an appointment, with just 22 percent of them obtaining a slot, compared to 29 percent of uninsured patients and 17 percent of patients on Medicaid, according to results of a study in which research assistants posed as patients seeking an initial evaluation. "Although healthcare reform is likely to expand health insurance coverage to more Americans, our research shows that even with insurance, patients face barriers when they try to access cancer care," ... "Given the typical pre-appointment expectations for new patients – which typically involve referral requirements, paperwork and routing of medical records and test results – both insured and uninsured patients must contend with many challenges that delay care with a specialty cancer provider."

Skin in the game and cancer - A recent study by Sonya Streeter and others from Avalere Health published in the Journal of Oncology Practice (JOP) shows that 1 in 10 patients with newly diagnosed Cancer did not fill their initial oral anti-Cancer prescription.* One of the primary reasons patients did not not fill these prescriptions was high out of pocket cost-share. The portion of Table 2 below (only the odds ratios focused on impact of cost sharing are shown; other factors were controlled for) highlights the impact of cost sharing on not filling newly prescribed oral anti-Cancer medicines:As compared to those whose pharmaceutical cost share was $0-$100, persons who had to pay $500+ dollars to fill their initial anti-Cancer prescription were around 4.5 times more likely to not begin their prescribed medicine; those with cost shares above $200 were consistently more likely to not fill prescriptions, again as compared to those with cost share ranging from $0-$100. The portion of Table 1 (below) shows the distribution of cost share amounts for an initial oral anti-Cancer therapy that were observed in the study, as well as insurance status.

Cellphone Radiation May Cause Cancer, Advisory Panel Says -A World Health Organization panel has concluded that cellphones are “possibly carcinogenic,’’ putting the popular devices in the same category as certain dry cleaning chemicals and pesticides, as a potential threat to human health.The finding, from the agency’s International Agency for Research on Cancer, adds to concerns among a small but growing group of experts about the health effects of low levels of radiation emitted by cellphones. The panel, which consisted of 31 scientists from 14 countries, was led by Dr. Jonathan M. Samet, a physician and epidemiologist at the University of Southern California and a member of President Obama’s National Cancer Advisory Board. The group didn’t conduct any new research but reviewed numerous existing studies that focused on the health effects of radio frequency magnetic fields, which are emitted by cellphones. During a news conference, Dr. Samet said the panel’s decision to classify cellphones as “possibly carcinogenic” was based largely on epidemiological data showing an increased risk among heavy cellphone users of a rare type of brain tumor called a glioma.

Get the Lead Out II - There is an absolutely serious hypothesis that the sharp drop in violent crime in the USA since the early 1990s is due to the EPA and, in particular, to the shift from leaded to unleaded gasoline roughly two decades earlier.  The hypothesis has clear implications for violent crime in other countries, since the USA banned lead early. The UK went unleaded in 1986 12 years after the USA. The USA violent crime peak came in 1995. So the predicted UK crime peak would be in 2007. I have a huge ugly pdf with the data I need and much much more.  The bottom line is that the total number of violent crimes was basically identical in 2004/5 2005/6 and 2006/7 then declined about 17% by 2009/10. The predicted peak of 2007 corresponds about as precisely to the data as is conceivable.

Mercury, PCBs widespread in sport fish along California’s urban coastline, survey finds - Nineteen percent of the coastline sampled by the state water board harbored fish with mercury in such high concentrations that they shouldn’t be eaten by young women and children. Traces of mercury and PCBs are widespread in sport fish in California’s urban coastal waters, a survey released last week by the state water board found. But 19% of the urban coastline sampled by researchers harbored fish with mercury in such high concentrations that they shouldn’t be eaten by young women and children. Fourteen percent of locations had similarly elevated levels of PCBs.

Wall Street’s Role in Narco-Trafficking – “Business is Booming” - America's Mexican policy--The Merida Initiative--is a nightmare. It's undermined Mexican sovereignty, corrupted the political system, and militarized the country. It's also resulted in the violent deaths of thousands of mostly poor civilians. But Washington doesn't give a hoot about "collateral damage" as long as it can sell more weaponry, strengthen its free-trade regime, and sluice more drug profits into its big banks. Then everything is just Jim-dandy.  There's no point in dignifying this butchery by calling it a "War on Drugs"? That's nonsense. What we're seeing is a giant powergrab by big business, big finance and the US Intel services. Obama is merely doing their bidding, which is why--not surprisingly--things have gotten a lot worse under his administration.  Obama has not only stepped up the funding for Plan Mexico (aka--Merida) but also deployed more US agents to work undercover while US drones carry out surveillance duty. Get the picture? This isn't some little drug bust; it's another chapter in America's War on Civilization.

Germany has 11 E.coli deaths, world's worst outbreak (Reuters) - An E. coli outbreak linked to contaminated cucumbers that has killed 14 people and made more than 300 seriously ill in Germany has spread to other north European countries and is expected to worsen in the coming week. "We hope that the number of cases will go down but we fear that it will worsen". The source of the virulent strain of the bacteria is unknown, German authorities said on Monday ahead of a crisis meeting of federal and state officials in Berlin. Most of the deaths have been in northern Germany. The E. coli pathogen has been identified on cucumbers imported from Spain but it is unclear if they were contaminated there, during transport or in Germany.There are 36 cases of suspected E. coli in Sweden, all linked to travel in northern Germany, authorities said. A small number of cases have been reported in Britain, Denmark, France and the Netherlands, all linked with travel to Germany.

E coli outbreak: WHO says bacterium is a new strain - A new and more virulent strain of the E coli bacterium caused the outbreak that has killed 17 people and left more than 1,500 ill across Europe, the World Health Organisation has announced. Hilde Kruse, a food safety expert at the WHO, told the Associated Press it was "a unique strain that has never been isolated from patients before ... [its characteristics] make it more virulent and toxin-producing". According to the Health Protection Agency three British nationals have been infected as well as four Germans in the UK. All are believed to have caught it in Germany. Three are believed to have developed haemolytic uraemic syndrome, a rare and severe kidney complication that destroys red blood cells and can affect the central nervous system. The HPA has said it is working with the Food Standards Agency and there is no evidence of suspect produce being distributed in the UK. As the number of cases continues to rise , Russia has extended its ban on imports of raw vegetables from the European Union – a move condemned by Brussels as "disproportionate" – and Spain is threatening legal action over the initial attempt by Germany to blame the outbreak on imported Spanish organic cucumbers.

Europe E. Coli Is Deadliest Outbreak as Rare Strain Causes Kidney Failure - E. coli that has sickened thousands in Europe has become the deadliest outbreak of the bacteria on record as a rare strain is causing kidney failure in unprecedented numbers, U.S. health officials said.  At least 16 people have died and 1,624 cases have been reported, according to the World Health Organization in Geneva. The number of reported cases is based on hospital records, and the actual number of infections may be 10 or more times higher, said Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota.  The strain circulating in Germany and nine other European countries produces a toxin not usually seen in E. coli that can damage the kidneys and other organs. Germany alone has reported 470 cases of the kidney ailment and officials advised against eating raw tomatoes, cucumbers and leafy salads.  “We usually consider that a rare complication, and to have 470 is absolutely extraordinary,” said Robert Tauxe, deputy director of food-borne illnesses at the U.S. Centers for Disease Control and Prevention in Atlanta, in a telephone interview. “This is a new public health problem.”

Midwest's soggy spring is dimming the fall's harvest hopes‎ - The calendar says spring planting time is over. But millions of soggy and unplanted acres say otherwise. Nearly one-third of U.S. spring wheat acres haven't yet been planted, the U.S. Department of Agriculture reported Tuesday. Parts of Minnesota, North Dakota and Montana still are too wet, a pattern that is depressing farmers and pushing spring wheat to more than $10 a bushel, double last year's price.  "The final planting date for most of the state is May 31," said Lola Raska, executive vice president of the Montana Grain Growers Association. "Some farmers will try after that. The prices are so good, you hate to not take advantage of it."  While spring wheat is the crop furthest behind schedule, planting delays are common everywhere. In Minnesota, 12 percent of the state's cornfields - nearly 1 million acres - still weren't planted by Sunday evening, the USDA reported. That's worrisome in several ways. First, grain supplies already are tight and the grain trade was hoping for a huge crop. Yet major corn states like Minnesota (12 percent unplanted), Ohio (81 percent unplanted) Indiana (41 percent unplanted) and North Dakota (26 percent unplanted) are having trouble even getting started.  "Both edges of the Corn Belt - North Dakota and Ohio - is where it continues to be slow," said Chris Nagel, market analyst for Northstar Commodity in Minneapolis. "Ohio corn planting is only 19 percent complete, so they're not making much progress there."

Farmers make most of what dry days they get‎ - Indiana's corn woes have been well documented in recent weeks, with statewide storms leading to chronically wet fields and a late start to the planting season. But many local farmers said they've been able to beat the buzzer when it comes to today's optimal corn planting deadline, and they are now taking the slow start in stride. "Well, I think farmers are typically the eternal optimists," said Kevin Underwood, president of the Tippecanoe County Farm Bureau and an area farmer since 1994. "We're not going to be looking at any high end yields, but if we can avoid having more severe weather this summer, we should do all right." A report released Tuesday afternoon by the U.S. Department of Agriculture found that 59 percent of the Indiana's total corn crop was in the ground by Monday, a jump of 10 percentage points from where things stood a week before. At this time last year, 93 percent of the crops were planted.

Farmers near deadline to get corn crop planted - Ohio's corn crop, which in April looked like it could be the second-biggest planting since World War II, now is in danger of being one of the smallest planted. Frequent rains throughout April and May have left fields statewide in alternating states of flooded, soggy, and muddy, making it almost impossible for Ohio's farmers to get their corn planted. As of Sunday, only 19 percent of the state's corn crop had been planted, which was 74 percentage points behind last year's pace and the state's five-year average for this time of year. Only 7 percent of soybeans have been planted, although there is more time to get them in the ground than corn without great yield loss. Looming for corn farmers is a Sunday deadline -- the date they can scrap planting efforts and get 100 percent of their crop insurance payment. Farmers who hold off on insurance claims to attempt to plant corn will see their insurance refund diminished by 1 percent per day after Sunday. Depending on how much a farmer invested in seed and nutrients, holding off more than a week or two can lead to a financial loss.

Rising water costs lead to uncertain future for farmers -  San Diego County leads the nation in the number of family farms with nearly 6,700 operations, the majority of them smaller than 10 acres. These farms produce more than 200 different agricultural commodities. Mellano said growers are struggling with skyrocketing water costs, in many cases with increases of nearly 130 percent in just the past five or six years. And, water agencies warn that prices will continue to escalate for the foreseeable future. Costs to deliver water have increased; supplies have been reduced in recent years due to drought and restrictions on delivering water from the Sacramento-San Joaquin Delta; costs have risen for water from the Colorado River and for water on the spot market.

Half of Texas now under severe drought -A devastating drought tightened its grip on Texas over the last week with more than half the state now suffering the most extreme level of drought measured by climatologists.  A report released Thursday from a consortium of national climate experts said over the last week, Texas saw the highest levels of drought — rated as "exceptional" — jump from 43.97 percent of the state to 50.65 percent of the state. Meanwhile, to the north in Oklahoma, another key farming and ranching state, about 30 percent of the state continued to suffer severe and exceptional drought levels. The drought conditions have ravaged the region, sparking thousands of wildfires, drying up grazing land needed for cattle, and ruining thousands of acres of wheat and other crops. Texas farmers and ranchers have already lost an estimated $1.5 billion, and officials said if the drought continues into June, losses for the nation's second largest agriculture producer will top $4 billion, making it the costliest season on record.

Second driest spring since 1910, says Met Office - Parts of the UK have enjoyed one of the warmest and driest springs for more than 100 years, according to the Met Office. But while the south and east of Britain experienced balmy temperatures, places further north and east remained wet. For the weekend, forecasters predicted sunshine and temperatures in the mid-20s celsius. Across the whole of England and Wales, it was the second driest spring since 1910 and the driest spring since 1990. Central England experienced an average temperature of 10.3C (50.5F), the highest since monthly records began in 1659. The temperature for the whole of Britain was 9.2C (48.6F), the highest since 1910, the Met Office said. The previous top figure was in 2007 when the average was 9.05C (48.3F).

France Is In The Middle Of The Worst Drought In History: "After the driest spring in decades and the hottest in a century, France faces a severe drought. Ecological minister Hervé Brulé tells France 24: 'This is much worse than anything on record,' he said. 'Of course the weather might change as we go into the second half of the year, but so far we have had less spring rain than in 1976.” France is imposing water restrictions across most of the country, forbidding people from watering their gardens or filling up their swimming pools on certain days. France is the EU's biggest producer of wheat. Meanwhile there is a severe drought in China, wildfire worries again in Russia and flooding in the U.S."

Dam fallout? S China faces worst drought in 60 years, 35m hit - The Chinese government is trying to convince its people that the Three Gorges Dam, the world's largest hydroelectric project, is not responsible for the worst drought in six decades being experienced by southern China.  The severe drought in what is known as China's land of fish and rice has affected 35 million people. At least four million people are suffering from serious shortage of drinking water. "The drought would have been more severe without the dam," Liu Xuefeng, an official at the State Flood Control and Drought Relief Headquarters, told the local media.  The government is now trying to talk down prices saying there is enough in the granary to meet the country's requirements and no food shortages are expected. The six drought-hit provinces in South China account for 27% of the country's grain output, official sources said.

A Plea for the Water in All We Use, Make and Eat - “We’re using tomorrow’s water to meet today’s food demand,” warned Sandra Postel, National Geographic Freshwater Fellow, helping to provoke a meaningful discussion on water as it relates to food. Agriculture was a central theme as it consumes a disproportionate share of global water resources. Jon Foley from the University of Minnesota painted a picture of our inefficiency. “One liter of water is needed to irrigate one calorie food, but that changes by factor of 100 for the most inefficient practices.” It is clear that water efficiency improvements for agriculture must play a large role. One challenge is to gain an accurate understanding of the issue because allocation of water resources is not easily visible. Postel explained the concept of “virtual water” to paint a clearer picture. Water is a direct and indirect component of everything we use, make and eat. The average American consumes 2,000 gallons of water per day and more than half is incorporated into our diet. Grain represents the trading currency for water in the same way that oil is a trading currency for energy.

Food prices 'will double by 2030', Oxfam warns…The prices of staple foods will more than double in 20 years unless world leaders take action to reform the global food system, Oxfam has warned. By 2030, the average cost of key crops will increase by between 120% and 180%, the charity forecasts. Half of that increase will be caused by climate change, Oxfam predicts, in its report Growing a Better Future. It calls on world leaders to improve regulation of food markets and invest in a global climate fund."The food system must be overhauled if we are to overcome the increasingly pressing challenges of climate change, spiralling food prices and the scarcity of land, water and energy," In its report, Oxfam highlights four "food insecurity hotspots", areas which are already struggling to feed their citizens.

  • in Guatemala, 865,000 people are at risk of food insecurity, due to a lack of state investment in smallholder farmers, who are highly dependent on imported food, the charity says.
  • in India, people spend more than twice the proportion of their income on food than UK residents - paying the equivalent of £10 for a litre of milk and £6 for a kilo of rice.
  • in Azerbaijan, wheat production fell 33% last year due to poor weather, forcing the country to import grains from Russia and Kazakhstan. Food prices were 20% higher in December 2010 than the same month in 2009.
  • in East Africa, eight million people currently face chronic food shortages due to drought, with women and children among the hardest hit.

Hunger Crisis Worsens, Food System Broken: Oxfam  - Food prices could double in the next 20 years and demand will soar as the world struggles to raise output via a failing system, international charity Oxfam said on Tuesday, warning of worsening global hunger. "The food system is pretty well bust in the world," Oxfam Chief Executive Barbara Stocking told reporters. "All the signs are that the number of people going hungry is going up," Stocking said. Hunger was increasing due to rising food price inflation and oil price hikes fuelled by speculators, scrambles for land and water, and creeping climate change, Oxfam said. Food prices are forecast to increase by something in the range of 70 to 90 percent in real terms by 2030 before taking into account the effects of climate change, which would roughly double price rises again, Oxfam said. Josef Schmidhuber of the U.N. Food and Agriculture Organization (FAO), said he broadly agreed with the message of the Oxfam report but disagreed with Oxfam's long term food price forecast. "I would not think that food prices would rise rapidly in real terms if there were no real increase in oil prices,"The Food Price Rollercoaster – graphic

Rice Soaring 50% in Thailand as Thaksin Seeks Votes in World’s Top Shipper - Rice prices in Thailand, the biggest exporter, may jump 50 percent by the end of the year under a plan by the party favored to win the July 3 election to buy the grain directly from farmers, said millers and traders.  Yingluck Shinawatra’s Pheu Thai party plans to reinstate a policy introduced by her brother, fugitive former leader Thaksin Shinawatra, to buy unmilled rice at 15,000 baht ($496) per metric ton, twice the current level. That would raise costs for exporters and boost the price of shipments to about $750 per ton from $500, according to a survey of eight millers and traders.  Rice has lagged behind gains in foodstuffs such as corn and wheat over the past year and the grain may be “the commodity which is separating us from a food crisis,” the United Nations Food and Agriculture Organization said in March. A jump in prices in Thailand may boost demand for cheaper grain from Vietnam, the second-biggest shipper, and India.

India Is Growing, But Indians Are Still Starving - The enthusiasm for expiration dates at the Summit must seem peculiar to the poor in a country where 43 percent of children under the age of five are malnourished. In sub-Saharan Africa, the figure is 28 percent; it’s 7 percent in China, to which India is so often compared. The Indian government’s own data show that 800 million Indians live on about twenty rupees (about $0.50) a day. Half of those are farmers who produce food that they, for the most part, cannot afford to eat thanks to the demands of speculators and affluent urban consumers. According to the United Nations Food and Agriculture Organization (FAO), wheat prices reached a record high in February, and the cost of rice—which accounts for 30 percent of the typical Indian diet—hovers at around 22 rupees per kilogram even in Patna and Chennai, capitals of major rice-producing states. That’s about twice the average cost from 2000 until the middle of 2007, when prices began to rise sharply. The average Indian consumes 73 kilograms of rice per year, which means that farmers, assuming they eat at least as much rice as their non-farming countrymen, are now spending some 20 percent of their income on rice alone.

The bitter harvest of ethanol - Monday, the National Agricultural Statistics Service (NASS), the Agricultural Statistics Board, and the United States Department of Agriculture (USDA) released the May 31, 2011, Crop Progress report.  This report in conjunction with WOAB (World Agricultural Outlook Board) Weekly Weather and Crop Bulletin gives the reader a clear week-to-week scorecard for how the major crops are maturing. What were the highlights from these reports? Corn: With planting complete or nearing completion in many states, producers had 86 percent of the nation's corn crop in the ground by week's end. This was 11 percentage points behind last year and 9 points behind the 5-year average. The most significant delay was evident in Ohio, where persistently wet weather has severely limited fieldwork during the past several weeks. Overall, emergence advanced to 66 percent complete, 17 percentage points behind last year and 12 points behind the 5-year average. Corn really is the "Big Kahuna" of US crop production, and due to cold wet weather the projections for a normal harvest are mixed. Let's look at Ohio. Only 19 percent of this year's corn crop was planted by week's end. This was 74 percentage points behind last year and 74 points behind the 5-year average. Another state reporting significant weather related issues was Indiana. . Only 59 percent of this year's corn crop was planted by week's end. This was 34 percentage points behind last year and 28 points behind the 5-year average.

Global food crisis: Counting the real cost of biofuels - This year, 40% of America's corn crop will go into car engines rather than stomachs. Add the fact that the US is both the world's largest producer of corn and the largest exporter, and that 10 years ago only 7% of its crop went to ethanol production, and you start to see why enthusiasm for biofuels among oil importers has had such a marked impact on food prices. Other factors have driven the breathtaking inflation and volatility in food markets over the last few years. These include a rising global population, millions more people shifting to western diets, declining crop yield growth, years of under-investment, extreme weather, high oil prices increasing the cost of inputs such as fertiliser, low stock levels, and kneejerk actions by governments such as food export bans and panic buying by importers. But it is biofuels that have been the real game changer. As the International Monetary Fund observed in 2008, biofuels accounted for 1.5% of global liquid fuels supply that year, but represented nearly half the increase in food crop consumption, mainly because of corn-based ethanol in the US. While they only accounted for a small fraction of liquid fuels, the fact that they represented 75% of the net increase in non-Opec liquid fuels in 2008 goes a long way towards explaining why oil importers have taken to them with such enthusiasm.

Belarus Freezes Food Prices - Belarus on Tuesday froze prices on a number of foodstuffs as analysts warned that the former Soviet republic could descend into economic chaos and an IMF mission headed to Minsk to assess the situation. A government decree said prices for fish, tea, coffee, certain types of sausages, cheese and a number of fruits and vegetables — some of which have doubled in the last two months — cannot be raised further until July 1.  Belarus devalued its ruble by 36 percent to 4,977 per dollar last week in an attempt to reduce a current account deficit largely caused by generous public spending in the run-up to Alexander Lukashenko's re-election as president last December. But the unofficial black market rate for rubles is still about 6,000 per dollar.

China is ravenous for farmland: Attempting to buy up millions of acres here - It's no secret China has been buying up vast amounts of natural resources like gold, copper, oil, and coal in recent years.  As more and more of its people begin eating meat, the country has now turned its attention to securing millions of acres to grow its own soybeans and other crops necessary for animal feed. First on its list are South American countries like Brazil and Argentina. These countries have blocked most advances for outright purchases so far, but these countries' dependence on cheap Chinese imports - and China's desperation for farmland - suggest it's just a matter of time before China gets its way.

China’s Interest in Farmland Makes Brazil Uneasy - When the Chinese came looking for more soybeans here last year, they inquired about buying land — lots of it.  Officials in this farming area would not sell the hundreds of thousands of acres needed. Undeterred, the Chinese pursued a different strategy: providing credit to farmers and potentially tripling the soybeans grown here to feed chickens and hogs back in China1.    The $7 billion agreement signed last month — to produce six million tons of soybeans a year — is one of several struck in recent weeks as China hurries to shore up its food security and offset its growing reliance on crops from the United States by pursuing vast tracts of Latin America’s agricultural heartland.  Even as Brazil2, Argentina3 and other nations move to impose limits on farmland purchases by foreigners, the Chinese are seeking to more directly control production themselves, taking their nation’s fervor for agricultural self-sufficiency overseas.

China drought threatens more than 34 million people – A debilitating drought along China's Yangtze river has affected more than 34 million people, leaving farmers and livestock without water and parching a major grain belt, the government said Saturday. More than 4.23 million people are having difficulty finding adequate drinking supplies, while more than five million are in need of assistance to overcome the drought, the Civil Affairs Ministry said in a statement."The special characteristics of this drought disaster is that it has persisted a long time," the ministry said. "Secondly the losses to the agricultural and breeding industries have been severe... while drinking water for people and livestock have been seriously impacted." Rainfall levels from January to April in the drainage basin of the Yangtze, China's longest and most economically important river, have been up to 60 percent lower than average levels of the past 50 years, it said.

Rainmakers of China struggling to cope with country's severe drought --China is running out of cloud-seeding shells after pounding the skies with a massive barrage to ease the worst drought that parts of the Yangtze delta have experienced for more than 100 years. One of the country's biggest manufacturers of the weather-modifying ordnance said its warehouses were empty despite raising production by 30%, operating on weekends and adding two hours to shift times. Workers on the assembly lines of Jiangxi Gangsi encase catalytic chemicals – usually silver iodide or liquid nitrogen – in shells, which are fired by cannon or dropped from aircraft, to create water droplets in clouds that will fall as rain. Since 2000, the company has played a key role in China's weather-modification programme, thought to be the world's biggest, with an annual budget of £65m and offices in 30 provinces. It is one of the nation's biggest makers of cloud-seeding shells, but company managers told the Guardian that they have struggled to meet a surge of demand during an unusually hot, dry spring.

China’s Three Gorges Dam Facing Low Water Levels - Chinese authorities downplayed the capacity of the Three Gorges Dam to discharge heavy amounts of water to provide relief to areas affected by the worst drought in inner and south China in 50 years, warning that the water levels within the dam itself have fallen to levels that may soon make cut backs necessary, according to Chinese media reports Friday. The water level within the dam is currently around 152 meters, having dropped by about 2 meters in the past week, according to a China Daily report Friday, which cited figures given the official Xinhua news agency Thursday.  Authorities began discharging more water to the middle and lower reaches of the Yangtze River around May 20, boosting the daily discharge rate to 200 million cubic meters. However, the dam will need to cut back the flow rate June 10, when it’s projected that the water level will get too low unless rains compensate, the report said.  Engineers cited in the reports said it was envisioned that the water level within the dam would fluctuate about 30 meters each year, rising to high point of 175 meters at the height of the summer flood season and dropping to lows before the ensuing rainy season.  The ongoing drought has raised concerns that China may suffer rolling blackouts this summer as hydropower plants shut down or operate at reduced rates because of low water levels.

Three Gorges Dam's power is seeping away - The Three Gorges Dam, the world's largest hydropower project, might lose the battle against the worst drought to hit Central China in 50 years if no rains fall by mid-June.  "If the drought continues and there is no rainfall before June 10, the dam will lose the capacity to relieve the drought," Wang Hai, director of the transport division of the China Three Gorges Corporation, told China Daily on Friday.  The dam's water discharge rate is expected to reach 11,000 cubic meters a second on average (about 3,000 cubic meters a second more than the water flowing in) from May 25 to June 10, and its water level had fallen to less than 151.7 meters on Friday afternoon, according to the corporation.  The hydropower project is designed with a capacity of more than 22 billion cubic meters for drought relief and flood control. Ideally, the dam's water level will reach the 175-meter mark in flooding season (generally from June to August) until early next year, when water will be gradually discharged to 145 meters, for drought relief.  Because the bottom-line for safe water transport in the upstream of the Yangtze River, the water transport hub, is 145 meters, Wang said.

El Salvadoran Government & Social Movements Say No to Monsanto - On the morning of Friday, May 6th President Mauricio Funes of El Salvador’s left-wing FMLN party, arrived at the La Maroma agricultural cooperative in the department of Usulután for a potentially historic meeting with hundreds of small family farmers. Usulután has often been referred to as the country’s bread basket for its fertile soil and capacity for agricultural production, making it one of the most strategic and violent battleground zones during El Salvador’s twelve year civil war between the US-supported government and the FMLN guerrilla movement. Once again, Usulután has entered the spotlight for its agricultural reputation. The FMLN, which initially formed around an ideology of national liberation from US hegemony, has now adopted the goal of “food sovereignty,” the idea that countries hold the right to define their own agricultural policies, rather than being subject to the whims of international market forces. On Friday, officials representing the Ministry of Agriculture and the local governorship accompanied President Funes in inaugurating a new plan aimed at reactivating the country’s historically ignored rural economy and reversing El Salvador’s growing dependence on imported grains.

Mexico Suffering Under Severe Heat with Over 11 States Seeing 100 Degree Plus WeatherMexican residents throughout most of the country are being warned to stay indoors during the day, wear hats outdoors and drink lots of water in light of extreme heat temperatures. 11 states in the country are facing temperatures over 100 degrees Fahrenheit with the southern coast facing over 112 degrees.  The Health Secretary, Jose Angel Cordova, is reporting an increase in diahretic diseases as a result of spoiled meats and vegetables due to heat and the propensity of Mexicans to eat from outdoor food stalls.Mexico City is also facing some very uncomfortable days since Thursday when the temperature was clocked at 83 degrees and all the public transportation not having air conditioning. 

Closeup: April’s Tornado Outbreaks - The video above, generated by the Commerce Department’s Environmental Visualization Laboratory, shows the powerful stirrings of the atmosphere through the month of April that generated that month’s extraordinary swarms of tornadoes — with 625 tornadoes confirmed so far out of 875 that were reported.  Video of April tornadoes. Of course, much more was to come in May. A more complete description of the video is appended at the end of this post. I sent the video to an array of researchers studying climate and the conditions that can result in extreme weather, including tornadoes. My hope was simply to get them thinking about broader patterns that might offer hints of what tips the balance from violent weather to utter calamity. Here’s the initial question I posed: I would love your meteorological-climatological impression of what you see in this that helps reveal the mix of factors in play. Also, are these features replicated well in models? A sequence of reactions can be read below.

Warmer Ocean Fueling Tornadoes - The stats on tornadoes so far this year are horrifying. A record-breaking 482 people (and ABC News reports 1,500 are unaccounted for in Joplin, Missouri) have been confirmed killed as of 24 May. We know that spring's a bad season for tornadoes. We know that La Niña years fuel stormy Aprils. But 2011 is redefining even those parameters. Now May is racing to catch up to and maybe even pass April. Here's what NOAA finds so far:

  • The National Weather Service's preliminary estimate is more than 100 tornadoes have occurred during the month of May 2011.
  • The record number of tornadoes during the month of May was 542 tornadoes set in May 2003.
  • The average number of tornadoes for the month of May during the past decade is 298.
  • May is historically the most active month for tornadoes.

More Weather Deaths? Wanna Bet? - Writing recently in the Washington Post, environmental guru Bill McKibben asserted that the number and severity of recent weather events, such as the tornado in Joplin, Mo., are too great not to be the result of fossil-fuel induced climate change. He suggested that government's failure to reduce emissions of greenhouse gases will result in more violent weather and weather-related deaths in the future.And pointing to the tragedy in Joplin, Mr. McKibben summarily dismissed the idea that, if climate change really is occurring, human beings can successfully adapt to it.There's one problem with this global-warming chicken little-ism. It has little to do with reality. National Weather Service data on weather-related fatalities since 1940 show that the risks of Americans being killed by violent weather have fallen significantly over the past 70 years. The annual number of deaths caused by tornadoes, floods and hurricanes, of course, varies. For example, the number of persons killed by these weather events in 1972 was 703 while the number killed in 1988 was 72. But amid this variance is a clear trend: The number of weather-related fatalities, especially since 1980, has dropped dramatically.

Dreadful La Nina season now over - The devastating 2010-11 La Nina weather event has ended, said Australia's weather bureau, after bringing record flooding to the country, disrupting major coal exports and destroying thousands of homes, and damaging crops in Asia. "The 2010-11 La Nina event has ended, with climate indicators of the El Nino, the Southern Oscillation, having returned to average levels," the Bureau of Meteorology said on Wednesday. "Climate models surveyed by the Bureau of Meteorology suggest that the Pacific Ocean will continue to warm over the coming months, with neutral conditions likely to persist through the Austral winter, that is, neither La Nina nor El Nino." The 2010-11 La Nina was one of the strongest on record, resulting in flooding in eastern Australia. It disrupted coal exports and was blamed for heavy rains which hampered crop and mine operations in Indonesia. News of the end to La Nina will be welcomed in India, which has forecast the June-September monsoon to end on schedule, strengthening the prospects of a plentiful farm output in 2011.

Is Extreme Weather Linked to Global Warming? - Yale Environment 360 asked eight leading climate experts whether they think there is growing evidence that human-caused global warming is contributing to an increased incidence of extreme weather — and to cite specific recent examples in their answers. Their responses varied, with some contending that rising temperatures already are creating more tempestuous weather and others saying that more extreme weather may be likely but that not enough data yet exists to discern a trend in that direction. Scientists in both camps said two physical phenomena — warmer air holds more moisture, and higher temperatures exacerbate naturally occurring heat waves — would almost by definition mean more extremes. But some argued that the growing human toll from hurricanes, tornadoes, floods, and heat waves is primarily related to burgeoning human population and the related degradation of the environment.

Worst ever carbon emissions leave climate on the brink - Greenhouse gas emissions increased by a record amount last year, to the highest carbon output in history, putting hopes of holding global warming to safe levels all but out of reach, according to unpublished estimates from the International Energy Agency.The shock rise means the goal of preventing a temperature rise of more than 2 degrees Celsius – which scientists say is the threshold for potentially "dangerous climate change" – is likely to be just "a nice Utopia", according to Fatih Birol, chief economist of the IEA. It also shows the most serious global recession for 80 years has had only a minimal effect on emissions, contrary to some predictions. Last year, a record 30.6 gigatonnes of carbon dioxide poured into the atmosphere, mainly from burning fossil fuel – a rise of 1.6Gt on 2009, according to estimates from the IEA regarded as the gold standard for emissions data."I am very worried. This is the worst news on emissions," Birol told the Guardian. "It is becoming extremely challenging to remain below 2 degrees. The prospect is getting bleaker. That is what the numbers say."

Global carbon emissions at record high: IEA -– Carbon-dioxide emissions hit a record high last year, the International Energy Agency said on Monday, dimming the prospects of limiting the global temperature increase to two degrees Celsius. "Energy-related carbon-dioxide (CO2) emissions in 2010 were the highest in history, according to the latest estimates," the International Energy Agency (IEA) said in a statement. After a dip in 2009 caused by the global financial crisis, emissions are estimated to have climbed to a record 30.6 gigatonnes (Gt), a five percent jump from the previous record year in 2008, when levels reached 29.3 Gt, the IEA said. Moreover, the IEA estimated that 80 percent of projected emissions from the power sector in 2020 are already locked in, as they will come from power plants that are currently in place or under construction today. "This significant increase in CO2 emissions and the locking in of future emissions due to infrastructure investments represent a serious setback to our hopes of limiting the global rise in temperature to no more than two degrees C," said Fatih Birol, the IEA's chief economist.Global leaders agreed a target of limiting temperature increase to two degrees C (3.6 Fahrenheit) at UN climate change talks in Cancun, Mexico last year.

Prospect of limiting the global increase in temperature to 2 ºC is getting bleaker. CO2 emissions reach a record high in 2010; 80% of projected 2020 emissions from the power sector are already locked in - Energy-related carbon-dioxide (CO2) emissions in 2010 were the highest in history, according to the latest estimates by the International Energy Agency (IEA).After a dip in 2009 caused by the global financial crisis, emissions are estimated to have climbed to a record 30.6 Gigatonnes (Gt), a 5% jump from the previous record year in 2008, when levels reached 29.3 Gt.In addition, the IEA has estimated that 80% of projected emissions from the power sector in 2020 are already locked in, as they will come from power plants that are currently in place or under construction today.“This significant increase in CO2 emissions and the locking in of future emissions due to infrastructure investments represent a serious setback to our hopes of limiting the global rise in temperature to no more than 2 ºC,” said Dr Fatih Birol, Chief Economist at the IEA who oversees the annual World Energy Outlook, the Agency’s flagship publication

Record gas emissions 'puts drive to halt temperature rise at risk' - Record levels of greenhouse gases were emitted into the earth’s atmosphere last year, according to new international figures. The bleak statistics, compiled by the International Energy Agency (IEA), will prompt fears the world’s drive to limit emissions and halt temperatures increases are likely to fail. Despite a high level push by governments to limit global warming, unprecedented levels of carbon were released into the air over the past 12 months, the unpublished figures have disclosed.  The IEA found a record 30.6 gigatons (Gt) of carbon dioxide gushed into the atmosphere, mainly from burning fossil fuel – a rise of 1.6Gt from the previous year.  The agency has calculated that annual emission should not exceed 32Gt by 2020 if the world is to escape the most damaging effects of global warming.  Experts said the figures, considered one of the most reliable measures of carbon emissions, showed that attempts to curb global warming were unlikely to succeed.

'Six Degrees: Our Future on a Hotter Planet,' Mark Lynas - What we are seeing now, in regard to climate change, are the consequences of what we did some time ago. We cannot see directly the impact of what we are doing right now. What the scientists are saying is complicated, of course, but generally it boils down to this: Anything more than a rise of something like 2 degrees Centigrade (3.6° Fahrenheit) in average global temperature is bad news. (For graphics that say it all, go to the fifth page of this document or the second page of this one.) The good news is that many sane people and some large institutions recognise this. The European Union, for example, has championed 2°C for some time. Empty words from politicians or part of a basic charter for the twenty-first century? As long as everyone else gets serious about reducing the probability of a temperature rise exceeding about 2°C, there's a chance that climate change will be manageable. So much for the theory. In practice, what to do?

Will Global Warming Make the Earth Uninhabital Within 50 Years? - NYC Mayor Bloomberg is insinuating that possibility. BLOOMBERG: If you ask the public ‘is there global warming,’ is in ’50 years the earth going to be dramatically different or perhaps uninhabitable,‘ their eyes roll. Nobody can think 50 years in advance. Your job is not to ask the public where they want to go and get behind them. Your job is to tell the public and convince the public where they should go, and lead from the front. The Mayors of these cities are not asking the public whether they are willing to spend to live healthier lives and live longer. They are there to explain to the public that if they don’t spend that money they’re not going to live as long and not going to be as healthy. And then convince them to come along, reach into their pockets, pay their taxes, change their policies.  Before you panic at Mayor Bloomberg's words, please review the charts posted below. Sea level is rising at a mean of 3.1 mm per year for the last 15 years. Extrapolated for 50 years, that equates to a sea level rise of a little over 6 inches. That is troubling for beach erosion, but hardly reason to start building an Ark.

Chris Hedges: The Sky Really Is Falling - The rapid and terrifying acceleration of global warming, which is disfiguring the ecosystem at a swifter pace than even the gloomiest scientific studies predicted a few years ago, has been confronted by the power elite with two kinds of self-delusion. There are those, many of whom hold elected office, who dismiss the science and empirical evidence as false. There are others who accept the science surrounding global warming but insist that the human species can adapt. Our only salvation—the rapid dismantling of the fossil fuel industry—is ignored by both groups. And we will be led, unless we build popular resistance movements and carry out sustained acts of civil disobedience, toward collective self-annihilation by dimwitted pied pipers and fools. Those who concede that the planet is warming but insist we can learn to live with it are perhaps more dangerous than the buffoons who decide to shut their eyes. It is horrifying enough that the House of Representatives voted 240-184 this spring to defeat a resolution that said that “climate change is occurring, is caused largely by human activities, and poses significant risks for public health and welfare.” But it is not much of an alternative to trust those who insist we can cope with the effects while continuing to burn fossil fuels.

In the world, at the limits to growth - Most people in the world would envy our material austerity and be thankful for our endlessly 'collapsing' health service. But with our expectations thwarted and in the anxiety of uncertainty, we are focussed inward. Yet we remain as deluded as ever.  We imagine our troubles as if they are largely our own, shared maybe with a few other peripheral Euro-zone countries and some errant German banks. Our argument assumes that within our national life, a path can be found, however hard and long, that must eventually lead to renewed growth and a return to something like we had before property speculation consumed us. From the sidelines we hear that a UN Food and Agricultural Organisation index measuring the price of a basket of food commodities surpassed the 2008 record and oil prices remain well above $100 a barrel. This is in the context of a battered world economy and a global credit crisis that far from being resolved, has merely been displaced. The United States and Japan's credit rating is on negative watch, and the Euro hangs in balance. And while nobody will shout about it, there are many global banks who are only standing because governments and central bankers are deploying all their declining powers to prevent their bluff being called and all hell breaking lose. Food and energy prices are pushing popular revolutions in the Gulf, North Africa, and China which in turn are pushing up food and energy prices. All of this seems elliptical to our inward conversations.

Weather will never be weird enough to end climate denial - When it comes to climate change "denial is still the dominant response," writes Paul Gilding in The Great Disruption. "We won't change at scale until the crisis is full blown and undeniable, until the wind really kicks up speed. But then we will change."  When I read Gilding's book I thought it would take something like this year's historic storms and floods in the Midwest and South to wake Americans from their stupor on climate. But now I'm not so sure if even climate disaster will be enough. Even if there were one truly huge weather disaster, or a series of mid-level disasters in close succession, or something of similarly catastrophic impact, there's no guarantee that our collective response would be benign, or move us closer to smart policy. People don't tend to respond to trauma with good will and foresight. They respond with their amygdala: their fight-or-flight, us-or-them, zero-sum reptile brain. They become more susceptible to demagoguery, nationalism, and xenophobia, not less. I'm not sure a battered and fearful American public is one we can expect to embrace progressive change.

Ice melt to close off Arctic's interior riches: study (Reuters) - Global warming will likely open up coastal areas in the Arctic to development but close vast regions of the northern interior to forestry and mining by mid-century as ice and frozen soil under temporary winter roads melt, researchers said. Higher temperatures have already led to lower summer sea ice levels in the Arctic and the melting has the potential to increase access for fishermen, tourists and oil and natural gas developers to coastal regions in coming decades. The melting has also led to hopes that shorter Arctic shipping routes between China and Europe will open.The Arctic is increasingly a region of deep strategic importance to the United States, Russia and China for its undiscovered resource riches and the potential for new shipping lanes. The U.S. Geological Survey says that 25 percent of the world's undiscovered oil and natural gas lies in the Arctic. But the warming also will likely melt so-called "ice roads", the temporary winter roads developers now use to access far inland northern resources such as timber, diamonds and minerals, according to a study published on Sunday in the journal Nature Climate Change.

The House Wants to Slow the Military’s Clean Energy March…The Department of Defense is the largest energy consumer in the nation. It’s made significant efforts to wean the military services from their sole dependence on fossil fuels—particularly jet and diesel fuel made from oil—to power their planes, ships, and vehicles. Pollution from burning these fuels contributes to global warming, which, according to military leaders, is a “threat multiplier” for national security. Instead, the services are developing more efficient aviation, naval, and terrestrial heavy equipment, and various cleaner domestic advanced biofuels.* Unfortunately the House Armed Service Committee’s National Defense Authorization Act, H.R. 1540, would reverse this progress. Section 844 of the bill would actually allow the military to use alternative fossil fuels that produce more pollution than conventional fuels. The additional pollution would exacerbate global warming, which in turn would make our nation less secure. The House plans to debate H.R. 1540 over the next several days. Congress must remove this provision to enhance national security.

Money Blows in to a Patch of Oregon Known for Its Unrelenting Winds - In this sparsely populated landscape south of the Columbia River Gorge, annual checks for $590 are local residents’ share of a windfall brought by the growing wind energy industry. In an area otherwise dominated by wheat farms, hundreds of 300-foot wind turbines now generate electricity and cash.  “Wind is the only thing that is going to save rural Oregon,” said Judge Gary Thompson of Sherman County Court, “especially since all the timber is gone and the sawmills and all that are closing down. I think what it is is a breath of fresh air.”  The Columbia Gorge has been like an expressway for hard-blowing wind since long before the turbines arrived. Trees here lean to the east from the gusts that rip across the plateau.  Sherman County, which earned $315,000 in property taxes from the first wind farm in 2002, raked in $3 million from wind farms in 2010. The bounty, while mostly flowing to the farmers who lease their land for the turbines, also benefits the public. Taxes, fees and assessments on more than 1,000 megawatts of wind turbine capacity have brought $17.5 million in nine years to a county with just 1,735 residents.

Midwest power transmission project targets Kansas wind  - A Houston company is in the early stages of planning one of the largest energy infrastructure projects the Midwest has seen in years – a $1.7 billion high-voltage transmission line connecting Kansas wind farms with consumers in St. Louis and throughout the Ohio River Valley. The so-called Grain Belt Express transmission line, named to evoke images of train hopper cars rolling across the Plains, would stretch 550 miles from southwestern Kansas to southeastern Missouri. It would be capable of moving 3,500 megawatts of electricity – roughly enough to power 3.5 million homes – to eastern Missouri, Southern Illinois and beyond. The project is being driven by renewable energy demand, more specifically state mandates that have been approved by voters and legislatures including Missouri and Illinois. The goal in each case is to replace coal-fired power with cleaner energy.

Brazil approves massive Amazon dam for construction (Reuters) - Brazil's environment agency gave its definitive approval on Wednesday for construction of the Belo Monte hydroelectric dam, a controversial $17 billion project in the Amazon that has drawn criticism from native Indians and conservationists. The regulator, Ibama, issued licenses to the consortium in charge of Belo Monte to build the massive dam on the Xingu River, a tributary to the Amazon. The government has said the 11,200-megawatt project, due to start producing electricity in 2015, is crucial to provide power to Brazil's fast-growing economy. It will be the world's third biggest hydroelectric dam after China's Three Gorges and Itaipu on the border of Brazil and Paraguay.In January, Ibama had issued a preliminary license allowing the construction site to be set up. Since then the project has been halted and resumed several times due to court injunctions obtained by environmentalists and native Indians opposing the dam.

Greenpeace warns of radioactive sea life off Japan - Environmental activist group Greenpeace warned Thursday that marine life it tested more than 20 kilometres (12 miles) off Japan's stricken Fukushima nuclear plant showed radiation above legal limits. The anti-nuclear group, which conducted the coastal and offshore tests this month, criticised Japanese authorities for their "continued inadequate response to the Fukushima nuclear crisis" sparked by the March 11 quake and tsunami.  Greenpeace said it detected seaweed radiation levels 50 times higher than official limits, which it charged raised "serious concerns about continued long-term risks to people and the environment from contaminated seawater".  It also said that tests, which it said were independently verified by French and Belgian laboratories, showed above-legal levels of radioactive iodine-131 and caesium-137 in several species of fish and shellfish.

In Japan, a Culture of Nuclear Dependency - Kashima’s reversal is a common story in Japan1, and one that helps explain what is, so far, this nation’s unwavering pursuit of nuclear power: a lack of widespread grass-roots opposition in the communities around its 54 nuclear reactors.   Prime Minister Naoto Kan has, at least temporarily, shelved plans to expand Japan’s use of nuclear power — plans promoted by the country’s powerful nuclear establishment. Communities appear willing to fight fiercely for nuclear power, despite concerns about safety that many residents refrain from voicing publicly. To understand Kashima’s about-face, one need look no further than the Fukada Sports Park, which serves the 7,500 mostly older residents here with a baseball diamond, lighted tennis courts, a soccer field and a $35 million gymnasium with indoor pool and Olympic-size volleyball arena. The gym is just one of several big public works projects paid for with the hundreds of millions of dollars this community is receiving for accepting the No. 3 reactor, which is still under construction.

TEPCO: Fukushima Live Camera - Video pictures of Units 1 to 4 at Fukushima Daiichi nuclear power station are available.

Fukushima Risks Chernobyl ‘Dead Zone’ - Radioactive soil in pockets of areas near Japan’s crippled nuclear plant have reached the same level as Chernobyl, where a “dead zone” remains 25 years after the reactor in the former Soviet Union exploded.  Soil samples in areas outside the 20-kilometer (12 miles) exclusion zone around the Fukushima plant measured more than 1.48 million becquerels a square meter, the standard used for evacuating residents after the Chernobyl accident, Tomio Kawata, a fellow at the Nuclear Waste Management Organization of Japan, said in a research report published May 24 and given to the government.  Radiation from the plant has spread over 600 square kilometers (230 square miles), according to the report. The extent of contamination shows the government must move fast to avoid the same future for the area around Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant as Chernobyl, scientists said. Technology has improved since the 1980s, meaning soil can be decontaminated with chemicals or by planting crops to absorb radioactive materials, allowing residents to return.

Update on the Japanese Nuclear Crisis … Not a Pretty Picture - Experts have long said that Tepco’s projections for containing the nuclear crisis this year were unrealistic. Now, even Tepco is admitting that things won’t be stabilized this year. As Kyodo News reports: Stabilizing the crisis at the Fukushima No. 1 power plant by the end of the year may be impossible, senior officials at Tokyo Electric Power Co. said Sunday, throwing a monkey wrench into plans to let evacuees return to their homes near the plant.On May 12, it was confirmed that a meltdown had occurred at the No. 1 reactor, forcing the utility to abandon the water entombment idea and try to install a new cooling system that decontaminates and recycles the radioactive water flooding the reactor’s turbine building instead.  Given that the contaminated water has leaked from the No. 1 reactor’s containment vessel, a Tepco official said, “We must first determine where it is leaking and seal it.”The official added, “Unless we understand the extent of the damage, we don’t even know how long that work alone would take,” noting the need for one or two months more than previously thought to establish an entirely new cooling system.In other words, Tepco has no idea how long it will take to contain the leaking reactors.

Japanese Elderly Offer to Take Over Fukushima Nuclear Cleanup  "I am 72 and on average I probably have 13 to 15 years left to live," he says. "Even if I were exposed to radiation, cancer could take 20 or 30 years or longer to develop. Therefore us older ones have less chance of getting cancer."

Radiated Water at Fukushima Plant May Breach Storage Trenches in Five Days - Radioactive water accumulating in Japan’s crippled Fukushima plant may start overflowing from service trenches in five days, potentially increasing the contamination from the worst nuclear crisis since Chernobyl. Tokyo Electric Power Co. has been manually pumping water into overheating reactors after cooling systems broke down and much of that has overflowed into basements and trenches. The water is rising at a rate that means it will overflow as early as June 6, Bloomberg calculations from the company’s data show. “There is still a risk of radioactive water leaking into the sea,” Hikaru Kuroda, an official at the utility known as Tepco, said in Tokyo today. “We may have between five and seven days before the water levels reach the top of the trenches.”

Exclusive Arnie Gundersen Interview: The Dangers of Fukushima Are Worse and Longer-lived Than We Think - "I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan - it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed." So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.  Click the play button below to listen to Part 1 of Chris' interview with Arnie Gundersen (runtime 36m:31s):

What To Do With All The Nuclear Waste - This week the International Atomic Energy Agency (IAEA) visited Fukushima Daiichi, to investigate the accident, and TEPCO’s emergency response actions.  At Fukushima, massive amounts of high radioactive waste have been created, with no clear plan for long-term or permament storage.  Spent nuclear fuel is about 95% Uranium, another 1% consists of heavy elements such as curium, americium, and plutonium.  See Bloomberg Report...As of May 18th 2011, almost 100,000 tons of radioactive water had leaked out of containment at Fukushima.  The data also shows that the amount of radiated water may double by the end of December.   As a comparison, it is estimated that the United States has 71,862 tons of waste, according to state-by-state numbers obtained by the Associated Press.  Illinois has 9,301 tons of spent nuclear fuel at its power plants, the most of any state in the country, according to industry figures. It is followed by Pennsylvania with 6,446 tons; 4,290 in South Carolina and roughly 3,780 tons each for New York and North Carolina.  For long term storage the United States Government had looked to design a storage facility at Yucca Mountain, designed to hold 77,160 tons.

Merkel to Scrap German Nuclear Plants by 2022 After Disaster at Fukushima - German Chancellor Angela Merkel’s coalition endorsed a blueprint to shut its nuclear-power plants by 2022, repealing the law she pushed to extend the life of the reactors to become the biggest nation to exit atomic power.  EON AG and RWE AG, the two biggest utilities, led declines on the benchmark DAX stock index, with RWE falling to its lowest since December 2004 as the government retained a tax on spent fuel rods. Solar-power companies Q-Cells SE and Solarworld AG rallied.  The decision in the early morning hours today by coalition leaders in Berlin underscored Merkel’s flip-flop from a 2009 re- election promise to extend the life of nuclear reactors. She did her about-face after the March meltdown in Japan as the anti- nuclear Green Party gained in polls. Her party lost control of Baden-Wuerttemberg state to the Greens in March and finished behind them in a state election for the first time on May 22.

Germany To Shut Down All Nuclear Reactors - Angela Merkel has committed to shutting down all of the country's nuclear reactors by 2022, a task said by one minister to be as mammoth as the project to reunite East and West Germany in 1990. Monday's announcement, prompted by Japan's nuclear disaster, will make Germany the first major industrialised nation to go nuclear-free in decades. It gives the country just over 10 years to find alternative sources for 23% of its energy. The move, hammered out at a mammoth 14-hour overnight sitting at the Kanzleramt, came amid mass nationwide protests against nuclear power and at a low point for the chancellor's Christian Democratic party (CDU), support for which has crumbled at the ballot box in five regional elections this year. Although the proposal was welcomed among the general population, who have long been opposed to nuclear power, it was a move derided by one of Merkel's own MPs as "knee-jerk politics".

German nuclear cull to add 40 million tones CO2 per year (Reuters) – Germany's plan to shut all its nuclear power plants by 2022 will add up to 40 million tones of carbon dioxide emissions annually as the country turns to fossil fuels, analysts said on Tuesday. The extra emissions would increase demand for carbon permits under the European Union's trading scheme, thereby adding a little to carbon prices and pollution costs for EU industry. "We will see a pick-up in German coal burn," said Barclays Capital analyst Amrita Sen. "Longer term, they will be using more renewables and gas but this year and next, we should see a lot of support for coal burn." The phase-out is seen as more political than technical as German Chancellor Angela Merkel tries to capture anti-nuclear sentiment in the aftermath of Japan's Fukushima crisis. Environmentalists welcomed the shift, although some demanded a faster phase-out, hoping it would spur a shift to renewable energy which they view as less harmful by avoiding radioactive waste. But analysts say the move will also see an increase in planet-warming greenhouse gases equivalent to the annual emissions of Slovakia, as Germany uses gas and coal to plug a power generation gap, both of which are more carbon-emitting than nuclear power.

German Energy: Nuclear? Nein, Danke - EVERYONE was horrified by the earthquake and tsunami that killed 24,000 Japanese and caused three nuclear meltdowns. But in Germany the feeling was laced with terror. Suspicion of nuclear power became mass revulsion. At a recent race in Berlin sponsored by Vattenfall, which generates nuclear power, many runners carried no-nuke flags.  The response of Chancellor Angela Merkel has been called the swiftest change of political course since unification. Only last year her government overturned a decade-old decision to phase out nuclear power by 2022. After Japan she suspended that policy and yanked seven of Germany’s 17 reactors off the electricity grid. On May 30th she completed her U-turn. The plan to keep nuclear plants operating for 12 more years was scrapped; the seven reactors will be shut for good. Germany will be “the first big industrial country to shift to highly efficient and renewable energy, with all the opportunities that offers,” Mrs Merkel promised. Industry is less thrilled about losing nuclear, which provides 23% of Germany’s electricity reliably and cheaply.

Shale Boom in Texas Could Increase U.S. Oil Output - The Texas field, known as the Eagle Ford, is just one of about 20 new onshore oil fields that advocates say could collectively increase the nation’s oil output by 25 percent within a decade — without the dangers of drilling in the deep waters of the Gulf of Mexico or the delicate coastal areas off Alaska.  There is only one catch: the oil from the Eagle Ford and similar fields of tightly packed rock can be extracted only by using hydraulic fracturing, a method that uses a high-pressure mix of water, sand and hazardous chemicals to blast through the rocks to release the oil inside.  The technique, also called fracking, has been widely used in the last decade to unlock vast new fields of natural gas3, but drillers only recently figured out how to release large quantities of oil, which flows less easily through rock than gas. As evidence mounts that fracking poses risks to water supplies, the federal government and regulators in various states are considering tighter regulations on it.  The oil industry says any environmental concerns are far outweighed by the economic benefits of pumping previously inaccessible oil from fields that could collectively hold two or three times as much oil as Prudhoe Bay.

T. Boone Pickens slams Koch brothers on gas bill: "They don't answer to anybody!" - Billionaire energy magnate T. Boone Pickens slammed Koch Industries on Friday for its opposition to legislation he’s promoting that provides tax credits to jumpstart use of natural gas in the trucking industry. “They don't ever come toe-to-toe. They don’t get up and discuss these issues or anything. They are very mysterious,” Pickens said on CNBC “Their company, these guys are worth $40 billion, they don’t have to answer to anybody, and it is a private company and they avoid some reporting that public companies have to do,” Pickens added. Koch — which is helmed by billionaire brothers active in conservative causes — is opposing the natural-gas legislation alongside an array of right-leaning groups, including the Koch-founded Americans for Prosperity, Grover Norquist’s Americans for Tax Reform, and the Club for Growth. They allege it represents undue government meddling in energy markets.

UK company halts shale gas ‘fracking’ after scientists say it may have triggered earthquakes - A mining company has halted drilling for shale gas in England after scientists said two small earthquakes might be linked to the controversial process, known as “fracking.” The decision by Cuadrilla Resources Ltd. heightened European environmentalists’ concerns about a process that has been promoted as an untapped source of energy, but criticized by opponents as dirty and disruptive.The British Geological Survey recorded a 1.5 magnitude quake Friday near Blackpool in northwest England, within 1.2 miles (2 kilometers) of the gas well. A 2.3 magnitude quake was recorded nearby in April.

Small earthquake in Blackpool, major shock for UK’s energy policy - The controversial new drilling operation for natural shale gas in Lancashire has been suspended following a second earthquake in the area that may have been triggered by the process. The earthquake last Friday near Blackpool occurred at the same time that the energy company Cuadrilla Resources was injecting fluids under high pressure deep underground to deliberately blast apart the gas-bearing rock – a process known as "fracking", brought to Britain from the US, where it has been highly contentious. Click HERE to view graphic. Earthquake experts from the British Geological Survey said that the 1.5 magnitude quake last week was similar to a 2.3 earthquake in April in the same area and that both may be linked to the experimental fracking for shale gas at Preese Hall on the Fylde coast. "It seems quite likely that they are related," said Brian Baptie of the British Geological Survey (BGS). "We had a couple of instruments close to the site and they show that both events were close to the site and at a shallow depth.

Texas Urges U.S. to Leave Gas Fracking Oversight to States - The top energy regulator in the biggest natural-gas producing state urged federal officials to keep their hands off drilling techniques that environmental groups say contaminate drinking water.  Texas Railroad Commission Chairman Elizabeth Ames Jones said in an interview today that states are better-equipped than the federal government to regulate hydraulic fracturing, the practice of injecting high-pressure jets of water, sand and chemicals into rock formations to release gas and oil. Jones said yesterday that Texas won’t require drillers to disclose ingredients they regard as trade secrets.  “It would be a big mistake” for federal regulators to assume oversight of drilling for natural gas, Jones, 54, said today on the sidelines of a U.S. Energy Department meeting in Washington. She said she’s “hopeful” the panel “will come to the understanding that the one-size-fits-all federal oversight practice does not merit further attention.”  Jones, a Republican who has announced her candidacy for U.S. Senate, told a federal panel studying the risks of hydraulic fracturing that the practice, known as fracking, never has contaminated groundwater in Texas.

Even BP-Funded Scientists Find that the Use of Corexit Dispersant in the Gulf Made Things Worse … but BP Still Tries to Blame Others for Destruction -  As the Herald Tribune notes, even BP-funded scientists are finding that dispersant made things worse: BP succeeded in sinking the oil from its blown well out of sight — and keeping much of it away from beaches and marshes last year — by dousing the crude with nearly 2 million gallons of toxic chemicals. But the impact on the ecosystem as a whole may have been more damaging than the oil alone. The combination of oil and Corexit, the chemical BP used to dissolve the slick, is more toxic to tiny plants and animals than the oil in most cases, according to preliminary research by several Florida scientists. And the chemicals may not have broken down the oil as well as expected. Scientists reported some of their early findings last week at a Florida Institute of Oceanography conference at the University of Central Florida. The researchers were funded a year ago through a $10 million BP grant. There is anecdotal evidence that dispersant was still being applied many months after BP and the government said spraying had stopped. See this, this, this, this, this, this, and this.

Canada tries to hide Alberta tar sands carbon emissions - Greenhouse gas emissions from the tar sands are on the rise, but try finding that in Canada’s official report to the UN. Barely a day goes by it seems when someone from Stephen Harper‘s government is not touting the benefits of the Alberta tar sands.  But when it came to counting up the carbon emissions produced by the tar sands – big and growing bigger – a strange amnesia seems to have taken hold. The Canadian government admitted this week that it deliberately left out data indicating a 20% rise in emissions from the Alberta tar sands when it submitted its annual inventory to the United Nations.

Why Keystone pipeline will weaken the US - Keystone's boisterous defenders, and there are many, include the American Petroleum Institute, the Canadian government and U.S. Republicans, or what wags now call the Grand Oil Party. This oil-on-the-brain crowd swears that the massive $16-billion project will deliver lower gasoline prices, improve energy security, create jobs, save mankind, butter toast and even mix a better martini.  By law the U.S. State Department must ponder whether the project is in the national interest. It must also consider the impact of importing the world's most energy-intensive oil, an extreme and low-grade asphalt-like crude, that comes with production emissions that are 17 to 23 per cent higher than conventional oil.  Proponents, however, don't want any thinking or planning: they just to want to pump, baby, pump. They even vow to introduce legislation to force President Barack Obama to grant or deny a permit by November.

ND senator wants mediation for oil land disputes — North Dakota landowner and oil industry groups sparred Thursday about a proposed independent mediation board that would referee disputes between oil producers and landowners. Those arguments will become more frequent as western North Dakota’s oil industry continues its development, Sen. John Warner, D-Ryder, said during a Senate Natural Resources Committee hearing on the legislation Thursday. For a property owner to profit from oil production, he or she must own the land’s mineral rights, which can be sold or leased to an energy developer. It is common in western North Dakota for the ownership of surface rights and mineral rights to a parcel of land to be in different hands. A mineral rights owner also has the right to go onto the land’s surface to drill for oil or dig for coal. North Dakota law already requires that landowners be compensated for farm production losses and damage to their property, but supporters of Warner’s bill say surface owners are still at a disadvantage in negotiations over damage payments, which the senator compared to “negotiating rent with a squatter in your living room.”

Energy Intensity of Employment and the Passive-Aggressive Balance of Payments Strategy - The chart below shows something you should worry about more than the upcoming BLS employment situation report on Friday. The blue line shows the declining energy intensity of real GDP in the U.S. It's the "underappreciated positive trend" in energy efficiency that Jared Bernstein highlighted in his Odds and Ends a couple of days ago. Jared remarked that it takes half as much energy per dollar of GDP as it did in the 1960s. Actually, it takes about half as much energy as it did in 1977. But there is a very fat, dark cloud surrounded by that slender silver lining. The red line shows the increasing energy intensity of employment since 1973. It takes about 30% MORE energy to employ each person in the civilian labor force than it did in 1973. And the trend continues upward. There's nothing good about that news unless it is the analytical hint contained in the chart about what the root of the problem is.

Oil climbs above $102 in Europe as traders eye weaker US dollar, Middle East turmoil  - Oil prices climbed above $102 a barrel Tuesday as talk of more financial aid for Greece helped weaken the U.S. dollar and traders worried about turmoil in Libya and the Middle East. By early afternoon in Europe, benchmark oil for July delivery was up $1.81 to $102.40 a barrel in electronic trading on the New York Mercantile Exchange. The benchmark contract last settled Friday up 36 cents at $100.59. Markets in the U.S. were closed Monday for the Memorial Day holiday. In London, Brent crude for July delivery was up $1.64 to $116.32 a barrel on the ICE Futures exchange. Crude has risen from $96 last week amid a depreciating U.S. currency. The euro rose to $1.4402 on Tuesday from $1.4287 late Monday.

Alwaleed Says Saudi Arabia Seeks Oil Price of $70-$80 a Barrel - Prince Alwaleed bin Talal said an oil price of $70 to $80 a barrel is in the best interests of Saudi Arabia because it diminishes the urgency in the U.S. and Europe to develop alternative energy sources.  “We don’t want the West to go and find alternatives,” Alwaleed, a nephew of Saudi King Abdullah, said in an interview on CNN’s “Fareed Zakaria GPS,” scheduled for broadcast today. “The higher the price of oil goes, the more they have incentives to go and find alternatives.” The rebellion in Libya, political turmoil in Bahrain and speculative buying are responsible for driving oil prices to more than $100 a barrel, Alwaleed said. Crude for July delivery rose 36 cents to settle at $100.59 a barrel on the New York Mercantile Exchange May 27. Prices have increased 35 percent in the past year.  Alwaleed, who owns Citigroup Inc. (C) shares and ranks 26th on Forbes magazine’s list of the world’s richest billionaires with a net worth of $19.6 billion, said he continues to invest in the U.S. and that the nation is “down, for sure, but it is not out.”

Goldman Sachs sees $5 gas this summer -- Even with pressure on gas prices easing en route to Memorial Day, Goldman Sachs predicts U.S. consumers could see $5 a gallon this summer. Goldman estimates oil could reach $135 per barrel by mid-July, with accompanying gas prices hitting the $5-per-gallon mark, the New York Post reported Sunday. But the evidence isn't there yet. Oil has fallen to $100 a barrel this spring, and dampened demand has helped keep gas prices down as well. "We should be seeing some big declines at the gas pumps after Memorial Day," energy analyst Peter Beutel of Cameron Hanover told the Post. "Wholesale prices have been dropping, and that could cause some serious revisions downward at the pumps," he said. The national average for gas over the holiday weekend was $3.80 a gallon.

A different kind of carbon trading tax - Speculators argue that they do not affect oil prices -- we are paying more at the pump, and businesses far more to make their products, because this is the natural state of things: Oil supplies are static while demand is rising, so next year we will be back to the ultra-tight market of 2008, when oil prices sky-rocketed to $147 a barrel. In fact, Goldman Sachs says that is precisely where we are headed -- an average of $140 a barrel next year, the bank said in a note to clients this week.  These are geopolitical prices -- such levels weigh heavily on the economies of oil-consuming nations, such as the United States and Europe, and make producers such as Russia and the OPEC nations fat and mean.  Only, is the Goldman Sachs account of reality true? Let’s start with the 2008 runup -- yesterday, the Commodity Futures Trading Commission charged Parnon Energy, a big U.S. trading house, and two of its European affiliates with oil price manipulation. They bought up and stored a huge percentage of the available oil in Cushing, Oklahoma, in January and March 2008 with the aim of cashing in when the market perceived a drastic shortage of crude, the CFTC alleges. During the whole of these events, Goldman Sachs and other investment banks -- attempting to stave off tighter regulation -- paraded repeatedly before CFTC hearings, congressional committees and public cameras claiming that such activity was almost impossible. The surge was a reflection of fundamentals, and traders were innocent of any impact, they testified. Were they correct? Not if the CFTC case is accurate.

Cuba oil discovery could end embargo - The 50-year United States embargo against Cuba could finally be lifted after the discovery of an enormous oilfield in Cuban waters.The embargo has endured in part because there was little the U.S. wanted to buy from its impoverished neighbour. But the discovery of up to 20 billion barrels of oil in the waters off of Cuba's coast, 100 kilometres from Florida, has made U.S. businessmen and politicians consider lifting the embargo. Repsol, the Spanish oil firm, will start drilling within months.If it strikes a large deposit, the trade embargo could be revised or removed, according to Prof. Mark Jones, an expert on Latin America at Rice University of Texas."The greater the drilling and prouction, the greater the pressure will e to engage in an overhaul of the emargo, either getting rid of it altogethr or watering it down substantially,"

Eurozone Oil Consumption - This post has two views of Eurozone oil consumption.  The above has the data from BP from 1965 to 2009.  You can see that the consumption of the core countries peaked in the 1970s, and then again at a lower level in the 1990s, and growth after that came purely from the periphery.  The second peak for the whole area came in 2005, and I imagine that Eurozone oil consumption will never exceed those values again. The EIA data below only starts in 1980, but does include 2010: There was a slight further decline in 2010.  Given the increasing difficulties in the Eurozone at present (see Martin Wolf's excellent column if you didn't already), one imagines that consumption will decline again in 2011.

Oil Market Needs 1 Million Barrels More, OPEC Official Says - Global oil supply needs to increase by 500,000 barrels to 1 million barrels a day in the next several months to meet demand, an oil official from a Middle East nation said six days before OPEC meets.  While members of the 12-nation Organization of Petroleum Exporting Countries agree more crude is needed, they have yet to decide whether to formally change production quotas, the OPEC delegate said today, declining to be identified by name because he is not authorized to speak publicly. OPEC pumped 28.9 million barrels a day last month, according to Bloomberg estimates.  “It is the easy option not to change quotas at this meeting, but to avoid doing so sends a strong message that spare capacity is low or that there is a desire for higher prices,” Lawrence Eagles, New York-based head of commodities research at JPMorgan Chase & Co., said by phone today. “On balance, lifting targets is politically the better option. However, higher targets and higher output do not necessarily go together.”

OPEC seen ignoring West's call to act (Reuters) - OPEC is unlikely to bow to western pressure to officially raise oil output at its meeting next week, with members instead expected to act independently of the group, a Reuters poll showed on Wednesday. All 13 oil analysts and traders surveyed by Reuters predicted the Organization of the Petroleum Exporting Countries (OPEC) would roll over its current output agreement, untouched since the group's record cut in December 2008. "They will simply sit on the fence with oil back near $100 barrel," "Increases in individual production will be discretionary." Brent crude oil prices climbed above $127 a barrel in April, their highest since the record rally of 2008, as civil war in Libya cut exports.The West's energy watchdog, the International Energy Agency, has since urged producers to boost supplies to help lower fuel costs and protect the economic recovery.

The CIA Accurately Predicted How Long World Oil Supplies Would Last—in 1978 - I still have vivid memories of a headline that appeared in our local small town newspaper one day several years after those gas lines had abated. The headline read in stark simplicity: “60 to 90 Years' Supply of Oil Left,” and it really grabbed this thirteen-year-old’s attention. Being a thoughtful youth, I did a quick mental calculation and realized that if the headline was accurate it meant if I was lucky there was a chance I would not live to see the end of the oil age. Flash forward to middle age, and while researching this article I unearthed a reference to what it was that generated that headline from so many years ago. According to a Time magazine story published in October 1978, the source of that “60 to 90 year” figure was an official report produced for the Central Intelligence Agency by Richard Nehring, a policy analyst for the Rand Corporation. The Time article, entitled “Oil: What’s Left Out There?” centered on two basic questions: “How much oil does the world have left?” and “When will it run out?”

Estimating the critical levels of petroleum consumption necessary to sustain the modern food production system -- In Part 7, I examined the relationship between increasing global population and global petroleum production rates and found that they have a very strong linear correlation. Based on this correlation, and suggestions that the Green Revolution in food production and delivery was made possible by petroleum consumption, I hypothesized that the increase in petroleum production was the cause of the increase in population. I further hypothesized that, because petroleum exports and production are likely to continue to decline in the near future (Part 5 and Part 6), there could be an immediate decline in population that follows the previous correlation between increasing global population and global petroleum production rates, but in reverse. An alternative hypothesis I posed was that global population will continue to increases, even in the face of declining petroleum consumption, possibly through further gains in the efficiency of the food production system.

Entropy, Peak Oil and Stoic Philosophy - I am asking you to follow me with this idea; that the bell curve is a “natural” behavior of production for non renewable or slowly renewable resources. With “natural” I mean that it is the way the system is expected to behave when there are no strong interferences from political or other kind of perturbations. Then, I said that we should look at the inner mechanisms that make the economy behave in this way. I believe that we don't need to invent a brand new law, as Newton did for gravity. We already have the laws we need – even though so far we failed to apply them to this case. These are the laws of thermodynamics. Here are the three laws in a simplified form:

  1. You can't win
  2. You can't get even
  3. You can't quit the game

Five Misconceptions Squashed - Last month’s letter created precisely the stir I anticipated. You may recall that I came out in defence of human ingenuity and predicted that the oil era will end over the next decade – at least in terms of being the primary fuel for transportation. Not surprisingly, some of my readers scolded me for neglecting the demand side of the equation (i.e. strong growth in demand from emerging markets), whereas others agreed with my conclusions but thought my timing was horribly wrong. Quite a few seem to think that my version of events is a story for the 2030s and not the next decade as I predicted. Having said that, I had a fair amount of support as well. A number of readers forwarded information about other exciting energy projects in the pipeline, which has only served to reinforce my view that we are at the doorstep of a paradigm shift. In defence of my theory, I suspect many of my critics underestimate the difference between $50 and $100 oil prices. Several of the projects I mentioned in last month’s letter make little economic sense at $50. At $100 they suddenly become viable. Were oil prices to go to $200 (not entirely impossible), the development of alternatives to oil would only gain further momentum.

Peak Oil, Peak Water, Peak Resources, Peak Planet: Building a Currency for the 21st Century - In a planet running out of resources, the most important public policy tool may be the measuring stick. This becomes important to remember amid the remarkable swings of pessimism and guarded optimism we’ve seen over the past two years on the ability of individual nations to scale-up the sustainable energy agenda.. On the negative side, several nations have examined significant advances in clean energy markets, and have retreated, or at least so far failed to act.  This list,as of this writing, unfortunately includes both Australia and my country, the United States.  And, while we see several large-scale clean energy projects under design, costs and logistics are proving significant hurdles.  This mixed story is unfortunate, for sure, but also not surprising given that we still lack metrics, methods and a currency that reflects a world based around sustainable energy. The sad fact is that as a global society have wasted many good years – decades actually — during which we could have launched an economy based on job creation and investments in human capacity and creativity.  We have ignored the signals that nature has been sending us about the status and stresses we are placing our rivers, oceans, skies, mountains and of the health of the biosphere.   There are many metrics we might cite that consistently tell us that we are approaching, at, or beyond the carrying capacity of the planet in terms of flows of pollutants, and our need for resources.

Offshore Oil Dispute in South China Sea Has Enormous Global Implications - The world’s unceasing quest for new oil deposits has combined with offshore technology to impel many countries to investigate their offshore resources in their “exclusive economic zone,”  (EEZ) defined by the 1982 United Nations Convention on the Law of the Sea Part V, Article 55 as extending 200 nautical miles from a nation’s coastline. Difficulties arise in congested maritime areas where overlapping claims create friction, and one of the most contested areas in the world today are the waters surrounding the Spratly islands of the South China Sea. The Spratly islands consist of more than 750 islands, islets, atolls and cays and their EEZ real estate is variously claimed by China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei. While there are no native islanders, about 45 islands of the archipelago are now occupied by Vietnamese, Chinese, Taiwanese, Malaysian and Filipino forces, all determined to assert their nations’ claims of sovereignty. Given the potential resources, the possibility of confrontation is significant and is already occurring.

Rare Earths Are About to Become a Lot More Rare - China’s Baotou Steel has announced its intention to start up the world’s first rare earths exchange. The move is expected to increase the liquidity and visibility of these valuable elements while reducing their trading costs. So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu). Since the beginning of the year, the price of 99% pure cerium oxide has rocketed by 650% to $11.50 a pound.It turns out that you can’t build a hybrid or electric car, a wind turbine, thin film solar, LED’s, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can’t fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles.That’s where things get interesting. China now produces 97% of the world’s rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental damage are nil. In 2009, China announced that would start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products.

World copper demand growth to slow in 2011- Global demand growth for copper is expected to slow to 8.4 percent in 2011-12, slowing substantially from the average growth of 16.4 percent between 2005-2010, the International Wrought Copper Council (IWCC) said.China's demand for the red metal, used extensively in the electrical manufacturing, construction and power sectors, is expected to grow by 7 percent this year, down from a double-digit growth in 2010, the general secretary of the International Wrought Copper Council Mark Loveitt said on Sunday.The IWCC, which represents copper fabricators such as wire and tube makers worldwide, said the short-term outlook for copper remains uncertain as high prices were encouraging end-users to run down their inventories. Consumers were also reluctant to hold unnecessary inventories.Prices at current levels have also prompted end-users in some sectors to either substitute copper with aluminum or to use smaller and thinner components.

Copper Miners Must Tap New Areas as Demand Soars, Cesco Says - The global copper-mining industry needs to expand to new regions if producers are to bring supply back into line with unprecedented demand, according to a mining- studies group in Chile, the world’s largest producer.  So far, the industry’s reaction to record prices has been slow because of declining ore grades, the need for deeper mines and higher costs, Juan Carlos Guajardo, executive director of the Center for Copper & Mining Studies, said yesterday.  The global copper market faces a 377,000-metric-ton deficit this year, according to the International Copper Study Group, as demand, led by China and other emerging markets, outpaces supply. Copper futures in London surged to an all-time high in February.  “Since mining is a long-term industry, more time is needed to reach a new equilibrium in the copper market,”  By 2015, a further 2.1 million tons of capacity is needed, he said.

Counting the Cost – Glencore (news video)

Sudden China Slowdown May Mean 75% Drop in Commodities, S&P Says -- A "sudden" slowdown in China may lead commodity prices to fall as much as 75 percent from current levels, Standard & Poor's said. The floor for aluminum is 65 cents to 70 cents a pound, compared with about $1.20 a pound now, Standard & Poor's analyst Scott Sprinzen said in a statement e-mailed today. A sudden slowdown may be brought about by sudden shift shifts in government policy or problems in the banking sector, it said. Copper's floor is $1.50 to $1.75 a pound, compared with $4.10 now, iron ore's is $85 to $95 a metric ton compared with about $170 now, seaborne coking coal at the mine has a floor of $100 to $120 a ton, compared with about $180 now, and hot rolled coil steel's floor is $475 to $525 a ton compared with about $750 now, according to the statement.

China Raises Power Prices for Business, Farmers as Summer Shortage Looms - China raised electricity prices for businesses and farmers for the first time in more than a year, threatening to exacerbate inflation as the nation aims to curb power shortages that may be the worst on record.  Rates for industrial, agricultural and commercial users in 15 provinces will increase starting tomorrow while those paid by residential customers will be unchanged, said an official at the National Development and Reform Commission, declining to be identified because of internal rules. Malaysia said yesterday it will raise power prices for the first time in three years.  The increase in electricity costs may complicate China’s fight against inflation, which is above the government’s target. The world’s biggest energy consumer may boost residential rates in the second half, according to Citigroup Inc. Higher prices may spur generation as pressure eases on profit margins squeezed by rising coal costs. An electricity shortfall this summer may be as much as 40 gigawatts, surpassing the 2004 record, State Grid Corp. of China said.

Hitler and the Chinese Internet generation - A rumor is spreading virally throughout the Middle Kingdom that asserts that Austrian-born Hitler was raised by a family of Chinese expats living in Vienna. According to the rumors, a family named Zhang found young Adolf - born on April 20, 1889, when he fell on hard times as a young man in Vienna.  They took him in, sheltered him, fed him and paid for his tuition. As a result of this assistance, Hitler held eternal gratitude and admiration for the Chinese people. The rumor also asserts that Hitler secretly supported China in World War II, and that his ultimate ambition was to conquer the world in order to share power with China, with everything west of Pakistan to be administered by the Fuhrer, and everything east of Pakistan the province of the Chinese people.  This rumor apparently resonates deeply with the Chinese Internet generation. On May 10, 2011, a user of Kaixin, the Chinese equivalent of Facebook, posted a version of the rumor on his wall. The post attracted an enormous following, with more than 170,000 views and 40,000 comments. Of the people who left comments, 38.8% believe that Hitler was raised by Chinese, 7.1% believe that Hitler supported China in World War II, 4.6% regard Hitler as a hero, and 9.1% hope that China will have a leader similar to Hitler. As the rumor spreads throughout the Chinese social web, admiration for Hitler is growing stronger and stronger. Blog posts with titles like "Why I like Hitler" [2] are popping up every day, and an increasingly greater share of young Chinese are choosing to express their nationalism by voicing support for Hitler.

Beijing in fresh TV censorship move = The Chinese government has stepped up censorship of local television in a sign of the broadening of a political crackdown that has landed many dissidents in jail. China has severely clamped down on activists since February when an anonymous online appeal called for demonstrations along the lines of the “jasmine revolution” sweeping north Africa and the Middle East. Authorities have detained scores of human rights lawyers, activists, and writers. They have also arrested Ai Weiwei, the contemporary artist.

How real is China's growth? - I came away from China a bit less worried about property issues than I'd been going in. Don't get me wrong, China is building an enormous amount of new housing, and quite a lot of that new housing is standing empty, even as prices rise. But this isn't necessarily the problem many people suspect, for a few reasons. For one thing, the flow of new demand for housing seems sure. Millions of Chinese remain underhoused while real incomes are soaring. In some cases, the Chinese government is coordinating the construction of several years' worth of demand for new homes all at once, justifiably confident that new units will ultimately be occupied. In other cases, Chinese workers are buying up new units as investment vehicles—but are using savings, rather than debt, to fund the purchases. It's not impossible, or even that unlikely, that prices in the main cities may fall, but it would be wrong to assume that China's property markets operate in the way American markets do and share the same vulnerabilities.

SocGen: "The China Domino Has Fallen!", Big-Time Inflation Coming All Around The World - China is about to export inflation to the rest of the world in a process that will resemble the fall of three dominos, one of which is already fallen, according to Societe Generale. In a massive report titled "The China Domino has Fallen!" Soc Gen analysts outline the three dominos of the Chinese inflation export scheme, and their current progress.

  • Domestic inflation: China switch to a consumer driven economy means more domestic demand. Supply remains constant, so prices rise. This is already happening.
  • China exports inflation: "This dynamic seems as inevitable as gravity itself." Chinese demand for oil and steel has pushed prices up in those markets. Now it is effecting commodities like cotton and food products. That's being passed on to developed markets like the U.S., and it will really hit home in 2012.
  • China demand shock: The country's long-term economic rebalancing results in an permanent increase in global demand. Supply is sticky, and it will take time for it to catch up, thus limiting the world's ability to cope with this rise in demand. This is starting to happen.

China Moving Toward Action on Local Government Debt? - Yves Smith - This report by Reuters, suggesting that China was about to Do Something about its local government dud loans created a lot of chatter among investors: China’s regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world’s second-biggest economy.As part of Beijing’s overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the “Big Four” will be forced to take some losses on the bad debt, said the sources, both of whom have direct knowledge of the plans.Part of the debt will also be shifted to newly created companies, while private investors would be welcomed in projects previously off-limits to them, sources said. Um, the Reuters writers need to be a tad more accurate: “shift 2-3 trillion yuan ($308-463 billion) of debt off local governments” does not amount to “reducing the risk of a wave of defaults.” It may prevent nasty knock-on effects, but only economic stimulus or borrower assistance can reduce default risks.

China's slowdown: Starts with a spark - CHINA’S economy has, at least on paper, survived forces that have overwhelmed much of the rest of the world. But the recent round of bank tightening seems, at least indirectly, to be hitting with real force. Slowly, word has spread of Jin Libin, a resident of Inner Mongolia who ran a business empire encompassing supermarkets, mining and transport, who set himself on fire one day in April and burned to death. According to the Global Times, a government-run newspaper, he left private debts of $1.3 billion yuan ($191m) of private loans and another 150m yuan of loans from banks. Still to be reflected is the impact of his collapse on his lenders, which, the Global Times says, included local banks, pawnshops and guaranty companies that had lent him money. No doubt there were also substantial loans from an impersonal network, a form of credit that is commonly used in China, though not legal. The consequences will not be trivial. Many other explosions driven by the same financial forces that brought down Mr Jin are sure to come.

What if they built a city for one million people and nobody came? - Really intelligent planning for the future or enormous waste? You decide: read Peter Hitchens's piece about Kangbashi. This doesn't sound good: Seen from the new expressway which leads to it, it is a majestic line of towers in the haze. But at ground level there is something severely wrong. Traffic is slowed because a huge advertising hoarding has fallen from a bridge on to the carriageway. Like so much of modern China, sparkling at a distance, grubby and cracked close to, the reality does not quite live up to the appearance. There is far worse to come. One approach road leads past what was until recently a 30,000-seater stadium, costing £100 million and rushed to completion in nine months for last year's Mongolian Games - horse-racing, archery and wrestling. When it was opened, it looked rather like Concorde about to take off. But soon after New Year's Day, a whole white wing, plus the central peak, collapsed during the night.

China's Economy Slows, But Inflation Still LoomsChina1’s economy is starting to slow, after two years of torrid growth achieved following the global downturn. Chinese manufacturers’ backlogs of orders are gradually shrinking in many industries. Purchasing managers have become less optimistic about their businesses’ prospects. And after surging past the United States in car sales over the last two years, the Chinese auto market unexpectedly stalled last month, as carmakers curtailed production plans.  Because China’s cooling economy is partly a result of Beijing’s efforts to contain inflation, some economists are not worried, saying a slight slowdown could be positive. And they say that after the government eases off the brakes, economic growth should quickly pick back up. But other experts worry that inflation is already so entrenched that the government may be forced to continue braking the economy for a considerable time.

Will China’s bad debt problem affect employment? - The major talking point this morning has been the Chinese bad debt cleanup. Following Yves’ post on China, this post is the second of three on China from Credit Writedowns this morning. Read Michael Pettis’ take and my take on that action here. This post is going to be more about where China and the global economy are headed.  My view is that we are headed for a global growth slowdown at a minimum. Beyond that, we are dependent on the policy responses. Let’s start with this:industrial wages rise very quickly when the supply of excess rural labour is exhausted. This is called the Lewis Turning Point and is where China is right now.This will have major implications for the Chinese domestic economy and the world economy. The first implication is inflation. Without the endless stream of excess rural labour, wages are going to go way up in China and this means inflation will be a problem. Over the last twenty years, the introduction into the global economy of the former Eastern Bloc and China has meant a huge surge in available labour.  China’s labour shortage will work in concert with resource constraints and likely excess money supply as an inflationary force.  -Labour shortage could spell inflation and trade deficits for China

China manufacturing growth slows further - The official China Federation of Logistics & Purchasing Managers’ Index eased to 52.0 from 52.9 in April, marking the slowest pace of growth in nine months. The result was below the median forecast of 52.2 in a Reuters survey of economists. Meanwhile, a separate PMI published by HSBC and compiled by U.K. group Markit, showed headline activity at 51.6, easing from 51.8 in April, the slowest pace of growth in 10 months. Analysts at Credit Suisse said that the Federation’s PMI showed new orders declining at a faster pace than the slowdown in the overall reading, a sign that manufacturing activity may have already peaked in the current economic cycle. “Actual economic activity may have cooled down faster than the headline suggests,” said Credit Suisse analysts.

World-Wide Factory Activity, by Country - Global manufacturing slowed across the globe in May, amid lackluster consumption in the U.S. and Europe and lingering effects of Japan’s earthquake and tsunami. In one hopeful sign, Japan’s factory sector moved back into expansionary territory. Though most countries continue to show manufacturing growth, the rate slowed in all but Switzerland and Brazil. Just Greece and Spain were in contractionary territory. The U.S. posted a sharp drop in manufacturing activity, the 10th biggest one month decline on record. “The aggression of the slow-down in the ISM manufacturing report has got to be a worry for those seeing the weakness in growth as transitory,” . See a sortable chart of manufacturing activity, by country.

April Japanese Car Exports Collapse, Down 68% - Concurrent with last night's Moody's reminder that it is about to downgrade the Japanese economy, which we have long been claiming is the marginal global economic wildcard, we get an exportindustry update from the Japan Automobile Manufacturers Association. In short: April car exports were an unprecedented disaster, with the average exporter seeing a 68% drop Y/Y, with some, such as Toyota plunging from 150,118 to only 31,025 cars in April 2011. And while this would be the ideal environment for US carmakers to grab market share, the fact that many are missing critial Made in Japan components in their supply chain means that there is a broad based supply drop. Which is why tomorrow's update of GM's recent channel stuffing practice will be observed with such interest: if the firm reports yet another increase in the cars parked with dealers, then something in the US carmaking space is seriously wrong two months after this Japanese car export free fall.

Moody's Places Japan Aa2 Rating On Downgrade Review, Notes Possibility Of JGB Funding Crisis -- Moody's Investors Service has today placed the Government of Japan's Aa2 local and foreign currency bond ratings on review for possible downgrade. The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government's ability to fashion and achieve a credible deficit reduction target. Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies.Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.

Gov't to propose hiking sales tax to 10% by FY 2015 -  The government intends to outline a doubling of the consumption tax to 10% in stages by fiscal 2015 in its envisaged social security and tax reforms, government sources said Tuesday. The reforms will be presented at a government panel meeting to be held Thursday, the sources said. A sales tax increase is expected to help cover swelling social security costs in Japan at a time when the population is aging.The move followed a report compiled earlier this month by outside experts saying that any increase in the consumption tax to restore Japan’s fiscal health should be conducted in stages. The report mentioned the recent increases of value-added tax by 3 percentage points in Germany and 2.5 percentage points in Britain, suggesting Tokyo is considering a 2- to 3-point increase twice.

Moody's: Japan fiscal scheme may not be enough to avoid downgrade -  (Reuters) - Japan may not be able to avoid a downgrade of its sovereign debt rating even if it presents a strong welfare and tax reform plan next month, because of doubts that its economy can grow quickly enough to generate higher tax revenue over the long term, Moody's Investors Service said on Tuesday.  A lack of consensus between Japan's government and main opposition political party on fiscal policy after a devastating earthquake and tsunami on March 11 also suggests that a downgrade is likely after Moody's completes a review within the next three months, said Tom Byrne, the ratings agency's senior vice president and regional credit officer.  The Japanese government will release plans to overhaul social welfare spending and taxes next month, and the grim assessment from Moody's is a further blow to the ruling Democratic Party, which is already facing a motion of no confidence from the opposition and a revolt within its own ranks.  "The strength of Japan's economic recovery in the long term has more uncertainty and is weaker than we expected. In the long run, a key to fiscal consolidation is to have economic growth strong enough to generate tax revenue."

Japan PM faces party rebellion; no-confidence vote looms (Reuters) - A former Japanese prime minister joined the swelling ranks of ruling party rebels trying to oust leader Naoto Kan, raising the risk that a no-confidence vote will pass in parliament on Thursday, forcing him to quit. Japan's fifth premier in as many years, Kan has come under fire for his handling of the nuclear crisis triggered by the March 11 earthquake, the world's worst in quarter of a century. The Democratic Party of Japan (DPJ) rebels lining up against Kan also resent what they see as his high-handed style and fear his unpopularity and a policy shift towards fiscal reform could scuttle their chances if the opposition forces an election. The opposition will need the votes of more than 70 DPJ lawmakers to win the no-confidence motion in the lower house of parliament on Thursday, a target many analysts said it was unlikely to achieve.

Will Asia's cool down slow down the world economy? - A few months back I voiced concerns that some economists were being overly rosy about the outlook for global growth this year. And there are more and more reasons to be gloomy. Just look at the headlines from the past couple days: First, India announced that GDP growth in the January-March quarter came in at a well-below-consensus 7.8% -- the slowest pace since late 2009 -- led by a sharp and worrying decline in investment. Secondly, South Korea's growth is softening. Industrial production growth was down in April, export growth was slower than expected in May, and the HSBC purchasing managers' index is falling, a sign that the manufacturing sector is heading for bumpier times ahead. Korea's economy, driven by exports like chips and LCD panels, is often seen as something of a bellwether for what's going on in global manufacturing overall, and Korea looks to be predicting clouds with a chance of rain. Third, China's PMIs are also trending downward, a sign that industry is slowing in the Workshop of the World as well. April industrial production growth already fell. And commercial banks dished out fewer loans than they did a year ago. That's probably good news, since banks have been far too generous with credit, but it probably means dampened growth as well.

Australian economy sees sharpest contraction since 1991 -  Australia has reported its biggest quarterly fall in gross domestic product (GDP) in 20 years. Its economy contracted by 1.2% in the first three months of the year, compared with the previous quarter, the latest government figures showed. The government said flooding and cyclones in resource rich states of Queensland and Western Australia had a significant impact on growth. Australia's economy is heavily reliant on its resources sector. Australia has not only had to deal with the twin natural disasters. Other factors have also slowed down its economy. The country's growth has been powered by a boom in its resources sector."The time has come for realignment. As growth in China and India slows down, the pace of growth in Australia will also be affected,"

Australia Must Raise Debt Ceiling, Treasury Secretary Says -- The Australian government may have difficulty operating unless lawmakers approve an increase to the country's gross debt ceiling, Treasury Secretary Martin Parkinson said. "I couldn't imagine the parliament would be so foolish not to do so," Parkinson told the Senate Economics estimates committee in Canberra today about approving the laws. "Were that to be the case, it would have serious ramifications for the operations of government and I would imagine the government in those circumstances would be forced to find other ways." The government introduced laws to parliament on May 10 to raise the gross debt ceiling to A$250 billion ($277 billion) from the current A$75 billion to deal with budget deficits. The opposition Liberal-National coalition, which is leading opinion polls ahead of an election due in 2013, has accused the government of being addicted to debt and opposes the plan.

Indians seek out Indonesian coal - India has become increasing dependent on coal to feed its growing energy demands even as the rest of the world weans itself off the fossil fuel to cut carbon emissions. This year the country will overtake Japan to become the biggest importer of Indonesian coal, according to the Indonesia coal mining association. That’s a significant event: Japan is the world’s biggest importer of coal and traditionally the leading buyer of Indonesian coal. Indonesia is set to export 60m tonnes of coal to India this year, compared with 58m tonnes to Japan. Asia’s third largest economy was the fastest growing importer of thermal coal in 2010 with imports forecast to reach 77m tonnes in 2011, according to the Australian bureau of Agriculture and Resource Economics (ABARE). “In the past, Japan has traditionally been the leader at importing Indonesian coal, but now India is surpassing it. In terms of tonnage, India is moving towards 50-60 million tonnes… very strong,”

World’s Greatest Power Thieves Keep 400 Million Indians in Dark - To run his fan, lamp and small television, Sikander strings a homemade wire hook over power cables outside his one-room New Delhi house, helping perpetrate the world’s biggest energy heist. About one-third of the 174 gigawatts of electricity generated in India annually is either stolen or dissipates in the conductors and transmission equipment that form the country’s distribution grid, Power Secretary P. Uma Shankar said in an interview. That’s more than any other nation, according to a 2010 report by Deloitte LLP analysts that also estimated India’s losses at 32 percent. In China the rate was 8 percent.  The pilfering of almost enough power to charge California for a year lowers the annual income of Indian distribution companies by $16 billion and cuts output by 1.2 percent in the $1.3 trillion economy, India’s Planning Commission says.  Losses hamper work to bring grid electricity to an estimated 400 million people living without it and contribute to what the Central Electricity Authority says is a 10 percent shortfall in meeting peak power demand.

India must tread carefully in Africa - India should be no late-comer to Africa. Yet in a modern-day scramble for influence and assets on the continent, New Delhi trails Beijing. An Indian diaspora is deeply rooted in east and southern Africa. Traders have plied the Indian Ocean for centuries. India, as one of the first colonies to win independence from Britain, gave inspiration to the ambitions of countless African liberation movements and leadership as the world’s largest democracy within the Non-Aligned Movement. Today, Indian Railways runs the networks of close to a dozen African countries as part of bilateral technical and aid support that predates China’s recent engagement. Yet it has taken Manmohan Singh, the prime minister, and his predecessors in New Delhi a long time to join the dots and come up with a state-led initiative to raise the profile of India in Africa.

Asia’s New Growth Model - – For the countries of Asia – especially its rising giants, China and India – sustainable growth is no longer part of a global challenge. Instead, it has become a national growth-strategy issue. This marks a sea change in the global structure of incentives with respect to achieving sustainability.Over the next few decades, almost all of the world’s growth in energy consumption, urbanization, automobile usage, airline travel, and carbon emissions will come from emerging economies. By mid-century, the number of people living in what will be (by then) high-income economies will rise to 4.5 billion, from one billion today. Global GDP, which currently stands at about $60 trillion, will at least triple in the next 30 years.If emerging economies try to reach advanced-country income levels by following roughly the same pattern as their predecessors, the impact on natural resources and the environment would be enormous, risky, and probably disastrous. One or several tipping points would most likely bring the process to a screeching halt. Energy security and cost, water and air quality, climate, ecosystems on land and in the oceans, food security, and much more would be threatened.

What I Learnt in Rio: Discussing Ways to Manage Capital Flows - Olivier Blanchard - Last week I travelled to Rio de Janeiro in Brazil to participate in a conference on managing capital flows. . Clearly we still have a lot to learn about the optimal approach to managing capital flows, about the right policy tools, and the right combination of tools. To start with two general, but important observations. First, while the issue of capital controls is fraught with ideological overtones, it is fundamentally a technical one, indeed a highly technical one. Put simply, governments have five tools to adjust to capital flows: monetary policy, fiscal policy, foreign exchange intervention, prudential tools, and capital controls. The challenge is to find, for each case, the right combination. This is not easy.  Second, we need to better understand the costs and benefits of capital flows. The costs depend―more than is generally understood―on the institutional framework in each country: things like the exchange rate regime, the degree of dollarization of the economy, and the credibility of the central bank. Even costs related to ‘Dutch Disease’―the bogeyman still much in the minds of policy-makers―are in fact not well established

Next steps for the Doha Round: Introducing a new eBook - The Doha Round poses a dilemma for world leaders; the talks cannot be completed this year, but there is no agreement among WTO members on either suspending or killing the Round. This column introduces the latest VoxEU eBook, which gathers the thoughts of some of the world’s most experienced trade negotiators on what comes next. Indonesia's trade minister and former WTO Ambassadors from the US, China, India, Canada and Hong Kong each provide a plan for getting past the Doha crisis.

Life without Doha - In a recent commentary, I drew on the Interim Report of the High-level Trade Experts Group, appointed by the governments of Britain, Germany, Indonesia, and Turkey, which I co-chair, to explain why concluding the World Trade Organization’s ten-year-old Doha Round was important. Some critics rushed in to declare that Doha was dead – indeed, that they, being smart, had already said so years ago. Presumably, our attempt at resurrecting it was pathetic and hopeless. But, if Doha was dead, one had to ask why the negotiators were still negotiating, and why nearly all G-20 leaders were still issuing endorsements of the talks each time they met. Others argued that Doha was dead as negotiated. “Plan B,” though what was proposed in its many variants – always some minor fraction of the negotiated package to date – should more accurately be called Plan Z. It sounded like a great idea: better something than nothing. But, in multi-faceted talks that straddle several different sectors (for example, agriculture, manufactures, and services) and diverse rules (such as anti-dumping and subsidies), countries have negotiated concessions with one another in various areas. Whatever balance of concessions has been achieved would unravel if we were to try to keep one set and let go of another.

Where’s The Beef? A Potential Global Economic Freeze Around The Corner… - There’s an avalanche of bad economic news coming out of different parts of the world. In Asia, China is cooling off due to tightening policies put in place by the Chinese government to fight rampant inflation. Over here in Europe, government officials and monetary authorities are eagerly in search for a solution for the indebted countries, with Greece only a few weeks away from a total collapse. Such an event could trigger an economic armageddom in the EU, with contagion effects in every possible corner of Europe. And as of late, the US economy is starting to wobble. The most recent GDP figures (1.8%) came in below expectations (2%), the housing market is about to ‘double dip’ and consumers are throwing in their towels.

Why Christine Lagarde should never be head of the IMF - Europe seems determined to retain its prerogative of appointing the boss of the world's most important financial watchdog. Throughout the IMF's 65-year history, all 11 bosses have been from Western Europe. In return for allowing this stitch-up, America has traditionally provided the IMF deputy, while securing the top spot at the World Bank. Amid such blatant favouritism, there have been promises to make such selection processes more "transparent" and "merit-based". But Europe is saying "not yet". IMF voting weights remain so skewed that the US and European Union together – with only 10pc of the global population – can still out-gun the rest of the world combined. There are bigger reasons, though, why the name of the next IMF chief matters. For one thing, this crucial institution needs to reflect the extent to which the world has changed since it was launched from the ashes of the Second World War.

Heading the IMF - Krugman - I suspect that an endorsement from me may be the kiss of death — but anyway, Stan Fischer really would be the best choice. The obvious disclosure: Stan was my teacher and my colleague for many years, so of course I’m not objective. The point is that we’re living in times that require creative, independent thinking. An IMF managing director who serves as the front man or woman for the usual suspects, for conventional wisdom in unconventional times, is not what we need. And that’s what I fear Christine Lagarde, by all accounts an impressive person, but not someone with strong independent judgment on economics, would be. If she is the new MD, I’ll hope for the best, but I won’t expect it. Stan, by contrast, is both a first-rate economist and someone willing to challenge conventional views; he’s someone who could look at the cautious, conventional advice of committees, see its weak points, and go for real solutions instead. I don’t agree with everything he did in his last tenure at the IMF — but he’s been an amazing head of the Bank of Israel, pursuing highly unorthodox policies when necessary, with huge success.

A manifesto for the fund’s new supremo - Sachs - There has been much discussion of the qualifications and nationality of the next head of the International Monetary Fund. This talk is insufficiently ambitious. The fund’s next head must be a genuine economic architect capable of helping to design an entirely new international monetary framework.  The defining truth of our time is that the US-led international order – the one that gave birth to the IMF – is over. The problems in Greece, Ireland and Portugal are serious, but Europe can largely manage them itself. The IMF’s new leader must be chosen to address longer-term and more complex global challenges.  The end of the cold war was widely expected to result in stronger global leadership. Instead the period has been marked by rising financial instability, an explosion of tax evasion and corruption, and a ludicrous breakdown of policymaking in the US – where politicians now spend 90 per cent of their time fundraising and campaigning and only 10 per cent of it governing.  The IMF is not responsible for this mess, but it has not been effective in fixing it either.  The fund’s main task in the coming years should be to create a monetary and financial system that causes fewer international shocks – not to clean up after each debacle.

The French Determination to Run the I.M.F. - Simon Johnson - Just a few years ago, euro-zone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized. French authorities regarded the I.M.F. as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, as a candidate for its managing director, in fall 2007. Today the French government is working overtime to make sure that a Sarkozy loyalist, the leader of his economic team — Finance Minister Christine Lagarde — becomes the next managing director. Why do France and other euro-zone countries now care so much about who runs the I.M.F.? The euro currency union has a serious problem, to be sure, with the likes of Greece, Ireland and Portugal, but it is beyond bizarre that these countries are borrowing from the I.M.F., which typically lends hard currency to countries that have balance-of-payments crises — they have been importing more than they were exporting, while the private-sector capital inflows (typically loans of some kind) that financed this current account deficit have dried up.  I vividly recall discussions with euro-zone authorities in 2007 — when I was chief economist at the I.M.F. — in which they argued that current-account imbalances within the euro zone had no meaning and were not the business of the I.M.F.

Choosing the IMF’s Next Leader - Joseph E. Stiglitz – Sooner than expected, the International Monetary Fund will have a new managing director. For more than a decade, I have criticized the Fund’s governance, symbolized by the way its leader is chosen. By gentlemen’s agreement among the G-8 the managing director is to be a European, with Americans in the number two post and at the head of the World Bank. The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries. The outcome, however, was often not good for the IMF, the World Bank, or the world. Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank. Finally, as a new order seemed to emerge in the aftermath of the US-made Great Recession, the G-20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner. The presumption was that the outcome of such a process almost surely would be a managing director from an emerging-market country. After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries.

Bill Black: Bad Cop; Crazed Cop – the IMF and the ECB - One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies. Prior to the crisis, even the IMF had begun to confess that its austerity programs made poor nations’ financial crises worse. In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB). The ECB was set up, unlike the Federal Reserve, to have only one mission and one function – securing price stability through monetary policy. The Fed has three missions and three primary functions. The missions are systemic financial stability, price stability, and full employment. The functions are conducting monetary policy, serving as the lender of last resort, and acting as a financial supervisor. The crisis revealed that both dominant forms of central banking could attain their most fervent goal – near total “independence” in determining and conducting monetary policy – and fail abjectly. The crisis revealed that the ECB’s narrow mission and function left the EU helpless to deal with a severe economic crisis. The ECB could not save Europe. Only the Fed could, and did, save Europe through currency swaps, serving as a lender of last resort (often on the basis of chimerical collateral) to major European banks, and providing liquidity backstops to myriad financial markets.

Is the IMF an New Form of Colonialism ? – Joseph Stiglitz says “Yes” - Stiglitz, in "Globalism and its Discontents", raises the question of whether the IMF is a part of a new form of colonialism. Page 40-41 he talks about this picture of an IMF head standing over President Suharto of Indonesia, while the latter signs a "Letter of Intent and Memorandum", like the Irish one. He says "The IMF is not particularly interested in hearing the thoughts of its "Client countries" on such topics as development strategy or fiscal austerity. All too often, the Fund's approach to developing countries has the feel of a colonial ruler. A picture can be worth a thousand words, and a single picture snapped in 1998, shown throughout the world, has engraved itself in the minds of millions, particularly in those former colonies. The hapless president was being forced, in effect, to turn over economic sovereignty of his country to the IMF in return for the aid his country needed. In the end, ironically, much of the money went not to help Indonesia but to bail out the "colonial powers" private sector creditors. (Officially, the "ceremony" was the signing of a letter of agreement, an agreement effectively dictated by the IMF, though it often still keeps up the pretense that the letter of intent comes from the country's government).

It’s not just Dominique Strauss-Kahn. The IMF itself should be on trial - Sometimes, the most revealing aspect of the shrieking babble of the 24/7 news agenda is the silence. Often the most important facts are hiding beneath the noise, unmentioned and undiscussed.  So the fact that Dominique Strauss-Kahn, the former head of the International Monetary Fund (IMF), is facing trial for allegedly raping a maid in a New York hotel room is – rightly – big news. But imagine a prominent figure was charged not with raping a maid, but starving her to death, along with her children, her parents, and thousands of other people. That is what the IMF has done to innocent people in the recent past. That is what it will do again, unless we transform it beyond all recognition. But that is left in the silence.

European Unemployment - We last looked at these countries last December; the graph above gives an update with data through April 2011 in most cases (from Eurostat). As you can see, Germany is absolutely thriving, with unemployment lower than it's been in a decade.  France and Italy are not great but not terrible: unemployment is not too high, and it's falling.  Spain, Ireland, Greece, and Portugal are all in dreadful shape - unemployment is very high, and either clearly still rising (Greece), or at best uncertain as to whether recovery has really set in firmly (Ireland). Here, I basically buy the storyline of American critics of the Euro - these economies shouldn't be tied together by a common monetary policy and a common exchange rate.  The needs of the German economy and the Spanish economy right now couldn't be more different.

Eurozone retail sales fell in May - Retail sales in the Eurozone fell for the first time in three months in May, according to Markit’s latest PMI (Purchasing Managers' Index) survey. Moreover, sales were only marginally higher than one year earlier, and retailers cut both staff levels and purchasing during the month. Of the three largest euro economies covered, Italy remained the main source of weakness, while France and Germany both registered slower growth.Across the Eurozone as a whole, retail sales were up only slightly on a year earlier in May. This was in contrast to the trend seen in April, when retail sales grew at the fastest annual pace in nearly three years (although this partly reflected the timing of Easter in 2011 compared to 2010). In line with the pattern for month-on-month sales trends, Germany and France registered slower annual growth of retail sales in May while Italy posted a steep fall. In a further sign that the retail sector was contracting, the value of goods purchased by retailers fell during the month. This was the first drop in purchasing activity for seven months.

European Retail Sales Contract to 7-Month Low -European retail sales contracted in May to the lowest level since October 2010, driven by a “sharp drop” in Italy, Markit Economics said. A gauge of euro-area retail sales fell to 48.8 from 52.2 in April, London-based Markit Economics said today in a statement. The index is based on a survey of more than 1,000 executives and a reading above 50 indicates month-on-month expansion. Italian retail sales declined at the fastest pace in 11 months in May, while monthly increases in Germany and France, the euro area’s largest economies, were the weakest in seven and three months, respectively, Markit said.

Amazing Satellite Images Of Spanish Ghost Towns — Abandoned Since The Housing Crash

Police fire rubber bullets at protesters in Barcelona - Spanish police fired rubber bullets and swung truncheons to disperse anti-crisis protesters in a Barcelona square Friday as cleaning crews cleared their tent camp. Catalan police in anti-riot gear moved in after about 50 protesters sat down on the street to block a convoy of cleaning trucks leaving the Plaza de Cataluna square with remnants of the encampment. Police, some with plastic shields, were shown on television dragging protesters along the street and swiping with truncheons at activists, who had been chanting: "They shall not pass." Demonstrators chanted: "The people, united, will never be defeated!" and "No to violence!"

Police Clash With Protesters in Barcelona - El País newspaper reported that 121 people were lightly injured, including 37 police officers, “as the result of a police charge” on the protest camp. Video posted on the Web site of 20minutos, a Spanish news site, showed the officers charging at protesters.Citing a spokesperson for the authorities, who would not be named according to Catalan policy, Bloomberg News reported that about 300 people had been removed from the square. The authorities said that police had left the area by 1 p.m. El País reported that protesters had returned to the square. Just a few hours after the arrival of police officers, protesters were passing out fliers decrying their behavior, and calling for people to return to the square at 7 p.m. to protest. On Twitter, an appeal went out for protesters to “bring flowers” when they returned. In the square and elsewhere in the city, there has been a nightly banging on pots and pans at 9 p.m. to show support for the movement.

Are Fissures in Europe Worse Than Media Reports Suggest? - Yves Smith - Today, a hand-wringing comment by Peter Spiegel, the Financial Times’ bureau chief in Brussels, describes how sentiment against Eurozone integration has risen among the locals. The near-victory of the nationalist True Finns, regime change in Ireland and Portugal, and demonstrations in Spain, Greece, and Portugal suggest that the citizenry is increasingly unhappy. Spiegel describes the Netherlands as “the California of Europe” and describes in some detail how it opposed the recent €440 billion rescue fund, opposed recent efforts to integrate the western Balkans into the EU to i, and demanded reform of immigration policies.  Perhaps I am projecting US tendencies onto the EU, but I see the same signs of elite isolation ther as we have here. Per Spiegel: No mainstream social democrat now advocates centralised economic planning, just as no conservative candidate seriously questions the underpinning of the welfare state.In its place, we are seeing a new division, between globalisers and localisers. The urban elites on both the left (intellectuals, liberal internationalists) and the right (free traders, global business leaders) face a challenge to their postwar consensus from a new group of revanchists. This political force also comes from both the left (trade unionists, working-class whites) and the right (rural nationalists, far-right xenophobes). Did you notice the divide? No right thinking, educated person is against globalization; it’s only the lower classes, people in the hinterlands, and wackos. This is simply astonishing. It somehow does not occur to Spiegel (and I assume that he is merely a reflection of the chattering classes in Brussels) that the globalization/economic integration experiment has led to increased income disparity and and erosion of democracy.

Spain's 'indignados' summon spirit of 1968 - Thousands of Spanish protesters take part in an illegal demo against mass unemployment as international economist Jan Randolph tells Channel 4 News 'Spain is the biggest weakest link in the eurozone'.Spanish protesters occupied Madrid's main square in defiance of a ban on public demonstrations in the run up to the country's local elections. Some 25,000 mostly young people remain camped out in Puerta del Sol for a seventh day of demonstrations against unemployment and austerity measures. Spain's electoral commission had ordered the protesters - dubbed "los indignados" or "the indignant" - to leave ahead of the elections on Sunday. Protesters have gathered in Barcelona, Valencia, Sevilla, Bilbao and other cities. A law prohibiting political events on the eve of elections came into effect at midnight on Friday and has been upheld by the country's supreme and constitutional courts. But the massive crowd signalled their defiance as clocks struck 12, by raising their hands and standing in a silent protest.

The Indignant Movement In Europe: Not socialist, nor right... the hottest new ideology in Europe is indignant. That's the description of the latest gigantic protests in Greece, where up to 100K protesters turned out to rail against austerity, and politicians perceived as not serving the interests of the people. In Spain they're called Indignados, same thing. They're bubbling up in Italy, too, though there they're called grillini, named after Italian actor and activist Beppe Grillo. Again though, it's not about an ideology of left or right. It's indignance. And so on top of incredibly thorny financial issues, there's a groundswell of a-political anger bubbling up left and right towards political leaders. If you want to know why 'kicking the can' has come to its end, this is it. Now just imagine how angry people are going to get, when sovereignty begins to disappear.

Portugal too joins the square-occupation movement (and France as well?) - I was not aware at all but the Portuguese people joined the protest movement initiated (in Europe) in Spain on May 15. They did so more than a week ago, as reported by[pt], taking the Praça do Rossio (Dew Square, formally Praça de D. Pedro IV) at the center of Lisbon. Follows video of the camp (interviews in Portuguese): And Lisbon is just one of several Portuguese cities in this movement.   At this moment there are at least four states in the Euro-Mediterranean region with people taking some of their central squares: Egypt, Greece, Spain and Portugal. Who's next? For my latest review on other occupations and revolutionary processes, see here.

Italians are angry with their politicians; it would be foolish to ignore them - Like Spain's indignados, Italy's grassroots political protesters, such as the grillini, are threatening the established political order. "We are the most prepared and the least valued generation" said a placard at a demonstration of young indignados ("angry ones") in Madrid last week. In fact, the latest data provided by Istat suggests that young Italians might be even worse off than the Spaniards: 15 million people "are experiencing the risk of poverty and social exclusion", 23.1% more than the European average. More than 2 million young Italians (over 22% of those aged between 15 and 29,) in 2010 are "Neets" (not in employment, education or training), still living at home with the savings of their parents or grandparents, without anything to do and no hope. Eight hundred thousand women are discriminated against, out of a job as soon as they have a baby, making it impossible for Italian women to reconcile work and motherhood, an anachronism that erases decades of feminist achievements. The whole thing looks like a radiograph of Silvio Berlusconi's Italy: a country that is fast becoming older, more degraded and impoverished, a country with a government that chooses to punish women and the young, the first in line to experience unemployment during the economic crisis.

Forecast: Spain's protests to 'go global' --- Growing unrest in Spain will spread throughout Europe this summer and "go global" by winter, a U.S. trends forecaster said in an interview posted Friday. "Young people have wised up. They know the score," Trends Research Institute Director Gerald Celente told King World News. "Those are the people that are ahead of all of these revolutions." Inspired by the revolutionary wave of demonstrations and protests taking place in the Middle East and North Africa, tens of thousands of young Spaniards, expressing distress over 45 percent youth unemployment and severe government-imposed austerity measures, have taken over central squares in 60 cities -- including Madrid's busy Puerta del Sol -- seeking to overhaul Spain's socioeconomic and political systems, which they allege favor special interests, especially financial institutions. Like the so-called Arab Spring, the growing Spanish movements are spread via social media networks and led in the streets by the young.

More than 30,000 Greeks in Athens take center inspired by the protests of Spain - Some 30,000 people, police said, more as protesters have gone to the streets Sunday in Athens to protest the Greek political class. The demonstration has been called through social networks, as well as in Spain, and the participants cited the movement as a reference 15M. "We've had enough. The politicians are laughing at us. If things continue like this, our future will be very hard," said one of demonstrators gathered outside the headquarters of the Greek Parliament in Syntagma Square, while his teammates chanted "Thieves, thieves!". This is the fifth day of protests in Syntagma Square and this time they have been joined by a Spanish group who wanted to express solidarity with the merger. "People were outraged, but needed motivation to express themselves. The Spanish have given us that motivation," said Argyrou Iphigenia, an insurance agent, told Reuters. "We're not asleep. We are awake. The IMF must go. There are solutions without them," he argued.

Record turnout for 'Indignant' protesters in Athens: "Greeks inspired by the Spanish “Indignant” or “Indignados” movement held their largest protest so far in Athens on Sunday, which some estimates put as high as 100,000 people, although a more accurate assesment seemed to be that those taking part exceeded 30,000. No official figure was given for the number of people packing into Syntagma Square in front of Parliament but it was clear that the protest was by far the largest since the movement began on Wednesday. Then, some 20,000 people were thought to have taken to the streets of the capital but it was clear that on Sunday, the numbers were much larger. The protest remained peaceful, as people sang, chanted slogans against the country’s politicians and austerity measures and aimed gestures at Parliament. Greece’s deputy Prime Minister Theodoros Pangalos had earlier dismissed the significance of the country’s ‘Indignant’ movement. “It is a movement without an ideology or organization, which bases itself on only one feeling, that of rage,”

100,000 Protesting In Athens Right Now - The first confirmation of protests expected to sweep across Europe tonight from Greece to Spain, France and Italy comes from Syntagma square where up to 100,000 people are protesting at this moment. Ekathimerini reports: "Greeks inspired by the Spanish “Indignant” or “Indignados” movement held their largest protest so far in Athens on Sunday, which some estimates put as high as 100,000 people, although a more accurate assesment seemed to be that those taking part exceeded 30,000. No official figure was given for the number of people packing into Syntagma Square in front of Parliament but it was clear that the protest was by far the largest since the movement began on Wednesday." For now the Greek protest is peaceful, but with the US on vacation, and the EURUSD about to be very volatile, we urge readers to follow the real time update at the following live webcast.

Greece may raise up to 300 billion euros from selloffs - Greece could raise as much as 300 billion euros ($429 billion) if it steps up its efforts to sell off state-owned assets, European Central Bank Board member Juergen Stark was quoted as saying on Saturday. The ailing euro zone state, whose debt burden stands at around 330 billion euros, currently aims to raise 50 billion euros from privatizations by 2015 to help stave off a fiscal meltdown."The Greek government has shares in listed companies, it owns real estate. Experts estimate the sales potential at up to 300 billion euros," Stark told the newspaper according to a prerelease from its Sunday edition. Athens is setting up a sovereign wealth fund to pool real estate assets and state stakes in companies such as telecom company OTE, Post Savings Bank and ports. "(Greece) needs to intensify its efforts," Stark also said. "(The privatization program) is meant to raise 50 billion euros by 2015 and one should be more ambitious here."

Greece’s Papandreou Vows to Press Austerity - Greek Prime Minister George Papandreou said he’ll press ahead with new austerity measures after failing to win backing from the main opposition parties as he races to keep bailout funds flowing and avoid default. Antonis Samaras, leader of Greece’s biggest opposition party, New Democracy, rejected the plan at a meeting with Papandreou and other opposition leaders in Athens, saying his party wouldn’t be blackmailed. Papandreou said he will go ahead with the measures even while continuing to seek support and ruled out early elections. “My determination is to continue with this program in a very determined and decisive way,” Papandreou said today at a press conference in Athens. Greece has achieved “impressive” targets and there are signs of improvement in the economy, he said, adding that the country will “soon be out of the woods” by following through with plans for fiscal adjustment, state- asset sales and development of government-owned real estate.

EU racing to draft second Greek bailout: sources (Reuters) - The European Union is urgently working on a second bailout package for Greece in a race to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday. Greece's conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance. "You want to raise taxes and raise consensus with us, who have set reducing taxes as a priority? Don't even think about it," opposition New Democracy leader Antonis Samaras said. Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for next year. Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said.

Greece Needs ‘Support’ Instead of Debt Restructuring  - Christine Lagarde, French finance minister and a candidate to head the International Monetary Fund, said Greece needs “support” and its debt shouldn’t be restructured. “It’s essential that we retain a balance,” Lagarde said today on Europe 1 radio. “Greece has made significant efforts and we have to support those efforts,” she said.

The ECB’s stealth bailout - The Eurozone crisis lingers on. This column argues that the Eurozone payments system has been operating as a hidden bailout whereby the Bundesbank has been lending money to the crisis-stricken Eurozone members via the Target system on the order of €300 billion. Urgent corrective action is needed, the author argues, as the scope for this sort of transfer is limited. If markets sense the end of the line, the Eurozone may face a crisis like the one Britain faced in 1992.

Soft options are no longer viable options - A lingering dispute between the International Monetary Fund and the European Union has come out in the open. It is about the EU’s hesitance in supporting Greece all the way through next year. The IMF is saying to the EU: unless you agree to new loans for 2012, we are not going to risk our shareholders’ funds and pay the next tranche of the old loan. That tranche is due on June 29. If the stand-off is not resolved, Greece will default in July.  My hunch is that the EU will blink before the IMF does and agree another loan package – possibly at the European summit in late June. A political declaration will probably be sufficient to unlock the fifth tranche of the credit. The IMF’s share in this tranche is only a little more than €3bn but the political effect of a failure to pay up would be catastrophic. The Netherlands has already threatened to pull out of the Greek programme; and I cannot see the German Bundestag voting for a second tranche unless the IMF has signalled support for the programme.  There is one element of good news about this stand-off. It ends the quite dangerous illusion of soft options. Until recently the EU has wasted precious time with a discussion of silly schemes such as soft restructuring, or reprofilings. These would have made no difference to Greek debt sustainability but would carry their own inherent risks. The IMF’s hardline position has at least shown the Europeans that they cannot muddle through this crisis with half-hearted schemes.

Accusations of Treason in the Greek Parliament - Leaving aside for a moment the obvious questions of criminality and treason that have arisin from the details of the Memorandum of Understanding between the Greek government and the Troika (IMF/EU/ECB), which concedes total sovereign authority of the Greek state over the fate of its own citizens to foreign banks, let us turn to recent allegations made in Parliament against the Prime Minister of Greece himself, George Papandreou. The gist of the allegations rest on the charge by Mr. Kammenos, that the Greek Prime Minister, Mr. George Papandreou and members of his team, presided over the sale of 1.3 billion dollars worth of credit default swap contracts (CDS on Greek sovereign debt) on or around December of 2009, shortly after coming to power. The 1.3 billion dollars worth of insurance protecting against a Greek default was bought during the spring and summer of the same year, by the Hellenic Postbank, a public banking arm of the Greek government. It is unclear what the intentions of the Postbank were when it purchased the credit protection. Clearly, the previous government that was in power at the time (New Democracy or N.D.) understood that Greece was headed towards a fiscal crisis, otherwise they would not have purchased the insurance.

Greece’s Debts Are Europe’s Problem - Greece seems to be coming up a lot around here today. I mentioned How to Fix Greece in this morning’s reads; John Mauldin discusses how dysfunctional Europe is here. David Kotok extensively looks into the Barron’s piece here. But not all of you have a subscription to Barron’s. so have a gander at this infographic, from that article. It tells quite a story: what the hell, click on the graphic

An unprecedented loss of sovereignty - The FT has the details this morning about the Troika’s recommendations, due to be presented this week.  The deal likely to be proposed will foresee an unprecedented outside intervention in the Greek economy, in exchange for a €60bn finance package, of which €30-35bn would come in the form of a new loan. But the article said that each aspect of the deal faces formidable opposition from one party in the talks, and could still unravel. One big setback to the process has been the failure on Friday by the largest Greek political parties to achieve a consensus on economic reforms. While PM George Papandreou still expressed the hope that an agreement could eventually be reached, the Greek opposition leader Antonis Samaras called for a renegotiation of the EU/IMF agreement. “We don’t agree with a policy that kills the economy and destroys society,” he said.  Kathimerini reports that there will be a special eurogroup meeting on Monday, June 6, to discuss the Greek package. In a separate article the Greek newspaper also reported a firm denial from the International Monetary Fund of a Spiegel story that the Troika’s report will show that Greece has substantially failed to achieve the goal.

Greece Set for Severe Bail-Out Conditions - European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatization of state assets, in exchange for new bail-out loans for Athens.People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.Officials hope that as much as half of the €60 billion-€70 billion ($86 billion-$100 billion) in new financing needed by Athens until the end of 2013 could be accounted for without new loans. Under a plan advocated by some, much of that would be covered by the sale of state assets and the change in repayment terms for private debtholders.Eurozone countries and the International Monetary Fund would then need to lend an additional €30 billion-€35 billion on top of the €110 billion already promised as part of the bail-out program agreed last year. Officials warned, however, that almost every element of the new package faced significant opposition from at least one of the governments and institutions involved in the current negotiations and a deal could still unravel.

Will Greeks Defy Rape and Pillage By Barbarians Bankers? An E-Mail from Athens - Yves Smith - Wow, this is what debt slavery looks like on a national level.  The Financial Times reports that a new austerity package is about to be foisted on Greece. It amounts to asset stripping and a serious curtailment of national sovereignity: European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens….pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months. Even if they get their way, the rescue package is certain to fail to forestall an eventual default or restructuring because none of these rescues is a rescue. When the banks got in financial trouble, they got to borrow at discount rates. If Greece were to borrow from the ECB, say at 2% over the EBC’s policy rate, instead of the punitive rates on offer, it would look a hell of a lot more viable near term. I’m not saying that this is the best or only remedy, but the ECB is also blocking a restructuring, specifically, anything that would be deemed to be a credit event.

Greece to draw new EU-IMF loan for reforms: report — Greece will receive a new loan from Europe and the International Monetary Fund in return for additional spending cuts and a faster rate of privatisations, a newspaper report said Tuesday.Top-selling Ta Nea daily said Athens had concluded a deal with its 'troika' of creditors -- the EU, IMF and the European Central Bank -- that includes "a new loan", according to sources in Brussels. Eleftherotypia daily said the new loan could be up to 60 billion euros ($86 billion) to enable Greece to meet its payments schedule from 2012 onwards. In return, the government will make additional cuts of up to 10 percent to higher-paid civil servants and impose a stricter hiring procedure, only replacing one in ten job openings, said Ta Nea, which is politically close to the ruling Socialist party. A new entity called the Public Property Fund, independent from the state, will also be created to oversee the privatisation drive, both dailies said.

Greek Aid Package to Be Decided by June’s End, Juncker Says - European Union leaders will decide on additional aid for Greece by the end of June and have ruled out a “total restructuring” of the nation’s debt, said Jean-Claude Juncker, head of the group of euro-area finance ministers.  Inspectors from the EU, the International Monetary Fund and the European Central Bank are set to wrap up a review of Greece’s progress in meeting the terms of last year’s 110 billion-euro ($158 billion) bailout in coming days. The EU will then formulate its plan for further aid to Greece, which remains shut out of financial markets a year after the rescue package.  “We are waiting for their final judgment,” Juncker, who is also Luxembourg’s prime minister, said yesterday in Paris after meeting with French President Nicolas Sarkozy. “Their position will partly determine our position, so it’s too early. We will try to solve the Greek problem by the end of June.” Under the terms of the rescue package, Greece was due to return to financial markets and sell about 30 billion euros of bonds next year. With its 10-year bonds yielding 16.4 percent, more than twice that of the time of the bailout, the EU has indicated Greece will need more aid to plug its financing gap. The IMF has threatened to withhold its share of the payments until the EU explains how Greece will be funded.

Europe locked in 'chaotic' debate over Greece - European officials are locked in a heated debate over whether—and how—to give more aid to debt-ridden Greece just as a much-delayed examination of the country's finances draws to a close.  Experts from the European Union, the European Central Bank and the International Monetary Fund will likely conclude their review of Greece's accounts and austerity program over the next 24 to 48 hours, a European official said Tuesday.  Their report is set to show huge funding gaps in Greece's budget over the next two years, despite euro110 billion ($157 billion) in rescue loans granted only a year ago. It will also spell out new austerity measures and detail plans to privatize public real estate and corporate assets as the Greek government struggles to hit deficit targets set out in the bailout program.  In parallel to the review carried out in Athens, European governments and financial institutions are wrangling over different proposals that would make potential new loans to the struggling country more secure.  So far there is no consensus among eurozone countries on whether to give Greece new aid and how, the official said, despite increased pressure in recent days from the European Commission, the ECB and other financial leaders.

Fears grow of Greece loan default - European and IMF officials are expected to deliver their verdict this week on Greece's faltering drive to bring its budget deficit under control, as waves of political unrest and economic uncertainty continue to sweep struggling European nations. Greece's hopes of averting default dimmed over the weekend amid fears the country, whose debt burden stands at around 330 billion euros ($440.4 billion), may have missed fiscal targets set by its creditors. While the IMF has dismissed reports an international inspection team had found Greece had missed its targets, the current mission to Athens has stayed far longer than on previous occasions and remains locked in talks with the government to get economic reforms on track.Ordinary Greeks, meanwhile, took to the streets to vent their anger, with tens of thousands packing a central Athens square in a non-partisan protest to denounce the nation's ruling class. Protesters also directed their anger at the IMF and its demands for more austerity measures.

ECB Official: "Orderly" Greek restructuing is a "fairy tale" - Another update on Europe - the IMF, the European Central Bank and the European Commission are trying to decide on the next step for Greece: Lorenzo Bini Smaghi, an ECB executive board member told the Financial Times in an interview that a Greek "soft" restructuring is a "fairy tale". Here is quote: LBS: There is no such thing as an “orderly” debt restructuring in the current circumstances. It would be a mess. And I haven’t mentioned contagion – which would come on top. If you look at financial markets, every time there is mention of word like restructuring or “soft restructuring,” they go crazy ... “soft restructurings” “re-profilings” do not exist. They are catchwords that politicians have tried to use, but without any content.

German FDP expert calls for Greek euro zone exit-report -  (Reuters) - A leading finance expert of the junior coalition partner in Germany's parliament called on Tuesday for debt-laden Greece to exit the euro zone. "As long as Greece hasn't privatised a single cent worth of assets, increasing the aid would be absolutely the wrong signal," Free Democrat parliamentarian Frank Schaeffler told business daily Handelsblatt. "At the same time governments must help with an orderly euro zone exit," added Schaeffler, one of the loudest dissenting voices against Greek aid in the FDP. Athens should restructure its debt and private creditors should participate in the restructuring, he said.

Keeley Says Greece Debt Needs `Massive Restructuring' (Video) - Terrence Keeley, senior managing principal at Sovereign Trends LLC and a Bloomberg Television contributing editor, discusses the outlook for additional aid to Greece from the European Union.

The Euro Living Dangerously -  Krugman - A very important column from Martin Wolf. One way to summarize his argument is to say that slow-motion bank runs are already in progress in the European periphery, and that these countries’ banking systems are being sustained only by a process in which, say, Ireland’s central bank borrows from the Bundesbank and then lends the funds on to Irish private banks to replace the fleeing deposits. Here are claims among central banks as of the end of last year: You can see why we’re now at the panic stage. The Bundesbank is already very upset about its large claims on troubled debtors, which are backed by sovereign debt as collateral. Yet if financing stops in the wake of a debt restructuring, the result will be to collapse the debtor nations’ banking systems, a process Martin believes would lead to their ejection from the euro.  So the ECB keeps saying that restructuring is unthinkable. Yet austerity programs are not working; the prospect of a return to normal financing is receding rather than approaching. If you ask me, the water level has now dropped so far that the fuel rods are exposed. We really are in meltdown territory.

Paul Krugman: The Eurozone Is Now In "Meltdown Territory - The eurozone is now in "meltdown territory," with the likelihood of fringe states returning to the market on decline, according to Paul Krugman. Responding to a new column from Martin Wolf in the Financial Times, Krugman says that the region is now at the "panic stage" over its banks.  Martin Wolf's column describes how the eurozone has gotten itself into this mess: If this is a true currency union, a deposit in any eurozone bank must be the equivalent of a deposit in any other bank. But what happens if the banks in a given country are on the verge of collapse? The answer is that this presumption of equal value no longer holds. A euro in a Greek bank is today no longer the same as a euro in a German bank. In this situation, there is not only the risk of a run on a bank but also the risk of a run on a national banking system. This is, of course, what the federal government has prevented in the US. If that wasn't stark enough, Wolf's vision for what will happen to the eurozone in the event of a restructuring event should be.Debt restructuring looks inevitable. Yet it is also easy to see why it would be a nightmare, particularly if, as Mr Bini Smaghi insists, the ECB would refuse to lend against the debt of defaulting states. In the absence of ECB support, banks would collapse. Governments would surely have to freeze bank accounts and redenominate debt in a new currency. A run from the public and private debts of every other fragile country would ensue.

Should the euro zone be dissolved? - I was reading the ever-fascinating Martin Wolf in The Financial Times the other day as he bluntly laid out the stark choices facing Europe's great experiment with the euro: The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. Which route will Europe take? So far, its leaders seem to be heading towards some sort of greater integration – albeit grudgingly, and with many reservations. In recent months, Europe has increasingly accepted reforms that aim to strengthen the monetary union – a permanent bailout fund, stricter rules on fiscal management, more euro zone oversight of national economic policy and guidelines to improve the zone's competitiveness. On Thursday, European Central Bank President Jean-Claude Trichet suggested taking such steps further, even recommending the formation of a finance ministry for the euro zone. Dissolution has simply not been on the table. But should it be? There are reasons to argue that Europe would be better off today if it just scrapped the euro altogether.

News flash from Germany: IMF won’t pay for Greece -- Frankfurter Allgemeine Zeitung reports that it is almost sure now that the IMF will not be able to continue to pay for Greece after June 29 and that three options are being discussed, one of which – the bankruptcy of Greece – is wanted by no one. The second option is to use the Commission’s EFSM to take over the billions the IMF would have paid for otherwise. The advantage would be, from Angela Merkels point of view, that it involves no votes of national parliaments. A third option would be another adjustment program with yet more conditionality attached to it. The article says the latter is option will be discussed at a technical level in Brussels today, but no immediate decisions are expected. It is far from certain that Merkel will get a majority for that in Bundestag for such a package. And there remains the disagreement whether any such package should be accompanied by a private sector involvement.  Another big story yesterday was the Wall Street Journal’s report from Berlin, according to which Germany was considering dropping its push for an early rescheduling of Greek debt. The article quoted unnamed officials in Berlin who expressed hope that a deal could be reached with Athens to render this step unnecessary. Financial Times Deutschland, by contrast, reports that some central banks no longer exclude a voluntary restructuring – provided it does not trigger a negative chain reaction on the markets.

IMF: Taking Steps Against Possible Hacking Threat - The International Monetary Fund has taken steps to combat a possible cyber attack from hacking group Anonymous Operations, a spokesman said Wednesday. “We are aware of the threat, and have taken appropriate action,” IMF spokesman William Murray said in an email. Website Zero Hedge on Wednesday morning had a post linking to an Anonymous Operations Twitter account that suggested hackers would target the IMF’s website in relation to the fund’s work with Greece. The IMF is one of several key negotiators trying to work with the struggling European nation as it seeks to restructure a bailout package and its debt obligations. In statements previously attributed to the group, the hacking collective has blamed the IMF and Greek government for the conditions of fund aid to the country. In a May 25 statement cited by Zero Hedge and attributed to Anonymous, the group said “the people of Greece have been left with no other option than to take to the streets in a peaceful revolution against the economic tyrants that are the IMF.”

Panic Capital Flight in Greece, Depositors Yank 1.5 Billion Euros in 2 Days; EU Wants Severe Bail-Out Conditions Including International Tax Collection - Courtesy of Google translate please consider They lifted 1.5 billion Thursday and Friday from banks  Only a few steps separating from Friday to yesterday's mass panic! From early morning to counter the banks there is serious pressure for withdrawals of deposits, especially small amounts. The pressure on banks began last Wednesday, culminating in yesterday's day. It is significant that Thursday and Friday, banking sources estimate that rose around 1.5 billion euros in total! According to the same month in May estimated the outflow estimated at least 4 billion from 2 billion in April. The majority of depositors rushed to withdraw for pensioners and small savers and amounts ranging from 2-3000 lifted until 10 -15 000 euros. Motivation in most cases it was the fear that led the country into bankruptcy, deposits frozen even temporarily left without cash, or even lose their savings. Politicians do not seem to fully understand the risks posed by a widespread panic, not only for the stability of the banking system but for the economy and the country.

Greece Needs Brady Bond-Style Aid, Merkel Adviser Bofinger Says - Greece’s debt problems can be solved by a Brady bond-style rescue operation in which Greek government bonds are swapped against debt issued jointly by euro-region members, said German government adviser Peter Bofinger. Joint euro-region bonds would be helpful for Greece because they would carry a very low interest rate and they would be good for banks because lenders would receive AAA-rated bonds in exchange for lower-rated paper, he said in a Bloomberg Television interview in Munich today.  “Sooner or later we have to come to the euro bonds,” Bofinger said. “There is definitely no alternative to the instrument and it would really improve the situation considerably.”  Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-region finance ministers, said on May 12 that joint euro-area bond issuance is a “reasonable” proposition whose time will come. German Finance Minister Wolfgang Schaeuble rejected the idea as recently as May 18.

Moody’s downgrades Greece to junk – default is now a couple of ticks away -Just as a little hope emerged from a meeting of European finance ministers, Moody’s abruptly ended the party with a downgrade of Greece from B1 by three notches to junk-level  CAA1 – which is below the threshold  required by the ECB for collateral to be acceptable. Moody’s said it cut the rating because Greece is finding it hard to implement the agreed policies, the country’s faltering growth prospects, a track record of underperformance, and the increased likelihood of a bail-in by investors. “Together, these risks imply at least an even chance of default over the rating horizon.” Moody’s added that the rating assumed that a new package for Greece would be agreed.  A Caa1 rating is just a couple of notches away from a default rating. We are deep in junk territory here.  Minutes after Moody’s went public with the downgrade, the Greek finance ministry issued a statement, showing its irritation over the timetable. “Moody’s decision to downgrade Greece comes as representatives of the EU, ECB and IMF are in Greece to evaluate the country’s economic program,” The ministry said Moody’s decision “had been influenced by intense speculation in the media” and that it ignored the Greek government’s commitments to meet its fiscal target and to accelerate its privatization program.”

Moody's Downgrade Puts Greece in Debt-Rating Hall of Shame Alongside Cuba - Greece entered a league of debt- market pariahs when Moody’s Investors Service downgraded its credit rating to Caa1, leaving only Ecuador as a worse sovereign risk. Ecuador, now Caa2, defaulted in 1999 and again in 2008. Caa1, four steps above Moody’s lowest rating and 16 from the highest, marked a brief stop for Argentina in 2001 on its way to default and devaluation. In 1998, Pakistan was cut to Caa1 after its nuclear-bomb tests isolated it internationally. Cuba, battered by a U.S. embargo and mounting debt to foreign exporters, has had the same rating since 1999. Greece risks becoming the euro area’s first sovereign default, causing a chain reaction that could rock the financial system of the world’s second-biggest economic bloc. Last year’s 110 billion-euro ($158 billion) rescue of Greece failed to stem the contagion. With the country facing a funding shortfall of 30 billion euros next year, policy makers are trying to put together the latest financial lifeline by the end of the month.

The Stupidity of Hope: Greece Is Still Going to Default - Keeping in mind that the words “hope” and “Greece” should almost never be used in the same sentence, here would be the one exception: Let’s “hope” markets aren’t rallying on “hope” for “Greece.”  Hope, apparently, does spring eternal, however, and it seems as though despite all the evidence to the contrary, there are still people out there with money to spend who believe that Greece can be rescued yet from its seemingly intractable fiscal position.  How else to explain Monday’s surge in the euro and drop in the US dollar, which had been rallying on well-placed hopes that the periphery of Europe was sliding further into the debt abyss and ready to implode? Irrationality, we now can conclude, comes in many forms. The latest form is in some weakly substantiated murmurs out of Germany that the core of the core of euro zone nations might be softening its stance towards a Greek bailout and is ready to ease its demands that the nation speed up its ultimately unavoidable debt restructuring.

Greece, Please Do The Right Thing: Default Now - The big banks' loans to Greece were predatory by design. There is only one ethically defensible choice for Greece: default now. Before you flame me with emails about the "responsibilities of debtors," please read the entire entry.  Let's look at credit (offered by lenders) and debt (sold to borrowers) from the point of view of predation.  Would you borrow $1 billion if it was offered to you at zero interest, with no collateral required? I would, without hesitation, and I would buy various assets which offered a reasonable return above zero with the "free money," because the lender has no recourse if my investments fail to return the capital.  What does it take for a transaction to become predatory?

Greek default could bankrupt ECB - Further debt problems in Europe could lead to the European Central Bank needing to be recapitalised after the "unqualified failure" of its bond purchase programme.  According to F&C Asset Management, the ECB has squandered so much money supporting the secondary bond markets in the financial crisis that it cannot afford to make further risky loans to its crisis-ridden countries.  Director of global strategy Ted Scott launches a defence of the ECB's refusal to allow Greek bonds to be traded as collateral if the country were to default or to have a "soft reprofiling", as members of European Commission have proposed.  The ECB's stance would cut off funding to several Greek banks, likely precipitating several bankruptcies and a major European banking crisis.

Highlights of Trichet Speech Calling for More Euro Zone Fiscal Coordination - Here are highlights from European Central Bank President Jean-Claude Trichet’s speech Thursday, in which he proposed that euro-zone authorities, in some situations, should be empowered to take direct control over governments’ fiscal policies to contain crises and guard against contagion.

Greece Report: Agreement on New Bailout, Some Investor Participation, No "intrusive" Supervision  There are no specifics yet ... From Reuters: EU agrees in principle on new Greek plan-source Senior euro zone officials have agreed in principle on a new three-year adjustment programme for Greece to run until mid-2014 ... involve some participation of private sector investors ... involve detailed commitments by Greece on the governance of a new national wealth agency and the timing of specific privatisations, but it would stop short of intrusive international supervision ... There had been some discussion of "adult supervision" or what some were calling the loss of Greek sovereignty - apparently that isn't included. It isn't clear what the "participation of private sector investors" means, but the article suggests it will not trigger a credit event.

The Beatings Will Continue Until Morale Improves - Greece readies itself for a new round at the whipping post: Greece to present new austerity plan- Greece intends to present a fresh austerity plan on Friday, a government official said, after Moody's cut its credit rating deep into junk territory and said there was an even chance of eventual default. The budget plan will include a faster pace of privatisation and 6.4 billion euros ($9.2 billion) of new savings, including some tax rises, to eat into Greece's debt mountain, the senior official told Reuters.As Joseph Cotterill points out at Alphaville, the problem is that Greece continues to miss targets set last year for raising additional revenue. And so the vicious cycle of contractionary fiscal policies leading to lower income leading to lower tax revenues leading to additional contractionary measures continues...

A deal at last - The Economic and Financial Committee at their meeting in Vienna, agreed on a comprehensive package for Greece, which include a medium-term fiscal plan, privatization, new loans, and moderate private sector involvement, the details of which have yet to be worked out. Many details of this agreement have yet to be worked out (in line with a tendency in the EU to announce agreements well before they are actually agreed.)  Over the next three years the EU and IMF is expected to provide €30bn-€40bn, privatizations are expected to bring in €25bn and about €20bn is to come from the private sector. Some private investors are expected to accept swapping their Greek bond with new 10- or 15-year notes. The ‘reprofiling’ is to be handled in such a manner as to avoid triggering credit default swaps, sources told Kathimerini.  George Papandreou is now to present Greece’s midterm fiscal plan and its privatization program to Jean-Claude Juncker in Luxembourg today hoping to secure not only the June installment, but  also extra funding to cover an €85bn gap in public finances over the next three years.   The budget plan includes faster privatisation and €6.4bn of new savings with new tax increases for employees, self employed and pensioneers. The tax-free threshold will be reduced from 12,000 to 10,000 or 8,000. For self-employed professionals, it will go down to 6,000. Also, restaurants and tavernas will have to charge 23% VAT rather than 13%. This measure will be brought in after the summer. Further taxes on natural gas, heating oil, tobacco and soft drinks are also included.

Greece Is 'Kicking Can Down the Road' on Debt, Reinhart Says -- Officials in Greece are "kicking the can down the road" on repairing the country's ailing economy, said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington. "Denial is an element in all of this -- serious denial," Reinhart, 55, said. The country's local and foreign currency bond ratings were cut by Moody's Investors Service yesterday, which cited a growing risk that the country will default on its debt. Moody's also said the outlook on Greek debt is negative, meaning that the rating could be cut again. "Until not very long ago, we were hearing commentary to the effect that this was a liquidity crisis not a solvency crisis," Reinhart said. "But denial is just not on the other side of the Atlantic. We have quite a bit of that in the U.S., too."

IMF should force Greek restructuring: ex-director- The International Monetary Fund should push harder for Greece to restructure its debt and negotiate haircuts with bondholders rather than giving Athens more loans, according to the man who helped negotiate the IMF bailouts for Argentina and Uruguay. Claudio Loser, a former director of the Western Hemisphere for the IMF, told Reuters Insider that Greece could also benefit from leaving the euro to get its house in order but added such a decision would create a serious problem for the single currency. "Greece will have to take one or two of the two actions -- restructuring with a haircut and maybe abandoning the euro, although I would say abandoning the euro will be more complicated," Loser said. A source close to negotiations told Reuters on Thursday that euro zone officials meeting in Vienna had agreed in principle to a new three-year program for Greece to run until mid-2014, including some role for its private sector creditors.

Europe's Stress Tests to Be Delayed —The results of Europe's latest round of bank "stress tests" will be delayed until July as European regulators worry that banks and their national supervisors submitted overly optimistic data, according to people familiar with the matter.The European Banking Authority previously had planned to publish the test results later this month. That is getting pushed back as the EBA requires banks to resubmit data about how they would fare in an economic downturn, these people said. The tests, under way since March, are designed to gauge the financial health of 91 banks from 21 countries across the European Union

Portugal, Ireland Bond Risk Rises to Record, Default Swaps Show -- The cost of insuring Portuguese and Irish debt surged to records, according to traders of credit- default swaps. The nations led the Markit iTraxx SovX Western Europe Index of swaps on 15 governments 3.5 basis points higher to 200 as of 9:30 a.m. in London, according to CMA. Contracts on Portugal rose 11 basis points to 700, while Ireland climbed 10 basis points to 684. Credit-default swaps on Greece rose 10 basis points to 1,467, compared with a record 1,473 reached on May 24, CMA prices show. Spain added 6 basis points to 258, Italy was 3 basis points higher at 164 and Belgium rose 1 basis point to 148.5. An increase in the swaps signals a deterioration in investor perceptions of credit quality, and a basis point on a contract protecting 10 million euros ($14.4 million) of debt for five years is equivalent to 1,000 euros a year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Bank of Ireland to negotiate restructuring with junior bondholders - Bank of Ireland says that it plans to force burden sharing on €2.6bn of subordinated bonds in order to meet the €5.2bn in capital requirements laid down by the Central Bank following the results of the stress tests of the Irish banking system announced in March. It is expected that the burden sharing could contribute about €2bn to the capital raising target for Bank of Ireland. “The Bank intends shortly to launch a liability management exercise in respect of approximately €2.6 billion of its subordinated liabilities.  The terms of the liability management exercise will reflect the Minister for Finance’s objective of ensuring subordinated bondholders contribute a significant element of the Bank’s Core Tier 1 capital requirement of €4.2 billion,” said Bank of Ireland in a statement. “The Bank’s current expectation is that the cash prices under the exercise will be 10 per cent of nominal for Tier 1 securities and 20 per cent of nominal for Tier 2 securities, with no payment in respect of accrued interest.”The bank said that bondholders who do not take up the offer will be subjected to a call option with the amount paid “materially less” than what is currently on the table.

Bank of Ireland to Impose Up to 90% Losses on Bondholders - Bank of Ireland Plc will seek to impose losses of as much as 90 percent on 2.6 billion euros ($3.7 billion) of subordinated debt as it offers bondholders an exchange for cash or equity.  The lender, ordered to raise 5.2 billion euros of capital, said in a statement it expects to offer to pay cash of 10 percent of nominal value for Tier 1 securities and 20 percent for Tier 2 debt, with no settlement of accrued interest. The Dublin-based bank said it may also offer an equity-swap alternative at a premium to the cash offer with a payment of accrued interest.  “We were expecting the terms of the offer to be bad, but this is worse than expected,” said Stephen Lyons, a fixed- income analyst with Dublin-based securities firm Davy. “Another approach would have to been to engage with subordinated bondholders and not leave such a bad taste in the mouths, particularly for investors that might take the equity alternative, who the bank may wish to participate in a subsequent share sale.”  Bank of Ireland’s 747 million euros of lower Tier 2 senior subordinated 10 percent bonds due 2020 were quoted at 30 cents on the euro, down from 52.5 cents, according to Jefferies International Ltd.

Bank of Ireland rescue hits share and bond holders (Reuters) - Dublin moved closer to inflicting big losses on bondholders in Ireland's banks after one angry investor dropped a court challenge and Bank of Ireland (BKIR.I) unveiled plans that will also hurt shareholders. The Irish government has told bondholders they must help get a crippled banking sector back on its feet and Bank of Ireland on Friday showed how holders of both its debt and equity will help raise 4.2 billion euros ($6.1 billion) in fresh capital. In a move that sent its shares tumbling by a fifth, the bank said it would issue up to 2.2 billion euros (3.7 billion pounds) in new stock as part of an offer to buy back debt at a steep discount using both cash and equity.The bank, in which the Irish government holds a 36 percent stake, is so far the country's only lender to avoid falling into majority state control after a nationalisation of most of the sector to stop it collapsing under the weight of loan losses.

A political landslide in Italy – and a lame-duck government for two more years - It is not the fact that Silvio Berlusconi lost the regional elections in Italy, it is the sheer unimaginable extent. With most of the counting for the second round now done, it has become clear that he lost the conservative strongholds – Milan being the most important, where mayor Letizia Moratti lost against Giuliano Pisapia, who used to be an independent member of the Communist Reformation Party from 1996 until 2006. The latest vote tally in Milan, according to Corriere della Sera, was 44.9% againt 55.1%. Berlusconi’s centre right alliance PdL also lost Naples, and several other PdL strongholds, such as Triest, Cagliari, and Novara. Berlusconi acknowledged the defeat, but vowed to fight on to the end of the parliament terms – 2012. Reuters quotes a pollster who said that this was the first political defeat for the present government, and it would make early elections more likely. There would be no chance that this current government would undertake any economic reforms now. The situation would also raise doubts about the government’s ability to reduce the budget deficit following the most recent downgrade threat by S&P.  This would imply that Italy would effectively be run by a lame duck government in the middle of economic crisis that may yet hit the country. The uncertainty about Italy’s future is not (yet) expressed in the ten-year spreads, which remain comfortably below 2 per cent, but it is the experience of the dynamics of this crisis that investors take a while to see the significance of an important political shift only with some delay.

Spaniards' Anger at Bankers Spills Over as Protests Spread to City Centers - “There’s a growing feeling that the banks have played a big part in the problems now facing Spain,” said del Rio, 37, who gathered with a throng of people in the town’s main square last week as protests that began May 15 swelled across the country. “There’s real anger with banks that got out of control.”  A five-fold surge in bank lending in the decade up to 2007 has left its scars on customers as Spain’s property-fueled boom turned to bust, pushing unemployment above 21 percent and driving companies and consumers into default.  At least 28,000 people gathered in Madrid’s Puerta del Sol central square in the run-up to Spanish regional elections on May 22, according to organizers including the 15-M Movement, which says it’s protesting against “the way bankers and politicians have mismanaged the socio-economical crisis.” An assembly of demonstrators agreed on May 29 to continue the protest camp in Puerta del Sol this week after the movement also formed committees to take their message into city neighborhoods.

No Money to Pay 70,000 Employees In Castilla-La Mancha Region of Spain: Situation a "Total Failure" - My friend Bran who lives in Spain passed along this bit of news regarding Spain.After the power change in the Castilla-la Mancha community, the new People's Party governorship effectively declares it bankrupt, with 2 billion EU unpaid service bills and 7 billion EU in debt. 70,000 state workers are only guaranteed one month's wage now.  Courtesy of Google Translate: The PP says there is no money to pay payrolls in Castilla-La Mancha The PP will have to find ways to pay from next month's payroll of 70,000 employees of the Junta de Comunidades de Castilla-La Mancha, because the situation is "total failure", with a debt to suppliers of 2,000 million euros , has secured the regional secretary of the PP, Vicente Tirado. The PP leader said that this month other officials charged by the payroll but no money for months, but has sent a message of peace because the PP, he added, will find the mechanisms to pay thereafter, and cited, for example, privatization of public television.

Europe at the Abyss - It has come to this. A year after rescuing Greece from default, Europe is staring into the abyss. The bailout has proved insufficient. Greece needs more money, and it can't borrow from private markets where it faces interest rates as high as 25 percent. There is no easy escape. What's called a "debt crisis" is increasingly a political and social crisis. Already, unemployment is 14.1 percent in Greece, 14.7 percent in Ireland, 11.1 percent in Portugal and 20.7 percent in Spain. Some causes of Europe's plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there's also another less recognized culprit: the euro, the single currency now used by 17 countries.

The EU’s answer to the financial crisis: more EU - Ask most people what the causes of the financial crisis were, and you will get an answer encompassing unsustainable bank lending, out-of-kilter US property prices, greedy banks and inept regulation. Ask the European Parliament what the causes were, and the answer is simpler: not enough European Union. That is the conclusion of the parliament’s special committee on the financial, economic and social crisis, which after sitting for 18 months and sending delegations to countries hit by the said crisis, has issued recommendations to prevent it happening again. The answer: member states have to boost their contribution to the EU budget from 1.06 per cent of economic output currently to 5-10 per cent.It can sometimes seem that the European parliament’s recommendations are like a game of Jeopardy! gone awry: no matter what the question is, the answer will always be “what could be achieved by having more European Union?”

The Euro’s PIG-Headed Masters, by Kenneth Rogoff - Europe is in constitutional crisis. No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions. Unfortunately, they are not just “kicking the can down the road,” but pushing a snowball down a mountain. European Union officials argue that it would be catastrophic to restructure any member’s debts proactively. It is certainly the case that contagion will rage after any Greek restructuring. It will stop spreading only when Germany constructs a firm and credible firewall, presumably around Spanish and Italian central-government debt. This is exactly the kind of hardheaded solution that one would see in a truly integrated currency area. So, why do Europe’s leaders find this intermediate solution so unimaginable?

Jean Pisani-Ferry on Europe’s Tiger and German Nightmares - This INET interview with Jean Pisani-Ferry gives a useful overview of how Greece and Ireland came to have sovereign debt woes and the viability of the remedies proposed for each. Pisani-Ferry argues, as many other economists do, that austerity measures will not succeed in Greece because they will prove to be politically unsustainable.

Trichet Calls for Euro Finance Ministry as Crisis Deepens - European Central Bank President Jean- Claude Trichet said governments should consider setting up a finance ministry for the 17-nation euro region as the bloc struggles to contain a region-wide sovereign debt crisis. “Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?” Trichet said in a speech today in Aachen, Germany. He also favors giving the European Union powers to veto the budget measures of countries that go “harmfully astray,” though that would require a change to EU Treaties.. He said today that while any single finance ministry would “not necessarily” administer “a large federal budget,” it would “exert direct responsibilities in at least three domains.”These would include “first, the surveillance of both fiscal policies and competitiveness policies” and “direct responsibilities” for countries in fiscal distress, he said.It would also carry out “all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions.”

ECB’s Trichet Suggests Creation of Euro Finance Ministry - Europe should consider strengthening central control of economic policy if efforts to deal with its debt crisis do not deliver results, European Central Bank President Jean-Claude Trichet said on Thursday. Accepting a prize for his contribution to European unification, Trichet laid out ideas including the formation of a European Union finance ministry and a veto for EU authorities over spending and other major domestic policy decisions. "As a first stage, it is justified to provide financial assistance in the context of a strong adjustment program," Trichet said. "But if a country is still not delivering, I think all would agree that the second stage has to be different." "Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country's economic policies if these go harmfully astray?," he said. European policymakers are struggling towards a new aid package for Greece that is expected to include new loans, fresh austerity commitments and a stepped-up privatisation programme, potentially supervised from outside.

Jean-Claude Trichet Calls For Much Deeper And More Authoritative Control Over Bailed Out Countries: "Jean-Claude Trichet gave a rousing speech about the past and the future of Europe, while accepting the Charlemagne Prize today in Germany. The speech began: 'Each generation needs to affirm its commitment to Europe.' Trichet praised Europeans from Erasmus to Immanuel Kant to the post-war generation, but he said 'for the current generation, these achievements are taken for granted.' Then he gave some bold suggestions for the future. He said that if a bailed-out country isn't delivering on its fiscal-adjustment program, then a 'second stage' could be required, which could possibly involve 'giving euro-area authorities a much deeper and authoritative say in the formation of the county's economic policies if these go harmfully astray.' He suggested that euro-zone authorities could have 'the right to veto some national economic-policy decisions' under such a regime. In particular, a veto could apply for 'major fiscal spending items and elements essential for the country's competitiveness.'"

Building Europe, building institutions Speech by Jean-Claude Trichet

The Anglo-Saxon Budget Laboratories - In London, Prime Minister David Cameron is on the offensive. On assuming office, he entrusted budgetary forecasting to an independent Office for Budgetary Responsibility (OBR), thus forfeiting any possible sleight-of-hand. He then announced a bold consolidation program to cut the cyclically adjusted deficit by 1.5% of GDP per year, thereby targeting a deficit of 3.5% of GDP in 2013.Cameron’s bet was that this adjustment would stimulate, not hinder, growth. Since Ireland and Denmark showed the way 25 years ago, numerous governments have dreamed of successful “expansionary budgetary contractions.” But a closer look at these oxymoronic, quasi-miraculous episodes reveals that, for the usual recessionary impact of fiscal consolidation to be eliminated or even reversed, at least one of three conditions must be met: households’ precautionary savings decline; long-term interest rates fall; or a more expansionary monetary policy weakens the exchange rate. Absent these conditions, budgetary adjustments are almost always costly in terms of growth. This was confirmed by a recent careful and detailed study, carried out by the International Monetary Fund, of past consolidation episodes.

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