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

Saturday, June 18, 2011

week ending June 18

Fed's Balance Sheet Expands To $2.832T In Latest Week - The U.S. Federal Reserve's balance sheet expanded in the latest week as the central bank came closer to the end of its Treasury-buying program aimed at shoring up the economy.  The Fed's asset holdings in the week ended June 15 climbed to $2.832 trillion, from $2.815 trillion a week earlier, it said in a weekly report released Thursday.  The Fed's holdings of U.S. Treasury securities rose to $1.576 trillion on Wednesday, from $1.555 trillion.  Thursday's report showed total borrowing from the Fed's discount lending window fell to $13.23 billion on Wednesday from $13.36 billion a week earlier. Borrowing by commercial banks climbed to $52 million from $32 million last week. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts increased to $3.457 trillion, from $3.446 trillion in the previous week.  U.S. Treasurys held in custody on behalf of foreign official accounts climbed to $2.722 trillion from $2.704 trillion from in the previous week.  Holdings of agency securities slipped to $735.53 billion, from the prior week's $742.60 billion.

Fed balance sheet grows to record $2.83 trillion - The Federal Reserve's balance sheet expanded to a record $2.83 trillion in the week ended June 15 from $2.82 billion in the prior week, the central bank said Thursday. The Fed's balance sheet should stop setting new records in a few weeks if it ends its plan to purchase $600 billion in Treasurys on schedule at the end of June. The Fed has been buying bonds since last November to try to ease financial market conditions even though short-term interest rates are effectively at zero. The Fed has been discussing how to sell these assets and shrink its balance sheet but economists think the central bank will not make any moves in that direction this year given the soft tone to recent economic data. The balance sheet report shows that the Fed's holdings of Treasurys rose to $1.58 trillion from $1.55 trillion in the prior week. The Fed's holdings of mortgage-backed securities fell to $914.5 billion from $917.9 in the prior week. Bank reserves rose to $1.65 trillion from $1.63 trillion in the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 16, 2011

Fed prepares for last spurt of easy money flood (Reuters) - The flood of Federal Reserve money that has supported Wall Street and the rest of the U.S. economy for 2- years will shrink to a trickle with the conclusion of the Fed's bond purchases announced on Friday. The Fed said it will buy $50 billion of Treasuries, the final series of government bond purchases that marks the last phase of the $600 billion program it launched in November 2010 to prevent another recession. As a result, once the purchases are concluded on June 30, the financial sector will receive only a fraction of the roughly $100 billion a month in easy money it has been getting from the Fed. The conclusion of the Fed's bond-buying program, known as "Quantitative Easing 2," does not mean the stimulus will come to a complete stop. The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 billion to $16 billion per month.

A Look at QE2 - All QE2 does is to slightly restructure the maturity of U.S. government debt in private hands.  Now, of all the stories we've heard to explain our sluggish recovery, how plausible is this one: “Our big problem is the maturity structure of Treasury debt. If only those goofballs at Treasury had issued $600 billion more three-month bills instead of all these five-year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this tragic mistake.” That makes no sense.  For the same reason, when money is the same thing as debt, it doesn’t cause inflation... Moreover, QE2 distracts us from the real microeconomic, tax, and regulatory barriers to growth. Unemployment isn't high because the maturity structure of U.S. government debt is a bit too long, nor from any lack of “liquidity” in a banking system with $1.5 trillion extra reserves.  Mostly, it is dangerous for the Fed to claim immense power, and for us to trust that power, when it is basically helpless. If Bernanke had admitted to Congress, “there’s nothing the Fed can do. You’d better clean this mess up fast,” he might have had a much more salutary effect.

Taylor Rules & the Fed - The question often arises of which monetary policy rule the Fed uses in its analysis (I’m going to avoid the much more involved question of which monetary policy rule it should use). In their latest commentary, the economics team at MF Global note:“We realize Fed officials do not mechanically follow a Taylor Rule in setting monetary policy, and expectations for growth are being pared a little, but, based on the original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.” John Taylor himself has also repeatedly highlighted the famous 1993 version of his rule as opposed to the equally famous version he discussed in 1999. As for what the Fed looks at, from the historic FOMC transcripts you can see that every meeting it gets a list like this: That includes both original formulations of the rule and quite a few more. We also have the version of the rule that chairman Ben Bernanke presented at the AEA in early 2010:

Questions for Joe Gagnon: What is Quantitative Easing, Does it Work, and Should We Do QE3? - In the wake of recent bad employment numbers, people are looking for options to boost the economy. Some have proposed another round of quantitative easing to get us back to the normal rate of growth. I interviewed Joe Gagnon, Senior Fellow at the Peterson Institute for International Economics, about this program. He recently spoke at the Future of the Federal Reserve conference, co-hosted by the Roosevelt Institute and New America Foundation, about what we need to do now to get the economy re-started. He outlines some basics about monetary policy, discusses whether the first rounds of QE worked, and address criticisms of the program and whether a third round of QE will help.

How the housing depression spells QE3 - The double dip in U.S. house prices is raising fears of another recession. But by one measure housing and consumer spending never bounced back in the first place. The Chicago Fed's personal consumption and housing index, which tracks housing starts, building permits, retail sales and personal spending, hasn't been above zero since December 2006. That's a 52-month stretch that's unparalleled in the 34-year history of the index.The monthly index registers zero whenever activity in those categories grows in line with historical trend. A positive reading shows faster expansion and a negative reading either slower growth or outright contraction.Because the index doesn't track house prices, a look back at the past five years (see chart, right) shows a steep decline starting in 2007 but no rebound of any note. This year's readings are above the trough reached in early 2009, but not by much. And since falling housing prices won't do much to stimulate either consumer spending or homebuilding, it looks like a good bet that this index is going to stay at low levels for a good long time.

Gross and Rosenberg: QE3 will see interest rate caps - Yesterday, when discussing what QE3 could look like, I highlighted the 2002 remarks by then Federal Reserve Board Governor Ben Bernanke.. Bernanke was outlining what the Fed could do in a zero interest rate environment to promote economic activity. I indicated that the FOMC has already considered offering unlimited quantitative easing to target specific interest rates during the second round of quantitative easing. I believe the Fed will do this in QE3, and apparently Bill Gross and David Rosenberg do as well. While a QE3 is still a way’s off – probably not until 2012 – it makes sense to think about how it will be conducted. The crucial passage pertaining to quantitative easing in a zero interest rate environment is below. Bernanke stated: So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.

Fed Watch: Fed on the Sidelines - The FOMC’s two-day meeting next week is expected to be something of a nonevent. Caught between a deteriorating growth outlook and higher inflation numbers, it is widely expected that policymakers stand pat. A consensus view from the Wall Street Journal: With job gains potentially slowing, housing prices sliding and consumers spending cautiously, officials don't want to tighten financial conditions. This means they will maintain short-term interest rates near zero and keep the central bank's $2.6 trillion of securities holdings from shrinking. At the same time, because inflation has picked up, they're reluctant to embrace new initiatives aimed at boosting growth. On the growth side, the critical issue is that policymakers believe the second quarter drag is an artifact of temporary factors that will soon fade. Of course, this was the story last quarter as well, but they seem content to ignore the possibility that a string of temporary shortfalls looks suspiciously permanent. Indeed, arguably the only thing temporary about this recovery was the one quarter acceleration at the end of the 2010. Regardless of GDP downgrades, policymakers positioned themselves to turn a blind eye on growth, keeping focused instead on inflation.

Raghuram Rajam and the Need for More Systematic Monetary Policy - Raghuram Rajan has come out swinging against U.S. monetary policy.  He argues it is wrong to look to the Fed as some monetary wizard who can "revive the economy through a swish of the monetary wand."  He also believes the Fed's monetary stimulus causes more problems that it solves.  In particular, he views the Fed's low-interest rate polices causing excessive risk taking by investors and harm to savers.  On the surface his arguments are consistent with his belief that the housing and credit boom was similarly driven by monetary policy that was too easy back in the early-to-mid 2000s.  I am sympathetic to his views on the Fed's role in the housing and credit boom, but believe his current take on U.S. monetary policy is off.  Let me explain why.

Monetary Policy When One Size Does Not Fit All - SF Fed - The European Central Bank recently raised its target interest rate for the first time since the 2008 financial crisis. When compared with a simple interest rate rule, this rate hike appears consistent with the euro area's nascent economic recovery and rising inflation. However, economic conditions vary greatly among the countries in the euro area and the ECB's new target rate may not be suitable for all of them.

One size fits none - DAVID BECKWORTH directs us to a new Economic letter from the San Francisco Fed's Fernanda Nechio, which examines the appropriateness of euro-zone monetary policy. First, have a look at ECB policy relative to a Taylor rule for the euro-zone as a whole:  Here it seems as though the ECB is essentially following the Taylor rule (though by this rule, at any rate, the recent increase looks a little unnecessarily aggressive). When one disaggregates the euro data, however, the true absurdity of the current policy becomes clear:A few things really stand out here. In the first chart, ECB policy seemed a little loose from 2001 to 2005. From the second chart it's clear what was going on; the ECB stood idly by while the periphery overheated because it was making policy with an eye toward the core nations. Now that the peripheral booms over which the ECB presided have collapsed, the central bank is...continuing to pursue a policy that's most appropriate for the core economies.

Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went - Below we present that not only has the Fed's bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

Is Ben Bernanke Sabotaging The Chinese Economy? - In standard monetary theory, a country's currency may fluctuate with the country's balance of trade. If a country is a major exporter, the currency of that country may appreciate, while countries that are major importers might see their currencies fall in value. As China is a major exporting power, the value of China's currency—the yuan—might be expected to rise to reflect China's manufacturing might. Here's where Chang's theory comes in: when a currency is appreciating, it might put a damper on exports. As a currency appreciates, the price of goods in foreign currencies becomes more expensive. Essentially, if the yuan were to appreciate, the Chinese would lose their exporting-price advantage. So, the Chinese government maintains a peg between its currency and the U.S. dollar. When the Federal Reserve creates more dollars, the Chinese create more yuan.  Of course, as in many things in economics, the policies of the PBC have had unintended consequences. Inflation is currently spiraling out of control in China.

Chance of Another Round of Easing by Year-End: Roubini - There is a chance the U.S. Federal Reserve could unleash another round of quantitative easing by the end of the year, according to renowned economist Nouriel Roubini. In an interview with CNBC on Saturday, the head of Roubini Global Economics said the probability of QE3 will become “significantly higher” if U.S. economic weakness persists and the stock markets correct 10 percent or more. “Especially because we cannot do another round of fiscal stimulus, the pressure is going to be on the only policy that is available, [that] is another round of quantitative easing,” he said. Roubini, who correctly predicted the financial crisis that began in 2008, is especially concerned about the myriad problems the U.S. economy currently faces. “You have the problems of rising oil prices, of [a] weak labor market, of housing double dipping, the fiscal problem in the state and local government, the facts of the federal deficit problem,” he said. “All these things imply that economic weakness could persist in the second half of the year.”

More on why domestic central banks still setting interest rates are now outdated artefacts - Three years ago, I wrote this in a post: Capital mobility is now global. With more inter-connectedness among nations, it is now increasingly imperative that each individual nation's monetary policies be coordinated to ensure smooth economic results system-wide.

  • 1. With global capital mobility, if one country hikes its interest rate to contain domestic inflation, it can attract more capital from overseas, nullifying the hike. Similarly, if the country cuts rates to spur investment, capital might leave the economy for better rates elsewhere.
  • 2. An aggressive money supply policy in one country can spill over excess liquidity into the global system, spreading inflation globally.
  • 3. One country’s active currency management policies artificially inflates/devalues free floating currencies.
  • 4. Because of points 1, 2, and 3, one Central Banker’s monetary policies to cure domestic unemployment might be rendered ineffective.
  • 5. Financial crisis that start in one country can easily spread to other economies.
  • 6. That’s because the same toxic financial security can now have multiple listings in different markets.
  • 7. They can be placed in multiple markets, or owned, by multi-national banks looking for arbitrage opportunities created globally by, among other things, uncoordinated Central Bank policies.
  • 8. Conversely, a domestic bank can itself own multinationally-issued investments.
  • 9. There’s been an explosion in cross-border money laundering.
  • 10. Multinational corporations now also cross-lend funds borrowed elsewhere among subsidiaries located in different jurisdictions.

American Economic Policy: Running Out Of Road - THIS month America will reach two economic milestones. The Federal Reserve’s “quantitative easing”, or QE—loosening monetary policy by buying bonds with newly created money—will draw to a close. And the recovery QE was designed to spur will reach its second anniversary. Yet no one will be celebrating at next week’s meeting of the Fed, where officials are almost certain to reiterate that the $600 billion programme of bond purchases will end this month. For all the monetary and fiscal stimulus applied to the economy, the recovery has been a disappointment. Though the chance of renewed recession is slim, in a dreary rerun of last year a promising acceleration in hiring and spending is fizzling.  Since recession ended in June 2009, GDP growth has averaged 2.8%, roughly its long-term trend. After so deep a slump, the pace is usually much faster. Measured by totting up income rather than spending, the economy is no bigger than in 2006. The proportion of working-age people with jobs is lower than in the trough of the recession.

Krieger On Peak Government - But indeed it is this simple inability to understand the basic laws of the universe that has poisoned the economics profession around the world and has spread to the thinking of governments. This faulty Keynesian religion is exactly why our politicians believe in this preposterous notion of the higher the nominal GDP growth the better and makes them think they can take on infinite amounts of debt with no consequences. Remember this is the same man who also blames the entire Great Depression on monetary policy failures. He probably thinks bad monetary policy caused the Japanese tsunami. The reason this man is so dangerous is he really believes his own crap. He really does think he has figured it out. Just like the guy that comes up with a “system” to beat the casino. Unfortunately for The Bernank, the house always wins and he will go home just as penniless and discredited as that poor sap after his intellectual pockets are emptied out. Except unlike the gambler the whole world will witness The Bernank crash and burn and it will be written about for centuries to come.

Maybe Government Is the Solution - Over the last few years, and increasing in recent months, Fareed Zakaria has thrown off the shackles of his public role as a foreign policy commentator to become Time Magazine’s voice on the obstacles to American decline. Almost alone among the journalistic Mandarins, Zakaria is the voice of reason, common sense and adult responsibility. Nowhere is that more in evidence than his new column on the ideological blinders that cripple American Conservatism. In an era when government is considered reflexively bad by both Democrats and Republicans, Zakaria takes a little time to remind us of some simple facts: what is the evidence that tax cuts are the best path to revive the U.S. economy? Taxes — federal and state combined — as a percentage of GDP are at their lowest level since 1950. The U.S. is among the lowest taxed of the big industrial economies. So the case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark, neither one characterized by low taxes.

If QE2 Was Price-Level Targeting, It is Starting to Work - Has QE2 worked? Some say yes, some say no. The answer depends on what you wanted it to do. If you wanted a quick revival of the housing market, a boost to GDP growth, and rapid job creation, it’s easy to say QE2 has failed. None of those indicators look good. On the other hand, if you thought the purpose of QE2 was to save the country from deflation, then it looks better, especially if you are a fan of price level targeting. Price-level targeting is the view that central banks should focus their policy on holding the average price level to a preset growth path over an extended period. It resembles the more widely known policy of inflation targeting in assuming that monetary policy should target nominal variables, which it can affect directly, not real variables, which it can affect only indirectly. It differs from inflation targeting in how it deals with situations where inflation falls short of the target. Inflation targeting aims to get inflation back to a target rate, and then ease off. Price-level targeting more aggressively aims for above-target inflation until the price level has fully caught up to its previous path.

Fed must tighten policy or risk inflation: Fisher - (Reuters) - The Federal Reserve must reverse its super-easy monetary policy or risk fueling runaway prices, a top Fed official known for his hawkish views on inflation said on Monday. "There's enormous liquidity in the system," said Dallas Federal Reserve Bank President Richard Fisher, a voting member this year of the Fed's policy-setting panel. "We need to tighten policy or give rise to inflationary forces."The Fed has kept interest rates near zero for two and a half years, and has bought more than $2 trillion in long-term securities to push borrowing costs still lower and help pull the U.S. economy from its worst recession since the Great Depression.With recent economic data falling short of expectations, the Fed is not expected to start raising rates until late next year, based on trading of short-term U.S. interest rate futures at the Chicago Board of Trade.Fisher did not say when he believes the Fed should start removing accommodation, although several of his more hawkish colleagues have called for tightening as soon as this year. The Fed's policy setting panel meets next week.

Lower Income Households’ Vulnerability to the Recent Commodity Price Surge - NYFed -- In a previous post, I discussed the impact of changing commodity prices on the discretionary income of households and concluded that these effects generally were relatively modest except in cases of extreme swings in commodity prices. As many people know, there was a large surge in energy prices during the first quarter of 2011, and it appears to have had a significant effect on discretionary income and consumer spending. (See recent speeches by Federal Reserve Chairman Bernanke and New York Fed President Dudley; for views outside the Fed, see FT Alphaville, Tim Duy, and James Hamilton.)   In this post, I show that the budgets of lower income households have likely suffered a pronounced hit from this recent commodity price surge because they typically spend a greater share of their income on food and energy. I conclude that these households may have to cut back on much more of their other spending than the average family does—perhaps by enough to have an aggregate effect.

Core cuts both ways - Atlanta Fed's macroblog - With the six-month average of annualized headline inflation running just over 5 percent, this Wednesday's consumer price index (CPI) report looms a little larger than usual. While it is dangerous to predict such things, there is every reason to believe that the measured increase in CPI inflation for May could be quite low. And there is every reason to believe that this softness will persist into June. The reason is quite simple. Movements in gasoline and fuel prices really do push around the headline inflation number, and at long last it looks like that movement is in the downward direction. Here's the relevant picture: Let's assume that, annualized, CPI excluding food and energy rises 2.1 percent, as it has so far this year, and food and nongasoline energy prices each rise at 5 percent. Then when you plug in gasoline prices already realized for May and EIA predictions for June, you get a 0.4 percent rise in the headline CPI in May and a 0.7 percent decline in June (both rates annualized). Despite some probable relief on the headline inflation number, I remain aware of what that relief means and what it does not. Earlier in the year, Atlanta Fed president Dennis Lockhart had this to say:

Inflation Targeting Has Fans at the Fed, but Obstacles Unresolved - There’s been a lot of chatter in the market in the past few days about the possibility of the Federal Reserve creating a formal target for inflation, as many other central banks around the world do. Atlanta Fed president Dennis Lockhart embraced the idea in a speech last week, as have other regional Fed bank president. News reports are zeroing in on the issue. There are many fans of an inflation target at the Fed — mostly notably Chairman Ben Bernanke, a long-time proponent. The central bank came close to embracing one last year during discussions about its $600 billion securities purchase program. But the challenges that proved to be an obstacle last year when the idea was discussed seem unlikely to get resolved very quickly.

US inflation rise ties Fed’s hands on further easing - Core US consumer prices rose at their fastest rate for five years in May, making it almost impossible for the Federal Reserve to ponder further monetary easing.Excluding volatile food and energy prices, the consumer price index grew by 0.3 per cent from April to May, the most rapid increase since 2006. Compared with a year earlier prices rose by 1.5 per cent. Although temporary factors have exaggerated the rise, there has been an upward trend in core inflation since the year-on-year trough of 0.6 per cent last October, leaving the central bank with little scope to spur growth while meeting its inflation objective of 2 per cent. “It is quite a big increase, although some of it is temporary,” . “Undeniably there is no imminent threat of deflation.”The Fed concentrates on core inflation, which reflects underlying pressures in the economy, as the best guide to how prices will move. The decline in core inflation towards very low levels last autumn was crucial in its decision to launch a second, $600bn round of asset purchases to boost the economy, which came to be known as QE2.

Falling house prices mysteriously fuel inflation… Here is a mystery: house prices in the US are going down and yet house prices are driving up the core rate of inflation. According to the Case-Shiller index, US house prices fell at an annualised rate of 4.2 per cent in the first quarter of 2011; but according to the consumer price index, the price of “shelter” rose at an annualised rate of 1.4 per cent over the past six months, compared with 0.8 per cent for the six months ending last November. The answer to this conundrum has implications for how inflation will move in the months ahead and, therefore, for how the Federal Reserve will set monetary policy. It also shines a light on the occasional perversity of economic statistics because the indirect driver of inflation is the foreclosures that are devastating the US housing market. Foreclosures have pushed more people into a limited supply of rental housing. Paul Emrath of the National Association of Home Builders notes that there was “never a surge in production you could characterise as overbuilding” in the multi-family rented sector.

A Note to FOMC Members - According to this Bloomberg article, you are seriously discussing the adoption of an explicit inflation target.  Let me remind you that a price level target is even better since it has "memory".  Let me also remind you that during the September, 2010 FOMC meeting you folks discussed the possibility of a nominal GDP level target. There is much to like about a nominal GDP level target--it improves upon a price level target in how it handles supply shocks--and I hope you seriously consider it too.

Inflation Outlook Has Treasury Bulls Snorting - Investors sense that inflation gauges look set to peak and start rolling over by early next year. Certainly, a rebound in oil and other commodity prices could draw out that process. But with global growth throttling back, that prospect has dimmed. Prices on goods further back in the production pipeline, for example, already are down sharply. Prices for finished wholesale goods rose just 0.2% month on month during May, and crude-material prices slumped 4.1%. "The idea that there is significant inflationary pressure in the U.S. economy over the medium term is looking challenged," says BTIG chief global economist Dan Greenhaus.

Core Measures of Inflation increased in May -  Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment. The index for all items less food and energy rose 0.3 percent in May after increasing 0.1 percent in March and 0.2 percent in April. The shelter index rose 0.2 percent in May after increasing 0.1 percent in each of the seven previous months. Both rent and owners' equivalent rent rose 0.1 percent.  The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: the median Consumer Price Index rose 0.2% (2.1% annualized rate) in May. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.8% annualized rate) during the month.  Over the last 12 months, core CPI has increased 1.5%, median CPI has increased 1.5%, and trimmed-mean CPI increased 1.9%.  This graph shows these three measure of inflation on a year-over-year basis.  These measures all show that year-over-year inflation is still low, but increasing.  Note: You can see the median CPI details for May here. Although the year-over-year increases are below the Fed's inflation target, the annualized rates were above the target in May. However, with the slack in the system, the year-over-year core measures will probably stay near or be below 2% this year.

Complete Pass-Through of Core Wholesale Prices to Consumer Prices is Not Here Yet - The Producer Price Index (PPI) of Finished Goods increased 0.2% in May, following larger gains in each of the past five months. A 1.5% jump in energy prices was offset partly by a 1.4% drop in food prices during May. The BLS indicated that energy prices accounted for a large part of the increase in the wholesale price index. Energy prices have risen for eight straight months... At the earlier stages of production, the intermediate goods price index and core intermediate goods price measure advanced 0.9% in May. The latter has risen for ten consecutive months and the increase in May is traced to higher prices of industrial chemicals. Despite the sustained upward of core intermediate goods prices and the core finished goods prices, core consumer prices show a mild upward trend, implying that a complete pass-through of higher wholesale prices to consumer prices is not visible, as yet.

Mixed News On Inflation - Today’s inflation update for May was ripe with conflicting signals. There’s enough here for inflation hawks as well as doves to keep the debate bubbling until the next round of numbers. Headline inflation slowed last month to a 0.2% rise on a seasonally adjusted basis, down from 0.4% in April. But core inflation, which excludes food and energy, accelerated, rising 0.3% in May—the fastest monthly pace in nearly three years. That's still well within the Fed's 1%-to-2% target range, but the fact that core's rate delivered a rare increase above headline's pace raises warning flags by some accounts.  As for inflation’s annual pace, both headline and core CPI measures are rising, and at higher rates. As the chart below shows, headline inflation rose by 3.4% last month vs. a year ago, the fastest since late-2008. Core inflation’s year-over-year rate moved up in May as well, reaching a 1.5% increase vs, the same period in 2010.

Inflation Picks Up: Are Rising Consumer Prices Good for the Economy - Today's report on inflation is sure to cause some long faces among economy worrywarts. It should instead draw smiles. The Federal Reserve's favorite measure of inflation showed that prices rose faster in May than they have in three years. Overall, the consumer price index indicated that U.S. households are spending 3.6% more to buy the same goods they did a year ago. That jump in prices was higher than forecasters expected. And that has caused some people to say that we are entering a period of stagflation - which is when both unemployment and inflation are high, a dangerous mix that is often worried about but rarely occurs. Nonetheless, after a string of bad economic news, which has led many to ponder the risks of heading into a double dip, the uptick in inflation is a good sign.

Core prices rise faster in May, causing fears of stagflation - Higher prices seeped from the gas pump into the broader U.S. economy in May, adding new hurdles for the sluggish recovery and the government's options for boosting it.  The combination of a stagnant economy and rising inflation led some economists to worry that the country might be headed toward a repeat of the 1970s phenomenon of stagflation, which hobbled growth for years. Wednesday's Labor Department report rattled financial markets already spooked by the worsening debt situation in Greece and raised the specter that the Federal Reserve1 might have to raise interest rates sooner than expected to blunt inflation pressures.  The report helped accelerate the recent slide in the stock markets. The Dow Jones industrial average plummeted 178.84 points, or nearly 1.5%.Economists cautioned that inflation is volatile and could sink in coming months if gasoline prices continue their recent downward trend.But for a nation still struggling to shake off the effects of the deep recession, the prospect of higher prices for clothing, hotel rooms and a host of goods and services while wages remain flat could open up another pothole on the road to recovery.

Worry About Growth or Inflation, Not Both - The underlying inflation rate has moved substantially higher in recent months, but worries about its direction in coming months should be based on a consistent economic story. The core consumer price index, which excludes food and energy, increased 0.3% in May from a month earlier, the biggest jump since July 2008 as the Labor Department notes in its release. And on an unrounded basis the increase was the largest since May 2006. That move comes even as moderating gas prices produced a more stable level for the overall inflation rate. The move higher in the core amid a recent rash of reports suggesting an economic slowdown in the second quarter has prompted some to start ringing the bell of stagflation, a period of rising prices amid an economic slowdown. The problem is that those two economic stories aren’t consistent..

The economy , markets and inflation - Demand destruction. Demand destruction. Demand destruction.  That is all one seemed to hear from analysts and managers for months as food and energy prices soared. But now that we are actually seeing demand destruction, no one seems to recognize it. Yes, much of the May drop in auto sales was due to supply chain interruptions. But the bulk of the other economic weakness is due to higher inflation generating weak income and demand growth. Over the past six months the monthly change in real average weeklyearnings has been: -0.1 -0.6 -0.3 -0.0 -0.7 -0.2 The change in real personal income excluding transfers, the single best determinate of consumer spending, has been: 0.1 0.2 1.1 0.0 -0.1 0.1 The January 1.0% jump was due largely to the payroll tax cut. Given this weakness in real income, it should be no surprise that consumer spending and the economy has weakened.

Economy Brakes Even Before Fed Takes Its Foot Off the Accelerator - This month we have made the transition to a significantly weaker outlook, not only because of the current behavior of bank credit, but also because of the current behavior of the overall economy. With regard to the latter, even before the Federal Reserve has terminated its second round of quantitative easing – that is, even before the Fed has taken its foot off the monetary accelerator – the underlying pace of U.S. economic activity already appears to be coming in weaker than we had anticipated. Consistent with our downwardly-revised real GDP growth outlook, we have revised up our forecast for the unemployment rate. In addition, we have revised down our forecast for the yield levels of the Treasury 2- and 10-year securities. (See tables at the end of this commentary containing our current and April 28 forecasts.) If we are close to the mark on our second-half GDP and unemployment rate forecasts, we could envision another round of Fed quantitative easing commencing early in 2012 with no Fed policy interest rate hikes occurring until early 2013.

Can the Fed talk America out of a slump? =AT LOT of American economic writers seem pretty glum about the state of the economy right now, and it's not that hard to understand why. May's employment figure was a big disappointment. Industrial production numbers show a big slowdown in activity over the past month or so. Forecasters are revising their projections for second quarter growth downward; once again, a quarter that was expected to produce a near-4% rate of annual growth may generate a figure closer to 2%. Nervousness has grown in recent days with signs of increasing trouble abroad. European worries have driven equity prices sharply downward this week. The dollar is up, and markets are pouring back into Treasuries. The flight to safety is on. How worried should we be? This week's cover Leader argues that the soft patch is likely temporary, but that there's a risk to policy mistakes in Europe and America. I think that's probably right. It does seem to me that writers are overinternalising the May jobs report (just as they may have overinternalised the strong reports in the prior three months). I think the May report overstated the weakening of the American labour market.. June's jobs number should be better than May's.

A Garden Variety Recession? - Mark Thoma features the “debate” between Brad DeLong and Jim Grant. Brad has a nice summary of this debate. Mark Sadowski in a comment over at Mark’s place alerts us to an interview with Mr. Grant by none other than Lawrence Kudlow: Kudlow: Look, you’ve got some pretty convincing stuff [in Grant’s Observer]. This is the most stimulus we have ever seen. I think what you’re saying is the Fed has poured in 18 percent of GDP. Fiscally, spending and taxing 12 percent of GDP. Those are world records. But this isn’t even the worst downturn. Grant: By the numbers, this is a garden-variety recession. So far, statistically, on the GDP numbers, it is ordinary. What is extraordinary of course is Wall Street’s self-inflicted wounds in credit. However, what is truly momentous is the government’s response. Nothing like it. So there have been 11 recessions/depressions since 1929. On average, the sum of the fiscal and the monetary response as we index them is like 2.9 percent of GDP. A garden-variety recession this one is not. By Kudlow thinks Grant is “smart”. Kudlow is overestimating the amount of fiscal stimulus with his 12% claim.

Second Half 2011 U.S. Growth Rebound Intact, Economists Say - Slowdowns in consumer spending and employment will prove temporary, giving way to a U.S. growth rebound in the second half of 2011, economists surveyed by Bloomberg News said. After growing at a 2.3 percent annual pace this quarter, the world’s largest economy will expand at a 3.2 percent rate from July through December, according to the median forecast of 67 economists polled from June 1 to June 8.  Rising exports, stable fuel prices, record levels of cash in company coffers and easier lending rules will be enough to overcome the damage done by one-time events like poor weather and the disaster in Japan, economists said. Nonetheless, the current slackening means Federal Reserve policy makers will wait even longer to raise interest rates next year, the survey shows.

Analysts cut U.S. Q2 growth forecast to 2.5% rate - Economists polled by MarketWatch lowered their estimate for second-quarter GDP to a 2.5% annualized growth rate, according to a special survey conducted this week. While this is faster than the 1.8% growth rate reported in the first quarter, it is down from earlier projections for Q2 growth of about a 3.35% rate that prevailed over the past month. Weak job growth and a sharp slowdown in the manufacturing sector in May have raised doubts about the health of the economy. Fed chairman Ben Bernanke has said he expects growth to pick up "somewhat" in the second half of the year. Separately, economists at Macroeconomic Advisers lowered their estimate for Q2 growth to 2.5%. The estimate was 3.4% when the second quarter began in April.

Higher Growth, Lower Unemployment Predicted for Second Half of 2011 - The 35 participants in the June Livingston Survey have raised their estimates of output growth for the second half of 2011. The forecasters, who are surveyed by the Federal Reserve Bank of Philadelphia twice a year, project that the economy’s output (real GDP) will rise at an annual rate of 2.2 percent during the first half of 2011 and 3.2 percent during the second half of 2011, followed by growth of 3.0 percent (annual rate) in the first half of 2012. The projection for slower real GDP growth in the first half of 2011, which is 0.3 percentage point lower than the projection in the survey of six months ago, will be compensated with stronger growth in the second half of 2011.

Sluggish Hiring Seen as a Threat to Recovery = The potential for a persistent slowdown in hiring is the biggest threat to the U.S. recovery, according to economists in the latest Wall Street Journal economic forecasting survey, as they sharply cut the number of jobs they projected the economy would create in coming months..On average, the 54 economists in the survey expect the economy to add about 2.2 million jobs over the year, down from last month's forecast . In the latest survey, the economists lowered their forecasts for second-quarter growth in gross domestic product to 2.3% at a seasonally adjusted annual rate—down from last month's forecast of 3.2%. However, they see growth perking up to 3.3% in the second half of 2011.

The Great G.D.P. Disappointment - The quarter when the economy was supposed to stage its comeback is looking just as bad as its disappointing predecessor. We’ve had a slew of distressing economic data come in during the last few weeks. As a result, economists have been steadily downgrading their forecasts for economic growth in the second quarter. Today’s news is no exception; after a major bummer of an inflation report, Macroeconomic Advisers, the highly respected forecasting firm, lowered its annualized second quarter G.D.P. forecast to 1.9 percent. For reference, when the quarter began, Macroeconomic Advisers was expecting 3.5 percent growth. And way back in February, the firm was projecting 4.4 percent.  We saw similar downgrades last quarter, too. That quarter began with a forecast of 3.5 percent, which slid downward as the weeks rolled on and ugly economic indicators rolled in. The Commerce Department’s latest estimate for growth that quarter was 1.8 percent. Economists blamed temporary factors for that sluggish growth rate and forecast that growth would rebound in the second quarter. Unfortunately, though, the slide in forecasts for this quarter has been eerily similar to the slide in forecasts last quarter. Take a look:

Cleveland Fed's Top Economist Sees US '11 GDP Below 3% - The U.S. economy's slowdown should prove temporary as supply disruptions stemming from Japan's earthquake are solved earlier than anticipated and gasoline prices remain tame, a top economist at the Federal Reserve Bank of Cleveland said Friday. However, Cleveland Fed Research Director Mark Schweitzer cautioned that the U.S. economy is unlikely to grow at a very strong pace for some time as continued troubles in housing weigh on consumer confidence and spending. U.S. gross domestic product, the broadest measure of economic activity, should expand by less than 3.0% in 2011 after high energy prices weighed on consumer spending and Japan's disaster hit auto sales in the first half of the year, the central bank economist said.

The US economy flirts with its stall speed - The recent slowdown in the US economy raises the question of whether the growth of output may have dropped below the so-called “stall speed”. This is the growth rate at which a healthy expansion can no longer be maintained, after which the economic engine misfires and the US heads back towards recession. For as long as this risk remains, markets are likely to remain nervous, and will certainly be extremely focused on the minutiae of weekly and monthly activity data. Up to now, the data suggest that the engine of the economy has not stalled, though it is making some ominous spluttering noises.  What is the “stall speed” of an economy? The stall speed is the critical growth rate below which an economic upswing turns first into a period of much slower growth, and then shortly afterwards into a recession.  It has important predictive content if a dip below the critical growth rate signals, more often than not, that a cumulative process of economic retardation is setting in.

Fed's Lacker Not Mad, Just Disappointed - The President of the Federal Reserve of Richmond, Jeffrey Lacker, spoke on Monday, in a speech in which he lamented the sluggish pace of the U.S. economy and the grim outlook in the jobs market. "One striking observation that may be relevant to the possibility that growth underperforms for a sustained period is the apparent reluctance of many employers to add workers in the face of rising demand," Lacker said, as reported by Reuters. Interestingly, Lacker is a noted "inflation hawk" who opposed the Fed's recent $600 billion monetary stimulus known as QE2 or the second round of quantitative easing. Lacker's grim assessment could foreshadow a shift in Fed policy. Although the Fed has steadfastly denied that it would undertake a third round of quantitative easing, the fact that one of its inflation hawks is bearish on the economy may lend credence to the belief that the Fed will ultimately change its mind.

Fed's Lacker: Possiblty Grwth Underperforms For Sustnd Period – Richmond Federal Reserve President Jeffrey Lacker Monday said there is a possibility economic growth in the United States might be below trend for a sustained period, especially as many businesses remain reluctant to increase the size of their workforce — despite rising demand — due to uncertainty about the strength of the recovery.  Lacker did not comment on current monetary policy, instead focusing primarily on the evolution of manufacturing the South. He did give his views on the state of the economy. “The recovery to date has been tepid at best,” Lacker declared, noting that since it began in the second half of 2009, it has yet to produce a sustained period of above-trend growth. He added that while last year ended with household spending showing renewed strength, that strength abated early this year. “Although the factors affecting the first quarter slowdown — including high energy prices, bad weather and natural disasters around the globe — may prove temporary, the inability so far of the expansion to gain more traction has been frustrating,” Lacker said.

Steve Keen: Dude! Where’s My Recovery? - I initially planned to call this post “Economic Growth, Asset Markets and the Credit Accelerator”, but recent negative data out of America makes me think that this title is more in line with conversations currently taking place in the White House. According to the NBER, the “Great Recession” is now two years behind us, but the recovery that normally follows a recession has not occurred. While growth did rise for a while, it has been anaemic compared to the norm after a recession, and it is already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be substantially higher than this to make serious inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trending down. Unemployment is therefore rising once more, and with it, Obama’s chances of re-election are rapidly fading.

The Long and Winding Road to Recovery - The global economy has bounced back strongly from the nadir of 2009, but growth is still uneven and recent data in key advanced economies have been disappointing. It is against this background that the International Monetary Fund has released its updated forecasts and assessment of the global economy. This analysis comes in three complementary documents: the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor.The headline numbers do not look so bad. We expect global growth to be around 4.5% in 2011 and 2012, although the two-track recovery will continue, with advanced economies chugging along at around 2.5% annual GDP growth, while emerging-market and developing economies motor ahead at an impressive 6.5% rate. But insufficiently strong policies have left dangers lurking beneath the surface. We have seen greater weakness than anticipated in the United States and Japan. Even if this was due to temporary factors, including supply disruptions from the Japanese earthquake, labor and housing markets are still on the ropes in the US and some parts of Europe.

Key Question: Is the slowdown temporary? - The recent economic data indicated a slowdown in May: only 54,000 payroll jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, growth in manufacturing slowed sharply, house prices continued to decline to new post-bubble lows (as of March), and home sales slowed.  This raises a key question: Is the recent economic slowdown temporary or is the U.S. heading into a "double dip" recession? Some of the recent slowdown was related to the tragic events in Japan that started with the earthquake on March 11th. Also the sharp increase in oil and gasoline prices - partially attributable to events in the Middle East and North Africa - has impacted consumer sentiment and retail spending. Oil and gasoline prices have fallen in recent weeks, but are still up sharply from the end of 2010. A third possible temporary impact has been the severe weather this year. Although there is always severe weather somewhere, the weather has been especially extreme this year from the massive snowstorms in the east, to the recent flooding along the Mississippi river. But are these impacts temporary?

2011 Economic Woes Hark Back To 1937 - What if it just keeps going? That's the question Americans are asking as they consider last month's 9.1 percent unemployment rate, still so high 33 months after the crash of September 2008. Scholars of economic history are asking another question: Are we repeating 1937? That year, when Americans were expecting their economy to finally pull out of the Great Depression, the stock market took another dive, with the Dow Jones industrial average dropping from the 190s in March 1937 to less than 100 in March 1938. Nonfarm private unemployment, the measure of President Franklin D. Roosevelt's industrial economy, increased to more than 18 percent. Industrial production plunged by a third.  The problem then was monetary, some economists now say. Paul Krugman, in his New York Times column June 2, argued that monetary and fiscal tightening caused the 1937 downturn, and might be squeezing the breath out of the economy now, precluding job creation. Krugman cited Gauti B. Eggertsson of the New York Federal Reserve Bank, who recently published blog posts and papers noting that the later 1930s, as now, saw higher commodity prices. Officials considered these rising prices a signal of inflation, and pressed for tightening. They erred.

Goldman Cuts GDP View to 2% as Economy Weakens - Faced with the bruising headwinds of high unemployment, weak manufacturing and an otherwise listless economy, Goldman Sachs has slashed its forecast for gross domestic product.  The firm cut its second-quarter GDP outlook to 2 percent from 3 percent ... Goldman's move comes amid a week of disappointing manufacturing indicators from both the Philadelphia and New York Feds that compounded market fears over debt contagion from Greece and other peripheral eurozone nations. From a policy standpoint, Goldman said it does not expect the subpar growth to change the Federal Reserve's plans to end quantitative easing later this month. However, Goldman economist Sven Jari Stehn acknowledged that "the deterioration in economic activity, on its own, would call for fresh monetary easing." The primary thing keeping the Fed from going to another round of easing — or QE3 in market jargon — is that, while the economy languishes, inflation actually is rising more than expected, he said.

Global Growth Hits a Soft Patch - iMFdirect  - Our world forecast is 4.3% growth for 2011, and 4.5% for 2012, so down by 0.1% for 2011, and unchanged for 2012, relative to April.  This figure hides very different performances for advanced economies on the one hand, and for emerging and developing economies on the other.   We forecast advanced economies to grow at 2.2% for 2011, and 2.6% for 2012, down by 0.2% in 2011, and unchanged for 2012.  And our forecast for emerging and developing economies is 6.6% growth for 2011 and 6.4% for 2012, up by 01.% for 2011, and down by 0.1% for 2012. Two advanced countries have seen larger downward revisions.  The first is Japan where we now predict negative growth for 2011.   Disruptions from the earthquake have been stronger than we anticipated, and account for most of the decline.   The second is the United States, where we have revised our forecasts down by 0.3% in 2011, and 0.2% in 2012.    While it is too early to tell, we see this as a bump in the road rather than something more worrisome.  Special factors, in particular the effect of oil prices on disposable income, appear to have played an important role.   But, assuming oil prices stay broadly stable, in line with financial markets’ expectations, spending by consumers and firms should remain steady in what is, admittedly, a weak recovery.

IMF’s Revised GDP Forecast: Down, But Not Out - The IMF cut its forecast for global economic growth today, albeit slightly. The organization expects global GDP to rise this year by 4.3%, down from its previous 4.4% estimate. “The global economy, hit by slowdowns in Japan and the United States, is expected to reaccelerate in the second half of the year, but growth remains unbalanced and concerted policy action by major economies is needed to avoid lurking dangers,” the IMF advises.  For the U.S., the new prediction calls for a 2.5% rise, down from a 2.8% forecast in April. That's more or less what I've been expecting, which is to say growth of some degree. Not great, but enough to keep the macro demons at bay. Next week's economic data updates may change my view, but as I've been discussing this week, the numbers for the U.S. still fall short of risking a new recession. The argument that's it's soft patch still look more compelling, if only moderately. Apparently the IMF agrees.

IMF cuts U.S. growth forecast, warns of crisis (Reuters) - The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are "playing with fire" unless they take immediate steps to reduce their budget deficits. The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.The Washington-based global lender forecast that U.S. gross domestic product would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively. Overall, the IMF slightly lowered its 2011 global growth forecast to 4.3 percent, down from 4.4 percent in April. Its forecast for 2012 growth remained unchanged at 4.5 percent.

What Are The Social Implications Of Economic Collapse? -For the last few days, we’ve been having an important discussion about the magnitude of the economic challenges in the west; if you didn’t read yesterday’s letter, I really encourage you to do so before proceeding because it’s important to understand why the west has truly passed the point of no return. Simply put, the United States and much of Europe are borrowing an extraordinary amount of money now just to pay interest on the money they’ve already borrowed. They cannot even self-fund their mandatory entitlement programs without going into the hole, and their options are limited:

  • Option 1: Continue borrowing, keep the party going. As long as the government CAN do this, they WILL do this. 
  • Option 2: Inflation - The more buyers stop purchasing Treasury securities, the more the Federal Reserve will mop up the excess liquidity. In doing so, the Fed essentially conjures up money and loans it to the government. No matter what the government monkey statistics say, this is inflationary, plain and simple.
  • Option 3: Austerity - There’s going to come a time when the US government is forced to face its economic reality and make some incredibly deep cuts that would be felt across society
  • Option 4: Default - Eventually, the debt burden is simply going to be too much, and the most obvious solution will be to default.
  • Option 5: Economic Cannibalism/ In the best traditions of Atlas Shrugged, the government will continue its persecution of the productive class– professionals, investors, entrepreneurs, and skilled workers.

Is the U.S. headed for another Great Depression? - If a depression by any other name would feel as bleak, what do you call the current state of the U.S. economy? A number of influential American economists are no longer mincing words: They argue that deficit-obsessed politicians in Washington are setting the United States up for a repeat of the 1930s. “What we're experiencing may not be a full replay of the Great Depression, but that's little consolation for the millions of American families suffering from a slump that goes on and on,” insists Nobel laureate Paul Krugman. “At some point, the pain of high unemployment may lead to some new thinking in Washington – but until that time, welcome to the second Great Depression,” adds Dean Baker of the Center for Economic and Policy Research. At first blush, the analogy seems ludicrous. The U.S. unemployment rate hit 25 per cent during the Dirty Thirties. It's now at 9.1 per cent, after peaking at 10.1 per cent in late 2009. So-called automatic stabilizers – from unemployment benefits to food stamps – mean economic downturns now resemble a big pothole more than a bottomless pit. There are no bread lines.

Rosenberg Says 99% Chance of Another Recession by 2012 - In a Bloomberg video David Rosenberg, chief economist at Gluskin Sheff & Associates, says there is a 99% Chance of Another Recession by 2012. Rosenberg also talks about the outlook for the U.S. economy.  Selected Quotes I say that because as an economist, you have to be part historian. When you have a manufacturing inventory cycle recession, they are usually separated 5 years apart. But when you have a balance sheet recession, credit contraction, asset deflation (for example residential real estate), the downturn tends to be separated every 2 to 2.5 years. ... Economists call this a soft patch. It's not like this is a soft patch. Basically, when all the stimulus is gone, you get to see what the emperor looks like disrobed. It's not a pretty picture.  Rosenberg goes on to say it's a second recession, not a "double dip" and more stimulus is coming once the "Fed sees the white eyes of the economy

A Recession Or A Rough Patch? - Chatter about a new recession ticked up yesterday after the Greek debt crisis took another turn for the worse. Yale economist Robert Shiller, author of Irrational Exuberance, says there’s a “substantial” risk that the U.S. faces another downturn. There’s certainly plenty of support from the man on the street. Close to half of Americans think the U.S. is headed for a new recession, according to a freshly minted NBC News/Wall Street Journal poll. Perhaps, but the numbers suggest that this future isn't fate at this point. If we’re looking at the economic and financial numbers, there’s still plenty of room for debate on the next phase for the business cycle. There are dozens of reports to consider, of course, but one that’s been timely in dropping clues about new trouble in the pace of economic growth is sending mixed messages at the moment. Indeed, nearly a month ago the yield spread between nominal and inflation-indexed Treasuries was flashing a warning, as we noted. A similar round of caution was dispensed by this metric a year ago, ahead of the summer slowdown in 2010.

Stephen Roach: America is a Zombie Nation just like Japan - Stephen Roach has written an Op-Ed in today’s Financial Times that is worth reading. He outlines his version of Richard Koo’s Balance Sheet Recession theorem, opining that “the global economy is being hobbled by a new generation of zombies – the economic walking dead.” His main points are:

  • American consumers are retrenching. In the 3 1/4 years since 2008 began, real consumption growth has averaged 0.5% on an annualised basis, the lowest since World War II. That data point certainly rhymes with the consumer deleveraging of Koo’s balance sheet recession.
  • Zombie companies remain on life support. Roach says the antecedent to this is Japan where Japanese banks extended credit to effectively insolvent companies, postponing a full recovery for two decades. Roach calls this the “Japan disease”. This data point is at odds with Richard Koo’s prescriptions.

Roach’s conclusion: Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.The aim is to get zombie consumers to ignore their festering problems and start spending again – irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.

How to avoid our own lost decade, by Larry Summers - Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now half way to a lost economic decade. That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident... When demand is constraining an economy, there is little to be gained from increasing potential supply. .What, then, is to be done? This is no time for traditional political agendas.The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth.  Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10 year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.

US Is in Even Worse Shape Financially Than Greece: Gross -  When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC Monday. "Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures. The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show. Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

U.S. Is Worse Than Greece – Bill Gross - The manager of the largest US bond fund, Bill Gross, made that statement when at CNBC (the pump & dump TV) in regards to US financial structure. Looking deeper we say that US is much worse than Greece not just financially, but emotionally & mentally. The biggest problem is that here in US (while as we know things are worse than in Greece)….. the majority of people are not aware of that and believe that this is a temporary thing that as Americans we will quickly solve and go back to our ‘way of life’…. This ILLUSION is so large that creates an eery quiet feeling here in US while Athens burns in rioting and protesting. We are a ‘pressure cooker’ where the pressure continues to move up and up & up but nothing is spilled yet, while Greece is an open frying pan where hot oil is bouncing all over the pan and spilling outside (to the neighbors). The issue with the ‘pressure cooker’ is that we don’t know when exactly the breaking point and fatigue of the weakest link will give way to the explosion and we also don’t know for sure the magnitude of the explosion…..just stay as far as possible when it happens.

Snakebit - “About $9 billion in T-bills would have been paid down on Thursday, June 9, but the CMB issuance turned that into a $6 billion cash drain on the market. That’s not a big deal, but the swing from a paydown to a drain probably contributed to the market’s general weakness. It’s becoming increasingly apparent that POMO alone, without the help of the FCBs [foreign central banks] and commercial banks, cannot do the job of keeping both stocks and Treasuries levitated. Gains in one must come at the expense of the other.” Quoting Seeking Alpha’s Market Currents, “The Fed surpasses China as the largest holder of U.S. Treasuries, thanks to multiple QE operations. By the time QEII ends this month, the Fed will hold 16% of U.S. paper vs. 12% for the Chinese. Hopefully, the 3rd biggest holders - American households - will pick up the slack when the Fed steps away.”

Fiscal Deficits and the Bond Market Vigilantes - Tim Duy is channeling Hamlet, torn between his concern over mass unemployment in a stagnant economy and his fear that an attack on the dollar could be just around the corner. I think he is right that we came close to a disorderly decline in the dollar during the period leading up to the financial crisis, but it’s a big mistake to think that slashing fiscal deficits is any sort of insurance against a return of this threat. On the contrary, big government deficits are exactly the result of credit contraction in the private sector. Duy gives us a FRED visual on capital inflows to the US economy; I’m reproducing it here. Inflows ballooned from the mid 90s until the onset of the financial crisis. This was not a period of outsized fiscal deficits, however; it was the private economy (housing but not only) that ran up the tab. When the bubble popped, it was left to the Fed/Treasury combo to transfer debt from those who couldn’t finance it (households and financial institutions) to those who could (taxpayers). Unless you have a plan to turn a chronic current account deficit into a surplus within the next year or two, this is exactly what financial recovery in the private sector means: fiscal deficits. It’s the macro identity.

Seven Things You Should Know About the National Debt - As talk of the debt ceiling and deficits reaches a fever pitch in the media and on Capitol Hill, a great deal of inaccurate information has clouded the reality of the national debt and deficits. A new issue brief from the Center for Economic and Policy Research describes 7 key facts about the debt, deficits and the dollar, and shows why a clear, unfiltered understanding of them is crucial to current policy debates. “7 Things You Need to Know about the National Debt, Deficits, and the Dollar,” breaks down the basic economics of these issues in a manner unclouded by political agendas or partisan spin. It demonstrates the relationships between the national debt, budget and trade deficits, and the dollar and why these relationships matter. The brief discusses the following points:

  • The national debt is not literally a generational transfer
  • The high dollar, not the budget deficit is what causes the trade deficit and foreign borrowing
  • A large trade deficit requires that we have a very large budget deficit, extremely low private savings, or some combination thereof
  • The stock and housing bubbles led to an enormous reduction in private savings through the wealth effect
  • In times of economic weakness like the nation is experiencing now, deficit spending actually helps the economy to grow
  • High and rising private sector health care costs in the United States are responsible for the bulk of the federal budget deficit
  • Social Security has a dedicated stream of financing and does not directly contribute to the federal debt

CBO's Elmendorf: Debt Default Would Be ‘Dangerous Gamble’ - Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, said Tuesday that a U.S. government default on its obligations would mark a “dangerous gamble” because of the uncertainty surrounding the impact.The White House has warned that the country could default on its obligations if the $14.29 trillion federal borrowing limit isn’t raised by Aug. 2, but many lawmakers have said they won’t vote to raise the debt ceiling unless there’s a plan to reduce the budget deficit. “It’s difficult to know for sure what would happen, because we have no recent experience with our federal government defaulting on its obligations,” Mr. Elmendorf told reporters at a breakfast hosted by the Christian Science Monitor. “That’s what makes it a gamble, but it is a dangerous gamble because any government that has borrowed as much as ours has borrowed, and will need to borrow as much as ours will need to borrow, cannot take the views of its creditors lightly.”

Bernanke says US debt limit delay could end badly (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke warned on Tuesday that a failure to lift the government's $14.3 trillion debt ceiling risks a potentially disastrous loss of confidence in America's creditworthiness. Bernanke said in the absence of a quick resolution to the battle over the debt limit, the United States could lose its prized AAA credit rating, while the U.S. dollar's special status as a reserve currency might be damaged."Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system," Bernanke said in remarks prepared for delivery at an event sponsored by the Committee for a Responsible Federal Budget. Inaction could also "create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the long term," Bernanke added.

Ben Bernanke: Be Fiscally Responsible! (By Ben Bernanke) - Today I will briefly discuss the fiscal challenges the nation faces and the importance of meeting those challenges for our collective economic future. I will then conclude with some thoughts on the way forward. At about 9 percent of gross domestic product, GDP, the federal budget deficit has widened appreciably since the onset of the recent recession in December 2007. The exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. As the economy continues to expand and stimulus policies are phased out, the budget deficit should narrow over the next few years.

Canada urges U.S. to steer clear of debt default - Canada urged its top trading partner, the United States, on Tuesday to steer clear of defaulting on its debt to avoid "disruptions" to the global economy. Finance Minister Jim Flaherty told reporters he had spoken with his U.S. counterparts in Congress and budget officials in the Obama administration to encourage them to "work something out." "This is not just a procedural matter. This has some consequences," Flaherty told reporters when asked about the possibility of the U.S. missing a debt payment. "We don't need any more disruptions in the world economy these days," he said. His comments came as U.S. Vice President Joe Biden and a bipartisan group of lawmakers stepped up negotiations to find a deal that would allow Congress to raise the debt ceiling by an August 2 deadline, when the United States could start defaulting on its obligations.

CBO Chief Says U.S. Debt Default Could Cost Taxpayers Billions - A U.S. government default on its debts would be a “dangerous gamble” that could easily cost taxpayers billions of dollars, the head of the Congressional Budget Office said today.  Doug Elmendorf told reporters that if the investors who buy federal debt begin demanding even modestly higher interest rates, to compensate for additional risk, it could quickly add more than $100 billion to the interest payments the government must make on its debt.  “It is a dangerous gamble because any government that has borrowed as much as ours has borrowed, and will need to borrow as ours will need to borrow, cannot take the views of its creditors lightly,” Elmendorf said today at a breakfast in Washington sponsored by the Christian Science Monitor. “Even a small increase in the perceived risk of Treasury securities would be very expensive for the country.”  If interest rates increased by 10 basis points, it would add $130 billion to interest payments over the next 10 years, Elmendorf said.

Bernanke Calls for Fiscal Plan, but Warns on Using Debt Ceiling as Bargaining Chip - Federal Reserve Chairman Ben Bernanke Tuesday renewed his call for politicians to come up with a plan to contain the growing U.S. public debt soon, but once again warned about the dangers of using the debt ceiling as a bargaining chip in the negotiations. Failing to raise the debt limit could cause “severe disruptions in financial markets,” including ratings downgrades of U.S. government debt and damage to the special role the U.S. dollar and Treasurys currently enjoy in global markets, the Fed chief said in prepared remarks to a bipartisan organization which aims to educate Americans about the nation’s debt challenges.

Bernanke: "Failing to raise the debt ceiling would be self-defeating" - From Fed Chairman Ben Bernanke: Fiscal Sustainability Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation. In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills.

Bernanke: Raise the Debt Ceiling - Today, in a speech to the Committee for a Responsible Federal Budget, Federal reserve Chairman Ben Bernanke reiterated his position that long-term budget reduction is essential, but moving too soon could be harmful to the economy. Thus, he favors committing now to a plan to reduce the budget deficit, but waiting until the economy is on better footing before putting the plan in place: Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. … I have called for something similar, e.g. a deficit reduction plan that kicks in automatically with spending cuts and tax increases once unemployment crosses a predetermined threshold, and I have no quarrel with the general idea. I wish he’s support near term expansion of fiscal policy targeted at job creation, but at least he’s working against the inclination toward immediate austerity that has infected the political process.

Bernanke giving advice on fiscal issues? Sad - On June 30th as well all know, the Fed will finish up buying $600b of US Treasuries and reinvesting another $250-$300b of coupon proceeds and maturing debt, totaling up to $900b. To put into perspective, the US budget deficit from Nov (when the buying started) thru May totaled $789b. Thus, Fed buying has completely covered the back of the US Congress and Treasury during this time period. They have basically monetized the entire issuance of US debt since Nov. I therefore find with tremendous irony Bernanke’s speech right now on fiscal sustainability, lecturing on the evils of not raising the debt ceiling and the necessity of fixing the US government balance sheet. “I urge the Congress and the Administration to work in good faith to quickly develop and implement a credible plan to achieve long term sustainability…I hope, though, that such a plan can be achieved in the near term without resorting to brinkmanship or actions that would cast doubt on the creditworthiness of the United States.” We know politicians will never make tough decisions unless forced to but the Fed’s massive attempt over the past three years to lower interest rates across the entire yield curve has enabled massive government spending because of the low cost of funding, thus putting aside any reason to make tough decisions. Bernanke and the Fed is as complicit as Congress in what has been made of the US fiscal situation and the irony of today’s speech cannot be missed.

A game of chicken - Making a political game out of the debt ceiling is playing with fire. Treasury Secretary Timothy Geithner has been warning of serious repercussions if the debt ceiling is not raised, for example, in this letter written May 13 to Senator Michael Bennett (D-CO):Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our servicemembers, citizens, investors, and businesses. This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our Nation’s economy, significantly reducing growth, and increasing unemployment. Others question whether it's really such a big deal. Here's former Governor Sarah Palin (R-AK):I don't believe Tim Geithner as he cries wolf for the fourth time now, telling us that there is a drop-dead date and crisis will ensue, and economic woes will befall us even greater than they already are if we don't increase the debt limit.The truth is that there is no drop-dead date. This is because the debt ceiling is an inherently mushy concept. There are plenty of accounting gimmicks that the government can use, and is using, to postpone the crisis Geithner sketched in the quote above.

America’s Dangerous Debt Ceiling Debate - Mohamed A. El-Erian – It has been raised more than 70 times in the last 50 years, mostly without commotion. It must be raised again this summer if the United States government is to continue paying its bills on time. But now America’s debt ceiling has become the subject of intense political posturing and touch-and-go negotiations behind closed doors. And, obviously, the outcome has implications that go well beyond the US. US Treasury Secretary Timothy Geithner recently informed members of Congress that the government will be in this situation on or around August 2. Having already officially hit the ceiling, the Treasury is moving money around and tapping various pots of unused funds to pay its bills. In a few weeks, this “flexibility” will be used up. With the US government now borrowing around 40% of every dollar it spends, a truly binding debt ceiling would immediately force the government to reduce spending radically and in a disorderly fashion.Politicians across the political spectrum know that such a situation would unsettle an already fragile US economy, severely weaken the dollar, and raise serious concerns about the country's ability to meet its debt-service obligations, including to the many foreign creditors that the US will need in the future. Yet, in today’s polarized environment in Washington, Republicans and Democrats are unwilling to compromise – or at least to compromise “too early.”

The Dangers of a Default Position The default debate has gone global: In both the U.S. and Europe, markets are confronting questions about the sanctity of government debt. If handled wrong, this risks triggering a fresh financial crisis.  European politicians and central bankers are at loggerheads over whether Greece's private creditors can accept changes to their terms without triggering a default. In the U.S., there is talk of a "technical" default on Treasurys if agreement cannot reached in Washington on raising the debt ceiling.  The problem: If it looks like a default and smells like a default, it probably is a default. Using the word "technical" doesn't change the reality if some Treasurys aren't paid on time. The same goes for Europe. Even if banks "voluntarily" roll over their debt, it is hard to see that as truly an act of free will. Standard & Poor's downgrade of Greece to triple-C—making it the lowest-rated sovereign in the world—specifically fingers the latest German debt swap proposal as a default.

Race to the bottom: Losing the ugly contest - SOME disconcerting news reported in today's Financial Times:Some of Wall Street’s biggest banks are preparing to cut their use of US Treasuries in August as a precaution against any turbulence that could follow if warring Republicans and Democrats fail to increase soon the US debt ceiling, a senior bank chief said.One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasuries.It's enough to make one nervous. Even if Congress managed to avoid an actual default, just treading close to the deadline could get some market participants to sell Treasuries for caution's sake, leading yields upwards and perhaps throwing markets into disarray. Of course, I've argued that as these stories become more common, there will be intense, and ultimately successful pressure on legislators to complete a deal. Besides, where are investors gonna go? Europe?

More Signs Wall Street Is Preparing For Debt Ceiling-Related Problems - It was hard not to notice this story by Michael Mackenzie and Aline van Duyn in yesterday's Financial Times about how Wall Street is planning to deal with the situation if the federal debt ceiling isn't raised by August 2, the date the U.S. Treasury says the federal government's cash situation will become critical.  Here's the money quote:One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasurys. “We’re planning to lower our reliance on the use of Treasurys in early August and have more cash on hand as a contingency measure,” said a U.S. bank chief.

Deficit Cuts Won’t Take Place in Vacuum - The International Monetary Fund became the latest voice in the choir singing the praises of U.S. deficit reduction. Of course, the IMF has sung that tune before, but Friday’s solo had more urgency. The IMF actually lowered its expectations for the 2011 U.S. deficit in part because of better revenues, the result of higher capital gains in 2010. The problem remains farther down the road. What’s missing “is a political consensus on a comprehensive and balanced set of specific measures to underpin a credible medium-term adjustment plan with objectives endorsed by Congress,” Without such a plan, the report said, Treasurys could carry a risk premium, “which would not be good for the U.S. and the world economy.” Deficit reduction, however, doesn’t happen in a vacuum. If government spending zigs, another part of the economy has to zag. To cut the deficit, Washington will spend less and need to borrow less. That means less savings and more demand needed from other sectors.

Biden-led budget talks face daunting odds - For all the optimistic talk, negotiators seeking a deal for lifting a lid on how much money the government can borrow are learning how difficult it is to cut deficits by $2 trillion over the next decade or so. Just this week, the farm lobby showed it will fight to preserve its lucrative federal support as it rallied to the defense of a $5 billion a year subsidy on corn-produced ethanol, while House leaders maneuvered to protect up to $167 million in cuts in direct payments to farmers. At the same time, a blistering outburst from House Democrats against GOP cuts to food aid for pregnant women and hungry people overseas demonstrated that the two parties are miles apart on cutting domestic programs.

Negotiators Consider Big Medicaid Cutbacks - The Medicaid program for the poor is facing significant cuts in an emerging bipartisan budget deal as Republicans seek to shrink entitlements and Democrats protect other priorities.  Vice President Joe Biden and a group of negotiators from both parties met for the eighth time Wednesday at the Capitol, seeking an agreement that would pave the way for Congress to raise the debt ceiling.  Officials familiar with the talks in both parties say they expect Medicaid to be the biggest source of cuts in federal entitlement programs in whatever compromise emerges. Social Security, the government's largest entitlement, is not expected to be cut at all and Democrats' top priority in the budget talks has been to limit cuts to Medicare, the program that provides health care for seniors.

Debt negotiators focusing on Medicaid - This is what a lot of health-care advocates were afraid of. Social Security has, to the surprise of many, been untouchable in this year's various deficit talks and plans. Republicans reached out to touch the third rail of Medicare and got zapped. But Medicaid? Well, the program primarily serves the very young, the very poor and the very disabled. Those aren't constituencies known for meting out iron-fisted vengeance at the ballot box. And sure enough, Janet Hook and Janet Adamy are reporting that "officials familiar with the talks in both parties say they expect Medicaid to be the biggest source of cuts in federal entitlement programs in whatever compromise emerges." That could mean Medicaid is coming in for very large cuts or it could mean Medicare and Social Security is are coming in for very small ones. Either way, the focus on Medicaid is perverse. Medicaid is a much more precisely targeted program than Social Security and Medicare. It's used by primarily by people without the means or the agency to pursue other forms of coverage. Social Security and Medicare, conversely, serve millions of beneficiaries who hardly notice the programs, and don't need them.

Debt Ceiling Charade: Why Are Republicans Voting Against America’s Interests? - There isn’t much credibility left in Congress, perhaps none at all. In fact, the ceaseless C-SPAN sitcom we call government has offered plot lines from titillating tweets to illegitimate children, foreign lovers to shady cover-ups. But even their writers sometimes run out of ideas. Last week, when they thought you weren’t watching, they stooped to acting out their actual jobs: faking a vote on the debt ceiling. A group of Republicans and Democrats alongside them turned sacred duty into dramedy. Pretending they would favor something they actually don’t endorse, they voted against their own beliefs and our national interests.Of course, they first sold their banker buddies the good seats. Along with popcorn and reassurance that they weren’t actually planning a default on our debt, they were just pretending to do so in order to exact concessions.These “leaders” admit that not raising the debt limit is untenable. Defaulting on our loans, we’re told, has the potential to wreck our economy. In fact, we’re supposed to be very concerned about this economy. It’s not “healthy”; it’s in “free-fall”; it’s “crumbling into ruin”.

The Financial Road to Serfdom – How Bankers are Using the Debt Crisis to Roll Back the Progressive Era - Financial strategists do not intend to let today’s debt crisis go to waste. Foreclosure time has arrived. That means revolution – or more accurately, a counter-revolution to roll back the 20th century’s gains made by social democracy: pensions and social security, public health care and other infrastructure providing essential services at subsidized prices or for free. The basic model follows the former Soviet Union’s post-1991 neoliberal reforms: privatization of public enterprises, a high flat tax on labor but only nominal taxes on real estate and finance, and deregulation of the economy’s prices, working conditions and credit terms.  What is to be reversed is the “modern” agenda. The aim a century ago was to mobilize the Industrial Revolution’s soaring productivity and technology to raise living standards and use progressive taxation, public regulation, central banking and financial reform to distribute wealth fairly and make societies more equal. Today’s financial aim is the opposite: to concentrate wealth at the top of the economic pyramid and lower labor’s returns. High finance loves low wages.

AARP Agrees To Benefit Cuts?!? - This is a big story, for obvious reasons.  Seniors have been a powerful lobby against benefit cuts to Social Security and if their main representative organization here in DC is OK with cutting benefits to close the funding gap, then such cuts are a lot more likely today than they were yesterday. But before you get the scissors out, a few things to keep in mind. First, you might get the impression from this debate that Soc Sec benefits are chump change to seniors.  But in fact: “…for recipients age 65 and up on, Social Security is about two-thirds of their income and that share grows with age—for the old-elderly, it’s closer to 70% of their income.  Other data show that for a third of those over 65, Social Security accounts for at least 90% of their income.” So if you must cut, you’ve got to go to the top of the income scale, and here, from Dean Baker and Hye Jin Rho, the fact is: “The percentage of benefits that go to affluent seniors is too small to make very much difference to the program’s finances.”

Debbie Wasserman Schultz: Social Security Benefit Cuts “Off the Table” - Liberals and retirement security advocates were alarmed to read a story today that the AARP has dropped its objection to Social Security benefit cuts. They have since tried to clarify the issue by saying their position hadn’t changed, but the clarification was not in a reassuring way: they basically said they always allowed for benefit cuts as part of a balanced solution.  The oddest part of this story was that Social Security seemed to be out of the mix in the Biden deficit talks. This has alarmed advocates, who think that AARP may have put this back up for discussion. Eric Kingson said he wants to burn his AARP card. I asked DNC Chair Debbie Wasserman Schultz about all this today. She was fairly blunt. “I will tell you that benefit cuts are not on the table,” she said. “They’re not on the table for me and they’re not on the table for our party in the House.” Wasserman Schultz was not totally familiar with AARP’s position, but she stressed that Social Security “will be solvent until long after I retire, and I’m 44.”

The three coming deficit deals - Michael Gerson describes what top Republicans are saying will be in the final budget deal: A package of immediate and specific budget cuts; budget caps reaching out five years to reassure conservatives that tough budget decisions will be made in the future; Medicare reforms short of the House approach; no tax increases — a Republican red line — but perhaps additional revenue from the elimination of tax expenditures. I’m hearing mostly the same thing. The debt-ceiling deal looks like it’ll be almost entirely composed of cuts and caps. Whatever revenues are in it will be token contributions, at best. There won’t be structural reforms to Medicare, Medicaid and Social Security, and there won’t be a pass at tax reform. The budget caps will make automatic cuts to spending if we’re not on a path to primary balance by 2014. The big question with the cap is whether it just makes automatic cuts to spending or it also raises taxes. It’s not obvious to me why the Democrats would fold on that last point, but they might. What this means is that Democrats and Republicans have agreed that the “grand bargain” isn’t spending cuts for tax revenues, but entitlement reforms for tax revenues. And since there’s no agreement on either entitlement reform or tax revenues, those decisions will be delayed.

Dayen, CRS, Bernstein on the Myth of Expansionary Austerity -- David Dayen has an excellent catch-up in the American Prospect on where Washington is on short-term stimulus versus deficit cutting/austerity in the debt ceiling battle: One only needs to look to Britain, which cut $180 billion from its budget last year, to preview the disastrous effects of such a cut. The economyshrank, and real household income dipped to its lowest level since the 1930s. “There’s no way that budget cuts are not going to slow down the growth of the economy,” said EPI’s Mishel. Republicans theorize that a deficit deal would increase confidence in the business sector and financial markets, spurring economic growth all by itself. But there’s ample reason to suspect this ”expanding by contracting” theory. Sadly, the Obama Administration appears to have swallowed it. Last week, several White House officials, including Director of the National Economic Council Gene Sperling, stressed deficit reduction as the primary component of their economic-growth strategy, and repeatedly claimed that reducing the deficit would generate “confidence.”…

Austerity Can Wait for Sunnier Days - Here's the argument for austerity that seems to be winning in Washington. This is Carmen Reinhart at the recent INET conference at Bretton Woods: Her argument, essentially, is that yes, immediate austerity makes things worse. But the failure to invoke immediate austerity brings about even bigger problems down the road, so big that the pain now is worth it. I disagree that immediate austerity is needed. I don't think that waiting, say, two years to begin reducing the deficit will substantially change the chance of big problems down the road. I realize that the credibility of Congress can be questioned, particularly when it involves promises about future actions. But putting a plan in place now that kicks in once predetermined levels of the unemployment rate or some other measure of economic performance are met helps to resolve whatever worries about the long-run might exist. And it does this without imposing immediate austerity measures and endangering the economic recovery. Here's the entire session: » Continue reading "Austerity Can Wait for Sunnier Days"

WWFDRD (What would Franklin Delano Roosevelt do)? - I've heard, hell I've said, that what we need right now is an FDR, not a BHO. We need a new New Deal, a new WPA, a new social contract to break the strangle hold Big Money has on us in every single aspect of life. But if we look at things with a cold, hard, historical eye then we'd have to admit to ourselves that just having an FDR wouldn't bring about the changes we desperately need.  FDR was able to get his progressive policies passed because in the world at the time there was a MASSIVE push from the underclass. There were socialists and communists and anarchists on every corner. There were strikes and pickets and rallies and speeches. There were average people making the elites afraid.  And the elites ONLY EVER ACT IN THEIR OWN BEST INTEREST. FDR could be a progressive capitalist because to the elites progressive capitalism was preferential to straight up socialism, or god forbid, communism and state seizure of property and capital. But, and this is a big, questionable but, part of the fear the elites were feeling was physical. I love Emma Goldman and all her big, bold ideas, but she was a proponent of actual physical violence.

I Ruined the Economy and All I Got Were These Lousy Tax Cuts - Last week, Ben Bernanke delivered a speech in which he agreed that the government should reduce the deficit. However, he cautioned, “a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.”  In economist speak, that’s a warning to Vice President Joe Biden and the handful of congressional leaders he has assembled to tackle the deficit: Don’t cut spending too fast or you’ll kill the economy. Already, the federal government’s limit on the amount it can borrow has been reached, and Treasury Secretary Tim Geithner has warned that the government is now taking “extraordinary measures” to meet its obligations. Yet Republicans refuse to raise the limit without big cuts to government spending. Also last week, Sen. Jon Kyl, a Republican from Arizona and a member of the Biden negotiating team, reiterated his party’s demand: Every dollar the debt ceiling is increased must be accompanied by at least a dollar in spending cuts. That would require a $2.5 trillion deficit-reduction package that would rely on  spending cuts and not include tax increases, according to Kyl.

I Ruined The Economy And All I Got Were These Lousy Tax Cuts - Krugman - That’s the title of a report by David Dayen. Key takeaway: Republicans theorize that a deficit deal would increase confidence in the business sector and financial markets, spurring economic growth all by itself. But there’s ample reason to suspect this ”expanding by contracting” theory. Sadly, the Obama Administration appears to have swallowed it. “I think it’s bogus,” said Mishel, of EPI. “They feel politically forced into shifting to deficit reduction. And they now rationalize this as good for jobs. And I think they all know better.”  Mike Konczal adds, Someone noted that with Goolsbee leaving all of the big names surrounding economic policy are no longer economists but lawyers and people associated with Wall Street. And it is also telling that, with the Larry Summers editorial from the weekend, all of the economists you’d recognize who have left the administration are calling for more stimulus, while it is those there now calling for confidence.It’s worth noting, too, that it’s not even good politics. Having made the “pivot” from jobs to deficits because they thought it was what voters wanted to see, they’ll now get beat up over … not focusing on jobs.

The faith-based economics of deficit reduction, by Dean Baker: It's worth asking how the proponents of deficit reduction think that lower deficits will lead to increased growth and job creation in an economy mired in a severe slump? There is a standard "econ 101" story about how reducing deficits can boost the economy. The theory goes that if the government reduces its deficit, and therefore borrows less, it will reduce interest rates. Lower interest rates will, in turn, give firms incentive to invest more. However, is this what the deficit hawks believe will happen now? The interest rate on 10-year Treasury bonds is already down to 3.0%. Assuming a 2% inflation rate, this translates into a real rate of about 1%. How much lower do the deficit hawks think interest rates will fall if we were to sharply cut the deficit? Furthermore, how much more investment do they think we can induce even if we got a large reduction (for example, 0.5 percentage point) in real interest rates? Do they think that this sort of decline in interest rates will send the dollar tumbling and thereby improve our trade balance? Neither of these stories really passes the laugh test.

Jobs Program? -- Robert Reich visits Washington D.C. and asks about a jobs program:... I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. Here’s a sample of their responses:

    • “Dead in the water. We’ll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next.”
    • “Are you kidding? It’s all budget deficit, budget deficit, budget deficit. Nobody’s thinking about anything else.”
    • “Republicans beat us up so bad over the first stimulus there’s no way we’re gonna try for a second.”
    • “We got [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it.”
    • “No need. We’ll see job growth in the second half of the year.”
    • “The President doesn’t want to put anything on the table he can’t get through Congress.”
    • And so it went. Not a shred of urgency. ...

The Swamp of Washington and the Morass of the Economy - Robert Reich - This morning I was on ABC’s “This Week,” debating jobs and the economy with Republican Senator Richard Shelby of Alabama. Shelby restated the standard Republican playbook of spending cuts and tax cuts. But what struck me most was the similarity between Shelby’s overall attitude and that of the Democrats I talked with — a kind of shrug of the shoulders, a sense that it’s really not all that bad out there, and that nothing can be done anyway. The recovery is stalling across the nation yet in the Washington swamp it’s business as usual. Americans are scared, with reason. We’re in a vicious cycle in which lower wages and net job losses and high debt are causing consumers to cut their spending — which is causing businesses to cut back on hiring and reduce pay. There’s no way out of this morass without bold leadership from Washington to rekindle consumer demand.  If the Democrats remain silent, the vacuum will be filled by the Republican snake oil of federal spending cuts and cut taxes on big corporations and the wealthy.

Direct Job Creation: Why? Why Not?? - An NYT editorial today suggests that the federal government do some direct job creation to offset the weak economy. Why don’t we?  Why won’t we?  Is it because, as a Republican mantra would have it, “the government doesn’t create jobs—only the private market can do that?” Um…that can’t be it.  There are over 20 million gov’t jobs, about 17% of the total right now.  It’s true we can’t have a robust job market if the other 83% aren’t generating jobs.  But do me a favor—the next time someone touts that mantra, change the channel, stand up and shout something, or just do whatever it is you do when you hear an untruth. Why didn’t we do more of this in the Recovery Act?  We actually did a number of things that are awfully close.  State and local aid to states preserves public-sector jobs, and we know that many hundreds of thousands of teachers, police, firefighters and others were kept on the job thanks to the stimulus.Also, infrastructure spending was contracted out to private firms to build roads, repair bridges, improve airports, water systems, etc.  Again, not direct—the employer was private, not the Feds—but close.

Can Obama cut the deficit and have job growth too? - White House Press Secretary Jay Carney recently explained President Obama’s “singular concern, which is that the outcome of the deficit reduction talks produce a result that significantly reduces the deficit while doing no damage to the economic recovery and no damage to our progress in creating jobs.”  Great. And I want to go on a donut diet and shed ten pounds.  As far as Washington is concerned, there are only two ways to bring down the deficit: cut spending or increase taxes. Both reduce private sector incomes. This means that the president is looking for a way to reduce private sector incomes without hampering sales or job creation.  Can it be done? Let’s see.  Suppose the government decides to cut spending by $100. This means that someone in the private sector is receiving $100 less than they were getting before the government tightened its belt. Ordinarily, we would expect this to generate an even bigger drop in GDP, as the decline in income leads to multiple rounds of contraction due to the effect of the multiplier.

How to Cut the Deficit While Adding Jobs - When Joe Biden convened debt ceiling negotiations with Congressional leaders on May 5, the experts were saying that the economy was on an upswing. They’re not saying that anymore.  Consumer spending has weakened. Hiring has slowed. Stocks have slid. As tends to be the case in the long aftermath of a financial crisis, the economy once again needs help.  And the debt talks have become the best opportunity for Washington to provide that help. Doing so will require some political maturity, because the negotiators will have to hold on to two thoughts simultaneously. They will need to increase the deficit in some modest, targeted ways that could increase hiring, like tax cuts for businesses and spending on scientific research. At the same time, negotiators will have to find enough medium-term spending cuts and tax increases to bring down the deficit soon.  Economically, this mix is not all that complicated. Ben Bernanke, the Federal Reserve chairman, has called for a version of it, in his own cautious way. Coming up with a plan to reduce the deficit was urgent, he said, but making cuts now “could be self-defeating if it were to undercut the still-fragile recovery.”

Tom Ferguson on the Budget Battle: “We’ve Got Two Conservative Parties” -  In a recent interview with New School Radio’s Antonio Seccareccia, Roosevelt Institute Senior Fellow Tom Ferguson weighs in on the budget debate, which he sees as “the end stages of the Reagan Revolution.” The problem, he says, is that there are essentially two conservative parties at the national level: “Republicans want to cut, Democrats want to cut less.” That leaves no one to defend programs like Social Security at a time when people need them most. As for the growing deficit, Tom argues that the Republican push to cut taxes without cutting expenditures created the problem.  However, it only became truly catastrophic after the financial crisis, since “financial collapses typically crush economies for years, and that’s driven down the tax take of governments.”  In order to close the gap, we need to return to full employment as soon as possible.  Tom believes President Obama’s biggest mistake was his failure to pass a big enough stimulus in 2009, and the economy continues to drag because of his reluctance to push for another round.

The Gang of Six and Other Rogues - But watch for the bipartisan Gang of Six, and their conservative allies at Tim Geithner's Treasury Department, to snatch defeat out of the jaws of victory.  In the most likely budget compromise that saves the country from defaulting on the national debt, the differences between the parties will collapse in a largely conservative direction. If the current script is followed, Republicans will be the big winners. They will win on gutting social spending, aborting a fragile recovery, humbling the president, and undercutting his re-election chances. Heckuva job, Gang of Six.  Zachary Goldfarb's recent Washington Post profile confirmed Geithner's role in persuading President Obama to give deficit reduction priority over job creation. With the resignations of senior economist Jared Bernstein and more recently chief economist Austan Goolsbee, no senior economic adviser to the president is pushing jobs over budget cutting.  Even with the withdrawal of Senator Tom Coburn, leaving just five bipartisan stalwarts, the Gang of Six (minus one) claims it is on the verge of agreeing to a deficit reduction plan that proposes $4.7 trillion in spending cuts over a decade. If the test is how much to cut, this plan goes both Obama and Ryan one better.

House Trims $9B From Obama’s Defense Budget - The House Appropriations Committee passed today a $649 billion defense spending bill that trims $9 billion from President Barack Obama’s budget while boosting ground combat vehicles and special operations programs. The panel increased funding for the General Dynamics Corp. (GD) M1A2 tank upgrade by $272 million and for commando radios and electronics by $239 million over the Pentagon’s request. The bill also funds the Pentagon’s request for 32 Lockheed Martin Corp. (LMT) F-35 fighters, while cutting $75 million from research.  The committee strongly endorsed the new Army Ground Combat Vehicle and buying more Textron Inc (TXT).-Boeing Co. (BA) V-22 Osprey aircraft. The full committee endorsed reducing the $530 billion base defense budget by no more than $9 billion -- less than half the $20.4 billion reduction made in the current year’s defense budget, which ended up at $513 billion.

Can We Afford the Military Budget? - Defense Secretary Robert M. Gates gave a speech in Brussels on Friday in which he berated our allies in the North Atlantic Treaty Organization for not carrying their weight in terms of providing resources for the common defense. “For all but a handful of allies, defense budgets — in absolute terms, as a share of economic output — have been chronically starved for adequate funding for a long time, with the shortfalls compounding on themselves each year,” Mr. Gates said. An examination of the latest NATO data shows that in 2010, the United States spent 5.4 percent of its gross domestic product on its military — twice as much as spent by Britain and three to four times as much as most of our NATO allies, as shown in the following table. A crucial reason for this gap is that the United States spends almost as much today as it did during the Cold War. Every other NATO country spends substantially less..

GOP House To Cut Aid For Pregnant Women, Children While Spending $17 Billion More On Defense - Today, the Republican-controlled House will begin another onslaught on programs designed to help low-income and middle class families. The GOP quite literally wants to take food from the mouths of children, cutting $47 billion — or 10 percent — from domestic programs, to pay for more defense spending. In negotiations to reach a debt ceiling compromise, Republicans have declared defense cuts “off the table,” even though Pentagon spending is notoriously bloated and Secretary of Defense Gates and other top generals have admitted spending should be curtailed: But the GOP-dominated chamber will soon resume its budget-slashing ways as it kicks off debate Tuesday on a food and farm spending bill that cuts aid for low-income pregnant women and their children and slashes a key overseas food aid program by about one-third below this year’s funding. At the same time, the Appropriations Committee is set to approve a $649 billion measure that slightly boosts the Pentagon’s operating budget

Some Background on How the Roosevelt Institute Got Into Bed With Pete Peterson, the Enemy of Social Security - Yves Smith - Readers may be aware of the firestorm this blog kicked off by criticizing the decision of the Roosevelt Institute to accept a grant from the Peterson Foundation (later disclosed to be $200,000) to have its Campus Network, a group of college students affiliated with the Institute, its Campus Network, to prepare a budget for a Peterson-funded event, the “Fiscal Summit”. The purpose of the exercise was to discuss ways to reduce the fiscal deficit, when the Roosevelt Institute has heretofore taken the position that budget cuts at this juncture are bad policy (we cited two papers by Roosevelt Fellows as examples;many other Roosevelt Fellows, including Bill Black, Jamie Galbraith, Randy Wray, Rob Parenteau, and Marshall Auerback, have made similar arguments).  The Roosevelt Institute has issued rebuttals on its own site (“Speaking Truth to Power” by Andrew Rich, the president of the Roosevelt Institute. Some people associated with the Institute have also spoken out in favor of the participation in the Peterson event, such as Mike Konczal, and Zachary Kolodin.  After writing a second post on this disgraceful episode, and cross posting one from Jon Walker, which analyzed the health care recommendations in the students’ budget and found them to be sorely wanting, I had wanted to step back from this fray a bit. However, readers continue to ask for an explanation as to how the Roosevelt Institute came to make the decision to cast its lot with Peterson.

We Have Been Ruled By Really Stupid People - Of course the stupid or lying question always remains, but former admin official Ron Klain argues with imaginary hippies who told him all he had to do was build another Hoover Dam and the economy would be fixed, and then proceeds to ignore any multiplier effects for infrastructure projects while arguing that payroll tax cuts in the face of mass unemployment is the way to go. Also, too, subsidies for private industry! Or something.

We Told You So - In recent months – or has it been years? – Paul Krugman and Brad DeLong have been saying, in effect, “We told you so – the stimulus was not enough. Look at the sluggish economy and high unemployment rate. They are arguing that the problem with the fiscal stimulus is that it was not enough. The idea was right but the quantity was wrong.Let it pass that at ThinkMarkets it was predicted that this is what the stimulus advocates would say in the event that the economy did not improve as much as they wanted.    The basic problem with the quantitative claim is that it skirts some real problems in the analysis.

  1. What was supposed to happen when the lines of spending actualized by the stimulus were exhausted?
  2. How was the stimulus supposed to jump start private spending? Even the advocates of fiscal stimulus were not saying that the government stimulus had to be permanent .

Mapping the Money: Recovery Board Wants ‘One Stop Shop’ - Stimulus overseer Earl Devaney published proposals Tuesday on how to create a single, “one-stop shop” that would hold all information on how recipients of federal dollars use the money. If that sounds esoteric, consider this diagram, produced by Mr. Devaney’s agency, on how it currently works:Mr. Devaney, a former Secret Service agent, heads the board set up to oversee the implementation of the economic-stimulus package passed in February 2009. Now, he’s advocating to make the new transparency rules for the use of stimulus dollars apply to all federal grants, contracts and loans.Both the White House and House Oversight Committee Chairman Rep. Darrell Issa (R., Calif.) announced separate plans Monday to create a new agency modeled after the stimulus board to monitor all federal spending.

Discretionary Truthiness Update - Krugman - Politifact has now updated its work on the claim, universal on the right — and repeated often by Paul Ryan — that discretionary non-defense spending is up 80 percent under Obama. It’s completely false. As anyone who knows how to read federal statistics should have known, the real number — including the stimulus — is 26 percent. And it’s now in the process of falling off. The discretionary spending falsehood is a key part of the claim that Obama has presided over a vast expansion of government; as I’ve tried to explain, the only real area of rapid growth has been in safety net programs that spend more when there is high unemployment. So, two questions. First, why wasn’t this obvious to everyone? I mean, where are those huge new government programs? Second, why did I have to be the one pointing out this falsehood? Doesn’t the White House have any kind of response team? Or are they so eager to be bipartisan that they don’t want to point out that Ryan is talking nonsense?

Teetering US economy needs more stimulus first - It is important that Congressional and White House negotiators settle on sector-by-sector reductions. Just setting future targets will not be credible. The approach also should be broad-based, including reductions in both tax expenditures and entitlements. But, even a $1,000bn deal would represent a quarter of the amount ultimately needed to stabilise the debt/gross domestic product ratio and solve the problem entirely. Crucially, it would reassure everyone that America is moving to fix this problem which is so threatening. Such an agreement would be an unambiguous plus, with one, key caveat. Namely, the already anemic economic recovery has recently slowed even further. The evidence is unmistakable, which is why share prices have fallen for six straight weeks. This new weakness carries three implications for the deficit negotiators: 1) they should still press ahead to reach agreement; 2) the effective date of their reductions should be 2013, not next year; and 3) the three stimulus measures adopted in December last year should be extended one more year.

Jobs or infrastructure? - America is a high-energy society — that is, we consume a lot of energy. According to Wikipedia the United States has long been the world’s largest producer and consumer of electricity, with a global share in 2005 of at least 25%. This consumption is a primary driver of growth. Energy is our economic blood. The Energy Information Administration tracks and maps our current and potential energy sources. California is a big importer and converter of petroleum, which you can see in the excellent map above via the purple marks. Dependence on imported oil is something we need to phase out for a number of economic, political and environmental reasons. The other thing that the map shows is a vast swath of California that is ideally suited for solar power (see the yellow shading in the southeastern area). It’s bloody hot out there, and that heat can create electricity. Given that vast potential and the ability to redraw the energy picture, why doesn’t the federal government invest in rebalancing our energy sources from dirty oil to clean solar?  Why direct just 3% of federal “stimulus” to the economic lifeblood of our nation?

Mike Whitney: Revamping the WPA - When the recovery began 2 years ago, the rate of unemployment was 9.5 percent. Today it's 9.1 percent. Think about that for a minute. Doesn't that prove that the market isn't really self-correcting after all? I mean, if the market was self-correcting then unemployment would have gone down by now, right? But, it hasn't. Why? There's a long answer for that, and a short answer. The short answer is that unemployment can stay high forever if the wrong policies are in place. If you don't believe that, then vote Republican in 2012 and watch what happens when they start hacking away at public spending. Unemployment will soar to 15 or 20 percent in the blink of an eye.So, it's the policy that matters not the market. And when the wrong policies are implemented, then demand weakens, people get laid off, and the economy goes into a funk. The good news is that we know how to fix the problem and get the economy revved up again. But the bad news is the politicians are not interested in doing what it takes to put people back to work. In fact, unemployment isn't even on their radar. Maybe that's because some of their bigshot constituents aren't bothered by high unemployment; in fact, they kind of like it. It crushes big labor and puts pressure on wages. Maybe that's why they haven't been griping.

Don’ts and Do’s for a Fragile Recovery - Policymakers should adopt a balanced plan—one involving both spending cuts and revenues increases—to rein in medium- and long-term deficits.  But with over 20 million people un- and underemployed, now is not the time to institute large budget cuts or tax hikes. Aggressive spending cuts this year or next wouldn’t just hurt those most exposed to the tough economy.  By taking money and services away from those who need them most, such cuts would hurt the macroeconomy as well.  We should also avoid creating any additional economic “air pockets” in the short term.  One of the 2009 Recovery Act’s most effective programs was fiscal relief to help states meet their balanced-budget requirements despite a historic revenue decline.  Over the past three years, states and towns have been aggressively cutting jobs — more than 530,000 since August 2008 — but these job losses would have been much, much worse without the state fiscal relief.  Since most states still face significant budget gaps, another round of fiscal relief would preserve important jobs and services in our communities, like teachers and police.

Why Not Go For 5% Growth? - Some skeptics have complained about the 5% national economic growth target put forth by former Minnesota Governor Tim Pawlenty in his speech this week about his economic plan. They say it can’t be done. But I think the goal makes a great deal of sense. It would focus policymakers like a laser beam on the great benefits that come from higher growth and on the pro-growth policies needed to achieve it. As with any goal, if you take it seriously, you’ll choose policies that work toward that goal and reject those that don’t.  As stated in the speech, “5% growth is not some pie-in-the-sky number.” One way to see why is by dissecting the number into its two parts using basic economics. As we teach in Economics 1, economic growth equals employment growth plus productivity growth. Productivity is the amount of goods and services that workers produce on average in a given period of time. Thus, higher economic growth can come from higher employment growth or from higher productivity growth. Now consider some examples of average growth rates over the next ten years.

Aspirational Goals Can Distort Policy and Make Us Worse Off - John Taylor encourages policymakers to shoot at unattainable economic growth goals. But he of all people should know that when the Fed targets output growth in excess of potential growth, it can be highly inflationary (he argues he isn't doing this, that 4.7% growth is a reasonable goal to "aspire" to, but there's nothing in our history to suggest this level of growth is sustainable over the long-run). Ah, you say, but fiscal policy is different. Actually it isn't. Suppose you've hit a 3.5% growth rate, and that is potential growth, but your goal is 5%. That will cause you to put policies into place -- more tax cuts if it's up to Republicans -- to try to hit the higher growth target. This distorts policy and captures resources that could be used better elsewhere.

John Taylor on Pawlenty’s 5% Growth for a Decade Claim  - Dr Taylor starts with the recognition that the employment to population ratio is dismally low: Currently the percentage of the working-age population (age 16 and over) that is actually working is very low at 58.4 percent. In the year 2000 it reached 64.7 percent, so that is at least a feasible number. Raising the employment-to-population ratio to 64.7 means an employment increase of 10.8 percent (64.7-58.4/58.4 = .108) or about 1 percent per year over 10 years, even without any growth of the population. Adding in about 1 percent for population growth (from Census projections), gives employment growth of 2 percent per year. I have a couple of quibbles with this even if I earlier sang a similar tune. First of all – cutting government purchases now will likely mean less aggregate demand. I guess Dr. Taylor has joined Pawltenty is failing to recognize the Keynesian nature of the Great Recession. Secondly, I had been chastised by a few smart conservative economists for believing we could get back to a 64.0% employment to population ratio so this notion that 64.7% is feasible does seem like a stretch.

What Would We Need for Persistent 5% Growth? - Last week, I argued that Governor Tim Pawlenty’s aspiration for 5% economic growth over a full decade is implausible since the United States has achieved such steady growth only once since World War II. Over at Economics One, Stanford economics professor John Taylor offers a more positive take, defending the goal and offering a recipe for achieving it: 1% from population growth, 1% from employment growing faster than the population, and 2.7% from productivity growth. Add it all up and you get 4.7% growth, a bit short of Pawlenty’s target but close enough for government work. That sounds great, and I hope it happens, regardless of who is president. But let’s take a moment to kick the tires on Taylor’s assumptions..

What Really Matters for Growth (It's Not Tax Rates) - When Republicans talk about economic growth, they tend to talk as if there is only one factor that affects it: tax rates. Thus, last week former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, put forward an economic plan that he said would raise growth rate of the real gross domestic product to 5 percent per year from its historical level of about half that. His only specific proposal for achieving this ambitious goal was to slash tax rates on the wealthy. Pawlenty would cut the top individual income tax rate from 35 percent to 25 percent, cut the corporate rate from 35 percent to 15 percent, and eliminate completely all taxation of capital gains, interest and dividends – the principal sources of income for the wealthy. Implausibly, Pawlenty asserted that despite reducing revenues by some $8 trillion over the next 10 years – from the lowest level of federal revenues as a share of GDP in 60 years – that his plan would balance the budget. I could find no data or analysis of how Pawlenty’s plan would actually achieve this goal.

Ideologies That Fail Upwards - Paul Krugman - CBPP reminds us that the Bush tax cuts totally failed to deliver, even before the financial collapse: (graph)  And the story is even worse for believers in tax-cut magic if you include the Clinton years; some of us remember the confident predictions that the 1993 tax hike would lead to a catastrophic recession. You might have thought that an ideology that failed so dramatically would have been to at least some extent abandoned. But noooo: belief in tax-cut magic is central to the Ryan plan, and aspiring GOP candidates like Pawlenty seem to be in a race to see who can go more overboard in supply-side faith. Oh, and if you don’t believe their claims, you don’t trust the American people. What will it take before the GOP drops voodoo as its official religion?

Taxes for a Civilized Society - Deficit reduction is often just shorthand for encouraging fiscal responsibility -- a broad and ambitious goal that promotes a strong economy and intergenerational equity. This goal is prominent in fiscal policy circles these days. Yet the intersection of budget policy with tax policy -- namely, the crucial role that tax policy must play in reducing the deficit -- is just starting to get policymakers' attention. As the president's fiscal commission and other groups that have produced deficit reduction plans of their own have made clear, the solution to our long-term fiscal challenges will have to involve a mix of both spending cuts and revenue increases. On the tax side, raising revenue can be done more intelligently if we recognize that how we raise that revenue is important for the overall efficiency and equity of our entire system of public tax and spending programs -- the effectiveness of our fiscal policies as a whole -- and not just in the simple accounting sense of how much we reduce the deficit.

Obama to Consider Extending Payroll-Tax Holiday - President Barack Obama wants to consider extending a payroll tax holiday for employees and initiating a payroll tax cut for employers to accelerate the economic recovery, the White House said Tuesday. Obama believes the administration should “certainly look” at whether to extend payroll tax cuts set to expire at the end of the year, White House Press Secretary Jay Carney said. He said the president also is open to considering initiating a payroll-tax reduction for employers — an idea that would likely garner support from Republicans and businesses. The White House has been sending strong signals since last week about plans to push for an extension of the payroll tax cut for employees, enacted in December. That tax cut lowers Social Security payroll taxes paid by employees to 4.2% of earnings from 6.2%. The idea comes as a recent report showed hiring slowed in May and the unemployment rate edged up to 9.1% from 9%. Getting the unemployment rate lower is seen as key to Obama’s re-election effort.

The Case Against a Payroll-Tax Holiday for Employers - Bloomberg reports that the president's advisers are tossing around the idea of a temporary payroll-tax holiday for employers. Is this the right medicine to cure high unemployment?  Currently, employers face a 6.2% tax on the wages that they pay. This proposal would temporarily suspend some or all of that tax, in the hopes that employers would use that extra cash to pay new hires. As with any problem, to fix anemic job growth you have to first identify its cause. Is it that businesses aren't making enough profit to hire additional workers? This might be the case in some situations, but by in large, business profits have been faring relatively well over since 2010. Instead, the problem is demand: consumers aren't spending enough money to convince employers that it's a good time to hire additional workers.  Unfortunately, a temporary payroll-tax holiday for employers won't solve this problem. . That means that their labor costs would decline by about 6%. But for most companies, slightly lower labor costs won't result in an epiphany that they must hire more workers, because the reason why they weren't hiring in the first place hasn't changed.

A Targeted Payroll-Tax Cut - One of the most successful stimulus programs of the last few years has been the cash-for-clunkers program. In it, the government gave $3,500 to $4,500 to people who traded in an old car for a new one that got more miles to the gallon. If you didn’t buy a car — helping the economy in the process — you didn’t get the money. In my column Wednesday morning, I argued for a similar approach for a new payroll-tax cut for businesses. Rather than giving a tax cut to all businesses, as the White House seems to be mulling (though the details are unclear), a targeted tax cut would reward only those business that added to their payroll. This approach does less to increase the deficit and yet could do more to promote hiring. Michael Greenstone — an M.I.T. economist who runs the Hamilton Project, a Washington research group, and a former Obama administration official — wrote me an e-mail Wednesday morning making a more detailed argument for a targeted payroll-tax cut for businesses.

Is Ending Subsidies a Tax Increase? - The linked Americans for Tax Reform statement is titled “Coburn Amendment half-baked without DeMint Fix.” Americans for Tax Reform today reiterated its support for full, tax revenue neutral repeal of all government granted advantages and preferences to the ethanol industry. To this end, ATR is pleased to support Senator Jim DeMint’s amendment which repeals the Renewable Fuel Standard (ethanol mandate) and kills the death tax. This amendment fills in the gaps left by Senator Tom Coburn’s ethanol amendment and overwhelms the Coburn tax increase with a more significant tax reduction. The Coburn amendment repeals the ethanol tax credit and tariff but in a way that raises net taxes and grows government spending. The DeMint amendment abolishes the death tax which is a significantly larger tax cut than the Coburn amendment’s $6 billion tax increase.  So . . . ATR enthusiastically agrees that the subsidy is a waste of taxpayer money but opposed ending it because doing so would yield more money for the appropriations committees? That’s the same idiotic logic that calls increasing spending less than an agency asked for a “spending cut.”

The GOP, Ethanol, and the No-Tax Pledge - A majority of Senate Republicans yesterday took a symbolic but hugely important vote to eliminate $6 billion in tax subsidies for the production of ethanol.  And, so far at least, they have not turned into pumpkins. The symbolism of their vote should not be underestimated. In a small but important way, 34 GOP senators proved to themselves–if to no one else– that they can vote to “raise taxes.”  Most had signed the infamous pledge demanded by the self-styled protector of the faith, Grover Norquist, that they would never ever vote to raise taxes on anyone in any circumstances. Now, they have.    To be sure, this was in many ways an easy vote. The subsidy itself is one of the least defensible in the tax code and it benefits a handful of corn farmers and producers in just a few states. Besides, the Senate actually preserved the subsidy thanks to one of those procedural squabbles that makes it so difficult for the world’s greatest deliberative body to do anything. Plus, there is no chance this measure would pass the House, at least as a stand-alone bill. So this was the classic free vote—a chance for a lawmaker to make a point without actually changing the law.

A First Crack in the GOP’s “No New Taxes” Armor? - Tuesday’s vote in the Senate on Tom Coburn’s proposal to end the ethanol tax credit was significant even though it failed to get the filibuster-proof 60 votes.  It just barely fell short, receiving 59 votes.  And as the Washington Post’s Lori Montgomery explains, the fact that it got 59 votes means that at least some Republicans supported the revenue-gaining measure: The measure, offered by Sen. Tom Coburn (R-Okla.), fell short of the 60 votes needed to overcome a filibuster threat. But it had the support of 34 of 47 Republicans, most of whom have signed an anti-tax pledge that specifically prohibits raising taxes by any means but economic growth. Coburn has argued forcefully that Republicans must abandon that pledge if they are serious about tackling the spiraling national debt. Though the Senate turned back his measure, he said the vote nonetheless marks the beginning of the end of GOP tolerance for wasteful giveaways through the tax code.

There Will Be Taxes, Ctd - Via Ezra Klein Perhaps the most consequential argument happening in the Republican Party right now is whether a “tax increase” is anything that increases total government revenues, even if those revenues come from closing tax breaks, or whether it means raising marginal tax rates. If the former, there’s a deal to be struck on the deficit that pairs spending cuts with new revenues that come from cutting tax breaks and closing loopholes. If not, well, not. Grover Norquist has been leading the charge against this kind of deal. He says that closing loopholes and ending breaks is only acceptable if the new revenues are immediately plowed into further tax cuts. And today, in an important test vote, he lost. One of the things I’ve noticed is that is gets very difficult to even have a normative opinion on these matters once you start thinking about them in a positive way. It seems almost inevitable to me that tax revenues in the United States will rise substantially over the medium term and so caring about it one way or the other seems pointless.  . I am betting on VAT, but think the GOP would do better to argue for expanding the payroll tax. Slight chance for a millionaire’s tax bracket and other soak the rich measures but I am doubtful at this point.

The Misunderstood Mortgage Interest Deduction - The home-mortgage interest deduction does not by itself significantly distort housing markets. Too much owner-occupied housing has been built because housing is excluded from sales and other taxes owed by businesses. The housing boom and bust of the last decade, and government revenue shortfalls, have brought back the topic of whether the government excessively encourages home building. Those discussions invariably mention the elimination of the home-mortgage interest deduction. This deduction allows taxpayers who own a home, have a mortgage and itemize deductions to reduce their personal income tax by including home-mortgage interest payments in their tax deductions. Homeowners rightly consider this when considering whether and how much to invest in a home and how much they should borrow. A homeowner who pays, say, one-third of his taxable income in federal and state personal income taxes will recognize that a $3,000 monthly mortgage-interest payment really only costs $2,000, because the mortgage interest reduces his taxable income by $3,000 and thus the personal income tax owed by $1,000 a month. It’s as if he paid $2,000 and the federal and state government treasuries paid the other $1,000.

Casey Mulligan’s weird defense of the mortgage-interest deduction - It’s not easy to find an economist who thinks the mortgage interest tax deduction is a good idea, but the NYT has managed it, with this column from Casey Mulligan. Unfortunately, it makes no sense. Here, for instance, is the first paragraph, in full: The home-mortgage interest deduction does not by itself significantly distort housing markets. Too much owner-occupied housing has been built because housing is excluded from sales and other taxes owed by businesses. That’s the last we hear about sales tax: the argument isn’t fleshed out anywhere else. But apparently if you’re an economics professor at the University of Chicago, then this is all the argument that’s needed: houses aren’t subject to sales tax, therefore the mortgage-interest tax deduction doesn’t distort housing markets. It’s a non sequitur, and the bit about sales taxes isn’t even true. In New York City, for instance, real property transfer taxes, plus the “mansion tax” on properties over $1 million, plus the mortgage tax, can amount to 4.75% of the purchase price between them.

Taxpayers face $1.7 billion bill as nuclear lab pensions soar - Lockheed Martin and other contractors that manage U.S. nuclear facilities stand to reap $1.7 billion in savings next year while the Energy Department pays for their ballooning employee pension costs. The pension bills of the contractors, which include Bechtel Group and URS, are projected to more than double from $728 million in the fiscal year that ended Sept. 30 and increase almost 40-fold from $43 million in fiscal 2001, according to federal auditors. More than 30,000 scientists and engineers work at the nation’s 21 national labs and technology centers, according to the Energy Department’s Web site. “We have to go pay this bill,” said Mark Gaffigan, the lead author of a report by the Government Accountability Office. “That means we have less money to maintain the stockpile” of nuclear weapons and clean up nuclear waste.

Let’s Bribe Taxpayers To Give Up Tax Breaks - Sensible budget wonks of all political stripes understand that a solution to our looming budget crisis will require more tax revenues.  The aging of the baby boomers and rising health care costs will push up government spending.  Yes, I know that we have to slow the growth of health spending and we definitely should look for wasteful or ineffective programs to cut, but spending will go up. Of course, not a single House Republican is willing to publicly acknowledge this obvious fact.  They’re all in the thrall of Grover Norquist’s no-tax pledge, which Lori Montgomery reported he dreamed up as a 14-year-old boy.  Fact is, most of the ideas that pop into the adolescent male mind would be a poor guide for public policy and none more so than “the pledge.”  Then again, male politicians of both parties seem particularly prone to adolescent behavior.  But I digress. As Lori discusses, at least in the Senate, some Republicans are open to the idea of cutting “tax expenditures”–the tax credits and deductions designed to subsidize particular activities.   In fact, just yesterday, the senate, including most Republicans, repudiated Grover by voting to end ethanol tax breaks.  It’s a small step, but suggests that perhaps the dark lord’s death grip on sensible budget policy is weakening.

Number of high income taxpayers paying no tax whatsoever increases - IRS Stats are out.  Surprise.  See Justin Brayer, High-Income Tax Returns for 2008.  The number of high-income taxpayers (with incomes of 200 thousand or more--i.e., those in the top 3.1% of the income distribution) that had no US tax liability was doulble in 2008 what it was in 2007--.43% rather than .23%.  Why?  American Enterprise Institute economist Alan Viard is quoted by Bloomberg as saying "I don't know."   Just a guess would suggest that the increasing number of elite-friendly tax provisions--preferential rates on capital gains extraordinarily low, foreign tax credit now extraordinarily manipulable to allow use against US taxes otherwise due, charitable tax deductions (for value, not for actual after-tax investment amount), dividend taxes extraordinarily low, the complete exclusion of interest from municipal bonds and other huge percs and breaks in the Code that only the wealthy elite use--are the culprit.  The wealthy can skew their income in directions to generate less tax much more readily than the rest of us, especially with the Code provisions that operate in their favor.  Include a loss or two (maybe generated by a tax-planned transaction, in your partnership or S corporation, that results in what appears to be a loss but isn't a true economic loss) and you really have it made.....

WSJ Editorial Page Continues Not To Understand Economics - The Wall Street Journal opinion page accuses President Obama of flip-flopping on tax cuts: The Journal here is conflating two completely different beliefs. One idea is that marginal tax rates are extremely important in determining the incentive of workers, investors and entrepreneurs; raise marginal tax rates too high, and they won't bother to work hard or innovate. The extreme version of this dynamic, called "supply-side economics," deems these incentive dynamics so crucial that they determine the entire course of the economy. A completely different idea here is Keynesian economics. That idea holds that, when the economy is depressed, it makes sense for the government to encourage people to spend more. The government can do this by cutting taxes temporarily, thus putting more money into the hands of consumers, or by spending the money directly. The two concepts have nothing to do with each other.

Corporate Tax Cuts Won't Work - Message to Barack Obama: it is time to panic. Our economy is growing at annual rate of just 1.8 percent. Manufacturing just grew at its slowest pace in 20 months. More than 44 million Americans – one in seven – rely on food stamps. Employers hired only 54,000 new workers in May, the lowest number in eight months. Jobless claims increased to 427,000 in the week ended June 4. The unemployment rate rose to 9.1 percent. Nearly half of all unemployed Americans have been without work for more than 6 months. About 25% of all teenagers who are looking for work are unemployed. Eight-and-a-half million Americans are underemployed – i.e. working part-time because their hours have been cut or because they can’t find full-time work. There are, on average, 4.6 unemployed people for every one job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.

Banks battle over US tax law - Banks and foreign governments are mounting an increasingly desperate push against a sweeping US tax law that will force overseas institutions to report their American clients to the Internal Revenue Service. The Foreign Account Tax Compliance Act was passed by Congress last year and comes into force in 2013. Last week, senior bank executives implored Tim Geithner, US Treasury secretary, to modify the law, according to people familiar with the meetings.  Banks say they are already racking up significant costs. Eventually, they say, the task of scouring records for US citizens and then reporting them could run into billions of dollars and conflict with domestic privacy laws. Disclosure records show groups including Switzerland’s Credit Suisse, Barclays of the UK and TD Bank of Canada have together spent millions of dollars lobbying on the issue.  Terry Campbell, Canadian Bankers Association head, said the act was “conscripting financial institutions around the world to be arms of US tax authorities”. People involved in meetings on the subject say the Obama administration has indicated it will look to reduce the burden on banks, which have to identify US citizens with accounts of more than $50,000.

Obama Gives In to Whining on Wall Street - In the end, money wins: Obama Seeks to Win Back Wall St. Cash: A few weeks before announcing his re-election campaign, President Obama convened two dozen Wall Street executives, many of them longtime donors, in the White House’s Blue Room.The guests were asked for their thoughts on how to speed the economic recovery, then the president opened the floor for over an hour on hot issues like hedge fund regulation and the deficit. Mr. Obama, who enraged many financial industry executives a year and a half ago by labeling them “fat cats” and criticizing their bonuses, followed up the meeting with phone calls to those who could not attend. The event, organized by the Democratic National Committee, kicked off an aggressive push by Mr. Obama to win back the allegiance of one of his most vital sources of campaign cash. [H]e has suffered some unusually public defections and criticism by some former Wall Street supporters, who view his policies and rhetoric as unfair to their industry.

GOP Senators Weigh Fresh Angles to Rein In Dodd-Frank —A fairly noncontroversial U.S. Senate bill to support economic-development projects could quickly become contentious next week if Republican critics of the Dodd-Frank financial overhaul have their way. At least three GOP senators are considering taking a stab at attaching amendments to the economic-development measure that would rework key parts of the Dodd-Frank financial-overhaul law Congress passed last year. In fact, one amendment filed by tea-party Sen. Jim DeMint (R., S.C.) would repeal the whole financial law.

Regulators Set to Clash on Capital Rules for Banks -Two top U.S. regulators are set to clash over whether setting bank-capital requirements too high will restrict lending and hurt American companies trying to compete internationally. In remarks prepared for a hearing of the House Financial Services Committee on Thursday, Federal Deposit Insurance Corp. Chairman Sheila Bair and Acting Comptroller of the Currency John Walsh will offer starkly contrasting views of new requirements for banks’ capital cushions being imposed in the wake of the 2008 financial crisis. Their remarks, seen by Dow Jones Newswires, come as U.S. and international regulators are working on several efforts that will require the largest financial institutions to hold more and higher-quality capital.

Simon Johnson: The Big Banks Fight On -  Last week, they lost a major battle on Capitol Hill, when Congress was not persuaded to suspend implementation of the new cap on debit card fees. Despite the combined efforts of big and small banks, the proposal attracted only 54 votes of the 60 needed in the Senate.  On debit cards, the retail lobby proved a surprisingly effective counterweight to the financial sector. On the next big issue — capital standards — the bankers have a different problem: this highly technical issue is more within the purview of regulators than legislators and is harder to develop a crusade about, as it’s widely regarded as boring.  As the bankers busily rallied their forces to fight on debit cards and spent a great deal of time lobbying on Capitol Hill, they were doused with a bucket of cold water by Daniel K. Tarullo, a governor of the Federal Reserve.  In a speech on June 3, Mr. Tarullo implied capital requirements for systemically important financial institutions — a category specified in the sweeping overhaul of financial regulation last year — could be as high as 14 percent, or roughly double what is required for all banks under the Basel III agreement.

The Banking Miracle -The president of the American Bankers Association was railing against excessive regulation in a speech at the Waldorf Astoria. The banking reform bill, he complained, “would destroy a substantial part of our bond-distributing machinery.” He added, “Can anyone expect that a step of this kind will improve the quality of our long-term investments?” Modern echoes, for sure. But I read about the speech in a Jan. 27, 1933 article. The speaker, one Francis H. Sisson, was complaining about an early version of the Glass-Steagall Act, the most famous of all Depression-era bank laws, and the one that, in retrospect, probably did the most good. Less than six months after Sisson’s speech, President Franklin Roosevelt signed it into law. From my vantage point here in 2011, Glass-Steagall seems miraculous. It was amazingly radical, not just for its time, but for any time; it didn’t so much reform banking as upend it. Most notably, it ordered banks to get out of the securities business.  Glass-Steagall also created the Federal Deposit Insurance Corporation, which insured customer deposits for the first time, and outlawed branch banking by national banks, among other things. It is impossible to imagine anything like it passing today; although the modern reform bill, Dodd-Frank2, surely does some good, it’s not even comparable.

CFTC moves to delay some swaps rules past July 16 Reuters (Reuters) - The U.S. futures regulator on Tuesday put the brakes on reforms to the massive swaps market scheduled to automatically kick in July 16 and threaten the validity of billions of dollars in derivatives trades. The U.S. Commodity Futures Trading Commission's proposed delay was a relief to traders, who were facing a daunting gap between the old regulatory regime and the new one called for in last year's Dodd-Frank financial reform law. The CFTC, which must write regulations to cover dozens of complex reforms for the $600 trillion global swaps markets, has missed a series of deadlines for finalizing them. The lack of finalized rules risked creating a legal void for off-exchange derivatives trades used by companies and traders to offset risk on interest rate shifts or commodity price swings. It created fears that trades could be challenged or invalidated. The CFTC unanimously voted 5-0 on Tuesday to delay so-called 'self-executing' reforms until as late as December 31, or until the agency has finalized corresponding rules.

Still Writing, Regulators Delay Rules - Regulators overseeing financial reform are delaying many of the planned changes in the immense market for complex securities known as derivatives1 because they are running drastically behind schedule in writing their new rules.  The Securities and Exchange Commission2 said on Wednesday that market participants would not have to comply with many aspects of derivatives reform scheduled to take effect in mid-July. It declined to specify how long the delay would be in the equity derivatives it oversees.  The announcement follows a similar statement on Tuesday from the Commodity Futures Trading Commission3, although that agency imposed a year-end deadline for many of the changes in the derivatives it oversees.  The idea of changing the deadline had been divisive at the commodities commission. The two Republicans on the five-commissioner board had wanted to create an extension without a deadline. The Democrats, however, wanted a specific date to keep some pressure on the group to complete the rule writing, according to three participants in the meeting.

Dodd-Frank Delays Bring ‘Temporary Relief’ for Banks -There are yet more delays in implementing financial reform. The Commodity Futures Trading Commission has said it needs extra time to write a set of derivatives rules required by Dodd-Frank, and others that were scheduled to go into effect automatically next month may be deferred until the end of the year [1]—leaving the multi-trillion-dollar market mostly unregulated for the time being. The agency is meeting today [2] to hammer out the details of the delay. Derivatives are essentially bets on the value of an asset [3], and though there are many legitimate uses for these financial instruments, they can also be used by speculators in such a way that destabilizes markets—or, for that matter, entire financial systems. Dodd-Frank aims at making many of those transactions more transparent. The commission’s chairman, Gary Gensler, said the extra time could be considered “some interim relief [4]” for Wall Street. He’s also said in recent days [5] that volatile commodities prices and speculation in the commodities market show that new derivatives rules are needed.

Why I was the Skunk at the Party - Yesterday's hearing -- my Dealbook on it here -- was clearly all about political posturing: the Democrats are defensive about Dodd-Frank, rightly afraid that any change to it becomes a chance to repeal or gut, while the Republicans too often veer off into some free market rhetoric that really makes no sense when you are talking about financial institutions. Since when have banks been subject to the free market? Even pre-Fed they were (at least theoretically) under State oversight.So basically neither side wanted to hear what I had to say. But as is so often the case, Alan Sloan comes through with some clear thinking on the matter here.

In praise of the emerging-market regulatory model - THE Brazilian Finance Minister Guido Mantega spoke for many emerging markets in April when he fumed against, “countries responsible for the deepest crisis since the Great Depression…eager to prescribe codes of conduct to the rest of the world”. Mr Mantega might be pleasantly surprised by a Bank of International Settlements paper on central banks and financial stability, which holds up emerging markets as a model for the developed world. It turns out that the only governments to make central banks responsible for financial stability before the crisis were emerging markets. Emerging-market central banks were also far more likely than their developed world counterparts to use “macroprudential” instruments—the suite of tools including capital requirements for banks and systemic risk charges for key institutions, which the BIS now wants central banks worldwide to deploy.

Financial Services Intermediation - Traditionally, non-commercial banking (i.e., everything except savings deposits and consumer loans) was about one of two things:Tax arbitrage or  Regulatory arbitrage. The rest is window dressing; that is, it was basic financial intermediation, usually for the purpose of helping Corporate and/or High Net Worth clients. That was until the late 1990s and the Noughts, when the third level came to liquidity-prominence: Credit rating arbitrage. The third is the most chimerical of all, becausemdash;unless you're selling to or buying from the company that is involved (which has correlation issues, as I noted long ago)—neither party (in theory) has control over the outcome of events. It's asymmetric information on both sides: not so much gambling against the house as shooting craps in the alley, not certain whether there is a bobby down the block.
All of which is an indirect way of saying: Go Read Kash Mansori. Especially if you think US institutions are managing better than the EU is. (Hint: it may be true on the governance level, but the financial institutions's exposure appears to tell another story.)

The False Dichotomy between Banking Honesty and a Sound Financial System - It's exceptionally hard to kill bad ideas. The most spectacularly bad idea in economics and finance is that regulating business honesty is bad for business. The idea is exceptionally criminogenic. The idea ebbs briefly after each epidemic of control fraud it unleashes leads to crisis and scandal, but it quickly returns and intensifies. The bad idea has grown for three decades, which is why we have suffered recurrent, intensifying financial crises. Both major parties' dominant economic policy makers embrace this bad idea.  Nothing is better for honest firms than effective police, prosecutors, and regulatory “cops on the beat.” These things make possible “free markets.” Fraud cripples markets. Criminologists know this. The best economists have known this for over 40 years. But really bright people explained why 285 years ago.

Are banks firms? - In the debate over financial reform, one of the major themes has been the need to protect the public purse from the cost of future bailouts by requiring too-big-to-fail banks to hold a larger buffer of private capital.   In support of this requirement, and against bank lobby claims that it would raise their cost of funds and hence the price of credit, economists have weighed in with a standard argument from corporate finance, the Modigliani-Miller theorem. Unfortunately, as suggested in a forthcoming article in the Harvard Business Law Review, this argument may not work as well as its proponents think it does because banks are, in important ways, not like the ordinary firms to which the theorem is intended to apply.

Mirabile Dictu! Central Bankers Getting Concerned About Bank Capital Levels Rather Late in the Reform Game - Yves Smith - Something very peculiar is afoot. Well after the bank regulatory reform debate was supposedly settled, central bankers seem to be reopening that discussion. It’s puzzling because the very reason the banks won so decisively was that central bankers were not prepared to get all that tough with their charges.  I’m not clear what has led central bankers to get a bit of religion. Is it the spectacle of the Bank of England talking about breaking up the banks (they won’t get their way thanks to bank lobbyist working over the Independent Banking Commission, but no one doubted their sincerity)? Or the Swiss National Bank imposing 19% capital requirements, which as we discussed, is likely to lead to the investment banking are of UBS being domiciled elsewhere (assuming a country capable of bailing it out will have it)? Or perhaps it is central bankers being forced to recognize that their Plan A of extend and pretend and super low interest rates simply won’t lead banks getting to meaningfully higher capital levels when the staff continues to take egregious amounts out in compensation? Or have they realized how bad bank balance sheets are in the Eurozone and how tight the linkages still are among the major capital markets players, and they belatedly realize they need them to be much more shock resistant? The bottom line is that various central bankers have taken the surprising step of insisting their banks meet more stringent requirements for the biggest banks than those originally planned to be to be included in Basel III.

An Unlikely Couple - It’s hard to think of two groups more deeply in conflict with one another right now on financial issues than consumer advocates and mortgage lenders. It was even more striking to see those consumer groups—the Center for Responsible Lending, National Community Reinvestment Coalition, Consumer Federation of America and the National Housing Conference—taking a stand against a key Obama administration proposal for financial reform.  Under the Dodd-Frank financial-reform bill, passed by Congress last year, issuers of mortgage-backed securities must keep the equivalent of at least 5 percent of the value of those securities on their own ledgers, as a kind of inoculation against reckless lending. This “risk retention” was a response to a driving cause of the 2000s financial bubble and bust: Lenders originated mountains of bad mortgages and sold them to investment banks, which in turn packaged those mortgages into securities and sold them to investors, thus passing on the liability to them. If the issuers are financially exposed to the risk of their own products, the reasoning goes, they will be much less likely to package toxic debts to sell to investors.

Inept Obama “Anybody but Warren” Stance Reveals Fundamental Bank v. Middle Class Fault Line -- Yves Smith - It is obvious that Elizabeth Warren should head the Consumer Financial Protection Bureau. No less than our favorite NC nemesis, the staunch Administration defender Economics of Contempt, has said she is “tailor made” for the job. And despite the Republican bluster about using a pro forma session to keep the Senate in business to block a recess appointment, the Democrats could break that maneuver if they wanted to.  So why does Team Obama try to hide its choice not to appoint her behind silly “compromises” like its trial balloon of serving up the CFPB’s number two, Raj Date, as a candidate to lead the agency? The Republicans have already said they will approve no one unless they can cut off CFPB’s air supply by controlling its budget. You can’t negotiate with someone who won’t negotiate. Your options are to defy them or capitulate.  So this “compromise” is an inept sleigh of hand to shift responsibility for the Adminsitration’s refusal to appoint Warren on the Republicans.  The failure of the Team Obama to move beyond this impasse is revealing. It isn’t merely, as we have repeatedly mentioned, a sign that the Administration is in bed with the banksters. That’s a given.  The Warren fiasco reveals deeper layers of the Administration’s character defects: its indifference to the plight of the middle class and its tactical incompetence.

Political battle threatens centerpiece of financial reform… A year ago, President Obama championed the creation of a government agency that would be charged with protecting Americans’ wallets and restore certainty to the nation’s financial system.The CFPB was hailed by administration officials as a centerpiece of the sweeping financial overhaul passed by Congress last year — and the part that most directly affects voters. The agency would consolidate many of the consumer protection functions of seven government regulators, but its real muscle would be its ability to write and enforce new rules and examine financial firms beyond banks. But just weeks before its official launch, the future of the Consumer Financial Protection Bureau is in danger, hamstrung by a partisan standoff that has ground work on Capitol Hill to a virtual halt. The protracted battle threatens to rob the agency of many of the powers that Obama once cited as crucial to preventing another financial crisis.

What Happens if the Consumer Financial Protection Bureau Has No Director By Its Start Date? -- Yves Smith - A useful article in CNN Money (hat tip SA) describes what happens if the Consumer Financial Protection Bureau does not have a director in place by its official start-up date, July 21. That outcome looks certain, given that the House Oversight Committee has scheduled its ritual flogging of its defacto head, Elizabeth Warren, for July 14, and Senate Republicans have vowed to nix any candidate lest they get to strangle the agency by controlling its budget. Even if Obama were to have a brain transplant and do something so out of character as to get in a fight with banks and the Republicans, the logical window of opportunity for breaking the Senate’s planned pro-forma sessions (a device to forestall a recess appointment) would be the four week end of summer Congressional break. That starts August 8. So it looks like a sure bet that the CFPB will go past July 21 with no chief in place.  Contrary to popular opinion (and bank lobbyist fond hopes) the CFPB is not stymied if a director has not been installed. What would happen is:

  • 1. The CFPB does not get moved to the Fed. It stays in the Treasury under Geithner.
  • 2. The CFPB cannot act on new regulatory powers created by Dodd Frank, but it can act in one of its planned and still large roles, that of the overseer of existing consumer financial regulation which is now scattered among many agencies. Those powers are transferred to the CFPB as of July 21.

Consumer Financial Protection Bureau can open without chief - The new Consumer Financial Protection Bureau won’t necessarily be handicapped by President Barack Obama’s delay in naming a director. If the bureau launches on July 21 without a director, Wall Street analysts and attorneys for the financial services industry are bracing for a slew of enforcement actions against major banks. With no director to issue rules and guidance for banks, the bureau most likely will set policy by conducting investigations, suggested Jaret Seiberg, an analyst for the brokerage firm MF Global. “The ability of the CFPB to investigate financial firms and then bring enforcement actions for violating existing laws is the most potent weapon the agency has absent a director,” he wrote in a recent report. “It is also one that will garner politically attractive headlines.”

Consumer bureau to run - There's a myth in Washington that -- come its July 21 launch date -- the consumer financial protection bureau created by the Wall Street reform law has to sit on its hands without a Senate-confirmed director. But Treasury and those working to set up the bureau disagree. They're preparing the bureau to wield some pretty big powers even without a director, many of which have gotten short shrift at other agencies. With all the focus centered on who the president will appoint to run the bureau, and Republicans doing what they can to block1 even a temporary appointment during a congressional recess, it's easy to overlook what the consumer bureau can start doing on July 21. "It would be better for the country if we had a confirmed director in place sooner rather than later,""That being said, the consumer bureau has broad authorities that kick into place in July."

Raters Drawing SEC Scrutiny - U.S. securities regulators are weighing civil fraud charges against some credit-rating companies for their role in developing the mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter. The Securities and Exchange Commission's long-running probe into the deals has widened to the major credit-rating firms, including Standard & Poor's, the people said. The leading ratings companies have been criticized by lawmakers as "key enablers" of the financial meltdown, helping to fuel the $1 trillion Wall Street mortgage-securities machine before the boom ended.

Why the SEC Should Get Medieval With the Credit Rating Agencies - Biblically epic financial crisis on your hands? Fear not! The SEC is on the case. The agency is hot on the heels of credit rating agencies, which — perhaps you heard — may have had something do with the housing crash: Now, SEC officials are focusing on the question of whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, according to people familiar with the matter. “Fraud” these days is one of those fuzzy conceits that everyone seems to understand but no one can agree on. Wall Street CEOs didn’t commit fraud, they only “behaved frightfully,” as Roger Lowenstein decorously put it. Neither did lenders, presumably, since the feds let even major subprime loan pushers like former Countrywide chief Angelo Mozilo walk. Until now, Standard & Poor’s, Moody’s (MCO) and other credit raters also have escaped punishment for their role in the meltdown. The courts, too, have given the firms a free pass by repeatedly ruling that their ratings are constitutionally protected expressions of opinion.

Mirabile Dictu! SEC Probes Relationship Among Toxic CDO Sponsor Magnetar, Merrill, and CDO Manager - Yves Smith - It has taken forever for the SEC to probe the workings the biggest sponsor of toxic CDOs and of course the agency is going after only one highly publicized doggy deal. Nevertheless, the SEC has finally decided to look at the less than arm’s length relationship between the hedge fund Magnetar, whose Constellation program played a central role in blowing up the subprime bubble, and its collateral manager, which in this case a Merrill affiliated firm called NIR. As we will discuss, collateral managers were critical because they effectively served as liability shields for the other participants.  Note that Magnetar does not appear to be the target; the Financial Times reports that the SEC is examining how the deal’s underwriter Merrill sold the deal and how it worked with NIR.  The very same CDO that is the focus of the SEC probe, Norma, was also the first to be noticed outside the comparatively small community involved in creating and buying these deals, in a Wall Street Journal story by Serena Ng and Carrick Mollencamp in late 2007. By the standards of CDOs, Magnetar’s were somewhat exotic, in that they were heavily synthetic. Most (but not all) of the assets were credit default swaps; about 20% of the deal’s asset were bonds, primarily BBB tranches of subprime bonds or the lower rated tranches (AA to BBB) of other “mezz” (for mezzanine, meaning made largely of lower rated bond tranches) CDOs.

Did Goldman con the government? Who knows. Did it con its customers? You bet. - Starting in late 2006, Goldman Sachs made trades that would pay off if the housing market tanked. Was this a massive bet that the housing market was going to crash, as Goldman's critics maintain? Or was it merely a hedge, an attempt by the firm to reduce its risk, as Goldman claims? This debate, which has raged for more than three years, has lately taken on a new significance. Sen. Carl Levin, D-Mich., stops just short of accusing Goldman's top executives of perjury for describing the position as a hedge in their testimony before the Permanent Subcommittee on Investigations, which he chairs. Goldman, for its part, says its executives were telling the truth.  To my mind, the perjury question is a distraction. Any claim that Goldman lied to Levin's subcommittee will probably be hard to prove, and, anyway, the subject obscures more fundamental questions about Goldman's behavior. The evidence that Goldman misled the government is murky. The evidence that Goldman misled its customers, on the other hand, is fairly compelling. And if that is indeed the case, then there are suitable remedies.

Misdirection in Goldman Sachs’s Housing Short -- Goldman Sachs appears to be trying to clear its name. The compelling Permanent Subcommittee on Investigations report on the financial crisis1 [1] is wrong, the bank says. Goldman Sachs didn’t have a Big Short against the housing market. But the size of Goldman’s short is irrelevant. No one disputes that, by 2007, the firm had pivoted to reduce its exposure from mortgages and mortgage securities and had begun shorting the market on some scale. There’s nothing wrong with that. Don’t we want banks to reduce their risk when they see trouble ahead, as Goldman did in the mortgage markets? Nor should shorting itself be seen as a bad thing. Putting money behind a bet that a stock (or bond or commodity or derivative) is overpriced is necessary for the efficient functioning of capital markets. Short-sellers can keep prices from getting out of whack and help deflate bubbles. The problem isn’t that Goldman went short and reduced risk — it’s how.

American Banks ‘High’ On Drug Money: How a Whistleblower Blew the Lid Off Wachovia-Drug Cartel Money Laundering Scheme - Martin Woods is an expert at sniffing out "dirty" money passing through International Banking Systems. A police officer for 18 years and later a detective with London Metro Police Agency, Woods capitalized on his unique expertise as a fraud expert by joining Wachovia's London-based Bank in March 2005 as an anti-money laundering officer. It wasn't long after taking the job that he discovered that his own employer, one of America's leading banks, was a major player in aiding the "bloodthirsty" Mexico drug cartels to launder billions of dollars in drug money through Wachovia banks. Woods traced and identified a "number of suspicious transactions" related to Mexico-based Casa de Cambios (CDC). Casa de Cambios are currency-exchange operations set up along the U.S. Mexico-border to assist cross border transfers of money to remit labor paychecks. And on the illegal side the Casa de Cambios are also known as the superhighway for narcotic proceeds into the U.S. and overseas financial markets.

Small Banks, Big Banks, Giant Differences - There are reasons for bankers like me to view these as good times. Bank profits are up and failures have ebbed. Nonetheless, I remain troubled about the state of the financial-services industry.  Here’s why: community banks have given way to big banks and excessive industry concentration; profits are increasingly driven by risky trading; leverage is taking precedence over prudent lending; compensation is out of control. This toxic combination leads to continued taxpayer risk and threatens long- term U.S. prosperity.  Banking once was a community-based enterprise, relying on local knowledge to guide the process of gathering customer deposits and extending credit. Done well, this arrangement ensures that deposits are deployed into a diversified pool of investments, while providing depositors with liquidity and a return on their savings.  Over the past generation, however, the financial services industry changed dramatically. In 1990, the six largest financial institutions accounted for 9 percent of all U.S. domestic deposits. As of Dec. 31, 2010, the six biggest banks accounted for 36 percent of deposits.

Are big banks doomed to fail? - Have you ever watched something unfold, knowing that it hasn't got a prayer of succeeding? Then you understand how I feel about the provision in the Dodd-Frank financial reform legislation that would supposedly avoid future federal bailouts by requiring giant financial institutions to draw up so-called living wills. These "wills," which banks are currently discussing informally with regulators, are a weak, pathetic substitute for what Washington should have really done: that is, break up "systemically important financial institutions" into much smaller pieces. Or segregate their federally-insured-deposit parts from risky things like creating and trading derivatives. Instead, we have living wills. Translated into English, this means that giant institutions create contingency plans for regulators to break them up or liquidate them in a crisis without any cost to taxpayers. And without the Federal Reserve providing any financing to make the deals work. Living wills sure sound great. Unfortunately, they can't possibly work if we have anything resembling the 2008–09 panic, in which financial markets essentially closed down.

America's Bail-Out Maths - THE federal government is bowing out as America’s most hated fund manager. On June 3rd the Treasury reached an agreement to sell the rest of its holdings in Chrysler, a carmaker, to Italy’s Fiat. Ten days earlier it began to sell its stake in American International Group (AIG) through a public offering of the insurer’s shares. General Motors has returned to the stockmarket (the government still owns 26% of it) and Ally Financial, a former financing arm of GM and Chrysler, will soon follow. In March the Federal Reserve began selling mortgage-backed bonds it inherited from AIG.  Nobody liked the bail-outs, not even the rescued. The public was the most outraged, yet on a narrow reckoning of profit and loss, taxpayers have little cause for complaint.  When Congress held its nose in 2008 and approved the Troubled Assets Relief Programme (TARP) to spend up to $700 billion to alleviate panic, the White House reckoned it might end up losing half of that amount. In the end $411 billion was ploughed into financial firms, carmakers and schemes to reduce foreclosures and restart private lending. As of June 7th $308 billion of that had been paid back. The Treasury values the remainder at $130 billion but could quite plausibly garner more.

Michael Hudson: Free Money Creation to Bail Out Financial Speculators, but not Social Security or Medicare - Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government’s balance sheet from high finance, euphemized as “the private sector” as if it were the core economy itself, rather than its calcifying shell. Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century’s power elite to lord it over “taxpayers” in industry, agriculture and commerce who will be charged to pay off this debt. If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure. The bailout of Wall Street showed how central banks can create money, as Modern Money Theory (MMT) explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses.

Guest Post: America Is Being Raped … Just Like Greece and Other Countries - Preface: The war between liberals and conservatives is a false divide-and-conquer dog-and-pony show created by the powers that be to keep the American people divided and distracted. See this, this, this, this, this, this, this, this, this and this. So before assuming that privatization is a good thing, read on. Greece is thinking of selling some islands. Austria is thinking of selling mountains to pay off their national debt. Cities throughout the U.S. are thinking of privatizing their parking meters. What’s going on? Well, as I predicted in December 2008, bailing out the giant, insolvent banks would cause a global debt crisis:The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks. BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:

Wall Street Braces for New Layoffs as Profits Wane - Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs. The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.“Even Goldman Sachs, Wall Street’s most profitable firm, is retrenching. Senior executives at Goldman have concluded they need to cut 10 percent, or $1 billion, of noncompensation expenses over the next 12 months, according to a person close to the matter who was not authorized to speak on the record. The big pullback will cause Goldman employees, who have already been ordered to cut costs, to re-examine every aspect of their business.

Official: Billions missing in Iraq may be ‘largest theft of funds in national history’ - Approximately $6.6 billion in cash was likely stolen after being flown to Iraq during the months that followed the U.S.-led invasion, Pentagon officials said recently. Stuart Bowen, the U.S. Special Inspector General for Iraq Reconstruction, told The Los Angeles Times that the sum just might be 'the largest theft of funds in national history.' The cash was part of a series of shipments totaling more than $12 billion, taken largely from the U.N. 'oil-for-food' program and the sales of Iraqi oil. Officials in the Bush administration had hoped the massive pallets of cash would help calm Iraq's civilian population following the chaotic and violent invasion and toppling of Saddam. The funds -- which were separate from a $53 billion appropriation Congress approved for Iraqi reconstruction efforts -- were cobbled together by the Federal Reserve Bank of New York before being flown to Baghdad and distributed to interim Iraqi ministers, who U.S. officials see as the most likely culprits in the theft: an allegation that's not officially been leveled.

I Hate It When My Cynicism is the OPTIMISTIC Version - I didn't realize at the time was that the Supreme Court already had decided earlier yesterday that investing in mutual funds should be a hazardous activity: Janus Capital Group Inc (JNS.N) and a subsidiary cannot be held liable in a lawsuit by shareholders over allegedly false statements in prospectuses for several Janus mutual funds, the U.S. Supreme Court ruled on Monday.... Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable. Janus, being the two-faced G-d of Theatre, would approve of his namesake's claim: "Well, we own the company, we paid for the prospectus, we marketed the prospectus, we made assurances to investors based on our Due Diligence about the prospectus—why would you blame us if something goes wrong?"

In Greece, Some See a New Lehman - Bond traders and officials at the European Central Bank have been unified in their warnings that a restructuring of Greece’s debt would set off an investor panic similar to the one that followed the bankruptcy of Lehman Brothers. The thinking goes like this: though banks and other investors have done much to pare their Greek holdings in the last year, if they are forced to take a loss, and the ratings agencies declare Greece in default, investors would start selling in a panic. And they would not sell just the bonds of countries struggling with debt — Portugal, Ireland, Spain and Italy. In a hasty retreat into cash, traders would unload more liquid assets as well, everything from high-grade corporate bonds to American and emerging market equities — as occurred in 2008 after Lehman failed. According to a recent report by Fitch, as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks.  Citing recent data from the Bank for International Settlements, the blog points out that in the event of a Greek default, direct creditors would be on the hook for 70 percent of the losses, with credit default insurance picking up the rest. Thus, if one includes credit default exposure, American exposure to Greece increases from $7.3 billion to $41.4 billion.

Greek debt tsunami could reach US shores - It could be the default heard around the world. If Greece can no longer make payments on its national debt, the financial shockwaves may rock your local bank. As the Greek government teeters and European countries appear deadlocked over a rescue plan, holders of Greek debt face the biggest immediate risk. But the question many investors are asking — just as they did when the collapse of Lehman Bros. sparked the Panic of 2008 — is who, exactly, holds that debt? “This fear of Greek contagion breeds not only a credit crisis but a liquidity crisis, not only in Europe,” said Lincoln Ellis, a managing director at the investment firm Linn Group. “It could spread to the American banking sector as well.”

Uh-oh - According to a recent report by Fitch, as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks. There is more detail here; fortunately, not all of them have heavy exposure to Greece.  You will recall also that “runs on money market funds” were one problem which regulators have yet to address in a satisfactory manner.  Here is another claim, with an uncertain degree of verification: It will be American banks and insurance companies that will have to make the lion’s share of default insurance payments to European institutions if Greece fails…if one includes credit default exposure, American exposure to Greece increases from $7.3 billion to $41.4 billion. It still remains the case that without contagion effects these losses can be handled.

Could a Greek Default Destroy American Money Market Funds? - In 2008, these money market accounts were--as was always pretty obvious--a lot more like bank accounts than mutual fund shares.  The Reserve Primary fund held a lot of Lehmann Brothers commercial paper, which plunged close to zero, meaning that there were no longer enough assets in the fund to make all the shares worth at least a dollar.  This is known as "breaking the buck", and it was not the first time it had happened.  This triggered a run on the money markets, which the government really only stopped by a) passing TARP and b) guaranteeing money market funds.  But as Matt Yglesias points out, Dodd-Frank stripped Treasury of the authority to do such a thing again. And now the money markets are exposed to a Greek default: But according to Landon Thomas, Jr.'s reporting for the New York Times (hat tip Tyler Cowen), there's a threat of this happening again. This time not with the failure of an investment bank, but with a failure of Greece to pay its debts. Apparently "as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks" including "French banks like Société Générale, Crédit Agricole and BNP Paribas" with significant exposure to Greek debt.

Is Greece The Next Lehman Brothers? - Everywhere we look lately debt crisis in the eurozone is in the news. One could watch videos of street protests in Europe all day long for an entire week and not run out of videos to watch. One day Greece is going to default, but Europe's leaders are trying to postpone that day as long as they can. The longer they kick the can down the road, the more the tension mounts. This debt crisis has been going on for months & months, so by now everybody is whipped up into an hysterical frenzy. The operative word is fear. Is Greece the next Lehman Brothers? Will its default bring about the end of the world as we know it?  Like most everybody else writing about Greece, I am completely unqualified to answer that question, so why not write a post about it? As I see it, there are two issues from an American perspective.

  • What is the exposure of U.S. banks to PIGS debt?
  • What is the exposure of the U.S. economy to a sharp economic downturn in Europe?

How Will a PIGS Default Hit the US? - A sovereign default in the euro zone periphery seems increasingly likely. Countries like Portugal, Ireland, Greece, and Spain (the PIGS) face a crushing debt burden, while a globally weak economy, the fixed euro, and domestic economic woes limit their scope for growing out of their fiscal problem. As a result, some sort of debt restructuring or default seems all but inevitable. While investors and observers have long been concerned about the fallout of a euro zone default, the focus has largely been on European banks. Given that European creditors would bear the vast majority of the direct losses of a PIGS default, this concern seems warranted. However, as we learned during the 2008 subprime mortgage crisis, the person holding a loan is not always the person bearing the risk.  It’s worth bearing in mind that AIG was bailed out in the neighborhood of $180 billion dollars, which may never be fully paid back – while other recipients of bailout funds have either paid back their funds or never posed a risk to the taxpayer in the first place. Similarly, the holders of PIGs debt are not necessarily the ones holding the risk. Kash Mansori looks at new BIS data that traces the risk exposure of PIGs debt. The real bearers of risk? American insurance providers.

Indirect US Exposure to the Euro Debt Crisis, part 2 - As last week's new BIS data showed, it appears that US banks indirectly have substantial exposure to the peripheral Euro-zone countries that are teetering on the edge of bankruptcy. Exactly what form that exposure takes is a bit uncertain, though it seems likely that much of it is in the form of credit default swaps (CDS) written by the US banks to provide insurance against default to the holders of bonds from Greece, Ireland, and Portugal.  But it's a bit frustrating not to have a clearer understanding of exactly what form this exposure takes. So I've been trying to see if there is any public information that can give us a hint about exactly how the big US banks have incurred such exposure. Unfortunately, it's very difficult to get any good information about banks' derivatives exposures. The following table summarizes all of the useful information I could gather about credit default derivative activities from the 2010 annual SEC filings of the six largest banks in the US. It's not much, and doesn't really answer our original question, so mainly this just confirms what we have no way of knowing which US banks are exposed to the Euro debt crisis or why.

The Danger Isn’t Greece, It’s Everyone Else - Will this Greek drama go out on a global tour? That’s the fear as officials in Athens scramble to work out an austerity plan to avoid defaulting on the nation’s sovereign debt while some Greek voters riot in the streets. Some market watchers worry Greece 2011 could be a replay of Lehman 2008 when it comes to market performance and economic growth. Greece defaults, markets tank, and the global economy spins into severe recession. In the “Greece as Lehman redux” scenario, a default would force lenders, especially European banks, to write down billions in Greek loans. The losses would reduce bank capital and trigger a global credit crunch. That’s why rating agencies have put European banks under review for possible downgrade. Certainly, there are reasons to worry that Greece’s problems could be the last straw for the recovery, especially because a default could bring the unanticipated. And recent data show the U.S. economy has throttled back significantly in the second quarter. The biggest risk, however, isn’t Greece per se. It is the prospect of other peripheral euro members — Ireland, Spain, and Portugal — following Greece down the default path. That cascade effect has to be avoided.

Greece poses $41 billion risk to U.S. banks - While fears stirred by Greece’s deepening debt crisis raced Wednesday through global financial markets, a quick check of U.S. banks showed they risk losses on tens of billions of dollars should the Mediterranean nation default on its payments. U.S. banks had total exposure of $41 billion to Greece by the end of 2010, according to the latest figures from the Bank for International Settlements issued June 9. Most of the financial commitments appear to be indirect. About 83% is tied to “guarantees” that range from protection for sellers of credit derivative contracts to other obligations owed to third parties. Still the data are murky, according economic consultant Kash Mansori. “We don’t know exactly what the form of exposure is,” said Mansori, who authors the Street Light blog. “We can only make educated guesses.”

Unofficial Problem Bank list at 996 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 17, 2011.  Changes and comments from surferdude808:  This week a little bit of almost everything happened to the Unofficial Problem Bank List. There were three additions, two removals from failure, five removals from action termination, and two removals from unassisted mergers. The net of these changes leave the list with 996 institutions with assets of $416.7 billion.

The Sickness Beneath the Slump, by Robert Shiller- The origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused.  News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.  The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness.  Real estate prices have been a significant indicator of this ailment. An unprecedented bubble in American home prices started in 1997 and ended five years ago. Home prices rose 131 percent in that time, or 85 percent in real inflation-corrected terms, according to the S.& P./Case-Shiller National Home Price index.

Shiller: More Expectations Theory, Less Efficient Market Hypothesis - Yale professor Bob Shiller’s column in the Sunday NYT ( The Sickness Beneath the Slump) is filled with interesting tidbits, data and analysis. You may be tempted to think of his column as the typical Residential Real Estate analysis, looking at historical prices and current trends. Don’t. What the good professor does this morning is damn his own profession for their slavish devotion to bad theory. The Efficient Market Hypothesis — at least as  practiced by Wall Street economists — is the rough equivalent of a million monkeys with a million typewriters creating Hamlet. That somehow out of a crowd of emotional, irrational, ill-informed and greedy humans, some form of truth will emerge.

Wall Street's Latest Manufactured Outrage - The Fed and other regulators have proposed a set of rules that would put new limits on home mortgages: Borrowers would have to put 20 percent down and would have to show that their mortgage payments would amount to no more than 28 percent of their gross monthly income. The Washington Post makes this sound like doomsday: Nearly three out of every five U.S. borrowers who bought homes last year would not have met the proposed restriction on total debt, according to an analysis by mortgage research firm CoreLogic....If the rules were in effect now, Todd Pearson of Ashburn predicts he'd be shut out of the market. He says he has no debts other than his mortgage. But he figures his mortgage payment alone would exceed the threshold proposed by the new rules. You have to admit, these rules do sound pretty tough. In fact, they'd pretty much shut down the entire mortgage industry. So what's going on? Answer: Lots of financial industry whining.

“Capture” of Regulators by Fannie Mae and Freddie Mac - Political economists describe the process whereby government officials end up being the servants rather than the masters of the firms they are regulating as the “capture” by the industry of their regulators. When regulators are captured, much of what they do is motivated, consciously or not, by a desire to help the companies they are regulating, even when the social goals that the regulators should pursue are very different. An economically disastrous example of the capture theory is provided by the disgraceful regulation of the two mortgages housing behemoths, Fannie Mae and Freddie Mac, before and leading up to the financial crisis. In their fascinating recent book, Reckless Endangerment, Gretchen Morgenson and Joshua Rosner explore in great detail how Fannie Mae used political connections and intimidation of anyone who stood in their way to gain a highly dominant position in the residential mortgage market. The authors’ show that various government officials, including congressmen and presidential cabinet members, closed their eyes to what these two government-supported enterprises (GSE) were doing. They allowed them to take on enormous risks, while publicly defending their behavior as not being highly risky.

Guest Post: The Giant Banks Are ALREADY State-Sponsored … So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies? - Indeed, the Fed is pushing to eliminate all reserve requirements. If banks can lend without having any reserves, then agreeing to extend credit obviously comes before having the reserves. And the German central bank has publicly confirmed this as well. We Don’t Need the Giant Banks To Do It.  If private banks can create credit out of thin air – without actually having excess reserves – then the government could do so as well. In other words, if banks don’t need to have extra money lying around before they can make loans, then states and local governments don’t either.  Indeed, North Dakota has had its own public bank since the Great Depression, which has helped that state maintain one of the lowest unemployment rates and lowest debt levels in the nation.

Bank of America Housing Losses to Rise $27B, Bernstein Says…Bank stocks are mostly higher today, but that doesn’t mean that its housing-related problems are anywhere near done.Dow Jones Newswires’: “Bernstein says Bank of America faces another $27B in housing-related losses over the next 2 years, meaning the bank hasn’t even made it through 2/3 of housing-crisis losses. The largest chunk comes from the $408B in home loans BAC has on its balance sheet, where $12B in losses may be coming. “On the bright side for investors, Bernstein says BAC only needs to raise capital if it loses an astronomical $55B.

HUD: Bank of America “Significantly Hindered” Mortgage Probe (Updated) - Yves Smith - We said Bank of America would rue its purchase of Countrywide shortly after it took at stake in the troubled subprime originator: [E]ven though the financial press has almost universally hailed Bank of America’s investment in Countrywide as a bold and savvy stroke, the market has remained singularly unimpressed. I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it.  B of A knew, or ought to have known, Countrywide very well. To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously. In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it. It looks like Bank of America, in a misguided effort to limit Countrywide-related damage, has adopted some of its less than seemly habits, namely a disregard for oversight. Even in our current lax regulatory environment, you don’t mess around with a prosecutor or for that matter, a non-captured government auditor, like the HUD inspector general. It is funded separately from HUD and has the power to subpoena documents but not witnesses.

New York Attorney General Schneiderman Investigating Validity of Mortgage Transfers at Bank of America (Updated: Trustees Bank of New York and Deutsche Bank Also Being Probed) - - Yves Smith - The mortgage industry defenders are looking more and more like fools or liars. Last year, a case called Kent v. Countrywide created a firestorm because both Bank of America’s attorney and a senior executive from Countrywide’s servicing unit said that Countrywide as a matter of business practice retained mortgage notes. That was the wrong thing to say in court. From a November post: We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. If true, this has very serious implications. As we’ve indicated, it means that residential mortgage backed securties are not secured by real estate, or as Adam Levitin put it, they are “non mortgage backed securities….With the ramifications so serious, expect industry denials to continue apace until the evidence becomes overwhelming.  That time has arrived. Abigail Field did a small scale study in two New York counties and found none of the Countrywide originated loans had been conveyed properly, and also found that a majority of the non-Countrywide originated loans were similarly not transferred as stipulated. We have been advised that the New York State attorney general Eric Schneiderman was looking into the same issues as Field, namely, that of whether notes had been conveyed correctly by Countrywide and others.

Bank Of America Faces New Probe; New York Attorney General Launches Investigation Into Mortgage Securitization - New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities, these people said, who requested anonymity because they weren't authorized to speak publicly about the probe.Court testimony and independent studies have raised questions over whether banks and other financial firms passed along the required documents to trusts, the independent entities that oversee securities for investors. In some cases where trusts moved to seize borrowers' homes, judges have determined the trusts lacked legal standing due to faulty documentation.The inquiry could prove explosive: Wall Street's great mortgage securitization machine took millions of home loans and bundled them into securities for sale to investors. If the legal steps that guide securitization -- like taking mortgage documents from one party to another, a critical step under New York law -- were not undertaken, then the investors who bought the bundled loans could force the companies to buy them back, compelling them to eat enormous losses.

2 States Probe Paperwork in Mortgage Bundling -  Opening a new line of inquiry into the problems that have beset the mortgage loan process, two state attorneys general are investigating Wall Street’s bundling of these loans into securities to determine whether they were properly documented and valid. The investigation is being led by Eric T. Schneiderman, the attorney general of New York, who has teamed with Joseph R. Biden III, his counterpart from Delaware. Their effort centers on the back end of the mortgage assembly lines — where big banks serve as trustees overseeing the securities for investors — according to two people briefed on the inquiry but who were not authorized to speak publicly about it. The attorneys general have requested information from Bank of New York Mellon and Deutsche Bank, the two largest firms acting as trustees. Trustee banks have not been a focus of other investigations because they are administrators of the securities and did not originate the loans or service them. But as administrators they were required to ensure that the documentation was proper and complete.

Do We Have a Fraud Problem? The Case of the Mysteriously Appearing Allonge - I have generally been willing to give mortgage servicers, servicer support shops (like LPS), and foreclosure attorneys the benefit of the doubt when it comes to documentation irregularities (to put it mildly) in foreclosures. My working assumption up to this point has been that the documentation problems have been a function of corner cutting with securitization based on the assumptions that (1) the loans would perform better than they did and (2) those that defaulted would result in default judgments in foreclosure, so no one would ever notice the problems. I've also assumed that lack of capacity has played a critical role in problems in the default management chain--the system is held together by Scotch tape at this point. In other words, the problems in the system weren't caused by malice. I got some grief about this from people down in the trenches when I posted a comment about this a couple of weeks ago. And I was tempted to write it off as a function of litigants being too close to their cases. But a document I read today is making me rethink these assumptions. Here is an order from a Florida court that makes me start to wonder if we might have a serious fraud problem going on with blank endorsements and allonges.

Fraud, Anyone? Another Type of Mortgage Document Fabrication Finally Getting Attention - Yves Smith - One of the strongest testaments to the severity of the mortgage mess is the use of document fabrication as a remedy to otherwise insoluble problems. Although the business has now been shut down, the firm DocX, which was a subsidiary of Lender Processing Services, had a notorious price sheet that showed the comparatively modest fees it charged for creating, as in fabricating, documents out of whole cloth. Foreclosure defense attorneys reacted strongly to the publication of this information. The price sheets contained codes, and they had repeatedly seen these very same codes on foreclosure related documents and had wondered what they meant.  Why would lawyers and servicers (and their enabler DocX) resort to fraud? As we explained last October: The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title. That means that the originator had to sign the note over to an intermediary party (there were usually at least two), who’d then have to endorse it over to the next intermediary party, and the final intermediary would have to endorse it over to the trustee on behalf of a specified trust (the entity that holds all the notes). This had to be done by closing; there were limited exceptions up to 90 days out; after that, no tickie, no laundry. Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem.

New York State Appellate Court MERS Smackdown: Another Nail in the Coffin - Yves Smith - There has been a lot of buzz about a strongly worded decision by the New York Second Appellate Division in the Bank of New York v. Silverberg. This is yet another ruling against MERS, but its implications are narrower than some commentators have suggested.It is critical to note that MERS in theory is a mortgage registry, which means whatever authority it has (a matter still being sorted out), it extends to the lien only. MERS has repeatedly said in depositions it was not a lender and has no rights to the note, the borrower IOU. Thus since in most states the note is the critical instrument (the lien is a “mere accessory”), the party foreclosing needs to be a holder of the note (that actually means more than mere possession, you need to be a party of interest, in some states). MERS advised last year that servicers stop filing foreclosures in the name of MERS. However, there appear to be quite a few foreclosures undertaken in the name of MERS grinding their way through the system; this was one of them (I’m a bit puzzled that more in states with MERS-unfavorable precedents have not been withdraw and refiled, but that is over my pay grade). The ruling begins: “This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own.” It’s not hard to guess where this one is going.

How the Mortgage Industry Bullies Lawyers Who Sue Them - Yves Smith - One of the striking things, as the mortgage crisis has ground on, is how persistent and to some degree effective the industry incumbents have been in influencing news stories. One can argue they’ve been more successful than the TBTF banks, perhaps because if you can tank the global economy, keep your job, and still continue to pay yourself egregious bonuses, you don’t need to stoop to throttling every bit of negative coverage. The fact that near-urban legends like strategic defaults are trumpeted in the media as if they are a meaningful phenomenon, or that defenses of securitization practices by firms like K&L Gates, which have liability on their legal opinions, dominated the coverage on that issue for quite some time until more and more court decisions showed their analysis to be sorely wanting, illustrates how much spin there is in what purports to be news. For instance, the website Housing Wire, which appears to aspire to cover the mortgage/housing space comprehensively, nevertheless has had some pretty telling omissions. You saw nary a peep of the bombshell of a story by lawyer Abigail Field in Fortune, which found that all of the mortgages securitized by Countrywide and a large proportion of those that it serviced had not been transferred to the trusts as stipulated in the pooling and servicing agreements that govern then. As we have discussed in this blog at some length, this has devastating consequences. If the borrowers challenge a foreclosure, unless the judge is bank friendly, they will probably prevail. No one wants the party that would be in a position to foreclose (someone earlier in the securitization chain) to do so; that’s an admission the securities are not mortgage backed at least in part if not in full and the investors were defrauded. And there are no retroactive fixes (why do you think document fabrications have become so common?)

National mortgage fraud scandal spreads to the judiciary - While the U. S. Department of Justice is actively prosecuting mortgage and foreclosure fraud, a national organization that helps homeowners avoid foreclosure has evidence that certain state judges appear to be protecting lawbreakers.  Billions of dollars have been received by corporations in the foreclosure industry since the Great Recession began.  Are these vast sums of money finding their way to elected state judges and politicians?

California Bankruptcy Court Judge Edward Zellen Says Repeatedly He Doesn’t Care if the Creditor Asking to be Paid is Really Owed the Money - Yves Smith - Per Georgetown Law Professor Adam Levitin in a Yale Journal on Regulation article: The trustee will then typically convey the mortgage notes and security instruments to a “master document custodian,” who manages the loan documentation, while the servicer handles the collection of the loans. Increasingly, there are concerns that in many cases the loan documents have not been properly transferred to the trust, which raises issues about whether the trust has title to the loans and hence standing to bring foreclosure actions on defaulted loans…. In these cases, there is a set of far-reaching systemic implications from clouded title to the property and from litigation against trustees and securitization sponsors for either violating trust duties or violating representations and warranties about the sale and transfer of the mortgage loans to the trust.  Standing is a threshold issue and is a first year law school topic. It appears Judge Zellen either slept through that class or has been re-educated by the banksters since then. The borrower is pro se and appears to have comported himself well. The judge is quite another matter. This hearing took place last year but is germane because the case is going for oral arguments before the 9th Circuit Court of Appeals next week. Hat tip April Charney: Zulueta Bankruptcy Court Transcript

Stop the banksters: Michigan county weighs foreclosure moratorium - If common sense, instead of banks, ruled the nation, a solution to the foreclosure crisis would have been found long ago. That point was driven home over and over during a June 13 public hearing on a measure to stop the foreclosure "madness." Members of the Wayne County Board of Commissioners listened as speakers pressed for adoption of the Homeowner Protection and Neighborhood Preservation Act, introduced by Commissioner Martha Scott. It would demand an independent audit of foreclosure sales to determine if fraudulent practices were used by banks and mortgage servicers, have the sheriff implement a moratorium on sales of occupied homes, and place the issue of implementing such a moratorium on the November 8, 2011, ballot.

2 Big Banks Exit Reverse Mortgage Business - The nation’s two biggest providers of reverse mortgages1 are no longer offering the loans2, as the economics of the business have come under pressure.  Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America3, the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.  Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance4.  But the loans have increasingly become a riskier proposition.

How Big Banks Displace Families Who Rent - Banks taking over foreclosed properties are considered the new homeowners, but what happens when the building is home to dozens of families who rent? A local neighborhood group says that should make the banks the landlords too -- at least temporarily. The reality, though, is that banks tend to prey on people who don’t understand their rights and immediately evict the innocent tenants, even though displacing families blights entire communities and vacant buildings often become a safety issue. In a report (PDF) issued last week by the Lawyers’ Committee for Better Housing, there were 17,467 rental units in 5,904 foreclosed properties in Chicago -- which amounts to tens of thousands of Chicagoans who were left homeless in 2010. The banks involved in the majority of the foreclosure filings are Bank of America, Wells Fargo, Chase, Deutsche Bank, US Bank, and CitiMortgage.

Freddie Mac: Very low Cash-Out Refinance Activity - Some borrowers are paying down their loans because they do not sufficient equity in their homes to qualify for a loan (a downpayment in arrears). Others are probably paying down their loan amount to meet the conforming loan limits and obtain a better rate. Here is some data from Freddie Mac as of Q1: 75 Percent of Refinancing Homeowners Maintain or Reduce Debt in First Quarter

• In the first quarter of 2011, 3-out-of-4 homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Fifty-four percent maintained about the same loan amount, the highest share since 1985, when Freddie Mac began keeping records on refinancing patterns. In addition, 21 percent of refinancing homeowners reduced their principal balance.
• “Cash-out” borrowers, those that increased their loan balance by at least five percent, represented 25 percent of all refinance loans; the average cash-out share over the past 25 years was 62 percent.
• The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 15 years (third quarter of 1996).

Q1 2011: Mortgage Equity Withdrawal strongly negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is little MEW right now!), normal principal payments and debt cancellation. For Q1 2011, the Net Equity Extraction was minus $107 billion, or a negative 3.7% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q1. Mortgage debt has declined by $634 billion over the last twelve quarters. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be slightly negative.

Existing Home Inventory: Data for 54 Metro Areas - As a followup to Tom Lawler's post on how the NAR estimates existing home inventory, Ben at (aka has put the aggregate monthly inventory data online.  The NAR does NOT aggregate data from the local boards (see Tom's post for how the NAR estimates inventory).   Sometime this summer, I expect the NAR to revise down their estimates of inventory and sales for the last few years. Also the NAR methodology for estimating sales and inventory will be changed. Until then, I think the HousingTracker data might be a better estimate of changes in inventory (and always more timely).  Ben is providing a weekly update of aggregate inventory for the 54 metro areas. Right now he is showing inventory is up 0.1% from last month, and down 7.1% from a year ago.  Usually changes in inventory lead changes in house prices.  Now it appears inventory is falling, but of course inventory is still very high and there is a large percentage of distressed inventory, but this suggests house price declines will slow.

Inventory Overhang Means 6.5M New Households Needed - Experts blame the massive inventory of existing homes on the market for hindering the U.S. housing sector’s recovery. The overhang has been inflated by large volumes of foreclosures, and it’s expected to grow with millions more coming down the will take 6.5 million new household formations to absorb the excess inventory. Lowney has spent more than 16 years interpreting international economic and policy trends and advising North American companies. He estimates excess home inventories at 2.5 million. He says this oversupply has put downward pressure on home prices, which in turn has caused a variety of undesirable effects, such as pushing more houses underwater. This negative equity causes even more defaults, thereby increasing the oversupply, Lowney explained. CoreLogic reports that nearly one-quarter of all mortgage borrowers in the U.S. were underwater as of the end of 2010. The company’s analysts say the “stubbornly high” level of negative equity could have a significant impact on the industry’s shadow inventory – that looming supply of homes that are winding their way through foreclosure and expected to end up as REO, plus homes that have already been repossessed by banks but not yet been put on the market. At last count, Lender Processing Services put the number of mortgages that were delinquent or in foreclosure at 6,388,000. Of those, 2,184,000 properties were in the process of foreclosure.

California home sales fall 13.3% in May - Sales of homes in California plunged 13.3% in May from the same month a year ago, when tax incentives were fueling the market, according to real estate research firm DataQuick of San Diego. The lackluster sales market, which economists say is being held back by weak job growth, is contributing to anemic, if any, home price appreciation. The median price for a home was $249,000, down 10.4% from May 2010 and unchanged from April, DataQuick said. Spring is typically a key season for the housing market, but that doesn't appear to be the case this year, with markets sagging up and down the state. "Sales got a big shot in the arm a year ago, when people rushed to take advantage of expiring homebuyer tax credits," DataQuick President John Walsh said. "Today the market must stand on its own, and it's having a hard time doing that in the absence of stronger job growth and consumer confidence."

Southland Home Sales, Median Price Post Steeper Declines From 2010 - Southern California home sales held at a three-year low last month amid a sluggish move-up market and record-low sales of newly built homes. A total of 18,394 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in May. That was up insignificantly – 0.3 percent – from 18,344 in April, and down 17.4 percent from 22,270 in May 2010, according to San Diego-based DataQuick. ... On average, sales between April and May have increased 5.7 percent since 1988, when DataQuick's statistics begin. The 1,152 newly built homes that sold across the Southland last month marked the lowest new-home total for the month of May since at least 1988.  Distressed property sales continued to account for more than half of the Southland resale market last month, with little change from April. Roughly one out of three homes resold was a foreclosure, while about one in five was a “short sale,” where the sale price fell short of what was owed on the property.

Lawler: CAR vs. “Reality,” and the NAR Benchmarking - The California Association of Realtors (CAR) released their May home sales data this week: May sales and price report. Economist Tom Lawler writes:  Using a “reasonable” estimate of the California Association of Realtors’ (CAR) seasonal factor for May (I have some history of CAR’s NSA numbers), the CAR’s May home sales report would imply an estimate of about 45,000 existing SF detached home sales on an unadjusted basis last month. That number is about 26.6% higher than Dataquick’s (DQ) count of new and existing sales of SF homes and condos in California last May, indicating that the CAR’s existing home sales estimates continue to vastly overstate overall existing home sales in the state. CAR, of course, uses a methodology similar to the National Association of Realtors (NAR) to estimate existing home sales – it estimated total existing home sales (including sales outside of MLS) in 1999 based on data from the 2000 decennial Census and from the 2001 Residential Finance Survey, and then assumes that total existing home sales growth has been the same as MLS-reported home sales growth since then.

Case Shiller: Here Are The 15 Housing Markets That Will Fall The Most By 2012 - Case-Shiller's September housing report came out worse than expected, confirming to any doubters that the housing double dip is here.  National home prices dropped 1.5% in September. The new data will worsen Case-Shiller's already bearish outlook for the housing market. Earlier this month, it forecast a 7.1 percent drop in prices from Q2 '10 to Q2 '11, with price stagnation through Q2 '12. This is a brutal forecast, which would have wide economic consequences. Five years after the housing peak, markets in Florida, Nevada and California would remain down around 60 percent

US Housing Crisis Officially As Bad As Great Depression - It's official: The housing crisis that began in 2006 and has recently entered a double dip is now worse than the Great Depression. Prices have fallen some 33 percent since the market began its collapse, greater than the 31 percent fall that began in the late 1920s and culminated in the early 1930s, according to Case-Shiller data. The news comes as the Federal Reserve considers whether the economy has regained enough strength to stand on its own and as unemployment remains at a still-elevated 9.1 percent, throwing into question whether the recovery is real. "The sharp fall in house prices in the first quarter provided further confirmation that this housing crash has been larger and faster than the one during the Great Depression," Paul Dales, senior economist at Capital Economics in Toronto, wrote in research for clients.

Renters are next victims of the housing market - Renters, long happy to sidestep the drama homeowners have suffered in the roller-coaster housing market, are now facing their downside of the real estate market’s correction. With apartment and rental housing construction halved in recent years and a wave of former homeowners competing for apartment space with "echo boomers" and other renters, conditions have suddenly ripened for landlords to raise the rent.  Last year the rental market quietly shifted from a tenants’ market to what is now decidedly a landlord’s market, said Chris Herbert, research director at Harvard’s Joint Center for Housing Studies. The supply of properties is tightening and vacancy rates are dropping, so landlords have been emboldened to raise the rent. Nationally, rents are expected to rise 5 percent this year and another 5 percent in 2012, according to Greg Willett, vice president of research and analysis at MPF Research in Carrollton, Texas. The trend is not expected to moderate until 2013, when new multifamily housing construction adds to supply and the housing market stabilizes enough to attract new buyers.

Another House Price Index shows a small gain in April - Back when I started this blog in January 2005, everyone followed the OFHEO index for house prices (now called the FHFA index), and none of the other indexes were publicly available. Although Case-Shiller was made available to the public in 2006, it wasn't widely followed until 2007.  Most reporters just used median prices from the NAR in 2005, but median prices are distorted by the mix of homes sold.  The first mention of the Case-Shiller index on my blog that I could find was in May 2007. The first report about the index in the LA Times appears to be on June 27, 2007. This is just a reminder that we were flying blind in 2005 and 2006! There are several other house price indexes that I follow now: RadarLogic (based on a house price per square foot method), FNC Residential Price Index (a hedonic price index), Clear Capital, Altos Research and Zillow. FNC released their house price indexes for April today. According to FNC, their Composite index of 20 cities (same cities as Case-Shiller) was up 0.7% in April. You can see the FNC composite indexes, and prices for 30 cities here.

Using Google Searches to Track Housing Prices - The Bank of England has started to use Google search data to help it spot trends in Britain’s housing and labor markets. There is a strong correlation between how often people search online for “estate agents” and actual house prices, two Bank of England researchers wrote in a report on Monday. The central bank is now monitoring online search terms like “mortgage” and “house prices,” or “jobs” and “unemployed,” to get a more up-to-date picture of the state of the economy. The Bank of England previously depended only on data like property sales or unemployment figures, which are usually published with a delay.  “Monitoring current economic activity closely is an important aspect of policymaking, but official economic statistics are generally published with a lag,”. “Internet search data can help predict changes in unemployment in the United Kingdom. These appear to be as useful as existing indicators. For house prices, the results are somewhat stronger.”

Google Can Help Predict House Prices, Unemployment - According to research from economists at the Bank of England, the words that people search on Google can provide a reliable, and timely, indicator of economic activity. And not only can Internet searches help predict results, but the research shows they can also provide a better understanding of some economic issues. Using Google’s search data, the BOE  compared the occurrence of key words, such as “unemployed” and “house prices,” against official data for the labor and housing markets. The results showed Internet search terms are as accurate as traditional indicators at predicting trends; indeed, for the housing market they are even more accurate. Internet searches have a number of other advantages. They are extremely timely–in contrast, official data are published with a time lag, usually at least a month, meaning they don’t provide an accurate picture of the current state of the economy. Also, the searches draw from a vast sample pool, as around 60% of the U.K.’s adult population uses the Internet every day.

Homeowners Refinance to 15-Year Mortgages to Add Equity - Kirchman took out the new loan to reduce her interest rate to 4.5 percent from 7 percent, and slice the term in half to 15 years. She said she has paid down more principal in the past 10 months than in the previous six years of owning her home in the suburbs of Washington, D.C. “It’s unbelievable,”  “For very little more each month, I’m paying it off much more quickly.”  The portion of borrowers refinancing in January who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009. The share of cash-in refinancings reached a record 44 percent in the fourth quarter, according to data from Freddie Mac dating to 1985. While the share fell to 21 percent in the first quarter as mortgage rates climbed, it was almost double the quarterly average over the past 26 years. “They are people who -- rather than waiting for home values to rise -- are taking matters into their own hands,” Feldstein said. “They are building equity on their own.”

MAP OF THE DAY: Foreign Buyers Are Swooping In To Buy Homes In These Hotspots -  Thank heavens for international buyers, who spent $41 billion on U.S. real estate last year. Even with support, sellers cut $12 billion from homes listed on Trulia in the past 12 months.Where is all of that foreign money going? Trulia produced an interactive chart to show what markets different countries look at most (via Paul Kedrosky). Foreigners stay out of Middle America, excepting Chicago. Meanwhile the big buyers from China look only at New York, Chicago, Las Vegas and Los Angeles.

Residential Remodeling Index increases in April - The BuildFax Residential Remodeling Index was at 109.7 in April, up from 98.0 in March. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax: The Residential BuildFax Remodeling Index rose 15% year-over-year—and for the eighteenth straight month—in April to 109.7, the highest April number in the index to date. ..In April, all regions posted month-over-month gains, and only the Midwest posted a year-over-year loss. This is the highest level for the month of April since the index was started in 2004 - and even slightly above the levels for May in 2005 and 2006 (during the home equity and remodel boom). Note: permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 15% from April 2010.

Housing Starts increase in May - From the Census Bureau: Permits, Starts and Completions. Total housing starts were at 560 thousand (SAAR) in May, up 3.5% from the revised April rate of 541 thousand.  Single-family starts increased 3.7% to 419 thousand in May.    The second graph shows total and single unit starts since 1968.  This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit. This was above expectations of 547 thousand starts in May. Multi-family starts are beginning to pickup - although from a very low level - but single family starts are still moving sideways.

Residential Investment: Mutli-family Starts and Completions - Also from the Housing Starts report this morning ... Although the number of multi-family starts can vary significantly from month to month, apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and 2013 and will be breaking ground this year.   However, since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - there will be a record low, or near record low, number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling average. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.  The rolling 12 month total for starts (blue line) is now at the same level as the rolling 12 month for completions (red line), but they are heading in opposite directions. Starts are picking up and completions are declining. It is important to note that even if there is a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). The following table shows RI in Q1 2011:

Initial Jobless Claims At 414K, 10th Consecutive Week Above 400K; Housing Starts At 560K, Both Modestly Better Than Expected - While this morning litany of economic news was modestly better than expected, it really did nothing to change the picture that the US is rapidly regressing into another recession. Initial claims came at 414K, better than expectations of 420K, but as always expect next week's number to be revised higher to 418K or so: last week's number was as always pushed up from 427K to 430K. Far more importantly, this is the 10th consecutive week in which the initial claims data prints over 400k. Bullish? Continuing claims was just worse than the consensus of 3,670K, at 3,675K, down from an upward (of course) revised 3,696K from 3,676K. The biggest change was attributed to New York state, where 4,060 fewer layoffs were seen in the construction, mfg and retail industries, followed by California with 2,510 fewer claims due to a 'Shorter work week, as well as fewer layoffs in the service industry.' So shorter work weeks are now economic positive. Lastly, on the claims front, the 99 week cliff is pushing ever more people from under the government subsidy wing as 115K people dropped from ongoing EUC and Extended Benefits. The EUC 2008 number is 3,293,507 compared to 4,798,009 a year ago: nearly 1.5 million people have now lost the weekly government check to sit around and look for jobs. Looking at housing starts, the seasonally adjusted annualized number for May was 560,000, just above the 541,000 from April, although below the 580,000 from May 2010. Consensus expected 545K new home starts for the month, or a 4.2% increase from the unrevised April number of 523K. In other words, the starts data was both a miss and a beat, depending on what the baseline used is: revised or unrevised

NAHB Builder Confidence index declines in June - The National Association of Home Builders (NAHB) reports the housing market index (HMI) declined to 13 in June from 16 in May. This is the lowest level since last September. Any number under 50 indicates that more builders view sales conditions as poor than good. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts Press release from the NAHB: Builder Confidence Declines Three Points in June - After holding at a low but steady level for the past six months, builder confidence in the market for newly built, single-family homes declined three points in June to a reading of 13 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The last time the index was this low was in September of 2010. Every component of the HMI fell in June. The component gauging current sales conditions and the component gauging traffic of prospective buyers each fell two points, to 13 and 12, respectively. The component gauging sales expectations in the next six months fell four points to tie its record low score of 15 set in February and March of 2009.

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment. This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

Has the Bad Housing Market Reduced Labor Mobility? - Economists Colleen Donovan and Calvin Schnure have written an interesting new paper, Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?, examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility.  This question has significance far beyond either the real estate market or the labor market, because there has been a persistent line of argument from some that the US's current unemployment problem is not the result of insufficient demand, but is instead a "structural" problem resulting from the inability of the US economy to properly match people with available jobs. A frequent explanation for why it suddenly became difficult to match people with jobs in 2008 is that underwater mortgages have locked people in to their houses, reducing labor mobility and making job-matching more difficult. The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency.

A New Study on Post-Crash Mobility -This blog summarized a bunch of the research surrounding “housing lock” and a lack of mobility as a result of the housing crash back here.  The short answer is that states that saw the biggest declines in housing didn’t seem to be impacted at all in mobility, and the worst hit states might have even increased mobility.  Many studies found that people simply just rented out there homes and moved on to new places.  I found the evidence convincing and would note the lack of counter-evidence, or a literature saying that housing lock was in fact a major issue while dealing with these arguments.Mark Thoma points us to the following summary of exciting new research, written by Kash Mansori, of recent work by Colleen Donovan of Freddie Mac and Calvin Schnure of the National Association of Real Estate Investment Trusts: The evidence presented in this paper indicates that the fall in house prices has indeed caused a “lock-in” effect, but has not significantly impacted labor market efficiency

Should We Care if People Don't Pay Their Debts? - There has been a meme going around for a while that you don't really have a moral obligation to pay your mortgage, because the contract contains embedded options for the lender: you can pay them back, or they can take the house.  I've long thought that this was rather silly.  Go look at your mortgage documents.  You will notice that the contract does not specify any option for you to give them the house in lieu of payment.  The note you signed includes a promise to pay, period.  It also specifies what will happen in the case of breach, but you have specifically promised to avoid breach at all costs.    Maybe you think there is no moral obligation to keep your promises.  Try it in the context of your personal life:  it's okay for my boss to stiff me out of that raise they promised, because I can always quit.  It's okay for my wife to cheat on me, because I can always get a divorce.

It's The Debt, Dummy - I think charts tell a story that allows you to disregard  the lies being spewed by those in power. Below are four charts that tell the truth about our current predicament. The first is from The austerity and debt reduction storyline being sold by the MSM is a crock. The total amount of mortgage debt outstanding peaked at $14.6 trillion in 2008. The total amount of consumer debt (credit cards, auto loans, student, boats) outstanding peaked at $2.6 trillion in 2008. Today, mortgage debt outstanding stands at $13.8 trillion, while consumer debt stands at $2.4 trillion. Therefore, total consumer debt has declined by $1 trillion in the last three years. The MSM and talking heads use this data to declare that consumers have been paying down debt. This is a complete and utter falsehood. The banks have written off more than $1 trillion, which the American taxpayer has unwittingly reimbursed them for. Consumers have not deleveraged. They have taken on more debt since 2008. GMAC (Ally Bank) is handing out 0% down 0% interest loans like candy again.

So, why not a jubilee year? - After a long and intereresting post, Steve Keen concludes The only sure road to recovery is debt abolition—but that will require defeating the political power of the finance sector, and ending the influence of neoclassical economists on economic policy. That day is still a long way off.  Or not. In a highly-stressed complex system, small changes can create large shifts.

Stealing from Americans via strip malls and raw land – Commercial real estate reaches a new post-bubble low. A lost decade in commercial real estate values. -The commercial real estate (CRE) bubble is popping with dire consequences.  It is not uncommon for people to be in the complete dark when it comes to CRE.  Just ask a friend or family member what they know about the CRE market.  The mainstream media has absolutely failed to report on this $3 trillion market which has caused hundreds of banks to fail.  The Federal Reserve has purposely hidden assets backed by commercial real estate deep in the underbelly of its balance sheet trying to protect the banking system from facing reality.  In short the Fed has initiated a shadow bailout of the banking system, every wart and scar included, without even running it by the U.S. taxpayer.  Keep in mind that the Fed balance sheet has empty shopping malls, run down motels, and other items including luxury hotels.  This correction in CRE has been going on for a few years so it should come as no surprise to you that CRE values are now at a post-bubble burst low.

America's lost trillions -- One reason that the U.S. economy still struggles to achieve sustained growth is that Americans are a long way from recovering the trillions of dollars of household wealth lost during the Great Recession. U.S. household wealth fell by about $16.4 trillion of net worth from its peak in spring 2007, about six months before the start of the recession, to when things hit bottom in the first quarter of 2009, according to figures from the Federal Reserve. While a rebound in the stock market, an improved savings rate and consumer steps to reduce debt resulted in net worth gains since 2009, only a little more than half of that lost wealth - $8.7 trillion -- is back on household balance sheets.  That leaves American household wealth $7.7 trillion less than it was before the recession.

Retail Sales Slip In May - Retail sales fell a modest 0.2% last month on a seasonally adjusted basis, the Census Bureau reports. That’s the first monthly decline in nearly a year. Given the recent weakness in several economic reports, no one needs an excuse to see today's retail sales news as a sign of trouble ahead. Fair enough, although there's still room for debate. As troubling as the number du jour is, the broader context for retail sales remains quite positive. That may or may not be decisive, but it's something. As the chart below shows, the 12-month trend in retail sales remains robust through May, advancing nearly 8% on a seasonally adjusted basis. That's higher than during the boom years just before it all came crashing down in the Great Recession. If there's a new recession approaching, it's not obvious in the annual pace of retail sales.

Retail Sales declined 0.2% in May - On a monthly basis, retail sales decreased 0.2% from April to May (seasonally adjusted, after revisions), and sales were up 7.7% from May 2010. From the Census Bureau report:The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $387.1 billion, a decrease of 0.2 percent (±0.5%) from the previous month, but 7.7 percent (±0.7%) above May 2010.  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 16.4% from the bottom, and now 2.3% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.1% on a YoY basis (7.7% for all retail sales).  This was above expectations for a 0.5% decrease. Retail sales ex-autos were up 0.3%; at expectations of a 0.3% increase. As expected, auto sales impacted retail sales (due to supply disruptions).

Retail Sales Fell Less Than Forecast in May -  Sales at U.S. retailers fell less than projected in May, showing consumers were weathering elevated gasoline costs. The 0.2 percent decrease reported by the Commerce Department in Washington today compared with the median forecast for a 0.5 percent drop in a Bloomberg News survey of economists. Excluding the biggest slide in auto sales in more than a year, purchases climbed 0.3 percent. Another report showed wholesale costs rose last month. Stocks rallied on bets household demand, which accounts for about 70 percent of the U.S. economy, will improve as energy prices recede and the auto industry rebounds from the disaster in Japan. Chains including Limited Brands Inc. missed analysts’ estimates for May as fuel costs climbed to the highest level in almost three years and unemployment topped 9 percent. “We are seeing sustained economic growth at a moderate pace"

Global economy menaced by return of living dead - The global economy is being hobbled by a new generation of zombies – the economic walking dead. American consumers are in the early stages of an unprecedented retrenchment. In the 13 quarters since the beginning of 2008, inflation-adjusted annualised growth in consumption has averaged just 0.5 per cent. Never before in the postwar era have US consumers been this weak for this long. The zombie syndrome has an important antecedent. It was, in fact, a key symptom of the Japan disease, which led to the first of two lost decades for that country. It is comparable in post-bubble America. After a record buying binge that lasted a dozen years, US consumers were stretched as never before. Consumption excesses were built on the precarious foundation of two bubbles – property and credit – which have now burst. It will take a long time for American consumers to recover from the ravages of this bubble-induced spending binge. Deleveraging, the paying down of excess debt, has barely begun. Yes, household sector debt came down to 115 per cent of disposable personal income in early 2011. While that is 15 percentage points below the peak ratio of 130 per cent hit in 2007, it remains well above the 75 per cent average of the 1970 to 2000 period.

Consumer expectations in U.S. drop to lowest level in two years - Americans' views on the economy's outlook soured in June, showing that unemployment, inflation and the slump in housing are concerning consumers.  The Bloomberg gauge of economic expectations dropped to minus 31 this month, the lowest level since March 2009, from minus 16 in May. The Consumer Comfort Index, issued weekly, improved to minus 44 in the period to June 12, the highest level since mid April, from minus 45.9 as fuel prices kept falling. "Persistently high unemployment and the long-suffering housing market continue to cast dark clouds, likely informing the public's increasingly unhappy outlook for the future,"  "In terms of conditions now, the lead foot of gas prices has lightened lately."  Joblessness climbed to 9.1 percent in May, the highest level this year, and employers added fewer workers to payrolls than forecast. At the same time, consumer prices last month exceeded projections as the cost of everything from autos to hotel fares climbed, making it more difficult for American households to make ends meet.

The Truth About Retail Sales And The Price Of Gasoline - Some people have been quick to tout the rebound in retail sales as a sign of the strength in the economy and the positive impact of QE2, but a recent article by Brian Pretti at Financial Sense helped put this story in the proper perspective.  When one looks under the hood at the actual retail sales increase you find a trend that is oddly similar to the CPI data.  The surge in retail sales is largely due to the increased consumption expenditures in gasoline:“The picture by now should indeed be crystal clear. The ONLY category of retail that has been growing its sales as a percentage of total retail sales over both of the QE periods has been gasoline, again leaving the non-store retailing trends aside. And this is Mr. Bernanke’s wealth effect? To be honest it has indeed worked wonders for wealth generation – the wealth of crude oil producers, that is. The collective and very simple message is that there has been no wealth effect at all if one defines that as an increase in discretionary consumption. The Fed has incited commodity and equity speculation in its QE heroics, with the results being the rising cost of gasoline has acted to “displace” alternative forms of discretionary retail spending.

Number of the Week: Compensating for High Gas Prices - 138.45 billion: Gallons of gasoline the U.S. is forecast to consume this year, according to the Energy Information Administration. The price of gasoline eased in recent weeks, but it’s still high. At the current level of $3.71 for a gallon of regular, the U.S. would spend $140 billion more at the pump annually than a year ago, when it fetched $2.70. That’s equal to about 1.3% of the $10.9 trillion consumers look likely to spend this year according to a forecast from Macroeconomic Advisers. Unlike video games or restaurant meals, when gasoline goes up in price, people can’t easily forgo buying it, or buy something else in its place. It takes time to set up a car pool, or trade in the gas guzzler for a hybrid. As a result, when gasoline prices go up, people compensate by either saving less (and borrowing more) or cutting spending on other things. Since the housing bust and recession depleted many people’s savings (and destroyed their credit), these days they’re probably more likely to cut spending. There’s a reason retail sales have been less than robust lately.

The End Of Cheap Goods? - “IT IS the end of cheap goods,” says Bruce Rockowitz. He is the chief executive of Li & Fung, a company that sources more clothes and common household products from Asia than perhaps any other. In the low-tech areas in which Li & Fung specialises, the firm handles an estimated 4% of China’s exports to America and a sizeable chunk of its exports to Europe, too. When China was isolated under Mao Zedong, companies in Hong Kong, Taiwan and South Korea grew expert at making things. When China reopened in the late 1970s, after Mao’s death, these experienced Asian operators converged on southern China. For the next 30 years manufacturers in China helped to keep global inflation in check. But that era is now over, says Mr Rockowitz. Chinese wages are rising fast. A wave of new demand, especially from China itself, is feeding a surge in commodity prices. Manufacturers can find some relief by moving production to new areas, such as western China, Vietnam, Bangladesh, Malaysia, India and Indonesia. But none of these new places will curb inflation the way southern China once did, he predicts. “There is no next,”

Consumer Inflation Showed Small Increase for May - Consumer prices crept up last month at the slowest pace so far this year, tempered by a decline in energy prices, according to government figures released on Wednesday, while a regional report for New York suggested a decline in manufacturing activity and optimism. Taken together, the reports reflect the impact of some of the global events that took place in recent months.  “Both of them are reflective of the slowdown in the economy that we have experienced over the last few months,” The Labor Department said in its monthly report that the Consumer Price Index1, the most widely used gauge of inflation, was up 0.2 percent in May, compared with 0.4 percent in April, and up 3.6 percent from a year ago before seasonal adjustment. The monthly rise in the C.P.I. was the lowest since November, when the index was up 0.1 percent, the department’s Bureau of Labor Statistics said.

U.S. Wholesale Prices Rise 0.2% on Plastics, Fuel, Textiles -  Wholesale costs in the U.S. rose more than forecast in May, led by higher prices for fuel, plastics and the fastest rise in 30 years for apparel and textile costs.  The 0.2 percent increase in the producer-price index compares with the 0.1 percent median estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The so-called core measure, which excludes volatile food and energy costs, increased 0.2 percent, matching projections.  The costs of apparel and other fabricated textile products rose 1.0 percent in May, the fastest since 1.3 percent in April 1981. Federal Reserve Chairman Ben Bernanke has reiterated that he expects commodity costs to ease in coming months. “Consumers don’t have the income to sustain the higher food and energy prices, so they’re going to cut back on spending elsewhere,” “When you have five people competing for every job, wages are going to remain very weak, and that’s what ultimately drives inflation.”

LA Port Traffic in May: Both Imports and Exports increased - The first graph shows the rolling 12 month average of loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for May. LA area ports handle about 40% of the nation's container port traffic.  On a rolling 12 month basis, inbound traffic is up 0.4% from April, and outbound traffic also up 0.4%. The 2nd graph is the monthly data (with strong seasonal pattern).  For the month of May, loaded inbound traffic was up 5% compared to May 2010, and loaded outbound traffic was also up 5% compared to May 2010.   Exports are near the pre-recession peak in 2008, although imports in May were still below the levels of May 2006 and May 2007. This suggests the trade deficit with China (and other Asians countries) probably increased seasonally in May.

How to fix crumbling U.S. roads, rails and airways — If America’s prosperity depends on its roadways and transportation system, the future looks pretty rough.  After more than a decade of declining tax revenue in the United States, highways are crumbling, rail lines are overburdened and airline corridors are congested. Factor in the economic weakness, the public’s tax-cutting mindset and geopolitical instability, and an already shaky situation looks ready to worsen for commerce, jobs and several industries that are crucial for transportation infrastructure.  Analysts are pessimistic about the U.S. transportation system making progress. There isn’t enough money to maintain what the country has right now, much less to get to quality levels that are giving other nations a competitive advantage.  “Substantial under-investment won’t affect the economy in the short run, but productivity will be affected in the long run,”. “People will be stuck in traffic more often, stuck at airports longer, and that lost time adds up over 10, 20 years.”  It will also mean higher transportation costs, whether rail, trucking or shipping, and that will make American-made goods more expensive overseas and less competitive,

Industrial Production edged up in May, Capacity Utilization unchanged - From the Fed: Industrial production and Capacity Utilization Industrial production edged up 0.1 percent in May, the second consecutive month with little or no gain. Revisions to total industrial production in months before May were small. In May, manufacturing production rose 0.4 percent after having fallen 0.5 percent in April. The output of motor vehicles and parts has been held down in the past two months because of supply chain disruptions following the earthquake in Japan. Excluding motor vehicles and parts, manufacturing output advanced 0.6 percent in May and edged down 0.1 percent in April;  Capacity utilization for total industry was flat at 76.7 percent, a rate 3.7 percentage points below its average from 1972 to 2010. This graph shows Capacity Utilization. This series is up 9.5 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 76.7% is still "3.7 percentage points below its average from 1972 to 2010" - and below the pre-recession levels of 81.2% in November 2007.  The second graph shows industrial production since 1967. Industrial production edged up slightly in May to 93.0.

June Philly Fed manufacturing gauge turns negative — Exacerbating worries about a slowing U.S. economy, an important regional gauge of manufacturing activity showed contraction in June, according to figures released Thursday.  The Philadelphia Fed’s index of current activity fell to -7.7 in June from +3.9 in May — the first negative reading since September and the lowest reading in 31 months. Economists polled by MarketWatch had expected a +5.5 reading, and markets were fearful of a negative reading after a similar New York–area poll released Wednesday also fell into negative territory during June. See story about Empire State.

U.S. industry still shaken by earthquake -- The March 11 earthquake and tsunami in Japan continued to hamper U.S. manufacturing in May, the Federal Reserve said Wednesday. U.S. industrial production rose 0.1 percent in May compared to April, the Fed said. The figure reflects growth or contraction in manufacturing, mining and utilities. Manufacturing is the component affected by the earthquake "because of supply chain disruptions," especially in the automotive industry, the Fed said. Excluding automobile production, manufacturing output rose 0.6 percent in May. Including automobiles, manufacturing rose 0.4 percent after falling 0.5 percent in April. The Fed said production at the nation's mines rose 0.5 percent in May and output at utility companies declined 2.8 percent. Capacity utilization -- measuring production as a percentage of manufacturing, mining and utilities operating at full steam -- was flat at 76.7 percent, 3.7 percentage points below its average from 1972 to 2010, the Fed said.

Is China driving the wrong kind of structural change in the U.S.? - When economists talk about structural transformation, they typically have in mind developing countries and the dual economy models à la W. Arthur Lewis that emphasize productivity differentials between broad sectors of the economy, such as agriculture and manufacturing. They don't usually think about countries like the United States where this type of transformation has already taken place. But the figure below indicates that it is something we should be thinking about. The horizontal axis shows that between 1998 and 2007, the share of the labor force in manufacturing fell by around 3%. The share of the labor force in services (cspsgs) increased by a little more than two percent. The problem with this is that labor productivity in services is lower than economywide productivity (vertical axis) so this sectoral shift in employment lowers economywide productivity. Note that these changes took place before the Great Recession (the picture looks much worse for the period 1998 to 2009).

Small-business optimism drops for third month  -- Weak consumer spending is hurting U.S. small businesses, according to the National Federation of Independnet Businesses. The small-business optimism index fell for the third month in a row to 90.9 in May from 91.2 in April, the NFIB said Tuesday. At 90.9, the index is at "recession levels," the NFIB said. Business owners say weak sales are their major concern, followed by taxes and regulations. "Corporate profits may be at a record high, but businesses on Main Street are still scraping by," said Bill Dunkelberg, chief economist for the lobbying and trade group. Details of the survey were also weaker, with fewer businesses planning to hire or expand. More businesses were trying to raise prices.

NFIB: Small Business Optimism Index decreases in May - From National Federation of Independent Business (NFIB): Consumer Spending Remains Weak: Small Business Optimism Dips Lower in May. The first graph shows the small business optimism index since 1986. The index decreased to 90.9 in May from 91.2 in April. This has been trending up, although optimism has declined for three consecutive months now. The second graph shows the net hiring plans for the next three months. Hiring plans declined in May and are slightly negative.  According to NFIB: “[I]ndications of minimal future growth include the fact that in the next three months, 13 percent plan to increase employment (down 3 points), and 8 percent plan to reduce their workforce (up 2 points). That yields a seasonally adjusted net negative 1 percent of owners planning to create new jobs, a 3 point loss from April." Weak sales is still the top business problem with 25 percent of the owners reporting that weak sales continued to be their top business problem in May. In good times, owners usually report taxes and regulation as their biggest problems.

A Slowdown for Small Businesses - In the latest sign that the economic recovery may have lost whatever modest oomph it had, more small businesses say that they are planning to shrink their payrolls than say they want to expand them.  That is according to a new report released Tuesday by the National Federation of Independent Business, a trade group that regularly surveys its membership of small businesses across America.  The federation’s report for May showed the worst hiring prospects in eight months. The finding provides a glimpse into the pessimism of the nation’s small firms as they put together their budgets for the coming season, and depicts a more gloomy outlook than other recent (if equally lackluster) economic indicators because this one is forward-looking.  While big companies are buoyed by record profits, many small businesses, which employ half of the country’s private sector workers, are still struggling to break even. And if the nation’s small companies plan to further delay hiring — or, worse, return to laying off workers, as they now hint they might — there is little hope that the nation’s 14 million idle workers will find gainful employment soon.

Another Bad Sign for Hiring - Small businesses have ratcheted down their plans for hiring, according to a report from the National Federation of Independent Business. Each month the federation releases results from a survey of questions about small business optimism. One question asks whether businesses plan to increase or decrease the number of employees working for them in the coming three months. In May, there were more companies that planned to decrease their payrolls than those planning to increase them. This was the first time since September that net hiring plans were negative: This net hiring index was only barely negative — the number of companies planning to hire minus the number planning to reduce their payroll amounted to negative 1 — and so may have been within the margin of error. But even so, this indicator has been trending downward all year. That’s a bad sign, especially since this measure is by definition forward-looking. Bill Dunkelberg, the chief economist for the N.F.I.B., says that this question has in the past been a reliable predictor of how many jobs companies actually added.

Out Of Nowhere, The NFIB Just Sent Out This Warning: "Job Creation On Main Street Has Collapsed": "Here's a pre-NFP shocker. The NFIB -- the small business organization that regularly measures the pulse of small business economic activity -- just sent out a warning on the jobs situation (via @edwardnh). It's awful. — Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on May job numbers, based on NFIB’s monthly economic survey that will be released on Tuesday, June 7, 2011. The survey was conducted in May and reflects 733 randomly-sampled small-business owner respondents: “After solid job gains early in the year, progress has slowed to a trickle. The two NFIB indicators—job openings and hiring plans—that predict the unemployment rate both fell, suggesting that the rate itself will rise. “May’s job numbers will disappoint; meaningful job creation on Main Street has collapsed."

What’s Your Problem? - We were having a decent discussion on the Larry Kudlow show tonight when Larry and Ron Kruszewski had to go all taxes and regulations on me. When something changes, in this case, optimism or confidence among small businesses, you first look for something else that changed.  Did taxes go up in the recession?  To the contrary, the Recovery Act cut taxes by almost $300 billion and many more tax cuts followed (many, like equipment expensing and the HIRE Act—an employer-side payroll cut—targeted directly at small biz). Did regulation increase?  This is a cue for the small biz lobby to fret about the Affordable Care Act, and I have heard actual business people raise legit concerns.  But the Act exempts small businesses (with less than 50 employees) from the employer mandate. This is not a comment about whether taxes and regs are at some optimal level.  Certainly they’re too high for some people’s liking.  But they haven’t changed.  What’s changed is a housing bubble that burst and whacked the stuffing out of over-leveraged consumers.

11 Things You Should Know About The U.S. Postal Service Before It Goes Bankrupt -The cover story of this week's issue of Bloomberg Businessweek examines the United States Postal Service as it hurtles toward insolvency at an alarming rate.  Facing a projected $6.4 billion loss this year, the Postal Service is expected to hit its own debt ceiling by the end of this fiscal year on Sept. 30. The federal government will then have to choose between letting the agency default on its massive pension obligations or bailing it out to the tune of more than $50 billion. The Businessweek article, written by Devin Leonard, looks at the drivers behind the agency's financial woes, including its cushy relationship with postal workers unions and its flailing efforts to stem its customers' migration to the Internet. At the end, the article asks whether the U.S. will be able to follow in Europe's footsteps and reinvent its postal monopoly to regain relevance and profitability. If it cannot, Leonard concludes, the postal service is at serious risk of collapse.

Using German ingenuity to fix our economy - Aheretical idea has entered the national discourse: Maybe some other nations handle their economies better than we do. Some nations, after all, are growing like gangbusters. Some nations have retained manufacturing — even high-wage manufacturing — in the face of low-wage competition. And in some nations, ordinary people actually share in the proceeds from globalization that in this nation flow only to the rich.The June 9 issue of BloombergBusinessweek, to take just one example, included the article “Fixing America’s Economy: Nine Ideas from Around the World.” Looking at Germany, China, Turkey, Singapore and five other places, the magazine recommended stiffening qualifications for getting a mortgage, mandating corporate retraining of employees and imposing a national sales tax.

Obama's Jobs Czar's Plan : Will it Lower Unemployment? - How do we jump start a jobless economic recovery? According to the President's Jobs and Competitiveness Council, it's a combination of the familiar, the difficult and yesbut. In an op-ed piece in today's Wall Street Journal, General Electric CEO Jeff Immelt and American Express CEO Ken Chenault present a 5-part jobs program. The familiar includes facilitating small business loans and streamlining regulations. The pair say it's too difficult for small business owners to obtain SBA funding. But isn't the problem as much that businesses aren't seeking to expand? True, banks have raised their credit standards, but clearly there's money out there.  Likewise, streamlining the permit process is a great idea—providing there are projects to streamline. Our infrastructure is a shambles, but Congress is unwilling to spend on schools, bridges, fast rail or a 21st century electrical grid that would make us more competitive as a nation. We're on the fast track to nowhere

The jobs crisis | Lawrence Summers - Even with the massive 2008-2009 policy effort that successfully prevented financial collapse and Depression, the United States is now half way to a lost economic decade. Over the last 5 years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, about like Japan during the period when its bubble burst. At the same time the fraction of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. The fraction of the population working remains almost exactly at its recession trough and recent reports suggest that growth is slowing. Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent that once would have been unimaginable, new college graduates are this month moving back in with their parents because they have no job or means of support. Strapped school districts across the country are cutting out advanced courses in math and science and in some cases only opening school 4 days a week. And reduced incomes and tax collections at present and in the future are the most important cause of unacceptable budget deficits at present and in the future.

Lump of Larry - Thus Spake Professor Summers: A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply. In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained. A sincere welcome to the real world, Dr. Summers! In other words, abstract doctrine is bunk when conditions on the ground are not ideal. Meanwhile, back at the White House, President Pivot and his CEO choir is puffing... training?

Structural Unemployment or Not, Jobs, Jobs, Jobs is Part of the Answer - I don't think the idea that the unemployment problem is mostly structural stands up to the evidence, see here for example, but for the sake of argument suppose it is. How should we respond? There are three choices:

  • 1. Do nothing to help. Even though the problems facing the unemployed were created by events out of their control -- they should not get anything from the government. They're on their own.
  • 2. Provide government help in the form of transfer payments (i.e. cash or the equivalent, e.g. food stamps, from the government), but don't expect anything useful in return. Just send checks and vouchers.
  • 3. Provide the same amount of support as under 2, or better yet even more support, in return for jobs that do useful things for the community. That is, bridge the time while structural adjustments are underway with useful employment for those waiting for the structural changes to be completed.
  • 4. Provide job retraining, use tax incentives to promote better matching by inducing workers and firms to move, and implement tax and other incentives that encourage more business investment and hence faster adjustment from firms.

Lack of jobs, not lack of skills, explains underemployment rate - Some have suggested that part of the reason the unemployment rate remains stubbornly high is that too many American workers lack the skills and education currently demanded by employers. This so-called “skills mismatch” theory for today’s high unemployment, however, does not fit well with some basic labor market facts, particularly the growth trends in underemployment across all education levels. The underemployment rate is a more comprehensive measure of labor market slack than the unemployment rate because it includes not just the officially unemployed but also jobless workers who have given up looking for work and people who want full-time jobs but have had to settle for part-time work. As the chart shows, there was a very large increase in underemployment even among workers with a bachelor’s degree or more education, growing from 3.9% in December 2007 to 8.4% in March 2011. In fact, the percentage increase in this underemployment rate was greater for workers with a bachelor’s degree or more than for all other education categories.

Unemployment in a Self-Serve Economy - The gang at Fox Nation is amused that President Obama is blaming ATMs for high unemployment. But he’s right.… “There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.” I’ve been making a variation of this argument for fifteen years or more. The fact of the matter is that the number of jobs available to relatively low skilled workers is fast shrinking, with the functions that they used to do performed by machines. This has created jobs designing, manufacturing, selling, and servicing the machines but they’re not being done by the same type of workers. The most obvious example, for those of us over 40 at least, is the self-service gas station. When I was a kid, literally every station we stopped at anywhere in the country had one or more attendants who asked how much gas you wanted, pumped it for you, cleaned your windshield, and even checked your oil.

Capital vs. Labor - Catherine Rampell is exploring a thesis about the hiring practices. A sample On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too. Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price.. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin. However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders. On the other hand software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents. So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers.

Making Hiring Cheaper - On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too. In the past week, there has been some buzz about creating similar tax incentives that would subsidize labor, such as allowing employers to forgo paying their share of payroll taxes for any net new hires. Reuters and Bloomberg News reported, for example, that the White House is considering such a proposal. Times reporters had been hearing, though, that the idea was not yet seriously under discussion. Then today, Larry Summers, who until recently served as President Obama’s top economic adviser, wrote in The Washington Post that he believes employers should get a payroll tax cut, although he did not specify whether the tax cut should be applicable to new hires only.

Jobless Claims Fall To 4-Week Low - With each new data point on weekly jobless claims, the theory that the recent jump in filings is temporary grows stronger. Last week’s claims fell 16,000 to a seasonally adjusted 414,000, the lowest in a month and well below the recent peak of 478,000. That’s still too high to inspire much confidence about economic growth or the future of job creation, but it’s getting tougher to argue that a new recession is here based solely on this data series. True, this is just one number, but it’s an important leading indicator. If the economy is contracting, or set to contract, it’s likely that there’d be a clear sign in jobless claims. For now, the worst you can say is that the numbers in new claims are ambiguous.Despite April’s surge in jobless claims, the broader message is that new filings are basically unchanged since the year started. That's discouraging since the level is still elevated. A kind interpretation of what’s happened over the last two months is that jobless claims dropped an early clue that the economy is facing a fresh round of headwinds, as revealed by the late-April spike (black line in the chart below). The warning was more than subtle, as we noted at the time.

Manpower Survey: U.S. Employers Still Optimistic on Hiring Plans - U.S. employers remain optimistic about their hiring plans, marking the seventh straight quarter of positive outlooks from employers surveyed by temporary-staffing company Manpower Inc. The quarterly survey of more than 18,000 employers found 20% expected to increase staff size in the third quarter of 2011, compared with 8% who anticipate reducing staff. On a seasonally adjusted basis, the survey found a net employment outlook of 8%, up from 6% a year ago though unchanged from the second quarter.“Although employers are not signaling dramatic upswings in hiring plans, there does seem to be hiring energy developing based on sustained year-over-year growth,”

Lawyers Settle… for Temp Jobs - But the work the 37-year-old New York lawyer, a graduate of American University's Washington College of Law, is getting is a far cry from the stable, lucrative type he originally envisioned. Mr. Aponte is part of a growing field of itinerant "contract" attorneys who move from job to job, getting paid by the hour, largely to review documents for law firms and corporate clients. These short-term jobs, which can pay as little as $15 an hour, have increasingly become a fixture in the $100 billion global corporate legal industry as law firms and clients seek to lower their costs. This new "third tier" of the legal world illustrates the commoditization of the legal profession, which once offered most new entrants access to prestige and power, as well as a professional lifestyle. It also shows how post-recession belt-tightening is permanently altering some professions. For 10 to 12 hours a day—and sometimes during graveyard shifts—contract attorneys such as Mr. Aponte sit silently in a big room, at rows of computer monitors. Each lawyer reads thousands of documents online and must quickly "code" every one according to its relevance in litigation or an investigation.  Supervisors discourage talking and breaks are limited. The computer systems count each lawyer's speed. Some law firms use their own contract attorneys, while others hire them through third-party agencies.

Gridlocking the lives of the jobless -  Welcome to the miserable world of no-way-out politics. The economy needs another jolt, but Congress is in gridlock. Democrats, or most of them, realize that their political futures and the well-being of millions of households hang on whether unemployment can be brought down. Yet Republicans have the capacity to block even the smallest steps forward. Here’s what the Democrats’ agony looks like from the inside. Last Thursday, Senate Democrats devoted their weekly policy lunch to a simple question: What proposals to spur job-creation have any chance of passing Congress, given Republican control of the House and the effective veto power the GOP has in a Senate where a simple majority no longer rules? The agenda was organized by Sen. Charles E. Schumer of New York. He doesn’t need a pollster to tell him that jobs are his party’s make-or-break issue. “The voters gave us two mandates in 2010, not one,” he said in an interview. “They told us we should reduce the deficit and get rid of wasteful spending. We ignore that at our peril. But they also told us to create jobs, grow the economy and help the middle class stretch their paychecks.”

Adapt Or Die: Some Jobs Are Never Coming Back - Only 58.4 percent of Americans are employed, the fewest since the 1980s. Corporations have recouped 100 percent of profits lost in the recession. GDP has regained its pre-recession level with 7.3 million fewer workers. The recovery from the 2007-09 recession has been disappointing in many ways, but none as great as the chronically weak labor market. Two years since the recession’s end, the economy and job growth have slowed to a crawl, and the unemployment rate is rising again. You might wonder if Corporate America has even noticed. Corporate profits have posted one of their strongest recoveries on record, and stock prices have nearly doubled from their recession lows. The disparity is an ominous sign that the U.S. job machine is seriously damaged. Profits have always been the crucial driver of business investment in equipment and other types of capital that generate economic growth and jobs. Yet, while the rebound in corporate outlays for new machines, high-tech gear, and software has been strong, hiring has not shown the typical benefits. The weak upturn in job growth partly reflects the recession’s severity and a sluggish recovery in overall spending, but much has to do with the dramatic change in the structure of the economy since the 1980s, which may have permanently raised the unemployment rate.

Speaking out for good jobs - Posturing over deficits and playing chicken over lifting the debt limit dominate the economic conversation. The reality facing Americans gets lost in the hubbub. It is as if an impenetrable fog separates Washington’s follies from America’s agonies. In Washington, the economy is said to be in recovery. Restaurants are full; housing prices are going up. Republicans think it’s time to replay old conservative favorites: Curtail aid to the unemployed, roll back financial and health-care reforms, repeal what left’s of the stimulus while pushing to slash spending and taxes. The Obama administration wants to brag on the 2 million jobs created over the last 15 months, despite “bumps in the road.” The Democrats are so cowed by the elite’s focus on deficits that they are afraid to put forth a jobs plan. Outside of the scandal du jour, the city is fixated on how much and what to cut.

Demographics and destiny, US immigration edition - Here’s a chart that caught our eye from the CBO’s latest report on US immigration trends, updated with data through the end of 2009: As the report explains, legal permanent resident status (commonly known as getting a “green card”) is a step towards citizenship and allows immigrants to live and work in the US indefinitely, subject to certain conditions. After increasing in each successive decade since the 1930s, the percentage of legal permanent resident grants as a share of the US population at the start of the decade fell in the 2000s. By way of explanation, the CBO says the following, almost as a throwaway line:The most recent decline may be the result of increased scrutiny of applications stemming from concerns about national security. Also included was this chart showing the percentage of the population that is foreign-born, which did continue to climb last decade, though its rate of growth slowed:

1,000 firms targeted for audits in illegal hiring crackdown -- In an intensifying effort to battle illegal immigration, the U.S. government sent notices to 1,000 companies on Wednesday alerting them that auditors will be examining their hiring records.  The employers, ranging from small businesses to major enterprises, will be subject to inspections by the U.S. Immigration and Customs Enforcement (ICE) to determine whether or not they are hiring illegal workers. The agency declined to release the names of any of the companies being audited.  "The inspections will touch on employers of all sizes and in every state in the nation, with an emphasis on businesses related to critical infrastructure and key resources," ICE public affairs spokeswoman Gillian Christensen said in a written statement.  The audits are focused on industries considered vital to U.S. domestic security, including agriculture, banking, energy, information technology, health care and transportation systems.

Ga. gov says probationers should work on farms after growers complain of immigrant crackdown — Georgia Gov. Nathan Deal offered a provocative solution Tuesday for farmers who claim workers have been scared away by a crackdown on illegal immigration: Hire people on probation to toil in the fields instead. The Republican governor offered his remarks after an unscientific survey showed roughly 11,000 job openings in the state’s agricultural economy. He requested the survey after growers warned that a new Georgia law targeting illegal immigrants was scaring away workers needed to harvest labor-intensive crops like peaches and berries that are easily damaged by machines. “I believe this would be a great partial solution to our current status as we continue to move towards sustainable results with the legal options available,” . He refused to discuss the idea at a news conference on an unrelated topic.State correction officials sent a handful of the more than 15,000 unemployed people on probation statewide to work Monday on a south Georgia vegetable farm as part of a pilot program matching offenders with employers, said Stan Cooper, the state’s director of probation operations. Most people on probation are nonviolent offenders.

As Executive Pay Soars, Worker Pay Stagnates - What a glorious day to be an American worker! Pay is skyrocketing, the Great Recession is hardly a memory and leaders in Washington are putting labor concerns at the front and center of their agendas -- provided you are a worker who happens to be at the top of the corporate organizational chart.  In the latest sign of the growing disconnect between reality as enjoyed by corporate chieftains and that experienced by pretty much everyone else, compensation for chief executives of publicly traded companies in the S&P 500 last year leaped by more than 28 percent compared to 2009, according to a new survey from Equilar, a research firm that tracks executive pay. Among those enjoying perches at the top of the pyramid, according to a table on Equilar's site: John G. Stumpf, chairman and chief executive of Wells Fargo, the bank recently accused in a confidential federal audit of cheating taxpayers in its handling of foreclosed homes, pulled down $17.6 million; Lloyd Blankfein, overseer of Goldman Sachs, the banking giant that has become synonymous with malevolent Wall Street shenanigans, took home $14.1 million; and Jeffrey Immelt, chief of General Electric, netted $15 million in pay last year and is now tasked with helping President Obama create American jobs.

Our Lefty Military - The business sector is dazzlingly productive, but it also periodically blows up our financial system. Yet if we seek another model, one that emphasizes universal health care and educational opportunity, one that seeks to curb income inequality, look to the United States military.  You see, when our armed forces are not firing missiles, they live by an astonishingly liberal ethos — and it works. The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.  The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.

Incredible Shrinking Workers’ Income - graph

Clueless About The National Income - I love a good graph, and an excellent one has been making the rounds lately. I traced the source to David Frum's Incredible Shrinking Worker's Income. I also love it when people don't have the first clue about what they're looking at. This is a case in point. Workers’ share of U.S, national income is collapsing. What does Frum mean is collapsing?  Talking Point Memo (TPM) gives us a closer look, which I marked up a bit:  Workers share of national income began a precipitous decline from which it never recovered in the early 1980s, which perhaps just coincidently happens to be when I date the begininning of the Empire's decline. Specifically, the workers share fell off a cliff in 1983 during The Gipper's first term. And now David Frum asks Republican candidates whether it's a problem, and if it is, what can be done about it. Are those the very same Republicans that have done so much to redistribute the income over these last 30 years?

Benefit Games - In correspondence (and discussions), I’ve received complaints that the chart showing stagnation of real wages does not take into account benefits — particularly healthcare benefits — so that total real compensation has been rising. The problem with that analysis is that if you are paid $20 per hour, then you can deflate by CPI to get a real wage, but if you are paid $20 per hour and a voucher for $10 of medical care, then you cannot deflate $30 by the CPI to get the real wage. You have to deflate the medical care voucher by the price deflator for medical care — only the cash can be deflated by the general price index. So just because health-care benefit costs have been rising, pushing up total employer costs, does not mean that real wages, including benefits have been increasing. And if you take into account that defined benefit pensions were common in the past, whereas they are virtually non-existent in the private sector, then there is no reason to believe that benefits, in real terms, have been increasing.

State Unemployment Rates "little changed" in May - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in May. Twenty-four states recorded unemployment rate decreases, 13 states and the District of Columbia registered rate increases, and 13 states had no rate change, the U.S. Bureau of Labor Statistics reported today.  Nevada continued to register the highest unemployment rate among the states, 12.1 percent in May. California recorded the next highest rate, 11.7 percent. North Dakota reported the lowest jobless rate, 3.2 percent ... Nevada recorded the largest jobless rate decrease from May 2010 (-2.8 percentage points). Two other states had rate decreases of more than 2.0 percentage points -- Michigan (-2.5 points) and Indiana (-2.2 points). The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue (only Louisiana in May), the state is currently at the maximum during the recession.

Some state job gains stall or slip into reverse - State employment data released today by the Bureau of Labor Statistics confirms what the national data released earlier in the month showed: employment growth has stalled in many states—and slipped into reverse in some.  The tentative economic recovery is very much in danger, and millions of American families are paying a staggering price for the lack of concerted action to create jobs for the millions of unemployed Americans.  In May, 18 states and the District of Columbia continued to have unemployment rates of 9.0% or higher, and seven states continued to have rates of 10.0% or more. (Click here to see interactive maps.) Nearly half the states—24—continue to have total employment that is at least 5.0% less than at the beginning of the recession.  Two states—Nevada and Arizona—have job losses that still exceed 10.0% of December 2007 employment levels (13.8% and 10.3% respectively).  The number of states that have lost jobs over the past year (since May 2010) has grown to 12 (including the District of Columbia).  The number of states that have lost jobs in the previous three months has similar spiked, to 18 (including the District of Columbia), up from just seven in April.

Camp-Hatch Proposal Would Harm Long-Term Unemployed and Weaken Recovery — Center on Budget and Policy Priorities Legislation from House would rescind the federal government’s commitment to provide unemployment insurance (UI) benefits through 2011 to Americans who have been out of work for more than half a year and are still looking for a job. Their bill would both subject unemployed workers and their families to hardship and, by reducing the purchasing power of the unemployed, reduce the demand for the goods and services that businesses produce — slowing the economic recovery and limiting job creation. Moreover, their legislation does not take any steps to require, induce, or even encourage states to shore up their cash-strapped UI systems for the longer term. It thus would leave those systems highly vulnerable financially when the next recession hits.

For Want of a Word, Arizona’s Jobless Lose Checks - Arizona’s legislature has resisted making a small word change, from “two” to “three,” in its statutes. Only if it does will Mr. Ballesteros continue to receive jobless benefits through November, allowing him to pay his mortgage and medical bills.  Otherwise, his checks stop next week. “It is almost 100 degrees out there, and I am walking door to door handing out résumés,”. “Now Arizona decided to kill the benefits extension from the federal government because some legislator decided we’re just sitting around on our butts waiting for a check.”  That last extension of unemployment benefits — typically received in weeks 80 through 99 of unemployment — is paid for entirely with federal money and does not affect state budgets. But because of ideological opposition and other legislative priorities, Arizona and a handful of other states, like Wisconsin and Alaska, have not made the one-word change necessary to keep the program going.   The money, appropriated in the 2009 federal stimulus package, was initially intended for states with jobless rates higher than they were two years earlier. Since the recovery has been much slower than predicted, though, Congress decided last December to allow states to continue receiving the money if their unemployment rates were higher than they were three years earlier. States simply needed to change “two” to “three” in the relevant state law.

Cutting Workers’ Jobless Benefits Hurts Them and the Economy - The Wall St. Journal editorialized yesterday in favor of a bill that would renege on the federal government’s commitment to provide unemployment insurance (UI) benefits through December to Americans who have been looking for work for more than six months.  That would impose added hardship on those families and slow the economic recovery by reducing overall consumer demand. The Journal’s case for the bill simply doesn’t hold up. The bill, from House Ways and Means Chairman Dave Camp and Senate Finance Committee Ranking Member Orrin Hatch, would transfer the $31 billion that the federal government is estimated to spend on long-term UI benefits through 2011 to the states.  States could use the money to continue long-term UI benefits or for other things, like repaying the federal money they borrowed to pay for UI benefits when their UI trust funds ran out in the recession.  (Twenty-nine states have outstanding federal loans.)  Camp-Hatch would also lift a moratorium that prevents states from reducing their UI benefit levels in 2011.  (See here for our full analysis of the bill.) The Journal claims that many state UI trust funds are in debt to the federal government because federal law bars states from cutting UI benefit levels or reducing access to the program by changing eligibility rules. That’s wrong in several ways.

Copper Theft Strikes Out Sacramento Softball Complex, Benches Games - The Sacramento Softball Complex has gone dark due to copper thieves. According to a Parks and Recreation spokesperson, the theft happened sometime Friday night. The thieves apparently cut the locks and then stole over $1,000 worth of copper wire. Now the park is completely shut down. The lights, scoreboards, sound system, bathrooms, phone lines, and water all are not working. This isn’t the first time a copper wire theft has happened at a city park. In February Gregory Allen Alexander, 39, was electrocuted after police said he tried to cut a high-voltage copper power line for its recycling value.

PG&E sees surge in copper wire theft in Antioch area - Pacific Gas & Electric workers were shocked this month to find one of the utility's 45-foot wood poles along the railroad tracks chopped to the ground in what officials say is the most brazen local case to date of copper thieves targeting PG&E property. Wires were removed from the transformer atop the pole, and a handsaw was found on the ground. The utility is accustomed to a certain level of property vandalism but says it has seen a surge in copper thefts in recent months in the area of Antioch north of Highway 4. Thieves have swiped copper from about 300 poles in Antioch since the beginning of the year, compared with fewer than 10 in 2010, company spokeswoman Tamar Sarkissian said last week.

Stolen Copper Leaves Hundreds Powerless In Jefferson County - American Electric Power Takes Two Ridge Station Off-line - A case of stolen copper wire has left approximately 2,600 homes in Jefferson County without power.  According to a representative for American Electric Power, the neutral ground wire was stolen from the Two Ridge Substation just after 6:30 p.m. Monday.  AEP had to take the station off-line in order to safely make repairs, the representative said.  Total restoration of electrical service to those affected should occur by 10:30 p.m. Monday.  AEP is seeking tips on the theft.

Weak Economy Drives Theft Of Copper Wiring - They're stealing copper wiring from streetlights, stripping it from electrical substations, and burrowing into the ground for it as if mining precious metal. Always a problem, metal scavengers have become more brazen in the economic downturn, authorities said, sometimes endangering public safety across Philadelphia and South Jersey. They're removing brass fittings from water hydrants and wiring from cellular towers, telephone networks, and railroad lines such as PATCO. The crime has become so prevalent that the FBI says it affects national security by disrupting "the flow of electricity, telecommunications, transportation, water supply, heating, and security and emergency services." Utility companies such as Peco and PSE&G mark their wiring so it can be identified when stolen. They're working closely with area police departments, using the Internet to track thefts, and alerting area scrap yards to be on the lookout for stolen items.

Republicans Slash Food Aid For Low-Income Women And Children, But Dodge Farm Subsidy Cuts: Republicans have quietly maneuvered to prevent a House spending bill from chipping away at federal farm subsidies, instead forging ahead with much larger cuts to domestic and international food aid. The GOP move will probably prevent up to $167 million in cuts in direct payments to farmers, including some of the nation's wealthiest. The maneuver, along with the Senate's refusal Tuesday to end a $5 billion annual tax subsidy for ethanol-gasoline blends, illustrates just how difficult it will be for Congress to come up with even a fraction of the trillions in budget savings over the next decade that Republicans have promised. Meanwhile, the annual bill to pay for food and farm programs next year would cut food aid for low-income mothers and children by $685 million, about 10 percent below this year's budget.

HUD: Rural Americans increasingly turn to shelters - As the recession gripped America, thousands more people in rural and suburban areas turned to homeless shelters for help. The number of people using shelters or transitional housing in suburban and rural areas increased 57 percent from 2007 to 2010, with more than 500,000 people from smaller communities seeking help in 2010, according to a report by the Housing and Urban Development Department. During the same time there was a decrease in the use of shelters in urban areas. HUD Secretary Shaun Donovan said Tuesday in a conference call with reporters that about 40 percent of those who served in the armed forces come from rural areas and homelessness among Iraq and Afghanistan veterans could be a contributing factor. He said the agency is stepping up efforts to combat homelessness near some military bases, and that legislation signed in 2009 by President Barack Obama contained a component that opens the door for more programs targeting homelessness in rural areas.

City's Family Shelters Are Filling Up Faster, Sooner - For four days, Yasmeen Goodmond, 23, went to the city's homeless-services office, asking for help. And for four days, she was told there were no beds for her family. With nowhere to go, Goodmond and her two children went to the emergency room at Hahnemann University Hospital. They slept in chairs in the waiting room and slipped out in the morning. But their welcome was wearing out. Goodmond asked her cousin to watch her 5-year-old daughter for a few days, while turning to her grandmother for help with her 2-year-old son. For herself, she stayed on the streets, walking all over Center City, never sleeping. At 6:30 Tuesday morning, Goodman went immediately to the Appletree Family Center, the cheery name for the city's main intake office for homeless families, at 15th and Cherry Streets in Center City. But when the staff opened the doors at 9, they delivered the same news: no beds. "They just tell me there's nothing they could do," Advocates for the homeless say that the city's shelters for families always fill up in the summer, but that this year, that seems to be happening sooner than usual.

Ill-Informed Claim Does Not Justify WIC Cuts, CBPP: The House is scheduled to vote today on a measure to slash funding for the WIC nutrition program, which (as we have shown) would force the program to turn away at least 200,000 to 350,000 eligible low-income women and children next year.  The Appropriations Committee approved this unprecedented cut last month, in part based on the claim that more than 40 percent of WIC costs go to program administration.  But this claim is flatly false, as our new paper shows. In reality, only about 9 percent of federal funds for the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) go to administrative costs, and these costs represent only about 6 percent of the program’s total cost.. In deriving the 40 percent figure, the Committee apparently misunderstood a finding in a federal Agriculture Department (USDA) report. The proposed funding cuts for WIC are unprecedented.  Since 1997, Congress — on a bipartisan basis — has provided sufficient funding each year for WIC to serve all eligible low-income pregnant and breastfeeding women, infants, and young children at nutritional risk who apply.  False claims regarding WIC administrative costs are no justification for breaking that 14-year commitment.

How to Cut Child Poverty in Half - Cutting child poverty in half sounds like a magician’s trick, or some miracle of rapid economic growth. But Britain has used standard policy tools to reduce its child-poverty rate by more than half since 1994 and has effectively defended this progress against the pressures of the Great Recession. By contrast, the child poverty rate has trended upward in the United States since 2000, and children have proved economically vulnerable to increased unemployment. Most other rich countries rate higher on indicators of child well-being than either Britain or the United States. But we have more in common with Britain than most other countries, and rightfully pay closer attention to it. The contours of British success are detailed in “Britain’s War on Poverty,” a compelling book by Jane Waldfogel of Columbia University. An updated summary has been published online by two nonprofit groups that have long pressed for more attention to these issues: First Focus and the Foundation for Child Development,

Survey: U.S. trails in equal legal treatment of citizens — The U.S. lags behind western Europe in access to civil justice and legal assistance, according to an international survey released Monday that also raised questions over whether U.S. police forces treat all citizens equally.  The results of the survey by the World Justice Project, an advocacy group that promotes the rule of law, also signaled that some Middle Eastern countries continue to rank relatively low in certain areas, a key factor in the region's popular protests."Without the rule of law, medicines do not reach health facilities due to corruption, women in rural areas remain unaware of their rights, people are killed in criminal violence, and economic growth is stifled," William Neukom, the founder of the group, said in a statement announcing its second annual Rule of Law Index.

The systematic financial pillaging of the middle class – Millionaires don’t feel rich unless they have $7.5 million while 45 million Americans live on food stamps. Another 50 percent cannot come up with $2,000 in the next 30 days.-  For over 30 years the debilitating shrinkage of the middle class has been papered over with access and use of debt.  Debt in every form; mortgage debt, credit card debt, auto loans, and student loans.  Yet debt is not wealth.  Americans are facing a financially nightmare where 1 out of 3 has no savings.  This should come as a little surprise since the per capita income in the country is $25,000.  Many workers are simply getting enough out of their stagnant paychecks to pay the monthly bills.  Of course much of the real wealth has been systematically looted through bailouts and crony capitalism.  There was a time when the government and even Wall Street benefitted by a growing U.S. middle class.  Now all you hear from banking executives is how much cheaper it is to outsource American jobs at the same time their pay keeps soaring.  Why don’t we outsource their job?  The problem of course is a deep capture of our political system and a perfect fusing of Wall Street and the government.  The middle class is slowly floating away as inflation created by the Fed bailouts of the too big to fail banks causes more and more financial pain.

Class, power & ideology  - Marx was right to predict that capitalism would produce an increase in the numbers of the working class. Remember, 200 years ago the yeoman farmer, the master craftsman, or the comfortably off idle wife were all significant social roles. They are, I suspect, less significant now. What’s more, class in this sense is correlated with power: capitalists have it, workers don‘t*. This is because economic power flows to scarce resources and capital is scarcer than labor. This perspective yields answers to three key questions which cannot be answered without the concepts of class and power:

  • why has inequality increased since the 1980s? It’s because a mix of technical change and the emergence of a mass supply of cheap labor from China and India have increased the power of capital relative to labor.
  • why is the pain of deficit reduction falling upon public sector workers and benefit claimants rather than the “rich”? It’s because the “rich” have power and workers and benefit claimants don’t.
  • why did the state bail out bankers but not ordinary workers who lost their jobs? It’s because bankers have power - though the precise source of this is another question.

Robert Reich - Why the Republican War on Workers' Rights Undermines the American Economy -  The battle has resumed in Wisconsin. The state supreme court has allowed Governor Scott Walker to strip bargaining rights from state workers. Meanwhile, governors and legislators in New Hampshire and Missouri are attacking private unions, seeking to make the states so-called “open shop” where workers can get all the benefits of being union members without paying union dues. Needless to say this ploy undermines the capacity of unions to do much of anything. Other Republican governors and legislatures are following suit. Republicans in Congress are taking aim at the National Labor Relations Board, which issued a relatively minor rule change allowing workers to vote on whether to unionize soon after a union has been proposed, rather than allowing employers to delay the vote for years. Many employers have used the delaying tactics to retaliate against workers who try to organize, and intimidate others into rejecting a union. This war on workers’ rights is an assault on the middle class, and it is undermining the American economy. The American economy can’t get out of neutral until American workers have more money in their pockets to buy what they produce. And unions are the best way to give them the bargaining power to get better pay.

Younger People Have The Most Favorable View Of Labor Unions, Older People The Least -  Erik Loomis speculates on demographics and attitudes toward labor unions: In 2011, lived memory of unions is fading. Younger workers may not even really know what a union is or have known anyone who was a union member. Older workers may, but may either be anti-union or have seen their union fail to keep their jobs secure in the face of deindustrialization and globalization.  I wonder is it really common for people to not know anyone who’s a member of a labor union? Even at only about 12 percent of the workforce I feel like you’d still need to be pretty isolated to be in that state. I normally think of myself as pretty out of touch, but my father’s in a union, Ezra Klein’s in the Newspaper Guild, I know a bunch of people who at least at one point in their life were in AFT or NEA, etc. I suppose it’s different if you live in a right to work state.  At any rate, people—even very pro-union people—tend to think of unions as somewhat “old fashioned” and have this sense that young people may be especially likely to be union skeptics. But according to Pew that’s not the case and the actual age structure of attitudes toward unions is similar to the age structure of attitudes toward marriage equality for gays and lesbians:

Wal-Mart Workers Try the Nonunion Route - After numerous failed attempts to unionize Wal-Mart1 stores, the nation’s main union for retail workers has decided to try a different approach: it has helped create a new, nonunion group of Wal-Mart employees that intends to press for better pay, benefits and most of all, more respect at work.  The group, Organization United for Respect at Walmart, or OUR Walmart for short, says it has quietly signed up thousands of members in recent months, and it is going public this week with a Web site, ourwalmart.org2, and a Facebook page3. Organizers say they have more than 50 members at some stores, and they hope to soon have tens of thousands of members. Wal-Mart has nearly 1.4 million workers nationwide.  Although the Web site of OUR Walmart depicts the organization as a grass-roots effort by Wal-Mart workers, the United Food and Commercial Workers4 has provided a sizable sum — the union will not say how much — to help the group get started. The union has also paid hundreds of its members to go door to door to urge Wal-Mart workers to join the group.

States deep in debt, too - It’s not just the federal government - the states are broke, too. The 50 state governments owe more than $1 trillion in unfunded pension contributions and health care obligations to retired public employees, according to an Associated Press1 survey of state-level budget data. And the worst may be yet to come. Five states have budget deficits that account for more than one-fifth of the state’s general operating fund, and in seven more the deficit amounts to at least 15 percent of expected general fund revenues. State governments also will have a 5 percent less revenue in the upcoming fiscal year than they did in 2007-08, before the collapse of major financial institutions prompted an economic recession, the AP found. Adding to the trouble this year is the fact that states plugged holes during last two annual budgets with millions in federal stimulus dollars that are not available this year.

Monday Map: Status of State Budget Enactments, Fiscal Year 2012 - This map shows the status of state budget enactments for fiscal year 2012, based on this report�from the National Conference of State Legislatures (NCSL). Click on the image to view the full-size map.

AP Data Show States' Budget Challenges Differ - The country is pulling out of the Great Recession, but an Associated Press review of 50 balance sheets shows state budgets ravaged by declining tax revenue and bank accounts far leaner than they were when the downturn took hold. Many face massive liabilities for years to come. Budget and other fiscal data compiled by the AP show that across the 50 states, the $734 billion in cumulative revenue available for the coming fiscal year has dropped by about $34 billion, or 5 percent, from the 2007-08 fiscal year, when the recession began. Some states are in far worse shape. New Jersey, Nevada, Oregon, Illinois and Louisiana reported deficits that are more than 20 percent of their state's general fund. Even as many states begin a gradual recovery, analysts expect it will be several years before they reach pre-recession spending levels. In Georgia, for example, revenue has jumped by more than 8 percent from the previous fiscal year. But Republican Gov. Nathan Deal said he wants to use the bulk of the extra cash to replenish the state's depleted rainy day fund.

Minnesota Prepares For Shutdown - Time is running out for Minnesota's parks, highway rest stops and public universities, not to mention 36,000 state employees. If Gov. Mark Dayton and lawmakers don't agree on a budget by June 30, the state government is expected to shut down. The state moved one step closer to this outcome on Friday by sending layoff notices to much of the state workforce. Should officials not resolve their differences in time, state parks and highway stops could be shuttered over the busy Fourth of July weekend. Forget about renewing a driver's license or taking classes at state colleges. Nonprofit agencies may have to suspend their social services if their state funding disappears

Moody's cuts Cook County, Illinois to Aa3 from Aa2 (Reuters) - Moody's Investors Service on Thursday slapped Illinois' biggest county with a rating downgrade, citing financial woes that include a recently discovered revenue error and troubles with its health system. The rating for Cook County, which includes the city of Chicago, was cut to Aa3 from Aa2 with a stable outlook. "Cook County's financial position has historically been pressured, but recent revelations that a reporting error resulted in overstatement of the county's revenues by $90 million, coupled with a projected deficit at the health system for the current fiscal year and growing unfunded pension liabilities, have exacerbated the problems facing Cook County," Moody's said in a statement. The downgrade affects $3.5 billion of outstanding general obligation bonds. Cook County, joins Chicago and the state of Illinois, which were hit with rating downgrades last year as their financial situations deteriorated in the wake of the economic recession.

Jerry Brown opens door to gimmicks budget - Two days before the state budget deadline and with no sign of a deal, Gov. Jerry Brown said Monday he would consider using accounting gimmicks to balance California's budget deficit, despite his longstanding promise not to. His changing rhetoric, following months of failed talks with Republicans, comes as Brown braces for the Legislature to send him a budget that does not include the tax revenue he is seeking. "I will take a very hard look at it," Brown told reporters at the Capitol. "We've had discussions with the leadership, and I've told them the way I see things, and we'll see what happens when they bring it down."Such a move would be politically perilous for Brown's still-young governorship, but it remains unclear if he would follow through. Brown, who is trying to close the state's remaining $9.6 billion deficit, said he is still negotiating with Republicans and would continue to after Wednesday's rarely-met constitutional deadline. The Democratic governor could continue talks without committing to a budget for as long as 12 days after it is passed, the time he has to sign or veto it.

Oakland employees storm meeting, demanding council stop contracting -- Hundreds of city workers face potential layoffs in the coming weeks, and dozens of local union members let their anger be known as they stormed a City Hall meeting Tuesday afternoon, interrupting discussions about the city's contracting. Three civilian unions representing a total of more than 3,400 city employees have been negotiating with the city since April. Their contracts have expired and Mayor Jean Quan has called on them to make contributions to help solve the $56 million projected deficit Oakland is facing in the fiscal year that starts July 1. The protesters' chief demand was that the city stop contracting work that has been done in the past by its own employees. Their timing for that demand was fitting: As the crowd marched in, the Finance and Management Committee, made up of four City Council members, was discussing ways to smooth Oakland's clunky contracting process.

Faded Malls Leave Cities in Lurch - American cities, long reliant on sales-tax revenue from retailers to support municipal budgets, are facing a harsh reckoning as the era of the shopping center as municipal cash cow appears to be at an end. Sales taxes are a critical source of funding for many cities, typically second in size only to property taxes. They accounted for roughly 23% of all U.S. state and local tax collection in 2008, the latest year available, according to the Census Bureau. But big U.S. retailers are feeling the effects of a cautious consumer, pinched by the rise in gasoline and food prices, as well as by high unemployment. Consumer spending rose just 0.4% in April, the latest month for which data are available. Last week, many retail chains, including Target Corp., reported lackluster May sales. Municipal sales-tax receipts have declined in six of the past 10 years, compared with the year before, according to the National League of Cities, including drops of 6.6% in 2009 and 5% in 2010.  That has city leaders from Texas to California waking up to the likelihood their sales-tax decline isn't just a result of the bad economy. Instead, it is problem that will persist after a recovery, as demand for retail complexes is whittled by online shopping and the waning popularity of the big-box store selling everything from groceries to electronics.

America for Sale: Is Goldman Sachs Buying Your City? - In Chicago, it's the sale of parking meters to the sovereign wealth fund of Abu Dhabi. In Indiana, it's the sale of the northern toll road to a Spanish and Australian joint venture. In Wisconsin it's public health and food programs, in California it's libraries. It's water treatment plants, schools, toll roads, airports, and power plants. It's Amtrak. There are revolving doors of corrupt politicians, big banks, and rating agencies. There are conflicts of interest. It's bipartisan. And it's coming to a city near you -- it may already be there. We're talking about the sale of public assets to private investors. You may have heard of one-off deals, but what we'll be exploring with the Huffington Post is the scale and scope of what is a national and organized campaign to shift the way we govern ourselves. In an era of increasingly stretched local and state budgets, privatization of public assets may be so tempting to local politicians that the trend seems unstoppable. Yet, public outrage has stopped and slowed a number of initiatives. While there are no televised debates around this issue, there is no polling, and there are no elections, who wins it will determine the literal shape of modern America.

Durbin Bill Designed to Throw Wrench in Wall Street Infrastructure Heist - Yves Smith - Senator Richard Durbin has introduced legislation that would considerably complicate the effort of Wall Street players to pillage privatize state and government assets for fun and profit.  It is key to understand what a bad deal these transactions are for ordinary citizens. In addition to having sizeable up front fees, the return requirements are well in excess of the government entities’ borrowing rates, typically just under 20%. That means after you allow for the up front charges, the effective cost of funding is likely to be 20% or even higher. How does it make the remotest iota of sense for governments to fund at rates comparable to that of credit card borrowers? On top of that, the deals also impose serious restrictions on government sovereignity and often have extremely unfavorable clauses that serve to guarantee the investors’ returns. Again, one fundamental concept in finance is a risk/return tradeoff. A deal with a target return that high presupposes a high level of risk, so the degree of guarantees sought should lead to a large reduction in target returns. But as this Dylan Ratigan segment describes, that’s not how these transactions work:

Mayors See End to Wars as Fix for Struggling Cities - — While states are seeing their tax collections begin to rise again, much to the relief of budget-battered officials, the nation’s cities are having a far rougher time, with many losing state and federal aid just as the burst housing bubble is belatedly driving down property taxes. Providence and Hollywood, Fla., issued layoff notices to police officers this month that will cut jobs in the coming weeks unless the cities get more union concessions. Lansing, Mich., and New York are threatening to close fire stations. Teachers are getting pink slips in Philadelphia, and schools in Montgomery, Ala., are being closed. Libraries are open less. And potholes are staying unfilled longer in cities like Minneapolis. Local governments shed 28,000 jobs last month, the Department of Labor reported, and have lost 446,000 jobs since employment peaked in September 2008. So when downturn-weary mayors from around the country gathered here on Friday for the annual meeting of the United States Conference of Mayors, they decided to make a statement calling for the speedy end of the wars in Iraq and Afghanistan, and calling on Congress to use the $126 billion a year the wars cost for urgent domestic needs.

Power failures reveal aging Detroit infrastructure - Aging power transmission lines that failed under the stress of high demand left a handful of Detroit’s public buildings blacked out for more than a day, and provided a stark reminder of the rapidly deteriorating infrastructure in a city struggling to provide basic services. Even patchwork repairs to power grids, water pipes and crumbling streets are proving too costly for cash-strapped cities like Detroit, which faces a $155 million budget deficit amid steady revenue losses." "Outside of selling bonds and adding more long-term debt to the city, Detroit’s mayor will be hard-pressed to pay for upgrading or totally revamping the city’s electrical system. Bing also is dealing with crumbling city streets, scores of broken or malfunctioning fire hydrants and other ills while trying to cut $200 million from next year’s budget. He’s also trying to provide police, fire and other services for 700,000 people in a city designed for more than a 1.5 million residents.

Brown Vetoes California Budget With a Pledge to Seek $9 Billion in Taxes - California Governor Jerry Brown said he would keep negotiating with Republican lawmakers to extend $9 billion of expiring tax and fee increases after vetoing a budget written by Democrats that lacked the provision. Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks and accounting tricks, said the budget sent to him yesterday used legally suspect techniques to paper over a $10 billion shortfall. The veto means California, the biggest issuer of municipal debt in the U.S., faces the start of its fiscal year July 1 without a budget that would let the state borrow from Wall Street to pay bills. Democrats, who don’t command enough votes to override Brown’s veto, said it’s now up to the governor to find a compromise with Republicans who oppose his tax plan. “In the next several days, I’m going to do everything I can, I’ll move heaven and earth, to get those votes,” Brown said. “I’m certainly going to give them the chance to become heroes rather than people who become complicit in the destruction of our universities and our schools.”

Who's Getting Screwed by Ohio's Budget Cuts? - Wildly unpopular Republican Ohio governor John Kasich has a proposal: to cut $8 billion from his state's 2011-2013 budget. While Kasich is indeed facing a gaping budget hole (though some say he's exaggerating its size), many argue that the reforms unfairly punish lower-income Ohioans. One provision gets rid of the estate tax, which applies to only the top eight percent of estates, and another would enact income-tax cuts that return way more money to Ohio's top earners. Let's break down who's carrying the bulk of the proposed budget's burdens: Local governments are probably the biggest losers in Kasich's budget, losing 50 percent of their funding by the second year of the plan. And prison workers worry that the provision to sell off Ohio's prisons will lead to layoffs. Altogether, a report by think tank Innovation Ohio estimates, the budget will cause a loss of 51,000 state jobs. Education loses 11.5 percent of its current funding in the Kasich budget. According to the Ohio Education Association, that would mean firing of 10,000 teachers. Cleveland schools are already planning to lay off at least 500 educators. At the university level, the cuts average 13 percent. Ohio State, one of the largest universities in the nation, soon will be presenting its plan to account for the deficit to its board. Spokeswoman Shelly Hoffma says the budget-balancing measures include early retirements, not filling vacancies, and raising tuition for the second year in a row.

Gregoire signs budget that slashes education, health-- With what she called a heavy heart, Gov. Chris Gregoire signed a new budget Wednesday that will slash state spending in public schools, colleges, health care and human services in the next two years. "We cut and we cut deeply," she said. "We did not resort to gimmicks or short-term fixes or to new taxes. That in and of itself is historical for the times." The plan she signed will spend $32.2 billion between July 1 and June 30, 2013 and erases a projected $5.1 billion shortfall through a combination of $4.5 billion in cuts and transfers from other accounts. There's also $738 million set aside in reserves though that amount is likely to shrink when a new revenue forecast comes out today. Everyone expects it will predict another drop in tax receipts. "I know we're going to get a bad forecast," Gregoire told reporters

Infographic - US Education vs The World

With state aid delays, more schools might borrow - A greater number of school districts might have to borrow more money this summer because of delays in state aid payments. Because of a combination in the delays and a property tax bookkeeping shift, school districts will have up to $2 billion less in their coffers at the end of this month than they did at the same time last year. Last year, 130 districts, or nearly 40 percent of those in Minnesota, borrowed money. Financial advisers expect to see more of them doing so now. A possible government shutdown could also affect borrowing decisions.

Parent 'Trigger Law' In New York Would Allow Parents To Fire Teachers, Principals - A proposed state law would give New York parents significantly more power over their children's schools. The so called "trigger law" would allow parents who gather a majority at any persistently failing school to either fire 50 percent of the teachers, fire the principal, close the school or turn it into a charter school. From TIME: When people first hear about the radical-sounding law, they are almost always taken aback. But what they might not know is that failing schools can already be shut down by school districts under the No Child Left Behind law. The parent trigger simply takes the option provided to the school board and hands the power to the parents Carl Korn, a spokesman for New York State United Teachers, said parents should be involved in education decisions, but their participation should come before the school is failing. "We think the time to involve parents is before a school is identified [as persistently lowest-achieving]. Allowing a petition by parents would ignore the research, the other stakeholders, and leave the decision open to politics. Would we have an election-style campaign where we have advertising and mailings and money being spent on both sides, lobbying parents?" The legislative effort in New York is similar to one waged in California last year. Parents used the state's recently passed trigger law to try to force McKinley Elementary, a failing Compton school, to become a charter school.

1,500 Philadelphia teacher layoffs remain on hold - At a time when the school year is supposed to be winding down, the education debate is heating up in Philadelphia, where the cash-strapped school district continues to be the target of rallies, protests and lawsuits since issuing the largest number of teacher layoff notices in a generation. Though a court hearing Tuesday on the layoffs was postponed, the mayor was visiting several schools in an effort to assess planned cutbacks and drum up support for additional taxes to benefit the district. Even as he toured the buildings, tax opponents readied to protest at City Hall. The state's largest district, which serves about 203,000 traditional and charter school students, is facing a record $629 million deficit.

Yonkers borrowing deal dead; 700 school layoffs still targeted — A $20 million borrowing plan that was designed to reduce more than 700 school layoffs on July 1 appears to be dead. Mayor Phil Amicone announced his withdrawal of support for the plan after a Yonkers Federation of Teachers membership meeting Monday night produced no wage concessions. "I made it clear from the beginning of the budget process that I would only support one-shot emergency money for the Board of Education on the condition that each of the school district's unions shared in the sacrifices required to save jobs and programs, just as we were asking Yonkers taxpayers to do so," he said in a news release.

1,000 Clark County teachers wait to hear if they'll have job next year - Hundreds of Clark County teachers end this school year, unsure if they'll be back in a classroom come August. They're in limbo, waiting to hear if they'll be rehired. And it's not just the jobs of some that are in question, but also the salaries and benefits of all 18,000 district employees. With layoffs looming, Clark County public school teachers are having a hard time thinking of anything else this summer. "It's absolutely frustrating, not knowing where they're going to go, if they're going to have a job," says Ruben Morillo, the President of the Clark County Education Association. Morillo is set to begin contract talks with school district leaders. It comes on the heels of the final state budget, which requires the district to cut $150 million. Up to 1,000 teachers could be laid off, unless all teachers accept pay cuts.

Flint district weighs 463 job cuts as it faces June 30 budget deadline - The Flint School District is eyeing some of its deepest cuts in recent history as officials work to deliver a balanced budget by the June 30 state deadline. The proposed budget slashes 463 people from next year’s payroll. About 600 employees have received or are getting layoff notices. That includes 277 additional pink slips approved near the end of a nearly six-hour session of Board of Education meetings Wednesday. The planned cuts are far more severe than in recent years. Linda Thompson Last year, the district laid off nearly 300 workers but by July had called 255 of them back. Superintendent Linda Thompson stressed the severity of the district’s financial situation, as it struggles to trim more than $25 million from next year’s spending.

Los Angeles schools budget woes hit arts programs hard - Like almost 7,000 other school district employees, Engle had received a preliminary layoff notice earlier this year and could lose her job by midsummer. For the last several years, the Los Angeles Unified School District has faced large budget shortfalls and the school board has approved cutting positions and programs to try to balance the budget.The nation's second-largest school system is facing an estimated $408-million shortfall, and many unions have agreed to their members' taking four unpaid days off. But, depending on the state's budget, district officials could still approve cutting jobs over the summer.

Backward budgeting at the D.C. schools - According to the District’s official budget book, this year’s spending plan for D.C. public schools is running at $750 million. Next year’s proposed budget is $827 million, a 10.3 percent increase. That increase, in today’s hard economic times, will strike most parents as wonderfully surprising news. But they would be wise to hold the cheering. A quarter of the $77 million increase, over $18 million, will go to central administration. Meanwhile, direct allocations to schools will drop. D.C. school officials, we need to note, don’t see things this way. Acting Chancellor Kaya Henderson says the real numbers show just a $3.7 million increase for next year and a drop in funding for central administration. The budget book they provided the public and the D.C. Council, she says, is not accurate and differs from the real budget, which evidently only DCPS leadership can see. The total dollars that schools receive for teachers and other budget items, their argument goes, will stay about the same. But they neglect to point out that the higher salaries for teachers that Michelle Rhee negotiated will come out of those school allocations, as will a number of school-based staff positions that the central office budget used to cover.

Community colleges feel battered by budget - With a proposed state budget finally out of the maws of the Legislature, the state’s community college system – largest in the nation – is both thankful it was not dealt a death blow, but worried about what’s to come. The Legislature on Wednesday, unable to reach an agreement on Gov. Jerry Brown’s May budget proposal, approved a plan to close the state’s remaining $9.6 billion deficit much as it has in recent years – with the shuffling of funds, withholding of payments and other maneuvers. Although the California community college system did not sustain additional cuts beyond the $290 million originally proposed in the governor’s January budget, the plan defers $129 million in funding which will increase the cumulative total of delayed state payments to $961 million, or roughly 17 percent of the system’s annual funding, it says. “The deferred payments and the Legislature’s inability to reduce the state’s ‘wall of debt,’ will be problematic for academic planning and may push some of our colleges to borrow money that will have to be paid back with interest,” says

Board of Regents weighs 9.8% MTSU tuition hike - The Tennessee Board of Regents will consider a 9.8 percent increase in tuition and fees for MTSU in 2011-12, in part to "to mitigate a growing imbalance" caused by hiring more full-time temporary professors in lieu of tenure-track faculty. The recommendation by the TBR's staff, presented to its Finance and Business Operations committee Monday, will go before the regents later this month for consideration. The Board of Regents oversee the state's largest higher education system, governing six universities (including MTSU), as well as Tennessee's 13 community colleges and 26 technology centers.

Surging college costs price out middle class -- What do you get when college costs skyrocket but incomes barely budge? Yet another blow to the middle class. "As the out-of-pocket costs of a college education go up faster than incomes, it's pricing low and medium income families out of a college education,"  The numbers confirm what most middle class families already know -- college is becoming so expensive, it's starting to hold them back. The crux of the problem: Tuition and fees at public universities, according to the College Board, have surged almost 130% over the last 20 years -- while middle class incomes have stagnated. In 1988, the average tuition and fees for a four-year public university rang in at about $2,800, adjusted for inflation. By 2008, that number had climbed about 130% to roughly $6,500 a year -- and that doesn't include books or room and board.  If incomes had kept up with surging college costs, the typical American would be earning $77,000 a year. But in reality, it's nowhere near that.

Increasing number of middle-income parents don't want their children to go to university as it's 'not worth the investment' -Many middle income parents can no longer afford to send their children to university, with one in three saying it was not worth the investment, according to a report today. A survey of over 500 parents with a household income of between £15,000 and £40,000 showed that most believed a university education was less valuable than a decade ago. Half of those questioned by independent education foundation Edge said degrees no longer offered a head start in life, while almost two out five admitted they had changed their mind about wanting their children to go on to further education.

Colleges Now Offering Education In Disaster - Now in their early 20s, these women might be members of a support group for those brushed by trauma at a tender age. Instead, they spent the spring term studying disaster mental health at the State University of New York campus here.  Their undergraduate minor is among scores of programs on emergency management and disaster response that have sprung up across the country in recent years at the same unflagging pace as the catastrophes that have inspired them. Just as earlier waves of college students were molded by long-running conflicts like the cold war, today’s undergraduates have confronted an abundance of sudden, free-ranging calamity, both natural and not.  “This generation has never known a time without terrorism or disaster, and I think it has drawn many of them to this field,”

School pension system facing dire situation - Even if investment markets perform better than ever in history for the next five consecutive years, Pennsylvania taxpayers can expect to pay billions in pension liabilities for retired public school teachers, according to the chief financial officer at the state’s largest public pension system. The Public School Employees Retirement System, or PSERS, has an official $30 billion unfunded liability that will require steep increases in taxpayer contributions over the next three decades to pay down, after more than 10 years of under funding the system. But it will take several decades of high contributions and good investment returns to eliminate the unfunded liability. Brian Carl, PSERS chief financial officer, delivered the sobering information to the board at its monthly meeting Friday. He said investments alone could not cover the liabilities at this point, even in a year with good returns. "Because we’re so far under what we should be contributing, the outperformance doesn’t really help us," Carl said. "It helps, but it’s not going to eliminate the need for future contributions."

No Pension, No Security - Using a carrot rather than a stick approach, traditional pensions encourage workers to retire after they reach a certain age, allowing employers to structure compensation to reflect the obsolescence of skills and potential physical and cognitive limitations associated with aging. But the advantages of defined benefit pensions appear to have been forgotten in the headlong rush to replace pensions with 401(k) plans, which shift retirement costs and risks onto workers. Most workers look forward to retirement. Therefore, the best way to nudge workers into retirement is simply to make it affordable. Policy makers should build a retirement system that combines the cost-effectiveness and security of traditional pensions with the portability and limited employer liability of 401(k)s. (For example, see the Economic Policy Institute's proposed plan.) Combined with Social Security benefit cuts, the rise of 401(k)s has led to growing retirement insecurity and an increase in the labor force participation of older workers. Still, workers with only 401(k)s are better off than the nearly half of full-time workers with no retirement plan at all.

Pension Pinchers - Dave’s story mirrors those of the vast majority of public employees: Serve your state, and earn a comfortable, but not lavish, retirement--according to the National Institute on Retirement Security, public-employee pensions average a modest $20,867 per year. Sometimes, their pension is all they have: Employees of all state governments were excluded from Social Security when it was created, and more than a quarter of them still aren’t covered. Since Social Security benefits average less than $16,000 a year, the bonus for public employees is hardly lavish. How is it, then, that these unassuming public servants, and particularly their pensions, are suddenly at the epicenter of a vitriolic conflict? At the conference of the Republican Governors Association last fall, Tim Pawlenty of Minnesota likened state employees to attempted murderers, declaring that “the public-employee unions would stick a shiv in all of us if they could.” At the same conference, Scott Walker, then governor-elect of Wisconsin, took aim at state workers’ benefits, declaring, “We cannot and should not maintain a system where public employees are the haves and the taxpayers footing the bill are the have-nots.”

Social Security Cuts Loom Large - A large block of future retirees can expect to see their Social Security benefits dwindle by 19%, thanks to a 29-year-old piece of legislation that curtailed government retirement benefits. If the feds don't find other ways to shore up the pension system, it means bad news for millions of Americans under 50. There's no doubt Social Security is in big trouble financially. According to the Congressional Budget Office, Social Security coffers are expected to run dry by 2037, and this year alone the U.S. government will collect $45 billion less in taxes than it shells out. By 2016, Social Security is expected to fall permanently into deficit mode, so it's no surprise future beneficiaries may see their Social Security cut. A new study by the National Academy of Social Insurance estimates that some cuts have already been locked in, thanks to changes in Social Security's payment structure that date back to the 1980s. Americans born after 1960 have been staring down the barrel of a 19% benefits cut, and that could just be the beginning. If Congress doesn't pare benefits across the board, the study argues, future Social Security beneficiaries could be in even bigger trouble.

May Update: 2012 Social Security Cost-Of-Living Adjustment - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.1 percent over the last 12 months to an index level of 222.954 (1982-84=100). For the month, the index rose 0.5 percent ..."CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation ... The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.

AARP Pivots on Social Security Benefit Cut - —AARP, the powerful lobbying group for older Americans, is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington's debate over how to revamp the nation's entitlement programs.  The decision, which AARP hasn't discussed publicly, came after a wrenching debate inside the organization. In 2005, the last time Social Security was debated, AARP led the effort to kill President George W. Bush's plan for partial privatization. AARP now has concluded that change is inevitable, and it wants to be at the table to try to minimize the pain. The shift, which has been vetted by AARP's board and is now the group's stance, could have a dramatic effect on the debate surrounding the future of the federal safety net, from pensions to health care, given the group's immense clout.

Social Security: What Does AARP's Move Mean for the Debt Debate - When it comes to solving America's debt "problem," what we usually hear about is spending cuts or tax increases. Few talk about cutting Social Security. The program is wildly popular. It's also a huge contributor to the nation's debt problem. That's why the today's news, via the Wall Street Journal, that the AARP may be shifting its position on the national retiree benefit program could be huge break in the battle over how we should reduce the U.S. debt. Apparently, the debate inside the lobbying group was heated. But it is expected that the AARP's public stance will soon favor some benefit cuts for seniors receiving Social Security. It's not clear yet what cuts the group would support. But that group has had a huge influence over debates about Social Security in the past. And anything that stops the growth of Social Security could make a huge difference in the budget debate. But before everyone starts doing victory laps, there are some significant risks here in changing Social Security. Here's why:

Social Security Advocates Deplore AARP Decision To Put Social Security On Chopping Block - An article in Friday's Wall Street Journal has Social Security advocates angry and scratching their heads. It suggests that AARP -- one of the most powerful interest groups in Washington -- has done an about face on the question of cutting retirement benefits for seniors as part of a grand bipartisan bargain on shoring up the programs finances. The change in posture, agreed to by AARP's board, has already sent shock waves through the Beltway's large and influential entitlement reform community. It's prompted calls from lawmakers and centrist and conservative groups for Congress to seize the initiative and agree to cut benefits. It's mobilized Social Security's strongest advocates against AARP, and it's prompted AARP to initiate a partial walk back -- a statement calling the story "misleading, but reiterating that the group could support Social Security reforms if they don't cause future retirees too much pain. "It has also been a long held position that any changes would be phased in slowly, over time, and would not affect any current or near term beneficiaries," says AARP CEO A. Barry Rand -- in other words, the group could support some cuts, so long as they only impact people many years away from retirement.

“The Elderly” for Beginners - As the AARP says that it is open to modest cuts in Social Security benefits, it’s worthwhile asking a more fundamental question: are Social Security and Medicare programs that benefit the elderly? The answer may seem obvious. After all, the bulk of Social Security Old Age and Survivors Insurance benefits go to people over 62, and almost all Medicare beneficiaries are over 65. So it’s often observed in passing that our long-range budget issues are the product of transfers to the elderly. When you add to that the frequent complaint that, by running budget deficits, we are imposing burdens on our grandchildren, this age-based inequity seems even greater. But the problem with this framing is that “the elderly” change every year. There’s nothing inherently wrong or unfair with a program in which you pay insurance premiums while you work and collect benefits when you retire. Saying such a program benefits the elderly is like saying that life insurance doesn’t benefit the insured,

States to cut Medicaid benefits as federal help ends - Faced with a deepening recession two years ago, the Obama administration injected billions of dollars into Medicaid, the nation’s low-income health program. The money runs out at the end of this month, and benefits are being cut for millions of people, even though unemployment has increased. From New Jersey to California, state officials are bracing for the end to more than $90 billion in federal largesse designated for Medicaid. To hold down costs, states are cutting Medicaid payments to doctors and hospitals, limiting benefits for Medicaid recipients, reducing the scope of covered services, requiring beneficiaries to pay larger co-payments, and expanding the use of managed care. As a result, costs can be expected to rise in other parts of the health care system

Misguided Attack on Medicaid - Senator Orrin Hatch (R-UT) this week made several unfair and inaccurate attacks on Medicaid. Most egregiously, in his speech Wednesday at the Heritage Foundation, he repeated a recent claim by American Enterprise Institute analyst Scott Gottlieb that “Medicaid is worse than no coverage at all.”Gottlieb based his claim on several studies, such as one of patients with throat cancer that found Medicaid patients and uninsured people were both 50 percent more likely to die than privately insured patients. But, as a recent commentary in The New England Journal of Medicine explains, these studies are “beset by analytic problems.”Studies that appropriately adjust for the fact that Medicaid enrollees tend to be both sick and poor, as well as other factors that can skew results, “have consistently found that Medicaid coverage leads to health improvements,” conclude the authors, who include noted health policy experts Austin Frakt and Uwe Reinhardt.

As Number of Medicaid Patients Goes Up, Their Benefits Drop - The Obama administration injected billions of dollars into Medicaid1, the nation’s low-income health program, as the recession2 deepened two years ago. The money runs out at the end of this month, and benefits are being cut for millions of people, even though unemployment has increased.  From New Jersey to California, state officials are bracing for the end to more than $90 billion in federal largess specifically designated for Medicaid. To hold down costs, states are cutting Medicaid payments to doctors and hospitals, limiting benefits for Medicaid recipients, reducing the scope of covered services, requiring beneficiaries to pay larger co-payments and expanding the use of managed care.  As a result, costs can be expected to rise in other parts of the health care system. Cuts in Medicaid payments to doctors, for example, make it less likely that they will accept Medicaid patients and more likely that people will turn to hospital emergency rooms for care. Hospitals and other health care providers often try to make up for the loss of Medicaid revenue by increasing charges to other patients, including those with private insurance, experts say.

Arizona adults at risk of losing Medicaid - Brian Riess didn't know his Medicaid coverage had lapsed until he was in crisis. The reapplication process began at a Mesa detox center, and Riess was in line before the state Department of Economic Security office opened Friday to submit the rest of his paperwork and get back on the Arizona Health Care Cost Containment System.  State officials are banking on thousands of low-income Arizonans losing their health coverage to help balance the budget for the coming fiscal year. The stakes have never been higher for more than 220,000 childless adults on the state's Medicaid program. Unless a pending lawsuit or federal intervention prevents an enrollment freeze July 1, once people like Riess fall off the rolls they will no longer be able to get back on, regardless of their income or medical condition.

Health care queuing: this will get worse - The study used a “secret shopper” technique in which researchers posed as the parent of a sick or injured child and called 273 specialty practices in Cook County, Ill., to schedule appointments. The callers, working from January to May 2010, described problems that were urgent but not emergencies, like diabetes, seizures, uncontrolled asthma, a broken bone or severe depression. If they were asked, they said that primary care doctors or emergency departments had referred them.Sixty-six percent of those who mentioned Medicaid-CHIP (Children’s Health Insurance Program) were denied appointments, compared with 11 percent who said they had private insurance, according to an article being published Thursday in The New England Journal of Medicine.In 89 clinics that accepted both kinds of patients, the waiting time for callers who said they had Medicaid was an average of 22 days longer.

It's the Health Care Costs, Stupid - I’ve already written about Joe Lieberman’s very bad, no good idea of raising the Medicare eligibility age. Austin Frakt and Aaron Carroll show that it’s even worse than I thought: Americans near 65 who don’t have good health insurance delay needed treatment, causing a bulge in Medicare costs when they hit the magic age, and the same phenomenon would get even worse, so this might not even save money. The larger point is that we don’t have a Medicare problem, we have a health care cost problem. And Medicare actually does a better job of controlling costs than private insurers — not remotely good enough, but better. If you look at Medicare in isolation, the cost rise looks terrible, because it is: Source. But it looks a bit different if you look at private insurance, too: If Medicare costs had risen as fast as private insurance premiums, it would cost around 40 percent more than it does. If private insurers had done as well as Medicare at controlling costs, insurance would be a lot cheaper.

Medicare Saves Money, by Paul Krugman - Every once in a while a politician comes up with an idea that’s so bad, so wrongheaded, that you’re almost grateful. For really bad ideas can help illustrate the extent to which policy discourse has gone off the rails. And so it was with Senator Joseph Lieberman’s proposal, released last week, to raise the age for Medicare eligibility from 65 to 67.  And here’s what you need to know: Medicare actually saves money — a lot of money — compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs. The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009. But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.

Medicare Versus Private Insurance: The Data - Krugman - NHE web data (pdf), Table 13. I deflated both sides by the consumer price index. Note that the table does both a raw comparison and a comparison of “common benefits”, which takes care of the problem of differential coverage. If you look at the bottom of the table, you’ll see that on both comparisons Medicare payments have grown 1 percentage point more slowly than insurance premiums over the past 40 years.That adds up to a lot. But I gather from the comments that everyone “knows” that it’s the other way around, so I must be inventing the numbers. Oh, one more thing: is Medicare just shifting costs onto the private sector? The answer is no.

Private insurance competition in Medicare - Recently, there have been a number of calls to increase the role private insurance plays in Medicare. The thought is, as always, that increased competition and consumer awareness will lead to more pressure on insurance companies to innovate and bring down prices. That rarely happens. What happen more often is that insurance companies become better at figuring out which patients they do and don’t want to cover. In an important paper in the New England Journal of Medicine in 1997, researchers looked at how people moved in and out of Medicare HMO plans and traditional Medicare.  Back in the 1990′s there was a swing to “managed care”.  If you were over 65, you could choose a Medicare HMO or FFS Medicare on a month-to-month basis.  If you chose the Medicare HMO, you had to use their providers and hospitals, but you could get additional benefits. 

Misleading Medicare Mantra - When you criticize the Republican’s plan for Medicare privatization, their kneejerk comeback is to claim that Medicare is going bankrupt. They’ve got to break it to fix it. It’s a misleading non sequitur that should not go unchallenged. The claim was amplified recently by the Medicare Trustees report, which projects that the Medicare Hospital Insurance trust fund (“Part C” of the program) will become insolvent by 2024. But before you jerk that knee, consider these points:

  • the other main parts of the program, Part B (insurance covering doctors’ services, outpatient care, medical supplies) and Part D (the prescription drug benefit) are mostly funded by premiums and general revenues, and, according to the trustees report, are “projected to remain adequately financed into the indefinite future.”
  • the Trustees’ Report always presents the date that the trust fund won’t be able to fully meet its obligations (see figure below). As you see, it’s a moving target, most recently shortened by the weak economy and lower tax receipts. That doesn’t we should ignore the warning, but it does not mean that the insolvency date will continue to change with policy, economic, and cost changes.

The Republican's Fuzzy Line for Medicare Privatization - In their Medicare reform proposals, Republicans used to say that: our budget ensures no changes for those 55 years old or older...That, for example, is a feature of the Ryan plan. But if you are 55, or will be soon, Michele Bachmann would like to move you to the other side of the line: ...this is about people who are 55 and under. I don't want a 78-year-old woman to think that Medicare is going to be pulled out from under her, because it won't. It's the 55 and under plan. And so the reforms in Medicare will affect people 55 and under... Hopefully, the Republican voucher plan won't get past the proposal stage. But just to be clear, what are Republicans proposing, 55 and over, or 55 and under?

The Medicare Sky Is Falling (Part 2) Over at The Health Beat Blog, Maggie Mahar explains why the collapse of Medicare HI is less likely with the passage of healthcare reform. The Medicare “Crisis: A Shaggy Wolf Story. Potentially heading off the shortfall of Medicare funding is the passage of the ACA which is used by the Trustees to forecast a positive projection to Medicare. Before healthcare reform, Medicare HI would run short of funds in 2016. After its passage, the Medicare Trustees forecasted Medicare HI funding lasting to 2024 if Healthcare Reform program implemented. Why is such a delay in insolvency possible? Elmendorf's (the same Elmendorf who helped kill Hillary-Care) Congressional Budget Office forecasted a $950 billion generated over the next decade from the passage of healthcare reform. Two areas account for most of the savings and the third area could not be measured:

McKinseyGate - Krugman - The story so far: McKinsey released the alleged results of a study showing that large numbers of firms will drop health insurance coverage once the Affordable Care Act goes fully into effect. This is very different from the results of other studies, notably the Congressional Budget Office assessment of the act. So when the McKinsey alleged study made headlines, the firm was pressed to explain how the study was conducted. And it has refused to answer. It’s hard to escape the conclusion that the study was embarrassingly bad — maybe it was a skewed sample, maybe the questions were leading, maybe there was no real data at all. Whatever. The important thing is that this must not stand. You can’t enter the political debate with strong claims about what the evidence says, then refuse to produce that evidence. And it’s especially bad when the media give your claims lots of attention, while barely covering the furor over the refusal to explain where those claims come from.

McKinsey Thought-Experiment: What If They Are Correct? -- Assume—against all evidence—that the "once we educated them, 30% said they would stop offering health insurance to their lowest-paid employees" study is accurate. How does that, as John Boehner declares, cost America jobs? From Boehner's site: At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries. This should be intuitive. If the company is paying $1,000 a month for my family's health care along with my $800 a month,* it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I'm not a health-care administrator, it's win-win.** Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).If the McKinsey "study" were accurate—again, not the way to bet—we should expect overall employment to increase. As with the Earned Income Tax Credit, the expansion of HIEs will benefit firms, allowing them to reallocate capital into more useful areas.

It’s not about regulating markets, after all! It’s about regulating the individual! - "In perhaps the weightiest of the dozens of challenges to the Obama health care law, a panel of appellate judges grappled Wednesday with the essential quandary of the case: if the federal government can require Americans to buy medical insurance, what constitutional limit would prevent it from mandating all manner of purchases and activities?" —Kevin Sack, New York Times, Jun. 8 In my last post, Markets and the ACA: Why the Supreme Court Will Uphold the ACA, I wrote: [Santa Clara law prof. and ACA-litigation blogger Brad Joondelph is] right, but only if, as he says earlier, the market for health insurance is defined so narrowly that health insurance is viewed as a commodity, a product, independent of the product’s purpose and effect. And then, the constitutional issue would not, I think, be whether Congress has the authority under the Commerce Clause, aided by the Necessary and Proper Clause, to regulate the health insurance market, but instead whether this violates some other constitutional limitation. You know: the slippery-slope-to-government-compelled-consumption-of-broccoli argument.”  Turns out I was onto something.

Dangerous faux research - By now you’ve probably heard that McKinsey has refused to release details of its survey methodology that backs the finding that 30% of employers intend to drop coverage as a result of the ACA. By now you know that 30% is a dramatically higher figure than any other credible organization has suggested. It’s not what we’ve seen in Massachusetts. (On all this, see Aaron, Volsky, or Krugman). As someone who does research, this really bothers me. It should bother you too. Look, anybody can say what they like on a topic. They can put out a glossy report. They can claim they did a “survey” to make it sound scientifically rigorous. They can talk to the media all about it. They can stand behind their good name and reputation, if they have one. But when what they’re saying runs counter to previous experience and other credible estimates, they’d better have a good explanation. But, McKinsey has no explanation. None. They’re stonewalling. You know what would happen to me if I tried that? Suppose I sent my new results to a journal, results that were very different from that of others, and said, “Trust me. They’re good.” Well, my paper would be laughed out of the editorial office.

British fear 'American-style' healthcare - Ask a Briton to describe “American-style” healthcare, and you’ll hear a catalog of horrors that include grossly expensive and unnecessary medical procedures and a privatized system that favors the rich. For a people accustomed to free healthcare for all, regardless of income, the fact that millions of their cousins across the Atlantic have no insurance and can’t afford decent treatment is a farce as well as a tragedy.But critics here warn that a similarly bleak future may await Britain if a government plan to put more power in the hands of doctors and introduce more competition into the NHS succeeds — privatization by stealth, they say. So frightening is the Yankee example that any British politician who values his job has to explicitly disavow it as a possible outcome. Twice. “We will not be selling off the NHS, we will not be moving towards an insurance scheme, we will not introduce an American-style private system,” Prime Minister David Cameron emphatically told a group of healthcare workers in a nationally televised address last week. In case they didn’t hear it the first time, Cameron repeated the dreaded “A”-word in a list of five guarantees he offered the British people at the end of his speech.

Drug Shortages - WP: Doctors, hospitals and federal regulators are struggling to cope with an unprecedented surge in drug shortages in the United States that is endangering cancer patients, heart attack victims, accident survivors and a host of other ill people.Currently there are about 246 drugs that are in short supply, a record high. These shortages are not just a result of accident, error or unusual circumstance, the number of drugs in short supply has risen steadily since 2006. The shortages arise from a combination of systematic factors, among them the policies of the FDA. The FDA has inadvertently caused drugs long-used in the United States to be withdrawn from the market and its “Good Manufacturing Practice” rules have gummed up the drug production process and raised costs. Manufacturing-related causes that contribute to drug shortages are multifactorial. Inability to fully comply with GMP, which results in production stoppages or recalls, was considered a major cause.

Senate report: The Latin American war on drugs has ‘largely failed’ - A U.S. Senate subcommittee report this week called into question efforts to curb drug exports from Latin America, suggesting that billions in tax dollars had been wasted in no-bid contracts with no oversight on how the money was being spent or whether efforts were succeeding. The report comes just a week after a panel of formerly high-ranking officials -- including the former presidents of Switzerland, Colombia, Mexico and Brazil, along with a former U.N. Secretary General, a former U.S. Secretary of State, the prime minister of Greece and the former U.N. High Commissioner for Human Rights -- called for the drug war to shift its focus from enforcement and interdiction to medical treatment and harm-reduction policies. "It's becoming increasingly clear that our efforts to rein in the narcotics trade in Latin America, especially as it relates to the government's use of contractors, have largely failed,"

Weekend question - The Global Commission on Drug Policy recently reported back . What it said was what most everyone who's looked into this issue already knew: "The global war on drugs has failed, with devastating consequences for individuals and societies around the world." A new approach, one based more on realistic interventions than martial metaphors, is needed.  The news, however, was who was saying this: Former Federal Reserve chairman Paul Volcker. Former secretary of state George P. Schultz. Former president of Brazil Fernando Henrique Cardozo. Former secretary-general of the United Nations Kofi Annan. Former president of Switzerland Ruth Dreifuss. And many more important "formers."  So here's my question: What alignment of political forces and events would be needed for America to seriously rethink its drug laws? Would it have to begin in the states? Is it something a law-and-order Republican needs to do?

Call Off the Global Drug War - Jimmy Carter - IN an extraordinary new initiative announced earlier this month, the Global Commission on Drug Policy has made some courageous and profoundly important recommendations in a report on how to bring more effective control over the illicit drug trade. The commission includes the former presidents or prime ministers of five countries, a former secretary general of the United Nations, human rights leaders, and business and government leaders, including Richard Branson, George P. Shultz and Paul A. Volcker.  The report describes the total failure of the present global antidrug effort, and in particular America’s “war on drugs,” which was declared 40 years ago today. It notes that the global consumption of opiates has increased 34.5 percent, cocaine 27 percent and cannabis 8.5 percent from 1998 to 2008. Its primary recommendations are to substitute treatment for imprisonment for people who use drugs but do no harm to others, and to concentrate more coordinated international effort on combating violent criminal organizations rather than nonviolent, low-level offenders.

How Superbugs Will Affect Our Health Care Costs - Remapping Debate has a very, very sobering piece on antibiotic resistance, and what it means for the future of health care.  Two graphs sum up the problem.  The first shows the rise of antibiotic resistance in various common infections.  The second shows the decline in the approval of new antibiotics.These are not two trends you want to see moving in opposite directions.   There are a lot of reasons for the decline of new antibiotics--the market incentives are hopelessly misaligned, we've already picked a lot of the low-hanging fruit, and we're using way more antibiotics than we should in both humans and in animals.  But anything we do to reduce overusage actually makes the problem of new antibiotic development worse, because it reduces the potential profit.  At any rate, there's no clear way to solve this terrible divergence.

Death wish: Routine use of vital antibiotics on farms threatens human health - The use of modern antibiotics on British farms has risen dramatically in the past decade, fuelling the development of resistant organisms and weakening the power of human medicine to cure disease.  Click HERE to view graphic (218k jpg)  Three classes of antibiotics rated as "critically important in human medicine" by the World Health Organisation – cephalosporins, fluouroquinolones and macrolides – have increased in use by up to eightfold in the animal population over the past decade.   Experts say intensive farming, with thousands of animals reared in cramped conditions driven by price pressure imposed by the big supermarket chains, means infections spread faster and the need for antibiotics is greater. The widespread use of antibiotics in livestock farming is recognised as a major contributor to the growth of antibiotic-resistant bacteria. Last month British scientists identified a new type of MRSA in milk, the first time the resistant organism had been found in farm animals in the UK. Although the superbug is killed by pasteurisation, there are fears it could spread from cattle to humans.  Resistant genes for toxic forms of E.coli can jump from animal to human strains. The outbreak of a virulent antibiotic-resistant strain of E.coli in Germany last month, which has claimed 39 lives and left more than 3,300 people requiring hospital treatment, has been blamed on the overuse of antibiotics in farming.

Cheap meat, MRSA and deadly greed -  Many of the world's scientists are warning that one of the mightiest weapons doctors have against sickness is being rendered useless – so a few people can get richer, for a while. If they aren't stopped soon, the World Health Organisation warns we are facing "a doomsday scenario of a world without antibiotics". It will be a world where transplant surgery is impossible. It will be a world where a simple appendix operation will be as routinely lethal as it was in 1927, before the discovery of penicillin. It will be a world where pneumonia and TB and gonorrhea are far harder to deal with, and claim many more of us.... Use an antibiotic against bacteria, and it kills most of it – but it can also prompt the bacteria to evolve a tougher, stronger, meaner strain that can fight back. The bacteria is constantly mutating and dividing. The stronger the antibiotic, the stronger some bacteria will become to survive. It's Darwin dancing at super-speed. So the more we use antibiotics, the more we lose them. In many developed countries today, MRSA kills more people than Aids. The obvious conclusion, then, is that we should use antibiotics sparingly, and only when they are really needed to treat the sick. But in one crucial area we are doing the exact opposite – for the sake of a few people's profits. In the United States, Latin America, and Asia, animals being farmed for meat and milk are being automatically given antibiotics in their food all day – irrespective of whether they are healthy or sick. It's like slathering your child's Cornflakes with antibiotics, all year round.

Virginia Men Have 15 Years on Mississippi’s: Lifespan Study -  A man in Fairfax County, Virginia, can expect to live 15 years longer than one in Holmes County, Mississippi, according to a study released today that illuminates health disparities across the U.S. A woman in Collier County, Florida, has 12 years on a woman in Holmes, in the Mississippi Delta region of the southern state, said researchers at the Institute for Health Metrics and Evaluation at the University of Washington in Seattle. The study examined life expectancy in 3,147 U.S. counties through 2007. Tobacco use, obesity and high blood pressure have dropped life expectancy in Appalachia, the Deep South and northern Texas, said Christopher Murray, the institute director and a report author. He called for more investment in public-health programs and increased emphasis on primary care so doctors can catch and control high blood pressure and cholesterol levels. “Eighty-five percent of counties in the U.S. are not keeping up with what’s possible for women, and 81 percent of counties in the U.S. are not keeping up for men,” Murray said in a telephone interview. He defined “what’s possible” as progress made in the top 10 countries, including Canada, Australia and Japan, in extending human lifespan.

In many U.S. counties, life expectancy for women is declining - Women in large swaths of the U.S. are dying younger than they were a generation ago, reversing nearly a century of progress in public health and underscoring the rising toll of smoking and record obesity.Nationwide, life expectancy for American men and women has risen over the last two decades, and some U.S. communities still boast life expectancies as long as any in the world, according to newly released data. But over the last decade, the nation has experienced a widening gap between the most and least healthy places to live. In some parts of the United States, men and women are dying younger on average than their counterparts in nations such as Syria, Panama and Vietnam. Overall, the United States is falling further behind other industrialized nations, many of which have also made greater strides in cutting child mortality and reducing preventable deaths. In 737 U.S. counties out of more than 3,000, life expectancies for women declined between 1997 and 2007. For life expectancy to decline in a developed nation is rare. Setbacks on this scale have not been seen in the U.S. since the Spanish influenza epidemic of 1918, according to demographers."There are just lots of places where things are getting worse,"

Life expectancy in U.S. trails top nations -- Life expectancy in most U.S. counties lags behind that of the world's healthiest nations, in some cases by 50 years or more, according to a new analysis of government data.  For instance, in Holmes County, Mississippi, which has the lowest life expectancy in the country, a woman can expect to live 73.5 years, the average life span that women in the healthiest nations had in 1957 and have since far surpassed.  To determine how American life spans stack up internationally, researchers from the U.S. and the U.K. compared life expectancies in the U.S. to a moving average of those in the 10 nations with the lowest death rates, a group that includes other affluent countries such as Switzerland, Australia, Japan, and Canada.  Between 2000 and 2007, the researchers found, more than 80% of U.S. counties fell below the life-expectancy bar set by that group of leading nations, even though the U.S. spends more on health care per capita than any other country in the world.

Life Expectancy Fell in Many Counties in the US BEFORE the Crisis - Yves Smith - A rising tide did not lift all boats even when the economy looked a lot better than it does now. As Francois T, an MD and medical researcher, wrote: If you need ONE Indicator of how a nation is doing, it ought to be female life expectancy at birth. It is a tell tale sign that a lot of good things, (or bad things) are happening in the nation under study. Hence, forget about CDOs, CDS, RMBS, Pure BS, Official BS and what have you. Female LEAB will tell you something much more fundamental. He pointed to a just-released study, Falling behind: life expectancy in US counties from 2000 to 2007 in an international context. Some of its major findings: Large swaths of the United States are showing decreasing or stagnating life expectancy even as the nation’s overall longevity trend has continued upwards, according to a county-by-county study of life expectancy over two decades. In one-quarter of the country, girls born today may live shorter lives than their mothers, and the country as a whole is falling behind other industrialized nations in the march toward longer life… Some US counties have a life expectancy today that nations with the best health outcomes had in 1957 … Five counties in Mississippi have the lowest life expectancies for women, all below 74.5 years, putting them behind nations such as Honduras, El Salvador, and Peru. And get a load of this: Despite the fact that the US spends more per capita than any other nation on health, eight out of every 10 counties are not keeping pace in terms of health outcomes. That’s a staggering statistic.

How many US deaths are caused by poverty, low levels of education and other social factors? - A new study finds that the numbers are in the same range as deaths from heart attacks and stroke How researchers classify and quantify causes of death across a population has evolved in recent decades. In addition to long-recognized physiological causes such as heart attack and cancer, the role of behavioral factors—including smoking, dietary patterns and inactivity—began to be quantified in the 1990s. More recent research has begun to look at the contribution of social factors to U.S. mortality. In the first comprehensive analysis of such studies, researchers at Columbia University's Mailman School of Public Health found that poverty, low levels of education, poor social support and other social factors contribute about as many deaths in the U.S. as such familiar causes as heart attacks, strokes and lung cancer. The full study findings are published online ahead of print in the American Journal of Public Health.

Project MUSE - Demography - Incarcerating Death: Mortality in U.S. State Correctional Facilities, 1985–1998: Using data from the U.S. Bureau of Justice Statistics and Census Bureau, I estimate death rates of working-age prisoners and nonprisoners by sex and race. Incarceration was more detrimental to females in comparison to their male counterparts in the period covered by this study. White male prisoners had higher death rates than white males who were not in prison. Black male prisoners, however, consistently exhibited lower death rates than black male nonprisoners did. Additionally, the findings indicate that while the relative difference in mortality levels of white and black males was quite high outside of prison, it essentially disappeared in prison. Notably, removing deaths caused by firearms and motor vehicles in the nonprison population accounted for some of the mortality differential between black prisoners and nonprisoners. The death rates of the other groups analyzed suggest that prison is an unhealthy environment; yet, prison appears to be a healthier place than the typical environment of the nonincarcerated black male population. These findings suggest that firearms and motor vehicle accidents do not sufficiently explain the higher death rates of black males, and they indicate that a lack of basic healthcare may be implicated in the death rates of black males not incarcerated.

35% Spike in Infant Mortality in Northwest Cities Since Meltdown Might Be the Result of Fallout from Fukushima - The recent CDC Morbidity and Mortality Weekly Report indicates that eight cities in the northwest U.S. (Boise ID, Seattle WA, Portland OR, plus the northern California cities of Santa Cruz, Sacramento, San Francisco, San Jose, and Berkeley) reported the following data on deaths among those younger than one year of age:

4 weeks ending March 19, 2011 – 37 deaths (avg. 9.25 per week)
10 weeks ending May 28, 2011 – 125 deaths (avg.12.50 per week)

This amounts to an increase of 35% (the total for the entire U.S. rose about 2.3%), and is statistically significant. Of further significance is that those dates include the four weeks before and the ten weeks after the Fukushima Nuclear Power Plant disaster. In 2001 the infant mortality was 6.834 per 1000 live births, increasing to 6.845 in 2007. All years from 2002 to 2007 were higher than the 2001 rate. Data from Chernobyl, which exploded 25 years ago, clearly shows increased numbers of sick and weak newborns and increased numbers of deaths in the unborn and newborns, especially soon after the meltdown. These occurred in Europe as well as the former Soviet Union. Similar findings are also seen in wildlife living in areas with increased radioactive fallout levels.

Hot Particles From Fukushima, Japan, to Seattle Virtually Undetectable when Inhaled or Swallowed (video) Original estimates of xenon and krypton releases remain the same, but a TEPCO recalculation shows dramatic increases in the release of hot particles. This confirms the results of air filter monitoring by independent scientists. Fairewinds' Arnie Gundersen explains how hot particles may react in mammals while escaping traditional detection. Reports of a metallic taste in the mouth, such as those now being reported in Japan and on the west coast, are a telltale sign of radiation exposure.

China Considers a Market-Based Approach to Solve Its Kidney Shortage, Maybe the U.S. Can Follow? - The chart above illustrates a very serious and escalating health care crisis in America:  The number of kidney transplant operations has remained flat for the last six years, and there were actually fewer last year (16,968) than in 2006 (17,095).  Meanwhile, the number of registered transplant candidates continues to grow, at an average rate of more than 4,500 new candidates in every year since 2005.  In 2010, the chances of receiving a kidney for the almost 88,000 patients on the waiting list fell below 20% for the first time ever, and those odds probably won't improve any time soon.  Reason? It's illegal for Americans to receive any kind of financial compensation for providing a kidney to save the life of a stranger, and without financial compensation there's no way to solve the growing kidney shortage.  The number of kidney donations and transplant operations will remain flat, the kidney waiting list will grow, and the pain, suffering and death for those waiting will continue to escalate as the waiting list becomes a sure death sentence for a large majority of patients.  

EPA’s toxics rule no threat to job growth, new EPI study finds - A new study by the Economic Policy Institute (EPI) finds that new regulations on mercury, arsenic and other toxic air pollution from power plants proposed by the Environmental Protection Agency (EPA) in March would not provide a drag on the current economic recovery and would in fact have a slightly positive impact on job growth in coming years. While the “toxics rule” would primarily benefit the economy through large improvements to health and quality-of-life, it has been opposed by those claiming it would hamper job growth; today’s study finds that this is not true. A lifesaver, not a job killer: EPA's proposed "air toxics rule" is no threat to job growth by economist Josh Bivens is a comprehensive evaluation of the effect the toxics rule would have on the labor market.  It looks at more channels through which the toxics rule would affect the labor market than does the EPA’s Regulatory Impact Analysis (RIA), which was not designed to be a complete review of the job-market impacts of the rule.

Deaths from E. coli still rising in Germany - The death toll has risen to 35 in Germany's E. coli epidemic and health officials say about 100 patients have severe kidney damage. The source of infection has been identified as bean sprouts from an organic farm in northern Germany. At least 3,255 people have fallen ill, mostly in Germany, of whom at least 812 have a complication that can be fatal. About 100 patients with damaged kidneys will need transplants or life-long dialysis, one health expert said. Karl Lauterbach, an epidemiologist who is also an opposition Social Democrat (SPD) politician, warned that E. coli infections were growing worldwide.

Seven French children ill with E coli after burgers - The burger meat blamed for infecting at least six children in the north of France with a rare type of E coli bacteria came from Germany, Belgium and the Netherlands, the French producer of the burgers said Thursday.  Six children between the ages of 20 months and eight years were being treated in hospital in the city of Lille after being admitted Wednesday with symptoms of acute food poisoning. A seventh child was was being brought to hospital Thursday afternoon, the regional health authority said.  The six hospitalized children, who had eaten burger meat sold by German discount chain Lidl, were described by doctors as being in serious but stable condition.  Guy Lamorlette, manager of SEB, the French manufacturer of the frozen beef burgers sold by Lidl, told the German Press Agency dpa that the meat used in the relevant consignment of burgers came from Germany.  But he later added Belgium and the Netherlands to the list of countries from which the meat was sourced. The company imports meat from abattoirs throughout Europe.

German E. coli. Outbreak Highlights Need To Control Antibiotic Use In Agriculture. - A recent outbreak of E. coli. poisoning in Germany that killed 31 people and made thousands more sick starkly underlines the danger being created by the overuse of low level antibiotics in agriculture, particularly in beef, hog and poultry farming.  While the German problem has been identified as coming from organically grown sprouts, the source of the E. coli. likely came from irrigation water contaminated by runoff from nearby animal farms or processors. We’ve highlighted the danger of low level antibiotic use here, particularly regarding the efforts of Rep. Louise Slaughter  (D-NY) to pass legislation  prohibiting their overuse in farms.  The problem is straighforward:  The big Agriculture business model is based on the factory concept where huge processors cram animals into filthy lots filled with animal excrement and, unsurprisingly, pathogens.  To keep the animals alive long enough for slaughter, they are fed enormous amounts of antibiotics.  The pathogens adapt and in some cases are now untreatable. This whole issue is the subject of a new article by two time Pulitzer prize winner Nicholas Kristof, published in the New York Times.

Apples Top List Of Produce Contaminated With Pesticides - Apples are at the top of the list of produce most contaminated with pesticides in a report published today by the Environmental Working Group (EWG), a public health advocacy group. Its seventh annual report analyzed government data on 53 fruits and vegetables, identifying which have the most and least pesticides after washing and peeling. For produce found to be highest in pesticides, the group recommends buying organic. Apples moved up three spots from last year, replacing celery at the top of the most-contaminated list; 92% of apples contained two or more pesticides. "We think what's happening to apples is more pesticides and fungicides are being applied after the harvest so the fruit can have a longer shelf life," says EWG analyst Sonya Lunder. "Pesticides might be in small amounts, but we don't know what the subtle, long-term effects of many of these pesticides are yet."The worst offenders also include strawberries (No. 3) and imported grapes (No. 7). Onions top the "clean" list, found to be lowest in pesticides.

Not From the Onion - The headline says it all: House keeps farm subsidies, cuts food aid.  Here are some of the other provisions which seem designed just to be ridiculed by Jon Stewart:

  • Directs the Agriculture Department to rewrite rules it issued in January meant to make school meals healthier. Republicans say the new rules, the first major overhaul of school lunches in 15 years, are too costly.
  • Forces USDA to report to Congress every time officials travel to promote the department’s “Know Your Farmer, Know Your Food” program, which supports locally grown food, and discourages the department from giving research grants to support local food systems. Large agribusiness has been critical of the department’s focus on these smaller food producers.
  • Prevents USDA from moving forward with new rules that would make it easier for smaller farmers and ranchers to sue large livestock companies on antitrust grounds. The proposed rules are meant to address the growing concentration of corporate power in agriculture.
  • Delays for more than a year new rules for reporting trades in derivatives, the complex financial instruments blamed for helping precipitate the 2008 financial crisis. A Republican amendment adopted Thursday would require the Commodity Futures Trading Commission, which funded in the bill, to first have other rules in place to facilitate its collection of derivatives market data.
  • Prevents the FDA from approving genetically modified salmon for human consumption, a decision set for later this year.
  • Questions the scope of Obama administration initiatives to put calories on menus and limit the marketing of unhealthy foods to children.

Don’t get me wrong, I’d probably do away with a number of these rules as well. But anyone who argues against making school meals healthier because it’s too expensive at the same time as they vote for keeping billions of dollars in farm subsidies is not concerned about expenses. What unites the bill is not ideology but protection of agribusiness.

Ga. Criminals Sub for Immigrant Farm Workers - Georgia Governor Nathan Deal wants criminals to pick berries and peaches because of a farm-labor shortage being blamed on the state’s new law cracking down on illegal immigrants.  A state survey released yesterday reported that more than 11,000 agricultural jobs stand vacant during the height of the state’s fruit and vegetable picking season. Some of Georgia’s 100,000 probationers, of whom 25 percent are unemployed, can help, he said.  “The agriculture industry is the No. 1 economic engine in Georgia,” Deal said in a prepared statement. “It is my sincere hope to find viable and law-abiding solutions to the current problem our farmers face.”  Georgia’s immigration law, signed by Deal on May 13, is among five such measures enacted nationally in the past year, against opposition from civil rights groups, farmers and other businesses that rely on immigrant labor.

The locavore’s dilemma - There are many good reasons to like local food, but any large-scale metropolitan farming will do more harm than good to the environment. Devoting scarce metropolitan land to agriculture means lower density levels, longer drives, and carbon emission increases which easily offset the modest greenhouse gas reductions associated with shipping less food. Last year, I chaired the Citizen’s Committee for the Future of Boston, and our report endorsed urban vegetable gardens. Super-chef and committee member Barbara Lynch emphasized the educational value of letting children see food grow and I agreed with her. I share the locavore view that local food tastes better, and that there is something wonderful about eating something you’ve grown yourself. But while neighborhoods benefit from the occasional communal garden, it is a mistake to think that metropolitan areas could or should try to significantly satisfy their own food needs. Good environmentalism is smart environmentalism that thinks through the total systemic impacts of any change. Farm land within a metropolitan area decreases density levels and pushes us apart, and carbon emissions rise dramatically as density falls.

A Look at How Many Calories $1 Will Buy - Lapham’s Quarterly has put together a graphic showing how many calories a dollar will buy in various forms, including lettuce, canned tuna, a bottle of Coca-Cola and a McDouble sandwich at McDonald’s. It’s a good illustration of one of the problems with the American diet: unhealthy food is often a lot cheaper than healthy food.One dollar’s worth of Coke has 447 calories, while $1 of iceberg lettuce has just 16.5. To look at it another way, you would have to spend about $5 to buy 2,000 calories at McDonald’s, $19 to buy 2,000 calories worth of canned tuna and $60 to buy 2,000 calories worth of lettuce.These gaps have become larger over time, as this chart makes clear:

Top Reasons for Rising Energy Use in the Food Industry (graphic) About half of the growth in food-related energy use between 1997 and 2002 is explained by a shift from human labor toward a greater reliance on energy-intensive technologies. High labor costs in the foodservices and food processing industries, combined with household outsourcing of manual food preparation and cleanup efforts through increased consumption of prepared foods and more eating out, appear to be driving this result. Increases in per capita food expenditures (adjusted for inflation) and population growth also helped drive up food-related energy use over this period, with each trend accounting for roughly a quarter of the total increase. Data for 2007 show an 8-percent increase in food-related energy use since 2002.

Scrap biofuel support to curb food costs: agencies - Governments should scrap policies to support biofuels because they are forcing up global food prices, according to a report by 10 international agencies including the World Bank and World Trade Organization. The report adds to growing opposition to biofuels targets and subsidies such as those in Europe, Canada, India and the United States. “If oil prices are high and a crop’s value in the energy market exceeds that in the food market, crops will be diverted to the production of biofuels, which will increase the price of food,” said the report. “Changes in the price of oil can be abrupt and may cause increased food price volatility,” said the report. Prepared at the request of the Group of 20 major economies, the report addressed price volatility in food and agriculture, and its authors also included experts from the World Food Program, International Monetary Fund, the U.N.’s Food and Agriculture Organization, and the Organization for Economic Cooperation and Development.

On the end of ethanol subsidies - Which aren't ending: On the ethanol subsidy, critics wanted to eliminate, as of July 1, the 45-cent-per-gallon tax credit offered to refiners for using the corn-based fuel at an estimated cost of nearly $6 billion a year. The 59-to-40 vote on Tuesday to advance the measure was 20 votes short of what was needed. The tax benefits are set to expire at the end of the year, but their proponents are already working to renew them. Most Democrats banded together with farm-state Republicans to defeat the effort by Senator Tom Coburn, Republican of Oklahoma, who along with his allies charged that federal ethanol supports are wasteful and unnecessary and are increasing the cost of food by inflating the price being paid for corn. “Parochialism trumps the best interests of the nation,” Mr. Coburn said after the vote. Those who opposed him, while acknowledging that the ethanol subsidies are likely to be eased out eventually, said it would be disruptive to the agricultural and fuel markets to make a sudden change.

Ethanol Suffers Rare Loss in Senate - The Senate voted Thursday to repeal a $6 billion tax credit for ethanol producers, a move that could signal the end of some federal subsidies as part of an eventual budget and debt-ceiling compromise.Most Democrats and a number of Republicans supported an end to the subsidy, in a 73-27 vote. The subsidy gives refiners a 45-cent-a-gallon tax credit for blending ethanol into gasoline and has been a factor behind higher corn prices in recent years. Sen. Chuck Grassley (R., Iowa), a longtime supporter of the credit, objected to the measure that would end the subsidy. The U.S. ethanol industry is protected by a tariff of 54 cents a gallon on imported ethanol and that, too, would end under the Senate measure. The ethanol provision was added to unrelated legislation that would renew a program directing federal funding to deprived parts of the country to help local governments attract private investment..

Senate Votes To End Ethanol Subsidies, White House Threatens Veto - It’s rare when Congress actually does something I completely agree with, so I will take the time to congratulate the United States Senate on its vote today to end ethanol subsidies:  – The Senate voted overwhelmingly on Thursday to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of taxpayer support for biofuels is ending.The Senate in a 73-27 vote approved an amendment to end the 45-cent-a-gallon subsidy the government gives refiners and the 54-cent-per-gallon tariff on imported ethanol, which would be a boon to a major ethanol-producing country such as Brazil that makes ethanol from sugarcane.  The fact that the Administration would consider exercising a veto to save a wasteful and inefficient subsidy like this is pretty appalling. As The Washington Post noted nearly a year ago, there is no coherent argument in favor of these subsidies:

Brazil to tighten control over supply and demand for ethanol - Brazil's national petroleum agency ANP unveiled late Friday detailed plans to tighten government regulation over the ethanol market, giving the sector a first glimpse of how the rules might affect supply and demand for the biofuel. The resolution published on ANP's website is the first move by the regulator to avoid a repeat of the recent ethanol supply crisis in the country, which led Brazil to import more than 200,000 cubic meters of the biofuel so far this year. Usually it does not import ethanol. The news rules only affect the sales and distribution of anhydrous ethanol, used a blending component to gasoline A. If the measures are taken forward, ANP will require distributors of road transport fuel to regularly notify the agency of contracted volumes for the purchase of anhydrous ethanol as well as details of spot deals.

Record Food Prices Linked to Biofuels - The biofuels industry is being blamed for record food prices and high price volatility. Earlier this month a report from the World Trade Organization and other international agencies recommended that governments cut support for biofuels to ease that volatility. On the heels of that report, the U.S. Department of Agriculture issued its corn forecast; it suggested that corn supplies will be very tight this year because bad weather has limited planting and because the share of corn going to ethanol is increasing. After the report, corn prices shot to record highs, reaching $8 a bushel. Then on Friday, the Organization for Economic Cooperation and Development released a report predicting that food prices will remain high for the next decade.  Many experts say the unprecedented prices are at least partially driven by government subsidies and mandates that have led to fourfold increases in production of ethanol biofuel and tenfold increases in production of biodiesel between 2000 and 2009 worldwide. In the United States, multiple bills and amendments have been introduced to scale back subsidies as a way of trimming the federal budget, and on Thursday the Senate voted to end tax credits for ethanol that amounted to nearly $6 billion. (The program won't be killed unless the House passes its own law ending it.)

Food Price Explosion 'Will Devastate The World's Poor' - After a 40% rise in global prices over the past year, droughts and floods threaten to seriously damage this year's harvest.  Food prices will soar by as much as 30% over the next 10 years, the United Nations and Organisation for Economic Co-operation and Development have predicted. Angel Gurría, secretary-general of the OECD, said that any further increase in global food prices, which have risen by 40% over the past year, will have a "devastating" impact on the world's poor and is likely to lead to political unrest, famine and starvation. "People are going to be forced either to eat less or find other sources of income." The joint UN Food and Agriculture Organisation (FAO) and OECD report predicted that the cost of cereals is likely to increase by 20% and the price of meat, particularly chicken, may soar by up to 30%. World food prices are already at a near-record high as droughts and floods threaten to seriously damage this year's harvest. The report said the global harvest is in a "critical" condition and warned that prices will continue to rise until depleted stocks are rebuilt.

Diets of poor hurt by rise in food prices - Oxfam (Reuters) - Rising food prices, hovering near record highs after a spike in grain costs, are changing diets particularly in developing countries such as Kenya, according to a survey issued by charity Oxfam on Wednesday. The majority of respondents in the survey, conducted in 17 countries, said their diet had changed over the last two years, with some blaming rising food prices but others health concerns. "Our diets are changing fast and for too many people it is change for the worst," . "Huge numbers of people, especially in the world's poorest countries, are cutting back on the quantity or quality of the food they eat because of rising food prices," The United Nations' Food and Agriculture Organisation's index of global food prices hit a record high in February, driven partly by rising prices for grains. Wheat prices have fallen back slightly since then but corn climbed to a new record high earlier this week.

Food Prices to Stay High This Decade on Demand, Slowing Output - Food prices will remain higher in the next decade than in the past 10 years as agricultural production slows and demand increases, the OECD and the United Nations said in a joint report today. Global farm output is forecast to grow an average 1.7 percent a year through 2020, compared with 2.6 percent in the previous decade, the Paris-based Organization for Economic Cooperation and Development and the UN’s Food and Agriculture Organization said in their annual Agricultural Outlook report. “Slower growth is expected for most crops, especially oilseeds and coarse grains,” they said in the report. “The global slowdown in projected yield improvements of important crops will continue to exert pressure on international prices.”

Where have all the flowers gone? - High-mountain wildflower season reduced, affecting pollinators like bees, hummingbirds It's summer wildflower season in the Rocky Mountains, a time when high-peaks meadows are dotted with riotous color. But for how long? Once, wildflower season in montane meadow ecosystems extended throughout the summer months. But now scientists have found a fall-off in wildflowers at mid-season. They published their results, funded by the National Science Foundation (NSF), in the current issue of the Journal of Ecology. "Shifts in flowering in mountain meadows could in turn affect the resources available to pollinators like bees,""Some pollinators with short periods of activity may require only a single flower species," write the ecologists in their paper, "but pollinators active all season must have flowers available in sufficient numbers through the season." For example, bumblebees, important pollinators in many regions, need a pollen and nectar supply throughout the growing season to allow the queen bee to produce a colony.

Peak Fish And The Age Of Slime - I want to make some simple points about what we humans are doing to life in the oceans, but since simple points apparently take a long time to sink in, I am going to make those points today and over the next three days. Even then, I don't expect many people to get it, to fully understand that the long-term consequences of what I'm saying here, but there's no harm in trying. Simply stated, humankind is destroying animal life in the oceans through overfishing and other environmental insults. The trend is so dire that it is unlikely there will be any wild fish in the oceans by 2050. In the middle age of children being born now, the oceans will likely be devoid of edible creatures (fish, mollusks, crustaceans, and so on). If we had some reason to believe this trend could be reversed, we could embrace the obligatory Hope. But there is currently no reason to believe this destructive trend will be reversed.

The International Conspiracy To Catch All Tuna - On May 27, 2011 the Associated Press reported the latest setback in the ongoing fight to save the North Atlantic bluefin tuna (species name Thunnus thynnus).  – The bluefin tuna has escaped being placed on the endangered species list, but the majestic fish prized by sushi lovers will be listed as a "species of concern" by the federal agency that oversees America's fisheries.After extensive scientific review, the National Oceanic and Atmospheric Administration announced Friday it has determined that bluefin tuna does not warrant protection under the Endangered Species Act. The agency conducted the review after the Center for Biological Diversity submitted a petition seeking an endangered status for the fish, claiming the species faces possible extinction because of overfishing and habitat degradation, including effects of the BP oil spill on bluefin spawning grounds in the Gulf of Mexico. I have a few things to say before proceeding. I will be giving you additional details below about a story whose broad outline you probably already know, so let's get back to first principles.

“It’s The Oceans, Stupid” — Can we save the engine of our economy and our livable climate? - One of the cornerstone recommendations of both the Pew Oceans Commission and the U.S. Commission on Ocean Policy whose reports were published in 2003 and 2005 respectively, was the institution of a national ocean policy to harmonize the responsibilities of the multitude of federal agencies with jurisdiction over some aspect of ocean management. Last year, President Obama announced such a policy and the creation of a National Ocean Council tasked with its implementation.Particularly in today’s political climate when Bill Clinton’s campaign catch phrase, “it’s the economy, stupid” seems once again to be the order of the day, some may wonder how the oceans fit into the conversation. Well, the reality is U.S. coastal counties are home to more than half of all Americans, generate an estimated $8 trillion dollars per year, and support 69 million jobs. But declining ocean health and a lack of effective coordination among regional groups, states and federal bodies is putting this great economic engine at risk. In response, the Joint Ocean Commission Initiative, comprised of members from both ocean commissions, released a report, America’s Ocean Future: Ensuring Healthy Oceans to Support a Vibrant Economy.

NOAA predicts biggest dead zone yet for areas of Gulf - Bay St. Louis - NOAA is predicting a dead zone in the Gulf of Mexico along the coasts of Louisiana and Texas this summer larger than any on record, based on the amount of pollution coming down the Mississippi River this spring. The dead zone has been in existence since the 1970s. It is caused when farm fertilizer and animal waste, washed into the river and flow downstream into the Gulf. The nutrients feed algae that overgrow, and use up oxygen in the water at the bottom of the Gulf. Starved for oxygen, marine animals either move or die. It’s an area that has been growing over the years. And federal agencies have made little progress in curbing the amount of nitrogen or phosphorus entering the river. This year, with twice as much nutrient-filled water coming down the Mississippi and Atchafalaya rivers, NOAA is predicting a dead zone the size of New Hampshire or New Jersey -- 8,500 to 9,400 square miles along Louisiana and Texas.

Extreme flooding along the Mississippi River to enlarge Gulf of Mexico dead-zone - The Gulf of Mexico’s hypoxic zone is predicted to be larger than average this year, due to extreme flooding of the Mississippi River this spring, according to an annual forecast by a team of NOAA-supported scientists from the Louisiana Universities Marine Consortium, Louisiana State University and the University of Michigan. The forecast is based on Mississippi River nutrient inputs compiled annually by the U.S. Geological Survey (USGS). Scientists are predicting the area could measure between 8,500 and 9,421 square miles, or an area roughly the size of New Hampshire. The largest hypoxic zone measured to date occurred in 2002 and encompassed more than 8,400 square miles. The average over the past five years is approximately 6,000 square miles of impacted waters, much larger than the 1,900 square miles which is the target goal set by the Gulf of Mexico/Mississippi River Watershed Nutrient Task Force. This collaboration between NOAA, USGS and university scientists facilitates understanding links between activities in the Mississippi River watershed and downstream impacts to the northern Gulf of Mexico. Long-term data sets on nutrient loads and the extent of the hypoxic zone have improved forecast models used by management agencies to understand the nutrient reductions required to reduce the size of the hypoxic zone. Hypoxia is caused by excessive nutrient pollution, often from human activities such as agriculture that results in too little oxygen to support most marine life in bottom and near-bottom water. The hypoxic zone off the coast of Louisiana and Texas forms each summer and threatens valuable commercial and recreational Gulf fisheries. In 2009, the dockside value of commercial fisheries in the Gulf was $629 million. Nearly three million recreational fishers further contributed more than $1 billion to the Gulf economy taking 22 million fishing trips. –

Thick Snowpack Holds Water — And Potential Peril - From the Sierra Nevada and the Cascades to the northern Rockies, much of the West's high country remains buried under a thick snowpack that is filling reservoirs and engaging dam operators in a nerve-racking balancing act as they watch for jumps in temperature that could turn all those scenic piles of white into raging floodwaters. The first week of June in California, snow depths of 7 feet or more were not uncommon at high elevations. Sensors on Lower Lassen Peak in the Feather River watershed recorded a whopping 24 feet. This year's early spring snowpack in the Sierra was the fifth-largest in the last 60 years. A cool, cloudy May delayed its melt, and this month has been similar thus far — at some upper elevations, more snow has fallen. California's two largest reservoirs are nearly full: Lake Shasta, on the upper Sacramento River, and Lake Oroville, on the Feather River, a tributary of the Sacramento. Three years ago, in the middle of a statewide drought, Oroville was half empty.

Nebraska nuke plant totally surrounded by floodwaters: How can Omaha levees hold? Dykes designed for a few weeks of water — 3-4 months expected, with 5+ foot rise (news video)

Nebraska Nuclear Reactor Flooded - Ketv noted in March: Fort Calhoun's nuclear power plant is one of three reactors across the country that federal regulators said they are most concerned about.  Last year, federal regulators questioned the station's flood protection protocol. NRC officials said they felt the Omaha Public Power District should do more than sandbagging in the event of major flooding along the Missouri river. OPPD officials said they have already made amends and added new flood gates. "We updated our flood protection strategy and have tested and re-tested our new strategy. The issue is operationally resolved, and at no time was there a threat to public safety or was public health at risk," OPPD President and Chief Executive Officer Gary Gates said. Those upgrades are being tested right now, as the area around the Fort Calhoun nuclear power plant is being flooded.

Rising water, falling journalism -  A little farther up the Missouri, at the Fort Calhoun Nuclear Power Station near Blair, Nebraska, the river is already lapping at the Aqua Dams -- giant plastic tubes filled with water -- that form a stockade around the plant's buildings. The plant has become an island. In Blair, in Council Bluffs, and in my hometown of Omaha -- which are all less than 20 miles from the Fort Calhoun Station -- some people haven't forgotten that flooding is what caused the power loss at the Fukushima Daiichi nuclear power plant and the disastrous partial meltdowns that followed. They're wondering what the floodwaters might do if they were to reach Fort Calhoun's electrical systems. The Nuclear Regulatory Commission (NRC) issued a "yellow finding PDF" (indicating a safety significance somewhere between moderate and high) for the plant last October, after determining that the Omaha Public Power District (OPPD) "did not adequately prescribe steps to mitigate external flood conditions in the auxiliary building and intake structure" in the event of a worst-case Missouri River flood. The auxiliary building -- which surrounds the reactor building like a horseshoe flung around a stake -- is where the plant's spent-fuel pool and emergency generators are located.Fort Calhoun remains on emergency alert because of the flood -- which is expected to worsen by early next week. On June 9, the Army Corps of Engineers announced PDF that the Missouri River would crest at least two feet higher in Blair than previously anticipated.

Arnie Gundersen - Fort Calhoun, Nebraska, Nuclear Plant: Emergency Level 4. Interview by Robert Knight of Pacifica Radio Network  "On June 6, 2011, the Fort Calhoun pressurized water nuclear reactor 20 miles north of Omaha, Nebraska entered emergency status due to imminent flooding from the Missouri River. A day later, there was an electrical fire requiring plant evacuation. Then, on June 8th, NRC event reports confirmed the fire resulted in the loss of cooling for the reactor's spent fuel pool. The discussion includes specific details of the technical failures at Fort Calhoun, the risks of coolant loss at overcrowded "spent" fuel pools, and the national hazards of nuclear facilities along the Missouri and Mississippi Rivers, and other water sites during the current period of floods and climate change." Part 1: Part 2: Part 3:

Spiking Conspiracy Theories About Ft. Calhoun Nuclear Power Plant - The Missouri River flooding is bringing waves of concern nationwide about the safety of the Fort Calhoun Nuclear Power Plant. Business Insider, a news aggregator, has a story and a video predicting all manner of nuclear catastrophe at the Ft. Calhoun Nuclear Power Plant. Readers might ask what is really going on? The answer is that while the Missouri River is rising, the reactor is safe. As the flood waters continue to rise, a spokesman for Omaha Public Power District says the plant is at a "notification of unusual event" classification because of the flood. It is required by the NRC because of the flood. That is the lowest level in an emergency.  The Omaha Public Power District has been prepared for the floods and the plant is safe. It has been in a cold shutdown since April because of a planned refueling. Although water from the Missouri is higher than the plant now; the vital area of the plant is surrounded by a 2,000-foot long berm that takes the protective level up about six feet -- to 1,010 feet or five feet above the river level. As of J10 AM June 16, the water is at 1,005 feet.

Jeff Masters: Missouri River flood hits unprecedented flow rates - However, the damages from the huge, slow-moving, lowpressure system that spawned the Joplin tornado have not yet been fully realized. The powerful storm pumped huge quantities of warm, moisture-laden air from the Gulf of Mexico northwestwards into Montana, where the moisture condensed into record-breaking heavy rain and snow. In portions of eastern Montana, the storm brought a year's worth of precipitation in a week, swelling the tributaries of the Missouri River to unprecedented heights. Billings, Montana, recorded 9.54" of precipitation in May, its single wettest month on record, and not far from its annual average precipitation of 14.5". A great 100-year flood has arrived along the Missouri River and its tributaries from Montana to Nebraska. Record spring rains, combined with snow melt from record or near-record winter and spring snows, brought the Missouri River at Williston, North Dakota, to 30' today (June 17), two feet above the record crest set in 1912. Tributaries to the Missouri, such as the Souris River in North Dakota and the North Platte River in Nebraska, are also flooding at all-time record heights. With warm summer temperatures and 2"-5" of rainfall expected over much of the area during the coming week, snow melt and rain runoff will swell area rivers even further, creating an even more dangerous flood. Flooding along the Missouri River has already broken two levees and closed two portions of I-29, a key trucking route that extends from Kansas City through Iowa, South Dakota and North Dakota to the Canadian border. A 20-mile stretch between Council Bluffs and the Missouri Valley area is closed, as well as a 22-mile section in southwest Iowa and northwest Missouri, causing significant disruptions to the trucking industry.

Flood-hit China warns of more rain - China's weather authorities warned Monday torrential rain that has triggered deadly floods and landslides would continue, as experts said a recent drought was making the situation worse. The government said at the weekend that flooding in 13 provinces or regions had already left 94 people dead and 78 others missing, and destroyed 465,000 hectares (1.5 million acres) of cropland, an area almost the size of Brunei.On Monday, the National Meteorological Centre said heavy downpours along the middle and lower reaches of the Yangtze river -- China's longest -- were to continue over the next three days, adding to an already serious situation. "Water levels in rivers and reservoirs in some areas of the Yangtze river are nearing or have already exceeded warning levels,"

USGS: Global Warming Drives Rockies Snowpack Loss Unrivaled in 800 Years, Threatens Western Water Supply - A US Geological Survey study released today suggests that snowpack declines in the Rocky Mountains over the last 30 years are unusual compared to the past few centuries. Prior studies by the USGS and other institutions attribute the decline to unusual springtime warming, more precipitation falling now as rain rather than snow and earlier snowmelt. The warming and snowpack decline are projected to worsen through the 21st century, foreshadowing a strain on water supplies. Runoff from winter snowpack – layers of snow that accumulate at high altitude – accounts for 60 to 80 percent of the annual water supply for more than 70 million people living in the western United States.

Warming to Blame for Water Crisis in U.S. West. Heat—not lack of precipitation—shrinking crucial snowpack, study says. -Much of the U.S. West's water supply is under threat as rapidly warming temperatures melt more snowpack annually than is created by precipitation, a new government study suggests. Each spring, melted snow and ice from the Rocky Mountains recharge up to 80% of the Columbia, Missouri, and Colorado River Basins.Together, these basins form the primary water source for nearly 70 million people in an area plagued by droughts—ncluding Denver, Las Vegas, Los Angeles, and Salt Lake City. (See an interactive map of the Colorado River Basinto learn more about continued drought in the West.)The new study, by the U.S. Geological Survey (USGS), appears to confirm a key source of the droughts: Snowpack has been disappearing over the past several decades. What's more, 60% of the decline is due to greenhouse gas-induced warming, the researchers conclude

Arizona Wildfire Threatens Electrical Grid— A massive wildfire continued its surge Thursday through eastern Arizona after jumping past firefighters’ containment lines the day before to the edge of residential areas and prompting thousands more people to flee after another in a series of evacuation orders.  Springerville, with about 2,000 residents, was the largest town to be emptied so far as emergency personnel grew worried about the out-of-control nature of the blaze. Winds were sending burning embers miles downwind, igniting dozens of smaller fires that required the urgent attention of firefighters and raising the prospect of the fire’s greatly extending its 12-day run, the authorities said.   At more than 600 square miles, the fire is larger than the land areas of New York City and Chicago combined. And it will probably continue to grow.  A map of the unruly fire shows a bright red, multitentacled mass extending across the Apache and Sitgreaves National Forests. But Mr. Whittington pointed out the tiny red dots beyond the front lines of the fire representing spot fires that, if not controlled, would extend the main fire’s march to the northeast across the New Mexico state line.

Arizona Wildfire Smoke Threatens Health Across Southwest - Health officials in New Mexico and Arizona are warning residents that air quality conditions could worsen today as enormous wildfires rage in the two states.  The Wallow Fire has been burning in Arizona for two weeks and spread into New Mexico on Friday night. It has burned nearly 700 square miles, destroyed more than 30 homes and displaced almost 10,000 people. Mark Shaffer of the Arizona Department of Environmental Quality told The Associated Press that breathing in the tiny particles in the smoke clouds that have darkened the skies over parts of the two states could cause both short- and long-term health problems.  "Larger particles, you breathe in and you cough and it tends to get rid of it," Shaffer said. The problem with the microscopic particles, each about 1/28th the width of a human hair, is that they get "very, very deep into your system and are very difficult to expel."  The air quality warnings span further than the areas directly affected by the fires.

Arizona wildfires creeping towards New Mexico; threaten small town of Luna - The massive Arizona wildfires, burning now for a third week, threatened Tuesday to scorch a small town in neighboring New Mexico. The raging flames moved within about a mile of the mountain burg of Luna, N.M., as the "Wallow Fire" continued its inexorable path across the state. The blaze was expected to become the largest fire in Arizona history before it is finally extinguished. Authorities believe the blaze was ignited on May 29 by an unattended campfire. Despite its duration and wide range, the fire has destroyed only 31 homes and a few other structures. In the tiny working-class town of Luna, N.M., the 200 residents were put on alert for possible evacuation due to the encroaching flames.

Arizona wildfire crews try to cut off eastern advance - Emergency workers light fires outside Luna, New Mexico, to try to keep main blaze from getting into town.  Emergency crews who have been battling a wildfire in eastern Arizona for two weeks have shifted their focus to New Mexico, where they lit fires to try to stop the advance of the blaze and protect a mountain town in its path. In the opposite corner of New Mexico, near the Colorado border, winds kicked up flames at a wildfire that had already forced evacuations and closed 20 miles of the main north-south highway through both states. "We're watching trees explode before our eyes. It's horrendous," said Barbara Riley, a schoolteacher and bed-and-breakfast owner in Raton, north-eastern New Mexico. The eastern Arizona fire has been burning since 29 May, and efforts to stop its spread finally met with success over the weekend.

Arizona Fire Could Become Largest Ever - The Arizona fire raging since May 29 through more than 670 square miles so far, is threatening more than homes and property. According to the Associated Press, “The eye-stinging, throat burning haze of smoke spewing from a gigantic wildfire in eastern Arizona is beginning to stretch as far east as central New Mexico, prompting health officials to warn residents as far away as Albuquerque about potential respiratory hazards.” The mammoth forest fire is largely uncontained, while the current forecast threatens gusty winds which will only fan the flames further. Thousands of people have fled their communities and two major power lines that bring electricity from Arizona to West Texas remain threatened. The fires crossed the New Mexico state line Friday night as 4,400 firefighters continue to battle the blaze.

High winds, temps propel Southwestern wildfires – Firefighters are confronting strong winds and steamy weekend temperatures in their battle to keep more homes, dry forests and stretches of high desert from the flames of several wildfires throughout the Southwest. With summer rains still weeks away, forecasters said crews would likely have little relief from the hot, windy weather that dogging them this past week. More high-wind warnings and fire weather watches were on tap for many areas through the weekend. Along the New Mexico-Colorado border, the wind got stronger as Friday progressed, testing fire lines that had been cleared through the rugged wooded area by bulldozers. Flags at the incident command post were whipping. In southern Arizona, the wind also helped fan the flames of two wildfires that had charred nearly 226,000 acres. One of the fires near Sierra Vista continued to push down a canyon, forcing more residents from their homes and putting others on notice that they might have to leave.

Fire's Manifest Destiny - Arizona is burning. Texas, too. New Mexico is next. If you need a grim reminder that an already arid West is burning up and blowing away, here it is.  As I write this, more than 700 square miles of Arizona and more than 4,300 square miles of Texas have been swept by monster wildfires. Consider those massive columns of acrid smoke drifting eastward as a kind of smoke signal warning us that a globally warming world is not a matter of some future worst-case scenario.  It’s happening right here, right now. Air tankers have been dropping fire retardant on what is being called the Wallow fire in Arizona and firefighting crews have been mobilized from across the West, but the fire remained “zero contained” for most of last week and only 18% so early in the new week, too big to touch with mere human tools like hoses, shovels, saws, and bulldozers.  Walls of flame 100 feet high rolled over the land like a tsunami from Hades. The heat from such a fire is so intense and immense that it can create small tornadoes of red embers that cannot be knocked down and smothered by water or chemicals. These are not your grandfather’s forest fires.

Russia’s Wildfire Damage is Triple Last Year’s, Ministry Says - Russian wildfires since the start of the year have destroyed almost three times the forest and crop areas damaged a year earlier, when the country experienced its worst drought in half a century, the government said.  Wildfires have ravaged almost 635,568 hectares (1.57 million acres) of land since Jan. 1, up from about 216,374 hectares in the same period last year, the Emergency Ministry said on its website today. About 44,641 hectares of mostly forest area, including three fires in protected areas, are still burning, the ministry said.  Wildfires, many ignited by smoldering peat fields, scorched an area three times the size of Luxembourg, killed more than 50 people and burned hundreds of private homes last year

Brazil: Amazon rainforest deforestation rises sharply: Deforestation of the Brazilian Amazon rainforest has increased almost sixfold, new data suggests. Satellite images show deforestation increased from 103 sq km in March and April 2010 to 593 sq km (229 sq miles) in the same period of 2011, Brazil's space research institute says. Much of the destruction has been in Mato Grosso state, the centre of soya farming in Brazil. The news comes shortly before a vote on new forest protection rules. Brazilian Environment Minister Izabella Teixeira said the figures were 'alarming' and announced the setting up of a 'crisis cabinet' in response to the news. 'Our objective is to reduce deforestation by July,' the minister told a news conference. Analysts say the new figures have taken the government by surprise. Last December, a government report said deforestation in the Brazilian Amazon had fallen to its lowest rate for 22 years. However, the latest data shows a 27% jump in deforestation from August 2010 to April 2011.

U.S. Had Most Extreme Spring on Record for Precipitation - Nature’s fury reached new extremes in the U.S. during the spring of 2011, as a punishing series of billion-dollar disasters brought the greatest flood in recorded history to the Lower Mississippi River, an astonishingly deadly tornado season, the worst drought in Texas history, and the worst fire season in recorded history. There’s never been a spring this extreme for combined wet and dry extremes in the U.S. since record keeping began over a century ago, statistics released last week by the National Climatic Data Center (NCDC) reveal. Their Climate Extremes Index (CEI) looks at the percentage area of the contiguous U.S. experiencing top 10% or bottom 10% monthly maximum and minimum temperatures, monthly drought, and daily precipitation. During the spring period of March, April, and May 2011, 46% of the nation had abnormally (top 10%) wet or dry conditions–the greatest such area during the 102-year period of record. On average, just 21% of the country has exceptionally wet conditions or exceptionally dry conditions during spring. In addition, heavy 1-day precipitation events–the kind that cause the worst flooding–were also at an all-time high in the spring of 2011. However, temperatures during spring 2011 were not as extreme as in several previous springs over the past 102 years, so spring 2011 ranked as the 5th most extreme spring in the past 102 years when factoring in both temperature and precipitation.

Is the EPA a Job Killing Machine? (Hint: No.) - Is the EPA a job-killing machine? On the off chance that empirical evidence still matters to anyone, Dave Roberts summarizes a bit of recent research into this question from the Economic Policy Institute. First up, Isaac Shapiro takes a look at the costs and benefit of several new EPA rules:  Expressed in 2010 dollars:

  • The combined annual benefits from all final rules exceed their costs by $32 billion to $142 billion a year. The benefit/cost ratio ranges from 4-to-1 to 22-to-1.
  • The combined annual benefit s from four proposed rules examined here exceed their costs by $160 billion to $440 billion a year. The benefit/cost ratio ranges from 12-to-1 to 32-to-1.

OK, fine: the rules will save lives and improve our health. But at what cost in the tidal wave of jobs lost just to get a bit of mercury and soot out of the air? EPI's Josh Bivens runs the numbers for one of EPA's biggest initiatives, the "air toxics" rule. Here's the final tabulation:

Extreme Weather Events Unprecedented, Scientists Say - Tornadoes, floods, wildfires, snowmelt, thunderstorms, drought — for Americans, it was a spring to rememberGovernment weather researchers said yesterday that, while similar extremes have occurred throughout modern American history, never before have they occurred in a single month, as they did in April. The last time anything remotely like it happened was the spring of 1927, which also had many tornadoes and flooding, said Harold Brooks of the Storm Prediction Center in Oklahoma. The tornado outbreak, floods, and drought during April were comparable to extreme events in the past, but never so close together in recorded history, agreed Deke Arndt, chief of the climate monitoring branch at the National Climatic Data Center in Asheville, N.C.The preliminary tornado count was 875 for April, and even after duplicates are eliminated the final total for May is expected to approach the single-month record of 542 set in 2003, Tom Karl, director of the climatic data center, said at a briefing.

Warning: extreme weather ahead - Tornados, wildfires, droughts and floods were once seen as freak conditions. But the environmental disasters now striking the world are shocking signs of 'global weirding' Drought zones have been declared across much of England and Wales, yet Scotland has just registered its wettest-ever May. The warmest British spring in 100 years followed one of the coldest UK winters in 300 years. June in London has been colder than March. February was warm enough to strip on Snowdon, but last Saturday it snowed there. Welcome to the climate rollercoaster, or what is being coined the "new normal" of weather. What was, until quite recently, predictable, temperate, mild and equable British weather, guaranteed to be warmish and wettish, ensuring green lawns in August, now sees the seasons reversed and temperature and rainfall records broken almost every year. When Kent receives as much rain (4mm) in May as Timbuktu, Manchester has more sunshine than Marbella, and soils in southern England are drier than those in Egypt, something is happening.

The Black Swan and the Bell Curve - Many developments in the last few years have suggested that general public concern about global warming is much shallower than one might have supposed earlier in the decade, most recently Germany's decisions to end reliance on nuclear energy entirely and accelerate the phase-out of currently operating reactors. That means much more dependence in the next decade on domestic coal and natural gas mainly imported from the Russian sphere, and probably somewhat greater imports of nuclear-generated electricity from France. And it means that Germany is very unlikely to meet its ambitious greenhouse gas reduction goal--a cut of 40 percent by 2020, vis-a-vis the 1990 level.  Deutsche Bank now predicts that greenhouse gas emissions from Germany's power sector will more than double in the next decade as a result of the country's new course, an astonishing prospect for a country that until now had been a leader in global efforts to address climate change.

Climate Change You Can See - Ever come across someone who wants visual proof that climate change is real? Well, now it's at your fingertips. Thanks to a joint effort by California universities and research centers, the California Energy Commission, and Google, Golden State residents now have access to a brand new interactive tool that showcases the effects of climate change. The website,, culls a wealth of information from the the state's scientific community and reformats it into easy-to-use charts and maps.  You can tailor the data to your specific location and voilá: The website will generate personalized local climate snapshots, wildlife risk areas, and sea level changes. Adjust the scale at the top of the tools section and you'll see changes between decades. The site's aim is to make the information publicly available, so your results can be easily downloaded.

Can humans really adapt to climate change? - When contemplating whether humans can successfully adapt to climate change, it is worth noting that at least twice in the last 1.2 million years our species was almost wiped out. Genetic research confirms that 1.2 million years ago the human population on Earth was around 18,500, perilously close to extinction. The reason for this low number is not directly known. Then about 150,000 years ago, it plummeted again down to just 2,000, probably due to climate change. Humans are remarkably adaptable creatures as is evidenced by the fact that they live on every part of the globe, from the steamiest jungle to the coldest tundra. But this nearly universal range (on land) does not now mean that we have become immune to shocks that almost wiped us out twice in the time we have roamed the planet. How can the world's most dominant and successful species be threatened now? Our numbers are far greater than ever before--close to 7 billion. Our technology allows us to appropriate the lion's share of the world's renewable and nonrenewable resources for our use. Won't we be able to use our prowess to meet any challenges that a changed climate can throw at us?

"The Arctic’s rapidly shrinking sea ice cover: a research synthesis," - The sequence of extreme September sea ice extent minima over the past decade suggests acceleration in the response of the Arctic sea ice cover to external forcing, hastening the ongoing transition towards a seasonally open Arctic Ocean. This reflects several mutually supporting processes. Because of the extensive open water in recent Septembers, ice cover in the following spring is increasingly dominated by thin, first-year ice (ice formed during the previous autumn and winter) that is vulnerable to melting out in summer. Thinner ice in spring in turn fosters a stronger summer ice-albedo feedback through earlier formation of open water areas. A thin ice cover is also more vulnerable to strong summer retreat under anomalous atmospheric forcing. Finally, general warming of the Arctic has reduced the likelihood of cold years that could bring about temporary recovery of the ice cover. Events leading to the September ice extent minima of recent years exemplify these processes.

Arctic melts faster than IPCC's forecasts - When the last Intergovernmental Panel on Climate Change (IPCC) report was published in 2007, there was a lack of data on the Arctic, so the panel left a big source of potential sea-level-rise out of its projections for this century. It estimated a conservative rise of about 18 to 59 centimeters. Many scientists have suspected that the IPCC's projections underestimate the pace of change and the latest research appears to back them up. New findings by the Arctic Monitoring and Assessment Programme (AMAP), a working group of the Arctic Council, reveal unprecedented rates of change in the Arctic Ocean, the mass of the Greenland ice sheet and the region's ice caps and glaciers over the past ten years. The research confirms that warming in the Arctic has been occurring at twice the global average warming trend since 1980. Surface air temperatures in the Arctic since 2005 have been higher than for any five-year period since measurements began around 1880, and summer temperatures in the region have been higher in the past few decades than at any time in the past 2,000 years.

The ozone hole located over the South Pole has affected the entire circulation of the Southern Hemisphere all the way to the equator - While previous work has shown that the ozone hole is changing atmospheric flow at high latitudes, a Science paper by researchers from Columbia University, US, demonstrates that the ozone hole is able to influence tropical circulation and increase rainfall at low latitudes in the entire Southern Hemisphere. This is the first time that ozone depletion – an upper atmospheric phenomenon confined to the polar regions – has been linked to climate change from the Pole to the equator. "The ozone hole is not even mentioned in the summary for policymakers issued with the last IPCC report," says Lorenzo Polvani, co-author of the paper. "We show in this study that it has large and far-reaching impacts. The ozone hole is a big player in the climate system." Lead author Sarah Kang says: "It's really amazing that the ozone hole, located so high up in the atmosphere over Antarctica, can have an impact all the way to the tropics and affect rainfall there – it's just like a domino effect."

Earth may be headed into a mini Ice Age within a decade - What may be the science story of the century is breaking this evening, as heavyweight US solar physicists announce that the Sun appears to be headed into a lengthy spell of low activity, which could mean that the Earth – far from facing a global warming problem – is actually headed into a mini Ice Age. Three different analyses of the Sun's recent behaviour all indicate that a period of unusually low solar activity may be about to begin. The Sun normally follows an 11-year cycle of activity. The current cycle, Cycle 24, is now supposed to be ramping up towards maximum strength. Increased numbers of sunspots and other indications ought to be happening: but in fact results so far are most disappointing. Scientists at the NSO now suspect, based on data showing decades-long trends leading to this point, that Cycle 25 may not happen at all. This could have major implications for the Earth's climate. According to a statement issued by the NSO, announcing the research: An immediate question is whether this slowdown presages a second Maunder Minimum, a 70-year period with virtually no sunspots [which occurred] during 1645-1715.

New solar minimum is not a get-out-of-jail-free card. Might reduce the coming warming by 3%, if at all  - Solar physicists have issued a prediction that the sun may be entering a period of unusually low activity called a grand minimum. This has climate skeptics speculating that solar 'hibernation' may be our get-out-of-jail-free card, cancelling out any global warming from our CO2 emissions. However, peer-reviewed research has examined this very scenario, "On the effect of a new grand minimum of solar activity on the future climate on Earth" (Feulner & Rahmstorf 2010). What they found was even if the sun fell into a grand minimum, global temperature would be diminished by no more than 0.3 °C. The sun is not our get-out-of-jail-free card.

‘Controlled’ power cuts likely as Sun storm threatens national grid - Officials in Britain and the United States are preparing to make controlled power cuts to their national electricity supplies in response to a warning of a possible powerful solar storm hitting the Earth. In an interview with The Independent, Thomas Bogdan, director of the US Space Weather Prediction Centre, said that controlled power "outages" will protect the National Electricity Grids against damage which could take months or even years to repair should a large solar storm collide with the Earth without any precautions being taken.  The most vulnerable parts of the grid are the hundreds of transformers connected to power lines many miles long that can experience sudden current surges during a geomagnetic solar storm, Dr Bogdan said. "It points to a potential scenario where large parts of either North America or northern Europe may be without power from between days or weeks, to perhaps months and, in extreme cases, there are estimates that it could last years," Dr Bogdan said.

What the U.S. power industry thinks about the future of the U.S. power industry - Every year, consulting firm Black & Veatch conducts a survey of people in the U.S. utility sector, mostly executives and managers, soliciting their opinions on trends, technologies, and strategies in the power industry. This year participation more than doubled, to 700 people. I've been looking through the full results (PDF) and was going to write up a summary, but then I discovered B&V already did that for me! Far be it from me to do unnecessary work, so with their permission, I'm going to post their "top 10 insights" from the survey. Then I'll do a follow-up post highlighting a few things I think are worth a closer look. This is a bit long for a blog post, but if you're interested in the direction of electricity in the U.S., it's packed with interesting details.

Renewable electricity generation continues to increase - Renewables now make up 79 per cent of New Zealand’s electricity generation, Acting Minister of Energy and Resources, Hekia Parata, announced today. Strong hydro inflows and generation from new wind and geothermal sources has seen renewable energy generation increase from 74 per cent to 79 per cent in the March quarter. Our high level of renewable generation and the use of gas over coal at the Huntly Power Station has also resulted in the lowest quarterly electricity emission in ten years. . “Generating more of New Zealand’s electricity from renewable sources will help us meet demand and reduce our greenhouse gas emissions.

Wind and Solar Global Stats - On Friday, I discussed the BP statistics for global solar installations.  Today, I compare that to the wind installation capacity from the same source.   As you can see above, the world has installed significantly more wind than solar capacity. Before we go further, a reminder that both these sets of numbers are for nameplate capacity, and all renewables suffer from intermittency issues meaning that the fraction of full power they produce, averaged over time, is a lot less than 100%. .  I still haven't found any good global statistics, but it does seem likely they are right, and solar capacity factors are probably more like 15-20%.  Wind capacity factors are in the range 20-40%.  So in terms of actual delivered energy, the difference is probably greater than the capacity graph above would suggest. However, in recent years, solar has been growing much faster: Wind has been growing in the range 20-35% for 15 years now, and had a not so great 2010 (we've already discussed the collapse of US wind installation last year).  Solar was growing in the same range until the early 2000s, but has lately taken off and had an unbelievable 2010.

U.S. Solar Installations Rose 66% in First Quarter - The amount of solar energy capacity installed in the U.S. increased 66 percent in the first quarter as panel prices fell and developers took advantage of expiring government incentives, a trade group said. Developers installed 252 megawatts of photovoltaic power systems in the first quarter, compared with 152 megawatts a year earlier, according to a report released today by the Washington-based Solar Energy Industries Association. “Strong demand continues to make solar one of the fastest- growing industries in the United States,” Rhone Resch, SEIA’s president, said in a statement. Commercial and government projects accounted for 59 percent of the installations, compared with 44 percent a year earlier. Residential projects were 28 percent and the remaining 13 percent came from utility-scale plants.

House GOP cutting American competitiveness, subsidizing yesterday’s dirty energy industries - Today the House of Representatives Sustainable Energy & Environment Coalition (SEEC) blasted Republican legislation that makes enormous cuts to Department of Energy (DOE) programs that support American innovation and economic competitiveness in growing clean energy industries. Yesterday the House Appropriations Committee passed legislation to fund federal energy and water programs for fiscal year 2012 (FY12). The Republican-sponsored bill, which will be considered by the full House in the coming weeks, flies in the face of President Obama’s calls for increased investments in clean energy research, innovation, and manufacturing, which the 48 members of SEEC have argued create American jobs, reduce U.S. oil dependence, and decrease pollution. Instead, the legislation sharply decreases funding for clean energy programs, and increases spending for oil, coal, and natural gas. SEEC leaders, who have described the GOP energy agenda as an “all of the below plan to grow oil profits,” decried the draconian cuts, and reiterated their opposition to wasteful subsidies for large oil companies that cost American taxpayers nearly $4 billion per year, and which House Republicans have continuously voted to preserve.

Fukushima: It's much worse than you think - "Fukushima is the biggest industrial catastrophe in the history of mankind," Arnold Gundersen, a former nuclear industry senior vice president, told Al Jazeera. Japan's 9.0 earthquake on March 11 caused a massive tsunami that crippled the cooling systems at the Tokyo Electric Power Company's (TEPCO) nuclear plant in Fukushima, Japan. It also led to hydrogen explosions and reactor meltdowns that forced evacuations of those living within a 20km radius of the plant. Gundersen, a licensed reactor operator with 39 years of nuclear power engineering experience, managing and coordinating projects at 70 nuclear power plants around the US, says the Fukushima nuclear plant likely has more exposed reactor cores than commonly believed. "Fukushima has three nuclear reactors exposed and four fuel cores exposed," he said, "You probably have the equivalent of 20 nuclear reactor cores because of the fuel cores, and they are all in desperate need of being cooled, and there is no means to cool them effectively."

Tepco Halts Filtering of Tainted Water at Japanese Plant - The Tokyo Electric Power Company said Saturday that the filtration system it had struggled to put into operation had broken down after just five hours, a disappointing setback in its efforts to cool the damaged reactors at the Fukushima Daiichi nuclear power plant.  The company said that the sprawling system, which is designed to siphon oil, radioactive materials and salt from the water used to cool the reactors, had been shut down because the levels of cesium recorded were similar to those requiring the changing of filters.  The filtration system was built ad hoc and rushed into service because Tokyo Electric, or Tepco, is quickly running out of space to store the tens of thousands of tons of water that have been contaminated after being poured into the reactors and spent fuel pools.  Some of the tanks, basements and other storage facilities at the power plant have inches to spare and could overflow within days. Tepco hoped to reduce the amount of contaminated water by reusing the newly filtered water. The company is also bringing in hundreds of extra tanks.

Followup: Why Don't We Ditch Nukes And Coal? - Ah, a believer in alternative energy. You think if we build enough windmills, install enough solar panels, and distill enough ethanol from corn we'll be able to dispense with noxious energy sources such as coal and nuclear power. I admire this noble goal. One needs to ask, however, whether it's actually possible. Let's browse amongst the databases and see what we can find out. Here's just the thing — a 2006 paper by MIT chemistry professor Daniel Nocera entitled "On the Future of Global Energy." Nocera's twofold ambition: one, to see how much energy the world is going to need by midcentury. Two, to figure out where we might get it. Glancing through this, Randvek, I have to be honest: things are looking a little grim.

The Green Revolution Backfires: Sweden’s Lesson for Real Sustainability - What if electric cars made pollution worse, not better? What if they increased greenhouse gas emissions instead of decreasing them? Preposterous you say? Well, consider what’s happened in Sweden. Through generous subsidies, Sweden aggressively pushed its citizens to trade in their cars for energy efficient replacements (hybrids, clean diesel vehicles, cars that run on ethanol). Sweden has been so successful in this initiative that it leads the world in per capita sales of ‘green cars.’ To everyone’s surprise, however, greenhouse gas emissions from Sweden’s transportation sector are up. Or perhaps we should not be so surprised after all. What do you expect when you put people in cars they feel good about driving (or at least less guilty), which are also cheap to buy and run? Naturally, they drive them more. So much more, in fact, that they obliterate energy gains made by increased fuel efficiency.

The Cost of Renewable Energy Sources - Gas is Greener - The math is simple: to have 8,500 megawatts of solar capacity, California would need at least 23 projects the size of Ivanpah, covering about 129 square miles, an area more than five times as large as Manhattan.  Wind energy projects require even more land. The Roscoe wind farm in Texas, which has a capacity of 781.5 megawatts, covers about 154 square miles. Again, the math is straightforward: to have 8,500 megawatts of wind generation capacity, California would likely need to set aside an area equivalent to more than 70 Manhattans. Apart from the impact on the environment itself, few if any people could live on the land because of the noise (and the infrasound, which is inaudible to most humans but potentially harmful) produced by the turbines.  Industrial solar and wind projects also require long swaths of land for power lines. Last year, despite opposition from environmental groups, San Diego Gas & Electric started construction on the 117-mile Sunrise Powerlink, which will carry electricity from solar, wind and geothermal projects located in Imperial County, Calif., to customers in and around San Diego. Consider the massive quantities of steel required for wind projects. The production and transportation of steel are both expensive and energy-intensive, and installing a single wind turbine requires about 200 tons of it. Many turbines have capacities of 3 or 4 megawatts, so you can assume that each megawatt of wind capacity requires roughly 50 tons of steel.

A New Age of Energy Abundance in the U.S. - According to data released recently by the Energy Information Administration, U.S. natural gas production set a new monthly record in March of 2.4 trillion cubic feet (see chart abvoe). This production record is another new milestone for the ongoing success of the hydraulic fracturing method of extracting natural gas from deep shale rock that is bringing about a new age of energy abundance in the United States. The booming natural gas production is also helping to create thousands of new jobs for Americans in a very tough job market. More than 34,000 drilling-related jobs were added over the past year in Pennsylvania—that’s almost a hundred new jobs every day in just one state and demonstrating that drill, drill, drill = jobs, jobs, jobs.

Shale Gas: Not a 'Game Changer' After All - Newly accessible natural gas from deep shale deposits around the world has been touted as a solution to everything from oil dependence to climate change.  David Hughes, formerly a geoscientist with the Geological Survey of Canada for 32 years and now an independent consultant, believes that those promises are overblown. He outlines his concerns in a new report entitled "Will Natural Gas Fuel America in the 21st Century?" which he prepared for the Post Carbon Institute. Even though he has limited his study to the United States, much of what he says is applicable to the rest of the world. So many of the claims made for shale gas are questionable that it's hard to know where to start. The key claim is that it will be plentiful. But strangely no particular price is attached to this claim. What would we have to pay for that bounty to be available? One driller I know says it's nonsense to tell the public that we will have extensive supplies of natural gas from shale without saying what it will actually cost. He said that natural gas selling for $5 mcf implies a much smaller exploitable resource than gas above $10 mcf, a level hit only briefly twice in the last decade.

Fracking picture of the day

Big Oil May Improve Fracking - Could increasing involvement by oil giants, such as ExxonMobil and Chevron, make it easier to resolve the fracking wars? That’s one possible outcome as multinational energy companies continue to grab shares of the booming market for natural gas from shale, a diverse industry in which hundreds of operators work under a patchwork of state-by-state regulations. ExxonMobil — already the nation’s largest gas producer — closed this month on its latest move, a $1.69 billion purchase of two companies with access to 317,000 acres in Pennsylvania and other parts of the Marcellus Shale region. Chevron made two big deals in the Marcellus this year, buying Pennsylvania-based Atlas Energy for $3.58 billion in February before announcing last month that it was acquiring leases for 228,000 acres of the gas-rich region. Some experts hope the companies will improve industry practices in the shale-gas game. The boom in unconventional gas extraction has brought complaints — exaggerated, the industry says — about spills, methane contamination of water supplies, discharges of fracking waste into rivers and streams and damage to rural roads by trucks heading to and from well sites.

Russia takes nuclear power seaward with 8 floating power plants - Russia is putting the finishing touches on the first of 8 new massive floating nuclear power plants. It plans to use the behemoth energy generators in the Arctic ocean to power the search for new oil and natural gas deposits. The reactors are built on giant platforms that resemble huge cargo ships, each one carrying a staggering $336 million price tag. With its new power plants, Russia hopes to secure as much of the unclaimed Arctic resources as possible, further cementing its position as a major player in world energy resources. The country is also interested in selling or leasing the power plants to other nations, and has already received interest from China, Indonesia, and Algeria. Currently, only one of the planned fleet exists, so any deals would still be many months or years from being struck. Japan's recent earthquake, tsunami, and subsequent reactor meltdown has given us a small taste of the ever-present dangers surrounding nuclear power. Some countries, like Germany, took the deadly event as a cue to lessen their dependence on the clean but volatile energy source, even going so far as to eliminate their entire nuclear power plant network over the next decade.

American Subcontractors Dominate Iraqi Oil Work - — When Iraq auctioned rights to rebuild and expand its oil industry1 two years ago, the Russian company Lukoil won a hefty portion — a field holding about 10 percent of Iraq’s known oil reserves. It seemed a geopolitical victory for Lukoil. And because only one of the 11 fields that the Iraqis auctioned off went to an American oil company — Exxon Mobil — it also seemed as if few petroleum benefits would flow to the country that took the lead role in the war, the United States. The auction’s outcome helped defuse criticism in the Arab world that the United States had invaded Iraq for its oil. “No one, even the United States, can steal the oil,” the Iraqi government spokesman, Ali al-Dabbagh, said at the time. But American companies can, apparently, drill for the oil. In fact, American drilling companies stand to make tens of billions of dollars from the new petroleum activity in Iraq long before any of the oil producers start seeing any returns on their investments.

Why US Oil Prices Are So Out of Sync with Global Crude - Oil prices are simply out of sync.  Traders say Monday's 2 percent slide in U.S. oil futures reflects concerns about weakness in the global economy, from the U.S. and eurozone to a possible slowdown in China. So why are Brent crude prices basically unchanged?Brent crude and other U.S. grades of oil haven't mirrored the plunge at all. The spread between Brent crude and WTI futures continues to widen, hitting a fresh, all-time high above $21 in Monday's session. WTI crude futures fell to below $97 a barrel on Monday, while Brent crude futures held steady, above the 50-day moving average of $118.30 in electronic trading in the late afternoon.  On the supply side, excess crude inventories in Cushing, Okla. — the delivery point for Nymex crude futures — have been pressuring the price-per-barrel of oil. A report from BENTEK forecasts crude oil production in the U.S. mid-continent is on pace to increase 60 percent by 2016, reaching 1.4 million barrels per day. Meanwhile, many traders point to production problems in the North Sea resulting in tighter supplies as a key support for Brent crude prices.

Yuck Euro And The Oil Slick - I hate to say I told you so but...  Oh wait, no, I'm actually loving this...  I TOLD YOU SO!  Look at July 2008 and look at June 2011.  Now, look at July 2008 and look at June 2011.  Now, look at where oil USUALLY trades.  Is it over $100 or under $80?  You don't want to go back further because then the case could be made for under $60. Wages have not gone up (adjusted for inflation, since 1973), home prices have not gone up (since 1985), stocks have not gone up (since 2006) - just oil and gold and silver and other stuff that people like to hoard in hopes of making themselves even richer - even though it comes at the expense of EVERYONE ELSE IN THE WORLD.  One of the protesters in Greece had a sign that said Prime Minister George Papandreou was "Goldman Sach's employee of the month" - now THAT's a good insult!  At least it indicates that the Greek people UNDERSTAND how they are being screwed over while it's the Americans who are bending over and taking it from the Banksters without complaint. 

Can the oil stabiliser work? - So, last night oil got thumped, down 2%. Given the fall, and the prospect for further weakness, I thought it might be useful to ask, where oil might head to and what the implications are for this price trajectory. The stakes could not be higher. There’s an opinion at large that the current slowdown in the US and, increasingly, global growth can be turned around if the globe’s automatic stabiliser, the oil price, eases. Gavyn Davies of the FT recently hung his hat squarely on this peg. Another excellent macro mind has recently emphasised the role of oil prices. Tim Duy reckons: Temporary weather and tsnumai induced disruptions for one, but we should be trying to look through such short term events.  The crisis in Europe, although to be honest I don’t think this is having much of an impact on the decision making of the average US citizen or firm.  I tend to think the rise in commodity prices, particularly oil, was the primary culprit, as consumer spending faltered and businesses struggle to pass increasing costs onto consumers.

2010 Oil Story: Drawing Down the Inventories - Hat tip to the Economist Magazine for catching a key, energy data point from week’s BP Statistical Review: in 2010, the world consumed about 5 mbpd (million barrels per day) more oil than it produced. Anticipating the discrepancy between the two figures, the BP Statistical Review authors write on page 9 of their PDF: Differences between these world consumption figures and world production statistics are accounted for by stock changes, consumption of non-petroleum additives and substitute fuels, and unavoidable disparities in the definition, measurement or conversion of oil supply and demand data. I agree with the Economist Magazine’s conclusion that most of the difference between 82.095 mbpd produced and 87.382 mbpd consumed came from stock changes. In other words: the drawing down of oil from inventories. Indeed, this was a key driver for oil’s advance last year from the high $70′s to over $90 a barrel. In the chart below, from the latest IEA Paris Oil Market Report, you can see that starting in mid-year, total OECD inventories started a new decline. Moreover, the histograms in the below chart also show the difference to the five year average, which also illustrates the global stocks drawdown. This coincided by the way with a resurgent, mid-year advance in the price of oil from a low of $69 to $92 by year end.

Global Energy Use By Source in 2010 - The above chart shows the latest proportions of primary energy sources, as reported by the BP Statistical Review. You can see that Renewables now appear in the data, and account for 1.32% of total world supply of energy. There are two big stories in the 2010 data from BP Statistical Review. The first I have already addressed: the colossal growth in coal consumption–predictably in non-OECD–but also the surprising strength in OECD coal demand. The second big story is the rebounding growth in renewables in power generation, which slightly topped 2008 to grow at 15.5% last year. But that is the total, global rate of growth. What’s exciting is that power generation from renewables in non-OECD countries, mostly Wind and Solar, is growing at an incredible 36%. I will write more about this subject, but it fits in with my view that the lack of complexity in Solar and Wind power offers unique advantages, especially to the Developing World.

The OPEC Monthly Oil Market report for June - With the turmoil in the Middle East and North African countries (MENA) now more evident in nature, the impacts on global oil production can be more rationally assessed. In this vein, the OPEC Monthly Oil Market Report (MOMR) for June has now been released. The main feature article looks at the prospects for the rest of the year, and as Leanan caught in Drumbeat, one of the major concerns has to be that OPEC supply, at current levels (28.97 mbd), does not reach the anticipated average demand for the year (29.9 mbd). However, putting that in context, MOMR begins by noting that the price of the OPEC basket fell $8.15 in May, to $110/bbl, so there are mixed signals in the air. Further, OPEC currently reports that they collectively supplied an average of 29.6 mbd in 2010, so that the increase in supply needed over last year is only 0.3 mbd.

May Global Oil Supply and the Libyan Mini Shock - The above graph shows the latest available data from the three agencies that publish estimates of global oil production (the EIA, the IEA, and OPEC).  According to the IEA, production increased by about 270 thousand barrels/day in May.  However, as you can see, we have not yet made up the loss of Libyan oil in February and March. The gap between what has happened and continuation of the existing trend (during the recovery from the great recession) looks as follows:The gap between the black line (average of the three agency's data) and the purple line (approx projection of what might have happened absent the Libyan revolution) is about 1.6mbd, or about 1.8% of global production - call it 2% to this level of accuracy.   My expectation for the impact of an unexpected 2% loss of global oil production would be that it would cause a sharp rise in oil prices, followed by a slowing of the global economy, but that it would not be enough to cause an out-and-out recession by itself.  My first estimate would be based on the IMF's estimate of the income elasticity of oil of about 2/3.  That would lead you to expect a reduction in global growth of about 1-1.5% (1.8% * 2/3 = 1.2%).  However, the damage would be worst in particularly oil dependent places like the United States.

Oil Heads for Biggest Weekly Decline in Six on Concern Over European Debt - Oil dropped to its lowest level in four months in New York on concern the Greek debt crisis will derail Europe’s economic recovery, curbing fuel demand. Futures pared an earlier loss of 3 percent as German Chancellor Angela Merkel moderated earlier conditions for supporting a Greek rescue plan. Crude is down 5.2 percent this week as data showed U.S. manufacturers turned pessimistic in June and demand for diesel declined. Prices will slide further next week, according to a Bloomberg survey of analysts. “Oil demand growth has slowed in the second quarter with a weakening of the economic recovery,” said Harry Tchilinguirian, London-based head of commodity-markets strategy at BNP Paribas SA. “The recent oil move is forex-driven. Past the current soft patch, we expect growth to pick up as we move into the fourth quarter.” Crude for July delivery on the New York Mercantile Exchange slipped as much as $2.83 to $92.12 a barrel, the lowest since Feb. 22, and was at $94.15 at 1:02 p.m. London time. This week’s price biggest decline is the biggest in six weeks."

Could We See A Summer Oil Shortage? This Economist Says Yes. -  Oil prices might be high, but there’s no shortages around the world, right? Think again, says Anas Alhajji, chief economist at NGP Energy Capital Management in Dallas. The U.S. might be getting all the oil it demands, but the story is different in places like China and Iraq, where because of electric power shortages governments and private citizens are turning to diesel. China has banned exports of diesel in efforts to secure enough to combat outages and has reduced production of chemicals to conserve fuel. Iraq in March bought 50 diesel generators to ease outages, with the nation’s electricity minister promising 16 hours of power a day by 2012. This is a real power shortage. Whether the shortage is the result of insufficient oil, gas, coal, nuclear, hydro, is almost beside the point–there is not enough energy available (especially diesel) to meet demand. This is why Alhajji doubts that any efforts by the Saudis or like-minded OPEC nations will be able to forestall a shortage of oil this summer. “We have a major problem right now, especially in July and August,” he says. The Saudis and Gulf allies may say that they intend to ramp up oil production, but not much of any increase will make it through to export markets. “Most of the increase in crude oil production will be burned in utilties’ power plants and in private generators in the oil producing countries to mitigate power shortages,” he says. Anything left will be burned up in China.

OPEC Meeting: Drill Will - FOR an organisation committed to “co-ordinating and unifying” the policies of its members, the lack of harmony on display at the twice-yearly OPEC meeting in Vienna on June 8th was rather unfortunate. The seating arrangements may not have helped: the representatives of Libya and those of Qatar—which is backing rebel forces in their battle against Colonel Qaddafi—were side by side.  Rather than reading from an official communiqué, OPEC’s secretary-general, Abdalla el-Badri, admitted that after a “thorough debate” on the oil markets the group had been “unable to reach a consensus” between those countries wanting a production increase and those happy to do nothing. Hardly fighting talk but an unusual admission that not all was sweetness and light. The news that OPEC production quotas would not budge immediately sent oil prices upward. Rumours circulated that Saudi Arabia had walked out. The lack of agreement counts as a defeat for the kingdom, which had wanted to signal that more oil would be available to a market where a barrel of Brent crude now fetches $118 compared with an average of $80 in 2010.

Saudi, US Debated Oil Reserve Swap Before OPEC - It was to be a swap felt around the world - a plan privately discussed by the world's largest oil exporter and the globe's biggest consumer to take the heat out of $120-plus oil prices. In the weeks leading up to the failed June OPEC meeting, U.S. and Saudi officials met to discuss surprising the market with an unprecedented arrangement: exchanging urgently-needed high-quality crude oil stored in the U.S. emergency reserve for heavier, low-quality oil from Saudi Arabia, according to people familiar with the plan. The idea involved shipping some of the light low-sulphur, or "sweet," crude out of the U.S. Strategic Petroleum Reserve to European refiners, who needed it after the war in Libya cut off shipments of its premium crude varieties coveted for making gasoline and diesel. In return Saudi Arabia would sell its heavier high-sulphur or "sour" crude at a discount back to the United States to top up the caverns that hold America's emergency stocks. It was a striking suggestion, one that would have demonstrated Washington's readiness to put the SPR to extraordinary use and Riyadh's willingness to work creatively with consumers to quell high prices.

Saudis to pump 10 million bpd - The Saudis don’t sell in the spot markets, they only post prices to refiners and then take orders at those prices. That is, they post price and let quantity vary. So the only way they could definitively get to 10 million bpd would be to change policy and sell in the spot market, which would let loose a downward price spiral until some other producer decided to cut production to stop the fall.  As always, it’s their political decision, and no telling what they might actually do. Saudi Shows Who’s Boss, to Pump 10 Million Barrels Per Day  (Reuters) — Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy.

Saudi Shows Who's Boss, to Pump 10 Million Barrels Per Day - CNBC: "Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy. Citing OPEC and industry officials, the newspaper said output would rise from 8.8 million bpd in May. There was no immediate independent verification of the story. The report suggests Riyadh is asserting its authority over fellow members of the Organization of the Petroleum Exporting Countries after it failed to convince the 12-member cartel to lift output at an acrimonious meeting in Vienna on Wednesday. "The Saudi intention is to show that they cannot be pushed around," said Middle East energy analyst Sam Ciszuk at IHS. "Either OPEC follows the Saudi lead or they will have problems." A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift OPEC production was blocked by seven producers including Iran, Venezuela and Algeria.

Saudi oil spare capacity shrinking fast - Saudi Arabia's cushion of spare oil capacity is thinning far faster than widely believed, threatening to trigger price spikes in the months ahead, energy industry experts warned at the Reuters Global Energy and Climate Summit on Monday. Concerns are growing over the kingdom's ability to pump more oil beyond an anticipated summer boost, leaving the world exposed to any further unexpected disruptions. The world's top exporter promised to produce as much oil as the market needs after the Organization of the Petroleum Exporting Countries last week failed to reach a deal. Saudi newspaper al-Hayat reported Saudi Arabia would boost output to 10 million barrels per day (bpd) in July, which Goldman Sachs' global head of commodities research Jeff Currie said would leave only 500,000 bpd spare. Currie and his team have warned for months about overstated Saudi output capacity. "If you get up to (10 mln bpd), you start to really create a very tight market relative to spare capacity," he told the Reuters "But the question that's more appropriate is when do you get to 9.5, when do you get to 10? Because when you start to look out over the horizon, their ability to create more flexibility in spare capacity increases tremendously."

IEA piles pressure on OPEC to pump more oil (Reuters) - The West's energy watchdog the IEA upped the pressure on producer club OPEC to increase output by forecasting a steep rise in oil demand later this year and predicting the strain on supply would last over the medium term. Oil prices rose in response to the latest sets of numbers from the International Energy Agency. Brent crude hit a session high of nearly $115 a barrel on Thursday, up almost $2. The Paris-based adviser to 28 consumer countries raised its assessment of how much OPEC oil would be needed this year by 400,000 barrels per day (bpd) to 30.1 million bpd in a monthly report. Data from the Organization of the Petroleum Exporting Countries has also indicated a need for more oil in the second half of this year. But the group failed to agree on an output increase at a meeting in Vienna last week and its secretary general took exception to public comment from the IEA, which has said it would release oil from emergency reserves if necessary. "Strategic reserves should be kept for their purpose and not used as a weapon against OPEC,"

Global oil crosses into structural deficit - I’m on the record as a long-term bull on oil prices, with us likely to see repeated spikes over the coming decade as weak new supply wars with stubbornly high economic growth in emerging markets. Periodically, high oil prices will, at best, tip us into recession, and prices will bounce back and forth until something breaks, whether in supply or demand. Some new analysis from RigZone reinforces this view. Picking up from where some related analysis from The Economist left off, and using new BP data, we have the following graph. It shows that oil, on an annual supply/demand basis, crossed over into structural supply deficits in 2005 and has never climbed back. Granted, this does not include biofuels, coal-oil, etc., which BP doesn’t track, but still thought-provoking.

IEA Boosts 2016 Oil Demand Forecast - The International Energy Agency raised its forecast for global oil demand growth to 1.3 percent annually over the next five years on economic expansion in China, cautioning that gains in prices threaten the recovery.  Consumption will increase to 95.3 million barrels a day in 2016 from 88 million barrels a day in 2010, with China accounting for about 41 percent of the gain, the Paris-based adviser to oil-consuming nations said in its Medium-Term Oil Market Report today. Crude prices are “weighing” on the developed nations that make up the Organization for Cooperation and Development, the agency said.  Global oil consumption will increase 1.2 million barrels a day, or 1.3 percent, annually over the next five years, the IEA said. That’s 700,000 a day more than the agency’s last forecast for 2010 to 2015 in December and will leave a “fairly thin” cushion of spare production capacity, it predicted.  “This expected rise in demand will be the consequence of sustained economic growth,” concentrated in Asia, the Middle East and Latin America, according to the IEA.

Who Will Step Up to Meet Oil Demand? -For those of you who use gasoline or diesel to get to work in the morning, you may have a problem, in case you haven’t noticed prices at the pump lately.  Oil demand in the United States is expected to be relatively flat over the next five years, but China’s will soar, a report predicts. According to a report released on Thursday by the International Energy Agency, total oil production each year from 2010 to 2016 will have grown by an average of 1.1 million barrels a day. But that is 100,000 barrels a day less than the average growth in global demand expected over the next five years. “After the sharp increase in oil demand in the second part of 2010 as the global economy recovered more quickly than anticipated from the recession, we now foresee higher mid-decade demand,” the report stated. Forty percent of the demand growth will come from China alone, with most of the rest coming from the rest of Asia and the Middle East, the report said. Europe and the United States are expected to have generally flat demand, in large part because their economies are expected to grow less robustly than economies in the developing world and their vehicles will become increasingly efficient.So whom are we going to turn to for more oil?

I.E.A. Says World Will Increasingly Turn to Americas for Oil - Over the next few years, world consumers are going to become more dependent on North and South America to satisfy their growing thirst for crude oil1, according to a forecast to be released Thursday by the International Energy Agency2.  The Paris-based organization estimated that the world would increase total oil production every year between 2010 and 2016 by an average 1.1 million barrels a day — roughly 100,000 barrels short of the expected increase in global demand over the period.  “After the sharp increase in oil demand in the second part of 2010 as the global economy recovered more quickly than anticipated from the recession3, we now foresee higher mid-decade demand,” the report said.  Tightening oil markets along with spreading unrest in the Middle East have driven oil prices 25 percent higher in the last year. But on Wednesday, concerns about a weakening economy sent prices sharply lower. The benchmark light sweet crude oil in the United States fell $4.56 a barrel to close at $94.81. If a major global downturn occurs and begins a more lasting decline in energy demand and prices, as happened in late 2008 and 2009, it could throw off forecasts.

Peak Oil: The Long And The Short - Peak oil has been a mathematically predictable occurrence since American geophysicist M. King Hubbert figured out the process in 1956. His model predicted that oil production in the United States would peak in 1970. He wasn’t far off. In 1971, when the U.S. was producing 88% of its oil needs, domestic production approached 10 million barrels per day and has been in decline ever since. The Department of Energy was established in 1977 with a mandate to lessen our dependence on foreign oil. At the time, the U.S. was importing 6.5 million barrels per day. In 1985 the country was still able to produce enough to cover 75% of its needs. Today, 34 years later, the U.S. imports 10 million barrels per day, almost half of what it uses.

Peak Stupidity - In public, the last government shrugged off the prospect of peak oil. In private, we know now that it had a different view.  A powerpoint presentation released at last by the Department of Energy and Climate Change, in response to freedom of information requests by the indefatigable Lionel Badal, shows that in 2007 the government spent six months secretly gaming the likely impacts of declining global oil supplies. The results were not pretty. The officials who conducted the assessment found that “it is not possible to predict with any accuracy exactly when or why oil production will peak”. They believed that “a permanent decline in global oil production – i.e. peak oil – is unlikely to take place before 2020. However, if it were to happen, the consequences for economic prosperity and security are likely to be serious”. Among these consequences were:

  • - “Impacts on UK security of oil supply”
  • - “Disruption of the UK economy especially the transport sector”
  • - “Possible geopolitical implications”.

Chinese oil demand -- Stuart Staniford notes that the number of trucks and passenger vehicles in China has been growing at about 23% each year. You don't have to extrapolate that too far into the future to come up with a pretty scary picture. Is that a silly extrapolation? Stuart notes that the plot for 2015 would still leave the U.S. with 7 times as many vehicles per person as China. And the level of oil consumption per person in China today is 1/3 the current oil consumption per person in Mexico ([1], [2]). No question, there's potential for a lot more growth in demand from China. What's substantially less clear is where the oil to fuel those cars could come from.

China Coal and The Great Doubling - Back in 2005 it was clear to a number of observers that China’s trailing rate of coal consumption was so strong, that its demand was on course to double by the end of the decade. As of 2010, this is precisely what’s happened. From a jump between 2002-2003, around 850 Mtoe (million tonnes oil equivalent), China is now consuming 1713.5 Mtoe as of last year, according to the BP Statistical Review.  It only took China 7-8 years to achieve this great doubling. While the sustainability of this rate of growth is certainly in doubt, it bears mentioning that last year a number of global coal producers increased production to help China meet its needs. Indonesia, in particular, raised its production of coal by an almost insane 20% over 2009. Indeed, a number of the regions that I have previously identified as having deep, recoverable reserves raised production in 2010 by substantial margins. The global transition back to coal is fully on course, with a veritable second Age of Coal now on the horizon.

Rare Earth Minerals and The Cost of Hard Drive Space - After watching this great and informative BBC video on the importance of rare earth minerals and Chinese, almost complete, dominance in their mining and export, it made me think of this post I´d seen on Carpe Diem´s about about how “The Cost of Hard Disk Space Has Decreased by Almost 1.5M Times Since 1980” - see graph below.  Perhaps one of the many reasons costs have fallen so much is because one of the rare earth minerals required in the production of the hard drives, Neodymium, and mined in China where labour costs are low and where fewer environmental restrictions exist (according to the video ”mining rare earth minerals is difficult, toxic and sometimes radioactive”) and so costs and prices are minimised. The US used to be a big producer of rare earths but has been forced to close many of its mines, thanks to Chinese competition. I blogged about China´s control of the rare earth market two weeks ago and how we are becoming increasingly dependent on China for rare earths in the production of electric cars amongst other things. Now, according to the video, it seems China is reducing it´s supply of rare earth exports by 22% ostensibly to ”protect the environment” although clearly this will have an impact on the price. 

Rare Earth Prices Double on China Controls - Prices of the rare earths used in lasers and plasma televisions more than doubled in the past two weeks as China tightens control of mining, production and exports, according to market researcher Industrial Minerals. The cost of dysprosium oxide, used in magnets, lasers and nuclear reactors, has risen to about $1,470 a kilogram from $700 to $740 at the start of the month, Industrial Minerals said in an e-mailed statement. Europium oxide, used in plasma TVs and energy-saving light bulbs, has more than doubled. China, supplier of 95 percent of the 17 elements known as rare earths, has clamped down on rare-earth mining and cut export quotas, boosting prices and sparking concern among overseas users such as Japan about access to supplies. The government may further reduce export quotas, pushing prices higher. “China has long said it will consolidate the industry but it’s moving more rapidly than many observers anticipated,” . “There might be an element of speculation but I think the price rises have been driven by people who are desperate for the product.”

"Meaningful probability" of a China hard landing: Roubini (Reuters) - China faces a "meaningful probability" of a hard economic landing and the euro zone is storing up problems for the future by not tackling the debt crisis head on, said Nouriel Roubini, the economist who predicted the global financial crisis. He said U.S. Treasury prices, which have risen sharply as investors sought a safe haven from the euro area debt crisis and worries about a slowdown in the global economy, were fairly valued although he was cautious about U.S. equities. New York-based Roubini is closely followed by Wall Street because he predicted the U.S. housing meltdown that precipitated the global downturn. China avoided a hard landing during the global credit crunch but faces a downturn after 2013 as it will struggle to keep increasing fixed investments, Roubini said. "There is a meaningful probability of a hard landing in China after 2013," . Roubini said investment was already 50 percent of gross domestic product. Sixty years of data had shown that over- investment led to hard landings, he said, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.

China’s Inflation Accelerates to 5.5%  - China’s inflation accelerated to the fastest pace in almost three years in May and industrial production rose more than estimates, sustaining pressure for a further interest-rate increase. The 5.5 percent annual gain in consumer prices matched the median forecast in a Bloomberg News survey of economists. Production rose 13.3 percent, exceeding a median 13.1 percent forecast. Fixed-asset investment quickened, according to statistics bureau data released in Beijing today. Food prices rose 11.7 percent from a year earlier as pork and vegetable costs surged. Inflation has exceeded the Chinese government’s 4 percent target each month this year as companies including McDonald’s Corp. boost prices. Still, the pace remains the slowest of the so-called BRIC nations, with the latest data showing annual rates of 6.6 percent for Brazil, 9.6 percent for Russia and 8.7 percent for India.

China Inflation Heading for 6% Shows Danger for Wen Extending Rate Pause - China’s inflation pressures have yet to be contained by four interest-rate increases since September, underscoring the danger of any extended policy pause as bad weather threatens to further drive up food costs. The central bank yesterday increased banks’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest gain since 2008. Inflation may reach 6 percent this month, according to banks from Societe Generale SA to UBS AG. Premier Wen Jiabao’s government has surprised analysts at banks including Barclays Capital by pausing on interest rates for 10 weeks, the longest gap this year. Officials may be reviewing signs of weakening global growth after the U.S. unemployment rate surpassed 9 percent and manufacturing cooled across Asia. “There’s still a long way to go” to contain prices

China PBOC official: Use forex to curb inflation - China should set up a stabilization fund to intervene in foreign exchange markets to keep the yuan's exchange rate within a target range, a move that would curb inflation, a local central bank official wrote in a commentary piece on Monday. Inflation is currently being stoked by the passive buying of foreign exchange by the central bank, Xu Nuojin, deputy governor of the People's Bank of China's Guangzhou branch, wrote in the Financial News, a central bank-backed paper. To maintain capital controls and its control over the yuan exchange rate, the PBOC buys up foreign exchange that enters into the country with newly issued yuan, which swells the domestic money supply. The PBOC tries to offset the additional liquidity by issuing notes and ordering banks to hold higher levels of reserves, but experts question the ability of such measures to absorb all of the liquidity generated by its foreign exchange purchases.

Bank loans in China: Tapping the brakes - In most large countries, loan growth of 17% would represent a breakneck pace. In China, such growth is perceived as sign of a slowdown. In May, the value of China’s outstanding bank loans rose by 17% from the year before, the slowest pace since late 2008. A series of interest rate increases and, more importantly, hikes to banks’ reserve requirements appear to be cooling the stimulus-fuelled surge in lending recorded in the months after the global financial crisis. The latest boost to reserve requirements, announced today, is the sixth hike so far this year. More increases are likely in the coming months, as worries persist over rising consumer inflation—5.5% in May—and a frothy property market. Still, the Economist Intelligence Unit expects China’s GDP to grow by 9% this year, only a modest slowdown from the 10.3% growth recorded in 2010. Despite the central bank’s tightening measures, credit conditions will remain relatively loose.

Consumer Spending Fades in China Economy - At the Haiyang Zhuangshi Co. hardware store in Beijing, sales of paint and aluminum window frames are slowing, one sign of a diminished role for consumer spending in China that’s foiling government objectives. “It seems the peak days are gone,” . “Between 2006 and 2008 when the property market was red hot, we could make quick money.” Hu’s loss underlines the dilemma for Premier Wen Jiabao: his campaign to control inflation is undermining attempts to make consumers a bigger driver of the world’s second-largest economy. Failure to lessen dependence on exports and investment spending leaves the nation more vulnerable to swings in external demand and subject to asset booms and busts. Government data this week showed retail sales growth slowed to 16.9 percent in May, less than the average of the past five years and a figure that’s inflated by soaring prices for food. By contrast, spending on fixed assets such as factories and property climbed 26 percent, excluding rural households, in the first five months, the fastest pace in almost a year.

Martin Wolf: Why China Could Fail Like Japan - Yves Smith - The Financial Times’ economics editor Martin Wolf takes up the theme treated at some length by China-based economist MIchael Pettis: that Chinas’ economy has moved into unknown and dangerous terrain. No sizeable economy has had investment and exports combined constitute nearly 50% of GDP, and that model is not sustainable. As we have indicted, there is evidence that investment is becoming less and less productive. China is taking $7 of debt to generate $1 of GDP, when the US at the tail end of the bubble needed a mere $4 to $5 of debt for each incremental $1 of growth.  Wolf does recite the optimist case on China, with the biggest factor being that China has a long way to go in improving the incomes of its citizens, and that alone can give it a very long lasting growth trajectory.  On the risks, Wolf sets aside commodities scarcity and environmental issues to focus solely on the economics case. One is that of a so-called “middle income trap” in which countries find it hard to manage the transition to more sophisticated production. Only Taiwan, South Korea, Japan and Singapore have crossed this barrier since 1950.

An outline of Austro-Chinese business cycle theory -- From Martin Wolf: Investment has indeed grown far faster than GDP. From 2000 to 2010, growth of gross fixed investment averaged 13.3 per cent, while growth of private consumption averaged 7.8 per cent. Over the same period the share of private consumption in GDP collapsed from 46 per cent to a mere 34 per cent, while the share of fixed investment rose from 34 per cent to 46 per cent. Professor Pettis argues that suppression of wages, huge expansions of cheap credit and a repressed exchange rate were all ways of transferring incomes from households to business and so from consumption to investment. Dwight Perkins of Harvard argued at the China Development Forum that the “incremental capital output ratio” – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results.

Introducing Alphachat, the FT Alphaville podcast - We’ve started a podcast, which you’ll find below alongside a bio of our guest, a guide to the themes we explored, and links to which we refer. There’s also another audio file of outtakes with questions and answers that we couldn’t include in the podcast itself because of time constraints. We’re still fumbling our way through the technical side of things and ask for your patience (Our topic for this edition was the Chinese economy — our discussion turned out to be mostly about the fragility of the Chinese economic model — and our guest was Michael Pettis. Hope you enjoy… Michael Pettis on the Chinese economy. In this edition, Cardiff Garcia talks with Peking University finance professor Michael Pettis about the limits of China's economic model, why we shouldn't trust the country's growth numbers, and the state of its banking system. Pettis also shares what it's like to run a nightclub and manage an indie record label in Beijing.

Wave of Unrest Rocks China - A wave of violent unrest in urban areas of China over the past three weeks is testing the Communist Party's efforts to maintain control over an increasingly complex and fractious society, forcing it to repeatedly deploy its massive security forces to contain public anger over economic and political grievances. In the latest disturbance, armed police were struggling to restore order in a manufacturing town in southern China Monday after deploying tear gas and armored vehicles against hundreds of migrant workers who overturned police cars, smashed windows and torched government buildings there the night before. The protests, which began Friday night in Zengcheng, in the southern province of Guangdong, followed serious rioting in another city in central China last week, plus bomb attacks on government facilities in two other cities in the past three weeks, and ethnic unrest in the northern region of Inner Mongolia last month.

Migrant Worker Riots In Southern China Intensify - In an indication of the prevailing popular mood among the key marginal economic force in China - its migrant worker population - hundreds of protesters rioted in the southern China city of Gunaghzou after a young pregnant street hawker was harassed by security guards, media reports said Monday. From Reuters: "Hong Kong television showed seething crowds of migrant workers from the southwestern province of Sichuan running through the streets of Zengcheng, smashing windows, setting fire to government buildings and overturning police vehicles. Riot police were shown firing tear gas Sunday night, deploying armoured vehicles to disperse the crowds and handcuffing protesters. Witnesses said there were more than 1,000 protesters and at least one government office had been besieged. "People were running around like crazy," a shopowner in the area told the South China Morning Post newspaper. "I had to shut the shop by 7 p.m. and dared not come out."

China's 'Wealth Drain': New Signs That Rich Chinese Are Set on Emigrating - According to a new study, a majority of Chinese who have more than 10 million Yuan ($1.53 million) worth of individual assets find the idea of real—estate investment a lot less tempting than so—called "investment emigration." Nearly 60% of people interviewed claim they are either considering emigration through investment overseas, or have already completed the process, according to the 2011 Private Wealth Report on China published by China Merchants Bank and a business consulting firm Bain & Company. The richer you are, the study suggests, the likelier it is that you resort to emigration. And among those who possess more than 100 million yuan, 27 % have already emigrated while 47% are considering leaving. (See: "On the Cutting Edge — China's Extraordinary Buildings") The fact that more and more rich Chinese are seeking to emigrate is turning into a hot topic in China, and statistics prove that the trend is a real one. According to Caixin online, a Chinese website specialized in finance, the compound annual growth rate of overseas investment by Chinese individuals approached 100% between 2008 and 2010. The compound growth rate of the Chinese who used investments to emigrate to the United States in the past five years is 73%.

One in three buyers of newly built London homes are Chinese - One in three buyers of newly built London homes are Chinese, Knight Frank, residential and commercial real estate firm, has said.Sky News quoted Knight Frank as saying that a decline in the value of the pound has made London more affordable for Far Eastern buyers who want apartments for children studying in Britain, or as an investment. Chinese buyers have shown interest in London because of its status as one of the world's most developed and highest value property markets. Referring to Europe's tallest residential tower in Canary Wharf, London, one of the Chinese investors said: "At the start we're not looking for something too expensive. Maybe around 400,000 pounds and we'll see how it goes and if it's going well then family, friends and relatives will come to invest more." A Chinese property consultant believes that people from his country have been showing greater interest in buying apartments in London because the property prices in Hong Kong have been raised by 70 percent in less than two years.

Corrupt officials took $124bn out of China - Corrupt Chinese officials smuggled an estimated Rmb800bn ($123.6bn) of ill-gotten gains out of the country over a 15-year period, according to a report released by China’s central bank. Around 17,000 Communist party cadres, police, judicial officers and state-owned enterprise executives fled the country between the mid-1990s and 2008, the 67-page report said. For higher-ranking officials who managed to abscond with large amounts of money, the ÛS was the favourite destination, while Canada, Australia and the Netherlands were also popular. Those who could not immediately secure visas for western countries often chose to stay in small countries in eastern Europe, Latin America and Africa while they waited for a chance to move to their final intended destination. Lower-ranking officials tended to escape to countries bordering China, the report said. The independently administered Chinese territory of Hong Kong was also a popular transit point. The report, stamped “internal materials, store carefully” and compiled in June 2008, was published on the website of the central bank’s anti-money ­laundering bureau this week. The bureau took the report down after it generated a public outcry.

Beware China’s Political Bubble - Although China has been churning out its share of unpleasant news, many onlookers don't consider its problems as serious as those of other big economies. They should think again. China’s biggest economic challenges are political in nature and daunting, and will almost certainly get worse. That is because its autocratic system, for all the stability it has provided, will struggle to handle the sustained economic slowdown the country is likely to confront during this decade. With crucial leadership changes due next year, the jostling has already begun over the people and political postures that the ruling Communist Party will select to steer the country. Reports of rioting by migrant workers in the southern manufacturing province of Guangdong this week are a reminder of how much is at stake in the years ahead. The protests that break out routinely across China are tiny compared with the upheaval that could erupt if growth slows and the political system is unable to cope. And social unrest is only one of the risks China will face when it can no longer grow its way out of every problem.

How to become virtuous and save more - The debate over the root causes of global imbalances is as fierce and as confused as ever.  The confusion isn’t helped by the vast army of moralizers who like to contrast the hard work and thriftiness of households in high-savings countries with the laziness and binge-buying behavior of households in high-consuming countries.  The world cannot possibly rebalance, they argue, until the later become more like the former.  There are few things in the world as satisfying as being able to deride the moral weaknesses of our neighbors, especially if we are lucky enough to have the very high savings rates that come automatically with very high income levels. There are nonetheless some obvious flaws in the argument.  First of all, if the high-consumers become as virtuous as the low-consumers, that just means that global demand will decline, and with it, global unemployment will rise.  In that case global savings won’t go up.   Second, lazy spendthrift Americans are actually more productive and work longer hours than people in almost any other rich country, including the harder-working and higher-savings counties in Europe.  Still, the argument does anyway fit in with a lot of cultural stereotypes about Spaniards and Greeks, or about Germans and Dutch, whose tasteless food, boring sex lives, and grim movies leave them no choice but to work away at office and factory. But is this really why people in some countries love to save and people in other countries love to consume?  No, it isn’t.  Aside from the satisfaction it brings, this moralistic argument is almost meaningless. 

Ken Rogoff Says Economy Will Collapse If Trade Deficit Falls - This is the implication of his statement in a NYT column that: "loans from emerging economies are keeping the debt-challenged United States economy on life support." Is that so? Suppose that emerging economies announced tomorrow that there will be no more loans to the United States. There would be two responses. First, interest rates in the U.S. would rise. Second, the dollar would plummet, especially against the currencies of countries like China, which have been buying U.S. bonds (e.g. lending money) as part of a deliberate policy to keep down the value of their currency against the dollar. Will these events sink the U.S. economy?First, it's not clear how high U.S. interest rates will go, since U.S. Treasury bonds remain one of the few safe assets for investors around the world. However, if rates did start to rise precipitously then the Fed could engage in a QE3 and buy huge amounts of debt.Could this lead to inflation? It is unlikely given the massive amount of excess capacity and huge numbers of unemployed workers in the U.S. economy. However, even if it did lead to an  uptick in inflation, this would be a good thing since it would help relieve the debt burden of homeowners and help to spur growth. This argument was made not long ago by an economist named Ken Rogoff.

Striking Claims From Gomory And Baumol - It came out in March, but this paper from Ralph Gomory and William Baumol makes some striking claims about the US-China trade relationship: In a world in which countries can learn and change their productivities, many things can happen that were really not possible in Ricardo’s time. We have used the Ricardo Model to reflect this new world. In a world in which productivities are often not fixed by nature but are often acquired we have shown the following possibilities:

  1. That the economic development of a trading partner can be harmful to the home country. Although the effect of that development starts good, it ends badly.
  2. That there is a dominant and dominated relation possible between two countries, a relation that is good for the dominant one and bad for the dominated one.
  3. That a country can attain a dominant position only by having an undeveloped trading partner.
  4. There is inherent conflict not only between a nation in a dominant position but between that dominant partner and the interests of a two-county world.
  5. While a country cannot gain a dominant position by building up its industries, it can avoid a dominated position and assure a good outcome by developing a particular subset of its own industries and not allowing them to be destroyed.

A New Era for the US-China Trade Deficit?  - Inflation in China is, if not quite galloping, at least trotting along at a decent clip: Inflation quickens in China, India; Beijing raises reserve ratios China's consumer price inflation hit a 34-month high of 5.5 percent, keeping inflation-fighting at the top of the agenda for Beijing, which sees little chance of the current slowdown from last year's 10 percent-plus growth turning into a hard landing.  Inflation in China has been an important contributor to the subtle but very significant change in the pattern of trade that we've seen between the US and China. For nearly 20 years, the story of the US's trade with China was a simple and predictable one: month after month, year after year, the US imported more from China. US exports to China also grew, but at a slower rate, and so the US's trade deficit with China grew steadily. But over the past couple of years that pattern has been broken. The big difference is that now, US exports to China are starting to grow rapidly, while US imports from China are growing slowly at best. Since the start of 2008, US exports to China have risen by about 40%, while US imports have risen by only about 10%. ... but even so, the bilateral trade deficit (goods + services) has been roughly constant for almost four years now, as shown in the chart below.

Japan Economy Minister: Sales Tax Hike Needed Even If Deflation Persists - Japan's economy minister said Wednesday the government should start lifting the nation's 5% sales tax even if deflation persists, as the nation's poor fiscal state could create even more serious economic pains in the future if allowed to worsen."No one would seek to raise taxes if the economy were in a depression, but should the economy be flying at its usual altitude, we would need to lift the consumption tax," Kaoru Yosano said at a press conference. "The issue of international confidence, market confidence in Japan's finances would become more important than the issue of deflation. We also have an important policy goal of preventing long-term interest rates from rising."

Japan Should Raise Sales Tax To 15%: IMF --Japan, struggling with the aftereffects of a devastating earthquake and tsunami on top of decades of stagnation, should raise its consumption tax starting next year to 15% from the current 5% level, the International Monetary Fund said Thursday in a staff discussion note. "With limited room to reduce non-social security expenditure and spending pressures from an aging society, new revenue measures must play a central role in a medium-term strategy to bring down Japan's high level of public debt," the paper's authors wrote. "Among various revenue measures, raising the consumption tax is the most appealing." As it tries to rebuild after March's earthquake, tsunami, and nuclear crisis, Japan is still working its way out of the "lost decade" that followed a long economic boom. Since the early 1990s, the country has seen its sovereign debt triple to 200% of gross domestic product, while its social spending has spiked as its population ages and its birth rate tumbles, the report noted. Compared with the personal or corporate income taxes, "raising the consumption tax is the most growth-friendly," said Kenneth Kang of the IMF's Asia and Pacific Department, one of the authors of the report, during a conference call to discuss the findings.

Japan’s Decline as a Robotics Superpower: Lessons From Fukushima - Robots were a major force in the automation drive that made Japan the most competitive nation in manufacturing in the 1980s. That glory seems to have faded in recent decades, and Japanese robotics are no exception. The two articles that follow highlight the failures of R&D in Japanese robotics engineering that were dramatically and tragically revealed by the earthquake and tsunami-driven meltdown of TEPCO’s nuclear power plants at Fukushima. Contrary to expectations that Japan would be a leader in manufacture of disaster relief robots that could have been used in problem solving and cleanup in the wake of the Fukushima Daiichi nuclear disaster, three months after 3.11, Japan’s robots have yet to make a significant contribution. These articles explain why Japan, in general, its robotics industry in particular, proved unprepared for severe nuclear accidents, and how haphazard the government and the nuclear industry has been in developing robots that could have eased the crisis.

India Wholesale Prices Rise Faster-Than-Estimated 9.06% From Year Earlier - India’s inflation exceeded analysts estimates, adding pressure on the central bank to extend the fastest round of interest-rate increases among Asia’s major economies. Bond yields and the rupee gained.  The wholesale-price index rose 9.06 percent from a year earlier after an 8.66 percent jump in April, the commerce ministry said in a statement in New Delhi today. The median estimate of 22 economists in a Bloomberg News survey was for an 8.74 percent increase.  The Indian economy may be “overheating” and further rate rises are warranted, Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC said yesterday, as well as calling for similar action in China. The Reserve Bank of India may boost borrowing costs June 16 for the 10th time since mid-March 2010, 15 of 17 economists in a Bloomberg News survey said.  “Inflation is a big worry and policy makers’ objective would be to fight the price gains rather than worry about growth,”

Egypt Debt Buoyed by Obama Guarantee for Eurobonds: Arab Credit (Bloomberg) -- President Barack Obama's guarantee on $1 billion of Egyptian Eurobonds is poised to reduce the country's borrowing costs, helping the transition to democracy after six decades of autocratic rule. The support that Obama pledged last month may cut yields on the five-year debt by 200 basis points, or the equivalent of $100 million, according to the median estimate of five fund managers surveyed by Bloomberg. Yields on Egypt's one-year bills jumped to the highest level since November 2008 following the uprising that ousted President Hosni Mubarak in February. The country last sold international debt in April 2010. Obama is offering assistance for the planned Eurobond sale as the International Monetary Fund forecasts Egypt's economy may grow 1 percent this year, the slowest pace since 1992, and Moody's Investors Service says the country's public finances are "significantly" weaker than countries with similar credit ratings. The budget may post its biggest deficit in at least a decade in the fiscal year ending this month, hampering efforts to create jobs and reduce the poverty rate, reasons that sparked the anti-Mubarak revolt, according to the Finance Ministry.

Canadian household debt reaches $1.5 trillion - Canadian households owe a record 1.5 trillion Canadian dollars to banks and other financial institutions, a study by the country’s Accountants Association says. If household debt was spread evenly among all Canadians, the report says, a family with two children would owe over 175,000 dollars. Nevertheless, more than half of those drowning in debt continue to borrow in order to cover their daily expenditures. The survey also found more Canadians carrying debt into retirement, with one-third of retired households carrying a debt of $60,000 and 17 per cent in debt $100,000 or more.

Central banker makes housing sense! - I was disappointed in RBA Governor, Glenn Stevens, speech Wednesday. I had expected that Mr Stevens would at least acknowledge Australia’s Achilles heel - its high level of household indebtedness and house prices - and warn of the significant risks that these pose to the economy. Instead, Mr Stevens ignored the debt Godzilla and linked Australia’s house price appreciation to population growth. Interestingly, the Bank of Canada (BoC) Governor, Mark Carney, also delivered a speech yesterday. And unlike Mr Stevens, Mr Carney was refreshingly open about Canada’s record high levels of household debt and over valued housing market, and the risks inherent to the Canadian economy. As mentioned previously, Canada and Australia have a lot in common. Both economies are commodity exporters. Both countries have experienced similar rates of immigration. Both countries largely dodged the global recession that has recently shocked the developed world. And both are said to have world-beating banking systems, with Canada’s ranked as the strongest and Australia’s ranked third strongest in the world by the World Economic Forum

Major economies losing growth momentum: (Reuters) - Major economies, with the exception of the United States, are losing momentum as the outlook for growth worsens in European and developing countries, the OECD's leading indicator for April showed on Tuesday. The Paris-based Organization for Economic Cooperation and Development said its composite leading indicator for member countries stalled in April to stand unchanged at March's level of 103.0 points. The indicator for the euro area fell to 102.8 from 103.1. Brazil, China, India and Russia, which are not members of the OECD, also registered lower readings. The indicator suggested a "possible moderation in economic activity" in China, slowdowns in Brazil and India and showed the "the first sign of a loss of momentum in Russia," the OECD said. Meanwhile, the U.S. economy, the world's biggest, continued to grow above trend although not as quickly as the indicator had suggested in March.

A Post-Crisis World of Risk - Click here to watch video. – The global economy’s most striking feature nowadays is the magnitude and interconnectedness of the macro risks that it faces. The post-crisis period has produced a multi-speed world, as the major advanced economies – with the notable exception of Germany – struggle with low growth and high unemployment, while the main emerging-market economies (Brazil, China, India, Indonesia, and Russia) have restored growth to pre-crisis levels.This divergence is mirrored in public finances. Emerging economies’ debt-to-GDP ratios are trending down toward 40%, while those of advanced economies are trending up toward 100%, on average. Neither Europe nor the United States has put in place credible medium-term plans to stabilize their fiscal positions. The volatility of the euro-dollar exchange rate reflects the uncertainty about which side of the Atlantic faces higher risks.In Europe, this has led to several ratings downgrades of the sovereign debt of the most distressed countries, accompanied by bouts of contagion spilling over to the euro. More seem likely.

Roubini Says ‘Perfect Storm’ May Threaten Global Economy - A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.  There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.  “There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.” Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

I.M.F. Names Lagarde and Carstens as Contenders for Top Post - The long-shot bid by Stanley Fischer, the governor of the Bank of Israel, to become managing director of the International Monetary Fund appeared to already be over after the international lender’s executive board said late Monday that it would only consider two other candidates. The board said in a statement that it would consider the candidacies of Christine Lagarde, the finance minister of France who is seen as the front-runner, and Agustín G. Carstens, the governor of the Mexican central bank. Without mentioning Mr. Fischer by name, the board statement suggested that he had missed the deadline for submitting his application. “The period for submitting nominations for the position of the next managing director closed on Friday, June 10,” the board said. Mr. Fischer, a former deputy director of the I.M.F. and influential economist, announced his candidacy on Saturday. However, Mr. Fischer said that he had been eliminated because, at 67, he exceeds the age limit of 65 for candidates for managing director.

More of the Same at the I.M.F. - Ken Rogoff - AS the world struggles to emerge from the greatest financial crisis since the Depression, the institution at the heart of the global economic system is facing a profound crisis of governance. Since the International Monetary Fund’s inception at the end of World War II, Europe and the United States have dominated decision-making. Incredibly, and possibly dangerously, decisions are now being made to keep the backward-looking status quo for at least another five years. True, the final stage of the race for the top job1 at the I.M.F. still offers the possibility that a Mexican candidate might beat out the French front-runner. Unfortunately, with Europe still controlling an excessive voting share, the outcome has all the suspense of a Soviet-era election. Worse, the I.M.F. board does not seem to feel the need to establish even a pretext of legitimacy for the powerful No. 2 position; everyone takes for granted that the board will rubber-stamp whomever the Obama administration nominates.  In a world where markets already pay more attention to what happens in China than in Europe, and where loans from emerging economies are keeping the debt-challenged United States economy on life support, the I.M.F.’s outdated governance practices have become an accident waiting to happen.

Trichet's Twisted Mind Fights the Oil Monster Alone - I cannot help but laugh at the latest nonsense out of ECB president Jean-Claude Trichet. Please consider Trichet: Need to prevent oil-fed inflation spiralSpeaking at an event organized by the London School of Economics, Trichet said the recent surge in energy and commodity costs had driven the sharp increase in headline euro zone inflation over the last year. "In those circumstances, the central bank must prevent increases in the prices of raw materials from being incorporated into the long-term inflation expectations which could trigger second round effects on wages and prices," he said. "Unemployment at 9.9 percent of the labor force remains much too high, and structural reforms are of the essence to make the euro area economy much more flexible and to elevate its growth potential," he said. There is not a damn thing the ECB or anyone else can do about peak oil. There is nothing the ECB can do about rapidly expanding credit in China. There is nothing the ECB can do about misguided QE policies in the US

Italy: Public debt hits €1890.6bln in April - Italy's public debt rose in April as the European Union's fourth-richest country struggles to combat pallid growth and could face a downgrade by the Standard & Poor's debt rating agency. The country's 1,890.6 billion euros of debt in April was an increase of more than 22 billion euros from March and of 75.2 billion euros from April 2010, the Bank of Italy in a statement said on Tuesday. The previous high of 1,879.992 billion euros was recorded in January. Italy's economy expanded only 0.1 percent during the first three months of the year, far lower than the 0.8 average for of the 17 countries that use the euro currency- the so-called eurozone. S&P in May downgraded its credit rating outlook on Italy to negative from stable. The agency said it made the move to reflect the country's chronically sluggish economic growth and heavy debt load. A downgrade would mean Italy's debt interest payments would increase. The Italian debt would have been much higher if Italy tried to spend its way out of the 2009 recession.

Spanish Revolution at a Crossroads: It started with a protest announced via Twitter, Facebook, and various listserves, scheduled for May 15, a week before the countrywide elections. Democracia Real Ya, 'Real Democracy Now,' was the name of the platform and its central demand. The protest took place simultaneously in dozens of cities throughout Spain. In Madrid there was a massive turnout; everywhere else it passed without incident, easily lost amidst a series of other protests that have been occurring with increasing frequency in response to the Labor Reform, social cuts, and home repossessions. But the night of May 15 and the following day, the protests transformed into occupations of central plazas in every city where people had taken to the streets under the slogan, 'real democracy now.' The central principles of the Real Democracy Now platform, adopted to a greater or lesser degree in other cities outside of Madrid, were unity among people indignant at the present situation, assembly decision-making, no political parties, no ideologies, and nonviolence. The occupation movement explicitly evoked the revolts in the Arab world. With blogs and cellphones they mimicked the high-tech component that Western media identified (and exaggerated) in the popular movements in Tunisia and Egypt. But their gains on the ground were quicker and most substantial than their extension through cyberspace. Within a week, there were permanent encampments in a hundred cities throughout the Iberian peninsula, as well as numerous support actions. In Catalunya alone, 121 permanent or temporary occupations and other gatherings were reported before the elections of May 22.

Spain Regulator May Ask for Cut on Debt to Utilities, Cinco Says - Spain’s energy regulator may propose a cut in the amount of debt it owes power producers for subsidized tariffs they charge to reduce the cost of repaying the money using bond sales, Cinco Dias reported. Consumers face 30.87 billion euros ($44.3 billion) in financing costs by 2026 based on the interest being paid by the first three bond issues backed by power bills sold to investors, the newspaper said, citing calculations in a document drafted by CNE, the watchdog agency. Power producers faced added costs not covered by revenue of 13.7 billion euros as of December 31 and may have a shortfall of as much as 7.5 billion euros from 2011 to 2013, Cinco Dias said. Spanish electricity consumers paid lower rates than were approved for utilities for the past five years, creating a so- called tariff deficit that the government promised to cover.

Half Of All Businesses In Ireland Are Contracting Or Struggling To Survive: "One in two businesses in Ireland is contracting or struggling to survive according to new research published today. The research by InterTradeIreland – which supports SMEs across the island to develop North-South trade and business development - was undertaken with 1,000 business managers and shows that nearly half of all businesses on the island are contracting or are in survival mode. Businesses reported that access to finance for day-to-day cashflow and controlling costs are among the main challenges as well as the rising cost of overheads, particularly energy, which two fifth’s of businesses cite as a ‘very large issue’ for them. InterTradeIreland’s Aidan Gough said of the results: The outlook is still in the balance with 50 per cent of firms contracting or in survival mode. We are unlikely to see any significant increases in employment or growth in the short to medium term.

Irish Payrolls Drop; Unemployment Falls as Labor Force Shrinks -- Irish payrolls fell 2.9 percent in the first quarter from a year earlier as builders, hotels and restaurants cut jobs. The number of people in employment fell 53,400 to 1.8 million in the first quarter from the same period a year earlier, the Cork-based Central Statistics Office said in a statement today. The percentage decline is the smallest since the third quarter of 2008. The seasonally adjusted jobless rate fell to 14 percent from 14.8 percent in the previous quarter. Prime Minister Enda Kenny, who's trying to boost economic growth and rein in a budget deficit after the country's bailout last year, announced a job-creation plan in May to be funded by a levy on private pension savings. He's also cutting the sales- tax rate on tourism-related services to help the industry. Employment fell in seven of 14 economic sectors in the first quarter, the CSO said. Construction jobs fell by 21,800, while employment in accommodation and food-service activities dropped by 20,800. The data "indicate that the labor market is very close to stabilizing, with half of all industry categories showing year- on-year increases," said Ronnie O'Toole, chief economist at National Irish Bank in Dublin. "These increases however, were not large enough to offset the continued loss of jobs in hospitality and construction."

Irish govt eyes $8.88b fund for jobs: Report - IRELAND'S government wants to use 5 billion euros (S$8.88 billion) from the state pension fund to bankroll an employment stimulus plan, The Sunday Times newspaper reported. Citing government sources, the newspaper said Dublin would have to get the approval of its creditors at the International Monetary Fund and the European Union before it can take funds out of the National Pension Reserve Fund (NPRF), which has already helped fund a bailout of the banking sector.'Hopefully we can work it out with the IMF that the money will be used for the stimulus package. It is going to happen in the near future,' the newspaper quoted a government source as saying.

Control Fraud and the Irish Banking Crisis - This is part of a continuing series of articles on the European crises of the core and periphery. This column focuses on the causes of Ireland’s banking crisis. It begins by discussing what we know about modern financial crises in the West.  The leading cause of catastrophic bank failures has long been senior insider fraud.  Modern criminologists refer to these crimes as “control frauds.” The person(s) controlling seemingly legitimate entities use them as “weapons” to defraud creditors and shareholders. Financial control frauds’ “weapon of choice” is accounting. The officers who control lenders simultaneously optimize reported (albeit fictional) firm income, their personal compensation, and real losses through a four-part recipe.

  1. Grow extremely rapidly by
  2. Making poor quality loans at premium yields while employing
  3. Extreme leverage and
  4. Providing grossly inadequate provisions for losses for the inevitable losses

Tempers Flare at Bank of Ireland Meeting —Bank of Ireland Chief Executive Richie Boucher had eggs pelted at him at a shareholders' meeting Wednesday, as one of Ireland's last surviving major lenders seeks to raise billions of euros more in capital in the coming weeks. The bank, which is already 36% owned by the Irish government after receiving €3.5 billion ($5.05 billion) in bailout aid, needs €5.2 billion more in capital and new buffer reserves, mainly to make good lending excesses during the boom years."

Noonan aims to target senior Anglo bondholders - Finance Minister Michael Noonan has said Ireland will go to our European partners with a plan to impose significant losses on some senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society. He was speaking in Washington after meeting the IMF and the US Treasury Secretary Timothy Geithner. Mr Noonan said the Government will seek to impose losses on some senior bondholders in Anglo Irish Bank. He said that around €3.5 billion in senior unsecured, unguaranteed bonds issued by Anglo Irish Bank and Irish Nationwide Building Society should have losses imposed on them. Mr Noonan said he had discussed this with the IMF, who supported the strategy. The Finance Minister said these banks are no longer normal entities and are more like warehouses for bad debts. In that context, he would be going to our European partners to propose significant cuts in the money to be paid to the bondholders

Ireland seeks to go after Anglo's senior bondholders (Reuters) - Ireland will seek to impose losses on over 3 billion euros worth of senior bonds in Anglo Irish Bank [ANGIB.UL] with the support of the International Monetary Fund, Finance Minister Michael Noonan said on Wednesday. Dublin wants private investors to shoulder part of a 70 billion euro bill for bailing out its banks, but has shied away from targeting senior bondholders in the face of opposition from the European Central Bank. After meeting with IMF officials in Washington, Noonan said he would enlist their support in trying to persuade the ECB that imposing losses on senior bonds in Anglo Irish would not trigger any contagion because it was no longer a real bank. "You can't put your money on deposit in Anglo Irish, you can't get a loan from Anglo Irish. As far as I am concerned this is not a bank," Noonan told Irish state broadcaster RTE. "We don't think the Irish taxpayer should have to redeem what has become speculative investment. I don't think it should be redeemed at par," he said

Van Rompuy urges Irish rate deal - European Union president Herman Van Rompuy has called for a rapid solution to the impasse over lowering the interest rate on bailout loans to Ireland. "I'm fully aware this is a sensitive issue for Ireland," Mr Van Rompuy told reporters today after meeting Taoiseach Enda Kenny at Government Buildings in Dublin. "We continue to work with our partners to find a solution." The Government has failed to secure a reduction on the 5.8 per cent interest rate on the EU portion of the loans amid French demands that Ireland raise its corporation tax rate. Minister for Finance Michael Noonan has ruled out any cut in corporation tax, saying it is not up for negotiation. Mr Van Rompuy, who is on his first visit to Ireland since taking up his position, commended the Government for the measures it has taken to address the economic crisis. "What you are doing is needed not only for your country but for the stability of the euro area as a whole," Mr Van Rompuy said.

Noonan Says Greek Crisis to Be Resolved Without Credit Event - Irish Finance Minister Michael Noonan said European authorities will find resolution to the Greek debt crisis that isn’t classed as a default. “A satisfactory resolution will be brought about, which will not be a credit event,” Noonan said in an interview on CNBC television in New York today. “But Ireland will be watching very closely.” The Irish government does not want a solution for Greece to amount to a “credit event” that could have a “contagion effect for Ireland,” Noonan said. “We’re totally different to Greece. We have our bank restructuring in place, we have our fiscal programs in place.”

Merkel Warns Against Inaction in Debt Crisis -German Chancellor Angela Merkel said Saturday that it was important to help indebted European countries in order to assure that a global economic upswing, and Germany’s economic health, were not undermined by further debt woes in the Euro zone. In a message apparently intended to convince a skeptical German public that Greece and other struggling economies should not be allowed to default, Mrs. Merkel asserted that Germany’s own economic recovery could be endangered. “If we don’t act right, that could happen,” she said in her weekly video podcast, “but that’s exactly what we want to avoid.” “That’s why we say that we cannot simply allow an uncontrolled bankruptcy by a country,” Mrs. Merkel said, adding that Europe needed to see how it could help struggling countries improve their competitiveness and also allow them to reduce their debts. She did not mention Greece by name. “We must do nothing that endangers the global upswing as a whole and would then put Germany in danger again,” she said.

Juncker: Greece Needs 'Soft' Debt Restructuring - Highly indebted Greece needs a "soft, voluntary restructuring" of its debt, said Jean-Claude Juncker, the head of the group of countries using the euro as a common currency, in a radio interview Saturday. At the same time, he lashed out at the U.S., calling their debt level "disastrous." Backing proposals by German Finance Minister Wolfgang Schäuble, Mr. Juncker told Inforadio Berlin Brandenburg that private lenders need to participate in a fresh aid program for Greece, but only on a voluntary basis. Also, any such move has to be made in a way that credit ratings agencies don't interpret as a credit default, he said. And it needs to be done without the "danger of infecting" other euro-zone members. In exchange for any fresh program, Greece needs to make sure it reaches its 2011 fiscal targets, Mr. Juncker added. "If Greek policies continue as they have in the first six months [of this year], then they won't reach the budget target," he said, adding that any additional aid would be linked to very strict conditions.

Politicians 'Are Lying Through Their Teeth' on Greek Aid - Der Spiegel - The European Central Bank may not think much of the German government's plans to save Greece from its debt crisis, but at least German Finance Minister Wolfgang Schäuble has found support at home. On Friday, the German parliament, the Bundestag, voted in favor of a motion that clears the way for more aid for Athens. Germany is prepared to help Greece, but only if private creditors are involved in any new bailout plan. The European Central Bank, however, remains opposed to any kind of debt restructuring. German commentators say the ECB, having bought billions in Greek bonds, is too deeply involved to be independent.

The Trial and Death of Austerity - On Sunday, for the second week running, protesters gathered in the main squares of major cities across Europe to voice their opposition to the wave of austerity that is sweeping the European Union. Nowhere was the call to protest answered with greater enthusiasm than in Greece.  In Athens, people swarmed into the city center for the 12th consecutive day. Some were packed into Syntagma Square, in front of the Greek Parliament, listening attentively to speakers chosen at random from the crowd. This modern-day agora has taken place every night. The rest, more than 100,000 according to estimates, overflowed into the surrounding streets. Strangers were conversing animatedly about the country’s serious problems, many waving Greek flags but none sporting party or union banners. Vendors who have set up improvised stands in the area in the last couple of weeks provided them with everything from from souvlaki and corn cobs to beer. It was a cross between a political demonstration and a street party.

Greeks protest for 19th day, utility union to strike - More than 20,000 Greeks protested against austerity measures in Athens on Sunday and workers at state-owned utility PPC announced strikes to oppose government plans to sell the company. In the 19th straight day of demonstrations against a new austerity campaign the Socialist government hopes to pass this month, protesters gathered in front of parliament in Athens' central Syntagma square, shouting "Thieves! Thieves! Thieves!" Having failed to meet fiscal targets under Greece's 110 billion euro ($160 billion) bailout by the European Union and International Monetary Fund, the government wants to raise taxes and slash spending more than planned this year in a bid to avoid default. It has slated more measures through 2015 to cut the fiscal deficit to 1.1 per cent in 2015 from 10.5 per cent of gross domestic product last year, including a plan to sell state assets worth 50 billion euros.

Bundesbank chief rebukes Greece - Germany’s new central bank president Jens Weidmann warned debt-laden Greece that international creditors will pull out aid if it fails to pursue painful cuts to tackle its huge deficit as promised. “Greece’s capacity for [debt] payment depends foremost on the attitude of the government and the people,” the hawkish Bundesbank chief told Welt am Sonntag daily in an interview that was published yesterday. “A lot of aid has been given, but under strict conditions such as massive and swift privatizations. If these commitments are not upheld, there will no longer be a basis for additional aid,” he said. “Greece would have made its own choice and should assume the undeniably dramatic consequence of a default on its payments.” Although a potential Greek default would likely make life hard for eurozone member nations the single currency will survive “and remain stable even in that case.”

Default would be dire, Greek leader says - Greece’s prime minister, George Papandreou, said yesterday that he will continue with policies to drastically cut the country’s debt because the alternative — a default — would be catastrophic. “We have taken a decision that no Greeks should live through the consequences of a default — and to change the country radically so that it . . . can stand on its own feet,’’ Papandreou told a newspaper. Never “did I imagine that we would need to slash pensions in order for the state to continue to pay any pensions at all,’’ he added. An austerity program running through 2015 is designed to save $41 billion. It’s seen as essential in securing the fifth installment, worth $17 billion, of a $159 billion bailout by the European Union and International Monetary Fund. Greece hopes to secure a second bailout this month.

ECB Stance on Greece Means Higher Debt Costs for Italy, Spain - European Central Bank President Jean-Claude Trichet’s spat with German Finance Minister Wolfgang Schaeuble over Greece threatens to boost yields for the region’s high-deficit nations as they peddle debt this week. Trichet urged European Union leaders on June 9 to reject Schaeuble’s call for private investors to assume a “substantial” part of the latest Greek aid package. The remarks signal how divided policymakers remain on how to shore up Greece and stop contagion that will weigh on debt sales this week by Italy, Spain and Portugal. “Debt managers and finance ministers in Italy, Portugal and Spain may not be pleased with the pressure that Trichet’s words put on their funding costs,” said Toby Nangle, who helps oversee $53 billion as director of asset allocation at Baring Asset Management in London.

A Distant Sound of Churning - The world is in a box, tortured with its obsolete ideas about how economies are supposed to run, especially the money part, and the economists are clueless. A case in point: the eminent Vincent Reinhart at the Council of Foreign Relations last week: "There are very few debt defaults... there are a whole lot of restructurings. For most of history, default is something the strong declare on the weak when they lose their patience. And if you're members of the same club, you're less likely to lose your patience. Hence you're less likely to default. Greece is in the club." The club he refers to - the Euro money club - is less a jolly fraternal lodge than a funeral insurance association. The latest restructuring for Greece he referred to is a cockamamie perpetual rollover with no redemptions allowed, while Greece has to agree to become more like its neighbor, Albania, in lifestyle.  There's a third option that Reinhart ignores: the Greek populace can riot in the streets, toss out their government, install some kind of rump leadership and hoist its middle fingers at the Euro management team, opting out of the club. Why this does not occur to Reinhart (and many other vested poobahs) I can't say, despite the fact that there are many places around the world (especially Europe these days) where the natives are obviously getting restless. Besides, it's not lost on the Greek people that they're being asked to go Albanian for the sake of a dozen banks up in Germany, France, and Holland, not their own country's sacred honor.

Peripheral CDS at new highs as Greek worries fester - The cost of insuring peripheral euro zone bonds against default hit record highs on Monday as disagreement over how to tackle Greece's debt crisis underpinned safe-haven debt ahead of bond auctions and U.S. data this week. European leaders are due to finalise a new rescue package for Greece at a Brussels summit on June 23-24, but deep divisions remain about how to get the private sector involved, while the deal would not help reduce Greece's massive 340 billion euro debt load. The market is likely to remain choppy in the run-up to that summit, moving on headlines as it has done in recent sessions. Meanwhile, German bonds could be further buoyed if data shows the U.S. economy's soft patch is becoming a hard landing. "There is underlying support because there is a lot of uncertainty still (in regards to) Greece and the data has been quite supportive recently for bonds,"

Tabled policy options vs. CDS pricing in Europe: similar but not the same - Rebecca Wilder - The discord in Europe across policy lines is growing. I thought it prudent to jot down a few notes regarding the different initiatives being tabled out there. The fact is, that betting on default, at this point, is essentially betting on the near-term outcome of an organic policy negotiation process. In my view, that's impossible, so market pricing cannot be predictive of the near- or even medium- term outcomes. As illustrated above, a hard and possibly quite disorderly restructuring is being factored into credit default swap (CDS) pricing. The chart lists the 5-yr CDS-implied probability of default by the listed Euro area countries (a credit event that would trigger CDS payments - see 'credit event' under the ISDA glossary). The pricing is based on a 40% haircut to the bond principal, so we're talking a 'hard' debt restructuring. This may occur at some point, especially in the case of Greece, but a hard restructuring is not being negotiated at this time.

Bunds Advance as Greek, Portuguese Bonds Decline Portugal’s 10-year bond yields climbed 65 basis points to a euro-era record of 10.45 percent, the biggest weekly gain since the five days ending April 1. Greece’s 10-year yields climbed 78 basis points to 16.72 percent, while Ireland’s increased 44 basis points to 11.25 percent. The cost of insuring against default on government debt sold by Greece, Portugal and Ireland rose to records, according to traders of credit-default swaps. The yield difference, or spread, between 10-year German bunds and Portuguese securities of a similar maturity widened 70 basis points to 745 basis points, the most since at least 1997 when Bloomberg began collecting the data.

Greece Gets Yet Another Downgrade - Standard & Poor’s just cut Greece’s debt rating to CCC from B, meaning Greek debt is “extremely speculative.” The outlook for Greek debt is “negative.”  The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece. This financing gap has emerged in part because Greece’s access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize. This lack of access, in our view, creates a gap between committed official financing and Greece’s projected financing requirements. Greece has heavy near-term financing requirements, with approximately EUR95 billion of Greek government debt maturing between now and the end of 2013 along with an additional EUR58 billion maturing in 2014.

Greece Branded With World’s Lowest Credit Rating by S&P on Default Threat - Bloomberg: "Greece was branded with the world’s lowest credit rating by Standard & Poor’s, which said the nation is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history. The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement yesterday. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.” Greece’s government, which plans to sell 1.25 billion euros ($1.8 billion) of 26-week Treasury bills today, said that the downgrade overlooked “intense” talks between European officials to address the nation’s financing needs. Credit- default swaps on Greece, Ireland and Portugal surged to records yesterday on concern governments’ struggles to resolve the turmoil will threaten their ability to pay their debts. “Greece will default -- it’s a question of when, rather than if,”

The downgrade assault by the rating agencies continues - what are the implications for the EFSF?  - Rebecca Wilder - As the rating agencies trip over themselves to downgrade sovereign credit, Greece yesterday became the 'World’s Lowest Credit Rating by S&P'. This is largely meaningless for bond pricing, since Greece is already trading at very distressed levels - the curve is inverted, and the two year bond is trading at 26%. However, the downgrade of other Euro area countries could have broader implications for the EFSF (and then ESM) liquidity facility. There are two reasons why ratings matter for the EFSF (European Financial Stability Facility):
(1) the 6 triple-A country guarantees facilitate the triple-A rating on the EFSF structure itself.
(2) countries that fall under the umbrella of the EFSF no longer contribute to the guarantee of the structure.
The table below illustrates the current EFSF guarantee structure (part of the credit enhancement to receive a triple-A rating) - details of which can be found here - and their associated foreign currency long-term ratings by the three major rating agencies.

Complaints Against Rescue Fund -- Germany's top court will soon hear a complaint filed against the Greek bailout and euro rescue fund. A recent remark by the court's president suggests it may attach strings to its approval of the bailouts -- and thereby reinforce the country's reputation for obstructionism in the fight to save the euro.

S&P sees self-fulfilling default in Greece - It is now the worst sovereign rating in the world – a notch above default. S&P downgraded Greece to CCC . The interesting aspect about this downgrading is that it reflects not the situation in Greece itself, but the official position by other EU government, who are publically advocating default. Talk about a private-sector participating in a Greek rescue package is thus becoming a self-fulfilling prophecy. S&P said in a statement: “In our view, Greece is increasingly likely to restructure its debt in a manner that, under the conditions of any package of additional funding provided by Greece’s official creditors, would result in one or more defaults under our criteria.” The news led to new market jitters, with Greek, Portuguese and Irish bond spreads reaching new euro-area records, but the situation has calmed down a little bit since.  An emergency meeting of the Eurogroup on the Greek crisis will be held Tuesday afternoon, followed by an informal EU finance minister in the evening. The idea is to bridge the gap between the positions of Germany and the ECB. Jean-Claude Juncker on Saturday backed Germany's proposal of a "soft restructuring" of Greece's debt with a voluntary contribution from private-sector creditors.  Note that Spanish bond spreads are rising again. Commissioner Joaquin Almunia, meanwhile, said Spain won't be able to raise financing if it fails to reach a budget-deficit target.

The Greek Crisis and the Threat to Political Liberalism: A cautionary tale for Ireland, Portugal, the whole of Europe - If 1929 has taught us anything, it is that a major (capital ‘c’) Crisis poses a lethal threat to (a) currency unions (e.g. the Gold Standard then, the euro today) and (b) political liberalism. The latter threat has, so far, featured only as a projection (see here for a relevant argument), rather than an observed reality. In a recent post I argued that the EU’s recent demand that Greece’s assets be privatised by a junta of foreign officials was the first step toward the dismantling of the EU’s basic democratic principles. Today, in this post, I  warn about an even more radical threat, this time to basic liberal tenets about the rights of private citizens. My warning will take the form of a true story, to which I am an eyewitness. It should, I submit, send shivers down the spine of all European (small ‘l’) liberals. Precisely because this is a seriously worrying tale, I shall include no commentary: just a blow by blow account of facts.

The silent ongoing run on Greek banksThe Greek banking system has a relatively low loan-to-deposit ratio of about 120%, well below Irish and Portuguese levels. But over the last year, deposits have fallen by €44 billion, and Greek banks have been shut out of the repo market, the interbank market and bond markets. That has left a €135 billion funding gap, mostly filled by the European Central Bank. Here is more.  Here is a good Irish analysis.  And this: Greece is now the lowest-rated sovereign in the world, having fallen below Ecuador, Jamaica, Pakistan and Grenada. An ideal partner for a currency union with the Germans, no?

EURO GOVT-Greek yields hit euro-era high as solution unclear - Greek, Portuguese and Irish 10-year bond yields hit fresh euro lifetime highs on Tuesday and were poised to rise further at least until details of a new bailout package for Greece are agreed. The cost of protecting Greek debt against default also hit a record and analysts cautioned that a well-bid auction of the country's treasury bills had not alleviated the gloom. "I wouldn't put my hand in the fire for the Greeks that they would not default by the end of the year," said Glenn Marci, rate strategist at DZ Bank.European policymakers remain divided over how to involve the private sector in a second rescue package for Greece, which urgently needs cash to bridge a financing gap next month.

Greeks say to cordon off parliament to stop cuts debate (Reuters) - Greek protesters vowed on Tuesday to cordon off parliament to prevent deputies from debating new austerity measures, and unions said they would bring the country to a halt in a national strike on June 15.  Pressure is growing on Prime Minister George Papandreou's government, which is trying to muster support for a five-year plan that its international lenders say is crucial for them to extend more funding and enable Athens to avoid default. European Union leaders and the European Central Bank are also split over whether private bondholders should share the burden of a fresh bailout plan. Papandreou's Socialist party is due to submit its mid-term plan for discussion in parliament on Wednesday, with the goal of passing it later this month. But protesters staging daily demonstrations that have swelled to tens of thousands in Athens' Syntagma square in front of parliament said they would encircle the building. "Now that the government is putting the medium term austerity programme to vote, we (will) encircle the parliament, we (will) gather and we (will) stay at Syntagma," the self-named People's Assembly of Syntagma Square said in a statement.

The ECB Monetary Policy Mess in One Picture - San Francisco Fed economist Fernanda Nechio shows us in one picture the ECB monetary policy mess: If there were any doubt that the ECB is in practice narrowly setting monetary policy for the core countries (i.e. Germany and France) this figure should remove it.  The figure should also nix any doubts as to whether what is good for the core is good for the periphery.  ECB monetary policy was too loose in the early-to-mid 2000s and now it is too tight.  If the ECB really wants to preserve the Eurozone in its current form it must confront this reality.  So far it hasn't and this is why I say the ECB is fiddling while the Eurozone is burning.

There Will Be Blood in Europe (Courtesy of the ECB) - The ECB (European Central Bank)'s plan to "kick the can down the road" as long as possible requires kicking in the teeth of the eurozone periphery countries. It could lead to uprising. Europe is supposed to be the land of compassion and enlightened social policy. America is supposed to be the domain of "jungle capitalism" and brutal discrepancies between rich and poor. Your editor heard this over and over as a student abroad in the late '90s. At the Oxford Union, a student debating society, there were spirited discussions on the treatment of the underclass. At Pulacky University in the Czech Republic, in the afterglow of the Velvet Revolution, we were reminded that America, too, had its brutal edges like the communists. Even the laid-back Aussies (during your editor's study time down under) thought the Yanks a bit harsh on social policy. And yet now it is Europe, not the U.S., determined to grind the masses under the heel of a crony capitalism boot. The ECB (European Central Bank)'s determination to force "austerity" on the periphery countries -- and to avoid debt restructuring at all costs -- is driving multiple generations to the brink.

Euro Finance Chiefs Race to Avert Default - Yields on 10-year Greek bonds climbed to 17.46 percent today, a record in the 17-nation euro-area’s history, before an emergency session of finance ministers in Brussels. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said before the meeting that “all options” will be considered regarding Greece. Austrian Finance Minister Maria Fekter told reporters that members of the group still differ on a bailout model. ECB Governing Council member Mario Draghi reiterated that the central bank opposes any steps that aren’t “purely voluntary.” The “cost of a default would exceed the benefits” and a “default would not address the root causes of the crisis,” Draghi told lawmakers in Brussels at his confirmation hearing for the ECB presidency. Christian Noyer, another ECB Governing Council member, said any attempt by euro-area governments to adjust Greek debt that resulted in a default would mean financing the nation’s entire economy. “Our position is extremely simple: if there is a solution that avoids a risk of default, it seems suitable,” Noyer told journalists. “If you can’t find it, it’s better to avoid touching the debt. If despite everything you try to reduce the debt and you provoke a risk of default, you’ll have to finance the entire Greek economy.”

Greek Rescue Package May Be Delayed by EU Disagreements on Investors’ Role - An emergency session of finance ministers in Brussels late yesterday failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new Greek aid package with European Central Bank warnings backed by France that the move might constitute the euro area’s first sovereign default. Yields on 10-year Greek bonds touched 17.46 percent yesterday, a record in the 17-nation euro area’s history. Finance ministers including Elena Salgado of Spain and Didier Reynders of Belgium stressed that any decision must satisfy the ECB’s concerns. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said before the meeting that “all options” would be considered. Germany and France, Europe’s two biggest economies, are on opposite sides of the dispute, with France indicating backing for the ECB’s view. While French Finance Minister Christine Lagarde has ruled out any action that constitutes a “credit event,” her German counterpart, Finance Minister Wolfgang Schaeuble, said June 10 that Europe’s biggest economy “has to insist on the participation of the private sector” in Greece. Schaeuble said yesterday’s meeting produced “no result.

Euro ministers fail to clinch deal on Greek aid - Euro zone ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on the leaders of Germany and France to forge a deal later this week. Nervous markets pushed the bond yields of Greece, Ireland and Portugal to their highest levels since the introduction of the euro in 1999 amid uncertainty over a second rescue for Athens and the contribution governments are likely to demand from the private sector." European paymaster Germany, backed by the Netherlands, wants the banks, pension funds and insurance firms that hold Greek debt to swap their bonds for new ones with maturities that are seven years longer. This would buy Greece more time to chip away at its massive 330 billion euro ($477 billion) debt mountain and limit the amount of taxpayer-funded aid Athens would receive. But ratings agencies have warned they would view this as coercive and label it a default.

Greek Unions Stage 24-Hour Strike Against Austerity, Asset Sales - Greece’s ports, banks, hospitals and state-run companies grind to a halt today as the two biggest labor unions strike to oppose Prime Minister George Papandreou’s additional budget cuts and asset sales.  ADEDY, the largest public-sector union, and the General Confederation of Labor, or GSEE, the biggest private-sector union, called the third general strike of the year to protest the government’s five-year fiscal plan and program of state asset sales, according to e-mailed statements.  Papandreou aims to get the 78 billion-euro ($113 billion) package passed in parliament by the end of the month. He faces growing dissent within his Socialist Pasok party and among Greeks. One Pasok lawmaker said yesterday he won’t vote for the bill, the To Vima newspaper reported. Papandreou holds a six-seat majority in the 300-member assembly.  “This government has the responsibility to save the country from default,” spokesman George Petalotis told reporters in Athens yesterday in response to questions on the strikes.

Opponents of Greek austerity plan set strike, protest (Reuters) - Protesters said they would surround the Greek parliament on Wednesday to prevent debate, putting new pressure on the government to drop its austerity plan, and two ruling party lawmakers said they would vote against the measures. Prime Minister George Papandreou is struggling to muster support for a five-year plan that international lenders say must be passed if they are to approve a second aid deal and give Athens the next tranche of funding in early July, enabling it to avoid default. The government will present the plan, which includes tax rises and spending cuts this year, for discussion on Wednesday and wants to pass it later this month.  But one lawmaker in the ruling party, which holds 156 seats in the 300-seat parliament, said on Tuesday he would vote against the plan, and another said he was leaving the parliamentary party group to oppose the measures.  Protesters, who have staged demonstrations in Syntagma Square in front of parliament every day for three weeks, said they would form a cordon round the building on Wednesday.

ECB Defends Its Balance Sheet - The European Central Bank‘s (rhetorical) defense of its balance sheet continues, this time from executive board member Lorenzo Bini Smaghi. Days after his ECB colleague Juergen Stark rebuffed the notion that the ECB’s peripheral debt and collateral holdings are turning into a “bad bank,” Bini Smaghi called the analysis behind such claims “fundamentally flawed.” “This argument is based on a clear misunderstanding of the type of operations conducted by the Eurosystem and of the risk control measures applied to those operations,” he said in a speech in Amsterdam. Officials have taken aim at suggestions that by buying peripheral government bonds, and lending tens of billions of euros to Greek, Irish and Portuguese banks — loans that are backed by government bonds and other types of collateral — the ECB’s balance sheet is dangerously exposed to any Greek default and the contagion that would ensue. A study from the think tank Open Europe last week estimated that if the value of the ECB’s asset holdings falls just 4.25%, “its entire capital base would be wiped out.”

Unpleasant Greek options - TODAY has been nasty day for markets, those in Europe especially. The euro is falling against the dollar. And yields on the debt of euro-zone periphery governments are rising to new heights. The yield on 3-month Greek securities is now over 12%. Markets want nothing to do with Greece if they can help it. European yields have spiked many times before, and each time European leaders have responded with a new bail-out package or other reassurances to prevent Greek panic from fueling a broader contagion.  So where's this go-round's intervention? Well the trouble at the moment is that Europe's leaders can't agree on one. It has become clear that euro-zone governments will be reluctant to contribute more support to Greece unless its private creditors also take a hit. But there is significant disagreement over how to achieve this haircut. All the plans currently under discussion are nominally "voluntary", but voluntary means different things to different people. The German plan is to convene a meeting of Greece's major private bondholders in order to "convince" them to participate in a debt exchange, in which current obligations are traded for new ones with extended maturities. The upside to this plan is that the more coercive aspects of it are likely to make for a high level of creditor participation, and a correspondingly larger benefit to Greece.

EU Will Consider "All Options" To Rescue Greece: Juncker - Eurozone will discuss "all options" available to save Greece from bankruptcy, reports quoted Eurogroup chairman Jean-Claude Juncker as saying on Tuesday. Speaking at the emergency meeting of euro area finance ministers, Juncker said that this was an informal meeting to arrive at a closest possible consensus on the issue. A more clear conclusion is expected to emerge in the next meeting scheduled on June 20 in Luxembourg. The meeting also discussed the possibility of pushing private sector Greek bondholders to share the burden of the new bailout package, reports said. The ministers have to break the impasse over the role of private creditors and sort out the disagreement between Germany and the European Central Bank on the matter. Germany has been pressing for burden-sharing by private bondholders saying that this could relieve the taxpayers. However, the ECB argues that such a move could amount to a default.

Greek ports paralysed by latest strike - Greek ports, banks, and other state-run organisations were at a standstill today as a result of a 24-hour general strike in protest at austerity measures. Thousands of demonstrators gathered in Athens’ Syntagma Square to protest against government measures to hold on to a €110 billion (US$142bn) EU bailout package. The public sector across Greece is said to be paralysed. Transport services have been disrupted and vessels remain docked at ports. However, airports were not thought to be affected. ADEDY, the largest public-sector union, and the General Confederation of Labour (GSEE), the biggest private-sector union, have called the third major strike of the year.

Europe's $103 Billion Yard Sale May Come Up Short as Buyers Seek Bargains - Prime Minister George Papandreou vowed in 2009 to scrap an agreement to sell a stake in Greece’s biggest phone company in a bid to get elected. This month, forced to raise cash, Greece triggered an option to sell 10 percent of Hellenic Telecommunications Organization SA (HTO), known as OTE, to Deutsche Telekom AG. (DTE) The price: less than one-third of what Europe’s largest phone company paid for shares when it last bought OTE stock in 2009. That deal underlines the challenge facing European countries such as Greece and Ireland, awash in debt, that are hoping to raise as much as 71.5 billion euros ($103 billion) in the continent’s largest yard sale of state assets in more than a decade. The push may founder as investors seek better returns in Asia and lower prices than governments are willing to accept, bankers and investors say. The threat of Greek default or euro breakup is scaring buyers and depressing prices, they say. “Forced sales in a downturn are unlikely to achieve good terms,”

Greek deputy quits governing party over austerity - A backbench lawmaker resigned from Greece's governing Socialists on Tuesday to protest a new austerity drive, eroding Prime Minister George Papandreou's majority and raising the specter of further defections ahead of a crucial vote this month. Former sports minister Giorgos Lianis will retain his seat as an independent in the 300-member parliament, according to the governing PASOK party, which now controls 155 seats — a majority of five. The defection came a day after barely-solvent Greece was accorded the lowest sovereign credit rating in the world, over fears private investors will have to share the burden of a potential debt restructuring. Standard and Poor's rating agency slashed the country's rating from B to CCC, warning of the likelihood of one or more defaults over the next couple of years as the country struggles to meet its colossal financing requirements.

Greek PM Under Pressure to Reshuffle Cabinet —Greek Prime Minister George Papandreou faces growing pressure from his Socialist Party to reshuffle his cabinet in an attempt to defuse public anger over another round of spending cuts.  Two senior officials—a senior Socialist Party leader and a cabinet minister—said the government's survival could depend on reseating top cabinet posts after the parliament votes through the new austerity measures at the end of June.  Public protests over deep government spending cuts has been growing as Greece struggles through the worst economic crisis in the country's recent history. Government insiders worry about eroding public support for reforms.

Greek Prime Minister Papandreou said to be told by opposition to step down - Greek Prime Minister George Papandreou’s options narrowed as the opposition told him to resign, allies turned against him and police deployed tear gas to break up anti-government protests. Papandreou, struggling to push through austerity measures demanded by international lenders, was told to step aside and let the president name a so-called technical government to renegotiate the terms of the nation’s rescue package, said an official in the opposition New Democracy Party. The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation of an impending government shakeup sent Greek bonds plunging and the euro weakening today. “When a government has so profoundly misjudged the anger, frustration and disillusionment in the population it is a matter of time until changes have to set in,”

Greek opposition calls on Papandreou to resign - The Prime Minister of Greece George Papandreou said he was ready to seek a vote of confidence for his government after coalition talks with the opposition failed. To get a new bailout from the EU, the Prime Minister should ensure the parliament`s approval for a crucial austerity bill, which includes increased taxes and spending cuts. Thousands of people took to the streets in central Athens on Wednesday to protest against austerity measures. The opposition leader Antonis Samaras called on George Papandreou to step down.

Papandreou Offers to Quit for Unity Cabinet -Greek Prime Minister George Papandreou offered to step aside to permit the formation of a unity government, as long as all opposition parties agreed to cuts required by an international bailout, said a person with direct knowledge of the matter. Papandreou’s bid, coming amid mounting popular protests and defections among his allies, countered a demand by the New Democracy opposition party that he quit and allow a so-called technical government renegotiate the terms of the rescue.

As Greek protests swell, Prime Minister George Papandreou offers to resign - Angry protesters pushed the Greek government close to collapse Wednesday, putting Europe on notice that deep budget cuts to tame the region's debt crisis face heavy public resistance and could crash on the rocks of national politics.Thousands of people packed downtown Athens in an effort to block lawmakers from debating brutal austerity measures that European finance officials say are essential if near-bankrupt Greece wants their help to pay its bills. The gathering descended into violence — with some protesters hurling water bottles, rocks and firebombs — that took riot police hours to quell and helped spark a dramatic offer by Prime Minister George Papandreou to quit in favor of a unity government.The volatile situation offered a stark example of the predicament facing the European Union as it tries to contain a debt crisis that has rattled markets for more than a year. The EU has demanded painful spending cutbacks by Greece, Ireland and Portugal as the price of bailing out their cash-strapped governments. Spain and Italy also have passed major belt-tightening measures to avoid getting sucked into the euro mess.

Greek default would pose contagion risk: Fekter (Reuters) - Letting Greece default on its sovereign debt could trigger a chain reaction with dire consequences for the rest of the euro zone, Austrian Finance Minister Maria Fekter told parliament on Wednesday. "If European countries would abruptly send Greece into default this shock wave would raise the danger of contagion and put other countries into serious difficulties," she told a debate on euro zone bailouts demanded by the opposition. "You can't forecast who might get hit," she said, adding a careful and controlled approach to helping Greece reduce its debt was the wiser course of action.

The Greek Restructuring Debate - Last week, German Finance Minister Wolfgang Schaeuble indicated readiness to accept a soft restructuring and bond exchange which would defer interest payments on Greek sovereign debt. He sent a letter to colleagues in the euro countries indicating this. However, since that time, central bankers have expressed disquiet over this policy approach. Yesterday, ahead of our chat, Mario Draghi, the head of the Italian central bank and likely next European central bank head, rejected this idea in very strong language saying, explaining that “the ECB is not in favour or restructuring and haircuts” and that it “excludes all concepts that are not purely voluntary.” For now then, it seems a soft restructuring is off the table. Nevertheless, market participants are uniform in their belief that Greece will restructure. And Greek bond yields have soared on the back of this expectation. Moreover, contagion has seen all of the euro zone periphery suffer with CDS and yields increasing in Spain, Portugal, Ireland and Italy. This is clearly unsustainable and I expect a definitive policy response in the next few days.

On Central Banker opposition to a Greek restructuring - Last week, German Finance Minister Wolfgang Schaeuble indicated readiness to accept a soft restructuring and bond exchange which would defer interest payments on Greek sovereign debt. He sent a letter to colleagues in the euro countries indicating this. However, since that time, central bankers have expressed disquiet over this policy approach. Yesterday, ahead of our chat, Mario Draghi, the head of the Italian central bank and likely next European central bank head, rejected this idea in very strong language saying, explaining that “the ECB is not in favour or restructuring and haircuts” and that it “excludes all concepts that are not purely voluntary.” For now then, it seems a soft restructuring is off the table. Nevertheless, market participants are uniform in their belief that Greece will restructure. And Greek bond yields have soared on the back of this expectation. Moreover, contagion has seen all of the euro zone periphery suffer with CDS and yields increasing in Spain, Portugal, Ireland and Italy. This is clearly unsustainable and I expect a definitive policy response in the next few days.

On the brink (again) - Dramatic events in Greece yesterday: As tens of thousands protested against the new austerity plans George Papandreou offered to step down in favour of a new unity government. But talks with the conservative opposition failed and George Papandreou announced instead a cabinet reshuffle and a vote of confidence in Parliament, Kathimerini reports. Papandreou had reportedly refused to accept the opposition’s condition to renegotiate the aid deal.  After the talks failed, opposition leader Antonis Samaras blamed the government for the failure and asked for early elections saying on television: "It is clear that the only one who can deliver a solution now is the Greek people," Reuters reports.  Analysts say that if Papandreou wins the confidence vote today, there might be no early elections and the chances increase that there is a sufficient majority in parliament to adopt the austerity plan.  To secure the support of the majority George Papaconstantinou had offered on Wednesday to soften some of the austerity measures, including not hiking the tax on heating fuel and keeping the tax-free threshold on property at €200,000 rather than €100,000, according to Reuters.  

The chances of a euro zone breakup are now increasing - The possibility of a euro zone dissolution are much more pronounced now. The recent BBC article “Greece crisis: Commissioners 'fear future of eurozone’” by Joe Lyman demonstrates how far we are from a proper resolution to Europe's sovereign debt crisis. More alarming was the subtext that:EU commissioners have a "profound sense of foreboding" about Greece and the future of the eurozone, a leaked account of a meeting has suggested. I highly recommend this article as background for the current political turmoil surrounding Greece. Here are the main political issues now at stake:

  • •Dithering on restructuring and default: “The ECB is not in favour or restructuring and haircuts” and “excludes all concepts that are not purely voluntary".
    •Opposition to bailouts outside the periphery:
    •Resistance to austerity:
    •Likelihood of more political unrest in the periphery:

IMF official 'concerned', ready to support Greece -"I'm concerned," Min Zhu, special adviser to the managing director of the International Monetary Fund, told a conference in Paris, as fears grew of a Greek debt default that could rock the eurozone. "The situation changed very dramatically in the last 24 hours," he said, after mass protests against austerity measures drove Greek Prime Minister George Papandreou to undertake a government reshuffle. "There is a lot of uncertainty," Zhu said. "We are working extremely hard on this issue. We are ready to provide support... It's an absolutely important issue today for Greece, for Europe and for the whole global economy."

Violence in Athens over Greek debt crisis - Greek bond yields soared as traders dumped the low-rated sovereign debt amid angry demonstrations and strikes in Greece. George Papandreou, the Greek prime minister, offered to resign as two more political supporters of his tough austerity measures defected. Mr Papandreou is in discussions with Antonis Samaras, leader of the main conservative opposition party, about forming a coalition to win cross-party support for the bail-out measures. A meeting of eurozone finance minister in Brussels on Tuesday failed to resolve the row between France and Germany over the Greek crisis. France, along with the European Central Bank, has argued that there should be no restructuring of Greek debt.

Greece general strike: protests in Athens – in pictures Guardian

2-Year Greek Bond Yield Hits 28.15%; Investors Bet on Prospect of 'Greek Accident' - Greek, Irish, and Portuguese yields are at or flirting with new all-time highs. Moreover, things are not looking pretty for Spanish and Italian bonds. Both trade at the upper end of their respective ranges yet German bond yields have fallen since the second week in April. The prospect of a messy default in Greece is rising, even though it appears the IMF will hold its nose and give Greece another trance of money. Credit default swaps price in a 75% chance of default in 5 years. However, Investors Now Bet On a 'Greek Accident' Within a YearA new bet has been placed on the Greek debt crisis. It backs a growing view among investors that Athens may be about to suffer a messy default that could spark a run on the country’s banks and a deeper euro zone crisis. “There is a meaningful chance of a Greek accident this summer. That involves a hard default and big losses for investors, which could have very worrying repercussions for the euro zone.” These fears have prompted bets on the so-called “accident scenario”, which involves buying one-year credit default swaps that would pay out big profits in the event of a hard default, typically a non-payment of loans, in the next 12 months.

Greece, Ireland, Portugal: Who Holds the Debt?. - With Greece’s debt travails very much in the news, and Portugal and Ireland starting to make more noise, let’s take a look at the estimated debt exposure of the three flailing countries. RBC Capital Markets compiled figures and did some analytical work to come up with who holds the sovereign debt of the three countries. German and French commercial banks are big players in all three countries, but the Eurocrats are even bigger holders. The biggest holders of sovereign debt in the three nations are asset managers, sovereign wealth funds and central banks. Here are RBC’s calculations: (Greece)

  • Domestic banks: EUR50 billion
  • German banks: EUR17 billion
  • French banks: EUR11 billion
  • Italian banks: EUR2 billion
  • Rest of Europe banks: EUR9 billion
  • Rest of World banks: EUR1 billion
  • IMF/EU: EUR53 billion
  • ECB: 47 billion
  • Asset managers, sovereign wealth funds, central banks: EUR151 billion

Greek Jan-May Budget Deficit Widens 12.9% On Year, Misses Target - Greece's state budget deficit widened 12.9% in the first five months of 2011 to EUR10.28 billion from EUR9.1 billion a year earlier, the finance ministry said Tuesday. The figure missed the government's target of EUR9.07 billion. According to the finance ministry's statement, net ordinary budget revenue for the five month period totaled EUR18.36 billion, down 7.1% from EUR19.76 billion in the same period of 2010 and a target of EUR20.52 billion. Ordinary budget outlays between January and May were up 6.4% to EUR27.59 billion, from EUR25.94 billion, and slightly above a target of EUR26.58 billion.

Greek Government in Turmoil Over Austerity Measures — The political crisis deepened in Greece1 on Thursday as Prime Minister George Papandreou2 scrambled to establish discipline within his own party a day after failing to secure a unity government amid a national uproar over unpopular austerity measures.  Mr. Papandreou’s increasingly divided Socialist Party was hit by the defections of two more lawmakers. Those were not expected to affect the Socialists’ narrow majority, as the seats will remain with the party, but they underscored the severity of the situation Mr. Papandreou finds himself in.  Mr. Papandreou was to hold an emergency session of the party’s parliamentary group at 4:30 p.m. local time, and people in the government said they still expected the prime minister to announce a cabinet reshuffle rather than a snap election later on Thursday.  One of the legislators who quit suggested that a snap election might be a solution to the crisis, but the other said such a course could be disastrous for the already beleaguered economy.

Europe's Greek Stress Test - Greek debt is in trouble—again. After a month of dickering, it seems likely that the International Monetary Fund and the European Union will agree to roll over Greece's debt so bondholders will be paid in full. Why is Europe so terrified of letting bondholders bear some of the risk that comes with high yields? The answer is that most of those bondholders are banks. If Greece defaults, then important French and German banks will be in deep trouble. Even a small rescheduling would force the banks to admit their losses. If Greece is allowed to default, reschedule or abandon its restructuring, Ireland, Portugal, Spain and Italy may soon follow. This scenario is beyond the EU's bailout capability. And it would leave the European financial system in shambles, because, again, the banks are holding that debt.

Private participation - So, Greece is the word today. If I understand the current impasse, much of the trouble is about how to engineer “private participation” in the losses that lenders to Greece and other debtors must eventually bear. The Eurocrats have decided they cannot allow Greece simply to default and impose haircuts on all of its creditors, and they cannot prevent a default by covering Greece’s solvency gap with public sector transfers alone. Despite European leaders’ best efforts to obfuscate and obscure transfers, creditor-state publics know they will be saddled with the lion’s share of these losses. They demand that private sector lenders bear at least a portion of the costs. Yet, there is no way to force a private bondholder to accept anything less than payment in full and on-time without that act constituting a default, thereby triggering the legal controversies and dangerous precedents that the Eurocrats are struggling to avoid. Suppose the EU were to organize a debt forgiveness fund. This would be a public sector entity whose purpose would be to help Greece and other troubled states retire their unpayable debt. Initially it would be financed by loans from EU member states. With the fund’s help, Greece would make all payments on time and in full. The fund’s contributions would constitute outright transfers. Greece would have eliminated, not postponed its obligations.

Unemployment rate in Greece: seriously unchartered territory - Rebecca Wilder - And you wonder why the Greek citizens are pushing back against austerity. Today the National Statistical Service of Greece released its quarterly labour force figures. From today's release (.pdf): In the 1st Quarter of 2011 the number of employed amounted to 4,194,429 persons while the number of unemployed amounted to 792,601. The unemployment rate was 15.9% compared with 14.2% in the previous quarter, and 11.7% in the corresponding quarter of 2010 . According to the labour market, debt deflation, 'infernal devaluation' (as Marshall Auerback puts it) is taking its toll on the real economy. The unemployment rate is (WAY) higher now than it was even before Greece joined the Euro area (2001). The release also reports the female unemployment rate, which stood at 19.5% in Q1 2011 and up from 15.5% in Q1 2010. Furthermore, the aged 15-29 unemployment rate stood at 30.9% (35.8% for females) in Q1 2011, up from 22.3% in Q1 2010. Key parts of the labour force are being hit harder than others, i.e., young and female vs. males aged 30-44. You wonder who's rioting? I bet its those younger citizens, 30% of the labour force, that are not working but WANT TO. This is a problem that's not going to disappear with more austerity.

Greece, Ireland, Portugal Lead Sovereign Credit-Default Swaps to Records - The cost of insuring against default on Greek, Irish and Portuguese government debt surged to records, driving a gauge of sovereign bond risk to an all-time high, on concern Europe’s deficit crisis is worsening.  Credit-default swaps on Greece soared 435 basis points to 2,189, while Ireland rose 37 to 799 and Portugal climbed 21 to 806, according to CMA prices at 5 p.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 9 basis points to 235. An increase signals deteriorating perceptions of credit quality.  Investors are betting Greece will default if it’s unable to pass the austerity measures needed to qualify for the next installment of international aid. Greek Prime Minister George Papandreou was set to shuffle his Cabinet and seek to win a confidence vote today as protests over budget cuts fueled speculation the measures will be put in jeopardy.

Europe's 'Lehman Moment' Looms as Greek Debt Unravels Markets ...The European Union’s failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives.  The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won’t pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November.  Market moves suggest heightened concern that authorities won’t be able to keep Greece’s debt troubles from spreading after Moody’s Investors Service said it may downgrade BNP Paribas SA and two other big French banks because of their investments in the southern European nation. The collapse of Lehman Brothers Holdings Inc. in September 2008 caused credit markets worldwide to freeze as investors fled all but the safest government debt.  “The probability of a eurozone Lehman moment is increasing,”

Can kicked? - WHAT to make of the latest news out of Europe? Let's back up a bit.Europe and the IMF put together a broad aid plan to help the Greek government meet its financial obligations. That plan will eventually need to be replaced with a new plan, seeing as how the Greek government won't be borrowing in private markets anytime soon. Europe hasn't been able to agree a new plan, largely because they can't figure out how to get private creditors to take a haircut without sending Greece into default. The IMF, however, doesn't like making loan payments to borrowers without a longer-term financing plan in place. Because there was no new plan, the IMF threatened to withhold its contribution to the next payment, and fears developed that Greece might be driven to a chaotic default. Having seen that Germany and the ECB really aren't close to agreement on restructuring, the IMF seems to have backed down. The European Union's top economic official strongly hinted this morning that an understanding with the IMF is likely to be reached over the weekend, such that IMF payments can continue.

Greenspan Tells Charlie Rose Default by Greece ‘Almost Certain’ - Alan Greenspan, former Federal Reserve chairman, said a default by Greece is “almost certain” and could help drive the U.S. economy into recession. “The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan, 85, said in an interview today with Charlie Rose in New York. “The chances of Greece not defaulting are very small.” Greek government bonds slumped, pushing the yield on the two-year note above 30 percent for the first time, as Prime Minister George Papandreou’s failure to win support for more austerity fueled speculation the European country will fail to meet its obligations. More than 20,000 people protested in Athens this week against wage reductions and tax increases, with police using tear gas on crowds and strikes paralyzing ports, banks, hospitals and state-run companies. The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” said Greenspan, who ran the central bank from 1987 to 2006. That may leave some U.S. banks “up against the wall.”

Why a Greek default won’t ever be priced in - Back on May 26, I was skeptical that Greek bonds were pricing in a massive default, despite the fact that the likes of Martin Feldstein were saying that they were. But even if they weren’t back then, we’re getting closer now. The numbers, courtesy of Peter Rudegair: Greek CDS spreads were 1,400bp on May 26; now they’re more like 1,900bp. Greek 10-year bonds were yielding 16.4% back then; they closed today at 18.3%, with prices at about 50 cents on the dollar, and the Thomson Reuters default-probability calculation is now over 90% for Greece. Which means it’s time for an article saying that default is not priced in yet at all: Today’s rising bond yields, stratospheric insurance costs and heavily pressured stock prices may only be a taste of what could come if euro zone leaders fail to halt Greece’s decline and ring-fence it from others. In short, a lot of markets and bond holders have not priced in some of the worst outcomes…“The main case that people are assuming is that when push comes to shove Europe and the IMF will step up,”

Greek crisis threatens European decade of economic implosion  - El-Erian - From day one, immense challenges faced the coalition of international institutions that opted for a liquidity approach to address Greece’s debt solvency problems. Now that this coalition is stumbling and bickering publicly, the outlook for Greece has taken a significant turn for the worse. Even as George Papandreou, the Greek prime minister, prepares to reshuffle his cabinet, he must know his nation’s predicament is now extremely hard to reverse. It is now commonly accepted that Greece’s predicament is due to two inter-related problems: the economy is unable to grow, and the debt burden is enormous. Yet neither has influenced sufficiently the approach that has been adopted by the crisis management coalition, consisting of the Greek government, its European creditors (namely other eurozone governments, the European Commission and the European Central Bank) and the International Monetary Fund. Instead, the focus has been on dramatic austerity for Greece and massive loans from the official creditors. Not surprisingly, every economic, financial and social indicator for the Greek economy has deteriorated. This has happened both in absolutes term and, more alarmingly, relative to the coalition’s already grim expectations. Such failure naturally encourages a blame game, and sadly that is exactly what is now happening.

EU Rehn Confident Next Greece Loan Tranche Approval Sunday - Euro-zone governments will agree at a meeting starting Sunday in Luxembourg to pay the next installment of rescue loans for Greece, while delaying the final decision on a longer-term Greek aid package until July, European Union economics commissioner Olli Rehn said in a statement Thursday.  Rehn strongly implied that the International Monetary Fund, which must also sign off on the loan payment, would agree even if euro-zone governments haven't put a multi-year financing plan in place for the country.

Greek Default Would Not Destabilize the Euro - Bundesbank President Jens Weidmann raised the pressure on governments to agree to a Greek bailout without the European Central Bank taking part in easing the country’s debt burden, saying the euro can withstand a default. Weidmann said the ECB was unwilling to turn its emergency bond-buying program into a “lasting institution” and that Greece’s implementation of austerity measures and asset sales was crucial to securing the handout to prevent a default. He spoke in an interview with German newspaper Welt am Sonntag. “If the commitments are not met, that cancels the basis for further funds from the aid package,” Weidmann told the newspaper. “This would be Greece’s decision, and the country then would have to bear the surely dramatic economic consequences of a default. I don’t think this would be sensible, and it would surely put partner countries in a difficult situation. But the euro would even in this case remain stable.”

Clear Position Is Greek Default Should Be Avoided - Report - It is the clear position of the European Central Bank that a Greek default in any form should be avoided, as should any action in the Greek crisis that would spawn a credit event, ECB President Jean-Claude Trichet says in an interview to be released Friday.  "We are telling them that doing anything that would create a credit event or selective default or default is not advisable," he says.  Still it remains the decision of political authorities and the ECB will act accordingly, based on decisions made, he notes. "But again, we are saying very clearly that they should avoid compulsion, credit event, or selective default or default. Our position is clear."

Greece may view euro exit, debt default as best option in financial crisis - THE European Union, European Central Bank and the International Monetary Fund are negotiating hard among themselves about how to structure debt relief for the Greek economy. The latest reports suggest they might have come up with a temporary deal among themselves. But what the EU, ECB and IMF want won't matter unless they get the Greek government to play as well. And that's by no means assured. For one thing, Greeks are growing fed up with austerity and seem very unwilling to take on the still stricter conditions being demanded of them to win fresh funding and avoid default. The Greek economy has taken a beating during the past couple of years. Non-stop, large-scale political protests, routine general strikes and parliamentary rebellion have brought Athenian streets to a standstill. And Prime Minister George Papandreou's government is teetering. Greeks are starting to question whether there might not be an easier way out of their crisis. And inevitably, Argentina's experience a decade ago has been attracting plenty of interest.

Is internal devaluation enough? Probably not, very unlikely...No - Rebecca Wilder - The IMF produced an interesting paper, "Euro Area Export Performance and Competitiveness", that could have policy implications for the effectiveness of internal devaluation on intra-Euro area export demand. As I interpret Table 1, page 13, intra-Euro area exports are less sensitive to foreign demand (like German demand for Spanish exports, for example) and more sensitive to measures of 'competitiveness' than are extra-Euro area exports. One could argue the following: these results demonstrate that internal devaluation has a better chance of working for trade within the Euro area than it would for other countries that aren't part of a single-currency union. The policy implication is that gained relative competitiveness via fiscal austerity in Spain, Greece, and Ireland has a fighting chance to produce a positive growth outcome. (If you want to skip to the end of this article, I present another interpretation of the results.) We are seeing evidence of internal devaluation rebalancing trade within the Euro area in the data. The chart below illustrates the shift in the trade balances on a rolling 12-month basis and as a share of GDP across key Euro area countries (click to enlarge).

Worries Grow About Breadth of Debt Crisis - Two Deutsche Bank strategists, Jim Reid and Colin Tan, warned in a report on Thursday that this Greek crisis had echoes of the collapse of the Lehman Brothers investment bank in September 2008, an event that plunged the financial system into chaos and required the commitment of trillions of dollars in government support to stave off another Great Depression. “Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” they wrote. “The period is resembling the buildup to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.” One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. The European Central Bank, too, is a big holder of debt, and analysts said in the event of a default it might need to be recapitalized, another blow to confidence.Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day.

Is Greece the next Lehman? - We can all remember the sudden collapse of Lehman Brothers in September 2008, the official launch of the last financial crisis. Panicked investors dumped stocks and bonds around the globe in a desperate flight to cash and quality. Credit froze. Banks buckled. Recession bit hard. Unemployment soared.   And here we are, almost three years later, confronted by another possible bankruptcy, that of Greece. We're talking about a country, not a financial institution, but we can paint an ugly scenario in which the impact of a Greek default would reverberate across the world just like Lehman's demise. Bondholders hit by losses on Greek debt dump the bonds of the other PIIGS like Ireland, Portugal and Spain, intensifying the European debt crisis. Perhaps the euro zone folds up. Panicked investors sell off stocks and bonds in emerging markets and anything else considered risky. Financial markets freeze up as banks, swamped by new losses, lock down credit. And worst of all, a default by Greece causes confidence in other indebted sovereigns to wobble, sparking debt crisis for the U.K, Japan – even (oh horror of horrors) the United States.  How likely is it? Can Greece be the next Lehman?

Parsing banks’ exposure to Greece - The Guardian has UBS data on the exposure that European banks have to Greek sovereign debt; the grand total, of €93 billion, seems low to me, especially when you back out the €46 billion owned by Greek banks. Add up all the French banks combined and you get to €9.3 billion; Germany’s even lower, at €7.9 billion. All of these sums are entirely manageable and imply that the impact of a Greek default on European bank solvency would be de minimis. But those aren’t the only numbers out there. Kash has found data from the BIS which shows much larger exposures: $65 billion in France, $40 billion in Germany. (And another $40 billion in the US, which I’ll come to in a minute.) But it’s worth looking at the raw data here — which is found on pages 102 and 103 of the PDF. The French $65 billion is made up of $57 billion in direct exposure, and $8 billion in potential derivatives exposure. And of that $57 billion, just $2 billion is held by banks: most is held by the public sector and the non-bank private sector. In Germany, too, direct exposure of banks to Greece is a mere $2 billion — and total derivatives exposure is even lower than in France.

Worries Grow About Breadth of Debt Crisis - The worry is that the worst case, a Greek debt default, would lead to damaging losses for European banks and spur a global panic, replaying the events of September 2008. Then, investors fled all but the safest government debt, unloading everything from corporate bonds to American and emerging country stocks. Global markets froze.  As European officials headed into a long weekend of critical talks, the European Union1 and the International Monetary Fund2 said that they were confident of a deal to secure a vital 12 billion euros ($17 billion) in outside aid needed to stave off an imminent Greek default.  The comments, reflecting belated advances in negotiations that have been going on for weeks, were aimed at calming anxious financial markets. But so far, the deepening concerns are stopping short of transferring forcefully to the United States. For the time being at least, investors seem to believe enough shock absorbers have been built in to comfortably withstand any default by Greece3 or other highly debt-ridden nation.

Greek default could trigger chain reaction - Greece's economy is small but the shock waves from a default on its debt could be amplified by links in the global financial system to hurt stocks, banks and entire economies far from the epicenter in Athens. In Greece, banks could go bust, overwhelming the government's ability to bail them out, and lenders in France, Germany and elsewhere in Europe could suffer serious losses. And the resulting market turmoil could strain the European' Union's backstop fund, pushing European leaders to drum up yet more taxpayer financing, with voters already annoyed at funding other people's failed governments. The exact effects of a Greek debt implosion are hard to anticipate, in part because no one knows how big the losses would be for bond holders, who stand first in the chain of dominoes. Forced losses of 50 percent would be one thing, a voluntary stretchout of repayment another. Beyond the immediate hit to banks, the biggest fear is that of contagion—a difficult-to-predict chain reaction that could roil markets and make it harder for other indebted countries to cope with their debts, with the result being higher borrowing costs for eurozone countries.

Default by Greece may start the global restructuring process - The Office of the Comptroller of the Currency and other regulators recently issued a request for comments on “Proposed Guidance on Stress Testing for Banking Organizations with More than $10 Billion in Total Consolidated Assets.” My firm and many others will be responding to the informational request, but the initiative is more than a little surreal.  Stress levels at the large banks included in the stress test exercise remain high by historical standards, as shown by this chart of gross charge-offs for the large bank peer group and Citigroup. Federa Reserve Board governor Daniel Tarullo has recently indicated that the largest banks may be required to hold more capital to protect the global financial system from the risk of failure.  Higher capital means less leverage, less lending, and lower earnings and dividends, hardly a prescription for fueling an economic boom.   Individual and corporate savers are transferring hundreds of billions per year to the banking sector, yet solvency issues still remain unresolved. Yet even as Tarullo and his colleagues in the US and other industrial nations talk about capital adequacy, the global financial system and the largest banks remain faced with more basic issues of excessive debt.   The situation in Europe with Greece, Ireland and other supposedly “peripheral” states facing default is the current focus of market attention.

The IMF blinked first: Greece will not default this month. The IMF has now agreed with the EU that the fifth tranche of the loan could be paid in June, which allows the negotiations for the next Greek loan package to be postponed until after the summer. An immediate bankruptcy of Greece has thus been avoided, but the markets now seem to have concluded that Greece will default sooner or later, and that the eurozone will crack up. Bond spreads rose all over the eurozone periphery. Most worrying is Spain, where spreads rose to over 270bp yesterday, approaching the records of last year, a sign that contagion fears are rising. Over the last 30 days, the Spanish spreads went up from 214bp to 274bp. Yesterday’s nervousness was aggravated by poor demand in the latest Spanish bond auction. The rise in spreads reflects the fear in market that the EU is not on top of this problem, as the crisis drags on and on.  The EU is now facing calls from the US but also China to end the crisis, but there is at present no prospect of that happening. Germany still insists on a substantial and quantifiable private-sector involvement, and this holds up negotiations in the Ecofin. It is possible that they might achieve a deal next week, but at least they have a backstop if they don’t.

Germany Backs Down From Confrontation With E.C.B. Over Greece - Germany backed away Friday from a confrontation with the European Central Bank over a new bailout package for Greece, agreeing under pressure from France not to force private investors to shoulder some of the burden.  The German government’s previous insistence on what the finance minister called “fair burden sharing” had renewed market jitters by threatening to derail negotiations on the second rescue, which will be needed to avert another financing crisis next year.  Chancellor Angela Merkel and the French President Nicolas Sarkozy announced the agreement after a two-hour meeting in Berlin.  “We would like to have a participation of private creditors on a voluntary basis,” Mrs. Merkel said at joint news conference with Mr. Sarkozy.  “This should be worked out jointly with the E.C.B.,” she added. “There shouldn't be any dispute with the E.C.B. on this.”

Merkel Agrees to Voluntary Greece Bondholder Role - Chancellor Angela Merkel retreated from German demands that bondholders be forced to shoulder a “substantial” share of a Greek rescue, saying she’ll work with the European Central Bank to avoid disrupting markets. “We would like to have a participation of private creditors on a voluntary basis,” Merkel told reporters in Berlin today at a joint press conference with French President Nicolas Sarkozy. This “should be worked out jointly with the ECB and there shouldn’t be any dispute with the ECB on this.” Merkel declined to give a date for the package to be worked out, saying the matter must be resolved “as quickly as possible.” European finance ministers next meet on Greece in Luxembourg on June 19-20, followed by a Brussels summit of European Union leaders on June 23-24. “The aim is involvement of the private sector on a voluntary basis and for that the Vienna Initiative, as it’s called, is a good basis,” Merkel said. “I think we can achieve something on this basis.” A rollover involves reinvesting the proceeds from maturing bonds in new securities.

Germany concedes on Greek debt deal - Germany has backed down from its confrontation with the European Central Bank over bondholders’ participation in a new Greek rescue programme, throwing its weight behind a voluntary rollover of Greek debt rather than a full-scale debt exchange with extended maturities. The deal, announced in Berlin by Angela Merkel, German chancellor, and French president Nicolas Sarkozy on Friday, lifted global markets on hopes that European leaders will be able to reach early agreement on a financial rescue package. The grim mood in Athens also lifted as George Papandreou, the Greek prime minister, announced a new cabinet dominated by tough socialist personalities, including Evangelos Venizelos, a populist politician and former political rival, as finance minister. His move is an attempt to win parliamentary approval by the end of this month for a four-year package of new austerity measures, including a radical privatisation plan agreed with the European Union and the International Monetary Fund as the precondition for a further rescue programme.

Merkel Wimps Out, Agrees to Laughable "Voluntary" Solution to Mess in Greece; Four Things to Expect Shortly - The Euro is up sharply today on news of a "solution" that allegedly involves "voluntary" rollover of Greek bonds by private investors. The whole world knows there is nothing voluntary about it. Moody's has even stated it will not be considered voluntary. However, such details do not stop stubborn fools like ECB president Jean-Claude Trichet and French president Nicolas Sarkozy from insisting they can dictate solutions to the market. On the "news" which everyone knew was coming, 2-year Greek bonds fell to 27.52% from 29.69% but are now trading at 28.03%. As we all knew she would Merkel caved in to demands from Sarkozy and the ECB. Whether or not the German parliament will go along remains to be seen. Bets are also off if Greek Prime minister George Papandreou does not survive an upcoming "vote of confidence". If Papandreou hangs on, it will be by 1-3 votes out of 300, hardly confidence inspiring. One way or another, Papandreou will not survive this fiasco. The only question is whether he is booted out sooner rather than later.

Kicking the can down to the European summit, and beyond - The pattern is repeating itself. The finance ministers cannot agree, and shift the debate up to the European Council, who will present the miracle of an agreement at next week’s European Council (a stage set that unfortunately creates much uncertainty, and actual damage in the meantime).  Germany already seems to be backing down. We will not do anything against the explicit advice of the ECB”, Steffen Kampeter, a state secretary in Wolfgang Schäuble’s finance ministry yesterday said, according to Handelsblatt. And that means that they will at most agree some fig-leaf private sector involvement. (It seems to us another example of politics intended for domestic consumption, except that this trick no longer works in an integrated monetary union. The Bundestag and the German media perfectly understand the message,  and are already about a German defeat.)  The outcome will be a purely voluntary rescheduling, which is a euphemism for “no rescheduling”, as nobody in their right mind would voluntarily take up any exchange offer, and to the extent they do, the rating agencies, and everybody else, will conclude that they have been forced. At yesterday’s unscheduled eurogroup meeting, Schäuble launch a last-ditch attempt to save his plan, but there was no majority in support. There will be another meeting on Sunday night in Luxembourg ahead of next week’s scheduled meetings, which will be followed by the EU summit.

UBS, Credit Suisse Must Bolster 'Thin' Capital Buffers, Central Bank Says - The Swiss central bank has sounded a warning over the health of the country's two biggest banks, saying they could face "considerable losses" if sovereign debt crises elsewhere worsen. As southern European neighbour Greece edged closer to the brink of a debt default, Thomas Jordan cautioned that Credit Suisse and UBS could be put at risk. In a news conference in Berne on Thursday morning, the Swiss National Bank vice chairman claimed that the banks' exposure to peripheral eurozone countries such as Greece was only "moderate". However he noted that Credit Suisse and UBS remain some way off meeting new international capital standards under the Basel III accord, saying reserves are still "not fully loss-absorbing". "[The banks'] exposure to credit and market risk relative to their capital remains considerable,"

Berlusconi allies in disarray after referendum blow (Reuters) – Italian Prime Minister Silvio Berlusconi’s centre-right government struggled to respond on Tuesday to a crushing referendum loss that even his supporters saw as a “hammer blow.”Berlusconi was under increasing pressure from his allies to make tax cuts to restore the government’s popularity following the highest turnout for a referendum in more than 16 years. Italians voted overwhelmingly in favour of four proposals to repeal Berlusconi-era laws on nuclear energy, water privatisation and trial immunity for government ministers. “If the vote in the local elections was a slap in the face, this is a KO for the centre-right,” the daily Corriere della Sera newspaper said in an editorial.

Analysis: Berlusconi's 17 years of dominance draw to a close Reuters (Reuters) - After 17 years, Italians finally seem to have had enough of Silvio Berlusconi. Massive defeat in four referendums on nuclear energy, water privatization and trial immunity for ministers last weekend were the biggest blow in an annus horribilis for the prime minister that many analysts say signals the start of a new era. 'He will not come back up. We cannot say how long the descent will take but certainly it will be fairly rapid,' Professor Gianfranco Pasquino of Bologna university told Reuters. Some 27 million Italians voted overwhelmingly in favor of referendums that Berlusconi had urged them to boycott. His humiliation opened a period of deep uncertainty and has generated what could be risky pressure to ease fiscal policy. The Italian prime minister's frequent gaffes and off-color jokes have given him a dubious international reputation that obscured his undoubted skills as a politician and communicator. Since bursting on to the scene in 1994, filling a vacuum on the center-right created by the destruction of the Christian Democrat party in a huge corruption scandal, he has dominated Italian politics and headed three governments."

Moody's puts French banks on review for downgrade over Greece (Reuters) - Moody's Investors Service on Wednesday placed France's top three banks, BNP Paribas, Societe Generale and Credit Agricole (CASA), on review for a possible downgrade, citing the banks exposure to Greece's debt crisis."Today's actions reflect Moody's concerns about these banks' exposures to the Greek economy, either through direct holdings of government bonds or credit extended to the Greek private sector directly or through subsidiaries operating in Greece, a key factor for CASA and SocGen due to their local Greek banks," Moody's said in a note. Euro zone ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on the leaders of Germany and France to forge a deal later this week.

French Banks Warned on Their Greek Debt —Europe's sovereign-debt crisis washed closer to U.S. shores Wednesday after Moody's Investors Service warned it may downgrade three French banks that rely heavily on U.S. money funds for short-term financing. Moody's cited the banks' exposure to Greek debt, and added that it may do the same to other euro-zone banks.  The three banks—BNP Paribas SA, Crédit Agricole SA and Société Générale SA—have all said recently that their exposure to Greece remains manageable. Analysts say a Greek default would cause them only small declines in the capital ratios used to measure financial strength.

EURO GOVT-Spanish yields soar after luke-warm auctions - Spanish 10-year government bond yields hit 11-year highs on Thursday and other peripheral bonds suffered after tepid demand at a Spanish debt auction added to concerns that Greece's debt crisis is spilling over.Fears that policymakers are struggling to find a solution to avoid a default for debt-laden Athens combined with worries over the stability of the Greek government to push investors into safe-haven core debt. That supported a French bond sale but did little to help a 2.8 billion euro auction of 10- and 15-year Spanish paper "We've already seen a decent concession going into the (Spanish) auction so they had to concede quite a substantial amount to investors in order to get them to buy," said WestLB rate strategist Michael Leister."As we saw in Greece and the other countries, you can fund yourself and get liquidity but the crucial issue at some point in time becomes the price. Here it seems Spain is clearly heading in the wrong direction."

Spanish 10-year bond yields remain near 11-year high as Greek debt saga drags on - The yield on Spanish 10-year bonds hovered round 11-year highs Friday as investors remained concerned that Greece’s debt crisis will spread to other countries. The yield stood at 5.58 percent on the secondary market in afternoon trading, a little down on the 5.70 percent peak struck on Thursday. And the spread, or difference between the yield on 10-year bonds and the benchmark German equivalent, ended Thursday at 274 basis points — close to a record set late last year. Rising contagion concerns were also evident in a Spanish bond auction Thursday. Though it went relatively well in terms of demand, the average rate demanded for the 15-year bonds spiked to a euro-era high of just over 6 percent. The Spanish government insists the public finances are on the mend and that it won’t join Greece, Ireland and Portugal in getting a financial bailout.

Hungary to cut govt debt to 77% by July, says PM - The Hungarian government will reduce the country's state debt from 81% of GDP to 77% in a single step to be announced next week, Prime Minister Viktor Orbán told journalists in Belgrade on Tuesday.   Orbán was probably referring to the withdrawal of government securities that are transferred to the state from private pension funds. Hungarian private pension fund members had until the end of January to opt out of a move, together with their pension assets, to the state pension pillar. About 97% of private pension fund members are returning to the pillar. Private pension funds must transfer the assets of members returning to the state pillar to the Pension Reform and Debt Reduction Fund by June 14. Government securities transferred in the portfolio will be withdrawn, thus reducing state debt. László András Borbély, deputy CEO of Hungary's government debt management agency ÁKK, earlier said that the government securities in the private pension portfolio were worth the equivalent of 4-4.5% of GDP, and state debt could drop as a result by a similar rate in June. More than HUF 2,800 billion in private pension fund assets are being transferred to the state pension pillar, pension fund association Stabilitás said early in June, citing preliminary data after the valuation date for the transfer. 

China Discloses "Vital Self Interests" In European Bailout - The country which has so far been doubling down on its losses in European bond exposure, much to the amusement of cynical onlookers, has finally disclosed that Europe is the locus of Chinese vital self interests, and that should Europe go down, one very major domino would be the implosion of China itself. Per Reuters: "China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner. At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade..."Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said.

IMF Sees Risks to Global Economy Mounting - The International Monetary Fund released its latest global economic forecast Friday, cataloging risks that have piled up in the world economy over just the past two months. The IMF says it still expects global growth of 4.3% this year, down slightly from the 4.4% estimate offered in April in what it called a “mild slowdown of the global expansion.” Among advanced economies, the U.S. is seen growing at 2.5% (slower than the prior 2.8% estimate) while Japan is expected to contract 0.7% (instead of 1.4% growth). In the update to the World Economic Outlook, the IMF’s economists said greater-than-expected weakness in U.S. activity and renewed financial volatility from the euro zone’s fiscal troubles “pose greater downside risks” to the world economy. They also cited more risks from “persistent fiscal and financial sector imbalances in many advanced economies” along with signs of overheating in emerging and developing economies, which are maintaining their strong growth prospects.

A euro-zone straitjacket? - LATVIA and Iceland successfully issued sovereign bonds at yields approaching Spain's last week. There are rumours that Dubai may follow suit. That the countries which started the sovereign debt crisis are returning to the market while peripheral euro-zone sovereigns continue to struggle has led to crowing from those who see austerity as a misguided strategy for Greece, Ireland and Portugal.The facts certainly suggest that the yoke of a single currency is a barrier to recovery. Iceland’s krona has halved in value since the crisis began, providing a stimulus to exports unavailable to euro-zone governments. Iceland let its banks go bust, whereas Ireland’s decision to stand behind hers led directly to the spike in Irish bond yields. Amid a temporary wobble in its currency peg to the euro, Latvia's government called on foreign banks, which had provided euro-denominated mortgages to Latvians, to accept writedowns. Even Dubai seems to provide a lesson for Ireland in how to deal with its banking debt; while Dubai kept up payments on its official sovereign bonds, it aggressively restructured the private debt of state-owned companies.

Iceland's Banks Come in From the Cold - Iceland's government last week raised $1 billion through an issue of five-year bonds at yields just above 3%. This successful return to private debt markets presents the best evidence yet that financiers approve of Reykjavik's handling of the financial crisis and think the country is on the road to recovery. Therein lies a lesson for the rest of Europe. Three years ago, Iceland forced its over-leveraged financial sector into a painful debt restructuring instead of bailing out its banks. The government had no other choice: Icelandic banks' assets totalled roughly 1,000% of GDP, and in the world's smallest currency area, no less. The central bank could not take on the role of lender of last resort without igniting a currency crisis.  Critics dubbed this response disastrous, and Iceland served as the cautionary tale of an "Icarus economy" whose banks had grown too big to save. Today, though Iceland's banking system defaulted, its government remains solvent, with debt levels close to the European average of between 80% and 90% of GDP.  Iceland's luck was that it did not qualify for a bailout. Since Iceland was not part of the European Union and the failure of its banking system wasn't sparking any "contagion" fears, no other major central banks were willing to lend to a hypothetical Icelandic bank-bailout scheme. When the government attempted on its own to take over one of the island's three banks, investors rushed to retrieve their funds, and in one week, Iceland's financial system was drained of liquidity.

Iceland Is Crowdsourcing Its New Constitution -As every news organization in America crowdsources their Palin email research, Iceland is months deep in a project to crowdsource the writing of a new constitution. The recovering European nation's existing constitution is essentially a carbon copy of Denmark's, Iceland claiming independence from Denmark in 1944. There were slight adjustments, like replacing the word "king" with "president," but after the financial crisis that brought Iceland's economy to its knees in 2008, the country's decided to start from scratch. The approach uses a combination of social media platforms--Facebook, Twitter, YouTube, Flickr--to gather suggestions from the citizens, and members of a consitutional council post drafts on their website every week. FromThe Guardian's report:"I believe this is the first time a constitution is being drafted basically on the internet," said Thorvaldur Gylfason, member of Iceland's constitutional council. "The public sees the constitution come into being before their eyes … This is very different from old times where constitution makers sometimes found it better to find themselves a remote spot out of sight, out of touch."

Teachers vote to strike in row over pensions - Two of Britain's largest teaching unions on Wednesday confirmed plans to strike on June 30 in protest at pension changes. The National Union of Teachers (NUT) and the Association of Teachers and Lecturers (ATL) confirmed the walkout after their combined 380,000 members voted overwhelmingly in favour of industrial action. The one-day strike will be the first mass walkout by teachers since 1986 and threatens the closure of up to 23,000 schools. The NUT last staged a walkout in 2008 but it was the first time the moderate ATL has voted to strike in its 127-year history. NUT general secretary Christine Blower said: "Teachers do not take strike action lightly but the overwhelming support for action by NUT members shows that teachers feel what is happening to their pensions is wrong." ATL president Andy Brown said teachers waited until the end of the exam season before calling the stoppage. 

Can the Bank of England tame credit boom and bust? - Credit-addled Britain and its debt-soaked economy means that the Bank of England (BoE) will this week become, in my opinion, the most powerful entity in the land. Threadneedle Street will certainly assume more power than most Government departments at the inauguration of its Financial Policy Committee. More than that, in an exclusive TV interview with Economics Editor Faisal Islam, the Bank of England's Andrew Haldane said from this week will be now accountable to "households and companies up and down the country".He said: "We are setting financial policy not as a means of protecting the banks but as a means of protecting the economy from the misfortunes of the banks and the wider financial system."Historically, too often we thought about our stakeholders as being people within a square mile of where we both sit. That with the advent of the Financial Policy Committee will change."

We're only halfway through seven lean years, warns Governor of the Bank of England - Britain could be only halfway through ‘seven lean years’ before the economy returns to full health, Sir Mervyn King said last night. But the Bank of England governor said the Government must not waver over tackling the huge budget deficit. In a stern lecture at London’s Mansion House, he warned that the failures during ‘seven years of plenty’ before 2007 would threaten the economy until 2014. But to the relief of consumers, he made clear that he is in no hurry to raise interest rates from the present 0.5 per cent to combat rampant inflation. Sir Mervyn endorsed Chancellor George Osborne’s deficit reduction measures, appearing to dismiss Labour’s calls for a change of course. ‘Of course, there can always be differences of judgment about the overall stance of policy, but to change the broad policy mix would make little sense,’ he said. But his remarks on interest rates put him at odds with hardliners on the rate-setting Monetary Policy Committee who are urging a rise.

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