week ending June 11

Fed balance sheet grows to record $2.82 trillion - The Federal Reserve's balance sheet expanded to a record $2.81 trillion in the week ended June 8 from $2.79 trillion in the prior week, the central bank said Thursday. The Fed balance sheet continues to set weekly records as the central bank completes its plan to purchase $600 billion in Treasurys by the end of June. The Fed is buying bonds to try to ease financial conditions and lower long-term interest rates under its plan, dubbed quantitative easing or QE2. Fed officials have begun to discuss how to shrink the bloated balance sheet, according to the minutes of their April meeting. Fed officials eventually want to return to holding only Treasurys and get the balance sheet back to pre-crisis levels, but some Fed officials believe the process could take five years. The Fed's assets and liabilities were only $870 billion in December 2007. The report shows that the Fed's holdings of Treasurys rose to $1.55 trillion from $1.53 trillion in the previous week. The Fed's holdings of mortgage-backed securities remained steady at $917.9 billion. Bank reserves rose slightly to $1.66 trillion from $1.59 trillion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 9, 2011 

Fed became second-largest Treasury investor in Q1 (Reuters) - The Federal Reserve overtook household investors as the second-largest holder of Treasuries in the first quarter, after foreigners, as the U.S. central bank purchased bonds as part of its second round of quantitative easing, Fed data released on Thursday showed. The Fed's $600 billion bond purchase program has displaced a number of traditional Treasury buyers as the central bank sought to stimulate the economy and drive investment into alternative asset classes. There has been fierce debate over whether other investors will step in to replace the Fed when its ends the bond purchase program at the end of this month. Fed data shows that households, previously the second-largest Treasury investor group, stepped out heavily in the first quarter, the first full quarter of the Fed buying program that began in late November. The households category, which includes some hedge funds, posted a net outflow of $155 billion to total $959.4 billion, its lowest holding since the first quarter of 2010.

Fed’s Fisher: QE2 Bond Buying Ends In June As Planned The Federal Reserve has done more than enough to get the economy back on track, and it will do no more, a top Federal Reserve official said in an interview Tuesday. Dallas Fed President Richard Fisher said that when it comes to the central bank bond buying program referred to as QE2, “it’s over at the end of June,” as planned. “My vote will be not to extend it, and I doubt there will be much discussion about extending it” among other policymakers, Fisher said.  “We’ve done an awful lot” to aid the economy in light of zero percent interest rates and large scale purchases of things like Treasury and mortgage-related securities, Fisher said. “We’ve provided the fuel. The real issue is who is going to step on the accelerator” and boost economic activity, he said. The central banker noted consumers and firms are still traumatized by the economic and financial difficulties of recent years, and that’s part of why growth levels are still struggling. But he does expect activity to pick up: “The next half of the year will have better growth than we’ve seen recently,” The official also noted unemployment won’t fall as fast as many would like to see.

Fed's Plosser: Jobs data doesn't change view - – Weak jobs figures on Friday do not change the fundamental outlook for the U.S. economy and monetary policy could be tightened by the end of the year, a top Federal Reserve official said on Monday. Philadelphia Federal Reserve Bank President Charles Plosser, a well-known inflation hawk who has a vote on policy this year, has said he believes the U.S. economy was in a gradual recovery. "Certainly, the employment numbers that came out in the United States on Friday were disappointing... But I'm not seeing anything fundamental has changed in my view of the medium term outlook," he told reporters after a conference in Helsinki. Asked about the chances of tighter policy in 2011, he said: "It's certainly possible by the end of the year," though he added much depended on how the economy performed.

Fisher Says Central Bank Has ‘Done Enough if Not Too Much’ to Help Economy - Federal Reserve Bank of Dallas President Richard Fisher said the central bank has “done enough if not too much” to stimulate the economy and “one has to question the efficacy” of doing more. While “it’s going to be a very slow slog” for the economy, the U.S. should grow at more than a 3 percent annual rate in the second half of this year, Fisher, 62, said today in response to audience questions after a speech in New York.  Fisher has said he will be among the first policy makers to push for a reversal of policy as needed. The Dallas chief, who votes on the Federal Open Market Committee this year, dissented five times in favor of tighter policy the last time he was a voting member in 2008. In his speech, Fisher reiterated his view that the nation’s largest banks may eventually need to be broken up to prevent them from posing threats to stability and economic growth. He echoed concerns among Fed district bank presidents, including Thomas Hoenig of Kansas City and James Bullard of St. Louis, that the financial-overhaul law enacted last year may not be strong enough to solve the too-big-to-fail problem and to prevent a meltdown by one or more big banks from damaging the economy.

Fed's Hoenig Urges Return to 1% Interest Rate Within a Year - Federal Reserve Bank of Kansas City President Thomas Hoenig, the U.S. central bank’s longest-serving policy maker, urged the Fed to raise its target short-term interest rate to 1 percent over the next year and to shrink its record balance sheet to prevent inflation and asset-price bubbles.  “‘Zero is not the right rate, that much I am pretty confident of,’’ Hoenig said today in Steamboat Springs, Colorado. ‘‘We have to begin the process of rationalizing our credit system’’ by tightening policy ‘‘so we don’t build and facilitate the building of imbalances and long-term risk of inflationary problems.’’  Hoenig, who doesn’t vote on monetary policy this year, has repeatedly urged the central bank to tighten monetary policy to prevent inflation from accelerating and asset price bubbles from emerging. He voted eight straight times in 2010 against record monetary stimulus led by Chairman Ben S. Bernanke, tying former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

Fed Watch: Circling the Drain - It is beginning to look like the economy is circling the drain. To be sure, I hate to make too much of one report, but the May employment report comes at the end of a series of bad reports stretching back to nearly the beginning of the year. There looked to be solid hope the recovery was on a better track as 2010 drew to a close, and that momentum appeared to carry through into January. But then we hit a wall.  Theories abound. 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. But what it really comes down to is that we have only had one good quarter in this recovery, and that simply was not enough to provide sufficient resilience to the sheer number of shocks the economy has weathered this year.  That, however, did not stop the policy environment from turning remarkably contractionary. The debate in Washington quickly turned to how quickly to cut the deficit, how quickly to withdraw monetary stimulus.

Is Bernanke Doing Enough to Save the Recovery? -  Fed Chair Ben Bernanke's much-awaited speech today didn't really say much. Markets tumbled on fallen hopes that he'd offer the sputtering recovery yet another bond-buying boost. There was no grand announcement of QE3, another round of the monetary stimulus that's been keeping markets afloat. But given the heat Bernanke's been getting lately for stoking inflation and sinking the dollar, it's not hard to understand why. The last round of quantitative easing sent shock waves across emerging markets, where politicians and economists have been blaming the Fed for driving up prices abroad. That's because QE2 depressed the value of the U.S. dollar, which sent a flood of investors abroad in search of higher-yielding assets. Of course, the dollar decline helped U.S. growth a bit by making our exports cheaper. But according to Bernanke, that wasn't the intended effect. The purpose, according to the Fed, was to stimulate U.S. demand so the recovery could gain speed.  And yet, a quick reminder on how that's supposed to work reveals it hasn't done any good.

Why won't the Fed act? - ON FRIDAY, my colleague here at Free exchange discussed the poor prospects for new Fed action in the wake of May's disappointing jobs numbers: Mr Bernanke has to care about politics. After all, monetary policy is to some extent a confidence game: a stimulative policy works in part because people think it will. If instead people only think it will drive up commodity prices and inflation while doing nothing to boost demand, then it won’t work – no matter what the economics says. Yet most of the rise in commodity prices that is often blamed on QE2 can be explained by excessively loose monetary policy in the emerging market economies, and that is being corrected. Inflation expectations have come down sharply. QE2 did help at the margin; I don’t see why QE3 wouldn’t as well. With the end of QE2 imminent, it's worth reiterating this last point. The Fed's second big round of asset purchases generated a firestorm of criticism, most of which turned out to be dead wrong. Additional easing was associated with a period of growth and a substantial improvement in America's labour market. It was not associated with a dollar collapse or excessive inflation. Indeed, 10-year inflation expectations remain below 2%. Why on earth wouldn't the Fed do more?

Fed Watch: Clear Message from the Fed - We received a pretty clear message yesterday – if you are looking for additional monetary stimulus, you need to find a new hobby. Not going to happen. Yes, we know we have said this before, but this time we are serious. Fed officials simply believe the weakness in the first and second quarters of this year is largely transitory, the impact of commodity prices and tsunami-related supply disruptions. In other words, nothing to see here, move along. The Wall Street Journal had the story time and time again today. Chicago Fed President Charles Evans, on his growth downgrade:  But we’re still of the mind that these are relatively transitory phenomena, that the recovery is still going to be continuing to take place and build. Atlanta Fed President Dennis Lockhart:The regional Fed president added Tuesday that he is “frustrated” with the pace of economic recovery. Still, the string of disappointing economic data “is no reason to panic” as “recoveries rarely play out smoothly.”. Did they make it clear enough? DON’T PANIC! It is all under control. Interestingly, Bernanke further suggests that not only will they do no more, no more can be done:

How Effective is Monetary Policy? - Nick Rowe reminds us that if a central bank is doing a good job in terms of hitting its nominal target, then both the indicator variables and the monetary policy instrument it uses should not be correlated with the target. For example, say the central bank were targeting a nominal GDP growth of about 5% a year and adjusted the stance of monetary policy to offset velocity shocks so that the 5% target was hit on average.  Though the stance of monetary policy would be systematically related to the velocity shocks it would not be correlated with nominal GDP growth. An observer, not knowing any better, might study the empirical relationship between the stance of monetary policy and nominal GDP growth and conclude monetary policy is ineffective with regards to nominal spending when in fact it is very effective.    This insight is important for several reasons. First, it helps shed light on why it monetary policy shocks in empirical studies appear to have less of an effect on the U.S. economy after 1980 than before. For example, below are two figures showing the typical response of real GDP to a 0.25% federal funds rate shock during these two periods.

QE2: What it Did, and What it Didn't Do - Let's start by clearing up an oft-misunderstood point. The Fed did not actually engage in what we typically think of as "quantitative easing", the way that the Bank of Japan did during the early 2000s. The goal of the Large Scale Asset Purchase ("LSAP") program (the more accurate term for QE2) was never to "create money". As illustrated in the chart to the right, none of the reserves given by the Fed to banks under LSAP were actually lent out -- they were all simply held by banks as additional excess reserves, exactly as the Fed expected and intended. Since "money" is only created when banks lend out their reserves, this means that the LSAP program didn't cause any money to be created, which is why the supply of money didn't budge.(1) So "QE2"  was not intended to create money, and did not create money. Instead, the program was intended to help the recovery by reducing long-term interest rates. The Fed did that by selling short-term assets and buying long-term bonds -- that's really the essence of LSAP.  And the hope was that by buying some long-term bonds and thereby lowering long term interest rates, QE2 would help stimulate demand.(2)

Life without QE2 - Last November, the Federal Reserve announced a plan to purchase $75 billion each month in intermediate-term Treasury securities, a measure popularly described as a second round of quantitative easing, or QE2. June is the last month of this program, and it looks unlikely that the Fed will extend it, causing some observers to be concerned. My view is that QE2 had relatively modest effects, and such benefits as it provided should not evaporate with the end of the purchases. One of the channels by which QE2 could have been expected to affect the economy is by changing the maturity structure of debt held by the public. The theory is that by taking a large enough volume of long-term debt off the market, the price of long-term bonds might rise, that is, long-term yields might fall.. The empirical evidence suggests that there is some potential for this to work, though massive purchases would be necessary to have modest effects on interest rates. The $75 billion purchased monthly by the Fed amounts to about 1% of marketable Treasury debt held by the public. Moreover, under QE2 the Fed has been purchasing intermediate-term rather than long-term debt, and the fact is that the average maturity of publicly held debt has actually been increasing rather than falling during QE2.

The QE2 trade-offs - THE Fed's QE2 programme of expansionary asset purchases is nearing its end, and later today all eyes will be trained on Ben Bernanke for hints about whether a a new round of purchases might be forthcoming. This confluence of events provides an opportunity for Buttonwood and me to renew our debate over the value of monetary easing. Yesterday, I wrote: The Fed's second big round of asset purchases generated a firestorm of criticism, most of which turned out to be dead wrong. Additional easing was associated with a period of growth and a substantial improvement in America's labour market. It was not associated with a dollar collapse or excessive inflation. Buttonwood says he's not so sure. But he should be! He comments: [W]hen Ben Bernanke unveiled his plans for QE2 in August last year, the unemployment rate was 9.5%, now it's 9.1%. Is this an improvement on what might have happened anyway? The counterfactual is hard to prove.

QE2 - The Bernanke Chronicles - Our self proclaimed “expert” on the Great Depression, Ben Bernanke, seems to be feeling the pressure. His theories worked so well when he modeled them in his posh corner office at Princeton. He could saunter down the hallway and get his buddy Krugman to confirm his belief that the Federal Reserve was just too darn restrictive between 1929 and 1932, resulting in the first Great Depression. I wonder if there will be a future Federal Reserve Chairman, 80 years from now, studying how the worst Federal Reserve Chairman in history (not an easy feat) created the Greatest Depression that finally put an end to the Great American Military Empire. Bernanke spent half of his speech earlier this week trying to convince himself and the rest of the world that his extremist monetary policy of keeping interest rates at 0% for the last two years, printing money at an astounding rate, and purposely trying to devalue the US currency, had absolutely nothing to do with the surge in oil and food prices in the last year. Based on his scribbling since November of last year, it seems that Ben is trying to win his own Nobel Prize – for fiction.

More on the Effectiveness of Fed Policy - Kathleen Madigan at the Wall Street Journal on Wednesday:Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire….Fed policy’s main lever for growth is to prompt people to borrow money. But after the financial implosion, businesses and consumers have little appetite for credit. Kathleen Madigan on Thursday:April’s news on trade was quite good, and U.S. manufacturers can thank the Federal Reserve. But improving growth falls far short of solving all the economy’s problems, especially with job growth……the Fed has made a mighty contribution to this situation. “By dramatically increasing the supply of U.S. dollars under its [quantitative easing] programs, the Fed has effectively (and perhaps explicitly) been engaged in a weak dollar policy,” When combined with the recovery in global demand, the weak dollar has contributed significantly to the enhanced competitiveness of U.S. exports.”So there is nothing the Fed can do to stimulate the economy on Wednesday, but on Thursday we learn there is another channel by which monetary policy operates, exchange rates. Madigan still insists there is no way for stronger demand to turn into job growth.

Merk Commentary: Bernanke - It's Complicated! - Get ready for more money to be printed – this time not to subsidize an overly indebted American consumer, but to stem against the credit destruction caused by the Federal Reserve (Fed) itself. Tuesday evening at the International Monetary Conference in Atlanta, J.P. Morgan CEO Jamie Dimon gave a laundry list of changes that have already incurred in the banking system. For practical purposes, we believe we should expect more easy money; Dimon is correct that headwinds caused by upcoming regulations, as well as those already introduced since the onset of the financial crisis, are enormous. To keep the economy moving ahead nonetheless, more money may need to be printed than even the Fed expects.

Fed's Evans less rosy, but not warm to QE3 (Reuters) - A top Federal Reserve official said on Tuesday a recent bout of economic weakness had prompted him to cut his forecasts for U.S. economic growth this year and next, but not to support additional monetary easing. Charles Evans, president of the Chicago Fed and a strong supporter of the Fed's bond-buying stimulus program, told the Wall Street Journal in an interview he now sees U.S. gross domestic product expanding in 2011 between 3 percent and 3.25 percent, down from an earlier forecast of 4 percent. "I think it's a little lower than what I previously thought," he said. "But I don't think we're at a point that I would be arguing strongly for a further change in our accommodative stance."Evans' comments suggest that despite a recent spate of poor economic data, including U.S. companies hiring far fewer workers than expected in May and a sagging housing market, there is little appetite at the U.S. central bank for further easing.

Fed's Rosengren says too early for QE3 - (Reuters) - U.S. economic growth has been weaker than economists had expected, but it is still too soon for the Federal Reserve to consider additional bond purchases, Boston Fed President Eric Rosengren said on Monday. Rosengren also did not rule out a third round of quantitative easing of monetary policy, or QE3. "I think it's too soon to make that determination," Rosengren told CNBC Television. "It's too soon to determine what the next steps for monetary policy are." The latest bad news on the economy came on Friday, when the Labor Department's employment report for May proved much weaker than expected. Since then, markets have begun speculating about the possibility that the Fed, whose $600 billion bond-buying stimulus program ends in June, might have to do more to support the recovery. That program faced a lot of political opposition when it was first launched, but Rosengren said the Fed would make its decision on policy based on what the economic backdrop merits.

QE3 Unlikely Even as Job Growth Slows - Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to do a third round of quantitative easing even with the economy adding fewer jobs than forecast. Central bankers are likely to “extend the extended period” language for longer in their policy statements, Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. The less-than-projected pace of jobs growth in May that the Labor Department reported today shows that “there is a persistency here. It’s back to our old new normal,” he said.  “We don’t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program,” Gross said. Given the current pace of growth and inflation “they will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process.”

Fed's Hoenig: Market tantrum likely over tightening - Kansas City Federal Reserve President Thomas Hoenig said on Wednesday he would sell off securities on the Fed's balance sheet before raising interest rates as a way to wean the U.S. economy from easy money policies in place for more than two years. Hoenig told a business audience the Fed's first step to tightening monetary policy should be to drop its pledge to hold rates low for an extended period. He would then bring the Fed's balance sheet, which has expanded to more than $2.7 trillion as a result of extensive asset buying, to pre-crisis levels of closer to $1 trillion.Hoenig's stance puts him at odds with some other policy makers, who think raising interest rates should come first and that asset sales should come later.Financial markets would likely be spooked by these moves, said Hoenig, who is not a voter on the Fed's policy-setting panel this year. "The first time you tell this to the market, it will throw a tantrum of tantrums," he said. However, for the economy to remain dependent on super loose monetary policy is unstable and invites future turmoil, he added. Hoenig has been a long-standing critic of the Fed's easy money stance and has advocated higher rates and tighter policy for months.

Monetary Calvinball - Krugman - I was trying to come up with a way to describe Raghuram Rajan’s latest on why interest rates should go up despite high unemployment and quiescent inflation — but Mike Konczal saved me the trouble.. As Mike says, it’s Calvinball — making up new rules on the fly to justify whatever you, for some reason, want. And today’s column was about that reason. Rajan pulls two tricks. First, he makes interest-rate setting sound as if it’s a form of price control — and by the way, the critique of China’s low rates on deposits is that they’re controlled rates kept below the true price of credit in the economy, not that overall monetary policy is too loose.  Second, he simply takes it for granted that there’s something unnatural about very low rates right now. But why? But the main point, as Mike points out, is that all of Rajan’s arguments for higher rates would seem to apply just as well at a non-zero Fed funds rate. Let me make the case even more strongly than Mike does, and ask you to imagine that the world looks the way it does, but that the Fed funds rate was, for some reason, 4 percent. Would you argue that the Fed should respond by raising rates? That would be crazy — and it’s no less crazy to call for higher rates starting from here.

When a Nobel Prize Isn’t Enough, by Peter Diamond  - Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?  The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy. Republicans on the committee voted in lockstep against my appointment, making it extremely unlikely that the opposition to a full Senate vote can be overcome. It is time for me to withdraw, as I plan to inform the White House.  The leading opponent to my appointment, Richard C. Shelby of Alabama, the ranking Republican on the committee, has questioned the relevance of my expertise. “Does Dr. Diamond have any experience in conducting monetary policy? No,” he said in March. “His academic work has been on pensions and labor market theory.” But understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy.

With Rebuke of Senate Republicans, Fed Nominee Withdraws — Peter A. Diamond¹ said Monday he was withdrawing his name from consideration for the Federal Reserve Board² of Governors, issuing a sharply worded broadside that criticized Senate Republicans for blocking his nomination.  Mr. Diamond, a professor of economics at the Massachusetts Institute of Technology and a Nobel Prize laureate³ for his work on labor markets, had waited more than a year for a Senate vote, a step that Republicans refused to allow.  “We should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight,” Mr. Diamond wrote Monday in an Op-Ed article⁴ in The New York Times that announced his decision. Mr. Diamond criticized Senate Republicans for treating his expertise in labor economics as irrelevant to decisions about monetary policy. “Understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy,” he wrote.

Everything Is Political - Krugman - Peter Diamond has a depressing op-ed in today’s Times, withdrawing himself for contention as a member of the Fed board in the face of Republican opposition. What you need to know about Peter is not just that he’s a very great economist, but that he’s an economist’s economist — someone who is a deeply respected theorist, not at all someone who made his way as an ideologue. His work is basically apolitical. Except that these days everything is political. Never mind the obviously fake concerns about his suitability for the Fed. Obviously, Peter was blackballed for two sins: being personally a Democrat, and having been nominated by Obama. The thing is, the Fed was supposed to be above and aside from the partisan brawl. It never was, completely — but that was an ideal to be striven for. No more.

Do central banks need external oversight? - THE Nobel prize-winning economist Peter Diamond has withdrawn his nomination to the Federal Reserve Board of Governors. Mr Diamond supported the TARP bail-outs and QEs 1 and 2, and he was expected to be a dove on the interest-rate setting Federal Open Market Committee. That made him a target for Republicans. Senator Richard Shelby of the Banking Committee argued that Mr Diamond’s labour-market expertise is irrelevant to interest-rate policy, and blocked successive attempts to nominate him. Mr Diamond finally had enough and decided to ride off into the sunset (or at least, “take advantage of some of the many opportunities that come to a Nobel laureate”). The episode raises an interesting question: Do interest-rate setting committees need experts other than central bankers? And should legislatures have the power to block their appointment? David Blanchflower, who was an external member of the Bank of England’s Monetary Policy Committee until 2009, thinks diversity of opinion is essential:

On the contribution of monetary policy to economic fluctuations - What effect do interest-rate changes have on economic growth? Most studies suggest that the answer is “not much”. This column points out that a lot of these studies use US data from the early 1980s when monetary policy was under the “Volcker experiment”. When this episode is excluded, this column finds that the implied contribution of policy shocks to historical US business cycle fluctuations is much larger than found in much of the literature.

Monetary Policy. I'm not only not feeling it, I'm dehydrating because of it - Continuing my prior post suggesting that what ever monetary policy has done, it has not reached that vast majority nor has it addressed what is the main issue, I viewed this chart by Mike Kimel and thought: Perfect! Then comes Ken Houghton linking to this article with it's chart.  What do they have in common? Income inequality. So let me repost this graph from my 12/2007 post.  Take a look at 1996. That is the year that personal consumption crossed over the income level of the bottom 99%. It's been borrowed money ever since. For an economy that runs on making money from money, that's not a problem for those who earn their income by such a manor, is it?Back to Mike's chart. He noted that the change in what type of spending was associated with recessions happened around the early 70's. That time is when another major event happened. The rise in productivity disconnected from the rise in wages. That is, any rise in productivity did not produce a corresponding rise in wages as was the historical norm. My position is that this was the start of the "new" service economy of making money from money that went into full mode with Reagan. Ok, we went from government spending to private sector spending as the fuel for the economic engine which I agree with Mike is what is the real mechanisms that is behind the results Mike notes Tyler Cowen labeled The Great Stagnation. Mr. Cowen is correct, it's a great stagnation, but stagnation has it's cause.

Wow, Richard Koo UNLOADS On Paul Krugman: He Got It Wrong On QE2, And Now Obama Has An Awful Situation - Paul Krugman's belief that further monetary stimulus, specifically QE2, would be capable of supporting the U.S. economy misled the Obama administration and has put the U.S. in a difficult economic policy position, according to Nomura's Richard Koo. Koo says that while U.S. officials and Paul Krugman read his book on balance sheet recessions, they refused to admit more fiscal stimulus, that is government spending, was the only means by which U.S. could grow. Instead, they convinced themselves that more monetary stimulus would be enough to jumpstart U.S. growth. From Richard Koo: A senior Obama administration official I spoke with last October, just before QE2 was unveiled, concurred with my view that the US was in a balance sheet recession but cited an article written by Professor Paul Krugman just before our meeting as support for his position that the situation could still be dealt with using monetary policy. Continued... What are important here are not so much the views of Mr. Krugman and myself as the fact that the senior White House official said that while my theory of balance sheet recessions was very persuasive, Mr. Krugman’s and Ms. Wells’ criticism of it also had some merit. In other words, White House officials understood that they faced a balance sheet recession but still believed that additional accommodation by the Fed would be sufficient to lift the economy without resorting to fiscal stimulus. Two weeks later, Fed Chairman Ben Bernanke embarked on QE2.

Richard Koo Is Unhappy With Me - Krugman - Here.  But I have to say, he seems to be attacking a straw man named “Paul Krugman” who bears little resemblance to the Princeton economist of the same name. Here’s what I actually said about QE2:I believe that given the grim economic situation, all players in the game should be trying to do whatever they can. There are other things the Fed can do; they would help; uncertainty about how much they would help shouldn’t be a reason not to try. But it would be a big mistake to count on monetary policy alone. The zero lower bound on short rates really does matter, even if longer-term rates are positive. The Fed can control short-term interest rates, it can influence long rates — there’s a world of difference between those two statements. So it’s not safe to assume that the Fed can, for example, hit any target for nominal GDP that it chooses. What that means is that while the Fed should be doing more, so should other actors: unconventional monetary policy should go along with fiscal stimulus.

Will “Quantitative Easing” Trigger Inflation? - NYFed - The consequences of an expansion in bank loans and deposits depend on the level of economic activity during and following the expansion. If activity is slack, the additional loans can be expected to stimulate consumption (if the loans are to consumers) and investment (if the loans are to businesses), and hence stimulate aggregate production. However, if there is little slack in the economy, the additional demand from consumers and business will translate largely into inflation. Because the expansion of loans and deposits may take place over a prolonged interval, monetary stimulus (to either production or inflation) is likely to have long and variable lags.   Some commentators are concerned that the Fed’s large-scale asset purchases will trigger an expansion of bank lending and stimulate consumption and/or investment exactly when the economy is recovering for other reasons, and hence will trigger inflation. However, this concern assumes that the extra bank reserves will actually result in increased bank lending, which is far from obvious. To see why, we need to consider several alternative ways for the government to buy Treasury bonds from the public.

Fed’s Lockhart Calls For Explicit Inflation Target Of 2% - As the U.S. economy sluggishly pushes ahead with its recovery, it is a “good time” for the Federal Reserve to explicitly state an inflation target to more effectively communicate monetary policy, a key Federal Reserve official said Tuesday.  Federal Reserve Bank of Atlanta President Dennis Lockhart said he supports the establishment of an “explicit numerical objective” for inflation, which he believes should be expressed in terms of headline inflation.  Headline inflation–which captures energy and food price fluctuations–is what “real people” experience, Lockhart said.Lockhart said to reporters on the sidelines that he believes 2% is the “appropriate number” and one that can be easily communicated to the public. He added that a specific number, rather than a range, would be more effective. While unofficial, 2% has been the de facto long-term goal targeted by the Federal Reserve. That number, Lockhart said, is far enough away from zero and the threshold from tipping the economy into deflationary pressures. It is also a comfortable level as not to “distort” business and consumers’ decision-making.

In Support of an Explicit Inflation Target - text of speech by Atlanta Fed's Dennis Lockhart. Key Points:

• Lockhart said low and stable inflation is one of the underlying fundamentals that will shape the country's economic performance over the coming quarters and years. However, the objective of policy in the end has to be defined in terms real people experience—that is overall, or headline, inflation.

• According to Lockhart, he would not hesitate to support an exit from the FOMC's current policy stance if he believed the headline inflation number of the past six months was indicative of the underlying trend inflation rate. He doesn't believe this to be the case.

• The language the FOMC uses to explain its inflation forecasts can, at times, get in the way of effectively communicating its ultimate inflation objective. One way to deal with this tension is to set an explicit numerical objective for inflation, also known as an inflation target. He supports the FOMC setting such a target.

• According to Lockhart, the specifics of an inflation target would need to be worked out by FOMC participants. But a few principles for an effective inflation target would be stating it in terms of some measure of overall, or headline, inflation and making it achievable over a realistic time frame.

A Closer Look at the Recent Pickup in Inflation - NYFed - Inflation has picked up in the last few months. Between June and November 2010, the twelve-month change in the seasonally adjusted consumer price index (CPI) was stable, at slightly above 1 percent, but it jumped to 3.1 percent as of last April. In this post, we take a closer look at the sources of this acceleration in prices. We divide the “basket” of goods and services that make up the CPI into twenty-three items—such as medical care, motor fuel (or gas), apparel, education, and rent—and examine the change in each item’s inflation rate over the last seven months. This exercise reveals whether the increase in inflation since last fall is due primarily to a few outliers—food and energy, for instance—or whether it reflects a broader acceleration in prices. To conduct our analysis, we rely on the inflation “heat map” shown below, which uses color coding similar to that of weather maps to distinguish the items with the most significant increases or decreases in inflation from those with less notable changes.

Fed's Beige Book: Economic activity continued to expand, "some deceleration" - Fed's Beige Book: Reports from the twelve Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration. Some slowing in the pace of growth was noted in the New York, Philadelphia, Atlanta, and Chicago Districts. In contrast, Dallas characterized that region's economy as accelerating. Consumer spending was mixed, with most Districts indicating steady to modestly increasing activity. Elevated food and energy prices, as well as unfavorable weather in some parts of the country, were said to be weighing on consumers' propensity to spend. ... Widespread supply disruptions--primarily related to the disaster in Japan--were reported to have substantially reduced the flow of new automobiles into dealers' inventories, which in turn held down sales in some Districts. Manufacturing activity was reported as continuing to increase since the last report in all but two districts, although many noted that the pace of growth had slowed.

Beige Book, District-by-District Summaries - The Federal Reserve, in its latest beige book report, said Wednesday the U.S. economy kept expanding in the spring but that some parts of the country saw slowing in the pace of growth. The following is a district-by-district summary of economic conditions in the 12 Fed districts.

Bernanke sees 'loss of momentum' in jobs market - After a slew of wretched economic news, Federal Reserve Chairman Ben Bernanke warned Tuesday there had been a "loss of momentum" in the US jobs market. Two years into a slow and largely jobless recovery, Bernanke predicted employment growth would eventually pick up, but that a recent soft-patch needed to be carefully monitored, and that stimulative policies were still needed. "The jobs situation remains far from normal," Bernanke told an audience in Atlanta, Georgia, reiterating a now all-too-familiar story of a recovery hobbled by a lack of new employment opportunities and a continued housing crisis. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he told the audience.

Economists Lower G.D.P. Forecasts for 2nd Quarter - Quarter after quarter and month after month, the United States has been subjected to increasingly disappointing economic numbers. And this quarter is no different. In light of a streak of bad news — on jobs, auto sales, housing, manufacturing and retailing – many economists have ratcheted down their estimates for gross domestic product in the second quarter. A small selection:

• Macroeconomic Advisers is now forecasting 2.6 percent annualized growth, down from its forecast of 3.7 percent about a month earlier.
• Barclays Capital has lowered its forecast to 2 percent, from 3.5 percent.
• IHS Global Insight is expecting 2 percent.
• Joshua Shapiro of MFR is predicting (gulp) 1.5 percent, about half of what he’d previously expected.

You may recall that the same phenomenon occurred last quarter, when, for instance, Macroeconomic Advisers gradually slid its estimate down from 4.1 percent to 1.5 percent. The Commerce Department eventually reported that the economy grew at an annual rate of 1.8 percent last quarter.

Why deflation is killing the economy and why inflation is killing your pocketbook - The economy is suffering from structural, systemic deflation caused by regulatory capture by the banksters and the 700%-to-GDP debt ratio tied primarily to housing. Inflation is the immediate effect of the US dollar losing its reserve status as the result of all the aforementioned deflation. This is similar to stagflation, but not the same. Stagflation was the result of wage loss within an economy that was inflating. Our current dilemma is the result of a complete breakdown in the banking sector deflating the economy that is also causing the unwind of trillions in US dollar positions around the globe.

Financial Markets More Concerned with Recovery than Debt or Inflation - What is the source of recent variation in long-term interest rates, worries about the economic recovery or worries about the debt and/or inflation? This figure suggests worries about the economy are the main factor: [via] I don’t want to read to much into a simple visual correlation between two variables, but it is suggestive.

Fed’s Evans Shaves Growth Forecasts - Charles Evans, president of the Federal Reserve Bank of Chicago, is marking down his growth forecasts for 2011 and 2012, but says he isn’t prepared to call for new Fed actions to support the economy. In an interview with The Wall Street Journal, Mr. Evans said he now expects the economy to grow by 3% to 3.25% in 2011 and 3.5% and 3.75% in 2012, compared to the 4% growth rate he was expecting before a recent string of disappointing economic data. He said the recovery remains intact and that the damaging effects of recent shocks to growth – such as Japan’s earthquake and tsunami – should prove transitory. The Fed later this month will conclude its $600 billion Treasury securities purchase program. Mr. Evans doesn’t want to add to it, but he also has no inclination to reduce the Fed’s portfolio of mortgage or Treasury securities any time soon, he said.

Kevin Warsh on the Anemic Recovery - Only by the standard of the deepest, darkest day of the crisis is this economic recovery even plausibly satisfactory. On a historical basis, the economic recovery is modest, and unacceptably so. Some describe this recovery as the “new normal” and suggest we should just get used to it. Others suggest that recoveries from global financial crises are inevitably weak, and so we should lower our standards. I call this the new malaise. Instead of lowering our standards, we should improve our policies and raise our expectations. So why is the recovery weak? First, the symptoms have been confused with the disease. Some policymakers have tried to steer a housing recovery without an economic recovery. Second, intentions aside, the broad suite of macroeconomic policies has tended to favor the big over the small—big banks have been advantaged over small banks; big businesses have been favored versus small businesses. Third, macroeconomic policies, in my view, have been preoccupied with the here and now, not the long term. So going back several years, Washington has compensated for a faltering economy with temporary programs that plug quarterly GDP arithmetic, but do far less to support longrun growth. Massive stimulus has proven not to be as efficacious as many academic models would suggest.

Fed Watch: Output Has Not Fully Recovered - Kathleen Madigan at the Wall Street Journal claims:In a speech given Tuesday, the chairman discussed the aggregate hours of production workers, which had fallen by nearly 10% from the beginning of the recent recession through October 2009. “Although hours of work have increased during the expansion,” he said, “this measure still remains about 6 1/2% below its pre-recession level.” In other words, labor markets are nowhere near where they were before the financial collapse and recession. Output, on the other hand, is fully recovered. Real gross domestic product — which at its worst had shrunk 4.1% — surpassed its 2007 peak at the end of 2010 and expanded further in the first quarter of 2011. True, output has surpassed its previous peak, but this in no way should be the measure by which we determine if output has fully recovered. Full output recovery would require that activity return to potential output, and by that measure, output recovery remains little more than a fantasy: See also Mark Thoma's link to Justin Wolfers. Again, just because output regains its previous peak does not mean the economy has recovered.

Fed's Plosser not worried about growth downshift -  The recent disappointing pace of the U.S. economy is only a temporary soft patch, Charles Plosser, the president of the Philadelphia Fed, said Thursday as he also accused politicians of playing “a game of chicken” over the debt ceiling. Plosser forecast that growth should rebound to a 3.0% to 3.5% pace over the rest of the year and that there would have to be a “pretty extraordinary” deterioration in the economy for him to support a third round of quantitative easing.  “Such soft patches are not that uncommon,” Plosser said, pointing out that “temporary factors” such as the disaster in Japan, political events in the Middle East and higher food and energy prices have all had an impact. He added that the U.S. economy experienced a similar “bump in the road” last year after which it picked up momentum to finish with a 2.9% growth rate.

Bernanke: Growth "likely to pick up" in second half - From Fed Chairman Ben Bernanke: The U.S. Economic Outlook: U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

Testing Bernanke: Will the Economy Improve in the Second Half? - Earlier this week, talking to a group of bankers, Fed Chairman Ben Bernanke said essentially there was good news and bad news about the economy. The bad news was that the economic recovery had been slower than he and others expected. The good news: that's about end. Bernanke predicted economic growth will pick up. The second half of the year, he said, will be better than the first. On first glance, that doesn't seem like it would be hard. The first half of this year has been a real disappointment. GDP grew just 1.8%, far less than you would expect during the early part, we hope, of an economic recovery. And last month's dismal jobs report suggests that the economy has slowed even more in the second quarter of the year. What's more, it seems that most economic forecasters agree with Bernanke. On average, economists believe that the US economy will grow 3.5% in the second half of the year, which would be a huge acceleration from the first quarter. How likely is that? Not likely. History suggests that the second half of the year is likely to disappoint as well.

The Bernanke Scandal: Full-Frontal Cluelessness - How I wish that Ben Bernanke would get caught emailing photos of his underwear-clad groin. Otherwise we don’t stand a chance of reversing this administration’s economic policy, which is shaping up to be every bit as disastrous as that of its predecessor.  Indeed, the Fed chairman’s much anticipated remarks on Tuesday take one back to the contemptuous indifference of a Herbert Hoover to the public’s suffering: Bernanke dismissed the wobbly economy with its anemic 1.8 percent first-quarter growth as merely “somewhat slower than expected.” The rise in unemployment to 9.1 percent was “some loss of momentum.” The problem with Bernanke is that he is utterly clueless as to the stark pain and fear endured by the 50 million Americans who have experienced, or face the prospect of, losing their homes. His remarks reflected the insularity of a ruling-power elite that is magnificently impervious to the damage that Bernanke’s policies in the current and past administration helped inflict on what used to be called the American way of life. This is a man who assured us there was no housing crisis, while his policies at the Fed encouraged the mortgage securitization swindles that caused the meltdown of the economy.

Fears Grow Over Double-Dip Recession - One fund manager calls it a horror show, others are predicting the Federal Reserve will have to extend its unconventional measures and stocks across the world are falling heavily. The data from the world’s largest economy has fallen so sharply that investors have been caught off guard, raising fears over a double-dip recession.  It was a big fall in ISM Manufacturing PMI data on Wednesday that triggered the fall in stocks and saw money pour into Treasurys, pushing the yield on the 10-year note below three percent. The index fell from a very healthy 60.4 to 53.5 and while still indicating growth the scale of the fall has worried some economists who say it is too early to call this anything more than a slowdown.

Is a Double Dip Becoming More Likely? - In the past few weeks, with a growing number of bad economic reports - including last month's disappointing jobs number - there has been increasing talk of the possibility of a so-called double-dip recession. That's when the economy slips back into a recession while still trying to recover from the last one. Indeed, Ben Bernanke's talk on Tuesday left a lot of people asking why the Federal Reserve chairman isn't doing more to boost the economy, presumably to avoid this dreaded double dip. That caused my editor to ask me to find out just how many economists are currently predicting a double dip in the economy. According to the Blue Chip Indicators, which is probably the best survey of economic forecasters, the number of economist predicting a double dip is - wait for it - ZERO. That's right. Zippo.

Intensive Care Required For Sick US Economy -This is serious; what cures are there for pathetically small job creation and the suffocating weakness in real home prices? Dr. Bernanke has no magic potions. Congress and the White House are bewildered. The big Wall Street houses are  just plain wrong on their prognostications. The risk trade in equities and many commodities are under selling pressure.  There’s not much  help coming from rest of the world, where Japan is crippled, China in the midst of a directed slowing, Europe in a debt crisis.The lousy job figures have cleaned the clocks of the equity market and been a boon to the bond market, driving rates down below 3% on the 10 year note and driving up bond prices. Last weeks auctions of the 2 year, 5 year and 7 year treasuries were oversubscribed.  In this lousy economic climate we might not even need Chinese buying of governments.Here’s a dispiriting rule of thumb to consider. Self-reinforcing trends are fine when the economic cycle is in the up phase; but they are disastrous when the downturn starts gaining momentum.

From cautious optimism to caution - I was cautiously optimistic about 2011 as the year began. But the economic data have been weak. I see a global growth slowdown happening, not just a US slowdown. In China, for example, we could see a hard landing, meaning growth slows considerably as tightening takes a toll on the economy via credit writedowns and non-performing loans.Now, in April, I was saying this: This [cautiously optimistic] base case is still operative but many of the downside risks are starting to become evident.  When I wrote, "I expect this to continue through at least the first half of 2011, probably through the whole year," what I meant is that the cyclical recovery will see us through at least the first half of the year. However, I felt that starting in the second half, you will see problems from cuts in federal as well as state and local government. Monetary policy will also be less accommodative as well.  The question then was about exogenous shocks. I listed four in addition to the municipal problem:

• European debt crisis
• Housing
• Currency Wars
• Commodity prices

Fine line between slowdown and stall - The world economy appears headed for several months of sub-par growth, and there is no clear source of strength to lead it back to health. After a week filled with disappointing economic data, the debate is no longer over whether the economy has hit a soft patch but how long it will last. Friday's poor U.S. employment figures suggest demand will remain subdued in the world's biggest economy. Europe is still struggling to put an end to its sovereign debt troubles.  As for the big emerging economies, their inflation-fighting efforts appear to have succeeded in cooling growth. Although that was the intended result, it means they are not in a position to grow as fast as they did last year. Ironically, the country with the brightest near-term prospects may be Japan as it recovers from the March earthquake and tsunami. Still, even a strong rebound there may not be enough to lift the global economic clouds.

Predicting Recessions, The Great Stagnation, and Will There Be a Double Dip? - There's a lot of talk about a double dip recession these days. I don't think there's a precise definition of a double dip recession, but I think if there was it would be something like this: "a recession, followed by a recovery which doesn't last very long, leading into another recession." Given the official end of the recession occurred in June of 2009, if the current slow down is (or results in) a recession which gets labeled a double dip, that would imply a double dip recession is one that occurs no more than about two years after the previous recession ended. By that standard, there's only been one double recession in the last few decades - a recession began in July '81, 12 months after the previous one ended. Before that, you have to go back to the supposedly "Roaring" 1920s, when you'll find quite a few recessions coming back to back to back. You'll also find multiple and large tax cuts, I might add. Now, I was curious - how do you tell when you're in a recession?  Basically, if you corner enough economists, you might get them to tell you recessions begin if there's a big drop in private consumption, private investment, or gov't spending.

Wall Street Baffled by Slowing Economy, Low Yields: Trader - Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC. "What we’ve got right now is almost near panic going on with money managers and people who are responsible for money," he said. "They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy."We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake."Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month. "Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything," Yastrow said. "We’re on the verge of a great, great depression. The Fed knows it.

Decline and fall of the American empire - The US is a country with serious problems. Getting on for one in six depend on government food stamps to ensure they have enough to eat. The budget, which was in surplus little more than a decade ago, now has a deficit of Greek-style proportions. There is policy paralysis in Washington.The assumption is that the problems can be easily solved because the US is the biggest economy on the planet, the only country with global military reach, the lucky possessor of the world's reserve currency, and a nation with a proud record of re-inventing itself once in every generation or so. All this is true and more. US universities are superb, attracting the best brains from around the world. It is a country that pushes the frontiers of technology. So, it may be that the US is about to emerge stronger than ever from the long nightmare of the sub-prime mortgage crisis. Let me put an alternative hypothesis. America in 2011 is Rome in 200AD or Britain on the eve of the first world war: an empire at the zenith of its power but with cracks beginning to show.

U.S. Hurtles Toward System Failure  -The nation has no clue among leaders to engineer a recovery. Tragically, it is not possible unless the housing market rebounds convincingly, and unless the big US banks are liquidated. The negative momentum is so grotesque. It is like a man sliding backwards on a steep icy street with no objects nearby to grab. The remarkable fact in my view is that so many trained economists and market mavens are shocked that the US Economy is entering another recession. They must have considered Clunker Car program, New Homebuyer Tax Credit initiative, and the General Motors bailout all to be genius concepts. Innovation remains prevalent among technology and telecommunication firms. Too bad so much of the product output is done by US subsidiaries in Asia. The USGovt leadership thought a green revolution would make for a solid initiative until it realized that most of the purchases would come from Asia. The high speed rail projects almost all involve Chinese equipment. The US is so badly on a slippery slope, that a simple debt default might be the best of outcomes to hope for, given the nasty added ramifications that could come from chaos. The main location for innovation within the USEconomy seems to be in financial fraud and military weapons. Former USFed Chairman Volcker once accused the financial industry of having only one productive innovation in three decades, the automatic teller machine (ATM), a scurrilous accusation indeed.

Get Ready for the Next Financial Crisis - The U.S. is approaching a financial crisis worse than 2008, Jim Rogers, chief executive, Rogers Holdings, warned CNBC Wednesday. "The debts that are in this country are skyrocketing," he said. "In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt. "When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around."The well-known investor believes the government won't shut down in August if agreement isn't reached on raising the debt ceiling, but he did say "draconian cuts" are needed in taxes and spending, especially military spending. "We’ve got troops in 150 countries around the world. They’re not doing us any good, they’re making enemies. They’re costing us a fortune," he said.

After a recession, the least rational rise... Ignore them. - Despite millennia of Armageddon forecasts, betting on the end of the world has always been a money-losing wager. Given this oh-fer batting record of 0.000 percent, one wonders why people still regularly make this forecast. Wall Street fund strategists, religious zealots and economists seem strangely drawn to it. Never mind that if it were ever a winning trade, no one would be left for you to collect from. (That is called counterparty risk.)  You humans are a hardy breed. No matter how dire the circumstance, your species has managed to prosper. You survived the Ice Age, the Dark Ages, the Middle Ages, the Age of Aquarius (as well as Disco and Polyester). Mother Nature has thrown floods, earthquakes, droughts, plagues, pandemics, tornadoes, asteroids, tsunamis, hurricanes, melting glaciers and global warming at you. Not to mention world wars and nuclear proliferation.  Economically, you’ve withstood the Panics of 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893, 1896, 1907, 1929, 1933, 1938, 1973, 1987, 1998, 2000, and 2007-09 — and that is just over the past two centuries. You also saw through the Tulip Bubble, the South Sea Bubble, the Great Depression and the Great Recession, the Nifty-Fifty, the Asian Contagion, the Dot-com Bubble, the subprime fiasco and Bernie Madoff.  What is it going to take to kill this species off — or at least to bankrupt it?

Seven Problems a Recovery Won't Fix - The Big Grinning Kahunas that run the world don't agree on much these days, except one thing: the urgent, vital need for "recovery." On both sides of an increasingly fractious political divide, there's a common belief underlying the debates: what we really need is more stimulus, spending, cutting, slashing, or [insert big idea here], and the economy will "recover" — hey, presto!! — and pop roaring back into life.Hence, like many, you're probably waiting for this so-called mysteriously reluctant non-recovering "recovery" — the one that always seems just around the corner, but when the corner's turned, has automagically disappeared yet again. (Want fries with that latest global "soft patch"?)  Recovery means "a return to a normal state of strength." So here's a question. Is recovery enough? Consider seven things that a mere "recovery" probably wouldn't fix:

We’re Halfway to a Lost Decade - Many people date the financial crisis as beginning when Lehman collapsed in September 2008.  But the economy was already in recession. The NBER reckons the recession began in December 2007. But look closely, and you’ll see that it may have begun a year earlier.That’s the case I made in my latest my latest Marketplace commentary, which you can listen to here. The point is more easily made with a simple graph: The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure.  In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure. Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007. The red line also fell by more, and over a longer period. And today, GDP remains below its levels nearly five years ago. The economy had already run out of steam halfway through Bush’s second term. That’s why I say we are halfway to a lost decade.

Philip Pilkington: Down in the Hole – Is America Becoming the Next Japan? - Everyone who is anyone is saying it: the US looks set to become the next Japan. Yet the particulars of the argument are never really trashed out. Certainly both countries suffer from the same malady – namely, a bursting asset bubble punching gigantic holes in private sector balance sheets. This leads to similar policy approaches – not to mention similar policy failures. But beyond this overarching comparison people tend not to tread. Let’s start from the beginning; the asset bubbles that set off the crises. The housing bubble that inflated in the US prior to the economic collapse is too well-known for me to dwell on it at any length. Anyone who is not keenly and constantly aware of this phenomenon and its relation to our present difficulties should either get their head checked out or apply to The Washington Post for a job – needless to say that both options will likely land you in a madhouse. The Japanese asset bubbles are less well-known.  There was not only a major bubble inflating in the real estate market, there was also a one being blown in the NIKKEI stock market.

Debunking Our Most Crippling Economic Myths - To double dip or not to double dip. That's the question flowing from Wall Street to Main Street to the White House and back. But whether you classify what's happening to our economy as another "dip" or not, the pain of it all won't be short-lived. That's the essence of this week's cover story by Rana Foroohar. By parsing out five oft-repeated myths made worse by partisan wrangling, Foroohar lays out the reasons why we're kidding ourselves, not only about what's ailing the economy, but also about how we get back on track:

• Myth No. 1: This is a temporary blip, and then it's full steam ahead
• Myth No. 2: We can buy our way out of all this
• Myth No. 3: The private sector will make it all better
• Myth No. 4: We'll pack up and move for new jobs
• Myth No. 5: Entrepreneurs are the foundation of the economy

The White House Believes in the Confidence Fairy - Krugman - Ryan Avent brings grim news from a White House forum on the economy:The comments from Gene Sperling, Director of the National Economic Council and a key member of the team negotiating an agreement on an increase in the debt ceiling, were clearer still. The White House believes, he said, that deficit-cutting is an important component (the emphasis was his) of a growth strategy. And he repeatedly said that deficit-reduction was crucial in generating economic confidence. Confidence—he repeated this word many times. Obama has operated under severe political constraints, and those of us who criticize the inadequacy of the stimulus and other policies have to be mindful of that. But the White House did not have to concede the economic argument the way it has — especially when the confidence-fairy, invisible-bond-vigilante believers have been proved utterly wrong. I mean, how could you have a clearer test of liquidity preference versus loanable funds than having the US government borrow almost $3 trillion with zero, absolutely no, effect on interest rates? And yet the WH buys into the doctrine that failed.

Sugar, or the Changing Nature of “Confidence” in the Administration’s Economic Policy  - Oh dear god.  Sorry to start with two long block-quotes, but they are important and upsetting.  Zachary Goldfarb, Washington Post, Geithner Finds His Footing: Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said. Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue. Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt, according to current and former administration officials… The economic team went round and round. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”In the end, Obama signed into law only a relatively modest $13 billion jobs program

Time to panic? You Betcha. - Earlier this week, President Obama talked about the weakening state of the economy, telling us that he’s not worried about a double-dip recession and that the nation should “not panic.” It’s hard to imagine a more alarming assessment at this juncture. The recovery is faltering. 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 1 job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.

Who cares about the unemployed...Rebecca Wilder...it seems that way, at least, when I listen to much of the rhetoric coming out of Washington. But it's not just Washington, it's Wall Street, too. In my line of work, finance, market participants grapple with the monthly economic data flow, eyeing each release as if it's telling a new story about the current prospect for US economic growth - that it isn't just treading water. 'Consensus' economists forecast their expectations for the economic release of the day, the market then trades based on the surprise to which the data beat or disappointed expectations. Day in, day out, that's what we do. I have a problem with this automated way of viewing the world. It's tough to hear Wall Street economists defend their forecasts, stating that 'oil' or 'Europe' are the primary risks to the outlook; or that the structural unemployment rate has risen markedly so that harmful inflation is right around the corner. Step back, take a look at where 2.7% annual growth (current Consensus for 2011) actually gets the US labor market (see chart below). The biggest risk to the outlook is not oil, it's unemployment. The longer that the labor market remains idle - in fact, the labor force is now trending downward - the lower will the average skill level will go. Then you're going to get something much more structural, the so-called positive feedback loop.

The road to recovery gets steeper - In his FT blog of June 5 2011 Gavyn Davies notes that the “speed and extent of the decline in the manufacturing growth has been unusually severe, especially in the US”. Mr Davies notes that “if we add together all of the business survey evidence for May, we get a picture of a global economy which is probably continuing to expand, but not at a very rapid rate.” It underlines the fact that in the advanced countries as a whole, this has been a weak recovery, particularly given the depth of the recession. Of the six biggest advanced economies – the US, Japan, Germany, France, the UK and Italy – only the US and Germany had higher gross domestic product in the first quarter of 2011 than three years before and then only by a little. I regard the four laggards as being still in recession. The fact that the US had the highest GDP, relative to its starting point, of these six countries may be a surprise to some, given its 9 per cent unemployment rate in April. That reveals the flexibility of the US labour market. It also suggests that demand and so output remain depressed. By the standards not of other rich countries today, but of its own past, the US recovery is extremely disappointing (See charts).

Fixing America's Economy: Nine Ideas from Around the World - Democrats and Republicans are dug in like soldiers at Verdun over what to do about the sputtering U.S. economy. Exhausted by the political stalemate, they've been reduced to magical thinking, hoping that things will eventually get better by themselves. But time isn't on America's side. It may finally be time for Americans to consider ideas from a place that they don't usually look to for inspiration: the rest of the planet. The U.S.'s economic predicament does present some unique dilemmas. David Rosenberg, chief economist at Gluskin Sheff & Associates, a Toronto-based wealth-management firm, says of the U.S.: "We're basically in uncharted territory."  To prod the conversation forward, Bloomberg Businessweek scanned the world and found innovative economic ideas in countries as diverse as Germany, Brazil, Singapore, and Thailand that are applicable to America's mess. The focus was on short-term solutions, but since there aren't a whole lot of miracle fixes to be had, we also considered some longer-term reforms that create a better environment for years of sustainable growth.

Economic Disasters That Could Still Strike - After yet another weak jobs report came out last Friday—the U.S. private sector, it turns out, added just 38,000 jobs in May—economists have been groping for an explanation. One theory is that the economy is still in a deep, deep funk: As the IMF warned back in 2009, it takes a long time for the world to recover from a severe financial crisis. But another theory on offer, most recently from Fed chairman Ben Bernanke on Tuesday, was that May was just a nasty hiccup, thanks to a few unexpected one-time events. There were the lingering economic shockwaves from that 9.0-magnitude earthquake in Japan, which punched a few holes in the global supply chain. Plus, uprisings in the Middle East have sent the price of oil soaring, and that always hurts. Oh yeah, and a once-in-a-century tornado rampage flattened big swaths of the Midwest. So maybe we just got unlucky. But even if you believe this second theory (and many economists don’t), it’s not especially comforting. After all, unexpected crises and disasters seem to happen with a fair amount of regularity these days. If the plan for growth is to hope nothing sudden or jarring happens in the months ahead, that’s not a terribly prudent plan. So here’s a list of things that could still go very wrong in the months ahead—and send our all-too-fragile economy reeling yet again:

Why do safe, liquid assets become so expensive in a financial crisis? - In my last post, I argued that the “liquidity” premium was one of the fundamental drivers of the recession. In exactly the same way that a small drop in the supply of cash can cause a massive spike in the nominal interest rate (quite possibly leading to a recession), small shifts in the supply and demand for liquidity can drive up the liquidity premium and push other interest rates to disastrously high levels—even when the Fed does its best with conventional monetary policy. But why should the liquidity premium change so much, anyway? Brad DeLong is rightly skeptical: Now we understand why demand for money–what I call liquidity–is so interest-inelastic. You need money to buy stuff. But why is the demand for what Matt calls “liquidity” and I call “safety” so interest-inelastic in a financial crisis? It’s not that you have to cut back on your spending on currently-produced goods and services–you have plenty of cash money. But you are unwilling to part with some of your cash money because it is now–part of your holdings of liquid cash money are now in the the safe that you feel you must retain at all costs. But why must you retain it?

Disaster Not Averted - When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression: allowing a cascade of bank failures that both destroyed much of the country’s wealth and left the financial system badly crippled. Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression. But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.  Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression.  Then, as now, politicians in Washington were obsessed with the budget deficit.

The Fed, the budget and the economy Policy fatigue - WHEN America’s economic recovery stalled last summer, Washington swung into action. The Federal Reserve announced it would buy $600 billion of government bonds with newly printed money, pushing down long-term interest rates. Then, at the end of the year, Barack Obama struck an agreement with the Republicans to cut payroll taxes and extend unemployment benefits. Economic history seems to be repeating itself, in part. A promising recovery is again sputtering as job growth, which averaged 220,000 from February through April, slumped to 54,000 in May. The unemployment rate rose to 9.1%, the second monthly increase in a row (see chart). The economy grew at just a 1.8% annual rate in the first quarter and probably only a little faster in the second. Though not a double dip that barely qualifies as a recovery.  The response from Washington, however, is quite different from last year. In a speech on June 7th Ben Bernanke, the chairman of the Fed, acknowledged growth had been “uneven…and frustratingly slow.” But as the Fed’s second round of “quantitative easing” (QE) draws to an end this month, he gave no hint a third round was in the offing.

The Shame of the Ratings Agencies: How Moody’s Blows It Again - If the economic news wasn’t bad enough after the release of yet another anemic jobs report, the highly influential global ratings agency Moody’s just announced that it was contemplating a downgrade of the U.S.’s credit rating. The proximate cause is the continued impasse in Washington over raising the debt ceiling, which if unresolved by early August will technically leave the federal government insolvent and unable to meet its daily expenses (little things like paying the army, sending out Social Security checks, turning on the lights at VA hospitals). Said Moody’s in its statement: “Although we fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. … The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged … Moody’s will place the rating under review.”

China ratings house says US defaulting: report - A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order. "In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying. Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies -- eroding the wealth of creditors including China, Guan said.

China official warns on "excessive" holdings of U.S. assets (Reuters) - China should guard against risks from "excessive" holdings of U.S. assets as Washington could pursue a policy to weaken the dollar, a senior currency regulator said in comments published on a website that briefly pushed the dollar lower. However, the comments by Guan Tao of the State Administration of Foreign Exchange were quickly removed from the website at his request. He told Reuters the comments had been made in private academic discussions and represented his personal view only. "We must be alert of economic and political risks in excessive holdings of U.S. dollar assets," Guan, head of the international payment department at SAFE said in the article on the website of China Finance 40 Forum, a Beijing-based think-tank of Chinese economists, bankers and officials. (www.cf40.org.cn)"The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home," he said.

China's SAFE Warns Excessive Dollar Holdings Risky, Promptly Retracts Statement - For the nth time, China let loose that "excessive" holdings of US dollars are risky because "Washington could pursue a policy to weaken the dollar, a senior currency regulator said in comments published on a website that briefly pushed the dollar lower." Oddly this time, the statement which came from Guan Tao of China's State Administration of Foreign Exchange (SAFE) which is the entity responsible for managing the country's $3+ trillion in USD FX holdings, was promptly retracted, following an announcement by Tao to Reuters "that the comments had been made in private academic discussions and represented his personal view only." In other words this is an identical episode to the one when the BOC's Mark Carney told "a private circle" that the US is going to hell in a handbasket. While the announcement briefly pushed the dollar lower, is the take home message that everyone is secretly hating America, while in public keeping a rosy appearance? The answer, of course, is a resounding yes.

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills - China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury. Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here. Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase. Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March. 

Fed passes China to become largest US creditor  - The Federal Reserve has surpassed China as the single largest creditor of the U.S. government. UniCredit’s Chief U.S. Economist Harm Bandholz is out Thursday with the details: As a result of its asset purchase program (QE2), the Federal Reserve at the end of 1Q held about 14% of total outstanding federal debt (debt held by the public). It is, therefore, now the single-largest creditor of the US government. According to separate data from the Treasury Department, China is ranked second. It owned in late March Treasuries worth USD 1,145bn, which is slightly less than 12% of the total amount outstanding. After the Fed and China, the biggest holders of U.S. debt are

• the household sector
• Japan
• state and local governments
• and private pension funds.

German Rating Firm Cuts US Debt To Double-A From Triple-A‎ - German ratings agency Feri EuroRating Wednesday said it downgraded its credit rating on the U.S. to double-A from triple-A, citing the "continuing deterioration of the creditworthiness of the country due to high public debt, inadequate fiscal measures, and weaker growth prospects." The ratings firm said U.S. deficits "are not a sustainable fiscal policy," and said it would reconsider the rating if the government "creates a long-term sustainable budget." The ratings firm, which claims about 1,000 clients worldwide, is small compared with industry peers and focuses on Germany, France and the U.K.

Mounting US debt 'threatens' Saudi investment: Experts - Economists have warned Saudi investors that mounting US debt and a weakening dollar is putting at risk a traditional safe haven for investment: US treasury bonds, which make up 70 percent of Saudi investment in the US. Economists told Al-Eqtisadiah, a sister publication of Arab News, they believed that the hegemony of the US dollar in the world economy would not last long in light of $8 trillion in US debt. Financial expert Raja Al-Marzouki said the declining US dollar would have a negative impact on Saudi investments abroad."As a result all investments and deposits would diminish, affecting Saudis' income, purchasing power and profitability," he said, predicting the decline of the dollar would continue. "Saudi investors must be aware of the danger posed by investing in a single currency."According to him, there is no single major currency to replace the dollar and expected a basket of currencies would control the world economy in the future. He suggested that Saudis must distribute their investment in different currencies to reduce the impact of a falling dollar.

Gross Says U.S. Policy Prompting Foreigners to Question Dollar - -- Pacific Investment Management Co.'s Bill Gross said foreigners are questioning the dollar's role as the world's reserve currency because of U.S. polices that keep borrowing rates low to reduce the nation's debt burden. Gross, manager of world' biggest mutual fund, reiterated that investors should avoid U.S. Treasuries because they're not being compensated for the risk of inflation. Investors should buy debt of nations that maintain better fiscal and monetary policies such as Canada, Germany and Mexico, he said. "If you're a foreign holder of dollars," you should be concerned, Gross said, speaking today in Chicago at the 2011 Morningstar Investment Conference. "Ultimately, they too begin to question, and are already starting to, the soundness of a Treasury bill, bond or note." Gross eliminated government-related debt from his flagship $243 billion Total Return Fund in February, from 12 percent of assets in January, as the U.S. projected record budget deficits.

Why Bill Gross insists interest rates are going up - Bill Gross, founder of PIMCO, says the differences between the U.S. and Japanese economies show why interest rates here have nowhere to go but up.  Gross noted that U.S. Treasuries are yielding 1.55%. “Compare it to the Japanese market which we know is a moribund, dead, lost-decade kind of economy,” Gross said, “and the Japanese bond yields .8%. Here we have the US with a dynamic economy, … with respect to their Treasury departments, the U.S. and Japan are just 80 or 90 basis points apart.” “Unless we cataclysmically black-hole our economy and drive it far into further recession, it’s hard to see how we could drive [domestic] interest rates much lower.” Bond rates fell Wednesday on continuing fears of a slowdown in the U.S. economy following downbeat comments from Fed Chairman Ben Bernanke Tuesday.  Gross has been an outspoken bear on U.S. Treasurys in recent months, arguing that they don’t reward investors enough for the risk they carry.

The Decline of Pimco Macro - Krugman - I first talked to the Pimco people in, I think, 1991, when I was asked (and paid) to talk to them about economic issues; don’t remember the subject. Since then, of course, Pimco has continued to be a huge success; Bill Gross is without doubt a great investor. I have often found the economic analyses coming out of Pimco deeply enlightening. And in 2009-2010 the firm won big by betting, correctly, on interest rates staying low. For the past year or so, however, Pimco seems to me to have been making less and less sense. Gross bet big on the idea that rates would spike when quantitative easing ends; I guess he has three weeks to be vindicated, but it sure doesn’t look like it. And the economic logic was all wrong. Now Mohamed El-Erian is claiming that inflation in China and Brazil is Bernanke’s fault; again, the economic logic is all wrong.  El-Erian’s latest sort of shocked me; it sounds as if he’s making up his own version of macroeconomics. And that’s not something you should do unless the existing models have failed — which they haven’t.

Citizen Sues Atlanta Fed Based on Allegation that It's Issuing Federal Reserve Notes That It Has No Intention of Redeeming, Which Amounts to Counterfeiting -  Scott Beach sent me this link to his complaint against the Atlanta Fed. In his complaint, Beach points out that 12 United States Code Section 341 provides that Federal Reserve Banks can be sued, and can that they can:Forfeit [their] franchise for violation of law.  The complaint alleges that all of the Federal Reserve Banks (including Atlanta) stopped allowing Federal Reserve Notes to be redeemed in the early 2000's and that - because 12 United States Code Section 411 requires the notes to be redeemable - continuing to issue notes without allowing redemption amounts to counterfeiting.

Read this speech, then sell the dollar - BEN BERNANKE'S speech on Tuesday got all the attention, but the speech later that day by Bill Dudley, head of the New York Fed, is more intriguing. In it he analyses the macroeconomic origins of the global imbalances that precipitated the crisis and prescribes the policy path forward. He does so in logical, crisp and accessible language. Mr Dudley is, however, still a central banker, which means he must be translated, especially when it comes to the delicate subject of the dollar. In a nutshell, Mr Dudley tells us that aggressively easy monetary policy is essential to both the cyclical recovery and to a structural rebalancing of the American economy away from consumption and toward exports. This process will go more smoothly for everyone if emerging market economies (EMEs) cooperate and let their exchange rates appreciate (i.e. let the dollar fall), but absent such cooperation, don’t expect the Fed to change course.

How to Kill a Dollar - – The dollar has had its ups and downs, but the downs have clearly dominated of late. The greenback has lost more than a quarter of its value against other currencies, adjusted for inflation, over the last decade. It is down by nearly 5% since the beginning of 2011, matching the lowest level plumbed since the Bretton Woods System of pegged exchange rates collapsed in 1973.An obvious explanation for this weakness is the United States Federal Reserve’s near-zero interest-rate policy, which encourages investors to shift from dollars to higher-yielding foreign assets. Predictably, the Fed’s critics are up in arms. The central bank, they complain, is debasing the dollar. It is eroding the currency’s purchasing power and, with it, Americans’ living standards. Even worse, the Fed is playing with fire. Its failure to defend the dollar, the critics warn, could ignite a crisis of confidence. At some point, the Fed’s tolerance of a weak dollar would be taken as a lack of commitment to price stability. Frustrated investors would then dump their US Treasury securities. Bond yields would shoot up. The dollar would plummet. There would be financial distress and a deep recession.

Dollar Debasement - Krugman - Just a reminder: when people start talking about the plunging dollar, dollar debasement, whatever, the actual numbers look like this: So we’re talking about that downward jog toward the end, which basically brought the dollar back to its level just before the crisis; during the worst of the crisis safe-haven demand temporarily pushed the dollar up. And the recent decline is, of course, dwarfed by the dollar’s slide during the Bush years; funny how we didn’t hear cries about dollar debasement back then. Oh, and for the record, while I had a lot of bad things to say about Bushonomics, I definitely did not complain about the falling dollar.

 Tax cuts push debt to new milestone - What a difference a year -- and a big tax cut -- makes. A recent Treasury report noted that national debt will exceed the size of the economy this year -- a first since World War II. A year ago, the Treasury had estimated that notorious record wouldn't be hit until 2014.  Now the expectation is that total debt to GDP will top 102% this year, up from the earlier estimate of 96.4%. Why the change?Two factors are likely the biggest cause. First, the White House's 2011 GDP estimate is $219 billion lower today than it was a year ago. So debt as percentage of a lower number will always look higher.Second, the debt grew larger because of a tax cut deal brokered by President Obama and Republicans last December. That deal will add an estimated $858 billion to the deficits over a decade -- $410 billion of it in 2011 alone, according to the Congressional Budget Office.  The tax cut package¹ extended all the 2001 and 2003 tax cuts for another two years, enacted a one-year Social Security tax holiday and reduced the estate tax.

Low Yields on US Treasuries No Guarantee Against Fiscal Crisis - Treasury Secretary Timothy F. Geithner takes comfort from the government’s ability to borrow at low interest rates as the budget deficit hits a record high. “There’s a lot of confidence” in America’s capacity to meet its commitments, he told Bloomberg Television.  History suggests that such faith may prove to be misplaced in the long run. A study of 116 financial crises in 25 countries found that rates had a poor track record in foreshadowing financial difficulties, said Carmen Reinhart, a co-author of the analysis and the female economist whose work is most frequently cited by other researchers. European debt markets were “complacent” about the growing repayment risks there “even three years ago,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a May 18 interview.  “People don’t worry about credit risk very much until suddenly they worry about it a lot,”  “Then you can get a panic.”

Ex-CBO Directors: Crisis May Come Before Lawmakers Agree To Debt Ceiling Hike - Lawmakers may not reach an agreement to tackle the ballooning federal debt until financial markets indicate they are losing confidence in the United States' ability to pay its obligations, former heads of the Congressional Budget Office warned Tuesday. The four former CBO directors, who spoke on a panel sponsored by the University of Maryland School of Public Policy, agreed that the U.S. would eventually come to a long-term plan to reduce the federal debt. But Robert Reischauer, who directed the nonpartisan agency from 1989 to 1995, said it would be "very hard" for lawmakers to agree to a plan without an "external crisis of some kind." The remarks come as lawmakers are negotiating an increase to the $14.3 trillion federal debt ceiling, which Republicans insist must be coupled with immediate spending cuts. The U.S. hit the debt ceiling last month and will begin to default on its obligations by Aug. 2 unless the ceiling is raised, Treasury officials have said

Fed’s Plosser: Debt-Ceiling Wrangling Is Distraction From Long-Term Problems - The U.S. faces long-term fiscal challenges that need to be tackled and current wrangling between the nation’s lawmakers over the debt ceiling is a distraction from these problems, a top Federal Reserve policy maker said Thursday. “The U.S. does face a fiscal problem. It is a long-term fiscal problem, not a short-term fiscal problem and it needs to be addressed,” Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview. Earlier, he told an audience of economists in London that U.S. lawmakers are engaged in “a game of chicken” over the federal government’s debt limits, in a debate that’s “missing the point.” "It would be nice if we got away from this debate about the short term and really focused on the long-term challenges. They are quite serious and need to be addressed," Plosser said.

Fitch may cut US to "restricted default" in August - The United States probably wouldn't be able to maintain its prized AAA sovereign ratings status if it suffered even a "technical" default on its debt, Fitch Ratings said on Wednesday. The rating agency also warned it would downgrade the U.S. sovereign ratings to "restricted default" in August if the government fails to honor Treasury notes and some coupon payments on Treasury securities due on August 15. "Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective and though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," Fitch said in a statement.

US risks downgrade from AAA to B+, says Fitch - Fitch says it will downgrade the US from AAA to B+ if it does not increase the maximum amount it can borrow by August 2 and fails to make its first debt repayment after that date. The US hit its so-called debt ceiling again earlier this year, but without raising it according to normal policy. Clashes between Democrats and Republicans have hindered agreement on the country’s deficit. Fitch expects the country’s politicians to come to an agreement and enable the US to meet its obligations. However, it has published a note to warn of a sharp downgrade if the agreement does not materialise.

When will US debt be downgraded? By how much? - The once unthinkable prospect that US government debt might lose its AAA rating has suddenly become a real possibility. In fact, it now seems about as likely as not. The problem is not so much “can’t pay” but “won’t pay”. The problem is that the total value of outstanding debt keeps growing (this would happen even with a stable debt/GDP ratio) and the US Congress requires periodic votes to approve this. They are usually the occasion for some grandstanding, but this time the Republican majority of the House of Representatives is seriously threatening a refusal, unless the Democrats agree to massive (and still unspecified) spending cuts. The due date for raising the debt ceiling passed a while ago, but an actual default is being staved off by some sharp accounting tricks, which will apparently work until 2 August. At this point, loud alarm bells have started ringing for the big ratings agencies, Standard&Poors and Moodys. . For anyone who is following the news, the possibility that the US might default is obvious, and there is no reason (especially in view of their appalling performance leading up to the GFC) to think that the ratings agencies have any insights unavailable to the rest of us. But they have to make a choice and that choice will have significant financial, economic and political implications.

US "playing with fire" on debt default-China cbank adviser - The United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Speaking on the sidelines of a forum, Li said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case.

Bernanke: Sharp Fiscal Consolidation Focused on the Very Near Term Could be Self-Defeating - From Bernanke's speech:The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

Bernanke: Sharp Spending Cuts Could Hurt the Economy - Federal Reserve Chairman Ben Bernanke spoke again on Tuesday, but you didn’t miss much. He still thinks unemployment is way too high, and he still has no plans to do anything about it. His primary message didn’t change since the last time he spoke: He’s decided to do nothing, now and for the foreseeable future. The news from Bernanke’s speech to the International Monetary Conference in Atlanta will probably be his odd confrontation with J.P. Morgan CEO Jamie Dimon, who had the chutzpah to suggest that the Fed is making a bad economy worse by over-regulating Wall Street. (Remind me: Who collapsed the economy in the first place?) But buried beneath his Feddish verbiage, Bernanke did issue an interesting warning to Congress: Don’t make make a bad economy worse with big short-term spending cuts. He may be a Republican, but he’s no Tea Party Republican.  Bernanke didn’t call for more fiscal stimulus, but he strongly cautioned against drastic anti-stimulus, noting that “a sharp fiscal consolidation focused on the very near term could be self-defeating.”

Rx for a Double-dip Recession: Cut Government Spending by 15 Percent - Apparently nostalgic for recession, more than 100 House Republicans have proposed to cut federal spending by $550 billion in 2012. The Republican Study Committee (RSC) doesn’t ever quite say this is their plan, but it is. One hardly knows where to begin.This is an amazing number. It implies a 15 percent reduction in government spending in a single year—in the midst of a weak economy with unemployment that exceeds 9 percent.  It is an austerity budget of historic proportions.  Just to compare, the United Kingdom is moving to cut spending by 20 percent over four years. The House Republican budget devised by Budget Committee Chair Paul Ryan (R-WI) would cut 2012 spending by about 3 percent or $110 billion. The RSC would make Ryan look like a crazed liberal. Of course, that may be the idea. Not only do these lawmakers appear oblivious to the real economy, they may also be fundamentally misreading the markets.  I am increasingly hearing from Wall Street that a double-dip recession is a far more immediate worry than the deficit.

Wall Street Is Already Reacting Negatively To Debt Ceiling Fight - Three things are wrong with the continuing insistence by the Republican Congressional leadership and a number of potential GOP presidential candidates that the financial markets will not react negatively if the existing federal debt ceiling is not increased by Aug. 2, the date that the U.S. Treasury says the government’s cash situation will become critical. First, it’s not at all clear that GOP Congressional leaders really believe what they are saying. One of the back stories to last week’s scam of a debate in the House on a “clean” debt ceiling bill was that the leadership apparently went out of its way to let the financial world know in advance that the vote was nothing more than political theater and shouldn’t be taken seriously.  Second, the leadership and the candidates don’t seem to realize or be able to admit that the White House is in control of many of the levers that will affect the markets. Administration officials, not the Congressional leadership, will determine how to deal with a cash shortage, and Wall Street is much more likely to react to the Treasury’s decisions than to political hyperbole, demagoguery and attempted spin. Third, in spite of all the GOP protestations to the contrary, there are actually a number of important signs that capital markets have already begun to react disapprovingly to the debt ceiling impasse and that the economy is starting to feel the negative effects.

Will Geithner prioritize debt repayment? - Now that I’ve given Tim Geithner grief for looking at the world from a predominantly Wall Street, Treasury, fiscal and monetary policy point of view, I’m going to do just that myself when it comes to a potential debt default. I was confused this morning when I read this Reuters article saying that Republicans are flirting with the idea of the US defaulting, and quoting Paul Ryan as saying that holders of government debt would be willing to miss payments “for a day or two or three or four.” This of course is a very dangerous idea indeed, but that’s not what puzzled me. Rather, it was this: Republican Senator Pat Toomey has even introduced legislation directing the Treasury to prioritize debt service over other payments if the debt limit is not raised. It has 22 Republican co-sponsors in the Senate and 98 in the House of Representatives, although no members of the Republican leadership have backed it. I found this Brian Beutler article which explains just how crazy the bill is considered to be in Washington. Here’s Beutler’s headline:‘Pay China First’ — Republicans’ Wild Plan To Avoid U.S. Debt Default

Analysis: Parties maneuvering on debt and Medicare - The threat of a first-ever default by the federal government is pushing President Barack Obama and Republicans toward a sweeping agreement to cut government spending and increase the Treasury's borrowing authority. Yet a perennial partisan struggle over Medicare drives them apart. Remarkably, the two sides seem determined to pursue both accord and discord simultaneously, sparing the still-wobbling economy from threatened calamity while preserving Medicare as a political issue in the 2012 elections. "I'm willing. I'm ready. It is time to have the conversation" about deficit cuts and the debt limit, said House Speaker John Boehner, urging Obama to become personally involved. "It is time to play large ball, not small ball." But a few days later, House Democratic leader Rep. Nancy Pelosi of California said, "I could never support any arrangement that reduced benefits for Medicare. Absolutely not," Given the sheer size of Medicare, nearly $500 billion a year, any deal on reducing future deficits is likely to include savings from the program, if not the benefit cuts many Democrats oppose.

There's a reason they talk about 2 August: What the Republican Mainstream Hath Wrought - Reuters reports that the mainstream Republican Party has decided to jump the shark admit it is insane: David Frum, a former speechwriter for President George W. Bush and a Republican advocate for raising the debt limit, said he holds regular question-and-answer sessions with Republican congressman over a beer. "I have yet to meet one Republican who actually says a failure to raise the debt limit scares them," Frum said. "It is deeply, deeply troubling the number of Republicans I now talk to - and I include the mainstream - who think a technical default is manageable." Let us be clear: a "technical default" is manageable. It is being managed right now. We've been in "technical default" since around May 15th. Vendors are seeing payments delayed, contract signings are being put off, funding is being delayed. We can not pay soldiers, after all. They're getting food and lodging in Afghanistan or Iraq or Libya anyway; they don't need money. Pat Toomey appears to believe that would be a good idea: Toomey thinks those ungrateful Chinese bondholders are important. But who are they more important than? :Social Security recipients, who traditionally receive their checks and direct deposits on the 3rd of the month.

“No Downside” to Not Raising the Debt Ceiling - The U.S. Congress has a little less than two months to raise the $14.3 trillion debt ceiling or possibly default on its debt. Treasury Secretary Timothy Geithner says not allowing the Treasury to raise the debt limit would be "catastrophic" for the economy. Geithner is crying wolf according to Chris Whalen, a banking industry analyst and co-founder of Institutional Risk Analytics. Whalen argues Congress should vote against raising the debt ceiling unless they agree to major spending cuts. "Congress has the right to say 'no' and the people of the United States have a right to say 'no' we don't want to issue more debt," Whalen first made his thoughts known about the debt ceiling in a Reuters opinion piece Why Congress should vote no on raising the debt ceiling published in April."My view is that Congress should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America's political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible."

The $2.4 trillion debt-limit raise - Amid all the fuss over the debt-limit negotiations, I haven’t seen much emphasis on how much the debt limit is going to be raised. But here’s a pretty concrete figure: $2.4 trillion. It’s the number being “eyed” and “mulled” by Congress, which translated out of Reutersese means that the best-case scenario here is that there’s going to be another knock-down debt-limit fight in the immediate aftermath of the November 2012 election. Now a $2.4 trillion debt-limit hike is obviously a much better outcome than the $290 billion increase that Congress passed at the end of 2009. And by historical standards it’s large. But as these discussions become increasingly fractious and political, they must also become increasingly infrequent, for fear that they’ll simply become budget negotiations by proxy. (Or even something else entirely: while the Republicans are insisting on spending cuts this time around, there’s no telling what the quid pro quo might be next time.)

GOP Rep: Gov’t. workers need to ‘find a real job’ - Did you know that teachers, firemen, police, office workers, IT professionals and mail carriers aren’t actually doing a “real” job?  That’s according to Rep. Paul Broun (R-GA), who told a conservative radio host recently that he’s opposing a national debt limit increase because he believes it wouldn’t affect anyone with a “real job.”  Although Republicans raised the debt limit repeatedly and with little debate under President George W. Bush, Republicans under President Barack Obama are digging in their heels and threatening to harm the global economy by forcing the U.S. to default on its debts or make significant cuts to the government’s day-to-day operations.  Some of those day-to-day operations include workers who may be deemed “non-essential”: about a quarter million of them, according to the Congressional Budget Office.  But speaking to conservative talk host Martha Zoller, Broun was unfazed at all the jobs that would be lost.  “Well those are gonna be government employees that are put out of work,” he said. “There are a lot of government employees that need to go find a real job!”  (video) 

Federal Budget Deficit Totals $929 Billion for the First Two-Thirds of the Year - CBO Director's Blog - The federal budget deficit is $929 billion for the first eight months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review—$6 billion less than the shortfall recorded over the same period last year. For the first two-thirds of the year, outlays are about 6 percent higher and revenues are about 10 percent higher than they were last year at this time. The deficit in May was $59 billion, CBO estimates—$77 billion less than the shortfall recorded in the same month last year. About $43 billion of that reduction resulted from shifts in the timing of certain payments and revisions to the estimated costs of certain credit programs, mostly the Troubled Asset Relief Program (TARP). The lower monthly deficit is also the result of increased receipts in May—they were $28 billion (or 19 percent) higher than receipts in May 2010, CBO estimates. In total, receipts through the first eight months were about $1.5 trillion, $139 billion (or 10 percent) higher than receipts recorded in the same period last year. Individual income tax receipts rose by $156 billion, or 29 percent—the result of increased amounts withheld from paychecks and strong growth in payments accompanying 2010 tax returns. Withholding for individual income and payroll taxes rose by $59 billion (or 5 percent), while nonwithheld taxes increased by $41 billion (or 18 percent).

Tax Hikes On The Menu In U.S. Debt Talks - Top US lawmakers will tackle the politically treacherous topic of tax hikes in their next round of debt-reduction talks, a Republican involved in the discussions said. "They (Democrats) want to talk about revenues, we want to talk about spending constraints," Jon Kyl, the No. 2 Republican in the Senate, said. Kyl's comments suggest that negotiations led by Vice President Joe Biden are preparing to tackle one of the main stumbling blocks on Thursday in their effort to reach a deal that would allow Congress to increase the country's borrowing authority before an Aug. 2 deadline.  Top Republicans have said that any increase in the country's $US14.3 trillion debt ceiling would have to be matched by an equal amount in spending cuts, though they would not likely take effect immediately.

Economy’s Woes Shift the Focus of Budget Talks - Recent signs that the economic recovery is flagging have introduced a new tension into the bipartisan budget negotiations, giving rise to calls especially from liberals to limit the size of immediate spending cuts or even to provide an additional fiscal stimulus. On Thursday, for the first time in two weeks, Vice President Joseph R. Biden Jr. and six Congressional leaders will meet with a new urgency to take up negotiations toward reaching a deficit-reduction deal in July. Democrats will make the case for additional tax revenues to balance spending cuts, an approach Republicans have rejected. More broadly, however, the signs of an economic slowdown in past weeks — not least Friday’s report showing weak job growth in May — have altered the climate for those talks. Amid the emphasis in Washington on significant deficit reductions, including new plans for spending cuts from more than 100 of the most conservative House Republicans and from Tim Pawlenty, one of the Republican presidential aspirants, some Democrats, economists and financial market analysts are raising concerns that too much fiscal restraint this year and next could further undermine the recovery.

Geithner: ‘Very Good Chance’ of Deficit Deal This Summer - Treasury Secretary Timothy Geithner said Monday in Atlanta that policy makers have a “very good chance” of getting a deficit-reduction deal this summer, though he offered few new clues about how the White House and congressional Republicans might broker such a deal.  “We’re in the midst of trying to build a bipartisan consensus on a long-term fiscal reform plan that would bring our deficits down in the next three to five years on a path, actually a little more aggressive than what [the U.K. has proposed]…“We’re trying to figure out how to bring people together…There’s a broad consensus that we need to do $4 trillion to $5 trillion [in deficit reduction] in the next 10 to 12 years, and three’s a lot of overlap. Not enough. But a lot of overlap in the kind of spending, savings that you need to be part of that framework.”

War of Ideas on U.S. Budget Overshadows Job Struggle - A run of disappointing economic data, punctuated by Friday’s employment numbers, is emboldening Congressional Republicans in their standoff with the White House over the best way for the government to encourage growth. Republicans said the slow pace of hiring in May underscored the need for sharp cuts in federal spending and regulation to spur corporate investment. They have refused to increase the debt ceiling¹, the maximum amount the government can borrow, without an agreement to make such cuts.  They argue that Democratic efforts to revive growth through public spending programs have failed as the economy remained weak and unemployment high almost two years after the end of the recession².  Democrats counter that Republicans are unnerving businesses by sowing uncertainty about the government’s willingness to pay its debts, and that immediate budget reductions would cut jobs and undermine growth.

The Growth Test for Fiscal Policy Hurts the Unemployed - The website that tracks the stimulus spending, Recovery.Gov, is currently featuring the following story on its front page: Recovery Transportation Projects Completed around the Country They could emphasize all sorts of things, the number of people helped by spending on social services, the way in which the spending saved jobs by offsetting contractions at the state and local level, the impact of the tax cuts, how extended unemployment compensation helped families, etc., etc., but instead they chose to emphasize economic growth. If you click on the About tab, one of the main goals of the legislation was to Spur economic activity and invest in long-term growth In a recent column, I argue that this reliance on a "growth test" for fiscal expenditures (and tax cuts to a large extent) was necessary to get the legislation passed, but constrained our ability to pursue more direct job creation policies. (I think I oversold the actual reliance on the growth test a bit, but not in terms of how it was presented  and sold to the public):

Scarecrow’s Nightmare: Austan Goolsbee Defends President Romney’s Economic Plan - If I’d been asleep for the last decade and woke up to ABC This Week’s interview of Presidential economic advisor Austan Goolsbee, I would assume that Mitt Romney won the 2008 election, that he was predictably following Republican dogma about how to recover from a severe financial collapse and recession. Goolsbee correctly told us that a smart economist wouldn’t get overly excited about one month’s jobs and growth numbers but would instead look at the overall trend. Of course what he wouldn’t want to concede is that GDP grew at a meager annual rate of 1.8 percent over the first three months of 2011 and the overall trend for job growth was still not enough to make a serious dent in unemployment unless you believe taking 5-10 years to get back to full employment is okay. When Amanpour asked him what the Administration could or should be doing to improve conditions, he ticked off items you’d expect to hear from a typical GOP Presidential adviser: we’ve got to get the debt under control; we have a White House effort to identify and get rid of governmental regulations that are preventing the private sector from growing the economy; we should pass “free trade” agreements backed by the Chamber of Commerce; and we should leverage limited public dollars to release billions in private funding for investments.

The Stalled Recovery, Smoke and Mirrors, and the Carnage on the Street - Robert Reich  -Jobs and wages stink, if you haven’t noticed. They’ve been bad for months, even before this week’s data made it fairly clear the recovery has stalled.Stock prices had been rising nonetheless. That was partly because big corporations were enjoying big sales and fat profits from their foreign operations. But foreign sales are slowing. Chalk that up to the European debt crisis, Europe’s insane austerity measures, Japan’s tragedy, and China’s concerns about inflation.Meanwhile, other companies have been busy restocking inventories in the hope American consumers will be in a mood to buy. But that hope is coming to an end, as the reality dawns that American consumers can’t and won’t buy very much, given their shrinking home values, high debts, and job worries.Stock prices were also rising because of Wall Street’s certitude that it can make loads of money from the gullibility of millions of small investors.

The recovery/deficit deal the two parties should, but won’t, strike - Ezra Klein - Recently, the economist David Autor introduced me to a delightful concept: “Now-more-than-everism.” Credit for the coinage goes to Larry Summers, but anyone who follows politics will recognize the basic play. “Here’s how it works,” Autor wrote to me over e-mail. “1. You have a set of policies that you favor at all times and under all circumstances, e.g., cut taxes, remove regulations, drill-baby-drill, etc. 2. You see a problem that needs fixing (e.g., the economy stinks). 3. You say, ‘We need to enact my favored policies now more than ever.’”  There’s a lot of now-more-than-everism going around Washington these days, and at a time when we can afford it much less than usual. The recovery is sputtering. Unemployment is back above 9 percent. Growth projections are being revised downward. But neither the Democrats nor the Republicans are pushing any policies that seem even slightly influenced by the ongoing crisis. Both parties are calling for the same policies they’d be pushing at 6 percent unemployment and 3 percent growth.

The faith-based economics of deficit reduction -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. Lower interest rates should also cause the dollar to decline, since it will make US government bonds and other dollar assets less attractive to foreign investors. If the dollar falls in value, then our goods will be more competitive on world markets. This will cause us to import less and export more, thereby creating jobs. 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?

Thoughts on Voodoo - Krugman - There’s a quite good case to be made that austerity in the face of a depressed economy is, literally, a false economy — that it actually makes long-run budget problems worse.  Suppose you slash spending equal to 1 percent of GDP. That looks like a budget saving, right? But if you do it in the face of an economy up against the zero bound, so that the Fed can’t offset the demand effects with lower rates, it’s going to shrink the economy. Let me use a multiplier of 1.4; you can adjust the numbers as you wish.Now, a weaker economy means less revenue. Assume that every dollar up or down in GDP means $0.25 in revenue, which is conservative. Then the fiscal austerity reduces revenue by 0.35 percent of GDP; the true saving is only 0.65 percent. Now, the government has to borrow those funds; let’s say the real interest rate is 3 percent, Then the long run impact of the austerity on the fiscal position is to reduce real interest payments by 0.0195 percent of GDP. But what if there are long-run negative effects of a deeper slump on the economy? If the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity.

No Virginia, There Is No Such Thing As Expansionary Contraction - A lot of people have recently asked me why we’re stuck in this policy vise-grip, targeting spending cuts and deficit reduction when we should be targeting job growth.There’s no single perp here—there are numerous explanations, including politics and ideology of course, the changing views of the electorate on the effectiveness of Keynesian interventions, and the fact that normal people don’t readily do counterfactuals. By that, I mean we did the Recovery Act, and it demonstrably helped, but the unemployment rate still went up and hasn’t come down much.  Independent analysts, including the CBO, make the case that the economy would have been worse without the stimulus, but good luck with that one in a climate where people really don’t want to see their much-needed, hard-earned income spent on stuff they’re sure is wasteful. OK…but how do you get from “stimulus doesn’t work” to a particularly unfortunate strain of the current policy debate: “the best way to stimulate job growth now is to aggressively cut gov’t spending.”

Deficits More Than Pay for Themselves - Suppose the nation needs a key piece of infrastructure, a public good the private sector has trouble providing for itself. If the government puts the infrastructure into place through deficit spending, it will increase private sector growth for as long as the infrastructure remains in place, i.e. until it wears out (it could be replaced, but I want to focus on a single project). If the extra tax revenue from the higher economic growth rate covers maintenance costs, the cost of the project, and then some, then the project more than pays for itself. It won't cost taxpayers a dime. In fact, it will save them money. The problem, of course, is that just as in the private sector it is very unlikely that the economic growth rate would increase enough to actually generate sufficient revenues to cover the costs - it would take a substantial increase in economic growth to do that. Let me emphasize that this says nothing about whether a project benefits society. The tax revenue a project generates through increased growth is different from the economic benefits of a project.

Congressional Progressive Caucus People's Budget beats Ryan's corporatist budget by a long shot - Fact is, the radical right wing budget proposed by radical right Ryan gets lots of coverage. FAIR noted that he was on Meet the Press 4/10, Face the Nation 4/17, ABC'sThis Week 5/1, PBS News Hour (one on one) 5/1, ABC Good Morning America 4/13, and he's been profiled personally, showing that he has learned the key to Reagan's success--you can say the most absurd things that are ultimately extraordinarily dangerous for ordinary people, and get ordinary people to think you are great, just by smiling and coming across as "genuine" and acting like you believe the lies you are spreading. Be a good actor, that is, and you can move the corporatist agenda forward at huge cost to ordinary Americans, because they will (regrettably) trust in your (fake) genuineness that you will do right by them. The budget plan has been covered in nightly news shows many times--though not with the kind of piercing analysis that would expose its corporatist bones for what it is. Instead, in the segments I've watched, it is almost always treated as though it is what it claims to be, an attempt to put the US on sound fiscal footing. That's simply bullshit. It's an attempt to eliminate the New Deal and move the US back to the pre-New Deal period when regulators were weak-kneed and Business could pretty much do whatever it wanted, and the military would serve Big Business interests around the globe.

The Fruits of The Peterson Solutions Project - The latest crusade up in FireDogLake land is to castigate the Roosevelt Institute, the Economic Policy Institute, and the Center on Budget and Policy Priorities for having the temerity to participate in the Peterson Foundation’s effort to get six think tanks to write down scored plans for reducing the long-term debt load of the country. I take it that the selloutery of my colleagues at the Center for American Progress goes without saying to such an extent that we don’t even warrant a mention in Yves Smith’s righteous condemnation. But personally I’ve always liked EPI’s work, and CBPP’s, and Roosevelt’s, so I’ll be happy to welcome them into team sellout and let Jane Hamsher keep tending the lonely flame of true faith.  On another level, I believe we should judge an exercise like this based on its outcome. And it seems to me that progressives have a lot to be proud of here. Four of the six proposals (CAP, EPI, Roosevelt, and Bipartisan Policy Center) argue for defense spending cuts. Four of the six proposals (CAP, EPI, Roosevelt, and AEI) argue for a carbon tax. Three (CAP, EPI, Roosevelt) call for financial transaction taxes, and three (CAP, EPI, Roosevelt) argue for a public option. Four (CAP, EPI, Roosevelt, BPC) call for short-term fiscal stimulus. Five of the six proposals feature good ideas about farm subsidies. Four of the six proposals feature higher income revenues than called for by current law.

For Recession-Scarred Youth, a Voice in the Budget Debate - There is a new budget plan in town, one that doesn't belong to Republicans or Democrats, but promises like the rest of them to lower deficits and speed economic growth to create a better United States for our children and grandchildren. This one is actually written by the same young people who must suffer or enjoy the long-term consequences of decisions made today. While the policies overall lean leftward, the youth plan doesn't match well with either party’s platform or ideology. Consider that a warning to politicians who are currently avoiding the creative thinking displayed by the students in this document, whose generation will make up a third of the electorate in the 2016 presidential contest. The “Budget for a Millennial America” ends the wars in Iraq and Afghanistan by 2015, reducing and focusing defense spending on cyber- and energy-security. It cuts most corporate and individual income taxes, but replaces revenue with a financial transactions tax and a carbon tax. It funds universal Pre-K and a stimulus package designed to pull the economy through its stagnating recovery, while grafting Republican Sen. John McCain’s 2008 health care reform proposal on top of President Obama’s health care overhaul.

On Fauxgressive Rationalizations of Selling Out to Powerful, Moneyed Backers - Yves Smith - I’m surprised that my post, “Bribes Work: How Peterson, the Enemy of Social Security, Bought the Roosevelt Name” has created a bit of a firestorm within what passes for the left wing political blogosphere. It has elicited responses from Andy Rich of the Roosevelt Institute, Roosevelt Institute fellow Mike Konczal, as well as two groups only mentioned in passing in the piece, the Economic Policy Institute and the Center on Budget and Policy Priorities. They all illustrate the famed Upton Sinclair quote, “It is difficult to get a man to understand something when his job depends on not understanding it.” And so it is not surprising that all of them engaged in straw man attacks and failed to engage the simple point of the post: if you have a clear purpose and vision, you do not engage in activities that represent the polar opposite of what you stand for. These “the lady doth protest too much” reactions reveal how naked careerism has eroded what little remains of the liberal cause in the US. Despite the fact that the left, as does the right, has a moral stance underlying its political positions, operatives on the left have been willing to sell out, not just to make the occasional compromise, but on bedrock principles. Here the fish has rotted from the head; this posture reflects the corporatist-in-sheep’s-clothing stance of Obama filtering through the Democratic party infrastructure. What has happened with Roosevelt, and to a lesser degree with EPI and the CBPP, is blindingly obvious to those who are paying attention.

Jon Walker: Roosevelt Institute Abandons Traditional Liberal Health Care Policies For Pete Peterson - Worrying about long term deficits with official unemployment over 9 percent and treasury bonds rates at near-record lows is inherently an act of madness. It is the antithesis of both progressive policy and basic logic. Left to their own devices, liberals would relegate reducing the deficit to a very low priority in this economic climate. Of course when you’re a billionaire like Pete Peterson and you’re willing to spend millions promoting deficit hysteria, your can convince “liberals” to play into your deficit fetish at even the most illogical of times. Hence the Peter G. Peterson Foundations 2011 Fiscal Summit. I’ve berated all the so called “progressive” groups that took part in the Peter G. Peterson Foundation 2011 Fiscal Summit for including health care reform in their deficit reduction proposals, yet totally abandoning the traditional progressive solution: a single payer health care system. If the United States simply adopted a system that was roughly as efficient as France, Finland, Norway, Australia, Denmark, England, or New Zealand, we wouldn’t have a deficit. Yet the clear and demostrable global precedent set by these nations somehow managed to escape inclusion by these leading liberal economic lights. The Roosevelt Institute’s deficit plan, however, deserves special attention. Of the three plans, it is particularly bad on the issue of health care.  Lucky for Peterson, the Roosevelt Institute is willing to put the FDR legacy into the service of his and other lobbyist-friendly objectives. Let’s look at their proposal (PDF).

Welcome to the Recovery - Krugman - For unrelated reasons (textbook!) I just reread Tim Geithner’s unfortunate August 2010 op-ed Welcome to the Recovery. Even at the time, it seemed tone-deaf to both the economic and the political realities; now, of course, it looks much worse.  But Zachary Goldfarb’s deeply depressing piece on Geithner’s role in the internal economic debate offers some context: it looks as if “Welcome to the Recovery” was aimed not at the nation at large but at the pro-stimulus camp within the administration. No need to do more, Geithner was saying; we’ve got this under control. Except, of course, they didn’t.  I get really depressed. Whether he knew it or not, Geithner was making the Mellon-Schumpeter-Hayek argument that any effort to push up demand was somehow artificial and unsound. Not what anyone should be saying in the modern world, least of all a top official in an allegedly progressive Democratic administration.

How fiscal ideology trumped job creation - Ben Bernanke was hardly shy about straying into fiscal territory yesterday: And I don’t think it’s a coincidence that today sees the publication of Zachary Goldfarb’s big 2,200-word profile of Tim Geithner, banging the same drum, and contrasting it explicitly with the need for further economic stimulus.  The way that Goldfarb puts it, it’s pretty clear that Geithner’s actions have resulted in less stimulus and a weaker social safety net. I’m particularly interested in the “rancor” within the White House on this question, given that I thought there was a consensus on the issue, in terms of what the best policy should be: pay for a second stimulus now with the proceeds of a credible long-term deficit-reduction strategy. The message I’ve been getting — and I’ll admit that my ears are not well attuned to Washington nuance — is that we’d all love a second stimulus on such terms, but that it’s a political impossibility given the make-up of Congress, and that therefore there’s no point in even trying.

The Fatal Pivot - Krugman - Christy Romer talks about the economic debate (pdf) in the fall of 2009: Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery. I remember that fall of 2009 as a very frustrating one. It was very clear to me that the economy was still struggling, but the will to do more to help it had died. There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. This matches what I was hearing. And it tells you that it wasn’t just the Republicans: a substantial faction within the administration was eager to “pivot” away from the jobs issue. Christy also tells us that the Fed shifted its focus from promoting expansion to exit around the same time. Future historians will look back at this, and marvel. Of course, it’s just part of the broader story of how bad economic ideas — the very ideas that were proved wrong by the crisis, and continue to be proved wrong by subsequent events — have come to dominate the discourse.

More on Geithner, Deficit Reduction, and Expenditure Switching - Zach Goldfarb’s profile on Treasury Secretary Timothy Geithner ignited a firestorm among bloggers with the money quote:The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”Reactions on the shift to a deficit-reduction strategy come from Ryan Avent, Felix Salmon, and Mike Konzcal, among others. The general view is that Geithner has pushed the Administration into an economically dangerous position, guaranteeing millions remain unemployed, for absolutely no good reason. The yield on the 10-year Treasury is mired at 3%. Where is this loss of confidence that is so feared in Washington? Salmon gets to the heart of Geithner’s thinking here: Geithner cut his teeth in a world of bond vigilantes, and dealt with a series of international sovereign-debt crises where countries found themselves hammered by enormous bond spreads.I suspect - guessing, really - that Geithner is very much concerned the US is uncomfortably close to a currency crisis.

Let's dispel illusions on Medicare - First, to Ryan’s plan. Its supporters want people now 55 and older to breathe easy. Their Medicare coverage will be grandfathered in, and the limited subsidy plan wouldn’t kick in until 2022 anyway. However, as the nonpartisan National Journal reported last week, Ryan’s plan also repeals the Affordable Care Act enacted last year. That law closes the “doughnut hole” in the Medicare prescription-drug benefit — three-quarters of seniors’ drug costs are covered until they reach $2,840 and after they reach $4,550. In between, they must pay 100 percent. Right away, nearly 4 million of today’s seniors would see drug costs go up significantly if Ryan’s proposal passes. But wait: There’s more. All the seniors’ preventive-care services covered under the Affordable Care Act, such as mammograms, colonoscopies and smoking-cessation programs, would go away. This, even though Republican leaders have stressed personal responsibility measures as the preferred alternative to universal government care. Another severe hit to the elderly lay in the Ryan plan’s $744 billion in proposed cuts to Medicaid, the Journal report explained. Nine million elderly, low-income Americans qualify for Medicaid as well as Medicare, and it is through Medicaid that they receive coverage for long-term care.

Vouchercare Is Not Medicare, by Paul Krugman - What’s in a name? A lot, the National Republican Congressional Committee obviously believes. Last week, the committee sent a letter demanding that a TV station stop running an ad declaring that the House Republican budget plan would “end Medicare.” This, the letter insisted, was a false claim: the plan would simply install a “new, sustainable version of Medicare.”  But Comcast, the station’s owner, rejected the demand — and rightly so. For Republicans are indeed seeking to dismantle Medicare as we know it, replacing it with a much worse program.  I’m seeing many attempts to shout down anyone making this obvious point, and not just from Republican politicians.  Start with the claim that the G.O.P. plan simply reforms Medicare rather than ending it. I’ll just quote the blogger Duncan Black, who summarizes this as saying that “when we replace the Marines with a pizza, we’ll call the pizza the Marines.”  Medicare is a government-run insurance system that directly pays health-care providers. Vouchercare would cut checks to insurance companies instead.  And most seniors wouldn’t be able to afford adequate coverage.  Based on CBO estimates, the typical senior would end up paying around $6,000 more out of pocket in the plan’s first year of operation.

When You Don’t Need To Worry About Facts - Masquerading behind an invocation to “wisdom” in the title, David Brooks today finds his false equivalence (see here for another example) by comparing the the two parties’ approaches to Medicare: the Democrats, he says, favor “top-down centralized planning” while the Republicans favor the “decentralized discovery process of the market.” David Brooks swallowing Republican talking points whole is not worthy of note, so I’ll just point out one: he calls the Ryan Plan a “premium support plan,” despite the categorial denial by Henry Aaron, the creator of the premium support idea.* But it’s marginally more interesting to point out Brooks’s finely-honed rhetorical dishonesty.

Krugman: Republicans ARE trying to end Medicare - Paul Krugman debunks the Republican spin on the Paul Ryan plan for Medicare: Greg Sargent reports that they’re demanding that a TV station stop running ads saying that the GOP wants to end Medicare; the claim is that this is a lie, because the new program the GOP wants to impose in place of Medicare is still Medicare. As Greg says, this is important — because if they can get away with this, it will amount to a serious infringement of free speech, preventing people from running truthful ads. Because the fact is that Republicans are trying to end Medicare. The program we now call Medicare is one in which the government acts as your insurer, paying your major medical bills; coverage is guaranteed to all seniors. The program Republicans want gives you vouchers and tells you to go buy your own insurance, if you can. That’s not at all the same thing. Oh, they’re also trying to stop anyone from calling it a voucher plan — but that’s what it is.

Ryan’s Graphics: Geeks Bearing GIFs - The Republican House Budget Committee has a snazzy YouTube video up featuring Rep. Paul Ryan defending his plan to voucherize Medicare.  It looks good but, alas, misleads.  Supporters of his plan have been stressing this argument of late, so let’s be very clear about why it’s very wrong. The basic flaw is that Ryan and his video pretend that the R’s Medicare plan gives consumers the power to negotiate directly with health care providers, who can thus use their voucher-driven bargaining clout to hold down prices.  But, in fact, that’s not how his plan works at all.  Under his plan, seniors get to negotiate with insurance companies, not service providers (doctors, hospitals, etc.).  A few minutes in, the graphic complains that under the Affordable Care Act, a panel of “15 unelected, unaccountable bureaucrats decide how much, or how little, Medicare will pay doctors and which services Medicare will, or will not, pay doctors to provide for their patients.”Ryan’s video creates the impression that his plan is different in that it lets Medicare recipients decide what health care services to pay for, and thus control costs through that old market chestnut, consumer sovereignty (“No my good sir, I shall not pay $16,549 for that appendectomy!”)

Government's mountain of debt - The health insurance program for seniors is the nation's biggest financial challenge. The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20. This demographic burst — combined with the addition of a prescription drug benefit in 2006 and rising health care costs generally — has created an unfunded liability of nearly $25 trillion over the lifetime of those now in the program as workers and retirees. That is the taxpayers' obligation, beyond what Medicare taxes will bring in or seniors will pay in premiums for Medicare Part B — also called supplemental coverage — that helps pay for doctor visits and other expenses outside the hospital. That $25 trillion is likely an underestimate, Medicare's actuaries say, because it counts on 165 cost-saving changes in the health care reform law. Many of these are unlikely to occur — such as cutting physician payments 30% by 2012.

Health Care Costs and the Tax Burden - Last week I showed that total taxes at the federal level — individual and corporate income taxes, payroll taxes and so on — are at a 60-year low as a share of the broadest measure of income, the gross domestic product. Some readers took issue with my failure to include state and local taxes in the calculation. I have now done that, using data from the Organization for Economic Cooperation and Development, which represents the major developed countries. Among its most important responsibilities is the collection of internationally comparable data on a wide variety of topics, including taxes and health care spending. The table below shows total taxes, including state and local government taxes, as a share of G.D.P. in 2008, the latest year for which there is complete data. The table makes clear that the United States has very low taxes by international standards.

Why the Google Test Fails - In essence, Pawlenty wants to eliminate—after a Google search—any government program that is approximately in the same industry as at least one private-sector firm. The fact that FedEx and UPS deliver mail and packages does not mean those companies provide the same services as the USPS; skeptics should go to their nearest FedEx store and try to mail a letter to a rural address for 44 cents.   Pawlenty might view Kinkos and the Government Printing Office as providing the same service—printing—but such a crude definition can be applied to any government service. Why stop at the postal service, the Government Printing Office, and Amtrak?   Private schools thrive at both the K-12 and college levels; should we therefore abolish public education?  Privately owned parks and country clubs provide many of the same services that national parks do.  Retirees can purchase annuities in private markets, so the Google test seems to suggest abolishing Social Security.  Health insurance companies provide insurance to millions of people; does that mean Pawlenty wants to zero out both Medicare and Medicaid?  Some roads are built and owned by private companies; does that eliminate the need for public highways?  Private military contractors and mercenaries provide the same services as the U.S. military—would the Google test therefore encourage firing DOD personnel and replacing them with private surrogates?

Pawlenty's Tax Plan--Thinking about Inequality and Fairness in Tax Policy--Part III - This post continues the discussion of inequality and fairness in tax policy begun in Part I and Part II.  The idea is that democratic egalitarianism calls for a tax policy that serves to restrain the growth of inequality and the concommitant consolidation of economic power in the hands of an elite oligarchy, else democractic institutions cannot survive.  Brute capitalism must be balanced by government intervention on behalf of the people, else the economy will work to allow the rich who control the levers of power to exploit the working middle and lower classses. Former Minnesota Republican Governor Tim Pawlenty is running for president.  Like the rest of the GOP cast of hopefuls, he is bound and determined to introduce radical changes to the federal tax system that will carry out a corporatist agenda and so has released a proposed tax plan.   There is lots wrong with his plan, from the likelihood of it costing 7.8 trillion to 10 trillion over a decade, to the fact that it reduces revenues to the federal government so much that it raises only about 13.6% of GDP, a starvation level that would jeopardize all important public services and public goods like public transportation, public health care, public retirement security, and public parks.  Then there's the wacky extremist right-wing corporatist tax policy that it incorporates--a policy designed to continue the raping of the American economy and the American middle class by the elite current owners and managers of America's concentrated capital.

Payroll-Tax Break Said to Be Discussed by Obama Aides Amid Slowing Economy - President Barack Obama’s advisers have discussed seeking a temporary cut in the payroll taxes businesses pay on wages as they debate ways to spur hiring amid signs that the recovery is slowing, according to people familiar with the matter. The idea, which is in preliminary stages of discussion, is among several being talked about at the White House as the economy holds center stage for the administration and Congress, the people said on condition of anonymity to discuss internal deliberations. The unemployment rate in May rose to 9.1 percent, the highest level this year.  The talks reflect the political constraints the White House is operating under with the Republican majority in the U.S. House pushing to cut federal spending. A hiring stimulus based on a tax break for employers may appeal to Republican lawmakers, many of whom have called for measures to help businesses.  White House press secretary Jay Carney today refused to detail discussions within the administration.

Trading Tax Cuts for Working Class Misery - The latest dreary unemployment report gives little reason to expect that an acceleration in the recovery is just around the corner. In fact, when the jobs report is combined with the many other recent data points indicating weakness in the economy, the worry is that output and employment growth could slow further in the months to come, or even head back into recession. The Obama administration's response to the employment problem has been a case of too little, too late, and without the needed follow-up when it became clear the initial stimulus was far from sufficient to turn the economy around. The federal response did offset changes in government spending and taxes at the state and local level induced by balanced budget requirements, and neutralizing those changes was important.We were already running a large deficit when the recession hit. The Bush tax cuts, combined with the wars in Iraq and Afghanistan, explain much of the deterioration in the budget from the surpluses of the Clinton years. Had we made the sacrifices necessary to fund the wars instead of borrowing to pay for them, and if we had not embarked upon a budget-busting trickle down policy of tax cuts for the wealthy, the budget would have been in much better shape when the recession hit and our response could have been much more aggressive.

Ten Years Later, the Bush Tax Cuts Remain Unfair, Ineffective, and Expensive - The Economic Growth and Tax Relief Reconciliation Act of 2001 (the first of a series of Bush-era tax changes) was enacted on June 7, 2001. Ten years later, the Bush tax cuts have exacerbated trends of widening income inequality, accompanied the weakest economic expansion since World War II, and turned budget surpluses into deficits. As detailed in a new Economic Policy Institute policy memorandum, these tax cuts were heavily targeted toward the wealthy at the expense of middle class families, poorly designed as an economic stimulus, and costly—significantly more so than advertised.  Over the past 30 years, middle-class wages have stagnated despite robust productivity growth, while the wealthiest sliver of the population has captured greater shares of income growth and national wealth. Tax policy should be designed to promote economic fairness by pushing against the trend of ever-widening income inequality. Instead, the Bush-era (2001–08) tax changes actually increased inequality by delivering more than half of their benefits in 2010 to the top 10 percent of earners, who make over $170,000 a year. In fact, 38 percent of the dollar benefits went to the top 1 percent of earners (tax filers making over $645,000), who received tax breaks averaging over $100,000.

Top 5 Charts on the Bush Tax Cuts - To mark the ten year anniversary of the Bush tax cuts, the CBPP assembled the "Top 5 Charts on the Bush Tax Cuts." Here are two of the graphs:

‘Patriotic Millionaires’ Describe What They’ve Done With Their Bush Tax Cuts: ‘I Built A Dance Floor In My House’ - Paul Egerman isn't certain how many millions he's saved from the tax cuts enacted during the George W. Bush administration in the early 2000s and extended by President Barack Obama in December of last year.  "I do not know how much I've saved over 10 years but I'm sure it is several million dollars -- probably in excess of $10 million," said Egerman, founder of a medical transcription company called eScription.  And what, HuffPost asked, have you done with all that cash?"I've kept it," he said. "I have not done anything with that money." Egerman is part of a gang of self-described Patriotic Millionaires who wish the federal government would help itself to more of their money to address its big budget deficits. Nearly 200 millionaires have signed a letter asking congressional Republicans to consider healing budget gaps with increased revenue -- in particular, higher taxes on millionaires -- instead of just reduced spending.

Bush tax cuts 10th anniversary: They've been a failure in every conceivable way. In 2001, the Bush administration inherited a few years' worth of budget surpluses, so it decided to cut income tax rates, double the child-care credit, and sharply reduce the levies on investment income. The economy then slowed, even entering a brief recession. As a form of stimulus, the administration doubled down, expanding and hastening the 2001 changes. Bush promised that the tax cuts would do a whole lot more than put money in people's pockets—which, in fact, they did. He said they would "starve the beast," forcing Congress to reduce the size and scope of government. He promised they would increase the prosperity of all Americans. He also vowed: "Tax relief will create new jobs. Tax relief will generate new wealth. And tax relief will open new opportunities."  But the benefits mostly accrued to the rich, according to the nonpartisan Tax Policy Center. The think tank reports that between 2001 and 2008, the bottom 80 percent of filers received about 35 percent of the cuts. The top 20 percent received about 65 percent—and the top 1 percent alone claimed 38 percent.

Time To Let The Bush Tax Cuts Expire? - "Let them eat cake" has been the message on the Bush administration tax cuts, critics say, and with the ten-year anniversary of the cuts this week, they say it's time for them to go. According to the Congressional Budget Office, if extended, the Bush tax cuts would nearly double the deficit in ten years.  Mike Konczal, a research fellow at the Roosevelt Institute and a well-regarded blogger on economics issues, says the cuts never have helped the economy much, in spite of the way they were sold. "It's not like this has unleashed a wave of productivity, or better incentives, or increased work output. It's mostly just rich people got a lot more money." According to Citizens for Tax Justice, in 2013 the tax cuts would give the richest 1 percent $30,000 a family. The bottom three-fifths would get less than $400. Konczal says it would be wiser to do more to put people to work directly. He says the tragedy is that more of that money should have been invested in the country. "These deficits weren't created to increase schooling or make better infrastructure, or put money in working people's pockets."

Republican Bait-and-Switch on Taxes - As we approach a debt crisis in early August due to Republicans’ intransigence on raising the Treasury’s borrowing limit – on May 31 every House Republican voted against an increase – they are digging in their heels on the idea that trillions of dollars of spending cuts must accompany any rise in the debt limit. Although they repeatedly proclaim that “everything is one the table,” Republicans quickly add that this does not include higher taxes. Simple arithmetic, however, tells us that a budget deficit and the concomitant increase in debt can result from either higher spending or lower revenues. And indeed, lower revenues are responsible for about half the increase in debt since 2001, according to the Congressional Budget Office. Since 2001, the national debt has increase $11.8 trillion. This resulted from a $6.2 trillion decline in revenues and a $5.7 trillion increase in spending. Of the revenue decline, $2.8 trillion resulted from legislated tax cuts and $3.4 trillion from economic and technical factors. On the spending side, almost all of the increase was legislated, with $2.4 trillion of it coming between 2001 and 2008.

Anti-Tax Orthodoxy Runs Deep–and Wide - Here’s a really excellent front-page story by Lori Montgomery in today’s Washington Post, where she focuses on Grover Norquist’s so-far-successful super-gluing of blinders on the GOP when it comes to the idea of reducing tax expenditures.  Lori explains that the growing sensibility of some of the Republican party’s wisest fiscal policy leaders on this issue have not yet swayed Norquist away from his self-contradictory, ideological stance (emphasis added): On Capitol Hill, Norquist has admonished Coburn (Okla.), Crapo (Idaho) and Chambliss (Ga.) for suggesting a tax option for tackling the debt: reducing credits and deductions worth an estimated $1 trillion a year. Although most of the cash would be used to lower tax rates for everyone, a portion would be dedicated to restoring national solvency. No good, says Norquist’s group, Americans for Tax Reform. Under the pledge, raising revenue in any way requires an equal tax cut elsewhere to avoid expanding the size of government. And, yes, that sometimes means protecting tax breaks that Republicans view as bad public policy, Norquist and his supporters say.

The Genius of Grover Norquist - Matt Yglesias ridicules Grover Norquist; According to the Norquistian theology, a good small-government conservative can’t agree to close a tax loophole that’s bad public policy in order to entice Democrats into agreeing to spending cuts. You can’t achieve efficiency enhancing reforms to the tax code by using the prospect of enhanced revenue as a sweetener, and you can’t broaden the coalition for spending cuts by using enhanced revenue as a sweetener. So the tax code stays inefficient and the spending level stays high, all so the members of the True Faith can be unsullied in the purity of their complaints about the inefficiency of the tax code and the high level of spending. I think Grover’s plan makes more sense than Matt is giving him credit for. The idea is not to reform the government, its to bankrupt it. Once that is done spending reductions will come mechanically.

Norquist’s Taxpayer Protection Pledge is the height of fiscal irresponsibility - Grover Norquist likes to boast that 41 Senators and a majority of Representatives have signed his Taxpayer Protection Pledge, which unconditionally rejects any net reduction in tax credits, deductions, or rates unless matched dollar-for-dollar by some other tax reduction. Norquist has plenty of reason to gloat, but taxpayers should be livid. Adherence to this doctrinaire pledge would rule out anything remotely resembling a balanced approach to deficit reduction and instead force the dismantlement of the social contract of the last 80 years. Having taken revenue increases off the table, today’s conservatives are pushing massive spending cuts paired, of course, with sweeping tax cuts. The House Republican budget demonstrates an unwillingness to pay for public investments, services, and a safety net, especially for the vulnerable and poor: their budget slashes more than $2.2 trillion from health programs, eliminates guaranteed Medicare within a decade, halves federal Medicaid spending by 2030, and by repealing the expansion of coverage in the Affordable Care Act, would increase the number of non-elderly uninsured Americans by some 34 million by the end of this decade. But the accompanying tax policies reveal this is a matter of unwillingness, not inability, to protect the poor, disabled, and elderly.

There Will Be Taxes, Ctd -- From Pew. I keep telling my friends on the right: you really want to raise the cap on SS contributions. You are talking about the moving to a system where the dominant source of revenue for the Federal Government is a flat, deductions and exemptions free tax on labor.  No other course of action makes holding down capital gains taxes more likely. No other course of action a millionaires tax bracket less likely. No other course of action has less tax avoidance and evasion associated with it.  Medicare will not be killed. This is your shot. Take it.

Thinking about Inequality and Fairness in Tax Policy -  Income, wages, wealth, health care, housing, natural resources, human capital opportunities--all these things that people need to live a decent life tend to be redistributed and allocated to those who already have more of them.  Property begats property, and putting the owner class first begats a situation in which the owner class owns even more of whatever is valuable to own, and therefore commands, even more, the ability to keep the majority of the population in a state of quasi-servitude.  In a democratic society with a primarily capitalist economy, one of government's primary purposes is to enable individual freedom for all by countering the brute power of the capital-owning elite and redistributing those resources downwards. One way that a majority of Americans has favored for achieving this necessary justice result is progressive taxation policies--taxing the wealthy/higher income at a higher rate (or even on a broader base--to wit, the corporate tax).  When there is progressive taxation, the gains that the elite have made merely because they are in the elite and hold the keys to power are marginally restrained.  But more importantly, those revenues then can be used to fund government programs that expand public goods and create opportunities for the vast majority with significantly fewer resources, through programs like unemployment compensation, health care, public education from K-12 to university, public transportation, etc.. So we need to ask a few questions about our system today.  Is it working or is the tendency for income, wealth and other favorable attributes to accumulate at the top overpowering the means of redress that exist?  And does the population have a clear understanding of the democratic egalitarian principle, so that people will vote in the best interest of the continued functioning of a democratically premised society?

Corporate Execs Offer to Give Up Tax Breaks in Return for Lower Rate - From the Los Angeles Times: Executives from four large U.S. companies told lawmakers that they would give up lucrative tax breaks in exchange for significantly lowering the 35% corporate rate, spurring efforts to overhaul the tax code. Executives from Boeing Co., Sears Holding Management Corp., Emerson Electric Co. and Perrigo Co., a leading pharmaceutical manufacturer, said Thursday that they prefer the simplicity and certainty of a rate as low as 25% over the complexity of calculating frequently shifting tax breaks.[...] A recent survey by the firm of 318 top financial officials at U.S. companies found that more than 60% wanted to keep their existing tax breaks unless the corporate tax rate was reduced to at least 25%. But 17% said they preferred to keep their tax breaks no matter how much the rate was cut.

How Hedge Funds ride herd in America - Start with something called a “Safe Harbor”. This is a legal designation that is established by the IRS. The activities of entities inside the Safe Harbor are free from taxation. The critical variable in determining whether Safe Harbor status is granted is if the activities of those seeking tax-free status are conducting trade or business in the USA.  I will go you two extreme examples. Toyota, a foreign corporation, has plants and retail outlets in the USA. They are clearly conducting trade or business here. No Safe Harbor status for Toyota. On the other extreme consider an individual in Europe who owns some US Treasury securities as a passive investment. They are not conducting trade or business, so the interest income is tax-free. The problem is that everything in the middle of these two extremes is not so clear. Those who want the benefits of tax-free status, but have a question mark as to whether they in fact deserve the favored treatment, have to petition the US IRS and get a letter ruling to clarify their status. If they get a favorable ruling, they are off to the (tax-free) races. Next consider this article (Link) from the NY Times June 8th. This article discusses a new phenomenon in US finance. Hedge Funds are becoming lenders. They are acting as banks.

T-bills as a substitute for financial regulation - Let’s say that somehow — miraculously — the United States achieved a balanced budget, and furthermore assume that this did not interfere with cyclical goals.  There would be many fewer T-bills, especially since the current structure of the debt is quite short-term. Fully safe collateral would be hard to come by. I see the paucity of safe assets, and safe collateral, as a major financial problem looking forward.  Our economy desires to extend more short-term credit than we can back by ready safe collateral or that we can cover by FDIC-like insurance.  Yet credit moves forward, in part because of bailout incentives but also because failed managers simply aren’t, and cannot be, punished very hard.  We return to the 19th century problem of bank runs, this time on the shadow banking system, and we realize to our horror that 1934-19?? was the exceptional and now-disappeared “safe period.”  We shudder to think of the next crisis, which is one reason why so many people are skittish about the Greek situation. T-bills limit one agency problem, but create another.  If there were T-bills “coming out our noses,” finance would be much safer, although of course we would have to face the moral hazard problem of what the government does with so much borrowed money.  When the quantity of T-bills goes down, financial regulation becomes a tougher act to pull off.

The president needs to make the case for his economic policies - Eliot Spitzer - The White House may hope to dismiss last week's dismal jobs data as a "little bump," but the reality is that the state of the economy is dire. President Obama must acknowledge the economic malaise. Then he can make the powerful and true case that the policies he has been pursuing are correct while the Republican alternatives are horrendous canards. It's alarming that once again we are letting the Republican candidates' rhetoric and near-hysterical fear of government spending distort the national debate and keep us from the more dramatic economic changes we still need. The lessons of the Great Recession and the semi-recovery are clear:

1. Keynes was, and is, right.
2. Targeted government intervention works.  
3. An individual health insurance mandate works.
4. Making the Bush tax cuts permanent has not created jobs.
5. The housing crisis still needs to be addressed head-on.
6. Joblessness—not the deficit—should be our immediate policy concern.

Austan Goolsbee Exit: Obama Advisor Leaves Behind Frustration, Political Dysfunction - Austan Goolsbee, one of President Barack Obama's longest serving policy advisers and the chairman of his Council of Economic Advisers, leaves his post pretty much as he inherited it: with the economy moribund, no clear path to vigor in sight and the unemployment rate stubbornly elevated.  More than ever, the atmosphere in Washington seems so laced with toxicity that policymakers have largely given up merely debating how to spur the economy, cognizant that any approach will be deemed politically impossible. This, suggest policy-watchers, appears to have played at least some role in prompting Goolsbee to finally throw it in and head back to the University of Chicago to resume his academic career. He felt frustrated and tired of seeing what he viewed as necessary policies sacrificed to the imperatives of political positioning and compromise. 

Colbert or Goolsbee: Who’s the Clown?  - According to Goolsbee, ‘the main driver of recovery at this point has got to be the private sector.’ Goolsbee recently told the Financial Times that only during ‘a rescue phase’ should the government be the primary driver of the economy. Likewise, for the past year President Obama has repeatedly said that the private sector must be the engine of job creation, a perspective shared by such Tea Party leaders and libertarians as newly-elected U.S. Senator Rand Paul and eerily reminiscent of the approach of the Hoover administration. Unfortunately, private sector job growth continues to stall and underperform. The U.S. added just 54,000 jobs last month, well below the 150,000 to 200,000 new jobs that are needed each month just to keep up with the increase in the working age population. The official U.S. unemployment rate is now 9.1 percent. According to the U.S. Bureau of Labor Statistics, nearly one in five American workers are either unemployed, underemployed, or discouraged workers who have given up looking for work.

Geithner: Stimulus is ‘sugar’ for the economy - From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration: The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.” In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

How Does Geithner Still Have a Job? - The Washington Post has a great and frankly terrifying most read profile of Treasury Secretary Timothy Geithner. He has been a top proponent in the White House of not worry about jobs but instead feed the deficit hysteria. By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009. Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. Geithner wasn’t just wrong but devastatingly wrong. The pivot away from jobs has result in a staled recovery, hurting millions of Americans and likely endangering Obama re-election.

The Banking Emperor Has No Clothes - By Simon Johnson - In a major speech earlier this week to an American Bankers Association conference, Treasury Secretary Tim Geithner laid out his view of what went wrong in the financial sector prior to 2008, how the crisis was handled 2008-10, and what is now needed with regard to implementation of reforms.  As chair of the Financial Stability Oversight Council and the only senior member of President Obama’s original economic team remaining in place, Mr. Geithner’s influence with regard to the banking system is second to none. Unfortunately, there are three major mistakes in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled.  Added together, this suggests one of our most powerful policymakers is headed very much in the wrong direction.

Obama Badly Needs a New Economic Spokesman - Who has the stomach and intellectual heft to stand up to the deficit hawks? Gene Sperling, the head of the National Economic Council, is a hard-working, well-meaning fellow, and a very able Washington operator, but he doesn’t have the gravitas of a Summers, or even a Goolsbee. Jason Furman, Sperling’s deputy, is another able Washington insider—and the holder of a Harvard Ph.D—but he, too, lacks standing. Who else is there? It is unlikely that the Senate would confirm Paul Krugman or Joseph Stiglitz, the two liberal icons and Nobel Laureates. Given their criticisms of the Administration, it is also doubtful that either one would pass muster with Obama. Janet Yellen, who held Goolsbee’s job in the Clinton Administration, is now at the Fed. Other possibilities, I suppose, are Laura Tyson, Alan Blinder, Brad De Long, David Romer (Christina’s husband) and Alan Krueger. Some of these people probably aren’t interested in the job, and others I’ve overlooked may well be better choices.

“Lifting the Veil” - Yves Smith - Mark Ames referred me to the documentary “Lifting the Veil.” I’m only about 40 minutes into it and am confident it will appeal to NC readers, provided you can keep gagging in the sections that contain truly offensive archival footage. Ames’ mini-review:It begins with John Stauber, one of the great anti-PR writers, and historian Sharon Smith laying out the flat rancid truth: That the Democratic Party of today is the Big Co-apter. The Republicans have always been the party of corporate interests; and the Democrats portray themselves as agents of social change and progressive/populist opposition to corporate power, but the Democratic Party’s job is to co-apt these anti-corporate movements and subvert them to the same (or a different faction of) corporate interests. To complete our two-corporate-party farce, we have an alleged third choice, a so-called opposition “Third Party,” the largest “neither left nor right”/”neither Democrat nor Republican” third party for the past three decades. And that party is…ta-dum!…Libertarianism. Which was nothing but a corporate PR project designed to co-apt the whole realm of Third Party opposition and subvert it to the most radical corporate agenda of all. In other words, even our Third Party/outside-the-system party is nothing but the most purified, most extreme pro-corporate party of all!  You can watch it below or at Metanoia:

Death By Debt - cmartenson - One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can't be fixed.  By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past.  At least they are for the debt-encrusted developed nations over the short haul -- and, over the long haul, across the entire soon-to-be energy-starved globe. The sooner we can accept that idea and make other plans the better.  To paraphrase a famous saying, Anything that can't be fixed, won't.  The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

Debtors' Prison - Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover.Creditors — the rentier class in classic usage — are usually the wealthy and the powerful. Debtors, almost by definition, have scant resources or power. The “money issue” of 19th-century America, about whether credit would be cheap or dear, was also a battle between growth and austerity. The creditor class views anything less than full debt repayment as the collapse of economic civilization. In fact, however, debts are often not paid in full. In the 20th century, speculators lost fortunes as dozens of nations defaulted on debts. Several 19th-century U.S. states and municipalities defaulted. Losers in wars and revolutions seldom pay debts. The Brady Plan of the late 1980s paid bondholders of defaulting Third World debtors at about 70 cents on the dollar so that economic growth could resume.

“Debtors’ Prison”: Bob Kuttner on the Costs of Rentier Rule - Yves Smith - Bob Kuttner has an elegant and important article at American Prospect, “Debtors’ Prison“. It’s an evocative, historical form of the argument made here and elsewhere: that advanced economies have gone down a disastrously bad path in not writing down debt that can’t realistically be paid.  The usual poster child for “why not writing down debts is a bad idea” is Japan, but that isn’t gripping enough to evoke the right responses. Even though its post-bubble growth has been dreadful, Japan is still a well-run, tidy country with a low crime rate, universal health care, long life expectancy, and tolerable unemployment. That in turn is due to factors that do not obtain much of anywhere else: Japan was very cohesive to begin with, and its elites chose to have their incomes fall relative to everyone else to save jobs.  This is the polar opposite of what has happened in the rest of the world, where the gap between the haves and the have-nots has widened. Kuttner provides another set of examples as to why we need to get the creditor boot off all our necks: Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover…

The Rentier Regime - Krugman - Bob Kuttner has a very good column (pdf) in The American Prospect about “debt politics.” Let me elaborate a bit. If you look at the economic policy demands coming from the right in the face of our current slump, they seem remarkably insensitive to the fact that we are indeed in a slump. Early on, some conservatives called for the use of monetary rather than fiscal policy to stimulate the economy — and you had the likes of Greg Mankiw and Ken Rogoff calling for a period of above-normal inflation. But they were shouted down, and these days the right demands not just fiscal austerity (albeit without any rise in taxes), but hard money too. Modern monetarists like Scott Sumner find themselves without a political home.What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff.

Wir Haben Auch Rentner - Krugman - A number of commenters on my rentiers post argue that it’s mostly about the GOP wanting a bad economy as long as Obama is president. I won’t say that’s too cynical — in my experience, nothing is too cynical. But I’d point out that the austerity/hard money axis is, if anything, even stronger in Europe. Indeed, the ECB makes Ben Bernanke look like William Jennings Bryan. Of course, in Europe there’s a national dimension: the Germans are the creditors, the peripheral nations the debtors. I’d also say that I’ve had distressing conversations with central bankers from other parts of the world that should not have a dog in this fight, but who have also bought into the notion that inflation is always and everywhere a disaster, and that there’s something unnatural and distorting about low interest rates, even in a deeply depressed economy; when pressed, they can’t make a coherent argument about why, but they’re sure it’s true. What I guess I’d say is that the creditor-oriented mindset permeates the whole world of men in suits sitting around tables talking policy. And the world will suffer for it.

Who Are The Rentiers? - Krugman - Following up on my rentier post and the eurocentric followup, a question: who are we talking about? That is, who stands to gain from deflation, and lose if inflation is, say, 4 percent over a period of 10 years? Is it little old ladies living on fixed incomes, and salt of the earth workers who have scrimped and saved?Well, no. There are, of course, some ordinary people who would lose a bit from higher inflation. But Social Security — the bedrock of retirement for most Americans — is indexed to inflation, and retirement accounts invested in stocks wouldn’t be hurt. If you want to see who really has a stake in the inflation dispute, go to Edward Wolff’s latest on the American wealth distribution (pdf). Here’s the takeaway:Financial securities are overwhelmingly held by the rich — more than 60 percent by just one percent of the population, more than 98 percent by the top 10 percent. It’s true that middle-class Americans own significant shares of deposits, and that some part of their pension accounts would be in bonds. On the other hand, middle-class Americans owe the lion’s share of debt; relatively speaking, the wealthy have hardly any.

Rule by Rentiers, by Paul Krugman - Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree. Nor is the Federal Reserve riding to the rescue.The situation is similar in Europe, but arguably even worse. What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense. Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.  No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

Government and the Financial Sector - Perry Mehrling writes,The important point is that, to the extent the market-centered credit system is here to stay, the institutions that support the liquidity of that market system are also here to stay. Even more, to that extent we should view those institutions as essential to the operation of our credit system. The problem is not, as KC would have it, how to keep those institutions out of the safety net but rather how to bring them in explicitly, along with a reformed system of regulation and supervision that ensures their safety and soundness. KC refers to two officials from the Kansas City Fed, who argue against providing a government backstop for repo-based finance. Mehrling is in favor of such a backstop. One problem with government providing guarantees to financial firms is that it gets really ugly when you have to make good. For example, on Greece, Michael Hudson writes,The crisis for Greece - as for Iceland, Ireland and debt-plagued economies capped by the United States - is occurring as bank lobbyists demand that "taxpayers" pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry.

CEO Tells Fed Chief New Rules Hurt Banks - Federal Reserve Chairman Ben Bernanke defended U.S. efforts to overhaul regulation of financial markets after the financial crisis Tuesday, rejecting suggestions from J.P. Morgan Chase & Co¹. chief Jamie Dimon and other bankers that regulators have gone too far. Mr. Bernanke, speaking before a group of international bank executives, including Mr. Dimon, said the changes to financial oversight in the Dodd-Frank financial law were necessary.  "While it is true there are a lot of regulations in the pipeline there is a good reason why financial regulation has been reformed," Mr. Bernanke said.  The most pointed comments Tuesday came from Mr. Dimon, who has been vocal about the effect regulatory changes are having on the banking industry. Ticking off a list of changes to financial markets over the past three years, Mr. Dimon said he feared someone would write a book soon about how government overreach had hurt the economic recovery.

Dimon confronts Fed chief over banking regulations - Bankers and regulators in the UK and Asia attacked US rhetoric on financial regulation as a leading Wall Street executive confronted the Federal Reserve chairman over US policy. Jamie Dimon, chief executive of JPMorgan Chase, questioned Ben Bernanke, Fed chairman, at an Atlanta conference on Tuesday and suggested that a slew of regulations – such as plans for an additional capital charge for large banks – were hurting the economy, “Has anyone bothered to study the cumulative effect of all these things?” Mr Dimon asked. “And do you have a fear, like I do, that when we look back and look at them ... they will be a reason that it took so long that our banks, our credit, our businesses, and most importantly, job creation started going again?”Mr Bernanke replied: “I can’t pretend that anybody really has. . . . We don’t really have the quantitative tools to do that.” But the Fed was trying to produce rules that “do not unnecessarily impose costs or unnecessarily constrict credit”, he said.

Dimon confronts Bernanke over banking rules - Jamie Dimon, chief executive of JPMorgan Chase, one of Wall Street's most powerful banks, took his complaints about too much regulation directly to the chairman of the Federal Reserve last night, challenging Ben Bernanke to prove that new banking rules are not crimping the economic recovery. Mr Dimon declared his "great fear" that academics will look back a decade from now and conclude that Wall Street reforms, including extra capital requirements on the biggest banks and curbs on derivatives trading, caused banks to pull back on lending and therefore held back the economic recovery. The bank boss assailed Mr Bernanke with a long list of the new rules, and demanded to know if anyone at the Fed or elsewhere had "bothered to study the cumulative effect of these things" on bank lending. "Your list made me feel pretty good, it sounds like we are getting a lot done," the Fed chairman told Mr Dimon. "There are many, many things to fix."

Jamie Dimon’s New Math - Simon Johnson - On Tuesday, June 7, Jamie Dimon (CEO of JPMorgan Chase) pressed Fed Chair Ben Bernanke on the costs of bank regulation after the financial crisis of 2008.  Could this be what is slowing the economic recovery?  Bernanke was very polite in his response, but the question – as posed – made no sense at all.  (The full tape of his question is here,) Most of what Jamie Dimon lists under the heading of changes are just symptoms of the crisis itself, e.g., badly run firms and crazy products disappeared.  His substantive issue appears – from his question – to be just about capital requirements.  But the implication of Dimon’s question – that higher capital requirements will slow growth – is simply wrong.  I explain this in a column now running on Bloomberg. 

Kansas City-style Financial Reform- Jazz, barbecue, and now Kansas City has also its own distinctive style of financial reform, put forward in a recent paper by Hoenig and Morris, respectively President and Vice President of the Kansas City Fed. Whereas the 1933 Glass-Steagall Act drew a sharp line between investment banking and commercial banking, Hoenig and Morris propose to draw a similarly sharp line between complex/risky banking and comprehensible/core banking. Only the latter institutions would continue to benefit from the public safety net, and also be subject to public regulation and supervision. The proposal comes at an opportune moment, as authorities are considering the specifics of the new post-crisis regulatory regime, which increasingly seem to be falling short of any fundamental reform (see here, and here, for example).  The proposal emerges from a distinctive account of the origin of the crisis, which the authors see through the lens of traditional commercial banking, not to say Jimmy Stewart banking, or safe and sound banking.

Financial Overhaul Mired in Details and Dissent - Nearly one year after Congress passed financial changes to rein in the banking sector, more than two dozen of the legislation’s rules are behind schedule, and no end to the wrangling over details is in sight.  The delays come as regulators extend public comment periods on the rules, and as some on Wall Street and in Congress resist the changes. One result may be that many new safeguards do not take hold in earnest before the next election, an outcome that could open the door for newly elected officials to back away from the overhaul. The rules are mandated by the Dodd-Frank financial regulatory law and range from curbs on executive compensation¹ to consumer banking protection provisions to more transparency in the trading of derivatives, those complex financial instruments that contributed to the 2008 financial crisis. So far, 28 of the financial overhaul rule-making deadlines have been missed, according to Davis Polk, a law firm that is tracking the rules². Of the 385 new rules to be written, the law firm says, regulators have completed only 24 requirements; they were supposed to have taken 41 such actions by now.  “There’s an attempt to kill this through delay,”

From Dodd-Frank to Dud: How Financial Reform May Be Going Wrong -  Early last year, as they weighed whether to bar banks from speculative trading with their own money, congressional staffers turned to a key regulator for advice. The response from Julie Williams, the chief counsel of the Office of the Comptroller of the Currency, was startling, according to people familiar with the conversations. Williams insisted new rules were unnecessary since this type of trading did not play a major role in the financial meltdown. Congressional Democrats went ahead and wrote the trading prohibition into Dodd-Frank, the sweeping overhaul of the nation's financial rules pushed through last July. But now, behind closed doors, financial agency powerbrokers are jockeying over how to implement the law, a process turning out to be as bitterly contentious and politicized as passing Dodd-Frank in the first place. Government officials -- including Williams and the OCC -- are inserting exemptions as they formulate rules to enforce the law. Some regulators, facing severe budget constraints, caution that they may not be able to carry out some of its key provisions. Foes of the law in Congress, and even some former friends, are voicing concern that aspects of the law could erode American competitiveness. Wall Street is mounting a determined lobbying campaign to blunt provisions it failed to defeat on the floors of the House and Senate.

Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback - As early as this Tuesday we might find out who runs this country.  Is it Wall Street and the financial economy or the real economy of consumer citizens and retailers?  We will know the answer to this question based on what happens when the Senate votes on a bill to unwind a Dodd-Frank Act provision that would prevent banks from charging anticompetitive debit card swipe fees.This provision, known as the Durbin Amendment is a belleweather for the state of political power and thus financial regulatory reform in the United States. Banks are working furiously to roll back the Durbin Amendment, and their success or failure at doing so is a measure of the political power of financial institutions. If the banks win, it will not just be the traditional story of the banks' routing the consumer groups. If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.

Chart of the day, Dodd-Frank delay edition - I like Louise Story’s piece today on the mire in which Dodd-Frank finds itself. She links to this Davis Polk report, which includes this chart: That’s 28 missed deadlines to date, when it comes to new rules required in Dodd-Frank, with the big spike coming right up in the third quarter. The trend is clear: while the early deadlines were hit, later ones tend to get missed. My prediction is that the overwhelming majority of those 109 rules due in the third quarter are going to be missed rather than finalized.There’s an apocalyptic reading here, which is helpfully provided by a former CFTC official: “There’s an attempt to kill this through delay,”“The difference between eight or nine months and 24 months could be cataclysmic here.”  But what’s undeniable is that the banks have worked out that attacking Dodd-Frank in its implementation phase is proving much more fruitful than their attempts to attack it when the legislation was actually being put together. This is par for the course, when it comes to regulation: no matter how sharp legislators make a regulator’s teeth, the industry being regulated tends to be able to blunt them in reality.

Delaying the Dodd-Frank Rules - Planet Money’s Jacob Goldstein makes a great catch this morning, noting that The Wall Street Journal and New York Times have stories about Wall Street and the delayed installation of Dodd-Frank regulations, but that “they tell very different stories about what the delays mean.” And indeed they do. The Journal’s frame is that Wall Street is upset over the delay of derivatives rules and that it’s causing “uncertainty.” Here’s its lede: Banks, investors and companies are scrambling to cope with uncertainty caused by regulators’ delays in fleshing out the Dodd-Frank financial-overhaul law, amid fears the holdup might disrupt the $583 trillion derivatives market and spark a wave of lawsuits.The Times, though, points out that it’s Wall Street that is delaying the rules: The delays come as regulators extend public comment periods on the rules, and as some on Wall Street and in Congress resist the changes. Some of the most powerful players in the derivatives market — which is closely controlled by just a small group of banks — argued that the government should allow a slow pace of changes for rewriting derivatives contracts.

Oil Futures Fake Out - The CROOKS (allegedly, just indictments so far) at the NYMEX are running a scam and they have NO INTENTION WHATSOEVER of accepting delivery of even 1/10th of the 367M barrels they had as open contracts last week. In fact, Wednesday (June 8) they traded their contracts 454,043 times - isn't that amazing?  It's a 123% daily churn rate!  Of course, it's easy to churn 454M barrels of crude because the only sucker that ends up paying for all those fees is YOU, the end consumer of crude.  All those fees are passed on to you as part of the price of oil.   Don't forget to thank Uncle Lloyd and Uncle Jamie (who was whining to Uncle Ben about how stopping him from screwing over taxpayers is bad for the economy), when you fill up your tank, as Exxon's CEO Rex Tillerson told us last week, without those speculators, a barrel of oil would be $70. You can see Jamie sweating as President Obama said a Justice Department probe will examine the role of “traders and speculators” in oil markets and how they contribute to high gas prices. “The attorney general’s putting together a team whose job it us to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators,” Obama said April 21st in Reno, Nevada. “We are going to make sure that no one is taking advantage of American consumers for their own short-term gain.”   

Geithner Wants Global Rules on Derivatives - Treasury Secretary Timothy Geithner called for global standards in the way derivatives contracts are structured in order to prevent a global "race to the bottom." Mr. Geithner's comments in a speech Monday could open a new front in the clash among regulators, banks and industrial companies over how rules should be structured following the financial crisis. The Treasury secretary went further than previous statements from the Obama administration, which has called for more global regulation but previously had stopped short of pushing for harmonized standards for derivatives contracts, which are designed to track the return on stocks, bonds, currencies or some other benchmark.

The fallacy of financial regulation: neglect of the shadow banking system - In response to the crisis, the reforms in financial regulation address threats to the banking system by increasing capital and providing for liquidity in the banking system. This article argues that the measures miss the point of the recent crisis. The liquidity crisis in the shadow banking system was a major source of financial and economic instability. Liquidity grew within in the shadow banking system, and once liquidity evaporated, fire sales lead to downward revaluations of collateral assets. In a financial system increasingly dominated by market instruments, a collapse due to rapid revaluations or counterparty risk is a very high prospective risk. The liquidity and leverage ratios proposed by the Basel committee do not address the problem.  Some progress has been made in strengthening regulation in the financial sector. Reforms improving banking systems are a pressing area in which some work has been done. The Basel committee is introducing
(a) a leverage ratio as a supplementary measure to the Basel II risk-based framework. The leverage ratio is 3 per cent of total assets; and
(b) a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio.

The Three Consumer Banking Systems - For the past couple of years we've heard a lot about shadow banking versus traditional banking. But this dichotomy treats the traditional banking system as a unitary whole. That's hardly the case for consumer banking. The United States currently has three consumer banking systems. They have somewhat separate regulation and market segments, but they are fundamentally in competition with each other. The first system is the too-big-to-fail commercial banks. They are almost all structured as national banks, regulated by the Office of the Comptroller of the Currency. The second system are the community banks and credit unions.  They tend to be regulated by the FDIC and NCUA, but also by the Fed or state banking supervisors.  And the third system are the nonbank finance companies (payday lenders, title lenders, even pawn, etc). Despite the competition between these sectors, they have cooperated to a surprising degree recently, particularly community banks and credit unions with commercial banks. I'm frankly puzzled why they are willing to carry water for the big boys (do they want to be part of the club?).

The Republican attack on financial regulation - Ezra Klein - Republicans aren’t content with blocking anyone and everyone from leading the Consumer Financial Protection Bureau. Next week, they’re planning to attach a series of anti-Dodd-Frank amendments to a noncontroversial economic development bill. One amendment would neuter the CFPB, of course. Gotta keep trying, I guess. Another would repeal the whole law. A third would stop the government identifying too-big-to-fail firms and regulating them more tightly. And that doesn’t even get into the ongoing efforts to defund the agencies that need to implement the various regulations, or the language in the GOP budget repealing the government’s authority to dismantle firms that are about to detonate the financial system.  One possibility here is that I Rip Van Winkled it for a bit and banks got really popular while I was snoring under a tree. So I asked Gallup. The answer? Nope. Wall Street’s got the sort of poll numbers usually reserved for the guy who ran over your dog when you were a kid, or the boss who fired you from your first job. Almost 70 percent of Americans think they’ve got to much power in Washington. . What about among Republicans themselves? The tea party doesn’t much like the banks. The Republican legislators who had to vote for TARP and listen to Ben Bernanke talk up the chances of armageddon can’t want to go through that again, right?

Financial Reform: Why credit the rating agencies? - The credit rating industry is firing from both barrels.  The industry has launched a public relations effort that aims to delegitimize proposed regulations announced for public comment last month by the US Securities and Exchange Commission (SEC). The proposed regulations stem from the Dodd-Frank Act of 2010. At the same time the industry is taking its hubris to new levels by inserting itself aggressively and directly into public policy debates in the US and Europe. This is a rather stunning reversal of fortunes for the rating agencies.  In the early days of the financial crisis, it looked as if the industry was in for a fundamental overhaul. At that time, it seemed that there was momentum in the US around the creation of a new rating industry model—in the new model they would operate as public utilities. Elsewhere in the world, discussion of the failings of this industry was part of broader conversations about the need to move away from a US-centered financial architecture. In Europe and Asia, in particular, the misdeeds of the rating industry led to calls to create new regional and/or national entities that would credibly and ethically perform this work.

Divided Democrats struggle over swipe fees - A fight raging in the Senate over credit card swipe fees could come to a head this week, pitting two Democratic camps against each other: populists vs. Wall Street supporters. The Senate could vote as early as Wednesday on a bill that would delay new rules passed last year that cap swipe fees banks can charge merchants.  The intra-party divide is embodied by the opposing views of Majority Whip Dick Durbin (D-Ill.), the progressive who pushed through the measure in May of last year, and Sen. Chuck Schumer (D-N.Y.), whose local constituents include banks that are fighting tooth and nail to prevent the rules from going into effect. “This is a big political issue … you might say it’s a multibillion-dollar issue, because each month in America, over $1.3 billion is collected from customers all across America when they swipe their debit cards. Where does the money go?” Durbin asked on the Senate floor Monday. “Most of it goes to the biggest banks on Wall Street, the same banks that were just moaning and groaning a few years ago that they needed a bailout because they made some big mistakes. They’re back again.”

US Senate blow for banks over card fees -- Banks and card-payment networks suffered a blow in Congress as the Senate failed to delay the implementation of price caps on debit-card fees charged to retailers Lobbyists have been fighting to overturn the caps on so-called “interchange” fees before they are implemented by the Federal Reserve. The Dodd-Frank law instructs the Fed to ensure the fees are “reasonable and proportional” to the cost of processing transactions and in December, the central bank proposed capping the charges at 12 cents a transaction, a reduction of more than 70 per cent. Jon Tester, a Democratic senator from Montana, has spearheaded an effort to overturn the rule. But his move to delay the implementation by six months gained only 54 votes in the Senate, six short of the super majority needed. The US move to limit interchange fees comes after similar attempts in Europe. Last year, the European Commission dropped antitrust charges against Visa Europe in return for a commitment to cut the fees to a maximum 0.2 per cent per cross-border transaction. MasterCard has made similar pledges to European authorities. The Fed now has until July 21 to finalise its rule and can take into account public comments from banks, which have fiercely opposed the fee cap. Retailers, meanwhile, have urged the central bank to retain its price cut.

In Fight Over Debit Card Fees, a Loss for the Banks - What’s arguably been the biggest lobbying brawl so far this year came to a head today in the Senate [1] when lawmakers voted against delaying a controversial element of the Dodd-Frank financial reform legislation. The vote clears the way for the Federal Reserve to set rules that would limit banks’ revenue from debit card fees and cut costs for retailers—potentially lowering prices for consumers in the checkout line. For months, the nation’s biggest banks and retailers have been fighting fiercely over the Federal Reserve’s proposal to cap debit card fees—specifically, the fees that retailers have to pay to banks each time a transaction is made using a debit card. (Here’s our guide on the issue [2].) Today’s vote—a win for the merchants—defeated a major effort by the banks to delay the cap, which is now scheduled to take effect mid-July.  

Senate "swipe fee" reform: Why the big banks' defeat will help small businesses, but might not benefit consumers. - Yesterday, something rare happened in Washington. Consumers beat lobbyists. Small business defeated big banks. Despite weeks of hyperbolic ad campaigns and a lobbying blitzkrieg, the Senate reaffirmed its decision to limit the "swipe fees" that banks charge businesses for debit card transactions, starting on July 21. But it is not so clear that this unexpected victory will actually help consumers. Currently, banks charge retailers swipe fees, also known as interchange fees, of about 44 cents per transaction, culled whenever an American pays with debit, some 40 billion times per year. Those fees are a moneymaker, earning the banks about $15 billion a year. But they are burdensome for retailers. Indeed, stores actually lose money on some debit-card transactions, and see their margins uncomfortably thinned on others. If you use debit to buy a 99-cent pack of gum at your corner store, that store very well might end up in the red for the transaction if it is kicking 44 cents back to your bank. Big retailers, like Wal-Mart, have the clout to negotiate the fees down with the banks themselves. But small stores do not.

Elizabeth Warren and Consumer Protection - Elizabeth Warren may well be the most popular person in Washington. When she was head of the Congressional Oversight Panel on TARP, her willingness to go after Wall Street, the Treasury Department, and the Fed made her a liberal icon. And her folksy, Midwestern air and her ability to express complex financial issues in simple language turned her into an unlikely media superstar. Warren is now working to set up the Consumer Financial Protection Bureau, a new government agency inspired by her own work on consumer credit, and in the past couple of weeks almost a quarter of a million people have signed an online petition asking President Obama to nominate her as the official boss of the agency. Yet Warren may also be the most hated person in Washington. The banking lobby sees her as its nemesis, congressional Republicans are openly hostile to her, and conservatives decry her as the exemplary “totalitarian liberal.” At this point, the only way Warren will run the C.F.P.B. is if President Obama makes her a recess appointment, and Senate Republicans have vowed to try to stop even that.  But it’s profoundly misguided, because Warren is far from the anti-capitalist radical that her critics (and some of her supporters) suppose. Indeed, an empowered C.F.P.B. could actually be a boon to business.

The destructive nomination politics surrounding Warren and Diamond -- Jim Surowiecki has a good column on Elizabeth Warren this week, explaining that over the long term she and the CFPB, like most financial regulators, are likely to be good, not bad, for those they regulate. Over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed. The problem with Warren, of course, is much more political than it is substantive: she stands for What Obama Wants, and therefore the Republicans will close ranks against her. The same thing, tragically, has happened with Peter Diamond, who has now formally withdrawn his nomination from the bully pulpit of the NYT op-ed page:

Call Your Senators Over Sneak Attack On the Consumer Financial Protection Bureau - Yves Smith  The Republicans have threatened to kill the CFPB and they look to have finally pulled out their gun and taken aim. I received this message from Mary Bottari:In a last minute development, opponents of financial reform are pushing for votes TODAY on amendments to gut the new Consumer Financial Protection Bureau (CFPB) (AMENDMENT NUMBER #391 – Moran), and to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act entirely (AMENDMENT NUMBER #394 – DeMint) . A vote to delay and try to derail curbs on fees banks charge merchants – and thus the consumer – on debit cards is already scheduled (AMENDMENT NUMBER #392 – Tester).Call your Senators now and tell them to oppose these proposals to gut the CFPB! It is particularly important that your Senators hear from you that a vote for the Moran amendment on the CFPB is a vote to destroy the new Consumer Bureau. This proposal would put the regulators who failed to protect us from the predatory practices that led to the 2008 financial collapse IN CHARGE of the CFPB. It would strip the CFPB of its ability to stand up for consumers. It is designed to gut the consumer watch dog before it even opens its doors in July, and protect the big Wall Street banks and the status quo. Tell your Senators to stand up for the CFPB and to urge the President to appoint Elizabeth Warren as its Director.

Obama Eyes Ex-Banker for Consumer Chief - President Barack Obama is considering nominating Raj Date, a former banker with Capital One Financial Corp. (COF) and Deutsche Bank AG, as head of the Consumer Financial Protection Bureau, according to a person briefed on the process.  Date is already at the consumer bureau, working as a top deputy to Elizabeth Warren, the Obama administration adviser who is setting up the new agency. He is on a short list of candidates to become director, the person said.  Obama hasn’t made a final decision on who to nominate to the post, which requires Senate confirmation, the person said. The agency is to begin formal operations on July 21, one year after Obama signed the Dodd-Frank financial regulatory overhaul into law.  Date’s nomination could be a way for the Obama administration to tamp down political controversy over the leadership of the consumer agency, which is one of the centerpieces of Dodd-Frank. Warren could urge her supporters to endorse his nomination, and his industry experience has been praised by banks that would fall under the bureau’s oversight.

Obama Still Desperately Seeking Anybody But Warren to Head New Consumer Agency -- Yves Smith -The Administration is playing true to its craven form. And it isn’t hiding that sorry fact terribly well either.  The latest public-be-damned ploy by the Obama Administration is the floating the name of Raj Date, a former McKinsey consultant and financial services industry executive currently ensconced in the nascent Consumer Financial Protection, as the possible new head of the agency.  Remember the state of play on the nomination of the head of the Consumer Financial Protection Bureau. That individual is to be in place as of July 21. Even assuming everyone plays nicely, the timetable is now too short to go through the conventional approval process, meaning a recess appointment is the only way to get a permanent leader in place.  The Republicans have taken the stance that they are not prepared to be bound by the law, meaning Dodd Frank, despite the fact that most of what is promised to do was kicked over to studies and rulemaking, which assured it will be watered down to nothingness. 44 Republican Senators wrote a letter saying they won’t approve of any nominee from either party unless the CFPB is gutted reformed. And they are trying to block a recess appointment through the use of a “pro forma” sessions, as they did over the Memorial Day break and presumably will over the July 4 holiday.

Blocking Elizabeth Warren - It’s official: Elizabeth Warren will return to the torture chamber known as the House Committee on Oversight and Government Reform on July 14. Earlier this week, Darrell Issa, the California Republican who is chairman of the committee, tweeted the news¹. Apparently, Democrats aren’t the only ones who use Twitter to harass women.  Ostensibly, the House Republicans are outraged that Warren, in her capacity as a special adviser to the White House, offered “secret” counsel to the states’ attorneys general, who have been investigating the big foreclosure robo-signing scandal³. Never mind that she has repeatedly acknowledged that she offered her advice, which they had asked for — and that there is nothing wrong with a federal official advising state officials. No, the real reason Warren has become a piñata is that, as a Harvard law professor, she dreamed up the idea of a federal agency⁴ that could help prevent consumers of financial products — like, oh, predatory subprime mortgages — from being taken advantage of. Then she lobbied to turn it into reality, as part of the Dodd-Frank reform law⁵. And now, working for the administration, she is busy setting up the Consumer Financial Protection Bureau⁶, which will “go live” in less than six weeks.

Wonkbook: Heads Republicans win, tails consumers lose - A week ago, Nobel-prize winner Peter Diamond withdrew his nomination to the Federal Reserve’s Board of Governors. Republicans had blocked him for being unqualified, perhaps because the Nobel laureate had not also completed Hercules’ 12-feats of strength. That took one high-profile Obama nominee off the board. What about Elizabeth Warren, who bankers seemed to be warming to, even if Republican congressmen weren’t getting along with her? Turns out “what about Elizabeth Warren?” is the wrong question. “It’s not Elizabeth Warren-specific,” Mitch McConnell spokesman Donald Stewart explained. “It’s any nominee.” As Ylan Mui reports today, the Republicans have vowed to block any nominee to the Consumer Financial Protection Bureau. Why? They simply don’t like the agency. Instead, they want it overseen by a commission rather than a director, they want more control over its funding and tougher oversight over its activities. One might observe that if the GOP had been as interested in reining in Wall Street as they are in reining in the consumer-protection agency, we might be living in a very different economy today. But as the old saying goes, there’s no use crying over nine percent unemployment.

Defending Arianna Huffington from the shareholder value police - A few weeks ago I read an astonishing story about an army of lobbyists who had stormed Capitol Hill bent on repealing a law passed last year, thanks largely to the energies of a rival battalion of lobbyists. Hanging in the balance was $50 billion in profits one industry was extracting each year from, inter alia, the other. But the real cost of the dispute, the authors insisted, was the incalculable one borne by the public when its ostensibly democratic government is entirely preoccupied, in “trying to divide up the spoils between various economic interests.” Which is what was so astonishing about the story: its aggressive and unabashed pursuit of the “public interest.” I was pretty sure this concept was extinct; Washington has become so thoroughly infested with paid promoters of some industry or another’s shareholders’ interests that it’s impolite to display anything more than passing contempt for the “public.” More puzzling still, the media outlet that published this extravagant display of public interest journalism was the Huffington Post.

Not All Businessmen Are Smart, You Know - Stephen Carter, a professor at the Yale Law School and an accomplished novelist, wrote a Bloomberg column based on a conversation with a medium-sized business owner he met on a plane. The gist of the column is that the businessman isn’t hiring more workers because he’s worried about the regulations changing on him. From this, Carter draws a general lesson about business and government:“For medium-sized firms like his, however, there is little wiggle room to absorb the costs of regulatory change. Because he possesses neither lobbyists nor clout, he says, Washington doesn’t care whether he hires more workers or closes up shop. . "Jim Henley (hat tip Brad DeLong) has already pointed out the silliest thing about this column: anyone who has a growing business and isn’t hiring more people, and isn’t hiring them because he’s not sure about future regulatory changes, is making a mistake (or perhaps is in a very unusual business that is heavily exposed to some very particular and very concrete regulatory risk).

Goldman Sachs Investigators Bolstered by New York’s Martin Act - Prosecutors at the Manhattan District Attorney’s Office who are examining Goldman Sachs Group Inc. (GS) may have an easier time than federal authorities in bringing criminal charges because of a 90-year-old New York state law.  District Attorney Cyrus Vance Jr. subpoenaed Goldman Sachs, the fifth-biggest U.S. bank by assets, for records on its activities leading into the credit crisis, two people familiar with the matter said. Vance may bring charges under the state’s Martin Act, which lawyers call a potent tool for New York prosecutors probing investment frauds, Ponzi schemes and other white-collar crime.  To prove securities fraud in federal court, prosecutors must show that a defendant intended to defraud victims and that the investors relied on misstatements or omissions. Under the Martin Act, prosecutors aren’t required to prove intent, said Michael Perino, a law professor at St. John’s University in New York.  “The reason why New York prosecutors love it so much and Wall Street firms hate it so much is that it is a much, much easier case to bring,”

Goldman Plans to Fight Back Against Senate Report - Goldman Sachs Group Inc., trying to counter a Senate subcommittee report that is fueling investigations and suspicion of the firm, plans to accuse the subcommittee of drastically overstating Goldman's bets against the housing market in 2007, people familiar with the situation said. The securities firm is considering releasing documents about its mortgage bets that are aimed at showing what Goldman officials claim is sloppy math and incomplete analysis by the Senate Permanent Subcommittee on Investigations as the panel sifted through tens of millions of documents turned over by Goldman.

Goldman Uses Wall Street’s Favorite Reporter to Make Unpersuasive Defense Against Levin Report - Yves Smith - Last night, the Wall Street Journal reported that Goldman was going on the offensive against the Levin report:  Goldman Sachs Group Inc., trying to counter a Senate subcommittee report that is fueling investigations and suspicion of the firm, plans to accuse the subcommittee of drastically overstating Goldman’s bets against the housing market in 2007….The subcommittee’s 639-page report in April denounced Goldman as an unusually strong example of wrongdoing by financial firms during the crisis. According to the report, Goldman systematically sought to profit from a “big short” against the housing market and betrayed clients by putting the firm’s own interests ahead of theirs.Goldman initially said it disagreed “with many of the conclusions of the report,” though the company added that it takes “seriously the issues explored by the subcommittee.” Tonight, Andrew Ross Sorkin of the New York Times offers what appears to be a preview of the Goldman defense. If this is the sort of thing Goldman plans to provide, it is not terribly convincing.

The Times’ Andrew Ross Sorkin Gives Goldman a Rubdown - Taibbi - I've been trying not to say anything bad about Andrew Ross Sorkin. I even made a point of not watching Too Big To Fail so as not to get upset -- and when I heard from friends that the film turned Hank Paulson into Joan of Arc, that decision seemed to have been validated. Now I’m bummed to see that Sorkin has written an elaborate defense of Goldman in the New York Times "Dealbook" section, arguing among other things that Lloyd Blankfein probably did not commit perjury and that the bank did not have a huge directional bet against mortgages in 2007. As evidence, Sorkin cites unsubstantiated Goldman documents and Goldman sources who claim, among other things, that the bank had $5 billion worth of long bets on MBS "in other parts of the company," offsetting the now-notorious "Big Short." The Sorkin piece reads like it was written by the bank's marketing department, which may not be an accident. In November of last year, the New York Times announced that "Dealbook" was entering into a sponsorship agreement with a variety of companies, including ... Goldman, Sachs.

Goldman Sycophants of the World Unite! You Have Nothing to Lose but Your Virtually Non-Existant Reputations! - - Yves Smith - The Goldman defense against the Levin report is so late and so pathetic that it looks increasingly evident that the bank is simply hoping to blow enough smoke so as to cause confusion and muddy the waters rather than mount a frontal, fact-based rebuttal. Mind you, sniping and innuendo can prove reasonably effective if done persistently and loudly enough. The book Agnotology describes how Big Tobacco managed to sow doubt over decades of the link between smoking and lung cancer well after the medical evidence had gone from suggestive to compelling.  The first Goldman salvo was an Andrew Ross Sorkin piece on Monday which we deemed as unpersuasive. While it did point to an error in the Senate report, it failed to make a persuasive case that any mistakes undermined the report’s findings, and most important, the notion that Goldman staffers, in particular Lloyd Blankfein, perjured themselves. The most contested statement is the Blankfein denial that the firm had a “massive short” position; as Matt Taibbi points out today, the only way out on that one is to get into Clintonesque parsings of the word “massive”. Given the overwhelming evidence that Goldman intended to get out of its mortgage risk in late 2006 and its staff DID get the firm short in February 2007, then reversed that position in March to correctly catch a short term bounce. And in the March-May period, it was still getting as much crap product out the door and lying to clients about its position in the deals, claiming its incentives were aligned when its effective short position in the deals meant the reverse, that it would profit if they tanked, which they did.

Eyes on Goldman-Libya Dealings - U.S. securities regulators are examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya's sovereign-wealth fund, according to people familiar with the matter. Enforcement lawyers at the Securities and Exchange Commission are reviewing documents that detail the firms' relationships with the Libyan Investment Authority controlled by Col. Moammar Gadhafi, these people said. Among other things, SEC officials are interested in a $50 million fee Goldman initially agreed to pay the Libyan sovereign-wealth fund as part of a proposal by the New York company to help the fund recoup losses.

The Rise Of The Second-String Psychopaths - People with this illness were termed psychopaths. (The term nowadays is anti-social personality disorder.) These are terms for people who are smart, personable, and engaging, but who have no consciences. They are not guided by a sense of right or wrong. They seem to be unaffected by the feelings of others, including feelings of distress caused by their actions. Straying from a decent way of treating people, or violating ethical codes causes no anxiety, the anxiety which is what causes the rest of us to moderate our more greedy impulses. If most children feel anxiety when they are pilfering the forbidden cookie jar, psychopaths feel just fine. They can devour the cookies, shatter the jar as evidence and stuff it in the trash can. When accused, they can argue with apparent sincerity that the cookie jar has been missing for at least a week. There suffer no remorse, no guilt, no shame. They are free to do anything, no matter how harmful. Psychopaths are not technically insane. They don’t have a psychosis, like schizophrenia. They are experts in appearing normal. They can act the role of a caring, concerned executive, even though they actually do not seem to experience such feelings. If they hurt somebody, they don’t modify their behavior. The United States corporate and government spheres have become, Vonnegut suggested, a perfect habitat for psychopaths. What has allowed so many psychopaths to rise so high in corporations, and then government, he wrote, “is that they are so decisive. They are going to do something every fuckin’ day and they are not afraid. Unlike normal people, they are never filled with doubts, for the simple reason that they don’t give a fuck what happens next. Simply can’t. Do this! Do that! Mobilize the reserves! Privatize the public schools! Attack Iraq! Cut health care! Tap everybody’s telephone! Cut taxes on the rich!"

Corporate Police State: Cisco Enlists Prosecutors to Impede Whistleblower Lawsuit -- Yves Smith - You know it’s bad when a significant court of one of your most loyal foreign allies issues a major slapdown.  David Sirota of Salon reports on a stunning case (and yours truly is not easily stunned) and serves to reveal the depth of corpocracy in the United States.The very short form of this story is that Supreme Court of British Columbia ruled that Cisco and US police and prosecutors engaged in a “massive abuse of process” to have a former executive who had filed an anti-trust suit against Cisco imprisoned. Sirota gives a stinging write up, and if anything, the Vancouver Sun, which broke the story, is even more incendiary, reflecting the blistering tone of the court’s opinion. The judge said U.S. prosecutors acted outrageously by having the respected executive bizarrely arrested in Vancouver on May 20, 2010 as he testified before a sitting of the American court he was accused of avoiding.

New strategy – AIG will buy European junk instead of its own -  Fresh from failing to acquire its own portfolio of dodgy deals from the Federal Reserve — AIG’s Mortgage-Backed Securities (MBS) were acquired by the US central bank during the crisis and transformed into Maiden Lane II — the bailed-out insurer has a new strategy to lure investors to its stock after last month’s ‘re-IPO.’. We think the 57-page note from Deutsche Bank’s Joshua Shanker is the most interesting. In it, the analyst details management’s plan to move from 6 per cent return-on-equity (ROE) to over 10 per cent return within five years. A challenge to be sure — and one that won’t be accomplished without a certain amount of yield-seeking. But read the fine print of AIG’s execution plan, according to Shanker: Ironically, AIG was not successful in its repurchase plans as a competitive bidding process sold these securities to other buyers. Now, the company intends to use the allocated capital to seek higher yields elsewhere. It seems this had to be contemplated in an asset reallocation plan to some extent. Regardless, the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. We note that increased yield, in this regard, also carries with it increased risk.

US Taxpayers About To Be Saddled With Another European Bailout Courtesy Of AIG - Just when one thought every imaginable taxpayer bailout scheme had been seen, experienced and in many cases, forgotten, here comes AIG once again. The specifics come from Deutsche Bank's Joshua Shanker initiation of coverage report on AIG (naturally with a Buy rating, $34.00 target price), where within the fine print he notes: 'the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. ' Prudently, he adds: 'We note that increased yield, in this regard, also carries with it increased risk.' Translated this means that AIG is about to do for European banks what the ECB so far has been unwilling and/or unable: namely to transfer the risk associated with European banks' massive ongoing exposure to the continuously collapsing US housing market back to the US taxpayer, in the form of AIG, which was bailed out once, and which will certainly be bailed out again, when the time comes.

AIG Does It Again: Sale of Maiden Lane II Assets Tanking Credit Markets - Yves Smith  - Readers may recall that AIG had approached the Fed about buying the entirely of its Maiden Lane II portfolio, the off balance sheet vehicle established to hold the non-CDO assets removed from the otherwise bankrupt insurer. The logic appeared to be that the insurer would be able to liquify its equity in the vehicle. It seemed pretty obvious at the time that the Fed could not justify selling the whole book to AIG; if there were any unrealized gains in it, selling it at the current accounting value would be a subsidy to AIG. The bid was also thus a strategy to force the vehicle to be unwound and any gains to be realized (which would lead AIG showing a profit on its position). The problem is the “profit” appears to have been based on optimistic accounting, something we found to be the case in the Fed off balance sheet we’ve analyzed at length, Maiden Lane III. As Jim Chanos noted by e-mail, “Real transaction prices are not good for some of the ‘marks’ in many portfolios!” Needless to say, this also calls into question the use of Blackrock as asset manager, since the valuations were based on its marks. From Bloomberg:Federal Reserve auctions of mortgage securities that the central bank assumed in the rescue of American International Group Inc. are fueling a selloff in credit markets as Wall Street rushes to hedge against losses on stockpiled debt.

Postponing Judgment Day - I suggest we change the typeface on the dollar. Where it says e pluribus unum—"out of many, one"—it should read extend and pretend. The U.S. economy is built on a foundation of self-deception and crooked arrangements. In the months and years ahead, America will have to pay the piper. It will not be pretty. The S&P/Case Shiller housing index, which is a few months behind the current data, shows that average national home prices now match their 2009 low. Commercial real estate has also hit a post-bubble low. What is the exposure of America's banks to the losses now occurring? Nobody knows, or if somebody does know, they won't say. Despite the stenuous efforts of the Federal Reserve and the Treasury to bulldoze money toward The Usual Suspects, Bank of America is probably insolvent. Citigroup and Wells Fargo are also probably insolvent, if proper accounting rules were forced upon them, and government support were withdrawn. For now, the government connives in the phony accounting. One way or another, crooked schemes like this one always blow up. I don't know how, I don't know when, but one day interest rates will go up. You can take that to the bank—if you trust the bank, that is.

Unofficial Problem Bank list over 1,000 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 10, 2011. (new format) Changes and comments from surferdude808:  With no closing or action terminations, the five additions this week finally push the Unofficial Problem Bank List over the 1,000 threshold. The list includes 1,002 institutions with assets of $417.4 billion, up from 997 and assets of $416.7 billion last week.

US equity outflows largest in 10 months - Retail and institutional investors have withdrawn the most money out of US equity funds since mid-August, according to the latest weekly data from EPFR Global. Redemptions come as worries about the economy and the end of the Federal Reserve bond purchase programme later this month have hit equities, sending the Nasdaq composite index into negative territory for the year on Friday. Retail investors registered their largest redemptions for the year, at $2.1bn for the week ending June 8, said EPFR. It was the largest retail outflow since $2.3bn left the market in the last week of August in 2010 and they have wothdrawn $5.8bn from stocks over the past seven weeks. The total weekly outflow from both retail and institutional funds was $6.3bn, the largest redemption since the week ending August 18 last year.

'Junk' Bond Market Hit by a Selloff - A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.  Weak economic data including falling home prices and disappointing jobs numbers have led investors to dump these securities, which had risen strongly since the financial crisis.  The decline in high-yield, or "junk," corporate bonds accelerated after last week's employment figures, with prices falling nearly 1% on Thursday, the worst one-day loss in three months. Junk bonds offer high yields due to high default risks.

Telling the Right Story - Anyone who was in the MBS market and not working for a primary originator can tell you that the MBS securitization market ended around Halloween 2006. Only economists were fooled by what I've been calling a Xmas Miracle, and even they (via Mark Thoma) are starting to wise up: The Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure. In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure. Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007. You can sustain a bubble as long as more funds are coming into the system. Sell the 1BR on the West Side, reinvest the profits on the 2BR in Park Slope while that seller reinvests in 2,600 square feet in Summit or Hasting-on-Hudson who... Economics has caught up with finance. What will they think of next?

About Those Notes...Evidence of Securitization Fail - Since last October, shortly after the robosigning scandal broke, I've been talking until I turned blue in the face about robosigning being the tip of the iceberg with mortgage problems and that the real issue was chain of title. Robosigning appeared to be an almost unexpected deposition by-product; the real goal in the depositions that uncovered the robosigning was exposing the backdating of mortgage endorsement. And that they did--the notaries' whose seals were on the documents didn't have their commissions when the assignments supposedly took place. But why would anyone bother backdating mortgage assignments? The immediate reason is to show that the foreclosing entity was the mortgagee at the time the foreclosure action was brought. And lurking behind this is the mother of securitization fail issues (see also here and here)--the potential failure to transfer the mortgage notes into the securitization trusts.  When the securitization fail issue was getting attention last fall, one thing that was sorely lacking from the discussion was empirical evidence. But Abigail Field at Fortune has actually gone and done this. Incidentally, this is what federal bank regulators were supposed to do--go and look at the actual notes for foreclosure filings. Amazing how one intrepid journalist was able to accomplish much more than a beavy of bank examiners.

Michigan Court Relies on New York Trust Theory, Rules Loan Never Made it to Trust - Yves Smith - A June 6 trial court decision in Michigan, Hendricks v. US Bank, has not gotten the attention it warrants because to the extent it has been noticed, it has been depicted as invalidating an effort to effect a note (the borrower IOU) transfer via MERS. While that was one of the grounds for a ruling favorable to the borrower, the court also considered and gave a thumbs’ up to what we call the New York trust theory. That has far more significance, as readers will see shortly (hat tip to Foreclosure Fraud for this sighting). This legal argument, which so far has been tested in a very few cases (primarily in Alabama, since it was perfected by Alabama attorney Nick Wooten) was the basis of a favorable ruling in Alabama trial court. The reason it bears watching is that if the New York trust theory continues to be validated in court, it has devastating consequences for most post 2004 vintage residential mortgage backed securities. The bare bones outline of the argument is that the trusts, the legal vehicle that holds the mortgage loan, in virtually all securitizations, elected New York law as the governing law for the trust. New York law is well established and very rigid. A trust can act ONLY as stipulated; any deviation is a “void act” and has no legal force.

Foreclosure Fraud Price Tag: $20 Billion -- The nation's largest mortgage companies are operating on the assumption that they will have to pay as much as $20 billion to resolve claims of widespread foreclosure abuse, an amount four times what they had originally proposed, the top federal official overseeing the discussions told state officials Monday, according to people who participated in the conversation. Associate U.S. Attorney General Tom Perrelli told a bipartisan group of state attorneys general during a conference call that he believes the banks have accepted the realization that a wide-ranging settlement to the months-long probes will cost them much more than the $5 billion offer they floated last month, according to officials with direct knowledge of the call. Perrelli said he's basing his belief on his recent conversations with representatives of the five targeted firms: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.

Larry Platt, Prominent Securitization Lawyer, Made False Statements About BofA Mortgage Transfers - - Yves Smith - I wanted to follow up on an important article by Abigail Field, in which she did some serious spade work on the mortgage securitizations. Among other things, its shows prominent securitization attorney Larry Platt, who accused judges who interfered with the imperial rights of banks to foreclose of engaging in an “assault on the legal system,” to be a liar. Funny how that type is eager to try to say everyone else is engaged in bad conduct.  There has been an argument running since last fall between mortgage securitization industry participants, led by the industry (really, sell side) lobbying group, the American Securitization Forum, and major securitization law firms like SNR Denton and K&L Gates, versus independent legal experts, like law professor and special counsel to the Congressional Oversight Panel Adam Levitin and foreclosure defense lawyers.  The securitization industry has adopted the very odd legal position that all the complicated transfer procedures they crafted are irrelevant. They’ve also disputed that, as this blog and others have claimed, that the failure of mortgage bond originators and packagers to comply with these complex requirements became widespread if not pervasive, and the shortcomings are so serious that they impair the ability of servicers and trusts to foreclose when challenged. The magnitude of the train wreck in the courts suggests that there might be something to the skeptics’ case.

Embarrassingly Lame Federal/”50″ State Attorneys General Mortgage Negotiations Continue - Yves Smith - I’m having trouble understanding why anyone is still treating the Federal/state attorney general mortgage “settlement” negotiations as anything other that a fiasco. The more news reports come out, the more the parties aligned against the banks look like fools.The latest confirmation comes in an article by Shahien Nasiripour in the Huffington Post that a member of the Department of Justice briefed state attorneys general and reported that the biggest banks in the servicing business had resigned themselves to paying $20 billion:The nation’s largest mortgage companies are operating on the assumption that they will have to pay as much as $20 billion to resolve claims of widespread foreclosure abuse, an amount four times what they had originally proposed, the top federal official overseeing the discussions told state officials Monday...Sounds impressive, right? It’s not. You don’t negotiate price without negotiating terms, and yet this exactly what is happening. The dollar figure utterly meaningless unless you know what is being traded off against it. A bigger dollar figure means the banks will demand a broader waiver against liability, which is precisely what we warned against (actually, we advised this craven political exercise be dropped, since no investigations had been conducted and hence the Federal/state negotiators had no bargaining leverage). You don’t give a waiver unless you have an idea the depth and nature of the abuses and the likely costs associated with them. As Dave Dayen at FireDogLake points out, the Abigail Field report, based on one person’s work, suggest the mortgage chain of title abuses are pervasive. We’ve been told that other investigations under way are coming up with similar results. That confirms that banks have a sinkhole of exposure. As we said early on, they’d be getting a fantastic deal if they got a broad waiver for a mere $20 billion.

Quelle Surprise! Banks are Concerned About Mortgage Slowdown - - Yves Smith - It seems not to have occurred to the banking industry that relying people to be fools on an ongoing, large scale basis is not a viable business model. Investors have come to realize a bit late in the game that private label securitizations were structured so as to be far too favorable to the originators and servicers: too little disclosure, too many abuses, too little accountability, combined with impediments to seeking redress in court. Borrowers feel every bit as stung between deteriorating housing markets, foreclosure malfeasance, and doubts over chain of title. It isn’t simply that banks have been slow to ‘fess up and clean up; instead, they’ve kicked and screamed at every possible reform measure, from pro investor reforms such as a very good FDIC proposal that got watered down to nothingness and a weak 5% risk retention rule (which Dean Baker estimates will add all of 0.13% to the yield on a mortgage) to pretty much anything that would help borrowers. And that’s before we get to widespread evidence of incompetence  and fraud. It’s yet another sign of Banker Derangement Sydrome that the industry can think anyone outside of cash buyers in markets that have arguably bottomed would be keen about buying a house. But this American Banker reports reveals how they appear unable to recognize their role in creating this mess. They seem simply puzzled and a tad depressed that super low interest rates are producing only refis as opposed to home sales:

HUD to Re-Foreclose on REO Homes in Michigan - HUD says foreclosures will have to be re-filed on some of its REO homes due to a Michigan court ruling.  In April, the Michigan Court of Appeals issued a judgment stating that Mortgage Electronic Registration Systems, Inc. (MERS) does not meet the requirements under state statute to act as the foreclosing agent in non-judicial proceedings because the company does not own any interest in the debt nor is it the servicer of the mortgage.  In its notice to mortgagees, HUD said most of the major title insurance company underwriters doing business in Michigan have ceased issuing title insurance for any repossessed properties involving MERS and a non-judicial foreclosure.  “As a result, any Michigan REO properties in HUD’s inventory that cannot close due to an inability to obtain title insurance must be re-foreclosed in accordance with the Michigan Court of Appeals opinion,” HUD said.  The federal agency has directed its mortgagees to identify any affected properties by June 7th and notify HUD’s mortgagee compliance manager. The properties will then be re-conveyed by HUD to allow the mortgagee to cure the title defect.

I-Team:Man gets a $0 foreclosure notice - The housing crisis ended with many homes in foreclosure, which is why it was no joke when a man from Northampton got a letter stating his home would be seized if he didn't pay up zero dollars and zero cents! Not wanting to lose his house, he called the 22News I-team and finally got some answers.Following the mortgage meltdown, struggling homeowners dread getting that nasty letter in the mail announcing your home is listed under foreclosure. That happened to Mark, only his letter caught him off guard."It says, you owe us zero dollars, zero cents. I going to write a check to them for zero dollars and have it clear? I couldn't help but laugh," he said. Only, this was no laughing matter. The letter clearly stated if they didn't get his money, or lack thereof, by February 4th, his lender could seize his home. To make matters worse, his credit score was downgraded and getting in touch with someone at the bank to help him was no easy task.

Bank of America Gets Pad Locked After Homeowner Forecloses On It - It started five months ago when Bank of America filed foreclosure papers on the home of a couple, who didn't owe a dime on their home. The couple said they paid cash for the house. The case went to court and the homeowners were able to prove they didn't owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay. A Collier County Judge agreed and after the hearing, Bank of America was ordered, by the court to pay the legal fees of the homeowners', Maurenn Nyergers and her husband. The Judge said the bank wrongfully tried to foreclose on the Nyergers' house. So, how did it end with bank being foreclosed on? After more than 5 months of the judge's ruling, the bank still hadn't paid the legal fees, and the homeowner's attorney did exactly what the bank tried to do to the homeowners. He seized the bank's assets. 'They've ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, ' attorney Todd Allen told CBS. Sheriff's deputies, movers, and the Nyergers' attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers. After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.

Florida Homeowner Forecloses on Bank of America Branch - Yves Smith - I suspect readers will get quite a bit of pleasure from this news story. Bank of America tried to foreclose upon the home of a Florida couple who had paid cash for their house and therefore did not have a mortgage. The wronged pair not only got the suit dismissed, but the judge awarded them legal fees. After five months of Bank of America ignoring letters and calls to the bank about their failure to pay up, their lawyer foreclosed a BofA branch.  See the CBS video below for more details:

Tables Turn: Deputies and movers show up at bank to seize property for homeowner - The foreclosure nightmare started when Warren and Maureen Nyerges paid cash for a home owned by Bank of America in the Golden Gate Estates. They never had a mortgage whatsoever. But, the bank fouled it up and wound up issuing a foreclosure through their attorney. The couple took their case to court and after a year and a half nightmare the foreclosure was dropped. A Collier County judge said Bank of America has to pay the couple's $2,534 legal fees for the error. After more than five months the bank still hadn't paid up. So, the homeowners' attorney did just what the bank would do to get their money, legally seize their assets. "I instructed the deputy to go in and take desks, computers, copiers, filing cabinets, including cash in the drawers," Attorney Todd Allen told WINK News. Outside the Bank of America on Davis Boulevard, several deputies stood by with movers ready to start hauling out the bank's office supplies and furniture. After about an hour the bank finally cut a check to satisfy the debt, and no furniture was taken. A representative for Bank of America issued a statement saying they are sorry for the delay in issuing funds.

Oregon foreclosure filings surge 236% in April - Oregon's topsy-turvy foreclosure ride has taken a few more rolls in recent weeks as one large lender filed a flurry of new foreclosure starts, bucking a national trend.  Nationally, newly launched foreclosure actions dropped 14 percent in April, according to Realty Trac Inc. Not in Oregon, where they've jumped 236 percent, from 1,100 to 3,700, according to another foreclosure data tracker, ForeclosureRadar.com. Realty Trac recorded a similarly high number: 3,200.  The surge in "notices of default" comes from one loan servicer -- Bank of America Corp.'s foreclosure arm, ReconTrust Co.  And it follows a jump in cancelled foreclosures filed by ReconTrust in late February and March. Those followed rulings by federal judges halting out-of-court foreclosures in Oregon, saying lenders failed to follow state recording law.  Bank of America spokesperson Jumana Bauwens said the withdrawals and new filings resulted from a review late last year of its foreclosure process when it halted sales in all 50 states.

Is Foreclosure Via Facebook Coming to the US? -- Yves Smith - I don’t understand why anyone other that a public figure uses Facebook. It has been demonstrated that anything on Facebook can and probably will be used against you. Facebook greatly lowers the cost of people with bad intentions toward you making your life miserable.  One development overseas that may be coming to the US is using Facebook to send legal notices, such as foreclosure notices. As Bloomberg informs us, this practice has been accepted by courts in Australia, Canada, and the UK.  This article triggered my “planted story” detector, since the piece kept stressing how there were no privacy issues involved (well, that’s close to tautological given how Facebook works) and had virtually no negative views expressed about this practice being adopted in the US. Now some might argue that this development could eliminate some abuses, since in Florida, for instance, there are numerous instances of “sewer service”, meaning the process server falsely claimed that papers were served properly upon a delinquent borrower. But it would also allow for people to be served maliciously, say to initiate litigation they were out of the country and would find it even more difficult and stressful to organize their response. And I’m loath to accept the belief that Facebook is “reliable” and “secure”.

Dan Balz and the Washington Post STILL Don’t Understand the Housing Bubble - It was bad enough that the Washington Post could not see the housing bubble on the way up. As a result, it totally missed the most predictable economic disaster in the history of the world. Of course, since the Post's main (and often only) source on the housing market was David Lereah, the chief economist at the National Association of Realtors (NAR) and the author of the 2006 best seller, Why the Real Estate Boom Will Not Bust and How You Can Profit from It, it is perhaps not surprising that the Post managed to completely overlook the $8 trillion housing bubble that wrecked the economy. Lereah was paid by the NAR to promote real estate. The Post apparently thought that he was supposed to be providing unbiased assessments of the state of the housing market. What is perhaps is even more remarkable is that the Post, acting like a low-IQ dog, is unable to learn from its mistakes. It still relies on the new chief economist at the NAR, Lawrence Yun, as its main source of information on the housing market. And, as Dan Balz tells us in his column today, it is still utterly clueless about the housing bubble.

Too Big to Comply - Treasury released a detailed  report for the HAMP mortgage modification program today, for the first time rating the major banks and servicers on a variety of metrics.  Worst in three of four categories was BankofAmerica.  BofA, along with Wells Fargo and Chase, will have payments from Treasury suspended until their compliance under the HAMP contracts improves.  The report provides a trove of statistical confirmation of what homeowners, counselors and legal aid lawyers around the US are experiencing - temporary agreements that never become permanent, servicers losing and misrecording borrower information, and not communicating effectively with homeowners about applications and decisions.  Apart from the failures of the big three banks, HAMP is improving in some ways, but still not reaching enough homeowners.  Only 30,000 HAMP modifications are being added each month, while new foreclosure starts hover around the 150,000 to 200,000 per month level.  The number of temporary modifications in limbo past the 3-month program limit before becoming permanent is way down, except at the big three banks, which now account for half of all temporary mods passing their six month mark.  Last month's report also showed that reperformance is improved:  even after 12 months fewer than 20% of HAMP modified mortgages were back in default, a far cry from the 60% to 70% failure rates of the industry modifications done in 2007 and 2008.

Treasury Waves Wet Noodle at Big Banks Over HAMP Mortgage Mod Abuses - Yves Smith -This latest move by the Treasury Department to appear to Do Something about Big Bad Banks is so off the charts pathetic that I am straining to find an adequate description. It isn’t merely ineffectual; it looks instead like a deliberate thumbing of the nose at the financier-afflicted public, with the Treasury and the mortgage industrial complex elbowing each other in the ribs and laughing uncontrollably at how they’ve made their point, that the public be damned, while observing proper bureaucratic forms in the process. The latest measure is to withhold (as in merely delay) $24 million in payments to three big banks, Bank of America, Wells, and JP Morgan, for their abuses under the Obama mortgage modification program know as HAMP. That averages $8 million each. And since this is merely a delay, the cost to the bank is the cost of not having the money sooner. Since they can borrow at pretty much zero, the economic cost is so miniscule as to not be worth presenting to the public. The abusive late and junk fees on a single abused borrower (which are ultimately paid to the bank out of the foreclosure sale) are bigger than the monthly cost per bank of the embarrassing sanction imposed here.

U.S. tries to reduce more homeowners’ mortgages (Reuters) - The Obama administration wants to help more struggling Americans stay in their homes by reducing the amount they owe on their troubled mortgages, a top Treasury official said on Saturday. "We are very definitely trying to facilitate more principal reductions," said Timothy Massad, Treasury's acting assistant secretary for financial stability. "It is a very important piece of the overall solution," he said. The administration is trying through taxpayer-funded programs to prevent homeowners from losing their homes. Nearly $50 billion has been set aside from the $700 billion bank bailout known as the Troubled Asset Relief Program, or TARP, to help distressed homeowners. Persistently high unemployment and a weak housing market pose a threat to President Barack Obama's re-election prospects next year.

Subsidence problem - A HEALTH check of America’s housing market is bound to be sobering. The 2011 edition of the “State of the Nation’s Housing”, an annual report from Harvard University’s Joint Centre for Housing Studies (JCHS), serves up some suitably chilling statistics.The number of completions of new single-family homes last year hit lows last seen in the second world war. Prices continue to fall, despite the lack of new supply: the latest Case-Shiller national home-price index, released last week, showed a first-quarter fall of 4.2%. The pressure on prices is not about to let up given weak demand and a huge overhang of properties on the way to market: more than 11m homeowners are stuck in negative equity, with another 4m more either behind on their payments or already in the foreclosure process.The amount of equity in American homes has plummeted from $14.9 trillion in the first quarter of 2006 to just $6.3 trillion at the end of 2010. Low-income households have borne the brunt of the pain: prices at the lower end of the country’s metropolitan markets have fallen much more steeply than those for plusher properties.

More Homeowners With Second Mortgages Are Underwater - Almost 40% of homeowners who took out second mortgages—extracting cash from their residences to cover everything from vacations to medical bills—are underwater on their loans, more than twice the rate of owners who didn't take out such loans. The finding, in a report to be released Tuesday by real-estate data firm CoreLogic Inc., illustrates the consequences of easy borrowing amid the housing boom's inflated prices. The report says 38% of borrowers who took cash out of their residences using home-equity loans are underwater, or owe more than their home is worth. By contrast, 18% of borrowers who don't have these loans were underwater. Overall 10.9 million Americans who borrowed to buy their homes, or 22.7% of all homeowners with a mortgage nationwide, were underwater in the first quarter.

CoreLogic: Negative Equity by State and more - CoreLogic released the Q1 2011 negative equity report today.showing that 10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011. This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home.  Close to 10% of homeowners with mortgages have more than 25% negative equity. This is trending down slowly - the decline is apparently mostly due to homes lost in foreclosure. The second graph from CoreLogic shows the default rate by percent negative equity. The default rate increases the more 'underwater' the property, and the default rate really increases with Loan-to-values (LTV) of 125% or more.  Note that most homes with LTVs of 125% are still current. Many of these people will be stuck in their homes for years - or eventually default. The third graph shows the break down of negative equity by state.  "Nevada had the highest negative equity percentage with 63 percent of all mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (36 percent) and California (31 percent).

CoreLogic House Price Graph, Real Prices, and Prices and Month-of-Supply - This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.7% in April, and is down 7.5% over the last year, and off 33.8% from the peak. This is the ninth straight month of year-over-year declines, and the index is now 4.0% below the March 2009 low. The second graph shows the quarterly Case-Shiller National Index SA (through Q1 2011), and the monthly Case-Shiller Composite 20 SA (through March) and CoreLogic House Price Indexes (through April) in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to October 2000, and the CoreLogic index is back to January 2000.  Here is a look at house prices and existing home months-of-supply. This graph shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted). House prices are through March using the composite 20 index. Months-of-supply is through April.

US house price fall 'beats Great Depression slide' - The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression. The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn. The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world's largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.

Fed's Yellen Says U.S. Housing Market to Have 'Long, Drawn-out Recovery - Federal Reserve Vice Chairman Janet Yellen said the housing market will undergo a “long, drawn-out recovery” and the Fed is working with other agencies to prevent foreclosures and clear the stock of vacant properties.  “Looking forward, I unfortunately can envision no quick or easy solutions for the problems still afflicting the housing market,” she said in a speech today in Cleveland. “Even once it begins to take hold, recovery in the housing market likely will be a long, drawn-out process.”  Residential construction and real estate, except rentals, still showed “widespread weakness” last month, the central bank said yesterday in its Beige Book survey of the economy. Almost 2 million homes were vacant as of the first quarter, and a large number of distressed sales is one reason house prices remain low, Yellen said.

Economy at tipping point and housing bad: Shiller - (Reuters) - Recent housing and employment data suggests the U.S. economy is at a tipping point where a double-dip recession is possible and home prices could have much further to fall, a veteran economist said on Thursday. Robert Shiller said the recent uptick in unemployment is not yet enough of a sign as to which way the recovery is heading. But if unemployment continues to rise in the coming months, it could suggest another recession. "Whether we call it a double-dip or not, I think there is a risk," Shiller told Reuters Insider in an interview. Likewise, data showing U.S. home prices fell into a double dip in March could prove to be either a seasonal effect over the winter months or part of a downward trend. "My gut feeling is we might see a continuation of the decline" in home prices, Shiller said earlier. He added that a 10 percent to 25 percent slump in real home prices "wouldn't surprise me at all," though he cautioned that was not a forecast.

Shiller Says U.S. Home-Price Declines of 10% to 25% ‘Wouldn’t Surprise Me’ -  Robert Shiller, the economist who co- founded the S&P/Case-Shiller index of U.S. home prices, said a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.” “There’s no precedent for this statistically, so no way to predict,” Shiller said today at a conference hosted by Standard & Poor’s in New York.  U.S. home prices plunged 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to a Case-Shiller report on May 31. The decline signaled a “double dip” as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.  A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction. Unemployment, which rose to 9.1 percent in May, and stricter lending conditions are signs that any recovery in housing may take years.

Lawler: Existing Home Active Listings show Big Declines in Wide Range of Metro Areas - Over the weekend I “downloaded” historical data on active listings of SF homes and condos for 54 metro areas back to April 2006 from housingtracker.net (it was a pain). The historical data are monthly averages of weekly listings, and in May the 54 metro areas combined had 1,111,996 listings.  CR Note: the following graph combines two graphs from Lawler. Below is a chart for all 54 metro areas [and] of the NAR’s estimate of the inventory of existing homes for sale over the same period (May 2011 data are not yet available). May listings for the 54 metro areas were down 6.8% from last May; down 10.2% from May 2009; and down 26.1% from May 2008! Obviously, the trend in listings for the 54 metro areas is materially different from the NAR’s inventory estimates over this period. Here is a table showing April 2011 listings compared to listings in April for the previous 5 years.

Census Bureau on Homeownership Rate: We've got “Some 'Splainin' to Do” = Economist Tom Lawler has written several articles on the different measures of homeownership and vacancy rates. Although some readers’ eyes will glaze over, this information is critically important for analyzing housing and the U.S. economy. I'm still thinking about the implications! From economist Tom Lawler: My frustration with the conflicting data on US housing that comes from different reports from the Census Bureau, and the inability of Census analysts to explain the differences or even tell “private” analysts what time-series data they should use to analyze US housing trends, has existed for at least a decade. Occasionally that long-standing “frustration” has led me to write that it almost appears as if Census officials and analysts “don’t care” about the conflicting data. Whether that was or was not the case in the past, it most certainly is not the case today. In fact, some Census folks called me up yesterday to discuss some of the issues, and to let me know that (1) they are “concerned” about the differences; (2) they understand that the differences in measures of key variables have significant implications for the outlook for housing and the outlook for construction employment, with potentially significant public policy implications; and (3) they are going to devote considerable time and effort to investigate the differences.

Home Builders’ Economist Lowers 2011 Housing Market Forecast - With the housing market faring poorly, the top economist at the National Association of Home Builders lowered his forecast for home construction this year. Builders are likely to break ground on 582,000 homes this year, down slightly from 585,000 in 2010 and a far cry from a peak of more than 2 million in 2005, David Crowe, the NAHB’s top economist said Wednesday. Crowe also forecasts that builders will start construction on only 431,000 single family homes this year — the lowest level of the housing bust. In an interview, Crowe said the start of the year was “much worse than I expected,” noting that overall economic growth was weak, the labor market grew less than forecast and consumer confidence hasn’t picked up. High gasoline prices, he said, are “just a joy-killer” that makes consumers less interested in purchasing a new home. At the start of the year, Crowe expected a much healthier rebound.

Housing: Sacramento Distressed Sales at high level in May - The percent of distressed sales in Sacramento decreased in May compared to April, but distessed sales are the highest percent of total sales for the month of May since Sacramento started breaking out REOs in May 2008, and short sales in June 2009.This should be no surprise after Fannie and Freddie announced record REO sales in Q1. We should see a high level of REO and short sales all year (putting pressure on house prices). I've been following the Sacramento market to see the change in mix (conventional, REOs, short sales) in a distressed area. Here are the statistics. This graph shows the percent of REO, short sales and conventional sales. There is a seasonal pattern for conventional sales (strong in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales increases every winter.

Land that sold for $30 million fetches $4.4 million after foreclosure - A 23.53-acre property at the Las Vegas Beltway and Hacienda Avenue that sold for $30.2 million in 2007 and was later foreclosed upon has been sold for $4.4 million.

Is now the time for a property firesale? - We were once told by a client that "when the US government decides to sell, no price is cheap enough." Our friend then added: "This is how Onassis made his fortune; buying the surplus cargo boats the US Navy no longer needed following the end of WWII for cents on the dollar." If the above is true, then there must be some fortunes to be made in US housing today, for not only is housing trading at very attractive levels against incomes and ability to service a mortgage, but the US government, through its GSEs, is also proving to be a very willing seller. Indeed, in 1Q11 the GSEs collectively sold 110,000 foreclosed homes, representing 10% of total housing sales. Needless to say, these sales were made at a material discount to market price. Importantly, this liquidation of foreclosed homes is likely to increase in the coming months, as more foreclosure processes are completed. There are already 600,000-900,000 foreclosed homes on the books of financial institutions (285,000 of these with the GSEs), and a further 2mn+ properties in the foreclosure pipeline (not to mention another 2mn of >90-day-delinquent mortgages for which the foreclosure process has not started). Thus, if foreclosures continue at the same pace as in the first quarter, then the GSEs will own approximately 600,000 properties by the end of the year, with a book value of $95bn and all indications are that the GSEs plan to continue selling these properties onto an already-bloated market (thereby pushing prices down and curtailing the nascent recovery).

China Wants To Construct A 50 Square Mile Self-Sustaining City South Of Boise, Idaho - Thanks to the trillions of dollars that the Chinese have made flooding our shores with cheap products, China is now in a position of tremendous economic power.  So what is China going to do with all of that money?  One thing that they have decided to do is to buy up pieces of the United States and set up "special economic zones" inside our country from which they can continue to extend their economic domination.  One of these "special economic zones" would be just south of Boise, Idaho and the Idaho government is eager to give it to them.  China National Machinery Industry Corporation (Sinomach for short) plans to construct a "technology zone" south of Boise Airport which would ultimately be up to 50 square miles in size.

Housing Starts and the Unemployment Rate - The following graph shows single family housing starts (through April) and the unemployment rate (inverted) through May. Note: there are many other factors impacting unemployment, but housing is a key sector You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and have declined recently, but mostly starts have moved sideways for the last two and a half years. This is one of the reasons the unemployment rate has stayed elevated compared to previous recoveries. Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.

For the Jobless, Little U.S. Help on Foreclosure - The Obama administration’s main program to keep distressed homeowners from falling into foreclosure has been aimed at those who took out subprime loans or other risky mortgages during the heady days of the housing boom. But these days, the primary cause of foreclosures is unemployment.  As a result, there is a mismatch between the homeowner program’s design and the country’s economic realities — and a new round of finger-pointing about how best to fix it.  The administration’s housing effort does include programs to help unemployed homeowners, but they have been plagued by delays, dubious benefits and abysmal participation. For example, a Treasury Department effort started in early 2010 allows the jobless to postpone mortgage payments for three months, but the average length of unemployment is now nine months. As of March 31, there were only 7,397 participants.

Q1 Flow of Funds: Household Real Estate assets off $6.6 trillion from peak - The Federal Reserve released the Q1 2011 Flow of Funds report this morning: Flow of Funds. The Fed estimated that the value of household real estate fell $339 billion in Q1 to $16.1 trillion in Q1 2011, from just under $16.5 trillion in Q4 2010. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011. Household net worth peaked at $65.8 trillion in Q2 2007. Net worth fell to $49.4 trillion in Q1 2009 (a loss of over $16 trillion), and net worth was at $58.1 trillion in Q1 2011 (up $8.7 trillion from the trough). This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.  In Q1 2011, household percent equity (of household real estate) declined to 38.1% as the value of real estate assets fell by $339 billion.  The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Fed: US Lost $7 Trillion In Household Wealth -- 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.  "The huge loss of consumption is due to loss of $8 trillion in bubble wealth," said Dean Baker, co-director of Center for Economic and Policy Research.  The gap that remains in household wealth is in stark contrast to the nation's gross national product, the broadest measure of economic activity, which has recovered all of the lost output of the recession.

Chart of the day: consumer credit growth - The latest chart on U.S. consumer credit growth is here.  I have been focusing on debt as a primary contributor to the slump the U.S. is experiencing. We've seen skyrocketing Debt-to-GDP and Mortgage Debt. Now, I want to look at consumer credit. The Fed releases a monthly statement showing consumer credit, both revolving and non-revolving debt. These statistics date back to 1944, so they give a nice view of how debt is managed over the course of a business cycle What you see in the chart is that debt growth (adjusted for inflation) always increases as the business cycle ramps up. Then as we near recession, it tails off, going negative in every recession since 1970 (1970, 1973-1975, 1980-1982, 190-1991). What is peculiar about this particular cycle is that debt growth never bottomed in 2001. Instead it kept going and ultimately bottomed in Jun-Jul 2006 at -0.6% real growth y-o-y. It then actually rose again through to August 2007 and has since started back down. I don't know what to make of this early bottoming and rise again, but there you have it.

Number of the Week: Average Household Still Needs to Trim $26,172 in Debt - $26,172: Amount of debt the average U.S. household would need to cut to bring balance sheets back to 1990s levels. Americans have made progress in paring back their debt, partly by cutting their credit-card use and mostly by walking away from mortgages and other loans. But they still have a long way to go. In the first quarter, households owed $13.3 trillion, an amount equal to 18.4% of total household assets, including stock portfolios, savings and homes, according to the Federal Reserve‘s flow of funds report. That was down from 21.7% two years earlier but still well above the 14.4% level that prevailed in the 1990s. That suggests household balance sheets don’t have nearly enough cushioning against financial shocks, like job loss and illness, as they should. To get back to 14.4%, households would have to shed a combined $2.9 trillion of debt. In other words, either people cut their credit cards up like crazy, or they keep putting their keys in the mailbox and walking away.

It's The Debt, Stupid! - Every once in a while, the mainstream press wakes up briefly and reports "oh, we remember—Americans have boatloads of debt. Maybe that's why the economy is not growing as fast it should be!"  CNN Money's America's own 'Lost Decade' is a case in point. The economy is still struggling. And Americans are in for a long and painful adjustment period.One major reason: their own household debt.Many experts say private debt owed by households, as well as businesses, is an even bigger problem than the government debt that's getting so much attention lately. And it won't be solved without a difficult stretch of high unemployment and slow growth that will likely last for six or seven more years, producing America's own version of Japan's "Lost Decade." "I think it's one of the major headwinds we're fighting against right now," "I think we're in for a lot of disappointment," said Carmen Reinhart, a leading expert on financial crises. "If historic norms hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this. I don't think the next six years look great."

Declining Cognitive Ability Presents Challenges to Boomer Finances - As Baby Boomers age, policy makers and economists may be served by looking at the condition of not just their nest eggs, but the health of their brains. Fluid intelligence — that is intelligence displayed in things like memory tests — decreases dramatically with age. In fact, “it’s all downhill from age 20” Prof. Laibson said. “What about the 80-year-olds? It’s the 80-years-olds who have the million dollar IRAs. Not the 20-year-olds.” But clearly, there’s a lot more to life than fluid intelligence. Crystallized intelligence — memory, wisdom and so on — does increase over time, but less so, on average, in senior years. All told, the point at which we make the best financial choices is 53 years old, according to his data. Many seniors end up in a state called cognitive impairment without dementia that isn’t quite dementia, but still (as the name implies) a deterioration of memory. In spite of this, people still may make financial decisions on their own. Prof. Labison estimated that 16% of those 71-79 years old, 29.2% of 80-89 year olds, some 38.8% of those over 90 years old are in such a state.

Import Prices Post Unexpected Gain in May - U.S. import prices registered a surprise gain last month, though falling commodity costs should ease concerns about inflation. The price of goods imported to the U.S. increased 0.2% from the month before, the Labor Department said Friday. The gain was the eighth in a row; following a 2.1% jump in April that was revised down slightly from an initial estimate of 2.2%. Economists in a Dow Jones Newswires survey had expected a 0.7% monthly decrease in import prices for May.

Import Prices in U.S. Unexpectedly Increase on Automobile, Clothing Costs - Prices of goods imported into the U.S. unexpectedly rose in May as increasing costs for consumer goods like autos and clothing overshadowed the first drop in fuel expenses in eight months. The 0.2 percent increase in the import-price index, its eighth consecutive gain, followed a revised 2.1 percent climb in April, Labor Department figures showed today in Washington. Economists projected a 0.7 percent decrease for last month, according to the median estimate in a Bloomberg News survey. Costs advanced 12.5 percent from May 2010, the biggest 12-month increase since September 2008. Growing demand from economies in Asia and Latin America, paired with a weaker dollar, is pushing up the cost of goods from abroad for businesses like Gap Inc. (GPS) At the same time, Federal Reserve Chairman Ben Bernanke has reiterated that he expects elevated commodity costs to moderate.  “Higher prices given the weaker dollar are something that the economy is going to have deal with going forward,”

AAR: Rail Traffic mixed in May - The Association of American Railroads (AAR) reports carload traffic in May 2011 increased 0.5 percent compared with the same month last year (essentially flat), and intermodal traffic (using intermodal or shipping containers) increased 7.5 percent compared with May 2010.This graph shows U.S. average weekly rail carloads (NSA).  As the first graph shows, rail carload traffic collapsed in November 2008, and now, 2 years into the recovery, carload traffic has only recovered about half way. From AAR: For the year to date through May, total U.S. rail carloadings in 2011 were 6,110,554, up 3.2% (186,751 carloads) over the first five months of 2010. Neither 2011 nor 2010 include the Memorial Day holiday . For the last two months, traffic has been tracking 2010 (no growth from last year). Of course auto traffic was down in May. The second graph is for intermodal traffic (using intermodal or shipping containers): In contrast to carload traffic, U.S. rail intermodal traffic continues to be impressive. U.S. railroads originated 932,956 intermodal trailers and containers in May 2011, an average of 233,239 per week and up 7.5% (65,440 units) over May 2010 on a non-seasonally adjusted basis. Seasonally adjusted U.S. rail intermodal traffic was up 0.8% in May 2011 over April 2011, the sixth straight monthly increase.

U.S. Big-Truck Sales Soar By 62% in May - According to a report today from  Wards Auto, U.S. big-truck sales soared in May, up 61.9% vs. a year-ago and far surpassing April’s 31.2% increase, previously 2011’s best monthly performance. Class 8 sales made the biggest leap, up 82.4% thanks to triple-digit percentage increases at Volvo Truck and PACCAR, up 175.4% and 145.4%, respectively. Through May, sales of medium- and heavy-duty trucks in the U.S. were tracking 30.9% ahead of like-2010.  In other big-truck news, Daimler says it will add output and jobs at its North American plants this year. In the second half the company will hire about 1,230 workers at its Mt. Holly and Gastonia, NC, plants, as well as at the truck maker’s sites in Portland, OR, and Saltillo, Mexico.

GM chief pushing for higher gas taxes - General Motors Co. CEO Dan Akerson wants the federal gas tax boosted as much as $1 a gallon to nudge consumers toward more fuel-efficient cars. A government-imposed tax hike, Akerson believes, will prompt more people to buy small cars and do more good for the environment than forcing automakers to comply with higher gas-mileage standards. "There ought to be a discussion on the cost versus the benefits," he said. "What we are going to do is tax production here, and that will cost us jobs." For the years 2017-25, federal officials are considering 3 percent to 6 percent annual fuel efficiency increases, or 47 mpg to 62 mpg. That could boost the cost of vehicles by up to $3,500. "You know what I'd rather have them do — this will make my Republican friends puke — as gas is going to go down here now, we ought to just slap a 50-cent or a dollar tax on a gallon of gas," Akerson said. "People will start buying more Cruzes and they will start buying less Suburbans."

Survey: Small Business Hiring plans turn negative - Here is a pre-release of the employment results from NFIB: NFIB Jobs Statement: On Main Street, Job Creation is Collapsing “After solid job gains early in the year, progress has slowed to a trickle ... meaningful job creation on Main Street has collapsed. [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. “Overall, reports of job reductions have returned to historically normal levels. However, the percent of owners hiring has not recovered to levels historically observed after two years of expansion. With one in four owners still reporting ‘weak sales’ as their No. 1 business problem, there is little need to add employees ... This graph shows the net hiring plans for the next three months.

Is This The End Of The Big Box Retailer? - Shopping center construction in the U.S. has hit a 40-year low, according to research from the CoStar Group. New data from CoStar shows the square footage of new shopping centers developed in 2010 was a 40-year low. Specifically, 12 million square feet of shopping center space was completed in 2010, the slowest U.S. industry growth on record since at least 1971. For comparison purposes:- 184 million square feet of shopping center space was developed in 2006 - The 40-year average of new shopping center square footage developed each year in 132 million square feet.Josh Brown asks whether this is a cyclical or permanent trend: Have shopping trends changed to the point these feet ain't coming back?  Or will development return once lending and borrowing gets back to a healthy level and businesses begin expanding again? While it's easy to say that this downturn is the result of a massive collapse in the U.S. real estate economy, it could also be the result of a new long-term economic reality.

Companies Spend on Equipment, Not Workers - Companies that are looking for a good deal aren’t seeing one in new workers.  Workers are getting more expensive while equipment is getting cheaper, and the combination is encouraging companies to spend on machines rather than people.  “I want to have as few people touching our products as possible,” said Dan Mishek, managing director of Vista Technologies¹“Everything should be as automated as it can be. We just can’t afford to compete with countries like China on labor costs, especially when workers are getting even more expensive.”  Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.

Man vs. Machine - In the epic battle of man versus machine, machines have a growing price advantage. As I wrote in a story today, companies’ spending on capital has grown much faster than their spending on labor since the recovery began in June 2009. Spending on equipment and software has risen 25.6 percent in the last seven quarters, while companies’ aggregate spending on employees has risen only 2.2 percent. Now, many economists will argue that hiring always lags capital spending, which is generally true. What’s troubling is how wide the gap in spending growth is this time around. In the seven quarters immediately following each of the last 10 recessions, equipment and software spending rose on average 15.6 percent, and labor spending rose on average 8.8 percent.

Economic 'Recovery' Leaves Jobs Behind - Still limping two years after officially emerging from the recession and buffeted by a new wave of bad news, the U.S. economy is struggling with problems that run far deeper than higher oil prices, the European debt crisis or auto industry slowdown stemming from the Japanese earthquake¹ and tsunami. Serious as those problems are, what's crippling the job market and chilling recovery on almost every front is a confluence of factors that economists and business leaders say are fundamentally reshaping the economic landscape in which Americans live and work.Taken together, these factors have created a vicious circle: Incomes of average families are barely growing, even as many struggle with heavy debts left over from the boom times. That in turn has curbed consumer spending power. And businesses, seeing little chance for a surge in sales, have had little reason to expand — neither hiring more workers nor paying their existing workers more.

The Jobs Emergency and America in Crisis - We’ve been pretending for too long that something approaching normalcy is just around the corner, another era of good jobs at good wages, ready to embrace us like an old friend. Any day now the middle class will be reconstituted. The American dream will be taken off of life support. Get over it. It is long past time to recognize that we are in the midst of a howling, long-term employment crisis that needs to be treated, as F.D.R. once said, “as we would treat the emergency of a war.”  I went into the CVS store a few days after Memorial Day to see what it was like on a non-holiday morning. There was still no one behind the registers. There were also very few customers. An employee working on the floor said the store planned to staff its regular registers only during the busiest hours. He added, with an embarrassed, somewhat ironic smile, “This is the future.”

Austan Goolsbee: No Economic Crisis – Austan Goolsbee, still at this moment chairman of President Obama’s Council of Economic Advisers, is clearly tired of hearing talk about the supposedly desperate state of the American economy.  On the heels of the latest government snapshot of the labor market, which showed the economy gaining a paltry number of jobs in May while the unemployment rate climbed to 9.1 percent, Goolsbee pushed back with vehemence at the suggestion that the current state of play amounts to a crisis. He insisted that the economy is improving, even if there is still a slog to come. "We do not have a sense of panic from one month’s jobs numbers, nor should we be having a sense of panic in general," Goolsbee said, speaking to a gathering of personal finance writers and editors at the White House on Wednesday. "Over the last six months, we have had added a million jobs in the private sector, which the president’s the first to say 'That’s not enough. We’ve got to do more, and get that higher.' But I really do not think that you take a variable series like the monthly job numbers, you don’t want to overreact to one month’s numbers that are different from what has been the trend."

US data chief warns on employment - Bad US payrolls data for May appear to reflect a “general weakening in job growth” rather than any temporary distortion, the head of the agency that compiles the statistics said in an interview with the Financial Times. “Probably the most notable thing about [the jobs report] is there isn’t anything notable about it,” said Keith Hall, commissioner of the Bureau of Labor Statistics. The US added only 54,000 jobs in May, well below this year’s average gain of 182,000, stoking fears that the recovery of the world’s largest economy has lost momentum . Some analysts suggest that the slowdown might reflect supply chain disruptions after Japan’s tsunami or extreme weather events such as the tornadoes that hit the US in May, rather than any deeper slowdown. But Mr Hall said this is hard to see in the data. “There was really no jump at all in people reporting work disruption. So whatever has happened this month is probably not a weather effect,” he said.  He said supply chain disruptions would be most likely to cause a fall in hours worked rather than outright job losses.

Jobs, offshore profits and infrastructure - Both political parties dance around each other with varying demands for cuts in entitlement programs, tax increases and a rise in the debt ceiling. It’s a doomsday prospect and the American people are feeling the chill of economic malaise. The policy response thus far has mainly been to engage in deficit-spending, to give tax breaks, to broaden the social safety net and to print money. It sounds potentially inflationary to me. It’s time for the political class to stop acting so small and embrace a way to rebuild our nation. It’s time to face the fact that we have a twentieth-century infrastructure at the beginning of the twenty-first century. But building new high-speed transit, offshore wind power, solar power arrays and new energy transmission grids is hugely expensive. Public infrastructure is a common good and must be financed as such. We can borrow financing models from the private sector but we must look more creatively for solutions. The first and most obvious place to look for public funding is from the defense budget. Diverting part of the money spent on wars to develop alternative energy infrastructure would allow us to begin to break our dependence on foreign oil.

Public pays price for privatization - In 1956, President Dwight Eisenhower embarked on the most aggressive public works project in U.S. history — the jobs-producing interstate highway system. And throughout the 1930s and ’40s, the government designed an elaborate set of public financing vehicles to build the great postwar suburban housing stock. America used to be a country that built things — using public and private resources. Great works of infrastructure provided jobs and returned an incredible social investment. It is inconceivable to imagine the modern economy without the vast investments in infrastructure made by preceding generations — everything from rural electrification to developing the Internet. So why aren’t we building more of it?² One way to think about the question is: Why did we build infrastructure in the first place? After all, building infrastructure implies the ability to build things here and being able to use the power of taxation to finance them. Privatizing infrastructure requires the ability to securitize revenue flows. Which one do you think modern America does better?

Matt Stoller: Cato – Privatization Deals Are ‘Fraught with Peril’ - Yves Smith - Matt Stoller, the former senior policy aide to Alan Grayson, wrote an op ed for Politico, “Public pays price for privatization,” on infrastructure transactions. We’ve depicted this troubling trend as “tantamount to selling the family china only to have to rent it back in order to eat dinner.” Stoller looks at the political consensus that in an earlier era was gung ho to build major public assets and now would rather rip fees from them by hocking them to investors:  America used to be a country that built things — using public and private resources. Great works of infrastructure provided jobs and returned an incredible social investment. It is inconceivable to imagine the modern economy without the vast investments in infrastructure made by preceding generations — everything from rural electrification to developing the Internet. So why aren’t we building more of it? One way to think about the question is: Why did we build infrastructure in the first place?…

We must rebuild structure to create U.S. jobs - Andy Grove - Clearly, the great Silicon Valley innovation machine hasn't been creating many jobs unless you're counting Asia, where U.S. tech companies have been adding jobs like mad for years. The underlying problem isn't simply lower Asian costs. It's our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. Friedman recently encapsulated this view, His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington, D.C., really wants to create jobs, he wrote, it should back startups. Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

Comparing Payroll Job Growth in 2011 to 2010 -Although payroll job growth slowed sharply in May, with only 54,000 net jobs added, job growth this year is well ahead of 2010. Note: I'll have an update to my economic outlook later. The first table below shows payroll job growth in 2010 and 2011 through May (excluding Census hires in 2010). The third column is total payroll growth for 2010. Although job growth is sluggish relative to the slack in the labor market (with the unemployment rate at 9.1%), 2011 is clearly better than 2010 through May.One of the reasons for the improvement this year is construction. Yes - construction!  For the first time since 2005, residential construction employment will probably be positive in 2011. Just eliminating the drag will help. Also residential investment will probably make a positive contribution to GDP growth for the first time since 2005 - mostly because of an increase in multi-family construction and home improvement.

2011 Private Employment is 2% Below 2001 Levels - From the Liscio Report, via Alan Abelson, May Employment data shows that a limp recovery is growing limper. As our friends and astute data scanners at the Liscio Report observe, disappointments were scattered throughout the report, And while they don’t think May is “an overture to a double dip,” it does plainly reflect accelerating erosion on the job front . . . More than a little shocking to Philippa and Doug (and to us as well) is that private employment today is 2% below where it stood 10 years ago and, as they’ve noted before, job loss over a 10-year period is unprecedented since the advent of something resembling reliable tallies began in 1890. So far, they point out somewhat grimly, “we’ve regained just 1.8 million jobs lost in the Great Recession and its aftermath, or about one in five.” That is a truly astonishing datapoint: An unprecedented 10 Year loss of private sector jobs going back as far as reliable data has been available.

How Long Before The Unemployed Find Work Or Give Up? - A new study from the Labor Department's Bureau of Labor Statistics shows that the Great Recession that technically ended in 2009 has doubled the time it takes before the average unemployed person either finds a job or gives up looking for work. Each month, BLS announces the latest unemployment rate and several other characteristics of the workforce, including the length of time people have been jobless. Last Friday's announcement brought news that the average unemployed person had been looking for work for 39.7 weeks as of May (the median length of unemployment rose to 22 weeks). According to a new paper by BLS economist Randy Ilg, by the end of 2010 the median successful job search lasted 10 weeks, up from five weeks in 2007. For people who gave up hope of finding jobs and left the labor force, the median search in 2010 lasted 20 weeks. Before the recession started, fruitless job searches usually ended after 8.5 weeks. People who want work but aren't looking because they figure none is available don't count as unemployed for the purposes of the headline unemployment rate, which is 9.1 percent. Add them in and you get 10.3 percent.

Average Job Seeker Gives Up After 5 Months - The amount of time the unemployed spent hunting for jobs rose sharply last year. Those out of work tended to search for about 20 weeks before quitting in 2010, compared to 8.5 weeks in 2007, according to a recent Labor Department report. The report studied how long unemployed workers took to either find a new job or quit looking. Labor-force participation, the share of Americans who are working or looking for jobs, has fallen to its lowest percentage since the mid-1980s. That’s partly because people have grown discouraged about their ability to find jobs and have given up looking. With those workers on the sidelines, the unemployment rate has been lower than it otherwise would be. The official unemployment rate hit 9.1% in May. Including all of those who had part-time jobs but wanted to work full-time as well as those who want to work but had given up searching, the rate was 15.8%.

Chronic unemployment worse than Great Depression -There is an unfortunate adage for the unemployed: The longer folks are out of a job, the longer it takes them to find a new one. CBS News correspondent Ben Tracy reports that the chronically unemployed face the hardest road back to recovery, and that while the jobs picture may be improving statistically on a national level, it is not for them.  When CBS News met the former truck driver he had been out of work for two years.  "I don't really tell too many people this but I'm not ashamed or nothing, I'm homeless,"  His day job is looking for work at a jobs center in Hollywood.  "They're saying there are more jobs. I'm just wondering where those jobs are,"  About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months - a higher percentage than during the Great Depression. The bigger the gap on someone's resume, the more questions employers have.

Why is Chronic Joblessness on the Rise? - The quip "don't quit your day job" isn't the insult it used to be. In this economy, it's the key to staying afloat. Not only is joblessness on the rise again, according to Friday's jobs numbers, which showed May unemployment ticked up to 9.1%. But the longer you're out of work, the harder it is to get back in. Roughly 45% of unemployed Americans have been jobless for more than six months, a higher percentage than during the Great Depression. And nearly one-third have been out of work for a year or more. Those scary prospects have driven a lot of employees to hunker down in existing jobs for longer than they normally would, which partly explains why unemployment is staying so high. Worker mobility, which greases the wheels of hiring, dropped off sharply last year. And although it's starting to creep back up, the number of job seekers who successfully relocate for new positions is still historically low, according to research firm Challenger, Gray, & Christmas. Fewer than 10% of job searchers relocated for a new position in this year's first quarter, a nearly 50% drop from mid-2009. "What's unique in this job cycle is hires and fires are very low, and fewer people are quitting jobs,"

Is high unemployment the 'new normal' even in a recovery? — A "new normal" is emerging for the U.S. jobs market, and a growing number of economists warn that it's likely to mean that unemployment will remain persistently high, at 7 percent or more, for years to come.  The 9.1 percent unemployment rate reported in May remains high by post-World War II standards long after the economy resumed growth following the worst recession in 70 years. It's prompting economists to rethink basic assumptions about the U.S. labor market.At issue is what's called the "full employment" rate. It's generally thought to be the rate at which everybody willing and able to work can find a job. It's a theoretical "ideal" rate; "full" employment can't be zero because there'll always be people in transition between jobs, and others with disabilities or just plain lazy who'll be excluded from the workforce. For much of the 1980s, the unemployment rate hovered between 6 percent and 7.5 percent. During the mid-1990s, the rate fell steadily to around what economists came to consider the rate of full employment — 5 percent. Anything above that would signal inefficiencies in the economy.

High US unemployment forecast to persist for years -- The US will still face high unemployment in 2020 except in “the most optimistic scenario for job creation”, according to a new report to be published on Friday. America needs to create 21m new jobs to keep up with population growth, say analysts at the research arm of consultancy McKinsey, but that will only happen if the economic trends of the last decade are reversed. The report implies that US policymakers and politicians must rethink their assumption that today’s 9.1 per cent unemployment rate will automatically fall back towards 5 per cent as the economy recovers. A strong economic recovery is a precondition for full employment, said Susan Lund, director of research at the McKinsey Global Institute in Washington, but productivity gains that complement rather than replace lower-skilled workers in areas such as healthcare, a slowdown in the movement of manufacturing jobs overseas and a recovery in new business start-ups will also be needed. “Demand for workers with college degrees rises in any scenario but you only get strong demand for low and middle income workers in the best case,” said Ms Lund, one of the report’s authors.

Updated: Major Trends in U.S. Layoffs - We now have enough data to be able to project the direction of the newest trend in U.S. layoff activity. The charts below reflect that new trend, for which we treated the seasonally-adjusted data for initial unemployment insurance claim filings of the week of 30 April 2011 as an outlier. The first chart represents the primary trends seen since 1 January 2006: Our second chart narrows the bands for the range into which seasaonally-adjusted new jobless benefit claim filings are likely to fall while the new trend remains in force:   At present, it appears that the overall trend is negative, as it appears that jobless benefits will be likely to generally rise in the weeks ahead, although with such a limited number of data points to define the trend so far, there can be quite a bit of volatility in the direction of the trend until it becomes more established.

Strolling Through the JOLTS Data - This is another one of my stream of clicks posts where I look up data and post the charts as I find them. Vaguely I am looking for evidence of PSST type effects, but more than that I am just trying to get a handle for what’s going on. One of the things that interests me is quits. They are pro-cyclical which we would expect. However, the interesting thing is that they so dominate layoffs and discharges that the number of “jobs lost” goes down in a recession. Here is the basic effect I am talking about:  Indeed, my hunch is that this more than any other measure will tell us how good the labor market is. Unexpectedly, the more separations there are the better the labor market is.  As you can see separations never fully recovered from the Dot-Com burst and every felt like the 2000s were weak for jobs. As of now separations have not recovered from the Great Recession and everyone feels like the job market is stuck in neutral.

BLS: Job Openings decline in April - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in April was 3.0 million, little changed from 3.1 million in March. After increasing in February, job openings have been flat. Job openings have been around 3.0 million for three consecutive months; the number of job openings was 549,000 higher than at the end of the recession in June 2009 (but remains well below the 4.4 million openings when the recession began in December 2007. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs  The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for April, the most recent (and dismal) employment report was for May.

Labor Demand Gets Softer - Last week brought dismal news from the labor market as the government reported feeble job creation in May. A government report on Tuesday shows that employers are not accelerating their demand for workers. In April, the number of job openings was 3 million, down a touch from 3.1 million in March. And the number of unemployed workers for every job opening nudged up to 4.6 in April from 4.3 a month earlier. Although layoffs are slowing, employers are still not looking to hire in large enough numbers. The number of job openings is about half a million higher than it was at the official end of the recession two years ago, but is still 1.4 million lower than it was when the recession began at the end of 2007, and certainly not enough to absorb the 13.9 million people who are currently unemployed. Of the 11 sectors tracked by the Labor Department’s Job Openings and Labor Turnover Survey, just three reported an increase in openings in April: construction; trade, transportation and utilities; and retail. And in another dose of sobering news, openings in manufacturing, one of the few engines of the fragile recovery, slipped from 235,000 in March to 230,000 in April.

A lack of want ads: the job market deteriorates - Today’s Bureau of Labor Statistics’ April report from the Job Openings and Labor Turnover Survey (JOLTS) shows that the number of job openings decreased by 151,000 in April.  Most of the job openings were in education and health and professional and business services. The total number of job openings in April was 3.0 million, and the total number of unemployed workers was 13.7 million (unemployment is from the Current Population Survey).  As a result, the ratio of unemployed workers to job openings was 4.6-to-1 in April, a deterioration from the March ratio of 4.3-to-1.  April marks two years and four months that the “job seekers ratio” has been substantially above 4-to-1.  A job seekers ratio of 4-to-1 means that for 3 out of 4 unemployed workers, there simply are no jobs.   The highest this ratio ever got in the early 2000s downturn was 2.8-to-1 in the middle of 2003

Full Employment, Quits and Private Tyrannies - I learned of a friend-of-a-friend who hated her job. She was sexually harassed by her boss and had to deal with co-workers who created a very hostile workplace for her. While working there she developed some pretty severe health problems, and thus also had a “job lock” issue. She couldn’t quit her job and find a new one without losing access to crucial health care services she needed to survive. One doesn’t have to be a strict proponent of game theory to understand that if your boss understands you can quit and find another job easily, he or she is more likely to create a respectful job atmosphere. And if your boss understands you are locked, they are much more likely to create an environment where domination is the norm. And what makes it easier to quit your job? Full employment.” He goes on to point out that the poor labor market even crimps things like workers’ willingness to take their vacation days. “When employees don’t have any alternatives in the job market squeezing like this is very likely to happen. No matter what your meta-philosophical motivations are, you should find this fairly offensive. There’s a strain of political philosophy that puts a lot of weight on the idea that people are entitled to whatever their endowments, talents and labor produces. Vacation hours here are earned benefits – they are part of labor contract negotiations – but this compensation is lost to workers in a weak economy like this

Jobless Claims Inched Higher Last Week - If you’re inclined to optimism, you can argue that today’s update on initial jobless claims isn’t signaling a new recession after all. True, new filings for jobless benefits rose slightly last week by 1,000 to a seasonally adjusted 427,000. That’s still too high to encourage forecasts of robust growth in either the labor market or the economy overall. But for the moment, the number du jour doesn’t provide much support for arguing that the recent stumble in the economy is getting worse. The trend isn’t necessarily getting better either, unfortunately, which leaves us betwixt and between and waiting for the next update. As the chart below reminds, recent history for this seasonally adjusted series appears to headed for another round of treading water. Oh, dear—been there, done that, and the result was a long hot summer last year and plenty of anxiety about how to resolve the macro stumble. For roughly the first half of 2010, initial claims went nowhere, offering an early clue of the new headwinds that would eventually force the Federal Reserve to launch a new batch of quantitative easing (QE2). The odds don’t look particularly high these days for a third installment, but that may change, depending on where the data goes.

Hour by Hour, a Measure of Economic Stress - Ben S. Bernanke, the Federal Reserve chairman, highlighted a relatively obscure measure of economic health, “aggregate hours of production workers,” to make the important point that our economy is not very healthy at all.The name pretty much explains the statistic: It measures the total number of hours that Americans are paid to work in production jobs, which make up 80 percent of all jobs. The comparisons, as Mr. Bernanke noted Tuesday, are not good.  Paid hours “fell, remarkably, by nearly 10 percent from the beginning of the recent recession through October 2009,” he said. Moreover, after two years of renewed growth, paid hours remain about 6.5 percent below the prerecession peak.“For comparison,” Mr. Bernanke continued, “the maximum decline in aggregate hours worked during the deep 1981-82 recession was less than 6 percent.”No other recession since 1964 has produced a comparable decline in hours worked.

Are More Productive Workers Bad for U.S. Jobs? - In discussing our unemployment problem today, WSJ's Real Time Economics pointed to an important issue: worker productivity. The piece explains that, with more productive workers supporting a growing population, the American employment rate and living standards are falling: The smaller the share of the population employed, the smaller the economy's potential to lift living standards through productivity gains. Indeed, productivity -- companies' ability to keep squeezing more production out of each hour worked -- is transformed from the prime driver of prosperity into a force keeping people out of work. Profits rise, but the ranks of the unemployed don't shrink. Productivity has become a bad word in this economic downturn, but should it be? Many think technology gains are stripping the U.S. workforce of badly needed human jobs. And the U.S. has it worse than other developed countries, since, as measured by economic output per worker, U.S. workers are the world's most productive. That's partly because Americans work longer hours, technology investments have increased their rate of return, and American companies are more competitive and efficiently organized.

The Geography of Immigrant Skills: Educational Profiles of Metropolitan Areas - Brookings - Since Congress last debated comprehensive immigration reform in 2007, the United States has experienced the Great Recession and now faces a slow recovery. Throughout, the highly charged public debate on immigration has focused on illegal immigration and its costs. Often lost in this discussion is the vital role of immigrants in the U.S. labor market.  Immigrants are now one-in-seven U.S. residents and almost one-in-six workers. They are a significant presence in various sectors of the economy such as construction and hospitality on the low-skill end, and information technology and health care on the high-skill end. While border enforcement and illegal immigration are a focal point, longer-term U.S. global competitiveness rests on the ability of immigrants and their children to thrive economically and to contribute to the nation’s productivity.

Reported Occupations-U.S. Labor Force, 1850-2000 (Interactive Chart)

Is the Summer Surge All about Labor Supply? - 

In a series of blog posts (most recently here), Casey Mulligan has argued rise in summer employment when school is out shows that labor supply always matters, even in a recession. Mulligan states that “[t]he economy creates jobs in the summer — even during the last several years, when our economy supposedly suffered from a lack of demand — because millions of people become willing and available to work,” and that even today “greater labor supply remains one route to higher employment.” However, as I show in this note, drawing this policy implication from seasonality, however, is a highly problematic exercise. Mulligan’s main evidence that summer is all about labor supply and not demand is that for teens and young adults, unemployment rises and average wages fall.  However, there is one simple way of assessing the claim that the summer surge in employment is only about labor supply – and that is to look at job vacancies.  If summer is mainly a time of a big labor supply shock, we should not see any systematic seasonal patterns in job openings. Moreover, we should expect to see a lot of labor market slack – which economists typically measure using the “unemployment-to-vacancy” (U-to-V) ratio.

Teens Disappear from the U.S. Workforce - As of May 2011, over two million jobs (2,004,000) have disappeared from the U.S. economy since teen employment peaked in November 2006. Since the total employment level in the U.S. peaked a year later, some 1,671,000 fewer American teens are now being counted as being employed. At this point in time, jobs held by teens account for 25% of all jobs lost in the U.S. economy since November 2006. Young adults (those between the ages of 20 and 24) account for 15% of the total decline in jobs from November 2007 to May 2011, while those Age 25 and older account for the remaining 60%.  But wait, it gets worse for teens. In May 2011, the BLS reports that 4,240,000 individuals between the ages of 16 and 19 had jobs. That's the lowest recorded number of teens in the U.S. workforce since July 1963, when 4,210,000 teens were counted as having jobs.

It's the McEconomy, Stupid - I alluded to it in my intro post, but this is worth highlighting: Up to 30,000 of the 54,000 jobs created in May were the result of a hiring spree by the hamburger chain, analysts at Morgan Stanley told Market Watch on Friday. So hiring at McDonald's accounted for about half of the nation's job growth in May. What lessons can we draw from this? One, obviously, is that the economy is anemic and lurching toward a "double dip"—which isn't some new dessert concoction at McDonald's. While unemployment hovers at 9 percent, job creation has slowed to a trickle—and what jobs are on offer tend to be of the burger-flipping, minimum-wage variety. The second lesson is that McDonald's itself obviously sees opportunity in this crisis. It made 25,000-30,000 net hires in just one month. That's a pretty big bet that its "dollar menus" and other cheap calorie blasts will remain popular among a cash-strapped populace having to work ever harder to stary in place. That's good news for Mikky D's shareholders—and bad news for public health in a nation besieged by chronic maladies caused by an excess of low-quality calories.

Could Fast Food Automation Replace Low Wage Workers? -Millions of people hold low-wage, often part-time jobs in the fast food industry. Historically, low wages, few benefits and a high turnover rate have helped to make fast food openings relatively abundant. These jobs, together with other low-skill positions in retail, provide a kind of safety net for workers with few other options.    In the current economic environment, these jobs are, of course, much harder to get. McDonald’s recent high-profile initiative to hire 50,000 new workers resulted in over a million applications—numbers that give McDonald’s a lower acceptance rate than Harvard. What about the future? Most forecasts assume that the fast food industry will continue to be a significant job creator. Is it possible that these projections miss the impact of technology? Could these jobs begin to disappear? For some insight into what could potentially happen, consider this article from the New York Times about the Kura sushi chain in Japan:

Tightening our belts: Americans lower income expectations - Goldman's economist Jan Hatzius looked at the University of Michigan² and Thomson Reuters³ poll, which asks consumers whether they believe their family income will rise more than inflation in the next 12 months. Hatzius applied a six-month moving average to smooth out the data and found that wage pessimism is at its lowest in more than two decades. "Households are already very pessimistic about future real income growth," "A slowdown in job growth would presumably translate into a further deterioration in (expected and actual) real income growth. This would heighten the downside risks to our current forecast that real consumer spending will grow 2.5% to 3% over the next year and might call for another downward revision to our forecast for US GDP growth in 2011 and 2012." Real hourly wages have dropped 2.1% on an annualized basis over the past six months, a rate of decline not seen in 20 years, according to Goldman. This analysis is backed up by the other most-watched consumer survey from the Conference Board⁴, which indicated earlier this week that the proportion of consumers expecting their incomes to increase was below 15% in May.

US Income Expectations Plummet to 25-Year Low - The average US worker anticipates that in a year from now he or she will be earning the same or less in wages than right now, a 25-year low in income expectations, based on an analysis by Goldman Sachs. The research explicitly compared expectations of real income growth, meaning that inflation was a significant consideration in the gloomy outlook. However, a combination of additional factors can also be blamed including the still-limping economy, anemic job growth, stagnant wages, lower-paying jobs, and fewer hours. “Real hourly wages have dropped 2.1% on an annualized basis over the past six months, a rate of decline not seen in 20 years, according to Goldman. This analysis is backed up by the other most-watched consumer survey from the Conference Board, which indicated earlier this week that the proportion of consumers expecting their incomes to increase was below 15% in May.“‘I am much more concerned that the second half resurgence we all expect never arrives and by early 2012 we are in a recession,’.

World Top Incomes Database - The chart above shows how far things have moved off their traditional ratios in terms of US incomes. The top 1% are earning more income, and keeping more of it, than anytime since the roaring 1920s. This fascinating set of data points via the Paris School of Economics (referred to us by Invictus!). You can access this via their website and slice and dice the income data by nation, income percentile, etc. anyway you like. As the Authors note:The world top incomes database aims to providing convenient on line access to all the existent series. This is an ongoing endeavour, and we will progressively update the base with new observations, as authors extend the series forwards and backwards. Despite the database’s name, we will also add information on the distribution of earnings and the distribution of wealth. As the map below shows, around forty-five further countries are under study, and will be incorporated at some point (see Work in Progress).

Wage growth slows to a crawl - Unemployment remained high at a rate of 9.1% in May 2011, but that is only one of many problems facing the labor market. In addition to this stubbornly high unemployment rate, wage growth has tumbled in the recession and its aftermath, falling from an annual growth rate of 3.8% in May 2007 to a rate of 1.8% in May 2011.  Average hourly wages were relatively flat in May (up 6 cents), a rate that has been treading water over the last year and which is far worse than before the recession started (see chart).  As for the concerns of inflation hawks, the trend in wage growth provides absolutely no cause for alarm.

The Challenge of Long Term Job Growth: Two Big Hints - I’ll have more to say on this when I’ve got some time, but these two charts have influenced my thinking a lot.The first one shows the long term trends in productivity and employment growth.  People sometimes worry that we’re getting too productive, able to satisfy the demands of our economy with “too few” workers.  That’s an age-old worry, and those who want to downplay it cite the fact that, as the graph shows, there is a positive, not a negative, correlation between productivity and job growth overtime. But look at the end of the graph.  Productivity accelerates while employment growth decelerates.  And that ain’t no blip either…it suggests the possibility of a structural change in this relationship.Here’s the second hint.  I basically copied this from a neat graph in the Washington Post; it’s just all the jobs sectors—construction, manufacturing, services, etc.—indexed to 100 in January 2007 and plotted through last month.I didn’t bother labeling every sector because I just wanted to make one simple point.  Look at health care/education (which is driven by health care).  Even throughout the worst recession since the Great Depression, with payrolls tanking worse than I’d ever seen, HEALTH CARE ADDED JOBS EVERY SINGLE MONTH.

New Low Paying Jobs Will Lead to High Debt - If workers can’t cover the basics with their income, they have to turn to credit cards.  Median real income fell $5,261 over the last decade. Our total revolving debt comes to $796.1 billion.  If and when jobs come back, what kind of jobs will they be? What will they pay? And what will that mean for our swollen levels of consumer debt? After all, wages have not fared well in recent decades. The 2000s saw them actually fall for the first time in recent history. Before that, they had stagnated for 30 years. And it seems that the jobs many people must now turn to are offering lower pay. As the LA Times reports: “In April, average hourly earnings for production and non-supervisory employees was $8.76 an hour when adjusted for inflation, down from $8.93 two years ago.” In particular, post-2008 income has seen a “significant drop.” Part of this is because the new jobs are concentrated in low-skill, low-pay work. The National Employment Law Project took a closer look at employment and jobs-growth data in February and says that just 14 percent of recent job growth comes from high-wage industries. About half comes from low-wage industries.” Most jobs are coming in “temporary help services,” work that comes with little benefits or security. Restaurants and food services businesses have made up 7% of hiring, particularly fast food joints.

Workers Too Often Tapping 401(k), Not A Piggy Bank - "It's my money, why shouldn't I use it?" It's a mindset that can be a slippery slope when it comes to your retirement savings. Indeed many workers may be robbing themselves of a secure future by viewing their 401(k) account as a piggy bank that can be tapped all too easily. There are plenty of ways to rationalize borrowing against your retirement account balance, but the real cost is the loss of potential earnings on a tax-deferred basis in your run up to retirement. And it's the intangible nature of this lost future income that undoubtedly makes the consequences of borrowing much harder for many to appreciate.  One key concern is that the recession has helped fuel a growth in 401(k) loans. Borrowing accelerated in 2009 as the recession took jobs and homes away from millions of workers who turned to their retirement accounts just to get by. The number of loans outstanding only grew further to a record level last year. More than 1 of every 4 workers with 401(k) accounts, some 27.6 percent, had a loan outstanding, according to human resources consultant Aon Hewitt. The rate had remained steady at around 22 or 23 percent through the mid-2000s.

When will incomes return to their 2006 level? - What happens if, instead of measuring GDP by adding up all the money spent in the country, you measure it by adding up all the money earned in the country? Theoretically, the two measures are identical, but in practice, there can be differences. Justin Wolfers has this chart: The red line, here, is a more reliable measure of national income than the blue line, which is the official GDP number. And it gives a sobering indication of just how devastating the Great Recession was: a drop of more than 7% in real GDP per capita between the end of 2006 and the end of 2009, with most of that decline taking place before the collapse of Lehman Brothers and the subsequent financial crisis. Writes Wolfers: Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006. I’d note that “average”, here, refers to the mean, not the median. The effect of Ben Bernanke’s monetary policy has been to funnel large amounts of income to bankers and plutocrats, even as the employment situation remains woeful, so you can be sure that median incomes are going to take significantly longer to return to their 2006 level than mean incomes. They’ll get there eventually, I’m sure. But it could take a decade.

Chart of the day, income-inequality edition - If you want to waste a bunch of time this morning, I can highly recommend playing around with the World Top Incomes Database. Click on “Graphics,” and knock yourself out — the database has a wealth of information, going all the way back to the 19th century, and creates lovely charts on the fly; it will even export them in .png format for you. Here’s one I just put together, showing how in 1994 the top 0.5% of the US population started raking in a greater share of total income than the top 1% of the German population — and how the top 1% in the US are seeing their proportion of total income rise dramatically, even as their German counterparts are seeing their share of total income shrink.

The destruction of the middle class will not be televised – 56 percent of American workers have less than $25,000 saved. Even worse 60 percent of retirees have less than $50,000 saved. 45 million on food stamps and the consequences of peak debt. - The disappearance of the middle class will not be televised.  Don’t expect your favorite talking head to relay this information to you.  At the core of our economy we have become a consumption nation.  This necessarily isn’t negative if we were to balance out the opposite side of the equation with adequate savings.  It would be one thing if the working and middle class were consuming with money that they had earned.  Instead for over a decade many Americans have used massive amounts of debt in mortgages, credit cards, and student loans to finance things they simply could not afford.  Unfortunately this game is up and many are now feeling the financial pangs of a country where the working and middle class are marginalized and government policy is geared to exaggerating the inequality especially in the financial sector.  Recent data shows that of current retirees, 60 percent have $49,999 or less saved up in retirement plans.  This coincides with other data showing that the average per capita worker makes $25,000.  You have those that can save and those that will rely purely on Social Security when they retire. (see charts)

Broader Unemployment Rates, by State - In the nations worst-off states, more than one in five residents wanted a job and were unable to find one early this year. Unemployment nationwide was 9.1% in May, but the rate still hovered in the double-digits in states such as Nevada, California and Michigan through the first quarter. Expanding the rate to include those who wanted to work but gave up their hunt provides an even darker picture: In each of those states the broader measure of unemployment topped 20%, according to a Labor Department report. The rate, known as the U-6, is designed to measure underutilization in the labor market and includes jobless workers, those who want a job but have given up searching and those who are working only part-time because they can’t find full-time positions. Generally, states that have high unemployment also have high levels of labor underutilization. That’s in large part because jobless residents grow discouraged about their chances of finding a job and often give up looking. See a map of which states have the highest share of discouraged and underemployed workers.

State, local layoffs to hit record levels -- Don't look to state and local governments to prop up the job market. To the contrary, this cash-strapped sector is set to go on a record-breaking layoff binge when the new fiscal year starts on July 1.State and local governments are forecast to shed up to 110,000 jobs in the third quarter, the first time the blood-letting has risen into the triple digits, according to IHS Global Insight.  "We're on a downward path,"   "It's not looking good." State and local government employment has been a drag on the economy all year, averaging a loss of 23,000 jobs a month over the past three months. Meanwhile, the private sector has created an average of 180,000 a month during the same period.

Recovery and Government Employment - (series of charts) I think the economy has some big issues going on in manufacturing and construction, however, even given that the private sector recovery just doesn’t look that bad. These are private sector job gains and losses over the last 10 years.The difference between this recovery and the last is of course public sector. I don’t have a good chart for that because I don’t know where I can get easy ex-census data.  Someone has it because I see a bunch of charts labeled ex-census, but I don’t know where they are getting it from. One interesting side thing though is to look at State and Local Government employment over time. Here is the log of State and Local employment going back as far as I have data, 1955. Noticeable downshift around 1980. Lets check it out in logs. With logs, straight lines are constant growth. So what we are seeing – a part from the 80s phase shift, is a slowdown that was continuous since around 1990. Lets do the same, with fraction of the population. That has a similar break as the stagnation in TFP.  Of course that makes sense if you think the TFP slowdown was about education. Most State and Local workers are in education.

Black Unemployment Crisis: Loss Of Government Jobs Hurts African Americans Hardest - Nearly 21 percent of the nation’s working black adults hold government jobs, as compared to some 17 percent of white workers and 15 percent of Latinos. Public agencies are the single largest employer for black men, and the second most common for black women.  The disproportionate vulnerability of African American employees to the impacts of government budget cuts helps explain why black workers have fared so much worse than other slices of the population since the recession’s end. In May, the unemployment rate among black Americans reached 16.2 percent, up from 15.5 percent a year earlier. By contrast, white unemployment was eight percent, an improvement from the 8.8 percent level of a year earlier. The loss of government paychecks erodes one of the great equalizing forces at play in the American economy for more than a century. A government job has long offered a pathway for African Americans to sidestep discrimination that has impeded progress in the private sector, where social networks often determine who has a shot at the best jobs, say experts.

Unemployment benefits fading away - Even though the nation's jobless rate is on the rise, millions of people could see their unemployment checks stop coming at the end of the year. Nearly all Americans who find themselves out of work starting next month will likely receive only 26 weeks of state unemployment checks -- at most.  Why? Because the deadline to file for extended federal benefits expires at the end of the year. "Most people who lose their jobs after July 1... won't be eligible for federal unemployment benefits,"  . And as Washington prepares to pull back, a growing number of states are cutting their share of benefits. South Carolina is poised to become the fourth state this year to reduce state benefits to 20 weeks¹, while Arkansas and Illinois have shorn one week off their unemployment insurance coverage.

Between Rock Bottom and a Hard Place - Last week, the housing market took another dive. Unemployment remained at about 9 percent, where it's hovered since January, and the economy added just 54,000 jobs -- far fewer than expected. The private sector added 83,000 new jobs, but continued government layoffs pushed the net number down.  But you won't hear much about the housing and hiring crisis from politicians in Washington and in statehouses across the country, which remain focused on cutting deficits rather than addressing -- or even mentioning -- these problems. They are cutting programs meant to jump-start the economy as well as programs on which struggling people depend: unemployment benefits, welfare benefits, retraining funds, and child-care subsidies. This will leave American workers across the country stranded and could hamper the faltering recovery.  Unemployment benefits are on the chopping block, at both the state and federal levels. Now, as the Huffingon Post's Arthur Delaney has extensively tracked, many states are cutting back. Michigan, Missouri, and Arkansas have shrunk the number of weeks people can receive state aid. A similar bill in Florida awaits the governor's signature, and more states are likely to follow. And the federal bills creating the 99 weeks max all expire at the end of 2011, so people still unemployed come January will be abruptly bumped down to their state limits.

Arizona May Cut Federal Jobless Aid to 15,000 by Failing to Change a Word - Arizona may cut off jobless benefits for about 15,000 people and stop $3 million a week flowing into the economy unless legislators reconvene to revise a law the way more than half of U.S. states have to match federal rules.  The one-word change would keep extended jobless aid coming after June 11 under a benefits formula, the state Economic Security Department has said. Changing the law to conform with federal rules is needed after Arizona’s unemployment rate fell. The U.S. pays for extended benefits if a state had at least 10 percent higher unemployment than three years earlier, after changing the “look-back” period from 24 months. Arizona’s April jobless rate at 9.3 percent was unchanged from the same month in 2009 while almost double April 2008’s 4.9 percent. To keep aid flowing the state must change its look-back rule, yet Republican lawmakers in Phoenix are reluctant to act.

New York State: Cuomo Calling for 9800 State Layoffs Starting in July - As state labor unions continue to negotiate with Gov. Andrew Cuomo's administration on expired contracts, the governor is moving forward on plans to lay off 9,800 workers beginning July 15. Cuomo promised months ago to trim the workforce if he couldn't get $450 million in concessions from the workforce. None of the contracts have been settled, but union leaders claimed Thursday that the governor is negotiating in bad faith by moving forward with layoffs.  Ideas suggested to cut workforce costs included furloughs and wage freezes for workers.  An agreement with the unions has not been reached on these points. In the meantime, the Public Employees Federation, which represents 56,000 professional, scientific and technical employees, said in a statement that it is "appalled" at what the governor is doing. The union, which is the state's second largest, has been waiting for a response from the governor's negotiators on a proposal.

Illinois highway construction halt could mean 52000 layoffs — Gov. Pat Quinn is announcing that Illinois faces an imminent shutdown of state highway projects, a spokesman for the governor confirmed Monday morning. About 31,000 construction workers will be laid off starting June 17, according to a construction industry source. Another 21,000 layoffs are anticipated from the shutdown of hundreds of other capital construction projects, ranging from high-speed rail to drinking water and wastewater projects, according to a memo prepared by the governor's office."These job losses are nearly equivalent to the number of new jobs created across the entire country in May," the memo noted. Funding expires June 30 because the Illinois House and Senate did not agree on renewing the state's capital construction funding authority before the legislature adjourned last week.

Indebted Alabama County Now Considering Nearly 1000 Layoffs = Jefferson County, Ala., already struggling under the weight of $3.2 billion in sewer debt, raised its estimate of the number of workers it may need to lay off, to nearly 1,000, or roughly 300 more than originally expected, a county official said Tuesday.The new total of 964 employees, which was agreed upon at a county finance committee meeting, represents more than 40% of the roughly 2,300 employees paid for by Jefferson County's general fund revenues. It includes 238 people who work for elected county officials; they weren't considered to be layoff targets previously, said Commissioner Jimmie Stephens, who oversees the county's finances. The layoffs are part of a proposed $14.5 million budget reduction that would touch all the county's departments, he said. Stephens said workers could be put on administrative leave without pay at the beginning of the next payroll period, around mid-June. A finance committee meeting to finalize any cuts will take place Friday.

BEA News Release (GDP by State): (map & chart) Real gross domestic product (GDP) increased in 48 states and the District of Columbia in 2010, according to new statistics released today by the U.S. Bureau of Economic Analysis that breakdown GDP by state.1 Durable–goods manufacturing, retail trade, and finance and insurance were leading contributors to the upturn in U.S. economic growth. U.S. real GDP by state grew 2.6 percent in 2010 after declining 2.5 percent in 2009.2 The resurgence in real GDP by state in 2010 was widespread, with all eight BEA regions growing. The Mideast and New England regions grew the fastest, led by finance and insurance and durable–goods manufacturing, respectively.

Economic Winner in 2010: North Dakota - Of all the states, North Dakota’s economy grew fastest in 2010. The biggest decline was in Wyoming, according to a report released Tuesday by the Bureau of Economic Analysis.  Click the interactive map below to see trends across the country:

Fed: Dallas is only area of country to show improving growth - For the first time this year, the economy slowed in several U.S. regions this spring. High gas prices weakened consumer spending, and the Japan crises reduced manufacturing output. Four of the Federal Reserve's 12 bank regions suffered slower growth in April and May compared with earlier this year, a Fed survey reported Wednesday. The report confirmed a slew of data that portray a national economy whose growth has faltered. Hiring has slowed, orders to factories have declined and home prices have fallen. Fed banks in New York¹, Philadelphia, Atlanta and Chicago said growth weakened in those regions. By contrast, the Fed regions in Boston, Cleveland, Richmond, St. Louis, Minneapolis, Kansas City², and San Francisco³ said growth there remained steady. The Dallas region was the only one to report accelerating growth. That was mostly because of higher oil prices that benefited that region's energy industry

Monday Map: State Spirits Excise Tax Rates

Meredith Whitney: State finances are worse than estimated - Meredith Whitney is issuing a fresh warning to mutual funds, banks, and politicians: The state of state finances is far worse than what you think, or at least than what you've been willing to tell the investors and taxpayers who will eventually carry the burden. In a new report released today to her clients, Whitney summons what appears to be the most comprehensive set of data ever assembled on state budgets and debt. Her conclusion is that the future deficits that need to be closed, either by new taxes or draconian cuts in social services, are far bigger than the official numbers show, and that debt levels, when all liabilities are counted, vastly exceed the official estimates. Late last year on 60 Minutes, Whitney predicted hundreds of billions in defaults on municipal bonds in the next five years. That controversial call was widely condemned, especially on Wall Street, where the muni market is an enormous profit spinner. Now, Whitney tells Fortune she never meant to make more than a general forecast. "I never intended on framing the scale of defaults as a precise estimate, but I continue to believe that degree of municipal defaults will be borne out over the cycle. I meant to point out that the state debt problem is a massive headwind for the U.S. economy, second in importance only to housing."

Los Angeles, fighting blight, goes after Deutsche Bank - The city of Los Angeles is suing financial giant Deutsche Bank for allegedly letting many of the 2,000 houses it obtained through foreclosures to fall into disrepair, leading to crime and lower neighborhood property values.  The city says it has repeatedly notified the company about the poor condition of the properties but the bank has not taken action to fix them. By neglecting the properties, Deutsche Bank has violated state law and city ordinances, according to the complaint filed in the Los Angeles County Superior Court. “We must fight blight by holding banks accountable when they create vacant nuisance properties that pose threats to our residents and destroy the quality of life in our neighborhoods,”

Sacramento fire, police and parks-rec departments on budget block tonight -With police protection, community centers and firefighting on the line, the Sacramento City Council tonight will start publicly redefining what the city can provide to its residents. Council members will debate key portions of a budget proposal aimed at filling next year's $39 million projected deficit. The plan calls for the most severe cuts to date to the city's public safety agencies. Sacramento would rely on nonprofit organizations, the faith community and neighborhood groups to operate city community centers. The proposal from interim City Manager Bill Edgar also recommends the council explore the politically charged idea of hiring outside contractors to do work traditionally performed by public employees.  Those changes will be the focus of tonight's hearing, during which the budgets of the police, fire and parks departments will be hammered out side by side. Council members wanted to debate those budgets at the same time to drive home their assertion that City Hall is all but broke.

California urged to sell its unpaid tax bills - California should sell its claims to unpaid taxes to the private sector to raise money to bolster its finances, a state tax official said on Monday. The proposal comes as the legislature approaches its June 15 Constitutional deadline for approving a budget for the fiscal year beginning on July 1 with little to suggest an agreement on a spending plan that closes a roughly $10 billion shortfall is in the works. "Selling aging debt is a common practice in the private sector and has also been used successfully by many local governments," George Runner, a member of California's Board of Equalization, said in a letter to Governor Jerry Brown and the legislature's leaders. The board, which collects sales and use tax along with taxes on fuel, alcohol and tobacco, has $3.1 billion in outstanding accounts receivable, other state tax agencies have similar if not larger outstanding receipts owed them and agencies that collect fees of various kinds are likely also owed significant funds, Runner told Reuters by telephone.

GOP running fake Democrats in Wisconsin recall election - The Republican Party of Wisconsin admitted Monday that they planned to run candidates as Democrats in this summer's recall elections. Earlier this month, the Wisconsin Government Accountability Board Tuesday approved recall elections for three Republicans, bringing the total number to six. At the same time, the nonpartisan election officials put the recall elections of three Democrats on hold. By running their own Democratic candidates, Republicans will force the July 12 recall elections to become Democratic primaries. The general elections would be moved to Aug. 9. "We should have protest candidates in most and perhaps all of the races," a Republican official told The Wisconsin Sentinel Journal. "We're not hiding this from anybody." "Republican senators are again busy doing their jobs crafting a fiscally responsible state budget that promotes economic growth, which puts them at a distinct disadvantage with many of their challengers who have had sufficient time to campaign,"

Fake eviction notices? Seriously? - The Koch Brothers’ attack operation is all class. The state director of the conservative group Americans for Prosperity offered no apologies today for papering homes in Detroit’s Delray district Monday with fake eviction notices.  Bearing the words “Eviction Notice” in large type, the bogus notices told homeowners their properties could be taken by the Michigan Department of Transportation to make way for the New International Trade Crossing bridge project. Apparently, if this bridge project goes forward, it’s likely to draw traffic and toll revenue away from a nearly privately-owned bridge. So, Americans for Prosperity is lobbying heavily against the state project, and the Koch-financed group’s campaign now includes fake eviction notices. AFP said the flyers were intended to get local residents’ attention. To that extent, the stunt worked — it caused panic among many families in struggling communities who thought they were losing their homes.

At least one good thing has come out of the recession - Economic efficiency requires that the additional benefits of state park attendance is equal to the additional costs. User fees can be used to accomplish this (In state parks ...): Some parks are closing altogether .. Here in Washington, one of only a handful of states that has not charged entrance fees to state parks, the revenue stream is about to change. Beginning July 1, the parks will no longer receive state money for their operating budgets. Instead, they will rely directly on new entrance fees — $30 for an annual pass, $10 for one day.  The knock on park user fees has always been that they are not equitable, those who can not afford to pay the fees are not able to visit parks.Yet some officials also worry that rising fees, rising gas prices and a need to “market” parks to people who will spend money will keep those with lower incomes from enjoying public lands. I'm sympathetic to this argument but equity cuts both ways. The state government subsidy seems to attach overly large social benefits to attracting visitors who can't afford the lower user fees, and it is not clear that taxpayers would choose to pay that subsidy if faced with it in a referendum (especially when state parks are competing with education and health care spending).

Third World America 2011: Forget "Fast Tracking to Anarchy" We've Arrived - Last summer I wrote about Arianna Huffington's latest book, Third World America:  I also wrote that municipal financial problems spelled a lower quality of life. Downtown Chicago crime escalated, along with attacks on officers in the Chicago Police Department. An officer who spoke up about the low morale of the undermanned and rudderless police force endured official retaliation.  This year, all hell has broken loose in downtown Chicago. Years of under-hiring have resulted in a police force that is unprepared for wildings and gang violence. Moreover, concealed carry in Chicago is illegal, unless one follows the Constitution.Tourists and residents have been attacked by mobs of youths on buses, on beaches, on bicycle paths, near the shops of the Magnificent Mile, and outside their homes. Mobs of shoplifters plagued "Mug Mile" stores. The irony is that these disenfranchised youths are turning to crime -- and if justice is done, prison sentences --a gainst innocent targets. Their focus is misdirected. Participating in a peaceful five million man march -- a true show of force and power -- against elected culprits in Washington would get them better results for lasting change.

Three arrested, accused of illegally feeding homeless - Members of Orlando Food Not Bombs were arrested Wednesday when police said they violated a city ordinance by feeding the homeless in Lake Eola Park. Jessica Cross, 24, Benjamin Markeson, 49, and Jonathan "Keith" McHenry, 54, were arrested at 6:10 p.m. on a charge of violating the ordinance restricting group feedings in public parks. McHenry is a co-founder of the international Food Not Bombs movement, which began in the early 1980s. The group lost a court battle in April, clearing the way for the city to enforce the ordinance. It requires groups to obtain a permit and limits each group to two permits per year for each park within a 2-mile radius of City Hall. Arrest papers state that Cross, Markeson and McHenry helped feed 40 people Wednesday night. The ordinance applies to feedings of more than 25 people. "They intentionally violated the statute," said Lt. Barbara Jones, an Orlando police spokeswoman.

Cops arrest charity workers for illegally feeding homeless - Feeding the homeless in a public park without the proper permits can land you in jail, at least in Orlando, Fla. A recent report in the Orlando Sentinel explains that police officers there arrested three volunteers with the Food Not Bombs (FNB) charity for illegally feeding a large group of homeless individuals in Orlando's Lake Eola Park. Jessica Cross, 24, Benjamin Markeson, 49, and Jonathan 'Keith' McHenry, 54, had been handing out food in the park when officers reportedly approached them. Local ordinances state that feeding more than 25 homeless people at a time in that area requires a city permit, and violation of these ordinances can result in a 60-day jail sentence, a $500 fine, or both. Because the group had not followed the rules, officers arrested the three with a set bail of $250 for each person. 'They basically carted them off to jail for feeding hungry people,' said Douglas Coleman, a spokesman with the Orlando chapter of FNB. 'For them (city officials) to regulate a time and place for free speech and to share food, that is unacceptable.' The group has been embroiled in a legal battle with the city for years, particularly after ordinances were passed in 2006 that essentially criminalized the feeding of the homeless in downtown parks.

Our stagnating economy vs our stagnating education system - Freddie DeBoer has a recent post on education that I think is demonstrative of a fairly common way of thinking about our educational system: You won’t find this in most education reform debates, but the fact is that a huge part of our education problems are found among a relatively small subset of our public school populations. Many millions of students pass through American public education and are perfectly well served, ready to go compete in that global marketplace I keep reading about. And then you have a numerically small minority who are terribly underserved, in terms of educational outcomes, and who drag down our educational statistics considerably. My question is whether he would judge how well the American economy is doing using similar logic? I believe Freddie had his druthers we’d undertake some fairly radical changes in our economy, including a much different redistribution system. If the performance of our education system does not merit radical change, then does our economy? I’m not sure the former is obviously outperforming the latter, especially if you judge them by all but the bottom of the distribution.

Community Job Loss Leads To Decline In Student Achievement: Study - Studies have long indicated that children whose parents lose jobs will falter academically. But new evidence shows that widespread job loss doesn't only affect the children of the jobless, it hurts kids whose parents are still employed, too. Statewide job loss decreases children's test scores, regardless of the employment status of their parents, according to 'Children Left Behind: The Effects Of Statewide Job Loss On Student Achievement,' a new working paper published by the National Bureau of Economic Research. The study looks at fourth- and eighth-graders test scores from the National Center for Education Statistics' National Assessment of Educational Progress in math and reading. It found significant effects of job loss on academic performance in a decline in eighth grade math test scores: For every 1 percent of a state's working age population that is out of a job, the state's average eighth grade math score declined by almost three points -- a small but not insignificant trend, researchers say. 'Research has found that the stress and anxiety of losing your job is actually not so much greater than the stress of worrying about losing your job'

Is the Economy Hurting Your Kid's Report Card? - The economy, it appears, is hurting your child's ability to do algebra. A study published  this week by the National Bureau of Economic Research found that higher rates of unemployment tends to lead to lower student test scores. And it's not just kids whose parents have lost their jobs, but all kids. The study by a group of Duke University professors looked at test scores and unemployment rates around the country. The researchers found that kids in communities with high unemployment rates tended to have lower test scores even if their own family hadn't experienced a job loss. In fact, the stress of a poor economy can lower test scores for children as young as nine. But the study, which looked at fourth graders and eighth graders, found that older students were affected the most, and that math scores tended to drop more with economy stress than reading scores.

Audit confirms near $80-million gap at RCSD - An audit of the city school district's 2011-2012 budget deficit has been completed and confirms that the district is facing a gap of about $80 million. The accuracy of the figure had been challenged by Rochester Teachers Association President Adam Urbanski. The audit was completed by the Buffalo firm Lumsden & McCormick which "examined the district's projected revenue and expenditures for accuracy, interviewed district staff, and verified specific data and documentation", according to a written statement from the district.The 11-page audit report says that the firm "found the amounts to be consistent," with the district's projections. When former Superintendent Jean-Claude Brizard presented the district's budget with the near $80-million deficit, it caused a storm of protests from parents, teachers, and students. The deficit would require severe cutbacks in both programs and staffing, Brizard warned. That's when Urbanski called for an independent audit, calling the deficit a fabrication. The RTA also insisted on an audit before agreeing to negotiate concessions.

Harrisburg parents sound off over proposed school closings - Harrisburg School District parents this evening sounded off against the school board’s planned closure of four schools during the first of three public forums on the plan that would help stem an expected $15 million budget deficit next school year.Parents aired concerns about oversized classrooms, safety and empty, large buildings that could create more blight in the city during the meeting at Hamilton School, 1706 N. Sixth St. The board tentatively adopted a $124 million 2011-12 budget last month that would close the Hamilton, Lincoln, Shimmel and William Penn buildings and layoff 226 employees. Board members said the closures are necessary in the face of deep state education funding cuts Gov. Tom Corbett called for in the proposed budget he delivered in February. The district would receive $42 million from the state during the next school year under Corbett’s plan, down from $51 million it received this year.

Govt. shutdown could mean 6000 layoffs for MnSCU -- The Minnesota State Colleges and Universities system will send layoff notices to 6,000 employees Friday if it can't work out a deal to get access to its money in a state government shutdown. The MnSCU Board of Trustees held an emergency meeting Wednesday to discuss the implications of a shutdown. Chief Financial Officer Laura King says the system has enough money in state accounts to keep operating but might not be able to access it in a shutdown. She says she's confident the system will reach a deal with the state budget department to keep processing MnSCU's money during a shutdown. But if the deal isn't reached by Friday, the layoff notices will go out. If there's no deal at all, she says, the system could shut down July 1.

Graduates face soft job market, pile of debt - Thousands of college students have received degrees recently, but their education may be costing them more than they bargained for.  The outlook on the job front is far from rosy, and many students are struggling to get out from underneath a mound of loan debt.  Last fall, college students hit an important though problematic milestone. Student loan debt outpaced credit card debt for the first time. Part of the reason has to do with more people attending college than ever before, but rising tuition costs are influencing the growth as well. In 2008, almost two-thirds of undergraduate students graduated with a bachelor’s degree and debt. The average student loan debt is $23,186 and 83 percent of students take out loans, according to finaid.org. With the economy still in a tenuous state, students are having a hard time finding jobs with salaries that help pay back their sizable debts.

Dept. of Education breaks down Stockton man's door - Kenneth Wright does not have a criminal record and he had no reason to believe a S.W.A.T team would be breaking down his door at 6 a.m. on Tuesday.  "I look out of my window and I see 15 police officers," Wright said. Wright came downstairs in his boxer shorts as a S.W.A.T team barged through his front door. Wright said an officer grabbed him by the neck and led him outside on his front lawn.  "He had his knee on my back and I had no idea why they were there," Wright said.  According to Wright, officers also woke his three young children ages 3, 7, and 11 and put them in a Stockton police patrol car with him. Officers then searched his house.  As it turned out, the person law enforcement was looking for was not there - Wright's estranged wife.  "They put me in handcuffs in that hot patrol car for six hours, traumatizing my kids," Wright said. Wright said he later went to the mayor and Stockton Police Department, but the City of Stockton had nothing to do with Wright's search warrant.  The U.S. Department of Education issued the search and called in the S.W.A.T for his wife's defaulted student loans.

SWAT team launch dawn raid on family home to collect woman's unpaid student loans - A father was dragged from his home and handcuffed in front of his children by a SWAT team looking for his estranged wife - to collect her unpaid student loans.A stunned Kenneth Wright had his front door kicked in by the raiding party at 6 am yesterday before being dragged onto his front porch, handcuffed and led to a police car with his three children.He says he was then detained for six hours while officers looked for his wife - who no longer lives at the house. Mr Wright was later told by Stockton police that the order to send in the SWAT team came from The U.S. Department of Education who were looking for his estranged wife to collect defaulted loan payments.

Pensionscare - Krugman - Via Andrew Leonard, the rise in stocks since the financial crisis has made the financial position of public employee pension funds much better:  “Public pension funds are experiencing a robust recovery from the historic market downturn of 2008-2009 — reporting strong investment returns, growing assets and funding levels on track to meet obligations,” said the National Conference of Public Employee Retirement Systems. The group, the largest trade association for public sector pensions, surveyed state and local systems representing 7.6 million people and assets exceeding $900 billion. It found that over the last year, funds have achieved an annual investment return of 13.5 percent, nearly double the 7.7 percent rate most assume. On average, said NCPERS, pension systems are 76.1 percent funded, meaning they can cover more than three-quarters of liabilities. Typically, pensions are considered fully funded when they surpass 80 percent.Things aren’t perfect, by a long shot. But that crushing pension deficit, which everyone knew was going to bankrupt all state and local governments? Mainly a creation of right-wing propaganda. Are you surprised?

30% Of People With A 401(k) Have Taken Out A Loan Against It: New All Time Record - About a year ago Zero Hedge posted an article titled: "Record Number Of Americans Using Retirement Funds As Source Of Immediate Cash" after a report by Fidelity uncovered that "plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier." It is now time to revisit this very important topic because if recent press reports are true, last year's record number has just increased by another 50%. "On "The Early Show" Thursday, financial journalist and Newsweek columnist Joanne Lipman said, "Right now we have 30 percent of people who have 401(k)s have loans against their 401(k)s, which is a historic high. And the problem is, it's growing like crazy: By 2014, we're expecting to see 30 million people take loans against their 401(k)s." The raiding of the last ditch piggybank is on, and who can blame them? With banks setting the example of always reverting to the Discount Window (or the Excess Reserve stash as is now trendy) when in trouble, ordinary working Americans are merely following in the footsteps of their financially more "literate" betters.

House Republicans propose Social Security opt-out - It was bound to happen...House Republicans propose Social Security opt-out House Republicans on Friday introduced legislation that would allow workers to partially opt out of Social Security immediately, and fully opt out after 15 years. Rep. Pete Sessions (R-NY), who chairs the National Republican Congressional Committee, and several other Republicans introduced the Savings Account for Every American (SAFE) Act. Under the bill, workers would immediately have 6.2 percent of their wages sent to a "SAFE" account each year. That would take the place of the 6.2 percent the workers now contributed to Social Security. Another 6.2% is sent to Social Security by employers. Under the Sessions bill, employers would continue to make this matching contribution to Social Security, but after 15 years, employers could also send that amount to the employee's SAFE account. Under the bill, employees would be able to make tax free contributions to their SAFE account, and take tax-free distributions at retirement age. The bill would also allow employees to stay with the Social Security program if they wish.

House Republicans Look To Privatize Social Security - Republican leaders left Social Security untouched in their House budget this year, but a group of GOP lawmakers are looking to fill the gap themselves with legislation that would create a voluntary privatized version of the program. Introduced by Rep. Pete Sessions (R-TX), who also chairs the House's campaign efforts at the NRCC, the "Savings Account For Every American Act" would allow people to immediately opt out of Social Security in favor of a private "S.A.F.E." account. Eventually the program would expand to let employers send their matching contribution to workers' Social Security to a "S.A.F.E." account as well."Our nation's Social Security Trust Fund is depleting at an alarming rate, and failure to implement immediate reforms endangers the ability of Americans to plan for their retirement with the options and certainty they deserve," Sessions said of the plan, according to The Hill. "To simply maintain the status quo would weaken American competitiveness by adding more unsustainable debt and insolvent entitlements to our economy when we can least afford it."

Most states proposing FY 2012 Medicaid cuts - Nearly all states are enacting Medicaid cuts for fiscal year 2012 to deal with overwhelmed budgets and a slow economic recovery, according to a new report by the National Association of State Budget Officers and the National Governors Association. To deal with Medicaid shortfalls, 33 states have proposed lowering provider payment rates to nursing homes, hospitals and physicians; 16 states have floated provider payment freezes; and 25 states likely will introduce benefit limits, according to the report. Other Medicaid-reducing strategies include limiting spending on prescription drugs, and enacting or increasing existing copayments. Still, it's a tough battle for budget-plagued states: Forecasts predict an 18.6% increase in Medicaid spending for states while federal funds decrease by 13%.

SC to cut Medicaid payments to docs - Payments to South Carolina's doctors for treating Medicaid patients will be reduced by up to 7% as the state cuts about $125 million from the program, officials announced Monday. Medicaid patients -- generally poor and disabled -- also will pay more for some visits. On July 1 their co-payments will go from $2.30 to $3.30, the maximum allowed by federal law, for doctor, clinic, home health and optometrist visits. Reimbursement rates to doctors, dentists and most hospitals will be cut July 8 for a second time this year. In April, rates were reduced 3%. The reductions will not affect Hilton Head Hospital, Beaufort Memorial Hospital or Coastal Carolina Hospital in Hardeeville, which are among 24 hospitals exempted from the cuts. Because they serve proportionally more Medicaid patients, reducing their reimbursement rates would be a greater hardship for them, state officials said. For the other hospitals, the reimbursement-rate reduction will be 4%.

Taps For A Community Hospital - Facing mounting financial losses and sharply declining patient admissions, the Cleveland Clinic¹, which owns Huron Rd Hospital and eight other community hospitals, announced on Monday that it would close² the 211-bed hospital, opening a much smaller family health center in its place.  The decision by one of the nation’s leading health care systems to close a neighborhood hospital, once a relatively rare event, reflects a stark new reality that is likely to play out across the country at hundreds of other hospitals that can no longer afford empty beds or wings and unused medical services. The federal health care law, which is likely to reduce payments for in-patient care, as well as changing demographics and a lessening dependence on hospitals, are converging into a death knell for longstanding health institutions. While many hospitals will be bought and converted into clinics or other health care centers, a lot are likely to be closed.

The Medicare Sky Is Falling - This is not the first time a politician, a think tank, or the news media has predicted the demise of Medicare due to exhausting its funds (Table 1). Both Medicare and Medicaid have also been identified numerous times as being the cause of rising healthcare cost resulting in calls for drastic over halls, privatization, state voucher programs, complete elimination, etc. In any case, 40 years later Medicare is still here and its funds will not be exhausted as claimed in the recent New York Times and Wall Street Journal articles. "The Medicare hospital trust fund faces bankruptcy by 1976 and taxes must either be raised or benefits reduced the senate finance committee was told today.” Chicago Tribune, July 2, 1969 "In the last few years, when it appeared that the Medicare trust fund would run out of money in 1987-89... But the need seemed less urgent after the Congressional Budget Office issued new estimates last September indicating that the Medicare trust fund would not go bankrupt until 1994." The New York Times; January 20, 1985 The Medicare hospital insurance program faces bankruptcy by 1996, two years earlier than projected last year.” The Washington Post; April 1, 1986

Medicare Sustainability - Krugman - Canada has a system called Medicare; it’s actually quite a lot like US Medicare, but less open-ended and more serious about cost control. Here’s Canadian spending on health versus US spending, both as percentages of GDP: Hmm. Canadian Medicare looks pretty sustainable, especially as compared with the US system, which has much more private insurance. Now, Canadian health care isn’t perfect — but it’s not bad, and Canadians are happier with their system than we are with ours. So anyone who tells you that Medicare as we know it — a single-payer system that covers everyone over a certain age — is unsustainable is ignoring the clear evidence that other countries somehow manage to make similar systems quite sustainable.

Health Care Zombies - Krugman - I actually first encountered the term “zombie lies” with regard to Canadian health care, where false beliefs — like the one about hordes of Canadians heading to America for care, which is completely untrue — just keep coming back, no matter how many times they’re killed by evidence.Let me highlight a domestic zombie that I see emerging in comments: the notion that if Medicare starts limiting the procedures it will pay for, this would be an infringement of your freedom of choice. I even see some people saying that it’s unconstitutional. I’ve taken this on before, so let me repost: But nobody is proposing that the government deny you the right to have whatever medical care you want at your own expense. We’re only talking about what medical care will be paid for by the government. And right-wingers, of all people, shouldn’t believe that everyone has the right to have whatever they want, at taxpayers’ expense. The Declaration of Independence did not declare that we have the right to life, liberty, and the all expenses paid pursuit of happiness. What will it take to shoot this zombie in the head?

The Next Step on the Road to Serfdom - Mankiw - Paul Krugman writes: But nobody is proposing that the government deny you the right to have whatever medical care you want at your own expense. We’re only talking about what medical care will be paid for by the government.I wish that Paul were correct, but I am not convinced that he is. Chills went down my spine a few days ago when I read the following proposal from the Center for American Progress, a think tank with strong ties to the Democratic party: Thus we also include a failsafe mechanism that would ensure significant savings. Our failsafe would be triggered if, starting in 2020, total economywide health care expenditures grow at a rate faster than the economy. Should that happen, we would empower the IPAB [the panel of experts set up by President Obama's health care law] to extend successful reforms in Medicare and other public programs to insurance plans offered in the health care exchanges and then potentially to all health care plans, such that the target is met. This will ensure that costs are constrained across the health care sector, preventing cost-shifting and maintaining access for all.* That is, under the likely scenario that healthcare spending keeps rising faster than GDP, the Center for American Progress would give government the power to prohibit people from buying expensive health plans with their own money. That is not my idea of progress.

In defense of Canada - Paul Krugman has been on a tear the last few days with a number of posts defending Canada’s Medicare. This was all leading up to his latest column, where he questioned why Medicare should be unsustainable in this country, when it’s sustainable there. So let me summarize a few of my past posts to try and pre-empt some of the false rhetoric.

• 1) Doctors in Canada are not flocking to the US to practice - I’d especially like you to pay attention to the yellow line, which is the net loss of doctors to Canada. In 2003, net emigration became net immigration. Let me say that again. More doctors were moving into Canada than were moving out.
• 2) Canadians are not flocking here to get care. Look, I’m not denying that some people with means might come to the United States for care.    But for the vast, vast majority of people, that’s not happening.  You shouldn’t use the anecdote to describe things at a population level.  This study showed you three different methodologies, all with solid rationales behind them, all showing that this meme is mostly apocryphal.
• 3) Doctors are not less satisfied practicing in Canada than the US - With the exception of Austria and Germany, fewer doctors were satisfied with practicing medicine [in the US] than any other surveyed country.
• 4) Claiming that hip replacements and cataract surgeries happen faster in the US does not prove that a single payer system doesn’t work.
• 6) Since Canada adopted their single payer system, infant mortality has dropped below that of the US

Joe Lieberman's Plan to Make Health Care Worse and More Expensive - So Joe Lieberman is proposing that we raise the Medicare eligibility age. That’s a truly cruel idea; several people are hanging on, postponing needed medical care, hoping that they can make it to 65 before something terrible happens. But beyond that, think about what it means to move people out of Medicare into private insurance, if they can get it. Medicare has its problems — but all the evidence says that it is substantially more cost-effective than private insurance. Partly this is because it has lower administrative costs; partly it’s because Medicare is able to use its market power to negotiate lower prices. And the international evidence is overwhelming: single-payer systems are much cheaper than systems centered on private insurance.So think of this as a national interest thing rather than a budget thing: Lieberman is proposing that we move a substantial number of older Americans into a worse, more expensive health care system. Why would you want to do such a thing, as opposed to raising enough additional revenue to keep them on Medicare?

Vermont's Move Toward Single-Payer Health Insurance - New England seems to be the testing ground for health insurance reform. The Affordable Care Act, now often called Obamacare by its critics, was modeled on health-insurance mandates put into place in Massachusetts under the governorship of Mitt Romney, a Republican, who announced last week that he was formally seeking his party’s presidential nomination in 2012. Now Vermont has passed legislation moving the state toward a Canadian-style universal, single-payer health-insurance system, to be phased in alongside national health-care changes. The plan relies heavily on the prospect of waivers that will allow it to reallocate some federal Medicaid funds and on other sources of money that have not yet fully specified. The new law calls for establishment of a five-member board to set reimbursement rates for health-care providers and streamline administration into a single, unified system called Green Mountain Care that will cover all Vermont residents.  The basic outlines represent a left-wing alternative to the health-insurance changes being put in place under the Obama administration, with a stronger commitment to equitable public financing, a single insurance pool and less reliance on the market.

Our Wasteful Health Care System - Krugman - The Economist’s “Democracy in America” blog has a very good illustration of the reasons our privatized, market-based system is so much more expensive, for no better results, than everyone else’s: A medical technology company is going public to generate the money it needs to advertise its products to hospital directors and insurance-company reimbursement officers. This entails significant extra expenditures for marketing, the new stocks issued to fund the marketing will ultimately have to pay dividends, banks will have to be paid to supervise the IPO that was needed to generate the funds to finance the marketing campaign (presumably charging the industry-cartel standard 7%)…and all this will have to be paid for by driving up the price the company charges to deliver its technologies. But beyond the added expense, why would anyone think that a system in which marketing plays such a large role is likely to be more effective, to lead to better treatment, than the kind of process of expert review that governs grant awards at NIH or publishing decisions at peer-reviewed journals? Why do we think that a system in which ads for Claritin are all over the subways will generate better overall health results than one where a national review board determines whether Claritin delivers treatment outcomes for some populations sufficiently superior to justify its added expense over similar generics? What do we expect from a system in which, as ProPublica reports today, body imaging companies hire telemarketers to sell random people CT scans over the phone?

When socialism works in America - Since the Veterans Health Administration (VHA) was systemically (and systematically) “reengineered” to follow a more decentralized, managed care template more than 15 years ago (1, 2, 3) it has demonstrated accumulating achievements in health and health care delivery, over time outshining not only its own performance but that of others (4, 5, 6). In chronic disease management and preventive care, the VHA has surpassed Medicare (7), commercial managed care (8), and various community health systems in adherence to broadly accepted process measures (9). Furthermore, beneficiaries of the VHA seem to have health outcomes — including mortality — that are the same as or better than those of Medicare (10, 11, 12) and private sector patients (13). These findings are noteworthy given the population served by the VHA, which is recognized to be highly and relatively burdened by socioeconomic disadvantage, comorbid illness, and poor self-reported health (1). It is remarkable that the VHA has been able to attain this superior-quality care at a lower cost than that purchased through Medicare, with expenditures that have increased at a much slower rate (adjusted annual per capita growth rate, 0.3% vs. 4.4%) (14, 15).

The Case of the Mystery Study - Krugman - Oh, wow. From Greg Sargent: The other day, the consulting company McKinsey released a startling study claiming that 30 percent of employers are planning to stop giving health insurance to their workers as a result of the Affordable Care Act. The study received a good deal of press coverage and was widely bandied about by conservative politicians and media outlets as proof that conservative warnings about the law are coming to pass. But as a number of critics were quick to point out, McKinsey’s finding is at odds with many other studies — and the company did not release key portions of the study’s methodology, making it impossible to evaluate. I’m told that the White House, as well as top Democrats on key House and Senate committees, have privately contacted McKinsey to ask for details on the study’s methodology. According to an Obama administration official and a source on the House Ways and Means Committee, the company refused.

Health Care Thoughts: Non-Compliant Patients - Ask physicians and nurses about their biggest clinical problems and non-compliant patients will likely be near the top of the list. And why should we care? Because non-compliant patients are huge cost drivers. Ezekiel Emanuel (MD, PhD, NIH) estimates that one-third of U.S. health care costs are driven by diabetes, and we know a lot about controlling diabetes, but it is very dependent on the patient being compliant with diet and medications. We don't do so well on this. Is there something about Americans that make us less compliant than we should be? Is our consumer culture a bad place to promote health? Is there not enough information? Are we stressed into non-compliance? Whatever the reason, it is very costly for all of us.

A new approach to dying - My column this week was an attempt to step out of the political system’s comfort zone on health care and consider some approaches that seem radical to us, but are perhaps necessary going forward. Daniel Callahan and Sherwin Nulland are talking about who we treat, and how we handle death.  The traditional open-ended model of medical research, with the war against death as the highest priority, should give way to a new goal: aiming to bring everyone’s life expectancy up to an average age of 80 years (already being approached), reducing early death, and shifting the emphasis in the direction of improving the quality of life of those in every age group. The highest priority should be given to children, the next-highest to those in their adult years (the age group responsible for managing society), and the lowest to those over 80. In light of the fact that we are not curing most diseases, we need to change our priorities for the elderly. Death is not the only bad thing that can happen to an elderly person. An old age marked by disability, economic insecurity, and social isolation are also great evils.  Some people may die earlier than now, but they will die better deaths.

Producing More Primary-Care Doctors - In “Why Medical School Should Be Free,” a recent commentary in The New York Times, Peter B. Bach, M.D., and Robert Kocher, M.D., proposed that medical school be tuition-free for all students. The two estimate that the annual tuition for medical students would be roughly $2.5 billion, given current tuition levels that average about $38,000 a year — although these vary among medical schools and are lower at public universities than at private universities. The authors would not, however, burden taxpayers with that $2.5 billion, trivial though that sum may be at 0.017 percent of our gross domestic product of $15 trillion.  Instead, they would raise the $2.5 billion by forcing medical-school graduates who choose residency training in specialties other than primary care to forgo much or all of their annual salary – currently about $50,000 – during their residency training, which may span four years or more. Residents in primary-care specialties would continue to receive their salaries.

Pharmageddon: how America got hooked on killer prescription drugs - "It's my back," he says, rubbing his lower vertebrae. "I'm a builder. I fell off the roof and hurt my back." That's odd, as we have just watched him run out of the clinic and over to his truck without so much as a limp. He's clutching a prescription for 180 30mg doses of the painkiller oxycodone.Chad is one of thousands of "pillbillies" who descend on Florida every year from across the south and east coasts of America. Some come in trucks bearing telltale number plates from Kentucky, Georgia, Tennessee, even far-away Ohio. Others come by the busload on the apocryphally named Oxycodone Express. It's a lucrative trade. Chad tells us he has just paid $275 (£168) to the doctor inside the clinic, or pill mill, as it is pejoratively called. The doctor, who can see up to 100 people in a sitting, can make more than $25,000 in a day, cash in hand. For Chad the profits are handsome too. He will spend $720 at a pharmacy on his 180 pills, giving him a total outlay of about $1,000. Back in Kentucky he can sell each pill for $30, giving them a street value of $5,400 and Chad a clear profit of more than $4,000. If he goes to 10 pill mills in Palm Beach on this one trip he could multiply that windfall tenfold. But then there's the other cost of the oxycodone trade, a cost that is less often talked about, certainly not by Chad or his accommodating doctor.

The Epidemic of Mental Illness: Why? - It seems that Americans are in the midst of a raging epidemic of mental illness, at least as judged by the increase in the numbers treated for it. The tally of those who are so disabled by mental disorders that they qualify for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) increased nearly two and a half times between 1987 and 2007—from one in 184 Americans to one in seventy-six. For children, the rise is even more startling—a thirty-five-fold increase in the same two decades. Mental illness is now the leading cause of disability in children, well ahead of physical disabilities like cerebral palsy or Down syndrome, for which the federal programs were created. A large survey of randomly selected adults, sponsored by the National Institute of Mental Health (NIMH) and conducted between 2001 and 2003, found that an astonishing 46 percent met criteria established by the American Psychiatric Association (APA) for having had at least one mental illness within four broad categories at some time in their lives. The categories were “anxiety disorders,” including, among other subcategories, phobias and post-traumatic stress disorder (PTSD); “mood disorders,” including major depression and bipolar disorders; “impulse-control disorders,” including various behavioral problems and attention-deficit/hyperactivity disorder (ADHD); and “substance use disorders,” including alcohol and drug abuse. Most met criteria for more than one diagnosis. Of a subgroup affected within the previous year, a third were under treatment—up from a fifth in a similar survey ten years earlier.

What Dow Chemical doesn’t want you to know about your water - Earlier this year, I was contacted by a PR firm working for Dow Chemical to contribute a 60-second video for the Future We Create virtual conference on water sustainability the company launched yesterday. As a vocal advocate for strict regulation of toxic chemicals -- especially for food and farming -- I was surprised the company would approach me. Dow is the country's largest chemical maker, and profits handsomely from developing some of the world's most polluting products, many of which are widely used in industrial and consumer goods as well as agriculture. In the video I submitted, which you can watch below, I stress that one of the greatest threats to clean water is chemical contaminants -- and that Dow Chemical has a long history of water pollution. The PR representative emailed to say "unfortunately we can't use your video," but that she would be happy to include me, still, if I would consider re-recording it. When we discussed what that would mean she said, no "fingerpointing"; they wanted a "positive, inclusive discussion."

Roundup Birth Defects: Regulators Knew World's Best-Selling Herbicide Causes Problems, New Report Finds   -- Industry regulators have known for years that Roundup, the world's best-selling herbicide produced by U.S. company Monsanto, causes birth defects, according to a new report released Tuesday. The report, "Roundup and birth defects: Is the public being kept in the dark?" found regulators knew as long ago as 1980 that glyphosate, the chemical on which Roundup is based, can cause birth defects in laboratory animals. But despite such warnings, and although the European Commission has known that glyphosate causes malformations since at least 2002, the information was not made public. Instead regulators misled the public about glyphosate's safety, according to the report, and as recently as last year, the German Federal Office for Consumer Protection and Food Safety, the German government body dealing with the glyphosate review, told the European Commission that there was no evidence glyphosate causes birth defects.

Weeds increasingly immune to herbicides - Agriculture’s most effective pesticides are rapidly losing their punch as weeds evolve resistance to the chemicals. With no game-changing alternatives in the pipeline, researchers warn that farmers could soon see crop yields drop and production prices climb. “It’s what Chuck Darwin talked about back in 1850. Organisms evolve in response to selection pressures in their environment,” says Micheal Owen, an extension weed scientist at Iowa State University in Ames. “In essence, the better we get at controlling weeds, the more likely those efforts will select for survivors that do not respond to controls.” In the June 8 Journal of Agricultural and Food Chemistry, Owen and other researchers describe a rapid rise of herbicide-resistant weeds and a particularly threatening trend: an increasing number of weeds that are simultaneously immune to multiple herbicides.

 Nuclear age has led to millions of fewer baby girls being born -Japanese nuclear disaster could hit girl births in U.S. Nuclear radiation from power plant leaks and bomb tests resulted in millions fewer baby girls born worldwide, according to a new study.Scientists noted these types of atmospheric blasts rather than on-the-ground incidents like Chernobyl, effected birth gender across the globe. Scientists at Helmholtz Zentrum München, Germany, analysed population data from 1975 to 2007 for the U.S. and 39 European countries.  Nuclear radiation from power plant leaks like the recent Japan disaster results in millions fewer baby girls born worldwide, according to a study There was an increase in the number of baby boys relative to girls in all of the countries from 1964 to 1975. This was the case in many eastern European countries for several years after 1986.

Death Toll From German E. Coli At 22 - German officials said sprouts from an organic farm near the town of Uelzen played a role in the country’s lethal E. coli outbreak, returning suspicions to the region where the infections began last month.  The outbreak has killed 22 people and sickened 2,333, according to the European Centre for Disease Prevention and Control, and put pressure on hospitals near the hard-hit areas of Hamburg and Bremen. At least one worker at the farm near Uelzen has been infected with E. coli and it supplied places where the bacterium was found, Gert Lindemann, the state agriculture minister, told reporters in Hanover yesterday.  German officials initially blamed Spanish cucumbers, causing outrage in the southern European nation. Sprouts may have been overlooked at first because they’re used in an array of dishes including salads and sandwiches, and as a garnish, said Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota in Minneapolis.

E. Coli Not Found in Initial Testing of Sprouts - German agriculture officials said Monday that 23 of 40 produce samples from a suspected sprout farm failed to identify E. coli contamination, a finding that adds to the confusion over the source of an outbreak that has killed at least 22 people and left more than 600 in intensive care.  The announcement, made at a news conference Monday afternoon, came a day after officials had identified tainted sprouts from a farm in the Uelzen area in the north as the “most convincing” cause, and shut it down while it tested 18 sprout mixtures, including beans, broccoli, peas, chickpeas, garlic, lentils, mung beans and radishes. The sprouts are often used in mixed salads. The results from the remaining 17 tests were expected within 24 hours.  The outbreak, which German health authorities first reported in late May, is caused by a rare strain of toxic E. coli that can cause bloody diarrhea. In extreme cases it can cause acute kidney failure and death. In previous outbreaks involving other strains of E. coli, kidney failure appeared most often among children. In this outbreak, most victims with kidney failure have been adults and more than two-thirds have been women. Cases have cropped up in at least 10 countries in Europe, but virtually all have been traced to northern Germany¹.

Germany's superbug is weaponized with Bubonic Plague DNA - On Tuesday [May 31], the German newspaper Süddeutsche Zeitung reported that [leading German E. coli researcher Helge] Karch had discovered that the O104:H4 bacteria responsible for the current outbreak is a so-called chimera that contains genetic materia from various E. coli bacteria. It also contains DNA sequences from plague bacteria, which makes it particularly pathogenic." ...Helge Karch, the director of the Robert Koch Institute (Germany's CDC) who heads a consulting laboratory at the Münster University Hospital in Germany, says that he has discovered that the super killer contains DNA from E. coli, which is what he expected. It also contains DNA from the organism that causes plague, responsible for wiping out a quarter of Europe's population during the Black Death (1348-1351). Bubonic plague is caused by Yersinia pestis and is one of the most feared of all disorders.

German Officials Conclude Sprouts Are The E. Coli Culprit - A-ha! It was the sprouts after all. Even though tests from an organic farm in Northern Germany failed to detect the Escherichia coli strain that has sickened more than 3,000 and killed 31, German disease gumshoes concluded from the pattern of cases that sprouts are to blame."It is the sprouts," Reinhard Burger, head of Germany's Robert Koch Institute, said Friday at a media briefing. How does he know? The institute, along with two other government groups, linked clusters of illness to 26 restaurants and cafeterias that got sprouts from the same grower in the German state of Lower Saxony, the Associated Press reports. German officials lifted warnings against the consumption of cucumbers, lettuce and tomatoes as a result of the finding. It's possible that by now all the tainted sprouts have been eaten or discarded. The farm that was suspected as the E. coli source was shut down more than a week ago. Even so, the government continued to warn people not to eat sprouts.

Xiahuanet: Bean sprouts blamed for E. coli outbreak again (Xinhua) -- The German authority said on Friday bean sprouts were probably the source of the E. coli outbreak, which has killed 30 people and infected about 3,000 around the world  "It's the (bean) sprouts," said Reinhard Burger, president of the Robert Koch Institute (RKI), Germany's national disease control center. "People who ate (bean) sprouts were found nine times more likely to have bloody diarrhoea or other signs of E. coli infection than those who did not," He saidBut he admitted this conclusion was based on epidemiological investigation, as no positive result has been found through sample tests. According to the data of RKI, more than 1,000 sample tests focusing on bean sprouts have been done so far.He also said the Robert Koch Institute was lifting its warning against eating cucumbers, tomatoes and lettuce but keeping the warning in place for the sprouts. This is the second time bean sprouts were identified as the source for the terrible outbreak. The German authority first issued warning on it last Sunday, which was overthrown by laboratory tests on Monday.

Scientists ‘Find EHEC Bacteria at Sprout Farm’  - Health authorities in Germany have finally been able to show that the pathogens which caused the deadly EHEC outbreak came from sprouts at an organic farm in the Uelzen district. According to SPIEGEL ONLINE information, the breakthrough was made by scientists in the state of North Rhine-Westphalia. Final verification, however, is still pending. As of Friday it remained unclear how the dangerous bacteria came to be present at the farm.  Even before this latest discovery, all the evidence had pointed to the farm in the state of Lower Saxony as the probable cause of the epidemic which has so far killed 29 people. Authorities had warned against eating raw sprouts. "It's the sprouts", the president of the Robert Koch Institute (RKI), Reinhard Burger, said in a press conference convened in Berlin on Friday.

It's "Sink or Swim" Ohio's Corn Growers - Drier weather in the past few days has Ohio's farmers itching to get in their fields to get corn planted. According to the National Agricultural Statistics Service, only 19% of Ohio's corn crop was planted as of Sunday, May 29. Normally, 93% of the crop is planted at this point. Indiana was in a better situation with 59% of corn planted as of Sunday, compared with an 87% average over the past five years. For every day that planting is delayed in late May and early June, corn growers can anticipate a loss in yield of up to two bushels per acre. "But that really depends on what happens later in the summer," LaBarge said. "We've had some years when we've had minimal losses due to late planting; other years, it's been worse." This is a critical week for farmers in another way. Sunday, June 5, is the first date corn growers qualify for a prevented planting crop insurance payment. Crop insurance doesn't cover all losses, but it may make sense economically to take the payment instead of risking lower yields due to late-planted corn crop or switching to soybeans.

Corn-Crop Delays in U.S. Signal Tight Supply - Wet weather that delayed corn planting in the U.S., the world’s largest exporter, may send global inventories to their lowest in 37 years, signaling higher costs for consumers and livestock producers.  More than one-third of Midwest fields were planted after the mid-May target for optimal growth because of excessive rain, and Ohio farmers as of June 5 were the furthest behind since 1989, with 58 percent sown, government data show. Goldman Sachs Group Inc. said June 6 that the disruptions increase the “potential for a shortfall.”  Corn futures more than doubled in the past year to $7.365 a bushel in Chicago and may top $9 if conditions worsen, according to Morgan Stanley. The rally is boosting costs for meat producers including Tyson Foods Inc. and ethanol makers such as Poet LLC, as global food inflation tracked by the United Nations accelerated in nine of the past 11 months.  “There’s potential to take out record highs this summer for corn,”

Corn Surge Spurring U.S. Hog-Herd Slaughter as Wholesale Pork Prices Slump - U.S. hog producers may start to cull herds as the faltering economic recovery curbs pork demand and tightening corn inventories boost livestock-feed prices, curbing animal supplies and increasing costs for meatpackers.  Since May 16, wholesale pork has dropped 9.6 percent from the highest since at least October 1997, while corn, the main ingredient in animal feed, gained 9.5 percent. Hog producers are facing record production costs, based on current futures prices, Steve Meyer, the president of Paragon Economics, said yesterday at the World Pork Expo in Des Moines, Iowa.  “I do not think there is any stomach in the industry for expansion, and there may be some contraction,” Ron Prestage, whose family business, Prestage Farms, has 170,000 sows in the Carolinas, Mississippi and Oklahoma, said in an interview at the expo. Hog futures may gain as much as 9.5 percent to $1 a pound by the end of August or early September without disruption to export demand, he said.

U.S. Corn-Crop Estimate Reduced After Wet Weather in Midwest Cuts Acreage - The U.S. corn harvest may be 2.3 percent smaller than forecast in May as farmers reduced acreage because of excessive Midwest rains, the government said.  The crop will total a record 13.2 billion bushels, down from the month-ago projection of 13.505 billion, the U.S. Department of Agriculture said today in a report. The USDA cut its estimate of inventories before the 2012 harvest by 23 percent to 695 million bushels, from 900 million projected in May. The consensus estimate of analysts in a Bloomberg News survey was for a surplus of 781 million. “It’s going to be a tight supply situation,” “Now the market will be watching to see if higher prices slow demand, or for any signs of new weather problems” that may threaten yields, he said. Inventories before the start of this year’s harvest were estimated at 730 million bushels, unchanged the May forecast. Analysts were expecting 706 million bushels. Corn futures in Chicago have more than doubled in the past year after adverse weather reduced U.S. yields last year and demand for the grain to produce food, animal feed and ethanol increased.

Corn Futures Climb to Three-Year High as USDA Slashes Inventory Estimates -   Corn jumped to the highest price in almost three years after the U.S. Department of Agriculture forecast tighter supplies, as adverse weather hurt crops. U.S. stockpiles before the start of the 2012 harvest may fall to 695 million bushels, the lowest since 1996, even as farmers collect a record crop, the USDA said. World inventories are projected to drop next year to the lowest since 2004. Prices have more than doubled in the past year as global output trailed gains in demand for livestock feed and biofuels. “Today’s report should be viewed as very bullish,” Bill Gary, the president of Commodity Information Systems in Oklahoma City, said in a report to clients. Corn “ending stocks were forecast at the second tightest level in history,” based on reserves to cover daily usage, he said."

Crop Weather Mayhem Delays U.S. Corn, Rice Planting as Prices Extend Gains - When the overflowing Mississippi River breached Arkansas’s levees and flooded Michael Oxner’s farm in May, the waters didn’t just wipe out his hopes of planting 1,400 acres of rice. It destroyed last year’s crop, too. Water inundated the bins that held the rice he’d harvested in 2010, ruining 25,000 bushels and leaving a fermented smell that turned his remaining grain into pet food.  Oxner lost $375,000 in 2010 rice alone. His rice land, along with 300 acres planted with corn, won’t be usable this season, Bloomberg Businessweek reports in its June 13 issue.  Since it’s too late to plant more corn, the 2,000 acres he has left will go into soybeans, which grow faster than other crops but fetch less on the market. Even with soybeans, Oxner is cutting it close: Soybeans usually go into the fields in May. Oxner’s ordeal is being repeated all across Arkansas, the prime U.S. rice-growing state, where 600,000 acres remain under water one month after flooding began. Nationwide, a spring of weather extremes means that summer has to be almost perfect if the U.S. is to meet global demand for its grain.  More bad weather could push corn, the most-valuable U.S. crop in monetary terms, to $9 a bushel. That would beat the record set in 2008 of almost $8.

Wet spring, lousy harvest mean higher food prices - U.S. food prices are expected to stay high through 2012 because a wet spring will likely cut the size of this fall's corn harvest.  And cotton has woes of its own, but for the opposite reason: a drought in Texas. The government said on Thursday that The United States will have a surplus of just 695 million bushels of corn next year, less than the 900 million estimated last month.The Agriculture Department said rain delayed planting schedules and will likely diminish crops by harvest time in September. This followed a more optimistic forecast in May, which predicted a drop in corn exports that could have replenished U.S. food supplies and eased prices. More expensive grain has led to food price increases this year. Manufacturers and grocery stores have passed higher costs on to consumers. For all of 2011, the USDA predicts food prices will rise 3 percent to 4 percent.

Farm Flooding Keeps Grain Supplies Tight - The record flooding across the nation's mid-section is dousing hopes for a spring planting boon that could replenish tight grain supplies and ease inflationary pressure on food prices.  The U.S. Agriculture Department, adding fuel to the nearly year-long grain-price rally, said Thursday that the flooding and excessive rain from Montana to Arkansas is blocking farmers from planting more than two million acres of land. The USDA said that May flooding on the Mississippi River and Ohio River, and now on the Missouri River, will probably prevent corn farmers from harvesting 1.9 million acres of land this autumn, prompting the agency to cut its one-month-old production forecast of the nation's biggest crop by 2.3% to 13.2 billion bushels.Flooding in Northern Plains states such as Montana and North Dakota has prevented farmers from seeding 290,000 acres of wheat. Flooding further south in states such as Arkansas and Missouri has kept farmers from growing 168,000 acres of rice.

Agriculture Industry Fears Disaster If Illegal Immigration Enforcement Program E-Verify Is Implemented: "-- The agriculture industry fears a disaster is on the horizon if the one bit of new immigration policy that Congress seems to agree on becomes law. A plan to require all American businesses to run their employees through E-Verify, a program that confirms each is legally entitled to work in the U.S., could wreak havoc on an industry where 80 percent of the field workers are illegal immigrants. So could the increased paperwork audits already under way by the Obama administration. 'We are headed toward a train wreck,' said Rep. Zoe Lofgren, a California Democrat whose district includes agriculture-rich areas. 'The stepped up (workplace) enforcement has brought this to a head.' Lofgren said farmers are worried that their work force is about to disappear. They say they want to hire legal workers and U.S. citizens, but that it's nearly impossible, given the relatively low wages and back-breaking work."

Georgia farmers attest to labor shortages ahead of new immigration law enforcement - The Atlanta Journal-Constitution reports on the ongoing exodus of undocumented immigrants from Georgia in anticipation of the new immigration enforcement law, which will take effect on July 1: Businesses that cater to the region’s Hispanic residents say the new law has sown fear among immigrants, scaring away their customers and employees. A grocery store chain that serves Hispanic immigrants says the new law has led to sharp cuts in sales at some of its locations, forcing it to consider closing one of its spots. And the pastors of local Hispanic churches say some of their parishioners are leaving Georgia and taking the donations that support charitable causes with them. Presumably, this phenomenon was the new law’s intended effect, but there are signs that some Georgians weren’t anticipating the central role that Hispanic immigrants play in the economy. The Georgia Agribusiness Council released a survey of Georgia farmers which said that 46 percent reported facing a labor shortage. As the Journal-Constitution’s Jim Galloway points out, comments on the survey repeatedly mentioned the law as the cause of the shrinking agricultural population.

Wheat Rallying 20% as Parched Fields Wilt From China to Kansas -- The worst droughts in decades are wilting wheat fields from China to the U.S. to the U.K., overwhelming Russia's return to grain markets and driving prices to the highest levels since 2008. Parts of China, the biggest grower, had the least rain in a century, some European regions are the driest in 50 years and almost half the winter-wheat crop in the U.S., the largest exporter, is rated poor or worse. Inventory is dropping 8.8 percent, the most in five years, Rabobank International says. Prices will advance 20 percent to as high as $9.25 a bushel by Dec. 31, a Bloomberg survey of 14 analysts and traders shows. Wheat as much as doubled in the past year as crops failed, spurring Ukraine and Russia to curb shipments and increasing the U.S. share of global sales by the most since 2004. Russia ending its export ban on July 1 and Ukraine lifting quotas may not be enough as crops wither elsewhere, fuelling gains in food prices which the United Nations says are already near a record. "In 32 years, I've never seen so many problems in so many places,"

Europe's Worst Drought In 100 Years Is Getting Worse - The greatest drought in over 100 years is currently hitting most of Europe.  Even Britain, long resistant to extended dry periods because of its location under the Jet Stream, is suffering. The Sun reports, two English counties have officially been declared drought zones today. More are expected to follow. In France the damage is already done, bringing emergency water-conservation measures and aid to farmers that will total $1.4 billion. The price of hay in France has risen so steeply that French soldiers have been deployed to distribute rations to hungry cattle waiting on sun-cracked dirt. Rather than go broke trying to feed them, farmers are selling off entire herds of livestock to the slaughterhouses. To help relive some of the burden, French officials waived farmers loan repayments for a year and exempted land taxes for the same period. All of this is not just bad news for farmers but for retailers, beer brewers, and biodiesel producers who will suffer severe shortages of raw materials and be forced to raise prices.

Europe prays for rain as drought worsens – Danube river level falls to 100-year low - Europe is in the grip of a new north-south divide. Yet this time the gap is not about economic competitiveness but rainfall, and it is the north, not the south, that is lagging behind. While southern Europe experienced a rather damp spring, much of northern Europe is in the midst of a drought. In France, the months of March and May were the hottest for more than a century, while England and Wales had their second-driest spring since 1910. Between January and April, “severe” rain deficits were recorded in Belgium, the Netherlands, Germany, Denmark, Hungary and Austria, according to the European Commission. … It is France’s worst drought in more than 30 years, according to Bruno Le Maire, agriculture minister, with rainfall at barely 45 per cent of the average between 1971 and 2000. Restrictions on water use are already in place in nearly two-thirds of France’s 96 mainland “departments”. Nicolas Sarkozy, president, is expected to announce aid measures for farmers on Thursday.

Farmers fear the worst after driest spring since records began‎ - Parts of England were officially declared drought zones yesterday after the driest spring since records began prompted farmers to warn that crop yields could be up to 50 per cent down in the worst-hit regions.  Millions of householders were told they face hosepipe bans as ministers held crisis talks with growers and water-thirsty industries over how to tackle the worsening problem. Despite the prospect of sustained rainfall over the weekend reaching even the most severely affected region of East Anglia, experts warned of depleted river levels and tinderbox conditions leading to a summer of forest and heathland fires.  Environment Secretary Caroline Spelman urged the public to conserve stocks by showering rather than taking a bath. "Households know how to use less water and everyone can do their bit to use water more wisely, not only through the summer, but throughout the year," she said.

Rain gives West European grain crops some respite (Reuters) - Long-awaited showers finally hit French grain fields over the weekend and more rain is expected this week in most key European producers, but it will likely not be enough to reverse drought damage to winter crops."For the moment it is not a revolution," Strategie Grains head analyst Andree Defois said about the French crop. "The fact that there is rain is seen as the end of a yield drain but we are far from conditions that will allow to make up for it all."What has been damaged will remain so," she added, explaining that even in ideal weather conditions the remaining grain would not be able to compensate for the lost output. France, the European Union's top grain producer, which experienced its driest March-May spring period in 50 years and the hottest since 1900, saw rainfall over the last few days and more is forecast until the end of the week. In key producing regions in northern France, last weekend's rains were the first significant precipitation in four months.

Russian Wildfires Could Be Much Worse Than Last Year: "Wildfires across Russia drove wheat prices to the stratosphere last summer, causing the world's third biggest wheat producer to stop all exports. Unfortunately this summer could be worse. Greenpeace spokesmen tells The Moscow Times: 'We're burning, burning badly. This year's situation is already much worse than last year's... 'There are dozens of them around Moscow. It's technically impossible to put out some of them already. 'A large amount of fires last year and this year do not show up in official statistics, but we've counted 64 peat fires around Moscow right now.' Russian officials confirmed these worries. The Federal Forestry Agency chief played down the threat to Moscow this year, but admitted that a surge in forest and peat bog fires is imminent. 'The summer will be tense and uneasy,' Viktor Maslyakov told journalists. He said the government should declare an emergency situation in three Siberian regions, where unusually hot and dry weather caused multiple wildfires."

China Feed Mills Use Wheat as Corn Prices Rise - Feed mills in China, the biggest grain user, are using more wheat as a raw material to cope with rising costs of corn, the China National Grain & Oils Information Center said.  Wheat is now about 5 percent cheaper in southern Guangdong province, the state-backed researcher said in a report sent by e-mail. The price advantage of wheat will gain as more supply becomes available following the harvest, it said. The price of new-crop wheat is 100 yuan ($15) less than old crops, it said.  The price of corn in Guangdong province rose 8.7 percent this year to a record 2,370 yuan a ton, while the price of wheat is little changed at 2,250 yuan a ton, according to Bloomberg data supplied by Shanghai JC Intelligence Co.  Between 30 percent and 40 percent of corn in animal feed formulas can be substituted with wheat, the center said. As of June 7, more than 42 percent of China’s wheat had been harvested, it said.

India’s Food Inflation Quickens to Eight-Week High on Onion, Fruit Costs - India’s food inflation accelerated to an eight-week high, adding pressure on the central bank to raise interest rates next week.  An index measuring wholesale prices of agricultural products rose 9.01 percent in the week ended May 28 from a year earlier, the commerce ministry said in a statement in New Delhi today. It gained 8.06 percent the previous week.  The Reserve Bank of India, which has boosted borrowing costs nine times since mid-March 2010, may tighten its monetary policy further in the June 16 meeting, economists said. Food costs have been a policy concern for the last two years, Reserve Bank Deputy Governor Subir Gokarn said June 2.  “Price pressures are growing and more rate hikes are needed,” N.R. Bhanumurthy, a New Delhi-based economist at the National Institute for Public Finance and Policy, said before the report. He said the central bank’s benchmark repurchase rate may be increased by a quarter of a percentage point to 7.5 percent next week.

Inflation in India May Quicken as Government Raises Crop Prices to Record -Food-price inflation in India, Asia’s third-largest economy, may accelerate after the government raised the prices it pays farmers for rice and oilseeds to records, making crops costlier, economists said.  The minimum prices for monsoon-sown crops including paddy, soybeans and corn were increased to help boost planting, the farm ministry said in New Delhi yesterday. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor. An increase in food prices would add to inflationary pressures in India, where the central bank has boosted interest rates nine times since March 2010. Global food prices reached an all-time high in February driven by stronger demand and harvest disruptions, according to a United Nations gauge. An index measuring wholesale prices of agricultural products advanced 9.01 percent in the week ended May 28 from a year earlier, the highest level in eight weeks, the trade ministry said yesterday. Overall inflation in India has been above 8 percent for 16 months.

Food Prices Stay Near Record as Meat and Dairy Costs Rise - Global wheat production will lag behind demand, helping to keep food prices high and volatile at least through next year, the United Nations’ Food and Agriculture Organization said.  Wheat output will rise 3.2 percent to 673.6 million metric tons in the season starting in July, trailing demand of 677 million tons, the FAO said in a report on its website today. Food prices stayed near record levels in May on higher meat and dairy costs. Food imports will rise 21 percent to a record $1.29 trillion this year, the FAO said separately.  The FAO’s Food Price Index of 55 food commodities fell 1 percent to 232.4 points from 234.8 points in April, the FAO said. The gauge was at an all-time high of 237.7 in February.  “The high-price situation is not something that’s just going to vanish over one season,” . “The fundamentals are still what they are, a very tight situation for almost all commodities.”

More Than 1 Billion People Are Hungry in the World - For many in the West, poverty is almost synonymous with hunger. Indeed, the announcement by the United Nations Food and Agriculture Organization in 2009 that more than 1 billion people are suffering from hunger grabbed headlines in a way that any number of World Bank estimates of how many poor people live on less than a dollar a day never did.  But is it really true? Are there really more than a billion people going to bed hungry each night? Our research on this question has taken us to rural villages and teeming urban slums around the world, collecting data and speaking with poor people about what they eat and what else they buy, from Morocco to Kenya, Indonesia to India. We've also tapped into a wealth of insights from our academic colleagues. What we've found is that the story of hunger, and of poverty more broadly, is far more complex than any one statistic or grand theory; it is a world where those without enough to eat may save up to buy a TV instead, where more money doesn't necessarily translate into more food, and where making rice cheaper can sometimes even lead people to buy less rice.

World food prices set to remain high into next year: UN -Citing dwindling stocks and only small production increases for the majority of crops, a new United Nations report released Tuesday says world food prices are likely to remain high for the rest of this year and into 2012.The biannual Food Outlook published by the UN Food and Agriculture Organization (FAO) states that the next few months will be critical in determining how the major crops will fare this year. Declines in the prices of cereals and sugar were responsible for the slight decrease in the May index, says FAO, adding that this offset increases in meat and dairy prices.  In the oilseeds market, supplies in 2011-12 may not be sufficient to meet growing oil and meal demand, implying further reductions in global inventories, the agency adds.  Meanwhile, the global supply and demand balance for sugar points to some improvements, supported by large anticipated production in 2010-11, which is likely to surpass consumption for the first time since 2007-08. Turning to global meat production, the agency says that high feed prices, disease outbreaks and depleted animal inventories were forecast to limit the expansion of production to 294 million tons in 2011.

Global Food 2011 Imports May Climb 21% to Record $1.29 Trillion, FAO Says - Global food imports may rise 21 percent to a record $1.29 trillion this year, with “poorer” countries spending up to 30 percent more than last year, the Food and Agriculture Organization of the United Nations said.  Costs of grain-based commodities and vegetable oils may account for 40 percent of the increase, the FAO said in a report on its website today. Livestock bills may rise an average 17 percent, sugar and beverages by 26 percent and vegetables and fruits by 13 percent, it said.  “This is going to be quite an increase for countries which are already vulnerable, for countries which are already experiencing a strong food inflation,” Food costs were near a record in May, buoyed by rising meat and dairy prices, the FAO said in a separate report today. Staple foods including corn will more than double in two decades unless action is taken, Oxfam International said last week.

Can free markets solve the food crisis? - The food crisis rages on. Though prices overall are a bit off their record highs reached earlier this year – the much-watched global food price index calculated by the Food & Agriculture Organisation dipped slightly in May – they are still way above the level a year ago. And with new fears of bad weather creating bad harvests, the FAO warned on Tuesday in its latest Food Outlook report that lofty prices may not be going away: You'll often hear criticism that free markets are a cause of today's high food prices. The notion here is that prices are driven up by speculators looking to make a quick buck with all that cash sloshing around the world from easy-money policies in the U.S. and Europe, like the Fed's QE2. The trading of food staples on international exchanges sometimes feels even immoral. How can we trust profit-greedy financial markets to deliver food to the world at prices everyone can afford?

Graph of the Day: The Global Agricultural Productivity Gap, 2010-2050 - Feeding the world by 2050 will require increasing agricultural output by 70 percent. To achieve this, agricultural productivity will need to grow at an annual average rate of at least 1.75 percent from a relatively fixed bundle of agricultural resources given growing regional scarcities of water and arable land. As noted earlier, over the past seven years, that rate has averaged 1.4 percent.

Farm Bill Preview  -  Farm Bill season is upon us! At any rate, we’re off to a stuttering, smoky start with the first official hearing in the Senate committee last Thursday. Ag Secretary Vilsack promised or threatened that the next Farm Bill will be “smaller”. This echoes the previously congealed conventional wisdom. Although most of the rhetoric has focused on cutting the direct payment program, we know that favorite targets will also be the crumbs for relocalization, small farmers, organic production, sustainable practices, and other things which got some modest support in the 2008 Farm Bill. These are already being targeted by the crafters of the Appropriations Bill. Since the price tag for these is negligible compared to Big Ag subsidies, which so far remain sacrosanct even in budget-cutting rhetoric, we can assume that here as usual the deficit terrorists are lying. Once again they’re using deficit fear-mongering as the pretext to gut miniscule programs which could possibly help rivals to corporatism, while this gutting is then portrayed as real action on the deficit. But the real corporate welfare gravy train continues unabated.

Food Sovereignty Responds to Corporate Takeover of Food Production - Although the credit crunch has pushed the issue of the global food crisis to the background, it is still going on today. In fact, the number of chronically hungry people worldwide has risen and is estimated to amount to 967 million people according to the new Declaration of Human Rights, launched by the Cordoba process[1] at the end of 2008, on the occasion of the Declaration's 60th anniversary. In 1948, the of the United Nations declared "... everyone has a right to be free from hunger and to adequate food including drinking water, as set out in Article 25 of the Universal Declaration of Human Rights."[2] The world famine in the 1970s led the Declaration to introduce the concept of food security: "... the availability at all times of adequate world food supplies of basic foodstuffs to sustain a steady expansion of food consumption and to offset fluctuations in production and prices."[3] This definition of food security, which is basically a technical matter of providing adequate human nutrition, led to the assumption that more food production would solve the problem of mass starvation. The Green Revolution led to a spectacular increase in the amount of food produced, but the numbers of the chronically hunger did not diminish accordingly.[4]

Welcome Back To The Casino. Instead of Mortgages, Now They're Gambling With The World's Food Supply - A just-released U.N. report says that governments may have to intervene to burst the bubbles that have developed in the price of commodities like food staples and oil. The report blames a dysfunctional commodities market, and disputes the conventional economic wisdom that commodity prices went up because of demand: "The changing role of commodity markets, which are turning into financial markets, has enormous repercussions for the economy," said one of the report's authors – Heiner Flassbeck, a director at the UN conference on trade and development (Unctad). "The possibility of allowing governments' direct intervention in the physical and financial markets needs to be considered," the study concluded.Investors are encouraged to behave like a herd, says the report, with few incentives to arbitrage or bet against the tide of rising prices. Without checks and balances in the system, investors create price bubbles that put many basic foodstuffs out of the reach of millions in the developing world.

UN report calls for regulation to curb speculators pushing up food prices - Investment in commodity funds has reached $270bn. Speculators blamed for putting staples out of reach of poor. Government intervention may be needed to burst the huge bubble that has developed in the price of commodities such as food staples and oil, a UN report says.  Prices have rocketed in response to dysfunctional commodities markets, according to the report, which also disputes the view of many senior economists and central bankers that commodity prices have jumped as a result of a surge in demand."The changing role of commodity markets, which are turning into financial markets, has enormous repercussions for the economy," said one of the report's authors – Heiner Flassbeck, a director at the UN conference on trade and development (Unctad)."The possibility of allowing governments' direct intervention in the physical and financial markets needs to be considered," the study concluded

U.S. Military Favors Biofuels for Waging Future Wars: "The U.S. military isn’t keen on War Party member Devin Nunes’ proposal to ramp up the development of a coal-to-fuel technology, which has origins in Nazi Germany, to produce fuel for the empire’s thousands of ships, aircraft, tanks and military equipment. In testimony before the House Subcommittee on Energy and Power June 3, Tom Hicks, the Navy’s deputy assistant secretary for energy, questioned the wisdom of using coal-derived Fischer-Tropsch fuels to meet the needs of the Department of Defense. Fischer-Tropsch is a thermo-chemical conversion process invented and developed in Nazi Germany prior to World War II to convert resources such as coal, natural gas and biomass to fuel oil."

We've Eaten All The Fish In The Sea - The ocean seems infinitely huge, but we're emptying it. That's the message of a 2003 study by Villy Christensen, Sylvie Guénette, and other researchers (via Paul Kedrosky). The authors took a look at annual catches of popular North Atlantic fish over the past half-century, and estimated the change in fish populations over the last hundred years. Below is the most frightening chart, which is based on the study (click for bigger).

A Warming Planet Struggles to Feed Itself - The rapid growth in farm output that defined the late 20th century has slowed to the point that it is failing to keep up with the demand for food, driven by population increases and rising affluence in once-poor countries.  Consumption of the four staples that supply most human calories — wheat, rice, corn and soybeans — has outstripped production for much of the past decade, drawing once-large stockpiles down to worrisome levels. The imbalance between supply and demand has resulted in two huge spikes in international grain prices since 2007, with some grains more than doubling in cost.  Those price jumps, though felt only moderately in the West, have worsened hunger for tens of millions of poor people, destabilizing politics in scores of countries, from Mexico² to Uzbekistan to Yemen. The Haitian government was ousted in 2008 amid food riots, and anger over high prices has played a role in the recent Arab uprisings.

Warming ‘to leave tropics hungry’ - Areas where food supplies could be worst hit by climate change have been identified in a report. Some areas in the tropics face famine because of failing food production, an international research group says. The Climate Change, Agriculture and Food Security (CCAFS) predicts large parts of South Asia and sub-Saharan Africa will be worst affected. Its report points out that hundreds of millions of people in these regions are already experiencing a food crisis. "We are starting to see much more clearly where the effects of climate change on agriculture could intensify hunger and poverty," said Patti Kristjanson, an agricultural economist with the CCAFS initiative that produced the report.  A leading climatologist told BBC News that agriculturalists had been slow to use global climate models to pinpoint regions most affected by rising temperatures. This report is the first foray into the field by the CCAFS initiative. To assess how climate change will affect the world's ability to feed itself, CCAFS set about finding hotspots of climate change and food insecurity.

US universities in Africa ‘land grab’ - Harvard and other major American universities are working through British hedge funds and European financial speculators to buy or lease vast areas of African farmland in deals, some of which may force many thousands of people off their land, according to a new study. Researchers say foreign investors are profiting from "land grabs" that often fail to deliver the promised benefits of jobs and economic development, and can lead to environmental and social problems in the poorest countries in the world. The new report on land acquisitions in seven African countries suggests that Harvard, Vanderbilt and many other US colleges with large endowment funds have invested heavily in African land in the past few years. Much of the money is said to be channelled through London-based Emergent asset management, which runs one of Africa's largest land acquisition funds, run by former JP Morgan and Goldman Sachs currency dealers.

The great land grab: India’s war on farmers - Land is life. It is the basis of livelihoods for peasants and indigenous people across the Third World and is also becoming the most vital asset in the global economy. As the resource demands of globalisation increase, land has emerged as a key source of conflict. In India, 65 per cent of people are dependent on land. At the same time a global economy, driven by speculative finance and limitless consumerism, wants the land for mining and for industry, for towns, highways, and biofuel plantations. The speculative economy of global finance is hundreds of times larger than the value of real goods and services produced in the world. Financial capital is hungry for investments and returns on investments. It must commodify everything on the planet - land and water, plants and genes, microbes and mammals. The commodification of land is fuelling the corporate land grab in India, both through the creation of Special Economic Zones and through foreign direct investment in real estate.

“Every 30 Minutes”: Crushed by Debt and Neoliberal Reforms, Indian Farmers Commit Suicide at Staggering Rate - A quarter of a million Indian farmers have committed suicide in the last 16 years—an average of one suicide every 30 minutes. The crisis has ballooned with economic liberalization that has removed agricultural subsidies and opened Indian agriculture to the global market. Small farmers are often trapped in a cycle of insurmountable debt, leading many to take their lives out of sheer desperation. We speak with Smita Narula of the Center for Human Rights and Global Justice at New York University Law School, co-author of a new report on farmer suicides in India. [video - includes rush transcript]

Large Dams Can Affect Local Climates, Alter Rainfall, Says TTU Study - Researchers investigating how large dams can affect local climates say dams have the clear potential to drastically alter local rainfall in some regions. A study by researchers at Tennessee Tech University, Purdue University, the University of Colorado and the University of Georgia, Pacific Northwest National Laboratory and Hellenic Center for Marine Research concluded that artificial reservoirs can modify precipitation patterns. The study—published in Geophysical Research Letters— marks the first time researchers have documented large dams having a clear, strong influence on the climate around artificial reservoirs, an influence markedly different from the climate around natural lakes and wetlands. ..."We know a lot about how climate change affects reservoirs, but what we didn't know a lot about was what a reservoir could do to the local climate," he said. "We just reversed our thinking by saying that a reservoir and the activities it supports are just as important a player for climate as the larger climate is for the reservoir. Basically, it's a two-way street."

Forests fight back all over the world - Forest density is increasing across much of the world after decades of decline, according to a new study by scientists from the United States and Europe. The change, which is being dubbed the Great Reversal by the authors, has important, has positive implications for carbon capture and climate change.  The research, carried out by teams from the University of Helsinki and New York's Rockefeller University, shows that forests are thickening in 45 of 68 countries, which together account for 72 per cent of global forests. Traditionally, environmentalists have focused their concern solely on the dwindling extent of forested areas, but the authors believe new evidence of more dense forest – made up of more and larger trees – could be crucial in reducing atmospheric carbon, which is linked to climate change.

Arizona wildfires spread smoke 1,000 miles - Smoke from Arizona’s third largest fire on record, the massive Wallow fire, has now blown downwind over 1,000 miles to Iowa. The fire, which is 0% contained, is expected to rage full-force for at least three more days due to unfavorable weather. Hot, dry, and windy weather is predicted again today over Eastern Arizona, where NOAA has issued red flag warnings for critical fire conditions. A large trough of low pressure is anchored over the Southwest, and several disturbances rippling along this trough will bring strong southwesterly surface winds of 20 – 30 mph, with gusts near 35 mph, through Thursday. Extremely low humidities of 5 – 15% and hot summer temperatures are also expected, creating a dangerous fire weather situation. Yesterday, Luna, New Mexico, located about 50 miles northeast of the fire, had wind gusts in excess of 30 mph for 8 hours, temperatures near 80°F, and humidities as low as 12%. During the day yesterday, the fire grew from 300 square miles to 365 square miles, 30% of the size of Rhode Island. A separate fire burning in Southeast Arizona, the 163-square-mile Horseshoe Two fire, is the state’s 5th largest fire on record. According to the Interagency Fire Center, 3.5 million acres have burned in the U.S. so far this year, the most on record for this early in the year–and more than double the 10-year average from 2001 – 2010 of 1.4 million acres. Extreme to exceptional drought conditions over most of Texas, New Mexico, and Eastern Arizona are largely responsible for the record fire season.

Wallow Fire Grows to Second-Largest in Arizona History - Firefighters continue to battle the Wallow Fire, now the second-largest wildfire in Arizona's history, and the weather is not providing any help in this struggle. The Wallow Fire has now consumed 311,481 acres with no containment, according to the Incident Information System website. The Wallow Fire has now beaten the Cave Creek complex fire with its 248,000 acres from 2005 for the ranking as second largest Arizona wildfire. The Associated Press reports the Rodeo-Chediski blaze from 2002 remains the largest wildfire in Arizona's history with its 469,000 acres.  The Wallow Fire continues to burn erratically due to high winds and tricky terrain in the region.

Arizona Wallow Fire May Hit Power Lines, Cause Blackouts - The massive wildfires raging in Arizona expanded as wind-whipped flames tore through canyons in the eastern mountains, forcing firefighters to retreat from flames that have ripped through the popular vacation town of Greer. Officials ordered the evacuation of two towns and the flames are threatening power supplies, which may lead to rolling blackouts across parts of Texas and New Mexico.  But with all this dry brush and heavy winds firefighters -- who have come to Arizona from as far away as New York -- are facing an uphill battle to bring the blaze under control. Aircraft are fighting to hold the line from above, dropping fire retardant to smother flare-ups threatening Paso Electric's high-voltage transmission lines, which supply electricity for hundreds of thousands of people. If these lines go, it will mean blackouts for many part of the region.

Disasters Costing $100 Billion Begin to Lift Insurance Rates - Natural disasters costing insurers almost $100 billion are beginning to lift some commercial insurance rates after a seven-year decline.  The reversal may benefit underwriters such as Chubb Corp. (CB) and brokers like Aon Corp. (AON)  Insurers hurt in the past 16 months by earthquakes in Japan, New Zealand and Chile and tornadoes in the U.S. are charging more for property coverage. Companies are seeking to strengthen finances after the recession drained value from investment portfolios and limited demand from business clients.  “The market is turning,” said Chris Johnson, senior vice president of commercial insurer FM Global. “If you look at reserves, if you look at every indicator for the industry, we have no slack left,” he said in an interview. “The only way to start turning the corner is for rates to rise.”

It’s only June: Record-breaking heat grips eastern half of US; forecasters say get used to it - Temperatures in the 90s were recorded across much of the South, the East and the Midwest. Baltimore and Washington hit 99 degrees, breaking high-temperature records for the date that were set in 1999, according to the National Weather Service. The normal high for the date is about 82. Philadelphia hit 97 degrees, breaking a 2008 record of 95, and Atlantic City, N.J., tied a record of 98 set in 1999. Chicago reached 94 by midafternoon. The temperature hit 97 in LaGuardia, N.Y., breaking the old record of 96 set in 2008. Newark, N.J., reached 99 degrees, breaking a record of 97 set in 1999. Forecasters said it felt even hotter because of the high humidity. The ridge of high pressure that brought the broiling weather is expected to remain parked over the region through Thursday.

Mother Nature is Just Getting Warmed Up: June 2011 Heat Records Crushing Cold Records by 13 to 1  - The tropics and much of the Northern Hemisphere are likely to experience an irreversible rise in summer temperatures within the next 20 to 60 years if atmospheric greenhouse gas concentrations continue to increase, according to a new climate study by Stanford University scientists…. “According to our projections, large areas of the globe are likely to warm up so quickly that, by the middle of this century, even the coolest summers will be hotter than the hottest summers of the past 50 years,” said the study’s lead author, Noah Diffenbaugh, That’s from the Stanford release for a new Climatic Change study.  The study, based on observations and models, finds that most major countries, including the United States, are “likely to face unprecedented climate stresses even with the relatively moderate warming expected over the next half-century.”As a taste of things to come, much of the United States has just been hit by a monster heat wave. Steve Scolnik at Capital Climate analyzed the data from NOAA’s National Climatic Data Center (NCDC) and found, “U.S. heat records in the first 9 days of June have outnumbered cold records by an eye-popping ratio of 13 to 1″ — 1609 to 124:

The Reality of Global Climate Change is Upon Us - Even those who deny the existence of global climate change are having trouble dismissing the evidence of the last year. In the U.S. alone, nearly 1,000 tornadoes have ripped across the heartland, killing more than 500 people and inflicting $9 billion in damage. The Midwest suffered the wettest April in 116 years, forcing the Mississippi to flood thousands of square miles, even as drought-plagued Texas suffered the driest month in a century. Worldwide, the litany of weather’s extremes has reached biblical proportions. The 2010 heat wave in Russia killed an estimated 15,000 people. Floods in Australia and Pakistan killed 2,000 and left large swaths of each country under water. A months-long drought in China has devastated millions of acres of farmland. And the temperature keeps rising: 2010 was the hottest year on earth since weather records began. From these and other extreme-weather events, one lesson is sinking in with terrifying certainty. The stable climate of the last 12,000 years is gone. Which means you haven’t seen anything yet. And we are not prepared.

Romney Stuns World With Mundane Statement of Fact - Mitt Romney capped off the week in which he made the anti-climactic announcement that he is, in fact, running for president with a statement that has drawn considerably more attention: He thinks the planet is actually warming.At a New Hampshire campaign stop on Friday, Romney stunned the world with his rather mundane acknowledgment of facts. Via Reuters:"I believe the world is getting warmer, and I believe that humans have contributed to that," he told a crowd of about 200 at a town hall meeting in Manchester, New Hampshire. "It's important for us to reduce our emissions of pollutants and greenhouse gases that may be significant contributors." The Reuters story notes that he "broke with Republican orthodoxy" in making this statement. I would point out, however, that the GOP's last presidential nominee, Sen. John McCain (R-Ariz.), came to this not-exactly-earth-shattering conclusion as well.

 Koch-funded group mounts cut-and-paste attack on regional climate initiatives - Fresh off last year’s successful defeat of federal climate legislation in the U.S. Senate, the oil baron Koch brothers and their dirty-energy buddies are now bent on dismantling one of the nation’s last hopes for doing anything about climate change in the near term: regional climate accords. Today, a total of 32 states are active participants or observing members in the Regional Greenhouse Gas Initiative in the Northeast, the Midwestern Greenhouse Gas Reduction Accord, or the Western Climate Initiative. That number will get a lot smaller if the American Legislative Exchange Council—a D.C.-based conservative advocacy organization funded by Koch family foundations, ExxonMobil, and other oil companies and big corporations—gets its way. ALEC offers legislative templates to state lawmakers who don’t want the hassle of writing their own conservative bills. Raegan Weber, ALEC’s senior director of public affairs, says the group has produced 800 to 1,000 pieces of so-called “model legislation.” Access to those templates is restricted to legislators who pay $100 for a two-year membership, which makes it difficult to trace a bill’s language back to ALEC.

Poor countries say rich evade new climate pledges - Developing countries said Friday that rich nations are refusing to negotiate an extension of their commitments to reduce greenhouse gas emissions, charging that they sought to "maintain their privileges and levels of consumption" at the expense of the poor.Two-week climate negotiations among 183 nations in Bonn, Germany, which reached their halfway point Friday, were stalled for three days this week in a fight over the agenda. Structured in four bodies, formal talks only began in two of them on Thursday as countries haggled over what should be discussed. The agenda squabble was more than procedural, however. It reflected deeper questions involving the objectives at the next major climate conference in Durban, South Africa, beginning Nov. 28, and underscored the continued rift between blocs of nations. The United States and other industrial countries want the Durban conference restricted to refining the few agreements reached last year, rather than return to intractable questions that have shadowed climate talks for years. Developing countries say those questions must be addressed.

Canadian government confirms it will reject new Kyoto Protocol - Canada confirmed on Wednesday that it would not support an extended Kyoto Protocol after 2012, joining Japan and Russia in rejecting a new round of the climate emissions pact. The current Kyoto Protocol binds only the emissions of industrialized countries from 2008-2012. Poor and emerging economies want to extend the pact, creating a deadlock at U.N. climate talks running from June 6 to 17 in Bonn, Germany. The confirmation makes it clear Canada is following the line its ruling party pursued ahead of last month’s election.  Canada has also previously said it could not achieve the binding emissions cuts it has committed to under the first round of Kyoto up to 2012, infuriating environmentalists and developing countries.

Canada’s Step Away From the Kyoto Protocol Can Be a Constructive Step Forward - Canada confirmed today (June 10) that it will not take on a target under an extension of the Kyoto Protocol following the completion of the first commitment period, 2008-2012.  Given that Canada is likely to miss by a wide margin its current target under the first commitment period, this decision may not be surprising, but it is nevertheless important.  More striking, it may actually turn out to be a positive and constructive step forward in the drive to address global climate change through meaningful international cooperation.  Why do I say that?The United States did not ratify the Kyoto Protocol, and has made it clear that it will not take on a target under a second commitment period.  The U.S. position continues to be that a considerably broader agreement is necessary – one that includes commitments not only from the Annex I (industrialized) countries, but also from the key emerging economies, such as China, India, Brazil, Korea, Mexico, and South Africa.

Greenhouse gas emissions hitting record highs (AP) -- Despite 20 years of effort, greenhouse gas emissions are going up instead of down, hitting record highs as climate negotiators gather to debate a new global warming accord.  The new report by the International Energy Agency showing high emissions from fossil fuels is one of several pieces of bad news facing delegates from about 180 countries heading to Bonn, Germany, for two weeks of talks beginning Monday. Another: The tsunami-triggered nuclear disaster in March apparently has sidelined Japan's aggressive policies to combat climate change and prompted countries like Germany to hasten the decommissioning of nuclear power stations which, regardless of other drawbacks, have nearly zero carbon emissions. "Japan's energy future is in limbo," . The fallout from the catastrophe has "put climate policy further down the priority list," and the short-term effect in Japan - one of the world's most carbon-efficient countries - will be more burning of fossil fuels, he said.

Carbon Release to Atmosphere 10 Times Faster Than in the Past, Geologists Find — The rate of release of carbon into the atmosphere today is nearly 10 times as fast as during the Paleocene-Eocene Thermal Maximum (PETM), 55.9 million years ago, the best analog we have for current global warming, according to an international team of geologists. Rate matters and this current rapid change may not allow sufficient time for the biological environment to adjust. "We looked at the PETM because it is thought to be the best ancient analog for future climate change caused by fossil fuel burning," said Lee R. Kump, professor of geosciences, Penn State

'Kill a camel' to cut pollution concept in Australia -- Australia is considering awarding carbon credits for killing feral camels as a way to tackle climate change. The suggestion is included in Canberra's "Carbon Farming Initiative", a consultation paper by the Department of Climate Change and Energy Efficiency, seen Thursday. Adelaide-based Northwest Carbon, a commercial company, proposed culling some 1.2 million wild camels that roam the Outback, the legacy of herds introduced to help early settlers in the 19th century. Considered a pest due to the damage they do to vegetation, a camel produces, on average, a methane equivalent to one tonne of carbon dioxide a year, making them collectively one of Australia's major emitters of greenhouse gases. In its plan, Northwest said it would shoot them from helicopters or muster them and send them to an abattoir for either human or pet consumption. "We're a nation of innovators and we find innovative solutions to our challenges -- this is just a classic example," Northwest Carbon managing director

Geo-Engineering Can Help Save the Planet -Carbon dioxide levels in the atmosphere are pushing 400 parts per million (p.p.m.) — up from the natural pre-industrial level of 280 p.p.m. Emissions for last year were the highest ever. Rather than drift along until a calamity galvanizes the world, and especially the United States, into precipitous action, the time to act is now. The biology of the planet indicates we are already in a danger zone. The goal of limiting temperature increase to 2 degrees Celsius, as discussed at the Copenhagen and Cancun climate summits, is actually disastrous. Even more disturbing, scientists have determined that, if we want to stop at a 2°C increase, global emissions have to peak in 2016. That seems impossible given current trends. Yet most people seem oblivious to the danger because of the lag time between reaching a greenhouse gas concentration level and the heat increase it will cause. So what to do? One possibility is “geo-engineering” that essentially takes an engineering approach to the planet’s climate system. An example would be to release sulfates in large quantity into the atmosphere or do other things that would reflect back some of the incoming solar radiation.

The Earth Is Full - You really do have to wonder whether a few years from now we’ll look back at the first decade of the 21st century — when food prices spiked, energy prices soared, world population surged, tornados plowed through cities, floods and droughts set records, populations were displaced and governments were threatened by the confluence of it all — and ask ourselves: What were we thinking? How did we not panic when the evidence was so obvious that we’d crossed some growth/climate/natural resource/population redlines all at once?   “The only answer can be denial,” argues Paul Gilding, the veteran Australian environmentalist-entrepreneur, who described this moment in a new book called “The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World.” “When you are surrounded by something so big that requires you to change everything about the way you think and see the world, then denial is the natural response. But the longer we wait, the bigger the response required.”

Muskrat Math - The proposed Lower Churchill hydro project is all about the math. Part of the problem we have all faced is getting the proper information to do the math and see if this deal is really needed, and if so does it make financial sense. According to Nalcor's Generation Planning Issues 2010 July  the Muskrat Falls project is not necessary.The following graphs are taken from the report: No, it is far more likely that we will have to try and sell that power on the open US market. The problem with that is Hydro Quebec is already there and selling to them at roughly 6 cents per kwh. Take the 25 cents or so it will cost to produce this power, and then sell it for 6 cents. That leaves us a loss of 19 cents per kwh. That would be bad if it were only a small excess of power being sold, but as shown earlier it looks to be all the Lower Churchill power.That would leave the Province and Nalcor with a staggering $931 million dollar loss year after year - for 35 years!

Global Energy Efficiency Declined in 2010 - Yesterday, BP came out with their annual Statistical Review of World Energy, which gives us a bunch of helpful data about 2010 to look at.  Gregor McDonald has already noted that the ongoing shift toward coal has continued.  The first thing that struck me was that the headline growth in global primary energy consumption, 5.6%, was likely larger than the growth in global GDP, implying that the efficiency with which the global economy uses energy must have declined. To assess this, I took the IMF data on global world product (at purchasing power parity), and then deflated it (using BEA GDP deflators) to get a series in real dollars, rather than nominal ones.  I divided that by the BP numbers for total primary energy (in millions of tonnes of oil equivalent), and that gives the graph above (not zero scaled to better show changes).  Indeed, although it has been fitfully improving for decades, it took a small step backwards in 2010.  Unfortunate. In my opinion, the world should be very focussed on improving its energy efficiency for multiple excellent reasons, and it's discouraging to see it go backward.

Global Solar Capacity Grew 73% in 2010 - BP are now including a page on solar power in their big energy spreadsheet, which is a wonderful development.  The above graph shows the overall capacity installed worldwide (in gigawatts of peak capacity at year end).  It's pretty clear who's making all the effort here! It should be born in mind that the graph shows total capacity, and this needs to get multiplied by what's called the capacity factor to be turned into actual electricity generation.  This is what makes allowance for the fact that solar plants are not generating much electricity when it's cloudy, or the sun is at low angles, and they aren't generating any at night.  I don't have global data for capacity factor, but it's probably in the ballpark of 30%.  Given that there are 8760 hours in the year, this gives about 100 TWhr of solar power generated.  BP also have data for total electricity consumption globally and it's 21325 TWhr in 2010.  So solar is something like 0.5% of total electricity generation.

GE Sees Solar Cheaper Than Fossil Power in Five Years - Solar power may be cheaper than electricity generated by fossil fuels and nuclear reactors within three to five years because of innovations, said Mark M. Little, the global research director for General Electric Co. (GE)  “If we can get solar at 15 cents a kilowatt-hour or lower, which I’m hopeful that we will do, you’re going to have a lot of people that are going to want to have solar at home,” Little said yesterday in an interview in Bloomberg’s Washington office. The 2009 average U.S. retail rate per kilowatt-hour for electricity ranges from 6.1 cents in Wyoming to 18.1 cents in Connecticut, according to Energy Information Administration data released in April.  GE, based in Fairfield, Connecticut, announced in April that it had boosted the efficiency of thin-film solar panels to a record 12.8 percent. Improving efficiency, or the amount of sunlight converted to electricity, would help reduce the costs without relying on subsidies.

3 nuclear reactors melted down after quake, Japan confirms -Japan's Fukushima Daiichi nuclear power plant experienced full meltdowns at three reactors in the wake of an earthquake and tsunami in March, the country's Nuclear Emergency Response Headquarters said Monday. The nuclear group's new evaluation, released Monday, goes further than previous statements in describing the extent of the damage caused by events on March 11. Reactors 1, 2 and 3 experienced a full meltdown, it said. The plant's owner, Tokyo Electric Power Co., admitted last month that nuclear fuel rods in reactors 2 and 3 probably melted during the first week of the nuclear crisis.

Tepco Plant Radiation Level Estimate Doubled by Safety Agency  - Japan’s nuclear safety agency doubled its estimate of radiation released by Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, which was crippled by the March 11 earthquake and tsunami. The station released about 770,000 tera becquerels of radioactive material into the air between March 11 and March 16, Hidehiko Nishiyama, deputy director-general at Japan’s nuclear safety agency, said at a briefing in Tokyo today.  The agency previously estimated that about 370,000 tera becquerels of radioactive material were released during the period.

Japan doubles Fukushima radiation leak estimate - The amount of radiation released by the Fukushima Daiichi nuclear power plant in the days after the 11 March tsunami could have been more than double that originally estimated by its operator, Japan's nuclear safety agency has said.The revelation has raised fears that the situation at the plant, where fuel in three reactors suffered meltdown, was more serious than government officials have acknowledged.In another development that is expected to add to criticism of Japan's handling of the crisis, the agency said molten nuclear fuel dropped to the bottom of the pressure vessel in the No 1 reactor within five hours of the accident, 10 hours earlier than previously thought. By the end of last week, radiation levels inside the reactor had risen to 4,000 millisieverts per hour, the highest atmospheric reading inside the plant since the disaster.

Tokyo Doubles Estimate for Total Radiation Release In 1st Week After Quake --The Japanese government, providing fresh evidence on the severity of a nuclear disaster at the Fukushima Daiichi nuclear complex, more than doubled Monday its estimate for the amount of radiation released from the plant in the first week of the crisis in March.  The Nuclear and Industrial Safety Agency, a government nuclear watchdog, also said it believes that reactor cores at some of the units at the complex melted much more quickly than the plant operator previously suggested, citing recent evidence suggesting initial efforts to inject seawater water into the reactors failed to achieve positive results.  NISA said it now estimates the total amount of radiation released into the atmosphere in the first week of the crisis at 770,000 terabecquerels. This compares with NISA's previous estimate, released on April 12, of 370,000 terabecquerels for the first month of the crisis. NISA has pointed out that most of the radiation was released in the first week. A terabecquerel is equivalent to 1 trillion becquerels.

Plutonium found in town near Fukushima nuclear plant --  Japan's nuclear safety agency has more than doubled its estimate of the amount of radiation released into the atmosphere from the crippled Fukushima nuclear plant. And plutonium believed to have come from the plant has also been found in a town near the facility - the first time plutonium has been found in soil outside the facility. The Nuclear and Industrial Safety Agency says it believes the earthquake-stricken Fukushima plant emitted nearly 800,000 terabecquerels of radioactive material into the air in the days after it was hit by a massive tsunami. That is more than double the original estimate and is based on new information suggesting the No.1 and No.2 reactors suffered meltdowns much earlier than thought revealed.

Are Nuclear Reactions Still Occurring at Fukushima? - You know that Fukushima reactors 1, 2 and 3 all melted down within hours of the Japanese earthquake. You also know that at least some of the subsequent explosions could have been caused by small-scale nuclear reactions called “prompt moderated criticalities”. But you might not know that nuclear reactions may still be ongoing. Specifically, it is well-known by nuclear scientists that the ratio of iodine 131 to cesium 137 tells a lot about when nuclear reactions have stopped. For example, on May 2nd, University of Tokyo physics professor Tetsuo Matsui published a scientific which Technology Review summarizes Professor Matsui’s findings as follows: Nuclear reactors produce radioactive by-products that decay at different rates. One common by-product is iodine-131 which has a half life of about 8 days while another is cesium-137 with a half life of about 30 years.  When a reactor switches off, the iodine decays more quickly so the ratio between these two isotopes changes rapidly over a period of days. That’s why measuring this ratio is a good way to work out when the nuclear reactions terminated.

Fukushima Reactor No. 1 more radioactive than ever - At the stricken Fukushima nuclear power plant, a robot sent into the building housing Reactor No. 1 on Saturday detected the highest levels of radiation measured since the crisis began on March 11. According to the Japan Times, The Tokyo Electric Power Company (TEPCO) reported that radiation levels in the air around Reactor 1 were at 4000 millisieverts per hour, an exposure level equivalent to approximately 40,000 chest x-rays. TEPCO says it has no plans to send workers into the area because of its dangerously high radioactivity. On Friday, a spokesman for TEPCO announced that steam was rising from underneath the reactor building. That afternoon, Japanese national television carried blurry footage of smoke rising from an opening in the floor. Underneath the reactor, an estimated 40,000 tons of "highly contaminated" radioactive water have collected in what is known as the pressure suppression containment vessel, and it's this water that is believed to be producing the steam. TEPCO officials warn that the water will begin to overflow from the storage vessel by June 20 as it reaches its maximum capacity, sooner if there are heavy rains.

Japan may have no nuclear reactors running by next April (Reuters) - All 54 of Japan's nuclear reactors may be shut by next April, adding more than $30 billion a year to the country's energy costs, if communities object to plant operating plans due to safety concerns, trade ministry officials said on Wednesday.Since the March 11 earthquake and tsunami, which triggered a radiation crisis at the Fukushima Daiichi plant north of Tokyo, concern among local authorities has kept nuclear generators from restarting at least four reactors that had been expected to come online after routine maintenance and inspection. Several more reactors have since shut for regular maintenance, slashing Japan's nuclear generating capacity to just 7,580 megawatts, or only 36 percent of its registered nuclear capacity. In May, Japan's average nuclear run rate fell to 40.9 percent, the lowest in at least a decade and well below 62.1 percent a year earlier. Before the quake and tsunami, which forced the closure of three other power plants in addition to Tokyo Electric Power Co's Fukushima Daiichi facility, nuclear power supplied about 30 percent of Japan's electricity.

Fukushima nuclear plant may have suffered ‘melt-through’, Japan admits - Molten nuclear fuel in three reactors at the Fukushima Daiichi power plant is likely to have burned through pressure vessels, not just the cores, Japan has said in a report in which it also acknowledges it was unprepared for an accident of the severity of Fukushima. It is the first time Japanese authorities have admitted the possibility that the fuel suffered "melt-through" – a more serious scenario than a core meltdown. The report, which is to be submitted to the International Atomic Energy Agency (IAEA), said fuel rods in reactors No 1, 2 and 3 had probably not only melted, but also breached their inner containment vessels and accumulated in the outer steel containment vessels. The plant's operator, Tokyo Electric Power (Tepco), says it believes the molten fuel is being cooled by water that has built up in the bottom of the three reactor buildings.

Nuclear fuel has melted through base of Fukushima plant - The nuclear fuel in three of the reactors at the Fukushima Dai-Ichi nuclear plant has melted through the base of the pressure vessels and is pooling in the outer containment vessels, according to a report by the Japanese government. The findings of the report, which has been given to the International Atomic Energy Agency, were revealed by the Yomiuri newspaper, which described a "melt-through" as being "far worse than a core meltdown" and "the worst possibility in a nuclear accident."  A spokesman for Tokyo Electric Power Co. said the company is presently revising the road-map for bringing the plant under control, including the time required to achieve cold shutdown of the reactors.  In a best-case scenario, the company says it will be able to achieve that by October, although that may have to be revised in light of the report.  Water that was pumped into the pressure vessels to cool the fuel rods, becoming highly radioactive in the process, has been confirmed to have leaked out of the containment vessels and outside the buildings that house the reactors. Tepco said it is trying to contain the contaminated water and prevent it from leaking into the sea, but elevated levels of radiation have been confirmed in the ocean off the plant.

Fukushima meltdown could be template for nuclear terrorism, study says - The Fukushima disaster's dramatic demonstration of how nuclear plants are vulnerable to cooling-system failure could "awaken terrorist interest" in attacking such plants, says a new joint study by US and Russian experts on the threat of nuclear terrorism.

CNN's John King interviews Arnie Gundersen about the Hot Particles discovered in Japan and the US - video - CNN's John King and Arnie Gundersen discuss "hot particles" detected in Seattle and Japan, the cozy relationship between Japanese regulator NISA (Nuclear and Industrial Safety Agency) and plant owner TEPCO, and changes at the Fukushima accident site since March. John King and Arnie Gundersen also discuss how TEPCO's acknowledgement today of another error in calculating radiation dose more than doubles the amount of radioactivity to which people in the Northern Hemisphere have been exposed.

Power Outages at Japan's Fukushima Plant, Cooling Continues - The operator of a crippled Japanese nuclear plant said on Wednesday it had experienced power outages at two of its reactors but it was able to continue the cooling process to bring them under control.  Tokyo Electric Power Co (Tepco) said it was investigating the power outages at its No. 1 and No. 2 reactors in the Daiichi plant in Fukushima, badly damaged by the devastating March earthquake and tsunami.  The company is also considering dumping low-level radioactive water into the sea from another nearby plant slightly damaged by the March disasters.  A Tepco spokesman said it may pump into the ocean about 3,000 tonnes of sea water that washed over the Daini plant after the March 11 tsunami. It is about 10 km (6 miles) from the Daiichi plant, where Tepco is still battling to bring under control the worst nuclear disaster since Chernobyl.

Analysis: Risks Too Great For Full Japan Nuclear Shutdown (Reuters) - Economic risks are too high for Japan to pull the plug on its 54 nuclear plants next year despite intense public pressure on Tokyo to cut reliance on atomic power in favor of other clean energy sources. Unless Tokyo overrides resistance from local officials, orders reactor restarts and faces down public disapproval, by April next year Japan's last plant would shut for maintenance and leave the country with no nuclear power.A massive earthquake in March crippled reactors, sparked the world's worst nuclear disaster in 25 years and left Japan struggling to supply homes and industry with power as nuclear capacity utilization fell to 36 percent. Three months later, the shortage is worsening as reactors are switched off one by one. Mindful of the growing public concern about safety standards, regional bureaucrats are delaying the restart of reactors after scheduled maintenance until tighter safety measures are implemented. Analysts doubt the government would allow the situation to develop into a full shutdown, but a partial shutdown would hurt.

Electrical Fire Knocks Out Spent Fuel Cooling at Nebraska Nuclear Plant -  A fire in an electrical switch room on Tuesday briefly knocked out cooling for a pool holding spent nuclear fuel at the Fort Calhoun nuclear plant outside Omaha, Neb., plant officials said. The safety of deep pools used to store used radioactive fuel at nuclear plants has been an issue since the accident at Japan's Fukushima nuclear plant in March. If the cooling water a pool is lost, the used nuclear fuel could catch fire and release radiation. As ProPublica reported earlier, fire safety is a continuing concern at the country's 104 commercial reactors, as is the volume of spent fuel piling up at plants. Officials at Fort Calhoun said the situation at their plant came nowhere near to Fukushima's. They said it would have taken 88 hours for the heat produced by the fuel to boil away the cooling water.

On the Shortcomings in US Nuclear Emergency Plans - Yves Smith - I normally leave the nuke/Fukushima aftermath beat to George Washington, but furzy mouse sent me a link to this very straightforward and well done video by Arnie Gunderson of Fairewinds. This evokes weird parallels to what we learned in the wake of Hurricane Katrina: it was obvious more needed to be done to protect public safety, but no one was willing to do it. And in visit to New Orleans over the Christmas holidays, I learned the levees have not been made higher as the Army Corps of Engineers recommended. All that happened was the breaks in the levees were patched. Gunderson gives a straightforward account of theory v. probable practice in a nuclear accident:

Seymour Hersh on Iran’s nuclear capability, the Arab uprisings and Obama’s isolation - The Pulitzer Prize-winning investigative journalist Seymour Hersh is back in the news this week with another explosive article that is ruffling some feathers at the White House. During the Bush administration years, Hersh was widely criticized by White House officials for his exposés on the torture at Abu Ghraib, secret U.S. operations overseas, and U.S. policy in Iran. Now it is the Obama White House upset with an article from Hersh. Earlier this week, The New Yorker magazine published his latest investigation titled "Iran and the Bomb: How Real is the Threat?" Hersh writes, quote, "There is a large body of evidence, however, including some of America’s most highly classified intelligence assessments, suggesting that the United States could be in danger of repeating a mistake similar to the one made with Saddam Hussein’s Iraq eight years ago—allowing anxieties about the policies of a tyrannical regime to distort our estimations of the state’s military capacities and intentions."

Regulators Block Restart Of Keystone Oil Pipeline, Cite Leaks  - The Obama administration blocked a Canadian company from restarting its controversial oil pipeline on Friday, concluding that "continued operation of the pipeline without corrective measures would be hazardous to life, property and the environment." In an order released by the Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA), the Calgary-based TransCanada, was told it must complete a series of safety tests before the 1,300-mile pipeline, known as Keystone 1, which carries crude oil from Canada to Oklahoma, can resume operations. According to the agency's findings, on May 7, 2011, "a reportable failure incident occurred on pump station piping on the Keystone crude oil pipeline resulting in the release of approximately 400 barrels of crude oil. On May 29, 2011, a second reportable failure incident occurred on piping at another pump station." The pipeline has spilled 12 times since it began operation less than a year ago.

U.S. oil industry warns China will fill Keystone pipeline vacuum - The U.S. oil industry is playing the “China card” in urging the American government to quickly approve TransCanada Corp.'s proposed Keystone XL pipeline project, which will deliver oil sands crude to Gulf Coast refineries. In a submission to Secretary of State Hillary Clinton, the Washington-based American Petroleum Institute argues that the $7-billion (U.S.) pipeline would be a major boost to job creation, and warned that the U.S. cannot take for granted its access to the vast oil sands resource in Canada. Other nations will aggressively develop this key strategic resource for their future energy needs if we fail to act,” API chief executive officer Jack Gerard said in his letter.  Although he did not name China, Mr. Gerrard was clearly referring to warnings that, in the absence of the Keystone XL pipeline, Canada will build alternative export routes to the West Coast to ship oil sands crude to the booming Chinese market.

Oil slick spotted in Gulf: Weathered oil from last year? - The Coast Guard in Louisiana got a report early this morning of an oil slick in the Gulf of Mexico off Venice, Louisiana. It's not known where the oil is from yet. The Initial report from fishermen was that it's several miles long, and the Coast Guard is using a helicopter to check it out, said Petty Officer Steve Lehmann. The National Wildlife Federation says early indications are that it's oil that sank to the bottom from last year's BP oil spill and now has been stirred up.Plaquemines Parish President Billy Nungesser reportedly told WWL-TV in Louisiana that the oil appeared to be weathered, not new.

The Monster Raving Loony Party - Krugman - Via Steve Benen, I see that Haley Barbour has the explanation for higher gas prices. It’s not demand from China and instability in the Middle East; it’s a deliberate conspiracy on the part of the Obama administration (pdf):

• BOB SCHIEFFER: Somebody told me that you actually said this week you think that the President is trying to drive up energy policy, energy prices on purpose. Did you say that?
• GOVERNOR HALEY BARBOUR: No question about that. I mean, this administration’s policies clearly have been to drive up the cost of energy, so Americans would use less of it. That’s environmental policy. That’s not energy policy. But that’s their policy. They think it will give you less pollution. Make these alternative energy sources– excuse me, Bob, more competitive. When– when Barack Obama became president, gasoline was about a dollar eighty a gallon. And now it’s up to four dollars a gallon. Why should we be surprised when his secretary of energy said in 2008, Steven Chu, what we really need in the United States is to get the price of gas up to where it in Europe. Well, we may need that in Berkeley but we don’t need that in Biloxi, I can tell you that.

Beyond Gas: Oil is "Lifeblood" of U.S. Economy - Less than 46% of each barrel of crude oil gets processed into "finished motor gasoline" according to the EIA. So what gets produced from the other 54% of each barrel of crude oil?   You can find the details here, but the list includes aviation and jet fuel, kerosene, lubricants, waxes, asphalt, dyes, athletic shoes, crayons, car tires, cosmetics, and plastics that are used in appliances, toys, flooring, computers, desks, carpeting, automobiles and medical equipment (syringes, artificial joints, prosthesis, catheters, hearing aids, artificial corneas, etc.).   As ExxonMobil's Ken Cohen concludes, "When some politicians, celebrities and even other companies talk about getting “off oil,” [MP: Or raising taxes on "Big Oil"] I hope they realize what that would really mean for our way of life – because it might make them think twice."

The US Crude Production Peak is not Symmetrical  - People that worry about the peaking of global oil supplies often use symmetrical curves as simple models for how production will peak and then decline, with logistics and Gaussians being popular choices.  This goes back to M. King Hubbert (and I've done some of this myself).  The United States is the poster child for this kind of analysis, since this region was the first to be developed at scale and production peaked in 1970.  However, it seems increasingly clear that the US production curve is far from symmetrical (perhaps driven by higher prices since the 1970s, and especially in the 2000s).  Using data from the EIA for production and reserves, we can see that the decline side is slower than the growth side for both: Here I have expressed the reserves on the right scale in millions-of-barrels-per-day-years (ie the number of years that the the current reserves would permit you to produce at a steady rate of one million barrels/day).  Production is on the left scale in mbd. You can see the noticeable slowing of decline in both production and reserves in the last decade

The Energy Limit Model - The energy limit model to economic growth is working beautifully, having come into play prior to the 2008 crisis and now once again forcing another global slowdown. Above is the most recently updated chart showing energy expenditures as a percentage of US GDP. As usual, I have not merely taken EIA.Gov’s calculations here, but cross checked various data from EIA.gov on total energy spending with BEA.gov data on historical GDP. In addition, I am working on a chained (real) dollar version of the above chart but here I have presented the nominal version of both expenditure and GDP. | see: US Energy Expenditure as a Percentage of GDP  1999-2010 (All Nominal Dollars). As we can see, the relief from the 2007-2008 energy spike was short-lived. Whatever economic “recovery” the US was able to cobble together was built on the base of lower energy price levels in 2009. But by 2010, the energy expenditure percentage was right back up above 8.00%. More urgently, preliminary data shows that 2011′s level is back above 9.00%. Given the recovery in coal and oil prices, that’s no surprise. This Spring’s run of terrible economic data, showing the US economy turning back down again, now has an obvious cause.

How to Wreck a Planet 101 - Three Energy Developments That Are Changing Your Life - Here’s the good news about energy: thanks to rising oil prices and deteriorating economic conditions worldwide, the International Energy Agency (IEA) reports that global oil demand will not grow this year as much as once assumed, which may provide some temporary price relief at the gas pump. In its May Oil Market Report, the IEA reduced its 2011 estimate for global oil consumption by 190,000 barrels per day, pegging it at 89.2 million barrels daily. As a result, retail prices may not reach the stratospheric levels predicted earlier this year, though they will undoubtedly remain higher than at any time since the peak months of 2008, just before the global economic meltdown. Keep in mind that this is the good news. As for the bad news: the world faces an array of intractable energy problems that, if anything, have only worsened in recent weeks. These problems are multiplying on either side of energy’s key geological divide: below ground, once-abundant reserves of easy-to-get “conventional” oil, natural gas, and coal are drying up; above ground, human miscalculation and geopolitics are limiting the production and availability of specific energy supplies. With troubles mounting in both arenas, our energy prospects are only growing dimmer."

Cost of oil consumption to US economy (graph) Sources: Oil Consumption: EIA Oil Price: St Louis Fed. GDP: St Louis Fed. Recession defined as decline in annual real GDP per capita. All figures are quarterly.

Yes, We're Still Running Out of Oil - Joe Romm has the right take on yesterday's announcement of a "massive" new oil find in the Gulf of Mexico:The discovery doesn’t prove we have ‘abundant’ oil reserves, as [House Natural Resources Committee Chair Doc Hastings] claims. It proves the exact opposite, that ‘Drill, Baby, Drill’ can’t solve our problems. Steve Greenlee, president of Exxon Mobil’s exploration business, unintentionally admitted that when he said, “This is one of the largest discoveries in the Gulf of Mexico in the last decade.”One of the clearest indications that the planet is running out of oil is the fact that discoveries of giant oil fields have slowed so dramatically in the past couple of decades. This new field in the Gulf is supposed to hold 700 million barrels of recoverable oil, which puts it at the low end of the category (a "giant" oil field contains 500 million barrels or more of crude), and these days that counts as a major find. But historically speaking, this is a pipsqueak, and we're finding damn few fields of even this size. The fact that this is so big a deal is a bad sign for the oil industry

Obama Hints U.S. Might Tap Petroleum Reserves To Combat Libya Oil Disruption - President Obama on Wednesday appeared to raise the possibility that the administration would release oil from the nation’s strategic petroleum reserve to provide relief to Americans grappling with high gas prices. Speaking at a gathering of personal finance writers at the White House, Obama suggested the conflict in Libya has removed large enough flows of oil from the global supply to perhaps justify a release of oil from the nation’s emergency stockpile to address soaring prices. “My general view has been that the strategic petroleum reserve is to be used when you don’t have just short term fluctuations in the market, but where you have a disruption,” Obama said. “Libya has taken 125 million barrels off the market. We’re examining broadly what that means in terms of the oil market.”

BP report raises doubts about global oil supply -  The global oil industry found the equivalent of only a fifth of the oil it used last year, BP said on Wednesday, adding fuel to a debate on whether the world is running out of oil.  BP said in its annual Statistical Review of World Energy that global proven oil reserves rose by just 6 billion barrels to 1.383 trillion barrels at the end of 2010.  Oil production meanwhile rose to 82 million barrels of oil per day, or 29.9 billion barrels on an annual basis – five times the size of the increase in reserves. The world’s gas reserves also rose only slightly to 187.1 trillion cubic metres from 186.6 trillion in 2009.  While global gas consumption grew by 7.4 percent in 2010 to 3.169 billion cubic metres (bcm) – the biggest rise since 1984 – gas output also recorded a 7.3-per-cent rise to 3193.3 bcm.  World oil consumption recovered after two consecutive years of decline, rising to 87.4 million barrels in 2010, up from 84.7 million barrels in 2009.

Iraq sees oil output at 3 mln bpd by year-end (Reuters) - Iraq expects its oil output to rise to 3 million barrels per day by the end of this year and sees it growing an additional 500,000 to 1 million bpd next year, Deputy Prime Minister Hussain al-Shahristani said on Saturday. Shahristani said Iraq's programme to install new single point moorings or SPMs would help increase export capacity by an additional 1.8 million bpd by the end of this year. The OPEC member's current output is about 2.7 million to 2.8 million bpd. Iraq's oil exports in May averaged 2.225 mln bpd. "Export terminals and pipelines will not be the obstacle," Shahristani, who is responsible for Iraq's energy affairs, told reporters during a visit to southern oilfields and export facilities. Iraq is rebuilding its oil infrastructure after years of conflict and has signed deals with oil majors to reach a proposed production capacity of 12 million bpd by 2017. Most analysts see 6-7 million bpd as more realistic

Oil Shipping Lanes (map)

Rift Over Output at OPEC - Several Persian Gulf countries favor an increase in OPEC's oil output, setting the stage for a public fight with Iran when the group meets this week. The Organization of Petroleum Exporting Countries is scheduled to meet on Wednesday in Vienna. Until recently, the consensus among market participants was that the group wouldn't take any action given that crude-oil futures prices in the U.S. are hovering around $100 a barrel. However, some influential voices have shifted their views in recent days. "Saudi Arabia and Kuwait want an output increase to meet the expected demand later in the year, and the United Arab Emirates will likely follow suit," said a Gulf delegate.

Oil price 'should remain' under $80: Petronas CEO - Malaysian state energy firm Petronas said Monday that the crude oil market's current fundamentals call for lower oil prices. "Given the current state of market fundamentals and cost environment, I believe prices should remain within the range of $75 to $80 a barrel," Shamsul Azhar Abbas, the oil company's chief executive officer said at an industry gathering. Meanwhile, Ahmed Ghalehbani, Iran's deputy petroleum minister said his country was "okay" with current oil output levels. Iran is the second-largest producer in the 12-nation Organization of the Petroleum Exporting Countries (OPEC). Ghalehbani said Iran's position at the upcoming OPEC meeting Wednesday will be to hold production quotas at current levels.

OPEC talks break down, no deal to lift oil supply (Reuters) - OPEC talks broke down in acrimony on Wednesday without an agreement to raise output after Saudi Arabia failed to convince the oil cartel to lift production. "We were unable to reach an agreement -- this is one of the worst meetings we have ever had," said Ali al-Naimi, oil minister for Saudi Arabia, OPEC's biggest producer.The failure to do a deal is a blow for consumer nations hoping the Organization of the Petroleum Exporting Countries would take action to stem fuel inflation.  It also underlines concerns about OPEC's willingness to help control prices, perhaps leaving the oil market more open to speculative attack. "It is absolutely amazing," said Alirio Parra, Venezuela's former OPEC president. "This is not market leadership. Brent crude rose $1.30 a barrel to $118.08.

Split by Infighting, OPEC Keeps a Cap on Oil - A meeting of the Organization of the Petroleum Exporting Countries ended on Wednesday in disarray, with ministers failing to reach a consensus to raise oil production levels. That left existing quotas in place, despite rising world prices and pressure from major oil-consuming countries to increase output. In the short term, the stalemate, which is a rare public disagreement within the cartel, is unlikely to have more than symbolic importance. OPEC¹ members are already pumping above their quota levels, and Saudi Arabia, the only OPEC country with the ability to increase production significantly, has promised to continue raising its output to satisfy world demand. But the discord highlights the widening split between Saudi Arabia and Iran, which are vying for influence in a Middle East that is being rapidly reshaped by populist uprisings throughout the region. The public disagreement also underscores that the 12 OPEC member countries are increasingly making their own decisions about production levels rather than bowing to the collective judgment of the group.

Oil jumps as OPEC talks fail, eyes Saudi solo hike (Reuters) - Oil prices jumped on Wednesday after OPEC failed to reach a deal to increase output, raising fears of supply shortages later this year that could fuel a further price rally, imperiling the economic recovery.After several hours, the Organization of the Petroleum Exporting Countries' talks broke down as Saudi Arabia failed to convince other members to lift production, as had been expected since last week. However, further gains in the oil prices were limited by expectations that the world's top exporter would unilaterally boost output anyway. In Vienna, OPEC officials said they hoped the group would meet again in three months time after what Saudi Oil Minister Ali al-Naimi described as "one of the worst meetings...ever". "It came as a surprise. It is bullish for prices. If you look at demand, it will be very robust in the next months and there is a big need for extra OPEC oil," "It will be important to see if the Saudis are willing to supply more, it will matter a lot. Otherwise the market will be very tight,"

The significance of OPEC announcements - The Organization of Petroleum Exporting Countries (OPEC) today announced that its members could not reach an agreement to change OPEC's production quotas. How significant is that announcement? In my opinion, not very. If OPEC were functioning as a traditional cartel, what would emerge from these meetings would be agreements on production quotas to which each country was going to adhere. But this is clearly not the case. Here, for example, is a graph of the OPEC production allocations for Saudi Arabia compared with how much the country actually produced. There was a brief period in 2006 and 2007 when the two series corresponded, though I believe the reason is that the Saudis wanted to use the cuts in announced OPEC quotas as cover for a production cut that they were intending to implement for other reasons. Perhaps they were unable to maintain production at the time, or perhaps they were unwilling. But in no sense was Saudi Arabia induced to cut production by the other oil-producing countries. Before and since that episode, the kingdom has pretty much ignored OPEC's production allocations.

Hamilton on the OPEC Announcement - From Jim Hamilton: The significance of OPEC announcements. Professor Hamilton reviews the OPEC announcement today, and points out that quotas for OPEC have been routinely ignored. He concludes:  I think today's announcement that this "quota" will remain in effect is largely irrelevant. At best the statements issued from these meetings provide a noisy signal of the intentions of some OPEC members. But if you're interested in what OPEC members really plan to produce, my view is that actions speak louder than words. The announcement might be "largely irrelevant" as far as actual production, but there was a market impact with WTI crude futures up over $100 per barrel (and Brent crude close to $118).

Oil production fails to keep up with demand - CRUDE-OIL prices shot up on June 8th—Brent crude to a one-month high of $118.59 per barrel—after OPEC representatives meeting in Vienna were unable to reach an agreement on production quotas. Many had expected an increase in quotas as members with spare production capacity, led by Saudi Arabia, pushed to avoid a price spike that may dampen long-term demand. As figures released in BP’s "Statistical Review of World Energy" show, global oil production has struggled to keep up with increased demand recently, particularly from Asia. In China alone consumption has risen by over 4m barrels per day in the past decade, accounting for two-fifths of the global rise. In 2010 consumption exceeded production by over 5m barrels per day for the first year ever, as world oil stocks were run down.

OPEC says oil supply gap looms later this year (Reuters) - OPEC followed this week's failure to reach an output deal with a forecast world oil supplies would begin to fall short later this year, draining inventories just when demand is expected to hit a seasonal peak. In its monthly report published Friday, OPEC said world demand for its oil would average 30.7 million barrels per day (bpd) in the second half of the year, much higher than the 28.97 million bpd the 12-member group produced in May. The figures suggest the world will be undersupplied by 1.73 million bpd -- enough to meet demand in an economy the size of France -- if the Organization of the Petroleum Exporting Countries does not increase supplies."Looking to the remainder of this year, the expected supply/demand balance indicates a tightening market," OPEC's report said. "As a result, global inventories could continue to decline as the market enters a period of high seasonal demand."

Saudi Arabia Defies OPEC and Raises Oil Output - Oil facilities have been targets of the fighting in Libya, where unrest has taken 1.3 million barrels a day off the world market.  In the wake of an unruly OPEC¹ meeting, Saudi Arabia² has decided to go it alone and raise production substantially in the coming weeks to meet rising global demand.  The Saudi newspaper Al-Hayat reported on Friday that oil³ officials there had decided to increase production to 10 million barrels a day in July, from 9.3 million barrels, with most of the additional output going to China and other growing Asian economies. Saudi oil officials did not comment on the report, but the fact that they did not deny an article that appeared in the tightly controlled Saudi press was taken by analysts as confirmation. The price of a barrel of light sweet crude dropped by nearly $2.64 to $99.29 a barrel in Friday trading, returning to the level that existed before the OPEC meeting in Vienna this week that ended in disarray⁴, with delegates refusing to raise official production levels. The Saudi move, which was not unexpected, shows that Saudi Arabia will try to counteract any shortages in the market arising from the turmoil sweeping through North Africa and Middle East.

Electric Company Of Saudi Arabia Warns Country May Run Out Of Oil By 2030 - Sometimes we wish the oil minister of former OPEC member Saudi Arabia ("we can supply any amount of oil"), Wikileaks ("Saudi Said To Have Overstated Crude Oil Reserves By 300 Billion Barrels or 40%"), and now Saudi Arabia's very own electricity company would coordinate their story. In a little noticed comment by Abdel Salam al-Yamani, head of the Saudi Electricity Company, in Al Mashka, which so far has been captured by only El Economista magazine, has provided the most recent insider confirmation of peak oil: a very troubling development for those who still naively believe that Saudi Arabia has any marginal boosting capacity, or more importantly, is willing to risk pumping more than possible. Yet, caught between a revolutionary rock and various other cartel nut cases, Saudi will soon be forced to sell as much oil as it can in order to placate it increasingly angry population with ever greater and ever more frequent "gifts" buying the transitory admiration of its people.

Saudi Arabia fears that the oil runs out in 2030 if current consumption is maintained - The electricity company of Saudi Arabia warns that oil in this country could be depleted by 2030 if left unchecked domestic consumption. According to a report of Saudi Electric, domestic consumption is estimated to be between 2.5 and 3.4 million barrels a day. The report, published in the magazine Al Mashka says that the increase in domestic consumption of oil is one of the main challenges facing the country, mainly because oil accounts for 80% of national income. Abdel Salam al-Yamani, head of the Saudi Electricity Company also warned of the consequences for citizens to ignore the calls to save electricity and water, and has advised that they depend more on solar energy.

Saudi Arabia to Produce 10mbd in July? - At the end of April, I noted this WSJ quote: Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February.  Ok. So here we have the Wall St Journal - premier business newspaper in the world - quoting the Oil Minister of Saudi Arabia, as to the level of Saudi oil production.  With three decimal places, four significant figures, no less.You ought to be able to rely on that, right?  Mr al-Naimi must know how much oil his fully nationalized oil industry produces. Having watched Saudi Arabian oil developments for quite some time, I have become cynical and jaded, and so I noted:At the time, the OPEC Monthly Oil Market Report ("based on secondary sources") showed 8.961mbd in March, versus 8.904 in February.  Today, I checked the IEA, which have now released the detailed tables for March, and they also show flat production of 8.62mbd in March, exactly the same as the 8.62mbd in February. Well, indeed JODI has now produced the numbers for March.  So, the Kingdom of Saudi Arabia reported to the Joint Oil Data Initiative that it produced 9.020mb/d in February, and 8.655mb/d in March, a fall of 365kb/d.  This is in sharp contrast to Mr al-Naimi's statement that the Kingdom's production dropped by 833kb/d between February and March.

Oil Production Problems Are Brewing in Iran - Iran - the second largest OPEC producer after Saudi Arabia - produces 3.7 million barrels of oil a day. After years of insufficient investment in infrastructure, however, that output is threatened. Iran's deputy oil minister, Mohsen Khojasteh-Mehr, says the country has to invest at least $32 billion to maintain its production capacity. If it does not do so, output will fall to 2.7 million barrels per day by 2015. The Iranian national oil company in fact plans to invest much more - its fifth development plan, which stretches until 2015, envisions investing $150 billion to increase oil production to 4.7 million barrels per day. The question is, where is Iran going to get all of this money? The official stance is that the national oil ministry will provide $50 billion and Iranian banks will invest $40 billion. The government expects to raise the other $60 billion through foreign investors. The problem there is that global powers have imposed tight economic and financial sanctions on Iran for its disputed nuclear program. Those sanctions have prompted most major Western companies to leave the country and made it difficult, if not impossible, for Western investors to participate in Iran.

China and the Politics of Venezuelan Oil - According to the U.S. Energy Administration, two months ago the United States total crude oil imports averaged 9,033 thousand barrels per day (tbpd), with the top five exporting countries being Canada (2,666 tbpd), Mexico (1,319 tbpd), Saudi Arabia (1,107 tbpd), Venezuela (930 tbpd) and Nigeria (918 tbpd.) Notice anything odd about this list? First, three of the top five oil exporters to the U.S. are in the Western hemisphere, and two of them are neighbors. Secondly, only two of the five states can comfortably be described as stable.  Canada is a stable, prosperous state, and its relations with Washington are excellent. Which leaves Venezuela - while a stable state, its policies under President Hugo Chávez have rattled Washington to the point that since 2010 neither state has had accredited ambassadors. Washington's myopia leads it to treat Central and Latin America as if the Monroe Doctrine were still valid. And speaking of China, its economic interest in trade devoid of Washington's hectoring political lectures has found a warm reception in Caracas.

Much Ado About OPEC: Russia Is The True Wildcard, And Just Got Even More Powerful - Today the world is transfixed with the dissolution of OPEC courtesy of yet another polarizing response to the most recent set of US MENA policies, with Saudi siding with the US (it has no choice in this: recent violent developments in the MENA region means Saudi Arabia is now even firmer attech to Uncle Sam's armed sleeve), yet the truth is that this is a completely non-event from a pure crude supply/demand perspective. Why? Because the real marginal supplier, in light of OPEC's secular decline in output, has been Russia for a long time. The Globe and Mail:  "Other than a gratuitous gesture to their concerns, any announced OPEC production increase isn’t going to pump more gasoline into U.S. gas tanks or, for that matter, the tanks of motorists anywhere in the OECD... Khalid al Falih, chief executive officer of state-owned Saudi Aramco, recently warned in April that at the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production." . The real story is here: "Russia, the one country actually capable of producing 10 million barrels a day, isn’t even at the table at the OPEC meeting. And it’s been Russia that has been adding the most to world exports over the better part of the last decade as OPEC exports have faltered."

China Surpasses US As Largest Energy Consumer; World Has 46.2 Year Of Proved Oil Reserves; Crude Has Lots Of Upside In Real Terms - In its just released must read Statistical Review of World Energy, BP has many critical observations, the key of which, while not a surprise to most, is that as of 2010, the US is no longer the world's biggest consumer of energy. The new leader, with a 20.3% share of global energy consumption: China. . From the report: "World primary energy consumption – which this year includes for the first time a time series for commercial renewable energy – grew by 5.6% in 2010, the largest increase (in percentage terms) since 1973. Consumption in OECD countries grew by 3.5%, the strongest growth rate since 1984, although the level of OECD consumption remains roughly in line with that seen 10 years ago. Non-OECD consumption grew by 7.5% and was 63% above the 2000 level. Consumption growth accelerated in 2010 for all regions, and growth was above average in all regions. Chinese energy consumption grew by 11.2%, and China surpassed the US as the world’s largest energy consumer. Oil remains the world’s leading fuel, at 33.6% of  global energy consumption, but oil continued to lose market share for the 11th consecutive year." And in terms of production reserves: "World proved oil reserves in 2010 were sufficient to meet 46.2 years of global production, down slightly from the 2009 R/P

Peak Oil Exports, Peak Oil And Implications For Population Change - This is the tenth and final part of this series where I summarize my analysis of regional petroleum production and consumption trends, and, the implications this has for population growth. I predict that population growth will continue or remain stable, with no global die-off for quite some time, although some regions, like Africa , may suffer a die-off soon.  Summary of Parts 1-9 I launched this study in with the goal of performing a world-wide export land model analysis of (instead of just the USA as I did previously), by analyzing the petroleum production trends for seven large regions: North America, Europe, the former Soviet Union, the Middle East, South America, Asia-Pacific, and Africa. As explained in part 1, the production and consumption data for these regions is described or is derivable from the BP Statistical Review back to 1965. In part 2 and part 3, I analyzed the production and consumption trends in these regions and based on this analysis, I predicted the export/import trends for these regions in part 4. My analysis showed that exports for the four exporting regions Middle East, Africa, former Soviet Union and South America , will all drop off to zero between about 2017 and 2030-35, depending on whether these ex-exporters become petroleum importers or not.

Govt must raise fuel prices to meet deficit target (Reuters) - The government needs to raise prices of subsidised fuels to achieve the budgeted fiscal deficit target of 4.6 percent of GDP for the current fiscal year to end-March 2012, the Prime Minister's economic adviser C. Rangarajan said on Thursday. New Delhi has budgeted a fuel subsidy bill of $5.2 billion for 2011/12, assuming oil prices below $100 per barrel. Oil prices are near $118 a barrel after OPEC members on Wednesday failed to agree to raise output. Analysts say an increase in prices of diesel, kerosene and cooking gas will help the government cap its subsidy bill, as every $10 increase in oil prices has the potential of increasing the fiscal deficit by around 0.2 percent of GDP. "The review of administered prices particularly of petroleum products is necessary," Rangarajan said. "It is required primarily from the point of view of maintaining the fiscal deficit." "Prices could be raised to the extent the upstream companies can provide support to (oil marketing) companies," he said.

Looming power crisis could cost electric firms 2 trillion yen - Efforts to overcome Japan's looming power crisis may cost the country's nine major electricity companies as much as 2 trillion yen in total a year, it has been learned. With Tokyo Electric Power Co. (TEPCO)'s Fukushima No. 1 Nuclear Power Plant knocked out by the March 11 earthquake and tsunami, and the temporary shuttering of Chubu Electric Power Co.'s Hamaoka nuclear power plant, electric companies across Japan are facing the need to boost generating capacity as well as switch to non-nuclear power sources, heaping staggering new costs onto their balance sheets. Seven of the nine firms fear they will not have a reasonable level of backup generating capacity for Japan's steamy summer months, while rising oil prices are pushing up the cost of non-nuclear power generation. Meanwhile, the possibility of rising electricity charges coupled with an uncertain power supply presents a serious threat to Japan's economic performance.According to the nine power firms, a combination of regular inspections, the March 11 disaster and other causes have put 37 of Japan's 54 commercial nuclear reactors out of operation. Seventeen are now supplying power to the grid, but five of those must also be shut down for regular inspections by the end of August.

Power Cuts Spread to West Japan as Nuclear Restarts Put on Hold - Power cuts will hit Kansai, Japan’s second-largest industrial region, as early as this month as restarts of nuclear plants may be delayed, impeding the nation’s recovery from a record earthquake and atomic disaster.  A delay in starting reactors shut for regular maintenance could mean Kansai Electric Power Co.’s clients will be asked to cut power use by 10 percent this summer, Fukui Governor Issei Nishikawa said in an interview. The Kansai region, home to Panasonic Corp. (6752) and Nintendo Co., sources about 55 percent of its energy from atomic plants in Fukui, north of Osaka.  Since the March 11 earthquake and tsunami crippled the Fukushima Dai-Ichi nuclear station and caused the biggest radiation fallout in 25 years, approvals to restart reactors have been delayed as prefectures agreed to wait for national guidelines. Mandatory maintenance every 13 months would also mean that just 14 of the nation’s 54 nuclear reactors may be operating in August, according to Bloomberg calculations.  The approval process “will take some time,” Nishikawa said. “When you’re along the highway and there’s rain and fog, it’s best to wait it out in a service area.”

Developing countries lead surge in energy demand - Global energy consumption rose in 2010 at the fastest pace since 1973, as fast-growing developing nations led a strong rebound from recession, according to a survey released Wednesday. The overall 5.6 percent rise in consumption saw gains in all regions and all categories of energy, BP PLC said in its 60th annual Statistical Review of World Energy. Consumption in the world's richest countries grew by 3.5 percent, the most since 1984, bringing it back to the level of a decade ago, BP said. Consumption in developing countries -- particularly resource-hungry ones in Asia and South America -- logged a 7.5 percent increase. 'By year-end, economic activity for the world as a whole exceeded pre-crisis levels driven by the so-called developing world,' said Christof Ruehl, chief economist for BP. Last year's surge was led by China, which increased its energy consumption by 11.2 percent, according to BP. That moved China ahead of the United States as the world's biggest consumer of energy, accounting for 20.3 percent of global demand compared with 19 percent for the U.S., the report said.

Malaysia begins rolling out 5% biodiesel blending mandate - Malaysia has begun rolling out its biodiesel blending mandate, which was launched in the federal administrative capital of Putra Jaya on June 1.  The mandate, requiring diesel to contain 5% biodiesel, was officially declared effective by the Malaysian Minister for Plantation Industries and Primary Commodities Bernard Dompok. The move was welcomed by Australia-based biodiesel company Mission NewEnergy, which has the largest capacity to produce the product in Malaysia.  Mission NewEnergy said the government had fixed the supply price of biodiesel to the oil companies linked to the monthly average refined, bleached and deodorized palm oil price. The price of B5 at the pump is expected to be similar to the price of normal diesel, which is currently MR1.80/liter, the company added.

China's gas consumption could overtake Russia's by 2020: analysts China could overtake Russia as the second largest natural gas market by 2020 on the back of demand fueled by a rise in per capita GDP, analysts from Bernstein Research said in a report issued Wednesday. "In the [country's] latest twelfth five-year plan, which was introduced a couple of months ago, the target is to increase gas consumption from about 6% of the energy mix in China to roughly about 8%," the report said.  This would translate into increasing natural gas demand from about 11 Bcf/day to about 25 Bcf/day, equivalent to the combined demand in the UK and France, the report added. The Bernstein report attributed China's growing consumption of natural gas to four factors -- industrialization, urbanization, the environment and transportation -- which were in turn triggered by the country's growing urbanization.

China shops for Latin American oil, food, minerals — Latin America is blessed with a wealth of natural resources such as oil, copper and soy, and seeks investment and loans to capitalize on them. China needs the commodities to keep its economy growing and has about $3 trillion in reserves to burn. Those interests have come together in a burgeoning and unorthodox partnership, as China lends and invests tens of billions of dollars in countries around Latin America in return for a guaranteed flow of commodities, particularly oil. Recent deals have made China a key financier to the governments of Venezuela and Argentina. At the same time, Chinese companies have secured a decade's worth of oil from Venezuela and Brazil, and steady supplies of wheat, soybeans and natural gas from Argentina. China is breaking new ground by aggressively locking down commodities around Latin America through large loans, investments and other financial arrangements. "I don't know of any other government which has done this sort of securing of rights for commodities and natural resources so systematically around the Third World as China, and they've used a whole host of new financial instruments to do this,"

Chinese Expressways vs US Interstates - The above graph compares the size of the US Interstate highway system (according to FHWA Table HM 220), with the Chinese Expressway system (according to the Chinese National Bureau of Statistics Table 16-4).  Both series currently run through 2009.  The notional extrapolation shown as the thin pink line suggests that the Chinese system will exceed the length of the US system sometime this year.  We won't know for sure until 2013. Of all the different ways that China is overtaking the US, this seems like it might be a particularly psychologically significant one to Americans.

Chinese vs US Vehicle Fleets - Yesterday, I posted a graph of the relative size of the US Interstate and Chinese Expressway systems, and pointed out that they are now of roughly equal size.  Commenter Joel noted, based on personal experience, that the Chinese system is currently comparatively empty.  Statistics on the size of the two vehicle fleets bear this out.  The graph above is based on FHWA data (via the Transportation Energy Data Book), and the Chinese NBS Table 16-25, and includes both trucks and passenger vehicles for both countries. The US fleet is still five times the size of the Chinese fleet.  However, over the last decade, the average growth rate of the Chinese fleet has been about 23%/year.  The pink line above shows an extrapolation at the same rate, which will result in the Chinese fleet reaching the size of the US fleet sometime later this decade.  So those new expressways may not remain empty for too long.

108 Giant Chinese Infrastructure Projects That Are Reshaping The World

China tightening its rare earth element production controls - China is giving its biggest, state-owned rare earths miner and producer a monopoly for the northern part of the country in reforms aimed at bringing the strategically important resource that's crucial to advanced manufacturing under tighter control. The Ministry for Industry and Information Technology said in a statement seen Wednesday on its website that Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co will be the only rare earths producer in the region - China's biggest production base for REEs. It said 35 other companies would be restructured or closed down by the end of June and that Baotou Steel Rare Earth will handle all mining, processing and trading in Inner Mongolia. The company was the only company able to satisfy the capacity and production requirements of various government ministries, the state-run newspaper Global Times cited Liu Jingchun, a researcher at Inner Mongolia's Economic and Information Technology Commission as saying. China has abundant reserves and produces 97% of the global supply of the 17 rare earth minerals, hence the boom in REE exploration and development in the rest of the world.

China’s factories face big, labor-driven changes - As labor costs rise, China’s manufacturers are facing unprecedented challenges. Some are being forced to move to less-expensive regions in the nation’s interior, others are shifting production to Southeast Asia, and some are shutting down.  Manufacturers may have been especially spooked by a report released May 5 by the U.S.-based Boston Consulting Group, which predicted a narrowing wage gap between the United States and China over the next five years. The report said the change will increase the number of “Made in USA” products appearing on U.S. store shelves at the expense of “Made in China” products.  Some wonder whether China’s labor-related challenges may threaten the country’s status as the world’s factory. Increasing numbers of manufacturers may relocate plants from China to India, Vietnam, Myanmar and Cambodia, countries that have been stepping up efforts to attract business and investment. How much should China worry? Actually, the worrying is already over for some enterprises: They’ve closed shop.

The limits of central authority - THE ranks of China sceptics are large and noisy. As China's government tightens policy in an attempt to engineer a soft-landing off of recent, scorching growth, the sceptics have ever more pieces of evidence hinting at big trouble. I have written that many of the most bearish China watchers are underestimating the real strengths in China's economy. But China does have some significant structural problems, and as growth slows, some of those problems may become more evident and more of an economic threat.One of those problems relates to the fact that China has an authoritarian government which often struggles to assert its authority. That is, what the government says goes, but the system is sufficiently decentralised that local and provincial authorities can often undermine or ignore commands from the top. Today's news provides several examples of this difficulty at work. For instance, Beijing wants to tighten credit in order to cool an overheating economy, but it doesn't want to hit private firms, which have been creating millions of new jobs, too hard too fast: The prospect of millions of unpaid factory workers greatly concerns Beijing, which is wary of anything that could spark social unrest. On Monday, more than 200 people besieged a government building, setting fire to cars, in the southern city of Chaozhou, after a worker was stabbed on the orders of his factory boss for asking for unpaid wages, according to Chinese media reports.

The Great Property Bubble of China May Be Popping - After years of housing prices gone wild, China's property bubble is starting to deflate. Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects. Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9% in April from a year earlier. If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China.

Chinese Real Estate Bubble Finally Imploding? - Yves Smith - The warnings of successful shorts like Jim Chanos, old Asia hands like Frank Verneroso, and economists like Victor Shih and Michael Pettis have failed to curb enthusiasm for the belief that the rise of China is inevitable and unstoppable. As someone who was deeply involved with Japan when it was seen as destined to replace the sclerotic US, I’ve learned to regard more or less straight line growth projections with considerable skepticism. China has accomplished the impressive feat of bringing literally hundreds of millions out of poverty in a comparatively short time frame. It has also studied the Japanese playbook and managed to avoid some of its pitfalls, in particular refusing to liberalize its financial markets.  China escaped much of the impact of the global financial crisis by ramping up investment even higher than its pre-crisis level. It now has investment approaching 50% of GDP, an unheard of level on a sustained basis. A big chunk of that is housing related (housing is an estimated 13.5% of GDP), and prices have long been considerably out of line with incomes, a telltale sign of a bubble. In Beijing, admittedly one of the hottest markets, an average priced new apartment was equal to 57 years of average worker savings. Another warning sign is inventory overhang; the level of unsold apartments in secondary cities will amounts to roughly 20 months of sales by year end.

Mounting concerns about China’s slowing growth - There are signs that the Chinese economy is slowing down, a development that has rattled economic commentators and share markets globally in recent weeks.The Organisation for Economic Cooperation and Development last month revised its growth forecast for China’s gross domestic product (GDP) to 9 percent in 2011, down from a 9.7 percent projection made last November. China’s GDP officially expanded by 10.3 percent in 2010. At the same time, the international credit ratings agency Standard & Poor’s warned of possible fallout from the Chinese government’s anti-inflationary measures, especially those tightening the supply of credit. Its report noted: “Inflation and a possible economic slowdown stemming from tightening measures could lead to a spike in credit losses over the next two to three years. Chinese banks’ profitability could slip in the remainder of 2011 and drop further in the next two years.”

What a China Slowdown Means for the World - China’s frothy property market seems finally to be taking a leg down, which could be bad news not just for China, but for some of its biggest trading partners. So who gets hammered if Chinese construction workers stop hammering? And what if the construction slowdown causes a broader economic slump in the world’s second-largest economy?  The first set of economies affected would be big commodity producers that sell to China or rely on China’s demand indirectly. Top of that list would include Australia (coal, iron ore, natural gas), South Africa and Brazil (industrial metals) and Chile (copper). Southeast Asian countries such as Thailand and Vietnam supply rubber, and Indonesia provides a lot of coal. Another impact of a China hard landing would be oversupplies in China of steel, machinery and other basic-material items, says Mr. Anderson. During a brief economic slowdown last decade, China reduced a glut by exporting those items at very low prices, which triggered a global drop in steel prices and political standoffs with the U.S. and Europe, where steel industries have bristled in the past over Chinese steel’s flooding global markets. China’s neighbors South Korea, Taiwan and Japan, which supply heavy machinery for construction and manufacturing, would also get hit.

World Bank forecasts slowdown in global economic growth - The World Bank released its latest Global Economic Prospects report Tuesday, forecasting slower economic growth the rest of this year and next. The World Bank is projecting a deceleration of gross domestic product (GDP) gains in the US, the euro zone, and the developing economies of Asia and Latin America compared to 2010. The only region where it foresees faster growth is Sub-Saharan Africa. While the World Bank attempts to put the best possible spin on its forecast, suggesting that there will not be a return to negative growth (a so-called “double dip” recession) and predicting an eventual acceleration, the figures released by the agency portend a growth of unemployment, poverty and social deprivation across the planet. In the US, Europe and Japan - where the so-called “recovery” has been characterized by anemic growth following the collapse of 2008 and early 2009, sustained high unemployment, and brutal attacks on the living standards of the working class - even slower GDP growth will mean a deepening of the slump

India and Brazil: Inverted Yield Curves - The Chinese 2’s – 5’s yield curve, as measured by swaps, flattened back to 23bpts making bank lending along the curve less profitable and therefore indicating an imminent credit tightening. Clearly with China’s regulated system it is not quite so easy, but Reuters (Richard Bernstein) highlights that now both Brazil’s and India’s sovereign curves actually inverted last week which invariably precedes a recession for the aforementioned reason. As Reuters says an inverted curve is not a signal that inflation is the problem but rather that the government has over-tightened. Bernstein said “The markets are still priced for very rapid unhindered growth, and I just think the probability of that is getting less and less”. Brazil raised base rates for a fourth straight time and indicated more rate hikes on the way. South Korean M2 money supply growth slowed to 3.9% y/y in April which as you can see by chart 2 is approaching all time lows.

Low wages and revolutions - No economy, whether modern or ancient, monarchist or democratic, capitalist or socialist, can rely solely on market forces to meet all the needs of society or to direct the development of the nation toward a desired destiny.  A properly regulated market performs many important economic functions that are necessary for any economy, feudal, capitalist or socialist. However, market forces, when unregulated or undirected by government, as neoliberals advocate for capitalist market economies, naturally allocate resources most efficiently toward efforts and investments with the highest potential return on capital rather than where it is needed most by the nation and its people. The Washington Consensus has been largely discredited since the Asian Financial Crisis of 1997 as an effective strategy for economic development for developing economies.

Trade Deficit decreased to $43.7 billion in April - The Department of Commerce reports: [T]otal April exports of $175.6 billion and imports of $219.2 billion resulted in a goods and services deficit of $43.7 billion, down from $46.8 billion in March, revised. April exports were $2.2 billion more than March exports of $173.4 billion. April imports were $1.0 billion less than March imports of $220.2 billion. The first graph shows the monthly U.S. exports and imports in dollars through April 2011. Exports increased in April and imports declined (seasonally adjusted). Exports are well above the pre-recession peak and up 19% compared to April 2010; imports are up about 16% compared to April 2010.The second graph shows the U.S. trade deficit, with and without petroleum, through April. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The petroleum deficit decreased in April as the quantity imported decreased sharply even as prices increased. Oil averaged $103.18 per barrel in April, up from $77.13 in April 2010.

The value-added content of trade: New insights for the US-China imbalance - Trade in intermediate inputs accounts for roughly two-thirds of international trade. This input trade reflects the increasing fragmentation of production processes across borders. Roughly two-thirds of international trade is in intermediate goods. As a result, measures of trade flows that tally the gross value of goods at each border crossing lead to a distorted view of world trade. Using a value-added measure, this column finds that the controversial US-China imbalance is in fact around 40% smaller than many people think.

Waiting for Chinese rebalancing - THE World Bank's Louis Kuijs describes the evolution of Chinese trade since 2007: In all, China’s exports have continued to strongly outpace world trade. Their global market share rose from 7.4% in 2007 to an estimated 9.6% in 2010, and this trend has continued in the first 4 months of 2011. In addition to the strength of gross exports, the value added content of exports has continued to rise. This is because of deeper supply chains in the processing sector and a rising share of normal (non processing) exports, which have a higher value added content. Thus, in value added terms exports have grown even somewhat faster than headline exports. China's imports have grown faster than China's exports, which have grown faster than global trade. Chinese leaders have been very quick to point to a declining trade surplus as evidence of progress on internal rebalancing. But will this continue? It has been nearly a year since China resumed a slow appreciation of the yuan against the dollar, and in that time China's currency has appreciated by about 5.2%—more than over the course of the first year of the 2005-2008 appreciation. At the same time, however, the trade-weighted dollar has declined about 9%, such that China's currency has actually fallen against those of many of its trade partners.

Why do we fear a rising China? - It's hard to argue that the rise of China, taken on the whole, is anything but good for the global economy. New wealth for China's 1.3 billion people means 1.3 billion more people who can buy stuff from the rest of the world, creating jobs from American research labs to Japanese industrial zones to Brazilian mines. A global economy no longer solely dependent on the U.S. consumer for growth is potentially more stable and prosperous. Yet few people see China that way. Many don't acknowledge China's positive role in the world economy at all. Instead, they focus on the competition China has created, especially for the developed world, or the jobs many believe China has “stolen.” However, even those who realize, or even directly benefit from, China's advance still can't but feel uneasy about that advance. But why is that? Why do we fear a rising China in a way we don't a rising India? Or why is an economically powerful China less acceptable than, for example, a stronger Europe?

China’s Net Purchases of Japan’s Long-Term Debt Rises to Record in April - China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves.China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows. “As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan.” Japanese government debt due in 10 years and longer has handed investors a 2.2 percent gain since the start of April, versus a 1 percent advance for the broad market, based on Bank of America Merrill Lynch data.

IMF urges Japan to triple sales tax to steady finances - (Reuters) - The acting head of the IMF urged Japan to reduce its massive debt load to boost public confidence in the sustainability of the economy, which the global lender said could be achieved by tripling the 5 percent sales tax. Japan's economy should bounce back from a slump after the March earthquake and tsunami, the International Monetary Fund said on Wednesday, while urging lawmakers to adopt another emergency budget and start raising the sales tax from next year as the center piece of long-run fiscal consolidation. "In the long run, it's clear that Japan requires a process of fiscal consolidation that would eventually begin to reduce the burden of public debt relative to GDP," IMF Acting Managing Director John Lipsky told Reuters in an interview. "That's an important element, giving confidence to the Japanese people about the long-term sustainability of the outlook and it's also important to Japan's partners."

Productive Vs. Unproductive: Manufacturing Vs. Financialization - There is so much ideological, quasi-religious fanaticism around "free trade" (there is no such thing as "free trade," there are only various permutations of managed trade) and "industrial policy" (every nation has one, explicit or implicit) that it is difficult to make any sense of the many intertwined issues.  Ideological purity is not a substitute for knowledge, any more than a superficial admiration of machines equals actually knowing how to assemble, maintain and repair them.  As a background context, we might start by noting that Marx outlined how finance capital comes to dominate industrial capital, as industry comes to depend on the credit extended by the banks/finance capital.  The key takeaway: if you don't control the banks, then they will end up dominating industrial capital. In the U.S., we have the worst of both worlds: a dominant financial Elite and various cartels (military-industrial, sickcare, agribusiness, etc.) that have captured what little of the Central State that isn't already beholden to financial capital.

Can We Explain This Without A Global Credit Shock - Here is year-over-year growth in capital formation in about 45 countries. Capital formation is investment and in most cases is dominated by construction. Some of the data is nominal, some of it is real. I actually think the discrepancy helps my point.The data starts in 1960 and comes up to the present day. It really looks like something “different” and global happened in 2008. There is a lot of noise and some individual countries moving way off track. Also new countries are added to the set as time goes on.However, there is a near universal nick in the series in 2009. The only country not fully nicked was Indonesia, the dark green line spanning the gulf. The slowdown in capital formation was only slight there. We could even say that the importance of oil in Indonesia “explains” its outlier status, but I don’t even want to go there.Even with Indonesia its really looks like something unprecedented happened in 2009 and it happened everywhere and it had to do with capital formation.

Reducing relative poverty - Reducing poverty is widely viewed as a key objective of a good society. The U.K.’s Labour government set a formal poverty reduction target in the late 1990s, and the European Union recently did so as well. In the United States, public opinion surveys consistently find a solid majority saying government spends too little money on assistance to the poor. The standard poverty measure in comparisons of rich nations is a “relative” one. The poverty line for each country is set at a percentage, usually 60% or 50%, of that country’s median household income. Which countries have been most successful in reducing relative poverty in recent decades? And how have they done it? Here’s what the picture looks like for twenty affluent nontiny longstanding democracies. The data are from three sources: the Luxembourg Income Study (LIS), considered the most reliable for comparative purposes; the European Union’s Statistics on Income and Living Conditions (EU SILC), which covers recent years for EU countries; and the OECD.

Can small loans reduce poverty? -Small loans, somewhere in the neighborhood of $100 to $500 dollars, are an increasingly popular weapon in the fight to reduce poverty. Called microcredit, institutions dole out these monetary advances to help extremely poor people engage in successful entrepreneurship and improve their quality of life.While proponents extol its virtues, researchers look for evidence; they want to know if it works. Does it really increase financial development and help individuals make solid monetary decisions as its supporters claim? "Proponents argue microcredit mitigates market failures, spurs microenterprise growth and boosts borrowers' well-being," the researchers write in a report, which appears in the June 10 issue of Science. The researchers found "microloans increase ability to cope with risk, strengthen community ties and increase access to informal credit." But they also found the subjective well-being of loan awardees slightly declined. In addition, they found awardees reduced their overall number of business activities and those in the study did not increase investment in their businesses.

India’s Voluntary City - Fascinating piece in the NYTimes about a new city in India, a new city of 1.5 million people and more or less no city government.Gurgaon was widely regarded as an economic wasteland. Gurgaon, had rocky soil, no local government, no railway link and almost no industrial base. Gurgaon’s disadvantages turned out to be advantages, none more important, initially, than the absence of a districtwide government, which meant less red tape capable of choking development. Gurgaon  has no publicly provided “functioning citywide sewer or drainage system; reliable electricity or water; public sidewalks, adequate parking, decent roads or any citywide system of public transportation.” Yet Gurgaon is a magnet for “India’s best-educated, English-speaking young professionals,” it has 26 shopping malls, seven golf courses, apartment towers, a sports stadium, five-star hotels and “a futuristic commercial hub called Cyber City [that] houses many of the world’s most respected corporations.” According to one survey, Gurgaon is India’s best city to work and live. So how does Gurgaon thrive? It thrives because in the absence of government the private sector has stepped in to provide transportation, utilities, security and more:

Are We Prepared for a Multipolar World Economy? -Throughout history, paradigms of economic power have been drawn and redrawn according to the rise and fall of those countries best equipped to drive global growth and provide stimulus to the global economy. Multipolarity, meaning more than two dominant growth poles, has at times been a key feature of the world economy. But at no time in modern history have developing countries been at the forefront of a multipolar economic system. This pattern is set to change. By 2025, six emerging economies – Brazil, China, India, Indonesia, South Korea, and Russia – will collectively account for about one-half of global growth. The international monetary system is likely to cease being dominated by a single currency over the same years. As they pursue growth opportunities abroad and are encouraged by improved polices at home, emerging-market corporations will play an increasingly prominent role in global business and cross-border investment, while large pools of capital within their borders will allow emerging economies to become key players in financial markets. As dynamic emerging economies evolve to take their place at the helm of the world economy, a rethink of the conventional approach to global economic governance is needed.

Do emerging markets deserve developed status? - Can the idea that EMs are “graduating” to DM status have merit – now or over the longer term? And, if so, what are the implications? At Morgan Stanley, we examined the macroeconomic characteristics of the EM-DM groups and their socio-political and institutional fundamentals. We find evidence that today’s EM economies may not have fully closed the gap, but they are in a stronger position than in previous moments of short-lived euphoria. A central macroeconomic indicator, gross domestic product growth and its volatility, speaks to the reversal of fortune. Circa 1970, EMs exhibited high mean and high variance relative to DMs; but after 1980 this risk-reward combination evaporated as EMs suffered a lost decade. But from the 1990s EM growth picked up and volatility moderated; DM growth slowed and, after the crisis, volatility spiked. The EM advantage looks strong again, but other economic indicators buttress

William Dudley on Economic Policy - New York Fed Chief William Dudley gave a speech yesterday called “U.S. Economic Policy in a Global Context”. Dudley’s overall aim was to show that one must regard US policy in an international context and not based on domestic factors alone. I think the whole Speech is worth reading but I wanted to highlight this section below on macro accounting identities. we all have to bear in mind that current circumstances put stress on the support for open global markets in the developed world. On the U.S. side, the recovery remains distinctly subpar in spite of aggressive monetary and fiscal stimulus. On the monetary policy front, short-term rates remain near zero and the Federal Reserve is just about to complete its $600 billion Treasury purchase program. On the fiscal policy front, the U.S. government has engaged in large stimulus program. This supported demand and employment while the private sector shifted its saving balance into surplus in an effort to repair balance sheets.Ultimately, the composition of economic activity in the United States needs to be rebalanced. There are two issues here. First, the consumption share of GDP may still be too high. Second, the need for U.S. fiscal consolidation implies that there will have to be offsetting increases in investment and the U.S. trade balance as the recovery proceeds.

Berlin Conference 2.0: Russia To Bail Out Hyperinflationary Belarus As Colonization Scramble Heats Up - Who said that only Germany is allowed to annex Greece (and soon Ireland and Portugal)? (and if Der Spiegel has anything to say about it, again, Bailout #2 is far from certain... more on that shortly). In a surprising move, Russia has decided to remind everyone just how irrelevant the IMF is now that Russia and China run the "sovereign rescue" show, and that it too can play the imperialist game just as well as the Troica. Following the recent hyperdevaluation of the Belarus Ruble as discussed on Zero Hedge, and the country's collapse into a hyperinflationary hell, Reuters has just reported that Putin, that "White Knight" of former USSR imperialist dominance, has decided to "bailout" Belarus. From Reuters: "Cash-strapped Belarus will receive a three-year $3 billion loan from a Russia-led regional bailout fund as it seeks to stabilize its economy, Prime Minister Vladimir Putin's spokesman Dmitry Peskov said on Saturday. The former Soviet republic on Friday unveiled a series of measures to end the crisis, including a vow to cut its budget deficit in half, after its currency lost 36 percent of its value in May and inflation reached 20.2 percent."

Ukraine on brink of default and impoverishment -This year, Ukraine has to pay around $4.8 billion in external public debt and about $40 billion in the private sector debts. In the event of termination of cooperation between Ukraine and the International Monetary Fund, the country will be threatened by default, said the executive director of the Bleyzer International Fund, Oleg Ustenko, during a press conference at Obozrevatel (Observer). In the background of the adverse external economic situation, a consequence of which may be a reduction in demand for the products of Ukrainian metallurgy, cooperation with the IMF takes a special meaning, the expert believes. Ustenko said that Ukraine has a huge debt (internal and external), which totals about 40% of annual GDP. According to the expert, this year, Ukraine has to pay off around $4.8 billion in the external public debt and about $40 billion – in private debts. He argues "countries that have a total debt from 40% to 60% of GDP in five out of ten cases declare a default".

South Korea warns euro zone troubles could hit here (Reuters) - South Korea on Tuesday called for careful watch over the euro zone's debt problems, saying Asia's fourth largest economy could face foreign-currency liquidity shortage if the financial instability continued for a long time. "If Europe's fiscal problems continued, de-leveraging of (European investments in) emerging-market countries could take place," the Financial Services Commission said in a statement. "Once European banks begin to call in their lending, the foreign-currency liquidity among banks (in South Korea) could worsen," it said, although adding there was no evidence of such instability yet. South Korea has frequently fallen victim of a squeeze in international financial markets as its banking system is heavily exposed to short-term overseas borrowings. It did so most recently in the 2008 financial crisis when its credit default swaps ballooned out.

Lack of Emerging-Market Unity Seen Handing Lagarde IMF Chief Job - In the race to select the next International Monetary Fund managing director, emerging markets have so far failed to coalesce behind a single candidate. This lack of accord, in the face of unified European support for French Finance Minister Christine Lagarde, is expected to hand the position over to a European for the seventh decade in a row, IMF analysts said. Lagarde’s only rival is Agustin Carstens, Mexico’s central bank governor, also the leading emerging-market candidate. (See a chart listing international support for IMF candidates.) Both now are campaigning around the world for the job. Carstens faces a hurdle, however: developing nations such as India, China and Brazil have yet to pool their votes. “The question is whether the rivalries among the emerging markets are greater than their common desire to shift the locus of management to their part of the world,”

Geithner May Support Lagarde for IMF to Keep U.S. Leadership of World Bank - U.S. Treasury Secretary Timothy F. Geithner says France’s Christine Lagarde and Mexico’s Agustin Carstens are both qualified to run the International Monetary Fund. He may have little choice but to support Lagarde.  Under an unwritten agreement that dates back to the end of World War II, the IMF has always been led by a European while the World Bank has been headed by an American. Backing a non- European for the IMF could mean relinquishing U.S. control of the World Bank -- an outcome members of Congress who decide on funding for development banks are not ready to contemplate.  “For the sake of influencing policy and lending, as well as maintaining congressional support, it is very important that the World Bank continue to be led by an American,” Representative Nita Lowey of New York, the top Democrat on the House Appropriations Committee panel that oversees foreign-aid spending, said in an e-mail. Congress has yet to approve the Treasury Department’s $3.4 billion international aid budget for next year, which includes funding for the World Bank.

Why Are the French So Determined To Run The IMF – And What Will It Cost You? - Just a few years ago, eurozone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized.  The organization was regarded by the French authorities as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, to become managing director in fall 2007. Today the French government is working overtime to make sure that a Sarkozy loyalist and the leader of his economic team – Finance Minister Christine Lagarde – becomes the next managing director.  Why do they and other eurozone countries now care so much about who runs the IMF? The euro currency union has a serious problem, to be sure, with the likes of Greece, Ireland, and Portugal, but it is beyond bizarre that these countries now find themselves borrowing from the IMF.  The IMF typically lends hard currency to countries that have “balance of payments” crises – meaning that they have been importing more than they were exporting, and the previous private sector capital inflows (typically loans of some kind) that financed this current account deficit have now dried up.

U.S. Economic Policy in a Global Context - text of speech by NYFed's William Dudley

Global Economy: Obama Presses Europe, Pledges Help for Greek Crisis - CNBC - President Barack Obama on Tuesday urged European countries and bondholders to prevent a 'disastrous' default by Greece and pledged U.S. support to help tackle the country's debt crisis. Obama, whose political prospects have suffered from persistently high unemployment and ballooning U.S. debt, has pinpointed the euro zone crisis as one foreign "headwind" hitting the U.S. economy. After a meeting with German Chancellor Angela Merkel, he stressed the importance of German "leadership" on the issue - a hint that he expects Berlin to help - while expressing sympathy for the political difficulties European Union countries face in helping a struggling member state. "I'm confident that Germany's leadership, along with other key actors in Europe, will help us arrive at a path for Greece to return to growth, for this debt to become more manageable," Obama said.

Eurozone On The Brink, As Usual -Simon Johnson- Jean-Claude Trichet, president of the European Central Bank until October, last week floated two proposals aimed at dealing with Greece and related eurozone public-debt problems. The first idea would allow European Union authorities to override the policy decisions of member governments that can’t come up with sustainable budgets, implying the creation of an external control board for the likes of Greece. This approach has been used in the past for very weak countries (as well as for the cities of New York and Washington in recent decades). In Europe today, it would have no political legitimacy and would be completely unworkable — imagine the street protests it would spark. The second idea would, down the road, create a finance ministry for the European Union. It would issue debt and have responsibility for a unified financial sector. This is just as brilliant as Alexander Hamilton’s fiscal and financial integration proposals for the young American Republic and, if implemented properly, would fix the deep problems caused by the original design of the eurozone.

The Penalty for Default, the Payoff to Austerity- Krugman - Ahem:The credit default swap (CDS) for the Icelandic state has now dropped to 200 points and has not been lower since many months before the banking collapse in October 2008. The CDS has been in constant decline since January and indicates growing faith in Iceland’s economy. Meanwhile, the CDS spread for Ireland is 683 basis points. Why, it’s almost as if defaulting on debts run up by runaway bankers and letting your currency depreciate works better — even from the point of view of investors — than socializing private-sector losses and grimly sticking with a fixed exchange rate.

Greece Creditors Must Give €30 billion to Bailout —Euro-zone governments have reached a tentative deal on a new financing package for Greece that will seek roughly €30 billion in contributions from the country's private-sector creditors, senior euro-zone officials said Saturday. The 17 euro-zone governments will ask Greece's creditors to exchange their soon-to-mature debt for debt with a longer maturity, a process that could begin as early as July after finance ministers approve the new Greek aid package at their meeting June 20, officials said.The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone's sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece's financing gap over the next three years, they said."Private investors would have a strong incentive to participate, because if they don't, there will be a default," said one official.

Greek Debt Plan Gains Support —Support is building among senior European finance officials for a plan to press Greece's private-sector creditors into accepting a debt exchange that would result in delayed repayment to them, people familiar with the matter say.But that aggressive course of action—which would probably trigger the euro zone's first-ever debt default—faces opposition from the European Central Bank, which would have to be a key player in the plan, and it will face tough battles at a series of meetings of politicians this month. Under the proposed plan, the 17 euro-zone governments would ask Greece's creditors to exchange their soon-to-mature debt for debt with a longer maturity, a process that could begin as early as July after finance ministers approve the new Greek aid package at their meeting June 20 ... A German finance ministry paper ... proposes a seven-year extension on maturing debt.

New Greek aid could exceed 100 billion euros: media (Reuters) - A new aid package for Greece could cost more than 100 billion euros ($144 billion), German news magazine Der Spiegel said in its latest issue to appear on Monday. The magazine said experts from the German Finance Ministry and the "troika" of the EU, IMF and European Central Bank consider it possible that Greece would need roughly that amount if it still needs to rely on foreign aid in 2013 and 2014. The German finance ministry declined to comment on the report. Greece's original EU/IMF bailout agreed a year ago was for 110 billion euros, with Germany's portion amounting to 24.4 billion euros. Greece is expected to need a second aid package of some 65 billion euros but the cost of a second package could rise to more than 100 billion euros, Der Spiegel said, because Greek government bonds will need follow-up financing in 2014. The report also said that German finance minister Wolfgang Schaeuble banned his deputy Joerg Asmussen from agreeing to any second rescue package that does not include the participation of private creditors

ECB's Bini Smaghi lays out case against Greek default - A senior European Central Bank director laid out on Monday the ECB's case against forcing the private sector to take part in a Greek bailout, warning that it could cost taxpayers dearly. Any restructuring of Greece's debt should only be a last resort, ECB executive board member Lorenzo Bini Smaghi stressed in a speech in Berlin, because it might have serious consequences for the economies of creditor countries. Changing the terms of how much Greece pays back and automatically involving the private sector "does not help save taxpayer's money; indeed, it may cost them more money," he argued, because the fallout from imprudent decisions could affect banks in many eurozone countries.

ECB official: Property means Greece solvent — Financially troubled Greece can pay its debts if it is willing to sell off billions in state property and carry through on plans for budget cuts, a top European Central Bank official said Monday. Lorenzo Bini Smaghi said Greece, with a debt of euro330 billion ($485 billion) and "marketable assets" of euro300 billion ($435 billion), is "solvent to the extent that it is willing to sell off some of those assets." In a speech in Berlin, Bini Smaghi said Greece needs to find the will to do this — as well as the determination to close its budget deficit, which requires backing off from spending decisions of the past decade. He noted that just holding public employee salaries to the rate of inflation over that period would have meant 30 percent less debt measured against gross domestic output. "The key question is whether the Greek government and the Greek people are willing to implement these measures,"

The Greek Debt Problem "In Simple Mathematics" - Stavros Lygeros in the Greek newspaper Kathimerini lays out the stark, cold math facing Greece: Even on the off chance that Greece’s primary debt is completely wiped out, in 2012 it will have to pay some 52 billion euros (35 billion in mature bonds and 17 billion in interest), while it is expected to receive 12 billion euros from the troika. In 2013, Greece is not expecting to receive anything from the troika, but it will still need to pay approximately 44 billion euros (27 billion in mature bonds and 17 billion in interest). Basically, it needs to have more than 84 billion euros for the 2012-13 period alone, so even if it receives a loan of 60-65 billion euros, it will still have a shortfall of 20-25 billion. Ostensibly, this amount is supposed to be covered by privatizations and the sell-off of state assets.Life, however, does not end in 2013. Where will Greece find the tens of billions of euros it need annually to service its massive debt? And what will happen after 2014, when the amount to cover interest rises?In other words, good luck.

Germany's Hostile Takeover Of Greece Has Officially Begun - Germany's Deutsche Telekom has just acquired a 10% position in Greece's Hellenic Telecom (OTE) in a deal valued at $585.7 million, according to Reuters. The Greek government will be left with 10% stake in the firm, but Deutsche Telekom will own 40%.  The German government owns over 30% of Deutsche Telekom according to 2008 data, so forcing Greece to sell its position in its own national firm seems a little hypocritical. It may not seem like much, but it's just the beginning in a process of asset sales by the Greek state. The next potential sales include Public Power Corp., which Greece owns 51% of, gambling firm OPAP SA, and natural gas firm DEPA SA. Whether or not it's German firms acting as the buyer in this market is unknown. But Germany is also working to have Greece sacrifice its fiscal sovereignty in return for more bailout aid, something Greek protesters are not pleased about.

Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy? - Yves here. This is a long and important post. Hudson reports that he has gotten a great deal of correspondence from Greece saying that articles like this arguing against the pending stripping of Greece by banks are being translated and circulated widely to provide moral support. If you cannot read this piece in full, please be sure to read the discussion at the end of how Iceland stared down its foreign creditors.

Kevin O’Rourke on the Irish/Eurozone Mess - This INET interview with Kevin O’Rourke, a professor of economics at Trinity College Dublin, focuses on how Ireland got into its mess as well as the domestic and international political dynamics as to how it is being resolved. There is an interesting tension between the cool talking head style and some of the coded descriptions of the stresses and the stark choices at hand.

Bank of Ireland bondholders team up to oppose plan - Bank of Ireland bondholders with over $1 billion of subordinated debt joined forces on Wednesday to oppose a proposed debt for equity conversion that would inflict large losses on them. The Irish government has told bondholders they must help the crippled banking sector get back on its feet and the Bank of Ireland has detailed how its debt and equity holders would help raise 4.2 billion euros in new capital.Junior bondholders at the bank were told on Wednesday they would be offered stock at between 11.30 and 11.76 euro cents if they convert debt into equity in a heavily discounted swap. However, a group of investors has appointed U.S.-based White & Case as legal counsel, claiming the proposals were contrary to opinions by the European Commission and were a clear abuse of a strict new Irish banking law.

Portugal votes for new govt, fears more austerity -  Portuguese voters were choosing a new government Sunday, one that will be forced to impose grinding austerity measures as part of a euro78 billion ($114 billion) bailout deal expected to pitch the country into a two-year recession. Polls indicate the opposition Social Democratic Party will unseat the ruling Socialists, but whichever party wins will face the enormous task of trying to nurse the debt-wracked country back to financial health. The winner in Portugal will inherit a record jobless rate of 12.6 percent and an expected economic contraction of 4 percent over the next two years in what is already one of Europe's poorest countries. Necessary welfare and pay cuts, tax hikes and promises of strikes from trade unions will also present tough challenges.

Today Portugal, tomorrow Spain, then Italy: Incumbent government fall like dominoes - The next government has fallen. Portugal’s centre right Social Democrats (PSD) won the elections with 38.6% of the vote or 105 seats, 27 seats more than in the last elections. The Socialists got 28% of the votes or 73 seats, a loss of 24 seats. See the latest results on Jornal de Negocios. Pedro Passos Coelho said he would immediately seek to form a coalition government with the smaller conservative Popular party (CDS-PP).Together they would have 129 seats in the 230-seat parliament. José Socrates conceded defeat and said he would resign as Socialist leader after the party’s worst election result for more than 20 years, the  FT reports. Passos Coelho said his government is fully committed to the terms of the bailout from the European Union and IMF. Jornal de Negocios quotes him saying that he would seek to “go beyond” the agreement with the EU-IMF programme to restore international confidence in Portugal.  Participation in the elections was low with 41.1% abstention, the highest abstention rate ever in a general election. The number of voters for the two biggest parties, PS and PSD, was less than the number of abstainers, notes Jornal de Negocios.

Ingredients of a European political union -  The existing political union may be too strong to blow up, but it is also too weak to function properly. For sustainability the EU will need to take further steps towards political integration. The problem will become acute when Greece actually defaults.So what kind of political union will this be?  Sustainability requires three fundamental institutional changes. The first, and probably most important, would be the creation of the office of a eurozone treasury secretary – someone in charge, with the power to override national policies if those conflict with the community interest. The treasury secretary would have his or her own administration and would represent the eurozone in international institutions.  The second change is a minimally sufficient fiscal union. We are talking about something really small here. This would not necessarily involve an increase in the EU’s budget but centralising a small number of policy areas critical for the functioning of a monetary union. Third, the counterpart of a mini-fiscal union would be a eurozone bond. For countries to guarantee each other’s debt is politically and economically irresponsible. If Greece, Portugal and Ireland were to default, Spain might come under pressure too

Mansori: Betting On the PIGs - Kash Mansori at the Street Light looks at some interesting data released by the BIS today on who owns the debt, and who sold the default insurance, for Portugal, Ireland and Greece: Betting On the PIGs. It ends up most of the debt is owned by European creditors, but US institutions are more exposed to a default. Kash writes: If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts. US and European financial institutions are likely to have very different incentives as negotiations regarding debt restructuring and reprofiling proceed. US banks and insurance companies are surely delighted with the "soft restructuring" that is currently being discussed. In essence, European firms have been betting that a PIG default will happen sooner rather than later, while US firms have been betting that default would happen later or not at all.

EU must make tough decisions on Greek rescue: IMF (Reuters) - Europe must take tough decisions before the IMF can release its next block of aid for Greece, the Fund warned on Tuesday, while ratings agencies and German banks cast doubt on whether private investors can be expected to help. Plans for a second international bailout of Greece are taking shape, with a proposal for a three-year package worth 80 to 100 billion euros set to be ready in the next two weeks, euro zone official sources said. In Athens, a senior Greek official said the government expected parliament to vote by the end of June on its medium-term austerity plan, a condition for the new package as Athens struggles to avoid defaulting on its debt. But the European Union needed to do more work before the Fund's board could release more loans. A team from the IMF, EU and European Central Bank reached an agreement last Friday, under which Athens would impose more austerity and faster privatization to cut its budget deficit.

Rating agencies say they do not accept debt rollover proposals - The EU’s attempts to fudge itself towards a crisis resolution – with a “voluntary” debt rollover – met a big setback yesterday. After Moody’s recent downgrade, Fitch Ratings yesterday provided the following clarification of how it would assess any debt exchange offer for Greek debt. “A debt exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress... would be judged by Fitch to constitute a 'coercive' or more commonly known as a 'distressed debt exchange' “ And Fitch made it clear that such an exchange would invariably triggered a downgrade to junk.  Moody’s already downgraded Greece to below-investment grade status, and Standard & Poor’s recently said that its benchmark for assessing a debt exchange would be whether investors were truly acting voluntarily. "In situations where investors consider a default to be possible and where the rating has fallen, it becomes more difficult to conclude that investors are exchanging securities voluntarily." S&P clarified further that a voluntary exchange whose rejections would involve negative implications for investors, would be considered a default.  In other words, every single option discussed by the EFC last week would be considered a default, including the various compromises that tried to bridge the gap between the positions of Germany and the ECB.

European Banks’ Capital Shortfall Means Greece Debt Default Not an Option - A failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.

Exposed ECB at risk of 'bankruptcy' - The European Central Bank has a perilously low capital position, meaning there is a "real risk" it will have to be bailed out by EU taxpayers, according to a leading think tank.  Research from Open Europe finds that the ECB currently holds around €81.2bn ($119bn) in capital - with the €1.9tn ($2.78tn) it has in assets, making it leveraged about 23 times over. A likely haircut on half of Greece's debt - a figure the think tank sees as necessary to bring the country's debt to sustainable levels - would see the ECB lose between €44.5bn ($65.3bn) and €65.8bn ($96.5bn). This would stem from the €190bn ($278.7bn) in Greek assets it purchased in an attempt to prop up the country's insolvent banks and government. This approach is also criticised for exacerbating the long-term problems facing the continent, the report says.  A restructuring would effectively make the central bank insolvent, since it would be even more leveraged than disastrous investment firm Lehman Brothers at its time of failure.

A First In History: The Coming Simultaneous European Banking Collapse - Watching international financial policy persisting on a concept to fight debt with more debt in an environment where official GDP growth rates only remain positive because of ridiculously low deflators, while interest rates apart from those central bank help for banks via laughingly low interest rates begin to surge everywhere else, this observer begins to wonder if one can expect anything else than a fast-rolling, simultaneous European banking collapse. Engulfed in more exponentially rising debt on public and private levels than ever before there simply cannot be another end of the longest growth cycle in history than a simultaneous collapse of international banking when lending freezes up due to fears about the real creditworthiness of the respective counter party. Globalization will have made it possible. The rise of supra-regional financial institutions that have evolved from two decades of radical deregulation of financial markets and are now too big to fail overshadows all major industrial nations as it has given birth to unprecedented bulks risks never seen before. The situation gets aggravated by the fact that banks have never held more derivatives than nowadays. At a notional volume of $580 trillion as of 2010 derivatives now exceed global GDP of roughly $50 trillion by a factor of 12. It strongly appears this world is overleveraged as derivatives volumes have remained at this level for the last 3 years. Minimum reserve requirements of a paltry 2% in the Eurozone mean that European banks are geared 1:50 (and possibly higher through the use of off balance sheet vehicles). An adverse 2% move of markets can wipe out any bank overnight. Compare this with China where minimum reserve requirements have been raised to a staggering 21% in order to curb speculative lending.

Euro area debt: Neither a borrower nor a lender be - Analysts are poring over new statistics on debt exposure from the Bank for International Settlements released today. As has become customary with each quarterly release of this data, the report’s (virtual) pages are flipped directly to the section detailing the size of banks’ portfolio of bonds issued by governments on the euro area’s troubled periphery. French and German banks are the most exposed, by far, to troubled government debt. Although banks have been reducing their exposure—the value of debt from Greece, Ireland, Portugal and Spain held by foreign banks fell by 35% last year—significant holdings remain. German banks, for example, were sitting on more than 40% of the US$54bn in foreign-held Greek government debt at the end of 2010. The inevitable restructuring of Greek debt will be painful for lenders, although the severity will vary according to the method employed. In the meantime, attempts to cajole banks into a voluntary refinancing of Greece’s daunting debt pile (along the lines of the “Vienna Initiative” in central and eastern Europe) will continue, despite a glaring lack of incentives for lenders to take part.

Greece to start austerity drive as nation seethes (Reuters) - Greek Prime Minister George Papandreou starts a campaign on Monday to secure a new international bailout by imposing years of austerity on a nation already seething over corruption and economic mismanagement. Unease is growing within Papandreou's ranks about the consequences of waves of budget cuts demanded under successive deals with the European Union and IMF -- and this could turn into alarm after at least 80,000 Greeks crammed a central Athens square to vent their anger over the nation's dire state. As the government struggles to prevent Greece from defaulting on its debt, the Socialist cabinet will discuss informally on Monday the medium-term economic plan which will impose 6.4 billion euros ($9.37 billion) of extra austerity this year alone.This is just the first stage of a drive to turn the plan, agreed on Friday with the EU and IMF as the price of a new financial rescue, into law. Greece's international lenders have made clear that the new bailout package, which would replace a 110 billion euro deal agreed only a year ago, depends on Athens keeping to its promises for further austerity and accelerated privatizations.

Greek Tragedy: Austerity And Default - Large public sector cuts mean job losses and wage cuts at the time when the private sector isn’t having any appetite for absorbing the losses.  As public cuts bite, private sector wouldn’t be doing any good.  As a note from Bank of Merica Merill Lynch pointed out some days ago, retail sales in Greece fell by 13.2% yoy in March, and lending to domestic private sector contracted by 0.5% yoy in April after a 0.4% yoy decline in March.  Even though inflation in Greece is still among the highest of the Eurozone, it has be steadily declining, and it will probably decline more in the months to go. Thus there is very little wonder that Greeks are coming out and protest on the street.  Reuters reported that the Greek Parliament will vote on the latest austerity measure in order to secure a new round of bailout. If new loan isn’t agreed by June 23-24, the alternative will probably be a disorderly Greek default in July. But that’s not easy of course.  As the people of Greece protest against austerity, even the government’s backbenchers stop supporting its own government

Schäuble says choice for Greece is between rescheduling or total default - Wolfgang Schäuble is raising the stakes in the debate about a private sector participation. In a letter to the EU finance ministers, the European Commission and the IMF, Schäuble asks for a rescheduling of the Greek debt, Süddeutsche Zeitung reports. The German finance minister warns that Greece needs a second rescue package in order to avoid “first disorderly bankruptcy” in a euro country. But Schäuble conditions this package to “a fair burden sharing between tax payers and private investors”. In order to secure a “substantial participation” of private creditors Schäuble proposes a “bond swap” with an exchange of old Greek government bonds into new ones. According to the paper he wants that old bonds be exchanged into new ones with an extended maturity of another seven years. Creditors who accept this would be assured that they will recover the full amount of money invested while those who refuse would not be paid out in case of a Greek bankruptcy. Schäuble is unclear if he wants to force creditors to accept this. The Berlin government points out. However. that many banks are in a hurry to sell their Greek bonds. “If we wait too long, Greece will have no private creditors anymore”, government sources told Süddeutsche.

Germany's Schaeuble Warns Of Greek Insolvency: Media (Reuters) - Greece needs substantial fresh aid from the euro zone to avoid the currency bloc's first state insolvency and bondholders might have to wait seven years for repayment as part of a rescue, German Finance Minister Wolfgang Schaeuble was quoted as saying on Tuesday. "We are facing the real risk of the first uncoordinated state insolvency within the euro zone," Die Welt newspaper quoted Schaeuble as saying. The paper said Schaeuble argued for a new bailout of Greece with a "substantial" expansion of European aid and with private creditor involvement. Separately, Sueddeutsche Zeitung newspaper said Schaeuble was proposing that private creditors, such as banks, should wait seven years for repayment of their debt. The newspapers said they were quoting from a letter Schaeuble wrote to, among others, European Central Bank President Jean-Claude Trichet.

Euro zone eyes private sector role in Greek debt deal - The euro zone edged closer on Wednesday to a compromise on a second Greek bailout package under which private creditors would be asked to swap their sovereign debt holdings for bonds with longer maturities. Several euro zone bankers, including the head of French heavyweight Credit Agricole, said they would support a maturity extension, a move that would not reduce Greece's massive debt burden but could buy it more time to meet its fiscal targets and avoid a harsher restructuring. The European Central Bank, which has argued loudly against any form of debt restructuring, may also be warming to the idea of private sector involvement if a cut in the principal of Greece's debt -- a "haircut" -- can be avoided. Greece sealed a 110 billion euro (98 billion pound) aid-for-austerity deal a year ago but has failed to restore confidence in its finances and a new package is in the works which could total 80-100 billion euros to cover Athens' funding needs through 2014. Whether and how to involve the banks, hedge funds and other private holders of Greek debt in the new package has been hotly debated for weeks, with some officials worrying such a step could unleash contagion that envelops new countries like Spain, with disastrous consequences for the currency bloc.

German Government Advisor: Debt Swap Might Not Be Enough For Greece -Report - A proposal to swap existing Greek sovereign debt for new bonds with longer maturities may not be enough to address the country's current debt woes, Lars Feld, an economics advisor to the German government, told SWR2 German television Thursday. Feld, who is one of the so-called "five wise men" of prominent German government economic advisors, further warned that a Greek debt restructuring would cost Germany "several billion" euros in the coming years in loan guarantees. However, swapping existing Greek debt for bonds with longer maturities may prevent Greece's debt from being downgraded by ratings agencies, Feld said in the interview.

Juncker: Can't Put Price on Greek Aid - Eurogroup President Jean-Claude Juncker said Thursday the amount of a new aid plan for Greece hasn't yet been established, a day after German Finance Minister Wolfgang Schäuble put the cost of saving the debt-laden euro member at €90 billion ($131.14 billion).  "It's too early a moment to announce definite figures," Mr. Juncker told a press conference in Luxembourg.  Mr. Schäuble, in a letter to euro-zone finance ministers, the International Monetary Fund, and the European Commission on Tuesday called for a substantial new aid program for Greece. Such a program would involve the participation of private holders of Greek bonds via a bond swap that would lead to an extension of outstanding Greek sovereign bonds by seven years, Schaeuble suggested.

Economic and political situation in Greece deteriorates – and it looks that Wolfgang Schäuble’s proposal will not be accepted - While the EU was rejecting Wolfgang Schäuble’s latest proposal (more on the reactions below), the situation in Greece seemed to be deteriorating dramatically. There is on the Greek prime ministers to drop his finance minister in a forthcoming cabinet reshuffle, amid signs of political unrest within the governing Pasok party. And the economic news is awful.  The latest data from the statistical office ELSTAT showed that unemployment hit a new record of 16.2% in March, up 40.2% yoy, with a youth unemployment rate hitting 42.5%, Reuters reports. Industrial output numbers showed the manufacturing sector shrinking by 11.3%, and employment fell by 5.4%.  The troika report, which was leaked to Reuters yesterday, said Greece risked missing its deficit targets without further consolidation measures. The report acknowledged that the recession appeared to be longer and deeper than initially expected. The report’s forecast is for a contraction of 3.8% this year and an expansion of 0.6% next year. (This is the J-curve thinking in every periphery forecast these days. They always assume it is going to be much better next year.) A privatisation agency with an independent board, to which the European Commission and euro zone member countries could nominate members, would be set up shortly. This article in Reuters lists the highlights of the report.

Cost to insure Greek debt soars on Schauble letter -- The cost to insure Greek bonds soared on Wednesday after a letter from German finance minister Wolfgang Schauble to European Central Bank President Jean-Claude Trichet was leaked, saying he'd like to see private bondholders make a larger contribution to resolving Greece's debt burden. The spread on five-year Greek credit default swaps jumped 104 basis points to around 1,500 points -- near a record, according to data provider Markit. That means it would cost $1.5 million a year to insure $10 million of Greek sovereign debt against default for five years.

Greece, Portugal, Ireland Credit-Default Swaps Surge to Records -The cost of insuring against default on government debt sold by Greece, Portugal and Ireland surged to records, according to traders of credit-default swaps. Contracts on Greece soared 30 basis points to 1,522, Portugal increased 16 to 722 and Ireland rose 10 to 690 as of 2:30 p.m. in London, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 4 basis points to 203, the highest since Jan. 12. Swaps on Spain increased 6.5 basis points to 261.5, Italy climbed 6 basis points to 165 and Belgium was 4 basis points higher at 144, according to CMA. An increase signals a deterioration in investor perceptions of credit quality. The cost of insuring corporate debt also rose. The Markit iTraxx Crossover Index of swaps on 40 companies with mostly high-yield credit ratings increased 2 basis points to 395, the highest since March 17, while the Markit iTraxx Europe Index of 125 investment-grade companies rose 1 basis point to a five- month high of 107.25, according to JPMorgan Chase & Co.

Greek unemployment rate hits 16.2 percent as government seeks deal on new austerity - Unemployment in debt-ridden Greece hit new record highs in March as government officials wrangled over tough new austerity measures required to tap the country's rescue funds. The jobless rate increased to 16.2 percent in March from 15.9 percent in February, the country's statistics agency said Wednesday. The total number of Greeks out of work was 811,340, up 40 percent from a year earlier, when the unemployment rate was 11.6 percent. March's is the highest level of joblessness recorded since the statistics agency began issuing figures in 2004. The government had projected an overall unemployment rate of 14.5 percent for this year in its 2011 budget. The situation is expected to get worse as the government imposes yet more austerity measures to meet targets set out in the agreement for Greece's euro110 billion ($161 billion) package of rescue loans

A European Generation Takes to the Streets -Any real revolution in Paris has to include the storming of the Bastille. Which explains why 200 young demonstrators are sitting in the shade of the trees at Place de la Bastille on this Thursday evening, wondering how to go about staging such a revolution.Their numbers had already swelled to more than 2,000 by the Sunday before, when they had occupied the entrance to the Bastille Opera and half the square. But then the police arrived with teargas and, since then, have kept strict watch over this symbolic site.  The protestors are trying to create a movement to rival the protests in Madrid and Lisbon. They want tens of thousands of young people to march in the streets of Paris, calling for "démocratie réelle," or real democracy. They believe that there is also potential for such large-scale protest in France, with youth unemployment at more than 20 percent, precarious working conditions and what feels like a constant state of crisis.

Buiter Expects `Serious, Hard Restructuring’ for Greece: Video Bloomberg

The Latest Details On Greece's New €120 Billion Bailout - New details on what Greece's second bailout are emerging and they look like this, according to Reuters (via Zero Hedge):

• €30 billion from the sale of government assets
• €30 billion from the private sector (bond holders)
• €60 billion from the EU and IMF

This second bailout is key to Greece receiving the next tranche of its current EU-IMF bailout, as it assures that the country will be able to pay its bills this year. It has been a wild morning for the euro, but this news appears to have given it a slight bump.

Greek Endgame? - The key players in this drama are making it embarrassingly easy to imagine exactly how a Greek default could happen this summer.  The immediate concern has been whether and under what conditions the "Troika" -- the IMF, the ECB, and the EU Commission -- would agree to give the Greek government another dollop of money (€12 bn) in July. Last Friday, the Troika seemed to indicate that they had agreed in principle to go ahead and disburse the July tranche of funds. But nothing has been finalized yet (and probably won't be until EU finance ministers meet on June 20), and public disagreements within the Troika are growing louder every day.Are the public positions of the members of the Troika more consistent with:
(a) Three parties trying to come to an agreement on how best to prevent Greece from defaulting.
(b) Three parties each looking out for their own interests, arguing over who is going to bear the costs of the Greek default, and using whatever leverage they have to improve their own outcome in the event of default.

Finance ministers may not be ready to make a deal on June 20 - Frankfurter Allgemeine Zeitung reports – deep down in a story on the ECB – that the positions of the various member states on the next aid package for Greece are so different that an agreement at the Ecofin on June 20 is unlikely. That means that the essential elements will have to be negotiated either in the European Council, or be pushed further down the road.  Jean-Claude Trichet yesterday threw down the gauntlet at Wolfgang Schäuble by specifically ruling out that the ECB would not participate in any maturity extension of Greek debt. Trichet said that any rescheduling would risk a default rating by the rating agencies – a sentiment that was confirmed by Fitch Rating yesterday according which any “voluntary” rescheduling at a time like this is almost certainly involuntary, and would be met with a downgrade, according to Reuters. Fitch also warned that it would revisit the ratings for other peripheral countries, as a default would imply a change in EU policy.  When asked about whether the ECB would not accept downgrade Greek collateral, Trichet said that the ECB would stick to its rules (which of course it can change at any time, so the answer is somewhat ambiguous). He said the EU should explore alternative ways of participating the private sector – through privatisations and direct foreign investment.

Greek, Portuguese, Spanish Bonds Decline Amid Bailout Concern -- Portugal’s 10-year bond yield rose to a record, leading a surge in the borrowing costs of Europe’s most indebted nations, as policy makers clashed over a solution to the region’s funding crisis. German debt rose as consumer-price inflation eased in May and equities declined, boosting demand for safety. Greek, Irish and Spanish benchmark bonds slumped after German Finance Minister Wolfgang Schaeuble stepped up his calls for bondholders to assume a “fair” share of further Greek aid, pitting him against the European Central Bank, whose President Jean-Claude Trichet yesterday rejected any direct participation in a second bailout of the debt-stricken nation. “The ECB and the German government are on a collision course and that was reinforced by Trichet yesterday,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There’s no common denominator in place.”

Greece, Portugal, Ireland Credit-Default Swaps Rise to Records-- 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. Contracts on Greece soared 45.5 basis points to 1,567.5, Portugal increased 11 to 730 and Ireland jumped 20 to 710 as of 4 p.m. in London, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 10 basis points to 211.5, the highest since Jan. 11. Swaps on Spain rose 14 basis points to 275, Italy increased 9 basis points to 174 and Belgium was up 8 at 153 basis points, according to CMA. France rose 5 basis points to 275. An increase signals deterioration in investor perceptions of credit quality. The cost of insuring corporate debt also increased.

Bond Deal May Augur More European Travails—A crack opened in Europe's credit markets last week that could portend deeper trouble for the region's banks and governments. Investors balked at buying a €1 billion ($1.46 billion) bond offering by Banco Santander SA that was backed by debt of Spanish local governments, according to people familiar with the sale. That left a group of big European banks that managed the deal holding roughly €500 million of the debt. The lack of demand, unforeseen by Santander or the managers, underscores the jittery nature of the region's credit markets. That some of the biggest banks in Europe, including Commerzbank AG, HSBC Holdings PLC and Société Général SA, were left holding the bag also demonstrates how easily sovereign risk can spread around the euro zone.

Record IMF Greek Lending May Intensify Favoritism Concerns - International Monetary Fund lending to Greece has already blown away any previous borrowing records based on country contributions to the world’s last-chance bank. That fact, along with the increasing likelihood the IMF will lend the failed economy even more cash and hasn’t required talks with private creditors, is underscoring concerns by emerging markets that the fund favors rich countries and may further undermine the bank’s perceived legitimacy. The IMF says the extraordinary lending is not just to save Greece, but the world economy. . IMF officials say the risk of European contagion is ring-fenced. But economists say the sheer size of the loan compared to Greece’s contribution to the fund, called its quota, indicates how scared the IMF is about Greece’s failure affecting the euro zone. Greece’s $40 billion loan from the IMF represents more than 30 times what it contributes to the IMF. The next biggest loan, also compared to its quota, is Ireland, with more than 23 times its fund contributions. Mexico’s flexible credit line of around $75 billion was for ten times its contribution, but it never actually tapped the line, just used its availability to reassure markets.

Germany MPs discuss resolution on Greece aid - German members of parliament are discussing on Thursday a joint motion for a resolution demanding the fair participation of private creditors in future aid to Greece, a draft of the paper obtained by Reuters said. The deputies from all three parties in Chancellor Angela Merkel's center-right coalition are demanding to have a say in agreements for new aid packages, the resolution said. "The German parliament urges the government to only agree to new financial aid for Greece if an appropriate participation of private creditors has been introduced," the document said."That way Greece's ability to carry its debt and so that a fair distribution between public and private sides can be reached."The document is not binding for the German government, but can be seen as a guideline for its leaders when they enter negotiations with other EU leaders.

ECB's Trichet flags July rate rise, hardline on Greece - "On balance risks to the outlook for price stability are on the upside, accordingly strong vigilance is warranted. On the basis of our assessment we will act in a firm and timely manner," Trichet told a news conference after the ECB kept its main refinancing rate at 1.25 percent. Trichet said evidence since the ECB's May meeting confirmed "continued upward pressure on overall inflation mainly owing to commodity and energy prices." But wary of choking off support too fast, the ECB would continue to provide banks with unlimited liquidity to support the recovery, he said. Trichet said evidence since the ECB's May meeting confirmed "continued upward pressure on overall inflation mainly owing to commodity and energy prices." Beyond July, Trichet left the ECB's options open, saying: "We are not signaling any particular pace for the next decisions on our interest rates."

Fiddling While the Eurozone Burns - So the European Central Bank (ECB) has decided to follow through on its plans to tighten monetary policy this year. The ECB will begin by raising its benchmark interest rate next month.  This is unbelievable. The Eurozone is under severe pressure that could ultimately lead to its breakup and yet the primary concern at the ECB is tightening monetary policy according to schedule.  If followed through, the consequences of this are not only bad for the Eurozone, but for the rest of the global economy too.  The slow-motion bank run now taking place in the Eurozone could easily turn into another severe global financial crisis.  So why then is the ECB pushing so hard for monetary policy tightening?  From the New York Times we learn the answer:With Germany, the euro zone’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn.Silly me, I thought the ECB's mandate was for the entire Eurozone not just Germany.  Now Germany is the largest economy in the Eurozone and so its economic conditions have a large influence on the the Eurozone aggregates that the ECB targets.  So maybe I am being too hard on the ECB here. Still, if the ECB really desires to save the Eurozone in its current form then tightening monetary policy is a move in the wrong direction. 

The global fallout of a eurozone collapse - Ken Rogoff - As many commentators have rightly observed, the euro experiment is at a crossroads. Either the eurozone will deepen into a fiscal union, or the weak members will be forced to break off. But the euro experiment has also brought us to a crossroads in the whole international monetary system. Will our grandchildren inherit a world with a huge number of national currencies, or a very small number of multi-country currencies? If the euro survives and goes on to assume co-reserve currency status with the dollar, surely there will eventually be a strong trend towards consolidation elsewhere. Other blocs will form to mimic the euro’s success. They will aim to enjoy lower interest rates, and greater resilience to financial crises. Perhaps, for example, Canada and Mexico will eventually form a North American currency bloc with the US, possibly extending to include a significant part of Latin America. China and Japan could put aside their differences and form the heart of a third major trading bloc in Asia. Indeed, until the recent financial crisis, it was hard for most researchers to imagine things any other way, save perhaps for idealists who believed the world should adopt a single world currency. Yet if the euro is torn by centrifugal force, perhaps because European leaders are constitutionally incapable of making tough decisions on how to radically trim periphery debt burdens, it could take a great many decades before any other region attempts a similarly ambitious programme. The 1980s and 1990s taught us that for countries with open capital markets, fixed exchange rates are a mirage that cannot be indefinitely sustained. If the euro goes the way of the Argentine currency peg, the noughts and tens – the first decades of the 21st century – will be viewed as teaching the same lesson about more radical currency marriages. Sovereignty and currency co-habitation do not mix.

German Industrial Output Logs Unexpected Fall In April‎  - German industrial output declined in April for the first time this year, largely due to a slump in the construction industry.  Industrial production dropped a seasonally adjusted 0.6 percent month-on-month, following a revised 1.2 percent gain in the previous month, the Federal Ministry of Economy and Technology showed Wednesday. Economists had forecast a 0.2 percent increase. The latest decline was the first since a 0.2 percent fall in December. The initial growth figure for March was 0.7 percent.  ING Bank NV's Carsten Brzeski said the period of a roaring German growth engine might be over. However, the engine is not stuttering, it is rather purring, the economist added. Output in the construction sector fell 5.7 percent, erasing a 5.5 percent gain in the previous month. Manufacturing output also declined 0.6 percent, led by a 1.5 percent fall in investment goods.

Germany’s Economy: Cooling or Drowning? - Does today’s disappointing German trade data represent a blip in the country’s economic rebound, or something more sinister? German exports dropped by 5.5% on a monthly basis in April in adjusted terms, reversing two months of increases and lowering the trade surplus, the Federal Statistics Office said Wednesday. Admittedly, the decline followed an exceptionally strong March reading, when exports surged by 7.2%, the most since May 2010. Still, it suggests external trade is likely to “make a much smaller contribution to overall growth in the second quarter,” said Ulrike Rondorf, an economist with Commerzbank in Frankfurt. For a country that has typically relied on its export prowess rather than on domestic consumption, that could be a problem. And it wasn’t the only bad news. German industrial output also unexpectedly fell by a seasonally adjusted 0.6% in April, after rising by 1.2% in March, signalling a slowdown in Germany’s key manufacturing sector. Analysts pointed to Japan’s earthquake as one possible culprit.  “The impact of the Japanese earthquake on the international supply chains was stronger than expected,”

The ECB’s Target2 activities are not constraining German credit growth - Perhaps you have seen Hans-Werner Sinn’s incendiary commentary from 1 Jun on the ECB’s stealth bailout. Well, Karl Whelan who has many years’ central bank experience finds that “Professor Sinn’s analysis is incorrect and that his policy prescriptions are extremely dangerous”. He wrote a recent post at Vox, which Credit Writedowns carried yesterday under the title The ECB is not conducting a stealth bailout. Willem Buiter is now out with a commentary on the same issue corroborating Whelan’s view. Below are the bullet points he highlights in his analysis for Citigroup followed by the full article. This is seriously technical stuff, but still very important. I have underlined the key bits because his argument ties in with something I have been banging on about for some time, namely that banks – in Germany or elsewhere – are not reserve constrained in a convertible floating exchange rate credit system.

Eurozone Woes Are U.S. Woes - A different perspective on the risks the world faces from the financial woes of Greece, Ireland and Portugal is provided by a new class of statistics published today by the Bank for International Settlements (BIS), the central bankers' central bank.What it shows is that US banks are collectively second or third most exposed to the woes of Greece, Portugal and Ireland, through what the BIS calls their "potential exposure" to these countries. This new visibility for the big bets US banks have made on the eurozone's most overstretched economies could prove controversial in Washington - coming so soon after these banks were bailed out by US taxpayers. The stats show that there is some considerable alignment of eurozone and US interests in preventing a Greek default - though I can see circumstances in which the US and the eurozone would be at loggerheads over some eurozone leaders' hope that creditors to Greece would be encouraged (though not forced) to roll over their loans to Greece, as those loans fell due for payment.

IMF warns on UK banks masking bad debts - British banks’ lenience to struggling customers may be disguising the dangers the institutions face, the International Monetary Fund warned as it delivered its latest verdict on the UK economy.  Lender forbearance, where loans are extended or payments reduced, “may, in some cases, have masked the extent of risks, given the high indebtedness of the household and commercial real estate sectors,” said the Fund. Just last week it emerged that the Financial Services Authority has accused banks of moving mortgage customers on to less strenuous terms to conceal bad debts. The latest warning came as the IMF delivered a strong endorsement of the Government’s austerity plans on Monday, but laid out a clear Plan B of monetary easing and tax cuts in case of an emergency.

Mob rule: Iceland Crowdsources Its Next Constitution - Country recovering from collapse of its banks and government is using social media to get citizens to share their ideas. It is not the way the scribes of yore would have done it but Iceland is tearing up the rulebook by drawing up its new constitution through crowdsourcing. As the country recovers from the financial crisis that saw the collapse of its banks and government, it is using social media to get its citizens to share their ideas as to what the new document should contain. "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."