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

Saturday, July 16, 2011

week ending July 16

Fed Balance Sheet Expands In Latest Week - The U.S. Federal Reserve's balance sheet expanded in the latest week as central bank Treasury holdings continued to grow after the formal end of a bond-buying program aimed at shoring up the economy. The Fed's asset holdings in the week ended July 13 increased to $2.882 trillion, from $2.874 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities climbed to $1.630 trillion on Wednesday, from $1.625 trillion. Thursday's report showed total borrowing from the Fed's discount lending window inched down to $12.51 billion on Wednesday from $12.55 billion a week earlier. Borrowing by commercial banks held steady at $5 million. U.S. government securities held in custody on behalf of foreign official accounts fell to $3.445 trillion, from $3.453 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts slid to $2.711 trillion from $2.716 trillion in the previous week. Holdings of agency securities dropped to $734.07 billion, from the prior week's $736.95 billion.

Fed balance sheet grows to record $2.88 trillion - The Federal Reserve's balance sheet expanded to a record $2.88 trillion in the week ended July 13 from $2.87 trillion in the prior week, the central bank said Thursday. The Fed balance sheet should stop growing as the central bank completed its plan to purchase $600 billion in Treasurys at the end of June. The Fed had talked about how to shrink its bloated balance sheet but weak economic data has put those plans on hold perhaps until next year. Fed chairman Ben Bernanke has raised the possibility of another round of asset purchases if the economy falters. Fed officials eventually want to return to holding only Treasurys and get the balance sheet back to pre-crisis levels, a process that 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 $1.63 trillion from $1.62 trillion in the previous week. The Fed's holdings of mortgage-backed securities held steady at $908.8 billion from last week. Bank reserves rose slightly to $1.68 trillion from $1.65 trillion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 14, 2011

Fed Minutes Formalize Exit Strategy -In minutes from its latest meeting the Federal Reserve formalized its plan to normalize monetary policy once it thinks the economy is on sounder footing. The process will begin with an end to reinvestment of expiring holding, then move on to rate increases and finally to sales of its securities holding built up during quantitative easing. From the minutes:

  • –To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA.
  • –At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.
  • –When economic conditions warrant, the Committee’s next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy.

How Will Quantitative Tightening Work? - The Fed’s second round of quantitative easing ended in late June. That means we are now in a period of quantitative accommodation. The Fed continues to hold a hefty portfolio of mortgage-backed securities and longer-term Treasuries — thus providing continued, unconventional monetary stimulus — but it’s not adding more. At the FOMC’s June 21-22 meeting, the members discussed how it would someday exit from this unusual policy posture. In short, the Fed discussed the roadmap for quantitative tightening. Here’s how it will work:

  • To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the [System Open Market Account].
  • At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.
  • When economic conditions warrant, the Committee’s next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy.

The Fed's Exit Strategy - Thoma - video

Fed Watch: A Divided FOMC - The FOMC minutes were simply fascinating. The discussion of the economic situation was markedly downbeat, even before the latest employment report, yet the final outcome of the meeting – the FOMC statement and Federal Reserve Chairman Ben Bernanke’s subsequent press conference – seemed to clearly indicate that, barring an outright return to the threat of deflation, the Fed saw its job as done. How can we reconcile these two positions? Presumably the faction leaning more toward additional easing is relatively small, while the majority believes either they have already gone too far or that further policy is ineffectual. Bernanke seemed to place himself in the latter category during the press conference. Is that really where he stands? This apparent divergence of views on the FOMC will bring extra attention to Bernanke’s testimony today on Capitol Hill. Begin with the economic situation as seen from Constitution Ave. A host of “temporary factors” are weighing on the economy: … including the global supply chain disruptions in the wake of the Japanese earthquake, the unusually severe weather in some parts of the United States, a drop in defense spending, and the effects of increases in oil and other commodity prices this year on household purchasing power and spending. I wouldn’t sigh too loudly just yet. It is reasonable to believe that some of these impacts are indeed temporary. For example, Bloomberg reports the Bank of Japan see good progress toward normalizing production conditions:

FOMC Minutes - FOMC minutes from the June 21-22 meeting are posted here. There are a few interesting things in there. First, there is a discussion, continued from the previous meeting, on the exit strategy. Basically, the FOMC plans to first stop reinvesting principal payments on the securities it holds, and will then begin increasing the fed funds target rate. Mortgage-backed securities (MBS) and agency securities will then be sold off over a three-to-five-year period. The minutes say: In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy. That's vague, but I take it to mean that, after three to five years, excess reserves will be zero.There is a bit of funny stuff:   When economic conditions warrant, the Committee's next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. The truth of the matter is that, over the period discussed here, where excess reserves are positive, the FOMC actually has no control over the fed funds rate, as that is determined by the interest rate on reserves (IROR), which is set by the Board of Governors.

Fed divided over more stimulus as economy weakens - Federal Reserve officials at their last meeting expressed concerns that the weakening job market might hold back the recovery. But members were divided over whether the Fed should consider taking additional steps to help the U.S. economy.  Some members said the Fed should be open to new stimulus measures if growth failed to pick up enough to "meaningfully" reduce the unemployment rate, according to minutes of the Fed's June 21-22 meeting released Tuesday.Others expressed concerns about inflation and said the central bank would need to take steps to begin removing its low-interest rate policies "sooner than currently anticipated." The minutes highlighted a division at the Fed between officials who are most worried that the economy is growing too slowly, including Fed Chairman Ben Bernanke, and some regional bank presidents who are concerned that the Fed's policies could spark high inflation.

FRB: Testimony--Bernanke, Semiannual Monetary Policy Report to the Congress--July 12, 2011

Fed weighing further easing, Bernanke says  — Just two weeks after completing a second extraordinary effort to juice the moribund U.S. economy, the Federal Reserve is contemplating more “untested” steps, the head of the central bank said Wednesday. Federal Reserve Chairman Ben Bernanke says the central bank is examining several untested means to stimulate growth if conditions deteriorate, even though the central bank believes the temporary shocks holding down economic activity will pass.  At the end of June, the Fed completed a plan to buy $600 billion of Treasury bonds in what markets have dubbed QE2.  “The possibility remains that the recent weakness may prove more persistent than expected and that deflationary risks might reemerge, implying additional policy support,” Bernanke told the House Financial Services Committee, in the first of two days of testimony about the economy and monetary policy.

Fed Officials Divided on Further Stimulus - Federal Reserve policy makers disagreed on whether additional monetary stimulus will be needed even if the outlook for economic growth remains weak, minutes of their meeting last month showed. “A few members noted that, depending on how economic conditions evolve, the committee might have to consider providing additional monetary stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run,” the Federal Open Market committee said in the minutes of its June 21-22 meeting, released today in Washington. “On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant” the FOMC “taking steps to begin removing policy accommodation sooner than currently anticipated.”

Bernanke lays out easing options - While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves...

Bernanke Says Fed Would Consider New Stimulus Effort - — The Federal Reserve chairman, Ben S. Bernanke, gave a subdued account of the economy’s health Wednesday, saying that he expected the economy to grow at a moderate pace during the rest of the year, with unemployment declining “only gradually.”  The unexpected weakness is forcing the Fed to reconsider its determination early this year to refrain from new efforts to stimulate growth. While no additional actions appear imminent, Mr. Bernanke said in Congressional testimony Wednesday that the Fed would be prepared to act if necessary ... Mr. Bernanke made clear Wednesday that a resumption of the central bank’s economic revival campaign faces a high hurdle. He said that the Fed would look for two conditions: economic weakness beyond current expectations and a renewed threat of deflation.  The first seems obvious to most people. The second, however, may the more important factor.

Fed Watch: A Nod to QE3? - Financial markets warmly embraced a perceived opening by Federal Reserve Chairman Ben Bernanke, jumping sharply on news that QE3 was still on the table.But QE3 was never off the table to begin with. It was simply that the bar to QE3 was very, very high. And I have to agree with Calculated Risk; I don’t see that Bernanke lowered it any today. The key sentence from the Congressional testimony: On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Note the two conditions – persistent economic weakness coupled with deflation risks. The latter was a focus when the Fed initiated QE2, with the lack of such risks guaranteeing the Fed would cease asset purchases at the end of June. Bernanke made clear the focus on deflation in his most recent press conference. Are we seeing signs that such deflationary fears are emerging? Not yet, at least not based upon the kinds of market and survey based indicators the Fed is watching:

The Fed is on hold - I have consistently warned for the past few months that the Fed would pause before rushing into QE3. I reiterated this yesterday. Yet, somehow people came away from Ben Bernanke’s testimony before Congress yesterday thinking the Fed was going to crank up the QE3 keyboard strokes. It’s not going to happen. Look at Bernanke’s prepared remarks: On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. On the other hand, the economy could evolve in a way that would warrant a move toward less-accommodative policy.

The Fed lists things it could do, but won't - THE financial press has been aflutter in recent days with stories of the form, "Fed opens the door to QE3".  The minutes revealed that some members of the Federal Open Market Committee are concerned about the disappointing performance of the economy and are anxious to talk about how the Fed might act if necessary. And in testimony given yesterday, Mr Bernanke listed the options available to the Fed: Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs. However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.

Bernanke spells it out - Well done to Tim Johnson for asking Ben Bernanke the direct question that finally let him spell out his position on QE3: I think the important point to make is that the situation today is somewhat different than it was in August of 2010, when we began to initiate discussion of further purchases of securities. At that time, inflation was dropping. Inflation expectations were dropping. It looked like deflation was becoming a potential risk to the economy and a serious risk. At the same time, over the summer the recovery looked like it was stalling. We were down to 80,000 jobs a month, private sector jobs a month. Growth was not sufficient to prevent what looked like a potentially significant increase in the unemployment rate. And so we felt that with both unemployment and inflation in, you know, being missed in the same direction, so to speak, that monetary policy accommodation was surely needed. And so we undertook that step. Today the situation is more complex. Inflation is higher. Inflation expectations are close to our target. We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting.And so, you know, we’re not prepared at this point to take further action.

Other Four Important Insights From Bernanke's Testimony - Chairman Bernanke's testimony before Congress this week generated much attention because he mentioned the Fed remained open to further monetary easing.  Many observers interpreted this statement as Bernanke opening the door for QE3.  Though this was the big news from Bernanke's visit to Congress, there were four other important insights in his testimony worth mentioning too.

  • First, Bernanke affirmed his new-found love for the portfolio channel of monetary policy.

  • Second, Bernanke implicitly acknowledges that interest rates would be low even in the absence of the Fed. 

  • Third, Bernanke acknowledges the Fed still has plenty of ammunition in its monetary arsenal.

  • Fourth, Bernanke reiterated the Fed's desire to slouch on the job and ignore the aggregate demand shortfall. 

Did Republicans Just Force the Fed Into QE3? - Mitch McConnell, the leading Senate Republican, has ventured to grab control of the debt and deficit negotiations that have devolved into a cat-herding exercise. On Tuesday, McConnell first took to the Senate floor to declare that there can be no real deficit deal “as long as this President is in the Oval Office.” Later in the day, he floated a plan that would end the debt ceiling stand-off by giving the White House the ability to raise the debt limit without Congressional approval, as long as any increase in the ceiling is paired with recommendations for equal amounts of spending cuts.  By effectively tabling all deficit and debt reduction until after the 2012 election, McConnell isn’t doing the economy any favors. No one is making a case for deficit cuts that would go into effect right now; those would be sure to sink the economy. But by agreeing to a meaningful long-term deficit reduction plan that would not kick into action until 2013, we  –  and that’s a global “we,” given our dependence on foreign investors to buy significant chunks of our Treasury debt — would have some clarity and progress on getting our financial house in order. That’s a long time to just keep muddling through when we’ve got a slowing economy and 14.1 million unemployed. But if that’s how things play out, it sure looks like it could force the Federal Reserve’s hand.

Moody's sounds note of caution while Bernanke promises support for US economy - Ratings agency Moody's warned it might strip the US of its AAA rating just hours after the Federal Reserve chairman, Ben Bernanke, was poised to inject further funds into the US economy and commit to several years of low interest rates to combat flagging growth and prevent further rises in the unemployment rate. Bernanke said a third round of quantitative easing, called QE3, could be necessary if the economy fails to regain momentum in the second half of the year. Moody's said it will review the federal government's triple-A bond rating because the White House and Congress are running out of time to raise the nation's $14.3tn borrowing limit and avoid a default. The US treasury says the government will default on its debt if the limit is not raised by 2 August. Moody's said: "An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments."

Federal Reserve Needs QE3 to Boost Economic Growth, Berkeley’s DeLong Says - The Federal Reserve should engage in another round of quantitative easing as growth in the U.S. economy remains slow and inflation concern remains low, according to Bradford DeLong of the University of California at Berkeley. “I don’t see any argument against QE3,” Delong said during an interview on Bloomberg TV. “The worry is always that it will destabilize inflation expectations, that they’ll lose their anchor, and yet when you look out as far as you can at the prices of the TIPS and of the 30-year Treasuries, you see no sign at all that there’s been any loss of confidence that the Fed will keep inflation under control.”  Another round of asset purchases would increase construction, creating jobs and boosting the economy, said DeLong, a professor of economics and former Treasury official during the Clinton administration. Fed policy makers disagreed on whether additional stimulus will be needed even if the outlook for economic growth looks weak, according to minutes released today from the Federal Open Market Committee’s meeting June 21-22.

QE3? Not So Fast. Let’s Debate the Merits of QE2 First - The Fed’s second round of monetary stimulus, the $600 billion QE2, ended on June 30. Since then, financial markets have rallied on news of another Greek bailout, and then fallen on weakening jobs and economic news from the U.S. The Dow is basically back to where it was when QE2 ended on June 30. So the world hasn’t ended, and yet there are those who think we need a third round. The minutes of the latest meeting of Federal Reserve officials, released Tuesday, show them divided on whether to implement a third round of monetary stimulus. Before we get ahead of ourselves, let’s first assess QE2. For that, we turn to two of our regular contributors, Justin Wolfers, and James Altucher.

Evaluating quantitative easing using event studies - Event studies are one method that has been used to try to assess the potential effects on markets of nonstandard monetary policy measures such as QE2. The Federal Reserve Bank of St. Louis recently hosted a conference whose objective was to evaluate evidence on the effects of these policies. Here I relate remarks I made at the conference on some of the challenges from trying to use event studies to answer this question. Event studies look at a narrow window of time around which a significant policy initiative was announced to see how markets responded at the time. The hope is that, over the short period studied, the policy announcement itself is the most important news item to which markets were responding. For example, a paper by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack presented at the conference identified 8 key days on which major details of the Fed's initial large-scale asset purchase (sometimes referred to as "QE1") were communicated to the public.

Putin says U.S. monetary policy "hooliganism" (Xinhua) -- Russian Prime Minister Vladimir Putin criticized the U.S. monetary policy on Monday, calling it "hooliganism," local media reported. "We, thankfully or not, cannot print a reserve currency. But what are they (the Americans) doing? They simply spit nails, turn on the printing press and throw money to the world, in order to resolve their urgent problems," Putin told members of the Russian Academy of Science in Moscow. While exploiting its monopoly on issuing a global reserve currency at full scale, the United States asked Russia to obey a strict financial discipline, he added. Russia is unlikely to resolve the problems it faces by covering the budget deficit with printing extra money, Putin said.

Fed Members Release Financial Reports - Federal Reserve Vice Chairman Janet Yellen stands as potentially the wealthiest member of the central bank’s board of governors since joining in October. Yellen reported assets valued between $5.1 million and $14.4 million, according to financial disclosure forms released Friday. The disclosure forms, used by officials across the government, report asset valuations and income only in broad dollar ranges and include spouses. Yellen was previously president of the Federal Reserve Bank of San Francisco, where she earned more than $400,000 annually. She is married to Nobel laureate George Akerlof, whose substantial income from writing and speaking engagements was included in the disclosure forms. She far outpaced Fed Chairman Ben Bernanke, who reported assets valued between $1.1 million and $2.3 million — figures barely changed from a year earlier.

Gold for cash - NEMO at the blog Self-Evident posts this amusing exchange from Ben Bernanke's testimony earlier this week: Amusement aside, the disappointing thing about Ron Paul's goldbuggery is the weakness of the analysis behind it. His support seems almost mystic in nature: that gold is money is a law of economics that's held for 6,000 years! In his defence, this quasi-mystical belief in the sanctity of gold in a monetary system was shared by the world's financial leaders for much of the industrial period. That's not much of a defence, though. Gold worship repeatedly drove the economy into ditches and off cliffs, but for a few lucky years in which the pace of new gold discoveries fortuitously matched growth in the global economy. Is gold money? No. Money is the medium of exchange. Money is what we use to facilitate transactions in order to capture efficiencies unavailable in a barter economy. You could probably take a gold bar to a store and swap it for something, but that would be a barter-like trade rather than a money-facilited exchange. You and the shopkeeper would have to haggle over the value of one good—the gold—vis-à-vis another and jump through all the hoops money is designed to eliminate.

There's something about money - In terms of the ideological origins of monetary confusion, I think Paul Krugman’s got it right. If you think redistribution of wealth and income is wrong, it’s easier to support that idea if you believe public policy has no role to play in stabilizing the economy. And you can really only believe that by confusing yourself about how monetary policy works.  But there’s still an issue of why these topics are so confused on the mass level. And I think the answer here is largely linguistic. Krugman’s column about the Capitol Hill Baby Sitting Co-Op is one of the best popular explanations of monetary policy ever written precisely because there’s no “money” involved in it. It’s just co-op scrip. Which helps because the language around money is very confusing. People say things like “Mark Zuckerberg has $9 billion” when what they mean is that Mark Zuckerberg has an equity stake in Facebook that’s worth $9 billion. Which is to say that normally when we’re talking about “money,” we’re talking about the accounting value of real assets. But monetary policy is much more about shortages of the medium of exchange.

US Sen Shelby Cautions Fed's Bernanke On Inflation - U.S. Sen. Richard Shelby (R., Ala.) Thursday cautioned that the Federal Reserve would be going in "the wrong direction" if it starts a third round of bond purchases to boost the economy."The stage is set for a resurgence of inflation if the Fed is not real careful," Shelby said at the start of a Senate Banking Committee hearing where Fed Chairman Ben Bernanke was set to testify.Bernanke Wednesday said the Fed is prepared to act if economic weakness persists, leaving open the possibility of further bond purchases. "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Bernanke said in prepared remarks at both hearings.Shelby, ranking Republican on the Senate panel, said the Fed's first challenge should be determining how to unwind its balance sheet."The last thing our economy needs right now is an inflation scare,"

US woes may spur inflation, hurt China's forex reserves  - The US Federal Reserve said on Wednesday it could ease monetary policy further if the United States failed to see solid growth, which analysts said may add to China's inflation and endanger its $3.2 trillion foreign exchange reserves.  "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support," Ben Bernanke, Fed chairman, told the House of Representatives Financial Services Committee. His remarks were generally interpreted as a signal of a possible QE3 (quantitative easing) stimulus infusion.

John Cochrane Offers A Sum Of All Right-Wing Fears - Apparently when Paul Ryan went out for dinner and a $350 bottle of wine, his dining companions were some hedge fund jerk and University of Chicago economist John Cochrane. Not coincidentally, Cochrane published a paper relatively recently (PDF) that offers a novel model of fiscal and monetary policy in a recession that has the convenient property of affirming all of Rep Ryan’s political views. Here’s a slice from the conclusion of his piece: Will we get deflation? The fiscal analysis suggests that if discount rates for government debt fall, and demand for that debt rises, in additional “flight to quality,” there may be very little that the Fed or even the government as a whole can do about it.  Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty. Lower growth is the single most important negative influence on the Federal budget.  When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow—and likely a “stagflation” not inflation associated with a boom.

Inflation Day - Krugman - OK, so the new report is out. Headline prices actually down, as predicted, but core inflation running above the Fed target on a monthly basis. So what should we conclude? First, no hyperinflation here. Second, about that core: it’s important to make a distinction between core-as-concept and core-as-usually-measured. The concept is that of inertial prices, which are set for extended periods and can get into a leapfrogging pattern of sustained inflation that’s hard to undo. The usual measure is just consumer prices less food and energy. This is clearly closer to the concept than the headline number, but not at all a perfect proxy. In particular, it’s clear that core-as-measured prices are “adulterated” by commodity prices. Higher fuel prices, for example, get reflected in the price of airline tickets, which are in the core-as-measured. So are used car prices, which rose at an annual rate of around 20 percent in June; is this really inertial inflation? Looking at the forest instead of the trees — and in particular noting that wages are still flat — and it’s hard to see an inflation problem looming here. The market certainly doesn’t.

Key Measures of Inflation ease in June - This week Fed Chairman Bernanke reiterated the Fed's position that further easing (i.e. QE3) would require both persistent economic weakness and a greater risk of deflation.  One thing to watch will be the following key measures. Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. ... The gasoline index declined sharply in June, falling 6.8 percent. ... In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month.The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.7% annualized rate) in June. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month.

Empire State Survey indicates contraction, Core CPI increases 0.3 percent - From the NY Fed: Empire State Manufacturing Survey  The July Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated for a second consecutive month. The general business conditions index remained below zero, at -3.8.  The index increased from -7.8 in June, but was well below expectations of a reading of 8.0. This is the first regional survey released for July and shows that manufacturing in the NY region is still contracting. From the BLSThe Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. ... The gasoline index declined sharply in June, falling 6.8 percent. ... In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month.Headline CPI declined because of the sharp decline in gasoline prices, but the core index increased 0.3 percent and is now up 1.6 percent over the last year.

Sticky Note - I’ve mentioned before that the Atlanta Fed’s sticky price CPI comes closer than the usual measure to the Platonic ideal of core inflation. So the sticky price number for June is now out. Here’s the trend — monthly changes at an annual rate — since the beginning of 2007: There was a blip earlier this year, probably reflecting oil prices feeding through even into sticky prices. But it’s over. Underlying inflation is under control — in fact, too much under control.

Fed Watch: On That Capital Flow Fallacy - Yesterday Paul Krugman chastised the White House over this quote from President Barak Obama’s press conference: I do think that if the country as a whole sees Washington act responsibly, compromises being made, the deficit and debt being dealt with for 10, 15, 20 years, that that will help with businesses feeling more confident about aggressively investing in this country, foreign investors saying America has got its act together and are willing to invest. And so it can have a positive impact in overall growth and employment. Krugman adds:Think about it: U.S. interest rates are low; there’s no crowding out going on; we are NOT suffering from a shortage of saving. I think it is worth trying to understand the Administration’s position in light of this morning’s trade release, which revealed an unexpected surge in the trade deficit. The deterioration was in both the petroleum and non-petroleum balances, nominal and real. I imagine the numbers will be another ding to the second quarter GDP forecast, although on net trade is still poised to make a significant contribution to growth. So far, in real terms, the trade deficit for Q2 remains improved relative to Q1. Still, the deficit was $50.2 billion, an outflow which requires an offsetting net inflow. Annualized, this amounts to $600 billion a year of inflow, although note the decline in oil prices should take some of the pressure of the nominal deficit over the next couple of months. I think it is protecting this inflow that concerns that White House.

Interest Rate Stories - Krugman - There are two different stories about why deficits might drive up interest rates... not at all the same.... The first story is good old crowding out: the government is borrowing, that competes with private borrowers, and that drives rates up.... [I]t’s a reasonable story when the economy is near full employment. But it’s all wrong when the economy is depressed, and especially if it’s in a liquidity trap. The other story involves fears about a government’s solvency. The key point to understand here is that one year’s deficit, in practice, can’t matter very much in determining a government’s solvency, which depends on the present discounted value of revenues and obligations over many years. So the deficit matters in that case only to the extent that it represents a signal about government determination. It’s worth noting that the current attack on Italy was not triggered by news about the deficit; it was triggered by worries about economic growth. And this makes one wonder whether austerity can really restore confidence.

Crude solution - David Jones may want to blame Julia Gillard, Barack Obama may want to blame Republican austerity nutters and the EU may want to blame rampant ratings agencies, but what we all really need to get things going again is more simple: cheap oil. Last night’s market action delivered slightly cheaper crude, down 2% or so on Ben Bernanke’s QE recalcitrance, but it remains stuck above $90 a barrel: The effects of this are clear. For the US, last night’s producer price index (which is a guide to the input prices being paid by the productive parts of an economy and hence is a leading indicator for consumer price inflation) showed its first decline for over a year: And look at where much of the decline came from: energy. Obviously an ongoing fall in oil prices would have a significant dampening effect on US inflation and would free the Fed to unleash more stimulus. And that’s before we add in the further positive of impacts on consumer spending.

The peanut theory of recessions – Nick Rowe - Assume a monetary exchange economy. You can't buy or sell anything except by giving or accepting money in return. Every single market is a money market -- where one of the other goods is traded for money. Money is both medium of exchange and medium of account, because all prices are measured in money. People hold stocks of money. When an individual buys something his stock of money falls, and the seller's stock of money rises. Start in full equilibrium. Every single market has demand equals supply. Now assume all prices are fixed. Every single price for every single good, including all inputs like labour, and all asset like bonds, is fixed. Now halve the stock supply of money. (Or double the stock demand, it doesn't matter). Every individual: tries (and fails) to sell more goods; tries (and succeeds) to buy less goods; because he is trying (and failing) to increase his stock of money. The result is a recession.  Now, let's add one tiny twist to that monetary disequilibrium story. Let's make one tiny exception to the assumption that all prices are fixed. Assume the price of peanuts is perfectly flexible. So the market for peanuts always clears. It's only a tiny twist, and a tiny exception, because by assumption peanuts are a tiny and unimportant part of the economy. If some disease destroyed all the peanuts, or some new method of peanut farming doubled the supply of peanuts, nothing much else would change. Peanuts are, well, peanuts, in the big macroeconomic scheme of things.

Global Monetarism Strikes Back - Olivier Blanchard, the chief economist at the International Monetary Fund (IMF) announced in a triumphalist tone that “earlier fears of a double-dip recession—which we did not share—have not materialized”  For Blanchard fiscal expansion has done its job, since “private demand has, for the most part, taken the baton.”  The risks are associated to the higher prices of commodities and inflation.  The Bank of International Settlements (BIS) has added to the IMF’s view that inflation is the main risk on an otherwise recovering world economy.  In their recent Annual Report they argue that: “spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally.”  That is, add monetary contraction to the policy mix. However, it is far from clear that private demand is sufficiently strong to maintain the recovery by itself, or that slacking capacity, beyond commodity prices, imply that inflation has become the major risk to the global economy.  The two-speed recovery – sluggish in developed countries and fast in developing countries – remains a fragile one, and the possibilities of rates of growth that are insufficient to bring back the prosperity of the boom years, and increase employment and living standards around the globe are still strong.

Long Term Growth - I want to back up another thing that Paul Krugman said. This time about long term growth. There is a wide spread sense among public officials and even a number of economists that there are things we either can or should do to prepare set the US up for strong growth over the long term.Yet, either the government has been amazingly consistent in providing the right balance of these goods, or they just don’t matter that much. Because long term growth has been incredibly consistent, even including the Great Depression and WWII. Here is the real US GDP on a log scale (straight lines are constant growth rates) Though the Great Depression was horrible at the time after it and the War time bounce back were over the economy simply resumed the same path as if nothing had happened. Great Depression. Massive World War. The New Deal. The coming of the income tax and then the raising of it to stratospheric rates. The rise of labor and fall of organized labor. Entry of women in the work force.  All of it and you can barely see a dent. Some  That’s deeply fascinating.

So Really, What’s Wrong With This Economy? - Perhaps it would be useful to take a moment and just catalogue what’s going wrong.

  • –Liquidity trap/zero lower bound; fading stimulus: As Paul Krugman and Brad DeLong point out, this is key. 
  • –The weak job market: It’s a 70% consumption economy, and if jobs and paychecks are scarce and fiscal/monetary stimuli are fading, ain’t much good gonna happen.  It’s a self-reinforcing weak demand cycle.
  • –Productivity and technology: There used to be something called “labor hoarding” where even when demand faltered, firms would hold on to many of their workers,
  • --China’s absorbing what little demand we can muster
  • –Bad tax incentives that encourage overseas production often in emerging economies that manage their currencies (see above).
  • –Actual uncertainty regarding the debt ceiling.
  • –Headwinds: Oil, Japan supply disruptions, Greek debt—these are all fading to one degree or another, but with all these other fragilities, even little bumps on the road can break an axle.
  • –The absence of union power in tandem with high unemployment, leads to weak bargaining power

Fall Into the Gap Forever? - Here are three graphs showing the gaps in output, consumption, and employment that have opened up since the recession: In all three cases, we appear to be growing along a lower growth path than before. The question is whether we are stuck on these lower growth paths forever. Will we ever recover the old growth path, in full or in part? That is, how much of the change in the GDP growth path is permanent, and how much is temporary? This is important because the level of employment is a function of the level of output. If we stay on the lower growth path, then we will have a permanent gap in employment -- most of the 14+ million unemployed will have little hope of finding work. We can share the jobs that exist, something like that, but we won't ever recover the jobs that were lost. However, graphs like the next one point to temporary changes as the dominant feature of output fluctuations. Sometimes the deviations from trend are highly persistent, as in the Great Depression, but eventually we recover. The trend has not varied much for over 100 years. It does vary slightly over time, but the variance in the red line is small relative to the overall variance in output:

MA's Monthly GDP Declined 0.4% in May - Monthly GDP declined 0.4% in May following no change in April, which was revised up from a 0.2% decline. While soft, the May reading is still in line with a rising trend. The May decline primarily reflected declines in net exports and the portion of monthly GDP not covered by the monthly source data. Domestic final sales posted a small decline, while inventory investment posted a solid increase. Averaged over April and May, monthly GDP was 1.8% above the first-quarter average at an annual rate. Our latest tracking estimate of 1.5% GDP growth in the second quarter assumes no change in monthly GDP in June.

Department of "Gurk!!" - Brad DeLong - Macro Advisers emails: The components of the CPI that we use to deflate retail sales were on balance above our expectations, suggesting less real PCE in June and the second quarter than previously expected. Vehicle assemblies in June were below levels indicated by previously published production schedules, suggesting less inventory building in the second quarter. As a result, we lowered our tracking estimate of GDP growth in the second quarter by one-tenth to 1.4%. Now what reason is there to expect that the third quarter will be much better? The next round of cuts in state and local spending is hitting the economy... right now. And the Recovery Act spending is ebbing rapidly

GDP Gap versus S&P 500 EPS - Over at Economist' View he has posted a nice set of charts on the GDP Gap, employment versus the long term trend and other measures of how much excess capacity the economy has that have become very popular among economists over the last couple of years. But these charts never include profits in their analysis and I would suggest that readers should know how profits look versus their long term trend. Over the last 50 years the long run growth rate of S&P 500 earnings per share has been about 7%. Moreover, even if you look at the more recent trend of operation earnings the trend growth rate has been almost this high. S&P 500 EPS is almost back to its 7% long run trend and the consensus bottom-up earnings forecast has it surpassing the long run trend in either the 4th quarter or the 1st quarter. By way of contrast it will be years before the GDP Gap is closed or the economy reaches full employment. This really shows how virtually all the gains in income so far in the recovery has gone to profits rather than labor.

The Political Economy of the Lesser Depression - Krugman - Everyone in the forecasting business is scrambling to mark down both their estimates of second-quarter growth and their forecasts for later in the year. Goldman Sachs (no link) was pretty optimistic a few months ago; now they’ve grown quite pessimistic: At this point, GS is predicting an unemployment rate of 8 3/4 percent at the end of 2012 — five years after the Great Recession began. They also note that the bump in underlying inflation due to commodity price hikes seems to be ebbing: As I pointed out yesterday, the same thing is true of the sticky-price CPI, which is arguably the conceptually closest thing to what we really mean by core inflation: So, terrible growth prospects; low inflation; oh, and low interest rates, with no sign of the bond vigilantes. Ordinary macroeconomic analysis tells you very clearly what we should be doing: fiscal expansion and monetary expansion by any means we can manage; in fact, the case for a higher inflation target pops right out of just about any model capable of producing the kind of mess we’re in.  And what are we talking about in policy terms? Spending cuts and an end to monetary expansion.

The Worst Time to Slow the Economy - NYTimes Editorial - It was not surprising to hear the Republican presidential candidates repeat their tiresome claim that excessive government spending and borrowing were behind Friday’s terrible unemployment report. It was depressing to hear President Obama sound as if he agreed with them.  After the report came out, the president went to the Rose Garden and said he hoped2 that a conclusion to the current debt-ceiling talks would give businesses “certainty” that the government had its debt and deficit under control, allowing them to start hiring again.  Certainty? That sounds like the other Republicans who have concocted a phony connection between hiring and government borrowing. There has never been any evidence that the federal debt is primarily responsible for the persistent joblessness that began with the 2008 recession. The numbers have remained high because of weak consumer demand and stagnant wage growth, along with an imbalance between jobs and job skills. Republicans have long tried to link unemployment and debt so that they can blame Mr. Obama for the poor economy, and build support for their ideological goal of cutting spending.  There is plenty of evidence, in fact, that the spending cuts already imposed by Republican intransigence are responsible for a great deal of joblessness.

The Trade Deficit Jumps While the Politicians Play Debt Ceiling Poker, by Dean Baker: The Commerce Department reported that the trade deficit jumped in May to $50.2 billion from $43.6 billion in April. The monthly data are erratic, but this is definitely bad news. This means that growth in the U.S. economy is likely to be very weak in the second quarter. (Measured in constant dollars, the deficit increased by $3.9 billion.) It does not look like trade is about to become a major driver of growth and jobs. This is also bad news for fans of income accounting. If we have a trade deficit, then national savings must be negative. That means either or both negative private savings or negative public savings (e.g. budget deficits). That's the rules -- there is no way around this one.

Gauging the Impact of the Great Recession - SF Fed Economic Letter - The Great Recession of 2007-2009, coming on the heels of a spending binge fueled by a housing bubble, so far has resulted in over $7,300 in foregone consumption per person, or about $175 per person per month. The recession has had many costs, including negative impacts on labor and housing markets, and lost government tax revenues. The extensive harm of this episode raises the question of whether policymakers could have done more to avoid the crisis.

How Close are We To a Second Recession? - If the blue line showing real GDP growth continues heading downward and crosses the 2% threshold shown by the red line, watch out: The Atlanta Fed's David Altig explains: The bottom line of this chart is that there has been a pretty reliable relationship between sustained bouts of sub-2 percent growth and U.S. recessions (indicated by the gray shaded areas). In fact, over the entire post-World War II era, periods in which year-over-year real GDP growth below 2 percent have been almost always associated with downturns in the economy.He adds "A pick-up in economic growth in the third quarter is important, as it would help to relieve the anxiety associated with this picture." The Fed is expecting a turnaround in the third quarter, but as David Leonhardt says: Government officials, especially those at the Fed, have proven too optimistic again and again throughout the crisis. In recent months, they have been saying that they didn’t need to take further action because the economy would soon heal on its own. What do they do now?

US Downturn for 2012 now assured - The Real 10 year bond rate average over 3 months has now dropped below zero to -0.12%. As I have been pointing out for the last month, this presages another economic downturn for the United States. Inflation just came in at 3.4%. Even though June saw a monthly deflation, it wasn't enough to prevent a move into negative real bond rates. The monthly Real 10 year bond rate also had its second month in negative territory at -0.43%.

Hard Slog -- the Real Future of the U.S. Economy: Peter Orszag -The continuing weakness in the labor market and the saga of the debt limit highlight the dual problems we face: low economic growth right now and an unsustainable amount of debt for the future. Unfortunately, both are probably more significant than policy discussions and official predictions about the U.S. economy suggest. The history of economies recovering from severe financial distress implies the unemployment rate will remain stuck at elevated levels for years, not quarters. And sluggish growth, in turn, will mean larger budget deficits. Under a plausible hard-slog scenario, the fiscal gap would exceed $13 trillion over the next decade, without a change in government policies. That’s at least $2.5 trillion more than the deficit with official economic assumptions -- a difference that itself will probably be larger than any deficit reduction that comes from the debt-limit deal. So it’s worth exploring the implications of slower growth in more detail. One important way in which the official projections may turn out to be too optimistic involves unemployment. The fundamental impediment to getting jobless Americans back to work is weak growth. Yet that is the norm rather than the exception after the type of experience we have lived through. Recoveries following financial collapses tend to be frailer than those associated with other sorts of economic declines.

From Italy to the US, utopia vs reality - In the eurozone, the fiscal crisis is lapping on Italy’s shores. In the US, the administration declares it will run out of funding early next month if the debt ceiling is not raised. Far fewer Europeans than Americans believe public sector defaults are beneficial. But important Europeans share with Republicans the view that there are still worse outcomes. For reluctant Europeans, the eurozone must not be a “transfer union”. For recalcitrant Republicans, taxes must not be raised. Fiat justitia, et pereat mundus – let right be done even if the world perishes – is the motto. The fiscal crises we see are a legacy of the west’s private and public sector debt binges of recent decades. As the McKinsey Global Institute tells us in an update of last year’s study of the aftermath of the credit bubble, this is an early stage of a painful process of deleveraging in several economies (see chart). “If history is a guide,” noted the 2010 report, “we would expect many years of debt reduction in specific sectors of some of the world’s largest economies, and this process will exert a significant drag on GDP growth.” So it is proving, with disappointment almost everywhere.

Reinhart and Rogoff: The Economy Can’t Grow - As public debt in advanced countries reaches levels not seen since the end of World War II, there is considerable debate about the urgency of taming deficits with the aim of stabilizing and ultimately reducing debt as a percentage of gross domestic product. Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such. Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings -- why not take advantage of the cheap money? Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt.

Sovereign risk and banks: Joined at the hip - THE Bank of International (BIS), the central bank of central banks, published a 52-page report this week on a topical subject: the impact of sovereign credit risk on bank funding. The report describes in some detail the symbiotic relationship that exists between governments and banks, and shows how it can turn destructive in periods of financial stress. To avoid that, the authors put forward several recommendations, including this one: In the current climate, advanced country governments should try to move as quickly as reasonably possible to implement credible strategies to stabilise or reduce their debt levels. This is key to anchoring market views about sovereign risk and avoiding negative spillovers on banks. Not, a surprising recommendation, though there are good questions concerning just what "reasonably possible" entails. Greece has made dramatic budget cuts in an effort to convince markets to trust its debt, but these cuts have neither had the desired impact on fiscal balances or reassured markets—and Greece's leaders are warning that the cuts aren't sustainable. In America, leaders are working diligently on a fiscal consolidation deal, despite indications that short-term cuts in America could be counterproductive.  Hence, the report suggests it will become more pressing that regulators address a perverse aspect of the bank-sovereign relationship:

Sentences to scare you the most important blog post in the world today - According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets. The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. . But watch what starts happening from 2008 and 2009. The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral.  Where ABS dissipated, sovereign debt stood in to fill the gap. And more. It’s one reason why the sovereign crisis is well and truly painful. It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

Global debt alarms ring through markets - Global financial markets were rocked by a breaking wave of debt dangers across the globe on Thursday, ranging from the eurozone to the United States and Japan, dealers said.  European stocks fell but the euro clawed back some losses. Investors are on red alert over the eurozone debt crisis which has already dragged down Greece, Ireland and Portugal -- all of which were rescued with vast bailouts -- and is spreading tentacles towards Italy and Spain. Greece urgently needs the support of a second rescue package. Moody's ratings agency fired an ominous shot at the United States overnight, warning of a possible downgrade to its top triple-A debt assessment, triggering comment that such a development could trigger a disastrous chain of events. The warning shot came after agencies downgraded Greek and Irish debt to junk status. There is also concern about huge amounts of public debt being carried by Japan, and more generally, but for differing reasons, about political grip in the European Union, the United States and Japan.

Analysis: Shift in petrodollar to unnerve Western markets - The long-standing support from petrodollars for Western financial markets is gradually waning as oil-rich countries favor recycling their windfall revenues closer to home and away from low-yielding developed economies mired in the debt crisis. Big oil producing countries provided a key source of stability and liquidity for developed markets in the past, and their purchases of Western assets also helped mitigate the impact of higher energy costs on economic growth. Petrodollar savings flows over the coming year are expected to hit $70 billion a month, surpassing the level reached during the boom of 2005-2007, as the global economy resumes a recovery after the current soft patch. But low real and expected rates of return in developed markets and debt crises in the euro zone and the United States will dissuade oil producers from making investments in the West.  This is especially likely because any oil producers are prioritizing domestic spending, partly because political unrest in the Arab world highlighted the need for redistributing wealth at home.

Dollar to Slide as Reserve Currency Status Is ‘Undermined’, Sumitomo Says - The U.S. dollar will extend its drop amid increasing pressure on U.S. lawmakers to raise the government’s debt limit, said Sumitomo Trust & Banking Co, a unit of Japan’s second-biggest lender. “Dollar-negative factors have piled up, including the very urgent issue of the debt ceiling,” Moody’s Investors Service put the U.S., rated Aaa since 1917, on review today for the first time since 1995 on concern the debt threshold won’t be raised in time to prevent a missed payment of interest or principal on bonds and notes. President Barack Obama and congressional leaders are struggling to reach a compromise on reducing deficits and raising the $14.3 trillion federal debt ceiling before the government exceeds its borrowing authority on Aug. 2. The Federal Reserve is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling, central bank Chairman Ben S. Bernanke said yesterday, also curbing the appeal of the greenback as a refuge.

Government Debt is Currently Cheaper Than Cash - The graph above, which I snagged from Karl Smith, illustrates the point that concern for the deficit at this point in time is simply absurd. This is a graph of interest rates on Federal debt. You will note that at this time, interest on Federal debt is actually negative.  Let that sit in your mind for a minute. The interest rate is negative. That means that right now, it is actually cheaper for the Federal government to borrow money than to spend cash. Which means that it makes more financial sense for the Federal government to borrow money than to spend cash. Which means that all the haranguing about the size of the deficit right now is pointless, because taxpayers are actually getting a better deal by having a deficit than if we had a balanced budget. No, it won’t be like this forever. Yes, the deficit is a long term problem.  But it isn’t today’s problem. Not by a long shot.

The horrifying AAA debt-issuance chartThis is why I love FT Alphaville in general and Tracy Alloway in particular: she’ll dutifully read 14 pages into something entitled “The Basel Committee on Banking Supervision Joint Forum Report on Asset Securitisation Incentives” before coming across this chart and immediately realizing just how important it is. I’ve put a bigger version here for people who want to pass it around in all its horrifying glory, but it’s also worth spelling things out, because it might not be immediately obvious. The big-picture thing to remember when looking at this chart is something which I’ve said many times before — that it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds. On a micro level, triple-A securities are safer than any other securities. But on a macro level, they’re much more dangerous, precisely because they’re considered risk-free. They breed complacency and regulatory arbitrage, and they are a key ingredient in the cause of all big crises, which is leverage.

I Hate to Keep Making This Point, But It Needs to Be Said - The anemic economic recovery can be tied to the ongoing elevated demand for safe and liquid assets.  Paul Krugman and Brad DeLong refer to this phenomenon as a liquidity trap; I like to call it an excess money demand problem.  Either way the key problem is that there are households, firms, and financial institutions who are sitting on an unusually large share of money and money-like assets and continue to add to them.  This elevated demand for such assets keeps aggregate demand low and, in turn, keeps the entire term structure of neutral interest rates depressed too.  (Note, that since term structure of neutral interest rates is currently low, it makes no sense to talk about raising interest rates soon.  That would push interest rates above their neutral level and further choke off the recovery.)   As Scott Sumner notes, the weak aggregate demand also makes structural problems more pronounced.   Many observers, for example, claim that firms are not hiring because of all the regulatory uncertainty..  This may be true, but consider how firms would be acting if their sales were rapidly growing. At some point, the marginal benefit of another employee would exceed the elevated marginal cost of that worker coming from the regulatory uncertainty. 

Scott Fullwiler: QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit - Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf (see here) and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here and here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum ones).  The following is a description of how the process would work and the implications for monetary operations:

  • 1. The Treasury mints a $1 trillion coin, or whatever amount is desired.
  • 2. The Treasury deposits the coin into the Treasury’s account at the Fed.
  • 3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin. The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed.
  • 4. Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%. Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year.
  • 5. The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed.
  • 6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown. Banks can’t “do” anything with all the extra reserve balances.
  • 7. Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%. Again, this is not inflationary. There are three points to make in explaining why.

The Breaking Point - According to both the Washington Post and the New York Times, Obama is proposing cuts to Social Security in exchange for GOP support for tax hikes. Lori Montgomery in the Post: Obama plans to argue that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers should seize the moment to take dramatic action.  As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. And Jay Carney’s carefully chosen weasel-words today do not contradict this:“There is no news here – the President has always said that while social security is not a major driver of the deficit, we do need to strengthen the program and the President said in the State of the Union Address that he wanted to work with both parties to do so in a balanced way that preserves the promise of the program and doesn’t slash benefits.”Nobody ever says they want to “cut” Social Security or Medicare. They want to “save” it.  Just ask Pete Peterson, he wants to “save” it. Likewise AARP.  They don’t want reduced benefits for senior citizens, they want to “preserve” it for future generations.  If they have an enormous customer base they can market private “add-on” accounts and other retirement products to when Social Security goes bye-bye, I guess that’s just a happy coincidence.Now if you think that this is something the President is doing because it’s the only way to get Republican cooperation you can stop reading here, because we’re going to disagree.  From the moment he took the White House, the President has wanted to cut Social Security benefits

Boehner says chance of budget deal "maybe 50-50"  = Speaker of the House of Representatives John Boehner told his Republican members on Thursday that chances of reaching a budget deal within the next few days "was maybe 50-50," a party aide said."Whether or not it happens is really dependent on whether they (Democrats) continue to insist on tax hikes" over Republican objections, the aide said. Boehner offered his assessment at a closed-door meeting with members shortly before White House talks with President Barack Obama and other congressional leaders.

Deficit Talks Scaled Back Over Tax Increases - — Citing differences over tax revenues, House Speaker John A. Boehner1 on Saturday night said he would drop his push with President Obama2 for a far-reaching, $4 trillion deficit-reduction plan tied to a proposal to increase the federal debt limit3.  On the eve of a second round of high-level bipartisan talks set for Sunday, Mr. Boehner issued a statement saying he would now urge negotiators to instead focus on trying to craft a smaller package more in line with the $2 trillion in cuts negotiated by Vice President Joseph R. Biden Jr.  “Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes,” Mr. Boehner said. “I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase.”

Debt ceiling options - As Congress and the President continue to wrangle over raising the debt ceiling, more of us are wondering, what would happen if the debt ceiling isn't raised? To paraphrase Sherlock Holmes, when you have eliminated the impossible, whatever remains, however improbable, must be Plan A. Let me begin with Bruce Bartlett's fine summary of the core issue: These expenses, and the deficit they've wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.  Some observers are suggesting that the debt ceiling itself is unconstitutional. However, Laurence Tribe raises doubts about that legal theory. Perhaps a sounder legal basis for the President to simply ignore the debt ceiling has been discussed in the Washington Post.  A separate question is whether it would be logistically feasible for the federal government to suddenly stop the payments that it is institutionally accustomed to make. Felix Salmon explains: purely as a practical matter, it's far from clear that it's even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I'm sure could not be implemented overnight-

Finding the Republicans’ golden ratio - MY COLLEAGUE R.A. blogged earlier this week on David Brook’s broadside against Republican intransigence on budget negotiations. Our Leader this week picks up on the theme: Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer.The 85%-15% split, which Republicans argue is optimal for deficit reduction, struck me as severe. In Britain an austerity programme split 3:1 in favour of spending has been met with street protests. The IMF programmes in Ireland and Greece do not come close to an 85%-15% split.The Republican’s golden ratio seemed even more striking, after looking at this must-see chart:

Debt reduction talks in limbo as clock ticks toward Aug. 2 deadline - Talks among President Obama and congressional leaders Sunday evening failed to break a partisan stalemate over how to raise the federal borrowing limit, leaving the politically charged negotiations in limbo three weeks before the administration says the country will begin to default. The White House meeting adjourned after roughly 75 minutes without agreement over how far the parties should go in cutting the deficit over the next decade or whether tax cuts and entitlement reductions should be a part of any deal. Congressional leaders will return to the White House on Monday to continue talks, administration officials announced, and Obama will hold a morning news conference before they do.  Both sides appeared Sunday to dig further into their positions, leaving the talks deadlocked, a historic default looming and a fragile economy increasingly vulnerable to the consequences of Washington’s entrenched partisanship and ideological divide over taxes and entitlements.

Obama: 'We need to' work out debt deal in 10 days - Grasping for a deal on the nation's debt, President Barack Obama and congressional leaders remained divided Sunday over the size and the components of a plan to reduce long term deficits. Saying "we need to" work out an agreement over the next 10 days, the president and lawmakers agreed to meet again Monday. Officials familiar with the meeting said Obama pressed the eight House and Senate leaders Sunday evening to continue aiming for a massive $4 trillion deal for reducing the debt. But there appeared to be little appetite for such an ambitious plan and the political price it would require to pass in Congress. Instead, House Speaker John Boehner told the group that a smaller package of about $2 trillion to $2.4 trillion was more realistic. A Democratic official familiar with the session said House Majority Leader Eric Cantor, R-Va., was especially adamant that any deficit reduction package could not contain tax increases and that any new tax revenue would have to be used to pay for other tax benefits.

A gamble where you bet your country’s good name’ - I can’t help but think the vast majority of the public just doesn’t fully appreciate what’s transpiring here. We’re dealing, after all, with fairly obscure legal mechanisms. Most Americans don’t know what the federal debt ceiling is, and in fairness, they’ve never had to. It’s a law that was approved more than eight decades ago, and hasn’t been particularly controversial or even relevant since. Policymakers have always realized they have an obligation — legal, economic, moral, and otherwise — to do the right thing. The United States is like the Lannisters: we always pay our debts. And in the case of the debt ceiling, we’re talking about money we’ve already spent — this is the equivalent of getting a credit card bill for charges we’ve already made. The entirety of the Republican Party — in the House, in the Senate, among its presidential candidates — has said it might pay the bill, but only if Democrats agree to take trillions of dollars out of a fragile economy. And if Democrats don’t do enough to make Republicans happy, GOP officials will simply refuse to do their duty. They know the consequences would be severe for the nation and the world. They apparently don’t care.

Time for a grand bargain on jobs - We ended the weekend with Speaker John Boehner walking away from the deal, not because the cuts weren’t steep enough but because they would be achieved, in part, through tax increases on hedge fund managers, private jet owners and oil and gas companies. This is a party, to paraphrase Nobel laureate Joseph Stiglitz, of the 1 percent, by the 1 percent, for the 1 percent. It is a party that accepts no new taxes, no closing of loopholes, no crackdowns on overseas tax havens, and no increase in corporate tax rates even as the biggest corporations pay little or no taxes on billions of profits. It is a party that embraces cruel cuts to the social safety net, but then draws its line in the sand on behalf of hedge fund managers. What kind of people aspire to govern with the goal of harming the weakest on behalf of the strongest? To them, shared sacrifice is anathema. Obama may want to play the role of reasonable adult, but being reasonable cannot mean acting as a hostage negotiator. It must mean being a leader of a nation that cries out for relief and reconstruction. He must push for a grand bargain on jobs, not cuts.

In Debt Watch, Next Shoe to Drop Could be Moodys - Wall Street and foreign investors might finally begin paying attention to the scrum over deficit reduction in Washington this week. That’s because Moody’s Investors Service could put the U.S. government’s Aaa bond rating on review for a possible downgrade soon. Moody’s had warned on June 2 that a “review” could come by mid-July “if there were no progress on increasing the statutory debt limit.” A spokesman for Moody’s said the timing of any ratings action depends on the considerations of a rating committee and can’t be disclosed. The U.S. government has already hit its $14.29 trillion debt limit, and Treasury Department officials have warned the government could begin defaulting on its debt after Aug. 2 if the ceiling isn’t raised soon. What would be significant about a “review” from Moody’s? It would depend on the market reaction. It would definitely move U.S. government debt closer to a potential downgrade, which could send investors scurrying, driving up Treasury yields and potentially forcing interest rates around the world to spike.

Obama Offered To Raise Medicare Eligibility Age As Part Of Grand Debt Deal: "In his press conference on Monday morning, President Barack Obama repeatedly insisted that he was willing to tackle some sacred cows as part of a larger package to raise the debt ceiling. Just how sacred, however, may surprise political observers. According to five separate sources with knowledge of negotiations -- including both Republicans and Democrats -- the president offered an increase in the eligibility age for Medicare, from 65 to 67, in exchange for Republican movement on increasing tax revenues. The proposal, as discussed, would not go into effect immediately, but rather would be implemented down the road (likely in 2013). The age at which people would be eligible for Medicare benefits would be raised incrementally, not in one fell swoop. Sources offered varied accounts regarding the seriousness with which the president had discussed raising the Medicare eligibility age. As the White House is fond of saying, nothing is agreed to until everything is agreed to. And with Republicans having turned down a 'grand' deal on the debt ceiling -- which would have included $3 trillion in spending cuts, including entitlement reforms, in exchange for up to $1 trillion in revenues -- it is unclear whether the proposal remains alive.

President Obama Just Vowed No Short Term Debt Limit Deals -- Recent History To The Contrary - President Obama just said, "So what I've said to the leaders is, bring back to me some ideas that you think can get the necessary number of votes in the House and in the Senate. I'm happy to consider all options, all alternatives that they're looking at. The things that I will not consider are a 30-day or a 60-day or a 90-day or a 180-day temporary stopgap resolution to this problem."  That's music to the ears of those of us who want serious deficit reduction after 2012, but, unfortunately, it flies in the face of recent history.This Congressional Research Service report lists 11 short-term continuing resolutions to fund the government that President Obama has signed since taking office on January 20, 2009. This Congressional Research Service report lists 3 short-term debt limit increases he has signed since taking office.

US lawmakers still far apart on debt agreement needed to avoid default - President Barack Obama and Republican lawmakers, seemingly trapped in inflexible bargaining positions, remain far apart on a deal to avert a first-ever default on the country's financial obligations. Congressional leaders were asked to return to the White House for more talks Tuesday afternoon after a 90-minute Monday session produced no progress other than to identify the size of the gap between Republicans and Obama. An Aug. 2 deadline looms for Congress to raise the country's debt limit. Republicans are insisting on major budget cuts to reduce the swollen deficit. Obama and his fellow Democrats are also offering budget cuts but in tandem with tax increases that the Republicans say they won't support. Both Democratic and Republican leaders agree the U.S. shouldn't be allowed to default on its obligations, which could skyrocket interest rates, send stock markets plunging and shatter faith in the world's No. 1 economy.

Geithner: We Need Debt Deal By Next Week -- Treasury Secretary Tim Geithner said Tuesday that he wants a deal to raise the debt ceiling and cut the budget by the end of this week -- or next week at the latest -- to give Congress enough time to turn the deal into law. "We know we don't have a lot of time, and we want to wrap up the broad outlines of the agreement by the end of this week, certainly by the end of next week," Geithner said at the Women in Finance Symposium at the Treasury Department. Geithner added that he was confident that the debt ceiling will be raised by the Aug. 2 deadline, the date when the United States would otherwise be unable to pay all its bills. "Default is not an option, failure is not an option, and they understand that -- Speaker (John) Boehner and Minority Leader (Mitch) McConnell -- absolutely understand we need to move in advance of the deadline on Aug. 2nd," Geithner said. "What's at stake is whether we can put together a long-term fiscal plan that's good for the economy."

White House Paints Doomsday Default Scenario - As the high-wire negotiations with the Congressional leadership resume Thursday over raising the nation’s debt ceiling, one message from President Obama and his top aides has remained consistent: The consequences of default would be very, very scary.  During his otherwise news-free Twitter town hall on Wednesday, the president sketched the doomsday scenario that would snowball from a breakdown in the negotiations and a failure to raise the nation’s debt ceiling. “Then the Treasury will run out of money,” he said. “Potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything.  And so our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.” Mr. Obama usually resists the use of heated rhetoric. But even as administration officials have searched for what Mr. Obama calls a “balanced approach,” they have sought to convince Americans that failing to reach a deal will affect them directly — and in a big and very bad way.

Obama ‘cannot guarantee’ benefits checks will be paid if debt deal isn’t reached - President Obama warned Tuesday that retirees might not receive their Social Security checks next month if lawmakers fail to reach an agreement on how to reduce the federal debt.  "I cannot guarantee that those checks go out on Aug. 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it," Obama told CBS's Scott Pelley in an interview set to air tonight on the CBS Evening News. Roughly $20 billion in Social Security checks are set to be mailed out on Aug. 3--a day after the Treasury Department says the U.S. will begin defaulting on its financial obligations unless the debt ceiling is raised. But the president cautioned that it's more than just Social Security checks that could be affected. "These are veterans' checks. These are folks on disability," Obama said, according to excerpts released by CBS News. "There are about 70 million checks that go out."

Obama insists on budget deal before debt ceiling increase - President Barack Obama and congressional leaders on Monday emerged still deeply divided over how to slash the nation's debt, with reality sinking in that even a middle-ground proposal was not big enough to succeed and would not get through Congress anyway. As time runs perilously short for action, Obama challenged top lawmakers to return to the White House on Tuesday with fresh ideas for a debt-reduction plan that could pass the House and Senate. All sides are scrambling to reach a deal as part of a tradeoff in which Congress would agree to extend the nation's debt limit by Aug. 2 to prevent a catastrophic government default on its bills. Turning up the pressure, Obama declared that he would reject any stopgap extension of the nation's borrowing limit, imploring lawmakers once again to reach one of the most sizable debt-reduction deals in years. He refused to even entertain a backup plan if that doesn't happen.

White House thinks it has debt debate high ground - President Barack Obama’s deficit strategy is a combination of audacity, hope and — in the eyes of Republicans — chutzpah. Obama, vilified by opponents for ducking the debt debate earlier this year, has seized the opportunity to portray himself as the champion of a $4 trillion “grand bargain” on tax and entitlement reform. This, after Speaker John Boehner (R-Ohio), who spent months pushing the president in that direction, pulled out of any attempt to “go big” over the weekend. “Obama wants $4 trillion in debt reduction, while GOP wants only $2-$3 trillion,” wrote veteran Democratic pollster Geoff Garin. “[It] seems clear now which one is serious about tackling the debt.” Added a senior Democratic aide, “He’s got the high ground. He’s the adult in the room. He’s looking good right now.” Many Democrats believe Obama’s proposed $4 trillion deficit-cutting deal, panned by lawmakers in both parties as too unpalatable5 to pass, may be a win-win politically for the president.

GE’s Immelt: ‘We Need Certainty About the Debt Ceiling — Now’ - “I just think we need certainty about the debt ceiling and we need it now. That really can only happen here. Let’s do it now,” Mr. Immelt, who is also chairman of President Barack Obama‘s Jobs and Competitiveness Council, said at the U.S. Chamber of Commerce. The two parties are working to reach a deficit-reduction deal that would clear the way for Congress to vote to raise the debt ceiling by Aug. 2, when the Treasury Department said the U.S. government will begin to default on its obligations, including debt payments. Mr. Immelt didn’t go into specifics on the shape of an agreement, but broadly criticized Washington officials for failing to adopt policies that could help businesses and create jobs.

Hopes Dwindling for Compromise in Budget Talks - From the White House and Congress to financial centers, pessimism spread on Tuesday about the prospects of a debt-limit deal between President Obama1 and Republicans, prompting the Senate Republican leader to propose a “last-choice option” that piqued the administration’s interest but angered conservatives in his own party.  The leader, Senator Mitch McConnell2 of Kentucky, said a bipartisan budget-cutting deal is probably out of reach, making it unlikely that Republicans would approve an increase in the government’s debt limit3 by Aug. 2. To prevent default, he proposed that Congress in effect empower Mr. Obama to raise the government’s borrowing limit without its prior approval of offsetting cuts in spending.  Administration officials welcomed the McConnell initiative for at least signaling that both parties’ leaders were committed to averting a potential economy-shaking government default; many Democrats in Congress saw it as a way to avoid the sort of deep cuts in Medicare4, Medicaid5 and Social Security6 that Republicans have sought as the price of their votes for a debt-limit increase.

A Way Out Of the Budget Impasse - In a column posted today on Bloomberg Views I suggested a way to resolve the budget impasse. It starts with the fact that about $6 trillion in deficit reduction is needed over 10 years to get to balanced budget.The proposal is that the President and the Congress  agree now to $2.5 trillion spending growth reductions and increase the debt limit by the same amount. The question about how to close the remaining $3.5 trillion gap--tax increases or more spending reductions--is then left to debate next year as part of the 2012 election. This chart--which I have used before--shows the feasibility of the idea. In a speech on April 13 President Obama already suggested about $2 trillion in spending growth reductions. So we are almost there.

Debt Ceiling Consequences - Negotiations in Washington continue over a debt reduction package that could be coupled with an increase in the Federal government’s borrowing authority. The Treasury Department has stated that August 2nd is the day when the US will have to stop issuing debt – as it will be out of “head-room” under the debt ceiling . But what exactly happens on August 3rd? Which current government obligations will get paid on-time by the Treasury? Who could get sent an IOU? The Bipartisan Policy Center has produced an interesting new report estimating exactly what will happen when the Treasury hits the debt ceiling, with an analysis of the month of August as well as a day-by-day guide to initial spending commitments. It provides a helpful illustration of how much general government operation is funded through deficit spending each month:

Great Depressions - Coming across stuff like this is exactly why I've been reluctant to even pick up the newspaper (metaphorically) in recent weeks: The U.S. Treasury will not default. Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues. Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise. I've made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that sze would reduce the US's 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.

Boehner-Cantor rivalry affecting debt talks - A long-simmering rivalry between the top two Republicans in the House has tumbled into the open, with far-reaching implications for deficit-reduction negotiations with the White House. Speaker John A. Boehner (R-Ohio) and Majority Leader Eric Cantor (R-Va.) are at odds over President Obama's call for a massive deficit-reduction package to address fiscal problems and provide for an increase in the country's $14.3-trillion borrowing limit before an Aug. 2 deadline. In private talks with the White House, Boehner favored a large package as part of pragmatic political deal-making. But Cantor, speaking for staunch conservatives in Congress, is opposed. In a briefing Monday, Cantor downplayed the divisions, insisting repeatedly that he and the speaker were "on the same page." But friction between the two has grown obvious, reinforcing months-old questions over who controls House Republicans. "I don't think Boehner would want to serve in a foxhole anytime with Eric Cantor,"

John Boehner’s Moment of Truth - House Speaker John Boehner (R-OH) is having his own Profiles in Courage moment. Congressional Republicans, through tenacity and discipline, have dragged President Obama far to the right. The White House seemed ready to give Republicans a long-term budget agreement they could only dream about when they won control of the House last fall. Not only would this fiscal plan mirror the GOP’s vision of smaller government, it would effectively forceDemocrats to abandon two of their most powerful political weapons–Medicare and Social Security. All the GOP needed to do was declare victory and pop the bubbly. Yet Boehner lost his will, unwilling to face down rejectionist elements of his own party.     Recall that Obama began debt limit negotiations by demanding a clean extension of federal borrowing authority with zero deficit reduction. He had ignored the recommendations of the chairs of his own deficit commission. And he had proposed a 2012 budget that would have added $3 trillion in red ink over the next decade.

McConnell: No real deficit deal until Obama is gone - The Senate's top Republican said Tuesday that he did not see a way for Republicans and Democrats to come to agreement on meaningful deficit reduction as long as President Obama remains in office.  "After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable," Senate Republican Leader Mitch McConnell said in remarks on the Senate floor. The remarks come as negotiations between Republicans and Democrats intensify on long-term deficit reduction ahead of a looming deadline on how much the United States can legally borrow. Treasury Secretary Timothy Geithner and many economists have warned of economic catastrophe if the $14.3 trillion debt ceiling is not raised before August 2. And lawmakers from both parties want to use the threat of that deadline to work out a broader package on long-term deficit reduction. Republicans are looking to cut trillions of dollars in federal spending, while Democrats are pushing for a more "balanced approach," which would include both spending cuts and higher revenue to the government.

Give Obama New Debt Limit Power, GOP Leader Says - With compromise talks at a vituperative standstill, Senate Republicans unexpectedly offered Tuesday to hand President Barack Obama new powers to avert a first-ever government default threatened for Aug. 2. Under a proposal outlined by Sen. Mitch McConnell of Kentucky, Obama could request — and likely secure — increases of up to $2.5 trillion in the government's borrowing authority in three separate installments over the next year, as long as he simultaneously proposed spending cuts of greater size. The debt limit increases would take effect unless blocked by Congress under special rules that would require speedy action — and even then Obama could exercise his authority to veto such legislation. Significantly, the president's spending cuts would be debated under normal procedures, with no guarantee they ever come to a final vote. McConnell made his proposal public a few hours before Obama presided over his third meeting in as many days with congressional leaders searching for a way to avoid a default and possible financial crisis.

As Talks Stall, New Debt Plan Offered - Negotiations over a deficit-reduction agreement spiraled downward Tuesday as the White House and congressional leaders dug in even as anxiety mounted that they could wait too long to reach a deal to avoid a government default.  In one sign that top leaders worry they won't reach a deal in time, Senate Minority Leader Mitch McConnell (R., Ky.) unveiled a proposal that would allow President Barack Obama to raise on his own the federal borrowing limit by $2.4 trillion in three installments before the end of 2012, unless two-thirds of Congress votes to block it.  Because Mr. Obama would have to lift the debt ceiling, it could place any political fallout on him for doing so. But Republican conservatives protested that Mr. McConnell's plan would give up the leverage the GOP has to force the White House to approve government spending cuts in return for a debt-ceiling increase.

The Big Blink? McConnell Proposes Giving Obama Authority To Raise Debt Limit Alone - Senate Minority Leader Mitch McConnell (R-KY) has proposed creating an escape hatch for Congressional Republicans, who have put themselves in a box by threatening not to raise the national debt limit if Democrats don't agree to trillions of dollars in cuts to popular social programs. The plan is designed to give President Obama the power to raise the debt limit on his own through the end of his first term, but to force Democrats to take a series of votes on the debt limit in the months leading up to the election. This would stave off the threat of defaulting on national obligations, but keep the charged issues of debt and spending at the center of political debate for months. The development confirms suspicions that the GOP was unwilling to truly use the looming debt ceiling as leverage to force conservative-friendly changes to popular entitlement programs, but suggests strongly that Republicans plan to continue politicking on fiscal issues through the 2012 elections.

McConnell Offers Three-Stage Option for Raising Debt Limit - Senate Republican leader Mitch McConnell proposed granting President Barack Obama unilateral power to raise the national debt ceiling as a “last-choice option” to avoid a default, a move intended to put the burden on the White House to identify future spending cuts.  McConnell offered the plan as the two parties remained in a standoff over tax increases and cuts to entitlement programs in deficit-reduction talks and as he and other Republican leaders assailed the president’s credibility on fiscal matters.  “As long as this president is in the Oval Office, a real solution is unattainable,” McConnell of Kentucky said on the Senate floor yesterday, in his toughest comments about the negotiations since the talks began. He dismissed Obama’s call to lower the deficit by $4 trillion over the next 10 to 12 years as “smoke and mirrors.”

The McConnell Plan: Saving Face Without Saving Money - Senate Minority Leader Mitch McConnell's (R-KY) plan for dealing with the debt ceiling imbroglio has been described in detail -- or at least as much detail as is possible when there's no legislative language -- just about everywhere (take a look at Jackie Calmes piece in the New York Times and Lori Montgomery's/Paul Kane's story in the Washington Post, for example) so there's no need for me to repeat it here. Two quick comments:

  • 1.  The proposal absolutely is a punt by the GOP.  It may be a way of saving face by claiming that it forces the White House to take sole responsibility for the debt ceiling, but it eliminates virtually all likelihood that any of the the spending cuts congressional Republicans have been insisting are the prerequisite for a debt ceiling deal will be enacted.  It's hard to see how that will play well with the tea party base that isn't likely to accept a procedural gimmick as a substitute for actual spending changes. 
  • 2.  McConnell is hanging his political hat on the fact that his proposal would require that the president send Congress a list of spending cuts equal to the increase in the government's borrowing authority he's requesting.  The presumption, of course, is that the president will take significant political heat for specific proposals.

Why Mitch McConnell Will Win the Day, by Robert Reich: Senate Minority Leader Mitch McConnell’s compromise on the debt ceiling is a win for the President disguised as a win for Republicans. But it really just kicks the can down the road past the 2012 election – which is what almost every sane politician in Washington wants to happen. McConnell’s plan would allow the President to raise the debt limit. Congressional Republicans could then vote against the action with resolutions of disapproval. But these resolutions would surely be vetoed by the President. And such a veto ... could only be overridden by two-thirds majorities in both the House and Senate – which couldn’t possibly happen. Get it? The compromise allows Republicans to vote against raising the debt limit without bearing the horrendous consequences of a government default. No budget cuts. No tax increases. No clear plan for deficit reduction. Nada. The entire, huge, mind-boggling, wildly partisan, intensely ideological, grandly theatrical, game of chicken miraculously vanishes. Until the 2012 election, that is.

Clean McConnell - Note this, from this AM’s WaPo:“Senate Majority Leader Harry M. Reid (D-Nev.) is working with McConnell on this approach. Aides said the two are discussing a strategy that would pair McConnell’s debt-limit proposal with at least $1.5 trillion in spending cuts identified through bipartisan talks that Vice President Biden has led in recent weeks.” Recall that Republican Senate Leader McConnell has a plan to allow the president to raise the debt limit without binding spending cuts—he has to recommend them, then Congress gets to vote on them. While this may be a (cynical and convoluted) way to avoid default, House Republicans don’t like it because they want binding spending cuts—and, of course, no revenues (other R’s like the McConnell plan because they can vote against the higher ceiling but since they won’t have the votes to veto the president’s request, it will still go up, but without their fingerprints…not exactly bravery in battle, but there it is.)

Understanding the McConnell debt limit proposal - Coming two full days after Leader McConnell released his proposal, this post may be too late to do much good. Most of Washington seems to have processed the idea and is now fiercely debating it. Still, I found the press coverage of the Leader’s proposal to be generally confusing and inadequate, so I hope this helps clarify things for anyone who was confused by other explanations. I will try to stay neutral as best I can in this post.

McConnell, Boehner increase criticism of Obama -  The top two Republicans in Congress sought Tuesday to put the onus on President Barack Obama for failure to resolve a fight over how to increase the government's borrowing authority. Senate Minority Leader Mitch McConnell said a deal with Obama is "probably unattainable" and House Speaker John Boehner said the specter of default is "his problem." The unusually blunt and combative language came just hours ahead of another White House meeting aimed at finding an accommodation on a package of spending cuts to accompany an increase the debt limit. It further complicated an already convulsive bargaining environment, with the Aug. 2 debt limit extension deadline fast approaching.McConnell maintained that White House offers to cut long-term spending amount to "smoke and mirrors" and directly challenged Obama's leadership. After years of discussions and months of negotiations," the Kentucky Republican said, "I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable."

Debt talks reveal the Republicans’ apocalyptic war on government - As Default-on-Our-Debt Day creeps ever closer, America’s two major political parties have embarked on a round of ideological redefinition. Republicans have subordinated even the appearance of concern for many of their historic priorities — reducing deficits and the debt, maintaining a passable system of roads, even reducing Medicare and Social Security payouts — to the single goal of blocking any tax increase on anyone ever again. Taking the adage that “that government is best that governs least” to an extreme, at least some seem to view a government shutdown as a consummation devoutly to be wished.  On the Democratic side, President Obama has moved so far to the right that he has picked up many of the ideals the Republicans have jettisoned and embraced them as his own. It’s Obama who’s now the deficit-and-debt hawk and who has proposed cuts to Social Security and Medicare. Congressional Democrats oppose the president’s proposed entitlement cuts, but in fact they’ve already voted to reduce Medicare spending (though not benefits) by passing health-care reform, and, as part of the current budget negotiations, have agreed to major cuts in domestic as well as military spending.

White House: Debt deal needed in "matter of days" (Reuters) - The White House said on Tuesday a debt deal needs to be reached in a "matter of days" because of the looming Aug. 2 deadline for raising the national debt ceiling to avoid default. White House spokesman Jay Carney also rejected as "unfortunate" a comment by Senate Republican leader Mitch McConnell that a real solution to the U.S. debt problem is probably not possible as long as President Barack Obama remains in office.

Obama: No Social Security Guarantee In August If GOP Doesn’t Back Down (VIDEO) For the first time in public, President Obama has warned that crucial benefits for retirees, veterans, and disabled people might not go out early next month if Republicans don't relent in the debt limit fight. "This is not just a matter of Social Security checks," Obama told CBS News in an interview that will air Tuesday night. "These are veteran's checks, these are folks on disability and their checks. There are about 70 million checks that go out each month. I can not guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

Dagong is likely to downgrade US rating - The US' sovereign credit rating is likely to be downgraded regardless of whether the US Congress reaches an agreement on raising its statutory debt limit, Chinese rating agency, Dagong Global Rating Co Ltd, said on Monday. "If the debt limit is raised and the public debt continues to grow, it will further damage the US' debt-paying ability, which is a key factor in Dagong's evaluation, and we will consider lowering its ratings accordingly," said Guan Jianzhong, chairman and CEO of Dagong. "If the raised limit fails to pass and the US faces default, the rating will be immediately and substantially downgraded," he said. According to Guan, the downgrading is really just "a matter of time and extent"

Defining Default -- Mark Zandi explains to Andrea Mitchell what will happen if the U.S. debt ceiling isn't raised.

Obama: I Cannot Guarantee We’ll Be Able To Pay Social Security After August 2nd - CBS News is out with a preview of an interview with President Obama that will air tonight in which the President states the government may not be able to make Social Security payments after August 2nd if the debt ceiling isn’t increased:President Obama on Tuesday said he cannot guarantee that retirees will receive their Social Security checks August 3 if Democrats and Republicans in Washington do not reach an agreement on reducing the deficit in the coming weeks. “I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News. The Obama administration and many economists have warned of economic catastrophe if the United States does not raise the amount it is legally allowed to borrow by August 2. 

Psychodrama Queens – Krugman - Greg Sargent tells us that the White House is promoting a Gerald Seib piece which summarizes the political strategy thus: A big deal would reassure independents who fear the country is out of control; position Obama as the adult who made Washington work again; allow the President to tell Dems he put entitlements on sounder financial footing; and clear the decks to enact other priorities later. [Bangs head against wall] What I learn from political scientists is that this is all fantasy — albeit a kind of fantasy beloved of political pundits, who love to imagine that complicated psychodramas are playing out in the minds of voters. Well, here’s a little secret: most voters don’t sit around reading Clive Crook columns or debating the Bowles-Simpson plan. They have a gut sense — things are getting better or they’re getting worse — and mainly vote on that basis. They’re not paying attention at all to this stuff.  Even if voters were trying to make decisions based on things like fiscal responsibility, how likely are they to have remotely accurate information? Not at all if they watch Fox; but the truth is that even if they watch a reputable network, or for that matter even if they read the Times, they probably have only the vaguest sense of what’s going on.

U.S. Debt Ceiling Increase Remains Unpopular With Americans - Despite agreement among leaders of both sides of the political aisle in Washington that raising the U.S. debt ceiling is necessary, more Americans want their member of Congress to vote against such a bill than for it, 42% vs. 22%, while one-third are unsure. This 20-percentage-point edge in opposition to raising the debt ceiling in Gallup's July 7-10 poll is slightly less than the 28-point lead (47% vs. 19%) seen in May. This measure reflects public opinion about raising the debt ceiling in the abstract. The question wording did not mention the rationales for or against raising the debt ceiling, nor did it explain that any such move would ultimately be a part of a broader budget bill involving spending cuts and perhaps tax increases. Republicans are far more unified in their opposition to raising the debt ceiling (60% opposed, 11% in favor) than Democrats are in their support of it (39% in favor, 21% opposed). Independents tilt heavily against raising the debt ceiling, 46% to 18%, although 36% have no opinion.

The Show Must Go On - The Debt Ceiling Reality Show is winding down to its dramatic conclusion on August 2. I think Fox should capitalize on the drama by gathering the American Idol judges to vote on the best performance by a political hack. We can have Ryan Seacrest announce on August 1 at 11:55 pm that the winner is – THE WALL STREET MONIED INTERESTS. The latest round of kabuki theatre performed by the corrupt lying thieves in Washington DC is being played out every night on the MSM. The volume of misinformation, lies, exaggerations, posturing, and propaganda is staggering. These vile excuses for leaders know that 80% of the American population wouldn’t know the difference between a debt ceiling and a drop ceiling. They use this ignorance to their advantage, as Obama warns that old people won’t get their social security checks and government drones won’t be paid. According to Gallup, Republicans and Independents don’t want the debt ceiling raised. The poll also indicates that at least one third of Americans don’t care. They are too outraged by the Casey Anthony verdict to focus on the economic future of our country.

America On The Precipice - Wars in the Middle East, tax cuts for the wealthy and unfunded social welfare programs have the US on the brink of defaulting on its $14.3 trillion debt. And its leaders are at loggerheads on how to respond. TWENTY days out from a possible default on its loans by the world's richest nation, America's political leaders apparently agree that it should never have come to this. But on how best to put things right, they remain at loggerheads, deeply divided along ideological lines, anxiously protecting what Barack Obama has termed their ''sacred cows'' - for Republicans, low taxes; for Democrats, coveted entitlement programs such as the national pension scheme and subsidised healthcare for seniors. The US has racked up debts of more than $US14 trillion, roughly equal to its gross domestic product, and the trajectory portends fiscal disaster. Without painful remedial action, the debt is expected to climb beyond $US20 trillion within five years, and hit $US25 trillion by 2021, just as the US is facing unprecedented challenges that threaten its global economic standing.

Bernanke urges GOP to approve debt limit raise - - Federal Reserve Chairman Ben Bernanke on Tuesday urged Republicans to support raising the nation's borrowing limit. He said threatening to block the increase to gain deeper federal spending cuts could backfire and worsen the economy. Even a short delay in making payments on the nation's debt would cause severe disruptions in financial markets, damage the dollar and raise serious doubts about the nation's creditworthiness, Bernanke said.It wasn't Bernanke's first warning to Republicans, who are vowing to block an increase that doesn't include a deal to slash government spending by the same amount. But it was his most explicit in terms of the consequences.The nation reached its $14.3 trillion borrowing limit in May. Treasury Secretary Timothy Geithner has said that the U.S. could default on its debt if it doesn't raise the limit by Aug. 2. The debt limit is the amount the government can borrow to help finance its operations.

Bernanke Calls Debt Limit 'Wrong Tool' for Forcing Budget Cuts - Federal Reserve Chairman Ben S. Bernanke said the U.S. debt ceiling shouldn’t be used as a bargaining chip to force budget cuts, and failing to raise it could cause “severe disruptions” in financial markets.  Using the debt limit deadline to force some “necessary and difficult fiscal-policy adjustments” is “the wrong tool for that important job,” he said. “We should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills,” Bernanke said today in the text of remarks in Washington.  Lawmakers are wrangling over spending cuts and budget reforms as they seek an agreement to increase the $14.3 trillion debt limit before Aug. 2, the date on which the Treasury Department said it will have exhausted all its borrowing authority. Moody’s Investors Service on June 2 said that it expects to place the U.S. government’s top credit rating under review for a possible downgrade if there’s no progress on increasing the debt limit by mid-July.

Boehner Is Wrong: A Deficit Reduction Bill With Revenues Can Pass The House - House Speaker John Boehner (R-OH) and Majority Leader Eric cantor (R-VA) are both being more than just a bit misleading when they keep repeating the mantra that a deficit reduction bill with revenue increases won't pass the House. What Boehner and Cantor really mean is that a bill with revenue increases won't get a majority of Republicans to vote for it and their leadership positions will be in serious and immediate jeopardy if they allow a bill to come to the House floor and be adopted with a majority of Democrats and just a handful of GOP'ers. That would mean that a bill with revenue increases would be adopted over the Republican majority's wishes and that they would be held responsible for letting it happen.

Obama Walks Out Of Tense Debt Ceiling Meeting: Reports - President Barack Obama walked out of a contentious meeting in ongoing talks to raise the nation's debt limit on Wednesday, an aide tells Reuters. Politico reports that House Majority Leader Eric Cantor said the president stormed out of the negotiating session with top congressional lawmakers. The Hill reports that House Minority Leader Nancy Pelosi disputed Cantor's account of what occurred at the end of the meeting.  "Cantor's account of tonight's meeting is completely overblown," a House Democratic aide told HuffPost. "For someone who knows how to walk out of a meeting, you'd think he['d] know it when he saw it. Cantor rudely interrupted the President three times to advocate for short-term debt ceiling increases while the President was wrapping the meeting. This is just more juvenile behavior from him and Boehner needs to rein him in, and let the grown-ups get to work." HuffPost's Jen Bendery reported earlier in the day: The White House on Wednesday closed the door a little more on the debt proposal being floated by Senate Minority Leader Mitch McConnell (R-Ky.), a measure already under siege by conservatives.  "This is not a preferred option,"

Cantor to the Woodshed  - David Rogers has word that the President of the United States monstered down on Representative Eric Cantor in Wednesday’s deficit ceiling squabble. This is so refreshing on so many levels. Cantor has been using this crisis to undermine his leader John Boehner, by playing the Tea Party/Grover Norquist recalcitrance card. The boy badly needed someone to get up in his face and Barack Obama, of all people, apparently did, telling Cantor, in no uncertain terms, that he’d veto any short term deficit ceiling fix or, indeed, any plan that did not include revenue increases. Then Obama walked out, or the meeting ended, depending on whom you talk to. So what we have now is the Republican party in, yes, disarray–a word used to describe Democrats almost exclusively, back in the day before the crazies took over the GOP store.

Tensions Escalate as Stakes Grow in Fiscal Clash - The Federal Reserve chairman, Ben S. Bernanke, warned on Wednesday of a “huge financial calamity” if President Obama and the Republicans cannot agree on a budget deal that allows the federal debt ceiling to be increased. Moody’s, the ratings agency, threatened a credit downgrade, citing a “rising possibility” that no deal would be reached before the government’s borrowing authority hits its limit on Aug. 2.  And the latest bipartisan negotiating session on Wednesday evening ended in heightened tension. Republicans said Mr. Obama had abruptly walked out in an agitated state; Democrats described the president as having summed up with an impassioned case for action before bringing the meeting to a close and leaving.  Across Washington, officials were weighed down with a sense that they were hurtling toward a crisis. Grim-faced lawmakers spent the day shuttling from meeting to meeting in search of a way out of the fix.  The stakes are high, for the economy, the financial markets and both parties. But the pressure was particularly intense on Republican leaders, who only weeks ago seemed to be on the offensive and in a strong position to extract major concessions from Mr. Obama and the Democrats.

Obama ends tense debt talks with a warning - U.S. President Barack Obama abruptly left debt negotiations with congressional leaders Wednesday at the White House when a top Republican said there was no longer time to engage in the large-scale deficit reduction discussions the White House is now seeking as part of a vote to raise the nation’s debt ceiling. The flare-up came at the end of the nearly two-hour session during which House Majority Leader Eric Cantor, a Republican from Virginia, told the president that Congress should instead consider a series of debt ceiling votes based on spending cuts that already have been identified. Talks could then continue to identify additional cuts for subsequent votes, he said. Republicans have refused Democrats’ call for taxes on the wealthy. The president responded by ending the meeting, sources said. “I suggested we were so far apart I didn’t see in the time before us how we get to where he wants us to be,” Cantor told reporters after the meeting. Obama warned Cantor not to set such an ultimatum, and according to congressional and administration aides repeated his vow to veto legislation that would extend the debt ceiling only for a short period.

Obama warns GOP leaders: 'Don't call my bluff' - President Barack Obama bluntly told Republican congressional leaders Wednesday they must compromise quickly if the government is to avoid an unprecedented default, adding, "Don't call my bluff" by passing a short-term debt limit increase he has threatened to veto. The presidential warning, directed at House Majority Leader Eric Cantor, R-Va., marked an acrimonious end to a two-hour negotiating session at the White House that produced no evident progress toward a compromise. Another round of talks is set for Thursday. With a threatened default less than three weeks away, Moody's Investors Service announced it was reviewing the U.S. bond rating for a possible downgrade, and the Treasury said the annual deficit was on a pace to exceed $1 trillion for the third year in a row. With the negotiations at a seeming standstill, Republicans drew a warning of a different sort, from an unlikely source -- the party's Senate leader, Sen. Mitch McConnell of Kentucky. In an interview with radio talk-show host Laura Ingraham, McConnell warned fellow conservatives that failure to raise the debt limit would probably ensure Obama's re-election in 2012.

Obama: Enough is Enough in Debt Talks, ‘This May Bring My Presidency Down, But I’m Not Yielding’ -In what was described as tense and dramatic Wednesday evening meeting on the debt ceiling, President Obama repeatedly clashed with Majority Leader Eric Cantor (R-VA) while giving both sides a Friday deadline on whether to go for a long-term reduction in deficit-spending or find a way simply to avoid a default. At one point, Cantor pushed for a short-term extension of the Aug. 2 deadline for Congress to raise the nation's borrowing rate, a request Obama shot-down, according to a Democrat familiar with the discussions. He also told the group of Congressional leaders that they can't accomplish anything if everyone keeps sitting in their own corners refusing to budge and move beyond their political comfort zones. After the the closed-door session at the White House, Cantor told Fox News that Obama ended the meeting by abruptly walking out of the room and all progress thus far had been erased in the Wednesday meeting.

Don’t mess with the debt ceiling - Bill Gross - To raise or not to raise the debt ceiling; that is the question: Whether ’tis nobler to suffer the slump and arrows of default today or in some distant future. Oh, bards of Washington, give us your answer. This Shakespearean financial dilemma hangs in the balance between now and a somewhat theoretical Aug, 2, but I can tell you what an unbiased investment manager thinks: Don’t mess with the debt ceiling. Raise it unencumbered if necessary. I say unbiased because my credentials have become very public over the past several months. Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008.

An argument for the McConnell plan - We’ve never thought the debt ceiling was the best leverage for a showdown over the entitlement state… The tea party/talk-radio expectations for what Republicans can accomplish over the debt-limit showdown have always been unrealistic. As former Senator Phil Gramm once told us, never take a hostage you’re not prepared to shoot. Republicans aren’t prepared to stop a debt-limit increase because the political costs are unbearable. Republicans might have played this game better, but the truth is that Mr. Obama has more cards to play. The entitlement state can’t be reformed by one house of Congress in one year against a determined President and Senate held by the other party. It requires more than one election. The full article is here.  Ezra reports: You’re increasingly hearing about the possibility of a split Boehner/McConnell deal, in which Boehner gets less than $2 trillion in spending cuts, which is not quite as many as he wanted, and the McConnell process is used to raise the debt ceiling beyond where the spending cuts have gone.

Debt, deficit deal shouldn’t include Social Security - As talks continue between Democratic and Republican leadership on the federal deficit and debt ceiling, President Obama is facing criticism—much of it from his supporters—for putting Social Security on the bargaining table. Republicans want cuts to mandatory programs, such as Social Security, included in any budget deal that comes out of the negotiations. Facing an Aug. 2 debt ceiling deadline, the president indicated willingness to tinker with Social Security. Recent work by EPI on proposed changes to Social Security demonstrates why the president should reconsider making any concessions that involve one of America's most valuable safety nets. Changes such as reducing the cost-of-living adjustments for beneficiaries, raising the retirement age, and capping federal spending would weaken Social Security’s ability to provide adequate benefits for retirees, the disabled, and the others who depend on it.

Proposed Social Security, Medicare changes draw fire from AARP and others - White House officials said yesterday it's still possible that President Obama and congressional leaders could reach a deal to reduce the deficit by as much as $4 trillion over a decade -- meaning cuts to Social Security and Medicare are still on the table. The potential cuts to the possible entitlement programs have senior and health care advocates sounding out in alarm, while the Democratic and Republican parties are already crafting messages to blame the other side for potentially hurting the programs. The nonpartisan AARP is spending millions of dollars to launch a television ad nationally and in local markets today, urging Congress and Mr. Obama to take Social Security and Medicare off the table. The ad features a man who identifies himself as a grandfather and retired teacher. "Right now, some in Washington want to make a deal cutting the Social Security and Medicare benefits we worked for," he sayd. "With billions in waste and loopholes, how could they look at us? Maybe we seem like an easy target -- until you realize there are 50 million of us."

Obama, Moderate Republican - Krugman - OK, not exactly. But Nate Silver’s analysis of the budget proposals is a must-read. Nate looks at polling, and extracts the following implied preferences for the mix between tax increases and spending cuts in a debt deal: What Obama has offered — and Republicans have refused to accept — is a deal in which less than 20 percent of the deficit reduction comes from new revenues. This puts him slightly to the right of the average Republican voter. So we learn two things. First, Obama is extraordinarily eager to make concessions. Second, Republicans are incredibly unwilling to take yes for an answer — something for which progressives should be grateful.

What Makes You Think Obama is Conceding Anything? - Looking at some data from Nate Silver, Paul Krugman concludes What Obama has offered — and Republicans have refused to accept — is a deal in which less than 20 percent of the deficit reduction comes from new revenues. This puts him slightly to the right of the average Republican voter. So we learn two things. First, Obama is extraordinarily eager to make concessions. Second, Republicans are incredibly unwilling to take yes for an answer — something for which progressives should be grateful. Why exactly are we rejecting the Null Hypothesis that Obama is to the right of the average Republican voter on fiscal issues. I can understand why both sides of the political spectrum would have an interest in painting Obama as a big lefty. What’s not as clear to me is why people believe their own propaganda. Now, maybe lots of folks have an inside track that I am completely missing. However, there is nothing in Obama’s mannerisms, tone or statements that differentiate him from a green-eyeshade conservative.

Can Obama Pull a 'Clinton' on the GOP? - Robert Reich - After a bruising midterm election, the president moves to the political center. He distances himself from his Democratic base. He calls for cuts in Social Security and signs historic legislation ending a major entitlement program. He agrees to balance the budget with major cuts in domestic discretionary spending. He has a showdown with Republicans who threaten to bring government to its knees if their budget demands aren't met. He wins the showdown, successfully painting them as radicals. He goes on to win re-election. It's no accident that President Obama appears to be following the Clinton script. After all, it worked. Despite a 1994 midterm election that delivered Congress to the GOP and was widely seen as a repudiation of his presidency, President Clinton went on to win re-election. And many of Mr. Obama's top aides—including Chief of Staff Bill Daley, National Economic Council head Gene Sperling and Pentagon chief Leon Panetta—are Clinton veterans who know the 1995-96 story line by heart. Republicans have obligingly been playing their parts this time.

Moody’s puts the US on review for possible downgrade - Well, it said it would. And it has. After US markets closed on Wednesday, Moody’s followed S&P’s April 18 less-definitive negative outlook announcement, and put the US’s Aaa rating on review for possible downgrade. US Treasuries are treating the news with a priced-in shrug. Other securities will also be affected; see this post for more details. Some will wonder whether Moody’s warning — as it ostensibly did in the 1995-6 shutdown — will spur politicians into action. We doubt it. Full release and rationale below.

Moody’s Puts U.S. Credit Rating On Review For Possible Downgrade - And so it begins, the first of the big credit rating agencies is sending a message that they’ve pretty much had it with the game playing in Washington: The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country’s debt ceiling, forcing the government to miss debt payments, Moody’s Investors Service warned on Wednesday.(…) In a statement, Moody’s said it sees a “rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.” Moody’s isn’t kidding around. Just today, they downgraded Ireland’s bonds to junk status over ongoing fiscal insolvency. Will this finally be what gets the adults in Washington to do what needs to be done? One can only hope.

Moody’s places US rating on review - The US may lose its triple A credit rating, after Moody’s warned that the political deadlock over raising the country’s debt ceiling could lead to a downgrade.  Moody’s on Wednesday placed the US rating on watch for a possible downgrade, pending a decision in Washington on raising the $14.300bn debt ceiling. Failure to do so by August 2 could result in the US Treasury missing a debt payment. “The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes,” said Moody’s. “As such, there is a small but rising risk of a shortlived default.”  : “This review is not any different to what we do with any other debt issuer facing an event that would lead to a downgrade.” He added: “A missed payment will trigger a downgrade. If the debt ceiling is raised, we still look at the outcome of long-term deficit reductions.” Moody’s is the first of the major rating agencies to place the US on notice of possible downgrade. In April, Standard & Poor’s affirmed its triple A rating for the US, but revised the outlook on its long-term rating to negative from stable. Standard & Poor’s has warned that it will slash its US credit rating to D, the lowest level, in the event the debt ceiling is not raised and the country misses a debt payment.

The debt ceiling ratings downgrade - Here’s what I said in April well before this debt ceiling issue reached a critical stage:  It is not clear whether there will be a risk premium associated with this risk, increasing the yield of Treasury bonds, as the showdown draws near…  But, the risk of default is real – and that doesn't sound like the hallmarks of a AAA-rated country, more like the hallmarks of a banana republic. Fast-forward to today and Reuters is now reporting that Moody's put U.S. ratings on review for downgrade. S&P says the damage is done and they may downgrade the US even if a deal is done. So, now we see that, in fact, the debt ceiling debate has done damage to the credibility of the US. Business leaders get that. These “job creators” take issue with the position of people like the ambitious Eric Cantor who is using this issue for his own political agenda. I should also point out that bond guru Bill Gross is going against his financial interest (underweight Treasuries) and speaking out on this issue. He wrote the following in a Washington Post Op-Ed: Pimco owns very few Treasury securities, and its clients would theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade. The market situation might resemble what happened after Lehman Brothers collapsed in 2008

We are one major scare away from global financial markets unraveling - Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default. The AAA ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today. The U.S., rated AAA since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the AA range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured. “It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,”

When Riskless Gets Risky - Moody’s bond rating agency got into the act yesterday and put the US credit rating, which has been Aaa (highest rating) since 1917 on its “downgrade watch.” No surprise there and markets largely shook it off.  The 10-year Treasury is up a few bps (basis points, or hundredths of a percentage point) to 3.13% but the recent trend confirms that investors continue to believe there will be no default. BTW, you’re well within you rights to take a jaundiced viewthe bond raters—they didn’t exactly distinguish themselves when they were giving high grades to dangerous mortgage bonds a few years ago.  But I agree with their assessment: “the probability of a default on interest payments [is] low but no longer de minimis.”  More on that in the next post. But here’s something from the Moody’s release that’s worth keeping in mind.  I’ve stressed that in an economy where publically held debt amounts to around $10 trillion, even a 50 bps increase in the interest rate adds $50 billion to debt service (and thus to the deficit).  But it’s also worth contemplating all the other rates that are tied to the so-called “riskless rate” of US Treasuries.

So What? - Everyone (well, the media at least) seems to be acting as if Moody’s downgrading the United States would be a bad thing. I feel like I must be missing something. First of all, we know what bond ratings are worth. See, oh, the entire past decade for evidence.  Since it seems preposterous to me that anyone could care about the informational content of a Moody’s downgrade, I’m guessing that people are worried about the legal-mechanical consequences of a downgrade — in particular, the requirements that some investors (money market funds, some other mutual funds, maybe pension funds and insurance companies) must invest some proportion of their assets in AAA securities. If, say, every money market fund suddenly has to dump all of its T-bills, that could cause systemic problems. But in that case, what is Moody’s thinking? Would they really express their opinion by downgrading Treasuries, knowing (a) that no one cares about their opinion itself yet (b) it could trigger a financial crisis? That sounds to me like just about the most irresponsible thing one can imagine — blowing up the global financial system to express an opinion that no one would care about except for the fact that large amounts of money are mechanically tied to it.

Debt Ceiling Debacle: Who Gets Paid First? - If Congress does not vote to extend the debt ceiling by the U.S. Treasury’s August 2 deadline, the United States may not be able to pay all its bills. In fact, the Bipartisan Policy Center estimates the Treasury will default on nearly half its financial obligations. Jay Powell, the former Under Secretary to the Treasury under President George H.W. Bush and current visiting scholar at the Bipartisan Policy Center, talked with CBS MoneyWatch about what will happen — and who will get paid first — if Congress cannot agree on a plan. What happens if there is no agreement by August 2? : If the debt ceiling is not increased by August 2, then the federal government will wake up on August 3 and find itself far short of the amount of cash it needs to pay all of its bills. And if that happens, for the month of August, we estimate that the federal government will default on 44 percent of its legal spending obligations. We do not believe there will be a debt default, but there will not be enough cash to pay the other obligations. The federal government will be faced with a series of impossible choices over what not to pay.

China Must Quickly Diversify From Dollar: PBoC Advisor - China should speed up diversification of its $3.2 trillion foreign exchange reserves away from dollar assets to hedge against risks of the U.S. currency's possible long-term decline, an advisor to the People's Bank of China said on Thursday. "We should accelerate diversification in reserve investment," Xia Bin, an academic member of the central bank's monetary policy committee, told Reuters in an interview. China faces "pressures and challenges" in managing its fast-accumulating foreign exchange reserves, but the holdings may also present the country with an "unprecedented" opportunity to help its long-term development, Xia said. China's reserves, the world's largest, swelled by $152.8 billion in the second quarter to a record $3.2 trillion, driven by sustained capital inflows and its large trade surplus. Chinese officials have pledged to diversify the huge reserves — as much as 70 percent of which are now in U.S. dollar assets, according to analyst estimates — but the process has been gradual.

China urges U.S. to protect investors following Moody's warning - China has urged the U.S. Administration to take measures to protect the interests of investors. The statement followed a warning by the rating agency Moody’s to place the United States’ triple-A credit rating on review for a possible downgrade if the country’s national debt threshold is no raised by August 2, which may lead to a partial default. China currently holds more than $1 trillion in U.S. treasury bills. Some countries, including Russia, have been cutting their U.S. treasuries holdings. Meanwhile, a regular meeting between President Obama and Republican congressmen has failed to bring them any closer to a debt ceiling deal.

China Must Seriously Assess Risks of U.S. Treasury Debt, Yu Says -- China needs to "seriously assess the risks" of its holdings of U.S. Treasuries, Yu Bin, director of the macroeconomic research department of the State Council's Development Research Center, said today. The U.S. economic outlook is "worrisome," he said at a briefing in Beijing. China needs to adjust the asset structure of its foreign- exchange reserves in the short term and control the size of its reserves in the medium to long term, Yu said. China aims to cut its reliance on exports to prevent the trade surplus from adding to its currency holdings, he said. The size of the reserves will only see a notable drop after China improves its foreign trade balance, Yu said.

Debt Limit Madness - Senate Republican Leader Mitch McConnell (R-KY) has effectively embraced the debt limit plan first offered months ago by President Obama. Under the McConnell/Obama scenario, Congress would extend the government’s borrowing authority through next year without agreeing to a dime’s worth of spending reductions or tax increases. As the deadline for action nears, the partisan rhetoric heats up, and the consequences of Congress’s failure to increase the debt limit become clearer, senators of both parties seem to be climbing aboard McConnell’s do-nothing-and-get-out-of-town bandwagon. But the tea party House Republicans are spitting mad. And Obama, who senses new political advantage on the deficit issue, is publicly cool. Somehow, the president, who spent his first two-and-half years in office studiously ignoring the deficit, has now become Fiscal Hawk-in-Chief.  Why would McConnell, who a week ago was demanding steep spending cuts as his price for extending the debt limit, now abandon the field without getting any reductions at all? Mostly, I think, because the tea party is scaring him half-to-death. As he candidly acknowledged yesterday, McConnell fears a default would destroy the GOP brand.

Debt Ceiling Charade: S&P places U.S. on Credit Watch Negative, Possible Debt Deal taking shape - From MarketWatch: S&P warns on U.S. debt, 50% chance of downgrade. I still think something will be worked out, but this interview with Stan Collender is a little scary. First on a meeting he had with some new representatives back in February:  What I took from that was, first, that the debt ceiling was going to be a lot more trouble than anyone realized. They did not want a negotiation there. There was a religious-like fervor on that point: Voting for the debt ceiling was a sin, and you can’t just sin a little. And later in the interview: EK: What do you think the chance is we see a deal before Aug. 2?  SC: Less than 50-50.  EK: What’s the scenario for that? Is it something like the talks seem like they’re going somewhere, and then whatever the negotiators come up with unexpectedly fails on the floor after the Tea Party whips on it?  SC: Something like that. In the back of my mind I keep remembering something Peter Orszag said, which was you were going to need a combination of Democrats and Republicans in the House, and the only way that vote would be acceptable for Boehner to schedule is after negative market reaction that spooks people. It’s not unlike how TARP got through. The average member of Congress has got to be sitting there saying if I don’t vote for this, it’ll be a disaster, and if I do vote for it, it’ll be a disaster. So without the negative market effect, there’s not enough pressure. But remember Bachmann is running around saying there will be no negative effect.

S&P to U.S.: Any missed payments could trigger downgrade - Standard & Poor's has privately told U.S. lawmakers and top business groups that it might cut the U.S. credit rating if the government fails to make any of its expected payments -- including Social Security checks -- even if it makes all its debt payments, the Wall Street Journal reported citing people familiar with the matter. The U.S. Treasury Department1 has said if the debt ceiling is not raised by Aug. 2 it will have to start prioritizing payments. Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year. Standard & Poor's had previously placed the U.S. rating on negative outlook on April 18, which meant a downgrade is likely in 12-18 months. Earlier this week, Moody's2 became the first of the big three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating.

Rating Agencies Inch Closer to Historic Downgrade of U.S. Debt -Standard & Poor’s took the unprecedented step Thursday of putting U.S. short- and long-term debt on CreditWatch negative and said there’s now a one-in-two chance they will downgrade the U.S.’s debt within three months. S&P and Moody’s Investors Service have become increasingly worried in recent months about the deadlock over negotiations to raise the debt ceiling and the failure to work out a plan to reduce the country’s long-term deficit.Here’s a chronology of their warnings.

Bernanke Warns Default Would Be ‘Self-Inflicted Wound’ - The U.S. government would face significantly higher interest rates if credit ratings agencies downgrade its debt, adding to an already high deficit, Federal Reserve Chairman Ben Bernanke said. “It would be a self-inflicted wound I would say,” Bernanke said at a Senate Banking Committee hearing. He added that the U.S.’s immediate debt problem is a political, not economic issue. Credit rating agencies this week moved closer to downgrading U.S. government debt as talks in Washington to cut budget deficits and raise the debt ceiling deteriorated. “I think that there is not really any solution other than to find a way to solve these problems, to address the fiscal issues and to raise the debt limit at the appropriate time,” Bernanke said.

‘Decision Time’ on Budget, Obama Tells Congressional Leaders… President Obama threw the deadlocked budget negotiations back to Congress on Thursday, telling Republicans and Democrats to try to work out an agreement to avert a government default, and suggesting that more ambitious efforts to cut the deficit had hit a wall. After a polite but inconclusive session that covered familiar ground and made no headway, Mr. Obama told the Congressional leaders to confer with their rank-and-file members over the next 24 to 36 hours to “figure out what can get done,” said a Democratic official briefed on the negotiations.  The president said he might summon the leaders to the White House over the weekend if there was no progress; he has scheduled a news conference for Friday morning to argue his case publicly. On Capitol Hill, leaders of both parties were focused increasingly on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that could provide a way out of the stalemate on the debt limit.  “The White House talks are irrelevant, a sideshow,” said an aide to Senate Republicans, “They have been overtaken by events.”

Democrats Highlight Possible Perils Of Default: No Border Patrol Agents, Student Loans, Food Inspectors - Sens. Chuck Schumer (NY), Ben Cardin (MD), Mark Begich (AK), and Chris Coons (DE) illustrated the catastrophic effects of the Republican strategy: He pointed out that if Treasury chooses to pay Social Security, Medicare and Medicaid, military troops and interest on the debt, there would be no money for anything else. The $172 billion the government will have on hand on Aug. 3 is insufficient to meet all of our national needs and will leave us facing impossible choices. Paying for Social Security, Medicaid, and Medicare, for instance, will take up $100 billion. That would leave a mere $72 billion to do everything else — including pay the interest on our debt and fund the military. As a result, many essential government services will be immediately shut down: “We wouldn’t have a dime for Student loans, the FBI, Cancer Research, IRS refunds, or border patrol agents,” Schumer noted. “What from this list are you going to remove to fund these jobs that keep America safe?”

Wonkbook: Five possible deals, and a slew of new warnings -  We're either at the beginning of the successful conclusion of the debt ceiling negotiations, or the beginning of the collapse of the debt ceiling. The case for the first is that there are now five plausible deals on the table: The $4 trillion deal, the $2 trillion deal, a smaller deal -- think around $1.5 trillion -- that doesn't include taxes or cuts to health spending, the McConnell deal, and the Reid/McConnell deal, which combines McConnell's mechanism for raising the debt ceiling with about $1.5 trillion in spending cuts and an expedited process for considering further spending cuts. The House Republican leadership and elements of the conservative base have voiced support for the McConnell deal as a last resort, and they'll presumably like the Reid/McConnell deal even better. But talk to the players in the process and the worried comparison you often hear is TARP: that was also must-pass legislation, and the first time it came to the floor, it failed. Many experts believe that failure played a significant role in worsening the financial crisis. Which brings us to the case for collapse. Some in the political system have sought to convince themselves that blowing through the debt ceiling won't be painful. Rep. Mo Brooks, for instance, said 'our credit rating should be improved by not raising the debt ceiling.' The people who tell the market what to think are doing everything they can to tell politicians like Brooks that this is dangerously, catastrophically wrong.

Barack Obama 'wants agreement on debt deal in 36 hours' - President Barack Obama has told top US lawmakers he wants agreement on the way forward towards a debt deal in 24-36 hours, according to aides. Five consecutive days of cross-party negotiations at the White House have failed to make a breakthrough. But Mr Obama believes a $2 trillion debt deal is possible if all sides bend a little, a Democratic official familiar with the White House talks said. "The president made clear that a big deal remains his strong preference,'' the official said. The official said a deal of approximately $2 trillion would be possible if all sides were "willing to give a little.'' Obama will hold a news conference at 11am ET (4pm BST) on Friday and may call back lawmakers for weekend talks if he does not hear from them within 24 to 36 hours about a "plan of action'' to get to a debt ceiling deal, the official said.

Call his bluff - President Obama is demanding a big long-term budget deal. He won’t sign anything less, he warns, asking, “If not now, when?” How about last December, when he ignored his own debt commission’s recommendations? How about February, when he presented a budget that increases debt by $10 trillion over the next decade? How about April, when he sought a debt-ceiling increase with zero debt reduction attached? All of a sudden he’s a born-again budget balancer prepared to bravely take on his own party by making deep cuts in entitlements. Really? Name one. He’s been saying forever that he’s prepared to discuss, engage, converse about entitlement cuts. But never once has he publicly proposed a single structural change to any entitlement.

If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States - For decades, the U.S. government has had a AAA rating.  On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get.  Moody's scale actually uses lettering that is a little different from the other two big agencies ("Aaa" instead of  "AAA"), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating.  The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out.   The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back.  In fact, we are rapidly approaching the point when this debt will no longer be serviceable.  If the credit rating of the U.S. government is not slashed right now, it will be soon enough.  In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago.  But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.

Debt Ceiling: What's The End Game For Republicans?  - Jonathan Podhoretz reads a Quinnipiac poll showing that by a margin of 48-34, the public is going to blame Republicans and not Obama if we don't raise the debt ceiling, and joins the ranks of the Washington sellouts:  Let's start by pointing out the obvious: the Democrats do not show any signs of caving.  They have offered what seem to be very attractive deals, and been turned down.  Think you're going to get a more attractive deal?  Every time another poll like this comes out, your bargaining position gets worse.  Moreover, in Washington, deals take time.  Even if Obama and the Democrats caved right now and gave the GOP massive entitlement cuts in exchange for raising the debt ceiling, the government would be hard-pressed to hammer out the details, draft them into legislative language, get the CBO to score the cuts so you know that they're real, and then whip the votes to get the damn thing passed.  Every day you wait makes it less, not more, likely that you can get any deal at all.

Plan B Emerges on Debt - A backup plan to cut the federal deficit and keep the U.S. government from default gained momentum Thursday even as President Barack Obama and congressional leaders paused their negotiations to determine if they can reach a deal. Ratcheting higher the pressure on Washington to strike a deal, Standard & Poor's for the first time said there was a 50% chance it would downgrade its rating of long-term U.S. debt within three months because the chances of default were "increasing" and the political debate about deficit reduction and the debt ceiling had "only become more entangled." The U.S. has had a AAA bond-rating from S&P for 70 years. The so-called Plan B is taking shape in quiet discussions between Senate Majority Leader Harry Reid (D., Nev.) and Republican leader Mitch McConnell (R., Ky.), away from unhappy House Republicans who don't favor the approach. It would link a package of spending cuts to a plan Mr. McConnell proposed earlier this week that would give the president the power to raise the debt limit through 2012 in three installments, unless two-thirds of Congress voted to block it. It likely wouldn't include any tax increases, a senior Democratic aide familiar with the discussions said.

The damage already done by the debt ceiling debate - Listen to anybody on Capitol Hill, and they’ll tell you that the debt ceiling debate is turning into a complete disaster, with the Republican rank and file such an inchoate mess that it increasingly seems as though no deal will get done at all. Look at the Treasury market, however, where the 10-year bond currently yields something less than 3%, and it looks decidedly sanguine; short-term debt maturing shortly after the drop-dead date of August 2 is similarly unaffected by the news from Washington. Megan McCardle thinks this shows a “giant disconnect” between Wall Street and Washington — things which Wall Street thinks are easy turn out in reality to be extremely hard, and things which any Wall Streeter would just do as a matter of course can be de facto impossible when political posturing starts getting in the way. I’m not sure the disconnect is all that huge, for a couple of reasons. For one thing, US default risk is impossible to hedge. US default is an end-of-the-world event, and markets by their nature can’t price such things. Conceptually, there’s no point in buying something which pays off if the world ends, since the world will have ended at that point, and in any case your counterparty won’t be able to make good on the contract.

Why the United States might pay China before we pay our own soldiers - I’ve spent the past week or so trying to get my head around this whole “debt ceiling” debate that’s raging in Washington. Clearly, it’s important, but what does it really mean? As it turns out, if the politicians screw up, it could be bad. Real bad. Think of the debt ceiling as America’s credit limit. The only difference is that the people we’re borrowing money from don’t set the limit, Congress does. At it’s most simplistic, if we hit the debt ceiling, we can’t borrow any more. This is not necessarily a bad thing, unless, of course, we need to pay for stuff and we don’t have enough money to do so. We spend on a lot of things, including our soldiers’ salaries, social security checks, and all the other outflows that the U.S. has to make on a constant basis. We also spend on a lot of stupid things and this, it seems, is the core of the debate. The Republicans think some of what the Obama administration is spending on is stupid. The Democrats think that what the GOP wants to spend on (mostly tax cuts for the super-wealthy) is stupid.

Debt-Ceiling Drumbeat - Tensions are rising as the deadline nears to raise the U.S. debt ceiling. Mark Zandi discusses the latest development with NPR's The Takeaway.

Debt Ceiling Thoughts - From the public signals, it seems as thought the President and Democratic leadership are trying to reach a reasonable deal with the GOP, but are ultimately determined to avoid a default on US debt or ratings downgrade no matter what the price.  They'll agree to huge cuts to Social Security, Medicare, and other parts of the social safety net if that's what it takes to avoid a default.  I sense that part of the GOP gets this and is going to milk them for all they're worth. That means that the Democrat's only hope are what Tom Egan calls the "tassled-loafer" Republicans (others would characterize the GOP split as crazies v. cravens), who are also desperate to avoid a default.  I'm well aware of the costs of a US default; it will undoubtedly hurt the economy, and not just the financial economy, but the real economy.  It could also affect the distribution of social safety net benefits. But those costs have to be balanced against the costs of gutting the social safety net. The former costs will not be long-term; the latter costs will be more or less permanent. There seems to be surprisingly little discussion about whose ox will get gored under each of these alternatives.

Will a debt ceiling deal save America’s AAA credit rating? - I have not been following the political ins and outs of the debt ceiling debate, but I did run across the followingKeeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a  ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:“If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.”

The 14th amendment and the possible government shutdown - Oh dear: Crisis talks on the United States' debt limit remained deadlocked overnight as negotiations led by US president Barack Obama degenerated into a slanging match. The president is said to have stalked out of the latest debt talks, which both sides have acknowledged as the most heated yet. "This may bring my presidency down, but I will not yield on this," Mr Obama is quoted as saying. The prospects of politicians reaching a deal to raise the debt ceiling are still in question after fifth straight day of talks.Some econ bloggers have pointed out that the 14th Amendment of the United States renders the "debt ceiling" unconstitutional: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave. But all such debts, obligations and claims shall be held illegal and void. My view is that the "debt ceiling" is not unconstitutional. What is unconstitutional is to default on this debt. Let me explain.

Governors Demand Quick Debt Agreement- The nations governors demanded a quick resolution to the debt wrangling in Washington Friday that would not throw the problem onto the states, but there was little agreement on how to resolve the impasse. Opening the summer meeting of the National Governors Association here, NGA Chairwoman and Washington state Gov. Christine Gregoire (D) declared, “We can ill afford the debate going on in Washington, D.C. We’re in a fragile state of recovery and the fact that we are not moving forward to solve the debt issue is resulting” in further economic uncertainty. She warned that any solution that shifts too much costs onto the states, especially in the Medicaid health program for the poor, could push many states back into recession.“Drop some of this partisanship, and let’s get this done,” said Nebraska Gov. Dave Heineman (R), the NGA’s vice chairman. “America cannot default on its obligations.”

Debt limit: House Republicans plan vote to link debt limit increase, balanced budget amendment - House Republicans emerged from a lengthy closed-door meeting Friday with plans to vote on legislation next week that would link a $2.4-trillion debt ceiling increase with a spending cut proposal and balanced budget amendment, proposals President Obama and Democrats have dismissed. The so-called cut-cap-and-balance legislation has slim chances of passage in the Democratic-controlled Senate. But for GOP leaders the vote gives conservatives one more opportunity to raise the nation's debt limit on their terms. "We're in the fourth quarter here," said House Speaker John Boehner (R-Ohio). "Let's get through that vote and we'll make decisions about what will come after."Debt talks at the White House are on hold Friday as congressional leaders confer with their rank-and-file to assess which proposals on the table could win enough votes to pass

Obama Tries to Win Battle for a Debt Deal — and Public Opinion - He said that increasing the U.S. government’s borrowing limit to avoid default may not be enough to protect nation’s economy if the move isn’t accompanied by a significant plan to reduce the federal deficit. “If we take that approach this issue is going to continue to plague us for months and years to come,” Mr. Obama said during a White House news conference. “What is important is that, even as we raise the debt ceiling, we also solve the problem of underlying debt and deficits.” He also worked to explain to Americans the consequences of failing to raise the debt ceiling by Aug. 2. If the U.S. government defaults on its debt, Mr. Obama warned, interest rates would rise for average Americans trying to get loans. “We could end up with a situation, for example, where interest rates rise for everybody all throughout the country – effectively, a tax increase on everybody – because suddenly, whether you’re using your credit card, you’re trying to get a loan for a car or a student loan, businesses that are trying to make payroll – all of them could end up being impacted as a consequence of a default,”

Transcript of Obama’s News Conference - Here’s the White House transcript of President Barack Obama‘s news conference Friday on the standoff over raising the debt ceiling and reducing the long-term deficit.

Obama debt ceiling: President Obama says he hasn't given up hope on large-scale debt-ceiling deal - President Obama said Friday that he hasn’t surrendered hope for a large-scale deal to raise the federal debt ceiling and slice the budget deficit even as the clock continues to wind down toward a potentially catastrophic federal default. The White House has been pushing for an agreement by the end of next week in order for it to be enacted by Congress before the Aug. 2 deadline set by the Treasury Department to increase the nation’s debt cushion in order to meet its current obligations.“We are obviously running out of time,” Obama said at a news conference at the White House briefing room. The White House has insisted that any deal include some mechanism for raising more revenue in order to significantly pay down the deficit, but congressional Republicans have balked at the prospect of tweaking the tax code for deficit reduction. That remains the largest stumbling block in negotiations.

Debt Deal Seems Far As Deadline Draws Near - The week in Washington began and ended with presidential news conferences. In between, there were daily meetings between President Obama and leaders of Congress over what to do about the federal deficit as the deadline nears for raising the federal debt limit. But despite some dire warnings about defaulting on some of that debt, the government seems no closer to an agreement that could solve either its short- or long-term budget woes. Last Monday, Obama challenged lawmakers to make what he called the "largest possible" deficit-cutting deal. He envisioned an agreement that would erase some $4 trillion worth of red ink over the next 10 years. "Now is the time to deal with these issues," he said on Monday. "If not now, when?" Well, not this week, anyway. Obama met with Congressional leaders on Sunday, Monday, Tuesday, Wednesday and Thursday, but they failed to reach any agreement on a deficit-cutting strategy. A meeting planned for Friday was called off, and Obama told lawmakers to keep working on it.

House Republicans brace for compromise on debt - Republican leaders in the House have begun to prepare their troops for politically painful votes to raise the nation's debt limit, offering warnings and concessions to move the hard-line majority toward a compromise that would avert a federal default. For weeks, GOP conservatives, particularly in the House, have issued demands about what they would require in exchange for their votes to increase the debt limit. In negotiations with the White House, Republican leaders have found those demands were unattainable. Unwilling to risk the economic and political consequences of a federal default, which could come as early as Aug. 2, they have started the difficult process of standing down.At a closed-door meeting Friday morning, GOP leaders turned to their most trusted budget expert, Rep. Paul D. Ryan of Wisconsin, to explain to rank-and-file members what many others have come to understand: A fiscal meltdown could occur if Congress fails to raise the debt ceiling. House Speaker John A. Boehner of Ohio underscored the point to dispel the notion that failure to allow more borrowing is an option.Freshman Rep. Steve Womack (R-Ark.) said the presentation about skyrocketing interest rates that could result from downgraded bond ratings was "sobering."

Debt Political Theater Diverts Attention While Americans' Wealth Is Stolen - Dennis Kucinich - The rancorous debate over the debt belies a fundamental truth of our economy -- that it is run for the few at the expense of the many, that our entire government has been turned into a machine which takes the wealth of a mass of Americans and accelerates it into the hands of the few. Let me give you some examples. Take war. War takes the money from the American people and puts it into the hands of arms manufacturers, war profiteers, and private armies. Fifty percent of our discretionary spending goes for the Pentagon. A massive transfer of wealth into the hands of a few while the American people lack sufficient jobs, health care, housing, retirement security. Our energy policies take the wealth from the American people and put it into the hands of the oil companies. We could be looking at $150 a barrel for oil in the near future. Our environmental policy takes the wealth of the people -- clean air, clean water -- and puts it in the hands of the polluters. Insurance companies, what do they do? They take the wealth from the American people in terms of what they charge people for health insurance and they put it into the hands of the few. We have to realize what this country's economy has become. Our monetary policy, through the Federal Reserve Act of 1913, privatized the money supply, gathers the wealth, puts it in the hands of the few while the Federal Reserve can create money out of nothing, give it to banks to park at the Fed while our small businesses are starving for capital.

Dicing with debt and the future | The Economist - “WE HAVE a system of government in which everybody has to give a little bit.” So said Barack Obama at the start of this week. But parse that sentence. Does the president mean that America already has a system in which everybody has to give a little bit? Or does he mean only that it ought to have such a system? It is not too much to say that the country’s economic well-being hangs on the answer. As the whole world knows, America’s government is in danger of defaulting after August 2nd unless Congress raises the federal debt ceiling so that it can keep borrowing enough to pay its bills. For a while the markets assumed that because a default would be so scary, Republicans and Democrats would have in the end to agree on the spending cuts the Republican-controlled House demanded as its price for raising the ceiling. The Theory of Inevitable Compromise was that each party would have to give a bit because voters will punish whichever proves too stubborn. But here are eight reasons to wonder whether the theory is true.

The debt ceiling debate as viewed from Europe - Here’s what Germany’s largest daily newspaper Bild Zeitung has to say about the politics in the US around the debt ceiling: "Irrespective of what the correct fiscal and economic policy should be for the most powerful country on earth, it’s simply not possible to stop taking on new debt overnight. Most importantly, the Republicans have turned a dispute over a technicality into a religious war, which no longer has any relation to a reasonable dispute between the elected government and the opposition." "If it continues like this, the US will be bankrupt within a few days. It would cause a global shockwave like the one which followed the Lehman bankruptcy in 2008, which triggered the worst economic crisis since the war. Except it would be much worse than the Lehman bankruptcy. The political climate in the US has been poisoned to a degree that is hard for us (Germans) to imagine. But we should all fear the consequences." The conservative daily Die Welt writes disparagingly: While Europe’s chaos is obvious to the Europeans and the rest of the world, there are few signs of self-doubt or self-awareness in the US. In the middle of the poker game between the two political parties to prevent a national default on Aug. 2, polls show that 77 percent of Americans believe that they live in the world’s greatest system of government. Just as many are convinced that life is only worth living as an American. A lot more of that from other German dailies here: ‘The US Is Holding the Whole World Hostage’ – Spiegel

Spiegel: The World from Berlin: 'The US Is Holding the Whole World Hostage' - Both Moody's and Standard & Poor's are threatening to downgrade the country's debt amid fears of a national insolvency. But for once it is not a debt-stricken euro-zone member that has come into the crosshairs of the powerful rating agencies. This time it is the United States, the world's largest economy, that is at risk of going bust .  The US needs to raise its debt ceiling, currently set at $14.3 trillion (€10.1 trillion), by Aug. 2, otherwise the country will run out of money. But negotiations between President Barack Obama and top Republicans and Democrats have so far failed to make progress.  With no solution to the US debt crisis in sight, the rest of the world is starting to get nervous. German commentators urge congressional leaders to get their act together. A US default would have catastrophic consequences, they warn.

Moody's shows U.S. turning Japanese - One of these days the United States will lose its triple-A rating, and the bond market won't blow up. But don't kid yourself into thinking that's good news. To the contrary, the tame reaction to Wednesday's downgrade warning from Moody's shows that the United States is already much further down the road to a Japanese-style quagmire than most of us might care to admit. Shocked? More like stunned into submission The Japan comparison sounds like a stretch. Yes, there are vast differences in culture and demographics and the official response to collapsed financial bubbles, many of which may eventually play out in America's favor. But the thread the two nations undeniably share – along with an unhealthy heap of debt -- is a dangerous case of political gridlock at a time when reform is urgently needed.

What An American Bank Run Would Look Like - Technically the title of this post is wrong: the truth is that nobody could possibly know or predict what a bank run would looks like in details suffice to say that it would have terminal and devastating results on the global economy. One needs only remember what happened when the Reserve Fund broke the buck and the $3 billion money market industry was at risk of unwinding (for those who do not, Paul Kanjorski does a good summary here). What we do, however, wish to demonstrate is the tenuous balance between physical money - yes, just like precious metals, there is actual "physical money", better known as currency in circulation - and more abstract, confidence-based, "electronic money." Now when it comes to talking about systemic instability, pundits often enjoy bringing up the case of the $600+ trillion (recently discussed here in a different capacity) in synthetic derivatives, whose implosion would "wipe out the world." While that may indeed be the case (the memory of the CDS-precipitated AIG implosion is still all too fresh), since nobody really can comprehend the side effects of the collapse of global derivative system, which by some estimates is over $1 quadrillion when combining exchange and OTC based derivatives, it is largely based on pure conjecture.

Reforming CPI: Not a "Grand Bargain" but a Prudent Reform - Recent reports indicate that the budget/debt negotiations will not produce a “grand bargain.” But whether the budget discussions produce a big deal or a small one, however, both sides would do well to implement a more accurate measure of economy-wide inflation, namely the “chained” C-CPI-U. Many aspects of federal law from income tax brackets to Social Security payments are indexed to grow each year with price inflation, more specifically with the Consumer Price Index (CPI). There are different versions of CPI now in use, including the CPI-U (measuring inflation facing all urban consumers) and the CPI-W (measuring inflation facing urban workers). Some programs use one of these and some the other, but generally the two are close in value anyway. Over the years, many economists have noted that these measures tend to overstate actual price inflation as felt by consumers. Simplifying considerably, this is because the rising price of one item often causes consumers to buy a different item instead, one whose price hasn’t risen as much. The mix of items that consumers buy thus changes over time, with the increase in the total cost of living being less than if no purchase substitutions had occurred.

Should Congress Cut the Deficit By Changing the Way it Indexes Taxes for Inflation? - Should Congress use a new measure of inflation to index the tax code? It sounds awfully technical—and it is—but shifting to what most economists believe is a more accurate measure of inflation would gradually raise a substantial amount of new revenue for politicians scrambling to find ways to cut the deficit. The idea has surfaced in the high-stakes budget negotiations between President Obama and Congress. Government would adopt something called the chained consumer price index (CPI) to adjust programs to reflect changes in the price of goods and services. Shifting to a chained CPI index would achieve two goals. It would fix a vexing problem with the traditional measure of inflation: The CPI does not reflect the fact that consumers respond to higher prices for one product by substituting another. For instance, if strawberries are very expensive at the farmer’s market this week, I may buy cheaper blueberries instead. And, let’s not kid ourselves, the other purpose is to scrounge some new tax revenues without seeming to raise rates or end popular subsidies.

Balanced Budget Amendments Are Not Always What They Seem - A constitutional amendment that would require a balanced federal budget has again gained favor, especially among Republicans. The proponents should be forced to answer an important question, “What is a budget?”  Forty nine states have constitutions or strong legislative language requiring budgets to balance.  An unfortunate effect has been to push many state activities “off-budget”. There are independent authorities that run turnpikes, hospitals, etc. and a plethora of other off-budget accounts whose main purpose is to avoid balanced budget requirements.  It has made the typical state budget very hard to read and understand. A federal balanced budget amendment has the added disadvantage of making it difficult to run a countercyclical policy or finance wars and other emergencies unless there are escape clauses.  But every escape clause creates another loophole.  In order to avoid certain budget rules in the late 1990s, the Congress declared the 2000 census to be an emergency, even though we have known since 1789 that we would have to have one.

The Federal Government Races to the Cliff - In the 1955 movie Rebel Without a Cause, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken.  Both intend to jump out at the last moment.  But the other guy miscalculates, and goes over the cliff with the car. This is the game that is being played out in Washington this month over the debt ceiling.  The chance is at least 1/4 that the result will be similarly disastrous.     It is amazing that the financial markets continue to view the standoff with equanimity.   Interest rates on US treasury bonds remain very low, barely above 3% at the ten-year maturity.   Evidently it is still considered a sign of sophistication to say “This is just politics as usual.  They will come to an agreement in the end.”  Probably they will.  But maybe not.

Reagan mythology is leading US off a cliff - Aljazeera - As things stand today, the US is hurtling toward a budget showdown in less than a month. Either President Obama will once again capitulate to extreme Republican budget-slashing demands, making Democrats seem as much of a threat to Medicare as Republicans, and virtually ensuring a GOP electoral sweep in 2012, or the US will default on its debt for the first time in its history, most likely plunging the world economy back into another five-continent recession, also costing Democrats the 2012 elections. These are the options left for a president and a political class completely divorced both from reality, and its own history of how one of the three greatest US presidents of all time steered the country from the brink of collapse eight decades ago Entirely forgetting the real history of how Franklin D Roosevelt used activist government to save American capitalism from itself, the entire US political establishment is instead hypnotised by the false history woven around its most over-hyped president of all time: Ronald Reagan. Idolatry of Reagan's supposed tax-cutting wonders propels the now widespread economic belief that up is down, that cutting government spending is the way out of - rather than into - a severe recession. At the same time, idolatry of Reagan's supposed political wonders propels GOP extremists to ignore all other considerations.

Reagan Proved Deficits Don't Matter* - "Reagan," Vice President Dick Cheney famously declared in 2002, "proved deficits don't matter." Unless, that is, a Democrat is in the White House. After all, while Ronald Reagan tripled the national debt and George W. Bush doubled it again, each Republican was rewarded with a second term in office. But as the Gallup polling data show, concern over the federal deficit hasn't been this high since Democratic budget balancer Bill Clinton was in office. All of which suggest the Republicans' born-again disdain for deficits ranks among the greatest - and most successful - political double-standards in recent memory. The triumph of the GOP messaging machine is reflected in a new Washington Post/Pew Research poll. In just the four months since the Republican majority took control of the House, the percentage of Americans believing the budget deficit is a major problem which must be addressed now catapulted from 70% to 81%. But even more revealing is an April Gallup survey which showed the deficit (17%) rivaling the unemployment (19%) and the overall state of the economy (26%). And as it turns out, those cyclical swings in budget angst reflect the complete victory of the conservative deficit narrative.

The Rise of the Wrecking-Ball Right - Robert Reich - Recently I debated a conservative Republican who insisted the best way to revive the American economy was to shrink the size of government. When I asked him to explain his logic he said, simply, “government is the source of all our problems.” When I noted government spending had brought the economy out of the previous eight economic downturns, including the Great Depression, he disagreed. “The Depression ended because of World War Two,” he pronounced, as if government had played no part in it. A few days later I was confronted by another conservative Republican who blamed the nation’s high unemployment rate on the availability of unemployment benefits. “If you pay someone not to work, they won’t,” he said. . “Government always makes things worse.”Government-haters seem to be everywhere.  Congressional Republicans, now led by House Majority Leader Eric Cantor, hate government so much they’re ready to sacrifice the full faith and credit of the United States in order to shrink it. Taming the deficit isn’t their aim.  Their ultimate goal, in the words of their guru Grover Norquist, is to take government down to “the size where we can drown it in the bathtub.” Where did this wrecking crew come from?

The Neuroscience of the Debt Debate - Unless its debt ceiling is raised from its current $14.3 trillion, or its budget is miraculously balanced, the U.S. will default on its financial obligations on August 2, leading to a credit downgrade, delayed government payments and other serious economic troubles.Debt default is an outcome that's almost unanimously opposed, so the failure of decision-making feels especially frustrating. With such complex political gamesmanship at play, neuroscience and game theory may offer some insight into the stalemate, suggesting that a sense of moral superiority could be disrupting a natural tendency to cooperate.  At some point, a mutual decision will be made, leading both parties either to claim at least partial victory or to pass the responsibility to someone else.Viewed with scientific detachment, whatever compromise eventually emerges will be a remarkable product of the complex neuronal calculus that goes into collective decision-making. Each brain in the House and Senate is trying to master an intricate game of strategy. Risk is being measured against payoff, stakes are being continually reassessed, and all of these calculations are updated fluidly as new information becomes available. Moreover, each congressional brain has to run a simulation of other brains to determine whether cooperation is likely—a feat with its own host of computational complexities.

A few things to remember about debt - THIS week, The Economist has quite a lot of material on the crisis in Europe, including a cover that deliberately evokes an earlier cover from another dangerous period. Carmen Reinhart and Kenneth Rogoff identify three periods in recent history when the world found itself in this situation, in which indebtedness was high across all of the rich world. The first corresponds to the debt burdens of the First World War and the Depression. These debts often led to defaults or even hyperinflations, and they roiled global politics and economics for two decades. The second debt spike is associated with the Second World War. After the miserable experience of the first debt exposion, rich economies tried a different strategy the second time around. They locked lenders—banks and households—into forced saving through a broad arrangement of financial and capital controls, then eroded the debts away with moderate inflation until they were gone.  Comes now the third debt spike, which is the largest yet. What will the advanced economies do? They will try austerity, but with debt levels extraordinarily high and the growth outlook poor, the public tolerance for tight budgets will probably disappear before the debts do. They could try to export their problems, but with economies responsible for over half of global output all cutting back simultaneously it won't work.

Manufacturing deficit fear - As survey after survey shows, the vast majority of the public are incredibly ignorant of the most basic facts about the budget and the economy. If we treated their teachers in the media the way the educational reformers treat public school teachers, few economics and budget reporters would have jobs.  One needs only to pick up a newspaper or turn on the television to get examples of thoroughly awful reporting. When we hear pledges to reduce the projected deficits over the next 12 years by $2tn or $4tn, how many people have any clue how large these reductions – on which the current debt ceiling talks between President Obama and House speaker John Boehner turn – are, relative to projected spending or projected GDP over this period? (The $4tn figure is 8.7% of projected spending and 3.7% of GDP.)

Warren Buffett: I Could End The Deficit In 5 Minutes (video) “I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”

On Deficit, Americans Prefer Spending Cuts; Open to Tax Hikes - Gallup - Americans' preferences for deficit reduction clearly favor spending cuts to tax increases, but most Americans favor a mix of the two approaches. Twenty percent favor an approach that relies only on spending cuts and 4% favor an approach that uses tax increases alone. Many Republicans in Congress oppose any such tax increases; thus, the legislation may not pass if tax hikes are included. Americans do not necessarily share this view, with 20% saying deficit reduction should come only through spending cuts. That percentage is a little higher, 26%, among those who identify as Republicans. Republicans do, however, tilt heavily in favor of reducing the deficit primarily if not exclusively with spending cuts (67%) as opposed to tax increases (3%). Fifty-one percent of independents share that preference. Democrats are most inclined to want equal amounts of spending cuts and tax increases (42%), though more favor a tilt toward spending cuts (33%) than tax increases (20%).

Why is the Most Wasteful Government Agency Not Part of the Deficit Discussion? - In all the talk about the federal deficit, why is the single largest culprit left out of the conversation? Why is the one part of government that best epitomizes everything conservatives say they hate about government—- waste, incompetence, and corruption—all but exempt from conservative criticism? Of course, I’m talking about the Pentagon. Any serious battle plan to reduce the deficit must take on the Pentagon. In 2011 military spending accounted for more than 58 percent of all federal discretionary spending and even more if the interest on the federal debt that is related to military spending were added. In the last ten years we have spent more than $7.6 trillion on military and homeland security according to the National Priorities Project. In the last decade military spending has soared from $300 billion to $700 billion.

Boiling frog alert: Congress wants automatic wage deductions to pay down the debt - Folks… you just can’t make this stuff up. On July 6th, just two days ago, at least a dozen busybody Congressmen sponsored the introduction of HR 2411, the “Reduce America’s Debt Now Act of 2011.” They always come up with fantastic names for these pieces of legislation… and rest assured, the better/more patriotic the name, the more ominous the bill. This one follows the pattern. HR 2411 states that every worker in America should be able to voluntarily have a portion of his/her wages automatically withheld and sent directly to the Treasury Department for the purposes of paying down the federal debt. “Every employer making payment of wages shall deduct and withhold upon such wages any amounts so elected, and shall pay such amounts over to the Secretary of the Treasury…” That’s right. Uncle Sam is so broke that he wants to give all the good little Americans out there the opportunity to contribute an even greater portion of their paychecks to finance government largess. Desperate? Hmmm…. Don’t worry, it gets better.

GSE Debt: ‘Treasuries with Higher Yield’ - Why worry about US Treasuries when they’re buried in agency debt:The expansion of agency debt not only imposes risk and realized losses on taxpayers—we recall the $160 billion that the U.S. Treasury has been forced to put into Fannie and Freddie to prevent their financial collapse—it also increases the cost of Treasury’s direct financing by creating a huge pool of alternate government-backed securities to compete with Treasury securities, and thus increases the interest cost to taxpayers. So although agencies are not “officially government debt,” they undoubtedly increase the required interest rates on Treasury securities, in my judgment, and thus increase the federal deficit. The greater the amount of agency securities available as potential substitutes for Treasuries, the greater this effect must be. As a manager of a major institutional investor told me recently, “We view Fannie and Freddie MBS as Treasuries with a higher yield—so now we own very few Treasuries.”

Trickle-Down Austerity - In all kinds of ways — consumer demand, the federal deficit, even the weather — the medium-term future is highly uncertain. But this uncertainty, while the main problem, is not the only problem. We are also committing an unforced economic error. We’re cutting government at the same time that the private sector is cutting. It is the classic mistake to make after a financial crisis. Hoover and even Roosevelt made a version of it in the 1930s. The Japanese made a version of it in the 1990s. Now we are making it. Federal payrolls have been roughly flat for years (even as the population has been growing). But state and local payrolls grew over the last decade, by almost 20,000 jobs a month on average. Since the crisis began and state and local taxes began plummeting, though, governments began to cut back. At first, the federal government stepped in, with the 2009 stimulus bill, and sent fiscal aid to states. Then the aid stopped.In round numbers, state and local governments have cut about a half million jobs over the last two years. If they had continued to hire at their previous pace — expanding as the population expanded — they would have added about a half million jobs.

Are We About to Repeat the Mistakes of 1937? - Friday’s jobs report clearly indicates that the economy remains weak, yet the pressure to reverse stimulus and begin tightening fiscal and monetary policy has become overwhelming. The Federal Reserve has already ended its policy of quantitative easing, and many of its regional bank presidents are demanding higher interest rates to forestall inflation. Republicans and Democrats in Congress appear to agree that large spending cuts must accompany a rise in the debt limit, which will be hit on Aug. 2 if Congress doesn’t act. Some economists are getting very nervous. With the economy in a fragile state, it may not take much to bring on another recession. Even a small amount of fiscal or monetary tightening may be enough to do that. It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.

The Few, The Proud, The Non-Hysteric - Paul Krugman - Martin Wolf: It is not that tackling the US fiscal position is urgent. At a time of private sector deleveraging, it is helpful. The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted. The fiscal challenge is long term, not immediate. But how can I be a non-hysteric if I’m shrill? Once again: if you took basic macroeconomic analysis seriously, you predicted that large deficits could and would coexist with low interest rates as long as the economy was depressed. Everyone who claimed the opposite was either ignorant of basic macro, or was making up new doctrines on the fly to justify his prejudices.

Getting to Crazy - Krugman - A number of commentators seem shocked at how unreasonable Republicans are being. “Has the G.O.P. gone insane?” they ask.  Why, yes, it has. But this isn’t something that just happened, it’s the culmination of a process that has been going on for decades. Anyone surprised by the extremism and irresponsibility now on display either hasn’t been paying attention, or has been deliberately turning a blind eye.  And may I say to those suddenly agonizing over the mental health of one of our two major parties: People like you bear some responsibility for that party’s current state.  Let’s talk for a minute about what Republican leaders are rejecting.  President Obama has made it clear that he’s willing to sign on to a deficit-reduction deal that consists overwhelmingly of spending cuts, and includes draconian cuts in key social programs, up to and including a rise in the age of Medicare eligibility. These are extraordinary concessions. As The Times’s Nate Silver points out, the president has offered deals that are far to the right of what the average American voter prefers — in fact, if anything, they’re a bit to the right of what the average Republican voter prefers!

Taking the R out of “Shrill”: Krugman exhibits, endorses ratchet effect America's favorite Nobelist endorses President Fuck You's betrayals on Social Security and Medicare because they show how "crazy" the Rs are. Dear Lord. Leave aside Obama's cynical and manipulative decision to put millions of elders, working people, and the poor in fear -- the people who are, in fact, Obama's base, supposing for a moment that the legacy party system is electorally responsive -- what kind of choice is this? It's just like the "choice" in my own state -- crazy Rs, or corrupt and cynical Ds.* Alternating in power. Forever. Obama gets the chance to play the role of "the only adult in the room," with a budget drama the Ds themselves set in motion, so he's looking better for 2012. If the usual front organizations like MoveOn can corrupt enough activists and suck in enough voters in battleground states, he'll win; and if the Rs (as in 2008**) don't really try, he'll certainly win.  The D discourse can now shift to the usual Big Lie of "saving" Social Security and "preserving" Medicare, when Social Security doesn't need to be saved, and Medicare should be expanded to everyone.  And thus, Versailles discourse has been successfully ratcheted right, since now Obama's proposal for cuts to both programs have moved the set point for the Overton Window right -- a strategic setback for working people, but and so a step that America's favorite Nobelist applauds, because of its tactical elegance.

The Wrong Perversity - Krugman - As Brad DeLong argues, there’s a very good case to be made that we’re currently living under conditions in which fiscal contraction actually worsens the long-run deficit. Why? The argument runs like this:

  • 1. Fiscal contraction reduces output in the short run; this immediately means that part of the initial gain in terms of a lower deficit is offset by reduced revenue and higher safety-net spending. These effects are especially large when you’re in a liquidity trap, so monetary policy can’t fight the fiscal contraction.
  • 2. Reductions in short-run output and employment take a toll on long-run growth, too: capital investment is depressed, workers lose their skills, and so on. This in turn reduces future revenues.
  • 3. Meanwhile, with real interest rates very low — actually negative on 5-year bonds — the cost of borrowing now in terms of future debt burden is also very low.

So there is no plausible argument on behalf of the claim that fiscal contraction expands output; there is, on the other hand, a very plausible argument to the effect that fiscal contraction doesn’t even help the fiscal situation. So guess which perversity is considered a suitable position for Serious People, and which isn’t?

A modest proposal: Congress should get retirement benefits at same age as the rest of us - Senator Sherrod Brown has an idea. If we are going to talk about raising people’s eligibility age for retirement benefits, then members of Congress should not have access to their own retirement benefits any earlier than the rest of us.  Brown is introducing a proposal today in Congress that would enshrine this into law: It would amend the Federal retirement system to make the Social Security retirement age the point at which current and future members of Congress get access to their own Federal retirement benefits.  Brown is hoping that the very fact that it’s a long shot will force some members of Congress — and the President — to rethink the notion that it’s acceptable to raise the retirement age on hard working Americans.  “The people who cavalierly say we can raise the retirement age probably don’t know people who work in a diner or in construction or in manufacturing or in retail and had their knees go out in their 40s or 50s,” Brown told me in an interview. “People who are doing physical work always have back problems and joint problems.”

The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit - CBO Director's Blog - Adopting a deficit reduction plan would have three kinds of effects on the budget. One would be the direct effect of the plan’s changes to spending and revenues. A second effect would be a reduction in interest payments by the government, as smaller deficits would result in lower federal debt. A third effect would result from the fact that smaller deficits would affect the economy in various ways, in turn leading to further changes in federal spending and revenues.At the request of the Chairman and Ranking Member of the Senate Budget Committee, CBO has estimated the magnitude of that third effect, using as an example an “illustrative policy” that would reduce budget deficits by $2.0 trillion over the next 10 years. That analysis is intended to help policymakers assess the broad economic and budgetary consequences of potential policies, beyond the standard budget estimates.The illustrative policy that CBO analyzed does not incorporate any assumptions about the particular mix of spending or revenue changes, is not meant to correspond to any specific legislative proposal, and does not represent a recommendation by CBO as to the desirable amount of deficit reduction.

Chart: Past Presidents’ Cuts In Military Spending To Reduce The Deficit: A new report released today by the Center for American Progress (CAP) outlines how President Obama and the Congress could cut military spending using bipartisan historical precedents without sacrificing security. “Defense spending helped create the fiscal crisis facing our nation today,” write CAP’s Lawrence Korb, Laura Conley and Alex Rothman, “and defense cuts must be part of the solution.” Levels of spending exceed the heights of the Reagan-era Cold War by $100 billion and the Eisenhower-, Nixon-, H.W. Bush- and Clinton-eras by more than $250 billion. “This ballooning defense budget played a significant role in turning the budget surplus projected a decade ago into a massive deficit,” the CAP experts write. This chart from the report maps out past presidents reducing military spending during similar budget crises:

Where The Money Went - Krugman - Somehow I missed the BEA’s very useful page tracking the Recovery Act and how it is translated into taxes and spending. (Thanks to the commenter who mentioned it). It’s especially useful for thinking about what the Obama stimulus really involved — and what it didn’t. Look at the peak quarter of stimulus (pdf), which was the first quarter of 2010. Here’s how I read it: at annual rates (in other words, actual numbers in the quarter were only 1/4 as large), the total budget impact was $357 billion. Of that, we had. Tax cuts and refundable tax credits: $151 billion. Aid to individuals (mainly unemployment insurance and food stamps): $70 billion. Aid to state and local governments: $103 billion. Everything else: $33 billion Note that the aid to individuals was basically safety net, and the aid to state and local was about mitigating spending cuts rather than spending expansion. Basically, this was at best an attempt to beef up automatic stabilizers. So much for “we tried Keynesian policies and they didn’t work.”

Will Politicians Acknowledge Their Failure?  - It has been nearly two and a half years since President Obama's stimulus package was signed into law. On July 1st, the White House Council of Economic Advisers (CEA) released the 7th quarterly report assessing the economic impact of the American Recovery and Reinvestment Act of 2009 (ARRA). Such reports are political in nature—Democrats must tout their presumed "success". Still, on the heels of two dismal BLS jobs reports, and with unemployment claims holding steady well above 400,000 per week, and at a time when it is perfectly clear that neither political party has the first clue about how to spur jobs growth, it is astonishing that anyone in the Imperial capital would have the balls to tell us how effective their policies have been.

The Disappointing Embrace of Job Killing Austerity -The president just held a press conference on deficit reduction talks with Republicans. I found the president's remarks during the press conference disappointing on several fronts. First, I am disappointed that the president seems committed to doing whatever it takes to reach a deal. There are lines that ought to be drawn in the sand, but even when they are drawn the lines are erased and moved as needed. It looks like a deal will be reached, the only question at this point seems to be how much the president will give away to get it. The president was, of course, trying to make it look like he is the one willing to compromise so that if a deal is not reached, the consequences will be blamed on Republicans. But it also appears he is willing to move quite a bit to get a deal done. Second, I am disappointed that Obama has adopted austerity as a valid means of stimulating the economy, something he made absolutely clear during his remarks. There is no evidence that this works in a situation like ours, i.e. that deficit cuts create so much confidence that they stimulate the economy. However, there is plenty of evidence that the fall in demand from the deficit cuts is harmful, and that such cuts are likely to impede the recovery. The president has embraced the idea that uncertainty about the future, particularly worries about the deficit, is holding back the economic recovery even though this cannot be justified from the historical record. It's hope over experience. Uncertainly may be a problem, but it's not uncertainty about the deficit. What's holding the economy back is uncertainty about jobs, worries about the slowing recovery, and whether a second recession is coming.

Obama and the Capital Flow Fallacy - Paul Krugman - Obama’s press conference wasn’t as bad as it could have been; he actually more or less said that stimulus should be sustained, except it isn’t politically possible. But he also invoked the confidence fairy – and introduced another fallacy, showing that he and his advisers still don’t get the essence of macroeconomics in a liquidity trap: I do think that if the country as a whole sees Washington act responsibly, compromises being made, the deficit and debt being dealt with for 10, 15, 20 years, that that will help with businesses feeling more confident about aggressively investing in this country, foreign investors saying America has got its act together and are willing to invest. And so it can have a positive impact in overall growth and employment. OK, so that’s the confidence fairy at the beginning. But the “foreign investors” thing is actually worse. Think about it: U.S. interest rates are low; there’s no crowding out going on; we are NOT suffering from a shortage of saving. So if foreign investors decide they love us, what does it do? It drives up the value of the dollar, which reduces exports, which leads to fewer jobs.

Category error from James Galbraith (of all people) - A fine summing up of the multi-layered impacted bullshit of ZOMG!!!! The debt!!!! from James Galbraith: What do we have, from a President who claims to be a member of the Democratic Party? First, there is the claim that we face a fiscal crisis, which is a big untruth. Second, a concession in principle that we should deal with that crisis by enacting massive cuts in public services on one hand and in vital social insurance programs on the other. This is an arbitrary cruelty. Third, a refusal to stand on the strong ground of the Constitution, against those whose open and declared purpose is tear that document and the public credit to shreds. So far so good. And it's always a pleasure to see a Howie Kurtz beat down: Obama strikes me as quite resolute. Atrios: We can't read minds, so at some point we have to judge people by their words and actions. This press conference tells us that the austerity crap isn't some bit of political posturing, it's a belief. I mean, raising Medicare eligibility to 67? That's resolute. Evil, but resolute.  Galbraith sees the main point at issue, what's really at stake, without recognizing what's in front of his eyes. Requoting:... the danger of allowing the Constitution to fail. (Leave aside the "banana republic" argument that the Constitution has already failed.) Question: What if what we're seeing really is a change in the Constitutional order?

Eat Peas and get Confidence – Not! - Obama said some interesting things at his press conference yesterday. Central to his words was the theme that when the USA get its hands on the debt ceiling crisis and establishes a framework for a return to fiscal reality there will be a resumption of confidence. With that renewed confidence would come more consumer spending, more business spending and investment, investors (both in and out of the country) would be looking for new opportunities to put money to work. The confidence that would come from a resolution of the budget dilemma would, by itself, be the tonic the economy needs to get moving forward again. I think that is all rubbish. I will try to make the case that exactly the opposite will happen. There may very well be a relief rally for a bit after news of a deal. But I say that relief will turn to fear in a matter of months. Start with the President's words that I thought were important: He made it clear on several occasions; The time is now. We have to eat our peas. But no sooner did he make clear his commitment to tackling the problems he said this: I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.

More Proof That Obama is Herbert Hoover - Yves Smith - Not only is Obama assuring that he will go down as one of the worst Presidents in history, but for those who have any doubts, he is also making it clear that his only allegiance is to the capitalist classes and their knowledge worker arms and legs.  You don’t need to go further than the first page of today’s New York Times for proof. The Grey Lady has realized rather late in the game that automatic stabliizers and emergency programs have been propping up the economy, and the fact that they are soon to disappear will be more than a bit of a downer. Apparently it is now OK for Pravda to make that shocking revelation from Moody’s (the source of the key data in the article) because the budget debate is so far advanced that the executioner has already started the downward swing of his axe; the only question is whether he will get a clean kill of the average citizen’s economic wellbeing or whether it will be a protracted, messy death. From the New York Times: An extraordinary amount of personal income is coming directly from the government. Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics.  By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year. The article also points out that people who are on the verge of being broke typically need to spend the money they get from the government as quickly as they receive it, which leads to a high multiplier effect, estimated at 2:1. Duh!

Barack Obama: America's First Tea Party President - For all its talk of the importance of averting a debt default, Barack increasingly signaling that major deficit reduction has become more than just a bargaining chip to bring Republicans aboard a debt deal. He actually believes that cutting entitlements and reducing the deficit are laudable goals, which would mark “transformational” moments in his President. Let’s face it: the man is not a progressive in any sense of the word; he’s a Tea Party President through and through. To be sure, it’s tough to make the case that the Tea Party has anything like a genuinely coherent political platform. They hate entitlements, but one of their leading voices in the Senate, Rand Paul, conspicuously avoided any talk of cutting Medicare during his campaign (unsurprising, given how much of his income as an ophthalmologist involved treating Medicare patients). You have Presidential candidate, Michelle Bachmann, pledging never to raise the debt ceiling, yet proposing to slash the federal corporate income tax and eliminate the capital gains and estate taxes. But for the most part, all share a visceral dislike of “excessive” government spending, buy into the notion that the federal debt levels are “unsustainable” and that entitlements, really need to be “reformed” (i.e. cut back). In that regard, their aspirations appear to have more in common with the President, than their ostensible GOP allies.
Why America Needs an Infrastructure Bank - FOR decades, we have neglected the foundation of our economy while other countries have invested in state-of-the-art water, energy and transportation infrastructure. Our manufacturing base has migrated abroad; our innovation edge may soon follow. If we don’t find a way to build a sound foundation for growth, the American dream will survive only in our heads and history books.  But how we will pay for it?   A bipartisan bill introduced by senators including John Kerry, Democrat of Massachusetts, and Kay Bailey Hutchison, Republican of Texas, seeks a solution: it would create an American Infrastructure Financing Authority1 to move private capital, now sitting on the sidelines in pension, private equity, sovereign and other funds, into much-needed projects.  Rather than sell debt to investors and then allocate funds through grants, formulas and earmarks, the authority would get a one-time infusion of federal money ($10 billion in the Senate bill) and then extend targeted loans and limited loan guarantees to projects that need a push to get going but can pay for themselves over time — like a road that collects tolls, an energy plant that collects user fees, or a port that imposes fees on goods entering or leaving the country.

Time is of the essence, any US budget deal will do - Larry Summers - The truth is that the expected impact of the deal over a 10-year period will not be its most important aspect except in the context of the current media cycle. Very little hinges on whether the deal picks up the low-hanging fruit with respect to entitlements and revenues – or even breaks some new ground – this year or in the next couple of years.  Agreements reached now are subject to revision, potentially radical revision following next year’s election.  Here is what is not getting its due attention. Decisions about spending and taxing over the next year or two will have a significant impact on job creation over the next year, the economy over the next decade and on the path of US national debt over an even longer horizon. Suppose any proposed deal could be adjusted, thereby adding an extra 1 per cent to gross domestic product growth over the next year. A reasonable assumption is that the increase in output might not be sustained as inflation slows down, investment is increased, fewer workers abandon the search for jobs, and so forth. Assume the impact falls from 1 per cent to 0 per cent over the course of a decade. The consequence would be an increment to GDP of 0.5 per cent or about $1,000bn over the period. That would represent close to 4m job years. And it would reduce deficits by about $400bn – more than it looks like Democrats will be able to come up with in revenue raising or Republicans in cuts to the cost of healthcare. Is there scope for adding fiscal measures that would contribute 1 per cent of GDP or more over the next year and a half? Absolutely. With economic demand constrained and in a liquidity trap where interest rates cannot fall further, fiscal policies have larger than normal effects. With even very conservative estimates of multiplier effects, a combination of continuing payroll tax cuts, maintaining support for unemployed workers, and accelerating infrastructure maintenance could add closer to 2 per cent of GDP growth over the next year and a half.

Lies, damned lies, and statistics - Last week the rabid US Republican Paul Ryan released a “House Budget Committee document” – The Debt Overhang and the U.S. Jobs Malaise – which drew on work produced by Stanford Professor John B. Taylor. You can sort of understand politicians who lie and embellish but when a text-book writing, senior economic professors misuses our art to misrepresent the situation you have to wonder.  Ryan’s document notes that: Nothing is more critical to today’s economy than restoring real job and business growth. Yet for almost three years, the U.S. economy has remained mired in a slow-growth, high-unemployment trap. The so-called “recovery” feels more like a malaise than a rebound.  The ideology is embedded in this statement. Note the use of the qualifier “real” on jobs and the bias towards “business” rather than growth in general.  Ryan then asks: The obvious question remains: “what is holding the economy back?”  In answering his question he cites the fact that recessions that originate from financial crises take longer to recover from. But there is no financial crisis that cannot be overcome with appropriate fiscal policy.

Government and Growth - David Brooks implies there is a causal relationship between government size and economic growth: if you look around the world there’s a slight negative correlation between government size and prosperity. He does use the word "correlation," so he's careful, but in context it seems to me he's at least being suggestive that causality runs from larger government size to less prosperity. Via Noah Smith, here's what the authors of work in this area say: ...while there is close to a consensus on the sign of the correlation [between government size and growth], there is also consensus on the fact that causality is very hard to establish with certainty using the method of instrumental variable estimation—or any other method currently available. In fact, it is close to conceptually meaningless to discuss a causal effect from an aggregate such as government size on economic growth. Thus, several scholars in our view have rightly concluded it is more fruitful to analyze separately the mechanisms through which different taxes and expenditure affect growth. Not all taxes are equally harmful, and some studies identify public spending on education and public investment to be positively related to growth

What the government can and can't do - PAUL KRUGMAN has this right: A number of people have been telling me there’s not much government can do about short-run economic performance, that we need to focus on long-run solutions. It’s a common sentiment inside the Beltway. And it’s also utterly, utterly backwards. Changing the economy’s long-run growth rate is hard. We’ve had almost 25 years of “new growth theory” research, with every possible regression run, looking for the keys to faster growth; my sense is that we’ve basically come up dry. Meanwhile, policy can have huge short-run effects. Calls for aggressive countercyclical policy can get you written off as some wide-eyed socialist, but it's actually much more radical to suggest that governments should forget about the short run and focus on pushing long-run growth to, say, 5% per year. One shouldn't be agnostic about long-run growth policy: public investments, tax rates and structures, and regulations can all shape the path of growth in economic potential. But a government has little to no ability to increase long-run growth in real per capita GDP from 2% per year to 3% per year. The same can't be said of the short-run.

Long-term or short-term? MU! - Paul Krugman says that there's not much that government policy can do to promote long-term growth:  Changing the economy’s long-run growth rate is hard. We’ve had almost 25 years of “new growth theory” research, with every possible regression run, looking for the keys to faster growth; my sense is that we’ve basically come up dry. Karl Smith agrees: [We] heard the President during the townhall talk about life long education, infrastructure, etc. Yet, either the government has been amazingly consistent in providing the right balance of these goods, or they just don’t matter that much. Because long term growth has been incredibly consistent, even including the Great Depression and WWII.   Now I am all for stabilization policy (as long as it comes in the form of infrastructure spending and QE instead of tax rebates). But I also tend to think that the long term matters a lot. And in America's current situation, I don't think there's that much of a tradeoff between the two!

Once more: I WANT MORE SPENDING! - Two nice charts from the NY Fed bank. The first shows just how much of a dive spending has taken. Considering we're a "consumption economy", I don't think this bodes well for us. The second shows how lacking in recovery such spending is compared to prior recession.  I don't know about you, but I don't care how much money we pump into the economy at the top, if it doesn't get in the hands the bottom 90% of the income earners, there will be no recovery. It does not matter if the Fed's are pumping it in or the Government is doing it via tax reductions because both methods are not putting the majority of the money in the hands of the many. The Fed article notes that this discretionary spending is "services". It is 30% of all personal consumption expenditures (PCE). Non-discretionary is 34% of PCE, that leaves 36% somewhere in the middle? They state PCE is 70% of all output. So, 30% of 70% is 21% of all output? Using $14.7trillion means about 3.09 trillion has taken a 7% hit of $216 billion!

Giving In On Tax Cuts for the Rich to Raise Taxes on the Rich? - Saturday night’s news on the debt ceiling talks is depressing even if not surprising.  As the Washington Post’s Paul Kane and Lori Montgomery report: House Speaker John A. Boehner abandoned efforts Saturday night to cut a far-reaching debt-reduction deal, telling President Obama that a more modest package offers the only politically realistic path to avoiding a default on the mounting national debt.“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes." The Post story goes on with some insights as to what went wrong: Obama, at least, was willing to make that leap and had put significant reductions to entitlement programs on the table. But on Saturday, Boehner blinked: Republican aides said he could not, in the end, reach agreement with the White House on a strategy to permit the Bush-era tax cuts for the nation’s wealthiest households to expire next year, as lawmakers undertook a thorough rewrite of the tax code.

High-Speed Rewrite of U.S. Tax Code Wavers as Lawmakers Bicker Over Basics - The collapse of efforts to kick off a U.S. tax code overhaul through a debt-ceiling compromise demonstrates how difficult it will be for lawmakers to rewrite the nation’s revenue laws.  Republican congressional leaders and President Barack Obama discussed a rewrite of the tax code over the past week and couldn’t resolve even the basic outline of what it should look like. They disagreed on revenue targets, the progressivity of the code, international taxation issues and the treatment of large businesses that aren’t currently taxed as corporations, according to two Republicans familiar with the talks.  Those disputes on important parameters that would guide an overhaul led House Speaker John Boehner to abandon efforts for a bigger deficit deal on July 9. Regardless of what happens in the debt-ceiling talks, the barriers that Obama and Boehner faced will recur if and when Congress attempts to restructure tax policy.  “This is a far more difficult and far more complicated process than, at least publicly, people have been willing to admit,”

The GOP’s evolving case against taxes - There are two ways to increase taxes. One is you just raise rates, particularly the top rates. Economists in general — and Republican economists in particular — don’t much like this approach because it raises taxes on the last dollars you’ve earned. That discourages productive people from doing more work, or so goes the argument. The other is you close loopholes and eliminate tax breaks. Economists prefer this approach because rather than raising taxes on doing more work, it equalizes taxes across the range of goods people can buy with their money. The mortgage-interest deduction, for instance, encourages people to spend more on housing than they otherwise would. If you took it away — and no one will, but just for the sake of argument — people would have the same incentive to do more work, but there wouldn’t be a tax break encouraging them to spend their money on housing rather than on other goods. Economists see that as a win-win. If you believe in a free market and balanced budget, flattening the tax code is a no-brainer. Glenn Hubbard, dean of Columbia’s Business School and one of the architects of the Bush tax cuts, would tell you the same thing, and so would Alan Greenspan. But Paul Ryan disagrees:

How the GOP Turned Tax Reform into a New Way to "Starve the Beast" - Earlier this year, Representative Paul Ryan proposed a deficit reduction plan that, in the name of tax reform, repealed most itemized deductions. The resulting revenue would not be used to pay down the deficit, however, but to cut tax rates, mostly for the benefit of comparatively well-to-do Americans. House Republicans supported the Ryan plan unanimously, as did all but four Senate Republicans. In the current debate, some Republicans are again warming to the idea of sweeping away many special tax provisions. But again, Republicans are arguing that most—and in some cases, all—of the added revenue should go towards cutting personal and corporate tax rates, not for deficit reduction and not for achieving important social and economic objectives more efficiently and fairly. Genuine income tax reform is very much needed. Some of the deficit-reduction commissions embraced such reforms, including taxing income from investments and from work at the same rates. But the simple repeal of all deductions, credits, and allowances, when coupled with lower tax rates, is a perversion of genuine tax reform. It is simply “starve the beast” in a new guise.

The Man Behind The GOP's No-Tax Pledge - One person with outsize influence in the debate over raising the debt ceiling is not at the negotiating table. Instead, he sits in downtown Washington at the offices of Americans for Tax Reform, a group that he has run for a quarter century. From there, Grover Norquist fields phone calls and emails from some of the people who are at the negotiating table, and he holds them to their pledge."The pledge" is a promise not to raise taxes. It is considered mandatory for many Republican candidates. Most Republican members of the House and Senate have signed it, as have many Republicans in statehouses across the country. The man who created it seems to Washington insiders like a constant. Norquist has been a fixture in every major important tax debate for decades. But when he started in politics in the 1960s, communism-fighting was his thing. Eventually he turned one eye to the size of the U.S. government. "When the Soviet Union went away, it became time to focus even more on keeping the American government to a small size," he said during an interview Tuesday.

Chart of the Day: We Have a Taxing Problem, Not a Spending Problem" - We have a spending problem, not a revenue problem." This is the usual Republican mantra, but is it true? As Jared Bernstein points out, a simple look at spending and revenue really doesn't back this up: There’s obviously much more to this analysis then a couple of lines on a graph, but the history of structural [] deficits in recent decades is that they are largely the result of cutting revenues rather than raising spending. ....That doesn’t imply that spending shouldn’t be on the table in the budget talks—though the real pressures come in the future, through health care—whacking food stamps, education, and so on is just plain mean. But it’s awfully hard to look at this graph and see support for that Republican mantra. I've added some handy lines to show the general trajectory of spending and taxes over the past three decades. Putting aside the Great Recession, which has temporarily cratered revenues and imposed a burst of stimulus spending, the trend is clear: spending has generally gone down, but so have taxes. Future healthcare expenses are a big issue, but the current deficit just hasn't been primarily a spending problem. It's been a tax cut problem.

The Moral Imperative for the Continuation of Low Tax Rates for the Top Income Fractiles - Or lack thereof. Reports indicate that one of the reasons the "grand bargain" failed was the refusal of one party to accede to an increase in tax rates on households with AGI above $250,000. [1]. I can understand this reluctance, given that the share of total income going to the top 5% of households fell from 38.7% to 36.5%, going from 2007 to 2008 (just ignore the increase of 17.6 percentage points in the previous 30 years). Below is an updated graph from our forthcoming book Lost Decades by myself and Jeffry Frieden, illustrating the grievous harm that these households have endured. In 2008, the threshold income for the top 5% was $152,726. The top 1% of households (with a threshold income of $368,238) also suffered a decline in their income share, which fell from 23.5% to 21%. This was in contrast to previous experience. From Lost Decades: Over the course of the Bush expansion, two-thirds of the country’s income growth went to the top 1 percent of the population. These very rich families ... saw their incomes rise by more than 60 percent between 2002 and 2007, while the income of the rest of the nation’s families rose by 6 percent.

People Support Higher Taxes to Reduce the Deficit by a 2-to-1 Margin - It appears that Republicans have walked away from a historic opportunity to reduce the deficit because of their obsessive insistance that not one penny come from higher revenues. Recent polls, however, suggest that the American people are not so obstinate and are more than willing to accept some increase in taxes to reduce the deficit. There is a high degree of consistency in every poll I could find on this topic. Can/Should the Budget Deficit Be Reduced with Spending Cuts Alone or Should There Be Some Increase in Taxes? (table of 11 polls)

Do Low Tax Rates On Rich People Actually Ruin The Economy? - In the past few days, as our dysfunctional government pushes us ever closer to defaulting on our obligations, we've taken a look at government spending and historical tax rates. The Republicans are right that today's level of government spending relative to GDP is higher than it has been in the past 60 years--and probably unsustainably so. So spending does have to be cut. But another one of the contentions of today's Republican party is that high income tax rates are always bad for the economy, because they deprive people of an incentive to work hard, thus making us a nation of lazy good-for-nothings. This argument has been repeated so often and for so long that it is now basically regarded as fact. But, interestingly, the history of income tax rates in the US actually suggests that it may be b.s. Some of the most prosperous periods in US history (1950s and 1960s) have come during periods of super-high marginal income tax rates.  And some of the most disastrous periods in US history (1930s, 2010s) have come after periods of super-low income tax rates. In the good periods, moreover, the middle-class boomed and inequality between the country's highest earners and everyone else shrank. In the bad periods, meanwhile, inequality soared, and the richest 1% of the population came to earn a staggering amount of the country's income.

1% Transaction Tax to Save the Country? - Tuesday on C-SPAN's Washington Journal, Representative Chaka Fattah (D-Pa) outlined his bold deficit fix, the "Debt Free America Act." According to Fattah, this proposal would "eliminate the national debt within 10 years" and "generate job growth and economic expansion," while simultaneously abolishing all federal individual and corporate income taxes. This can all be accomplished, purportedly, with a new 1% fee on all transactions that involve a payment instrument. Be it cash, credit card, debit card, check, or a transfer of stocks or bonds, all such payments would invoke the 1% fee. This transaction tax system is based on the premise that the annual volume of qualifying transactions in the American economy is $445 trillion. With a 1% rate, the tax would yield $4.45 trillion, roughly double what the federal government collected in 2010. But Fattah has also reported that under such a tax, "taxpayers would pay less than one percent of their income in taxes." So hold on a second. Individual taxpayers would pay less than one percent of their income to the federal government (drastically less than at present), but federal revenues would soar to $4.45 trillion? Really?

Why Taxes Will Rise in the End - Polls show that most Americans are opposed to raising the federal debt ceiling. Even when the Pew Research Center included the consequences in its question — a national default that would damage the economy — slightly more people were against raising the ceiling than were for it.  How could this be? Not so long ago, nobody was talking about tax increases or Medicare cuts, and the federal budget seemed to be in fine shape. If only we could get back to the past. Unfortunately, this nostalgic view depends on a misunderstanding of the budget. It imagines a budget in which the United States indefinitely has the world’s highest medical costs, its largest military, an aging population and, nonetheless, taxes that are among the world’s lowest. Economists have a name for that combination: a free lunch.  Free lunchism is ultimately the problem with the no-new-taxes pledge that so many politicians have adopted. A refusal to raise taxes, no matter how principled, cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military — or do some combination of the above.

Chart of the day: Where does the mortgage-interest deduction go? - Check out page 44 of the Joint Committee on Taxation report on the way that household debt is treated for tax purposes. I’ve put the table into chart form, to make it easier to see what’s going on. Apologies for the rather weird y-axis on the chart: it’s serving a double purpose, counting total returns for the left-hand column and dollars for the right hand column.  In any event, the big picture here is clear. Households earning more than $200,000 a year account for less than 10% of the returns, but get 30% of all the benefits. And households earning more than $100,000 a year get 69% of all the benefit. The mortgage-interest deduction might be a middle-class tax break, but realistically it’s an upper-middle-class tax break. The JCT is also very clear on the two separate ways in which it’s fundamentally unfair, benefiting owners at the expense of renters:. Because the Federal income tax allows taxpayers to deduct mortgage interest from their taxable income, but does not allow them to deduct rental payments, there is a financial incentive to buy rather than rent a home. Taxpayers are also allowed to exclude gains from the sale of their principal residences of up to $500,000 from gross income. There is no such exclusion for other types of investments, further reinforcing the financial incentive to buy rather than rent a home.

Study Makes Case that Oil, Gas Taxes Would Hurt the Economy - A study to be released on Tuesday says that President Barack Obama’s plans to raise taxes on the oil and gas industry might actually make the government’s fiscal straits worse, not better. The study by an Louisiana State University finance professor, Joseph Mason, concludes that a couple of the administration’s proposals – projected to raise about $29 billion over the next decade – actually would cause long-term net losses of about $54 billion in tax revenues, because of impacts on the industry. The change “comes at the expense of industry cutbacks that can reasonably be expected to cost the economy some $341 billion in economic output, 155,000 jobs, [and] $68 billion wages,” the study says. The accompanying drain on tax revenues would actually outweigh the increase from changing the rules, the study contends. The study was prepared with support from the American Energy Alliance, a market-oriented advocacy group that favors “freely functioning energy markets” and predictable, technology-neutral government policies. It suggests that easing federal restrictions on offshore drilling could have a much more beneficial effect.

GE CEO: Repatriation Tax Holiday Could Help Fund Infrastructure - The head of General Electric Co. said Monday he could support using a tax break for bringing back U.S. companies’ overseas profits to fund infrastructure projects. Using a repatriation tax holiday — a tax break for companies bringing back overseas profits to the U.S. — to help fund an ‘infrastructure bank,’ would be a good idea, GE Chief Executive Jeffrey Immelt said at the U.S. Chamber of Commerce on Monday. Lawmakers have proposed starting a national infrastructure bank to provide low-interest loans and loan guarantees to build highways, energy projects and water infrastructure.“We favor repatriation of our foreign cash back into the U.S., where it can do some good,” Immelt said. “I believe Senator Schumer has a good idea: taxes from repatriation could go toward creating the infrastructure bank that in turn creates jobs.” Sen. Charles Schumer (D., N.Y.) has said that his party would be willing to consider a tax repatriation holiday, provided the companies that benefit from the lower tax rate use the funds to help create jobs.

Levin Says Better Offshore Tax Compliance Would Reduce Deficit - U.S. Senator Carl Levin said the congressional focus on reducing the federal budget deficit should enhance the chances for passage of legislation to crack down on offshore tax havens.  Improving offshore tax enforcement would allow the U.S. Treasury to recoup a significant chunk of an estimated $100 billion in revenue that Levin said is lost annually to “offshore trickery and tax shelter abuses.” He made the remarks today at a press briefing unveiling the legislation.  Levin, a Michigan Democrat, heads the Senate Permanent Subcommittee on Investigations, which has examined offshore transactions for the past decade. He has introduced similar legislation in four previous congressional sessions. “Our great hope is that deficit discussions will give it momentum,”

Monday Map: EIC Recipients by State - Today's map concludes our series looking at the state distribution of common federal tax credits. It shows the percentage of filers in each state who receive the Earned Income Credit.

Buying Off Washington To Kill Financial "Reform" - During these times when we are bombarded with the news about the debt ceiling/taxes/spending cut negotiations aimed at screwing ordinary Americans, it is easy to forget that Congress has other work to do aimed at screwing ordinary Americans. Busy, busy, busy. So much screwing to do, so little time in which to do it. Newsweek has the familiar story in The Billion-Dollar Heist: How the financial industry is buying off Washington—and killing reform. We know this narrative by heart—an army of bank lobbyists, a flood of bribes. Ever since the law’s passage, those same “powerful interest groups” who opposed Dodd-Frank have been trying to prevent it from taking effect. As written, the law delayed implementation of most of its new rules for at least 12 months so regulators would have time to hammer out the finer points of the 2,319-page bill. But that delay has also provided an opening to banks and other financial institutions seeking to defang the law. Follow the money. The story of this evisceration is largely one of money—the tens of billions of dollars in profits that banks and other financial institutions stand to lose if Dodd-Frank is implemented, and the astonishing sums they’re spending to squash it. The industry paid lobbyists $1.3 billion in 2009 and through the first three months of 2010, according to the Center for Public Integrity, which added up the spending by the 850 businesses and trade groups fighting financial reform.

Authorities could bail out banks again, S&P says - Officials fighting the next financial crisis may again bail out banks using the public purse, S&P has said, in an opinion that casts doubt on one of the fundamental tenets of US financial reform. The rating agency said on Wednesday that the US Treasury, Federal Reserve and Congress might rescue a large financial group rather than allow it to fail like Lehman Brothers. Dodd-Frank, the legislation signed into law a year ago next week, was supposed to prevent bail-outs by allowing the government to seize and wind down safely an ailing “systemically important financial institution”, or Sifi: “We believe the government may try to avoid contagion and a domino effect if a Sifi finds itself in a financially weakened position in a future crisis.” The agencies’ views are crucial to the fight over whether the phenomenon of “too big to fail” has been ended. If not, the largest banks will continue to enjoy a funding advantage over their smaller rivals. The law prevents the Fed from directing emergency lending to any individual troubled institution and grants “resolution authority” to the Federal Deposit Insurance Corporation, allowing officials to sell off profitable parts of a failing group and impose losses on shareholders and bondholders. In an interview this year, Sheila Bair, chairman of the FDIC, criticised the rating agencies for not removing the prospect of government support from their models.

Why Dodd-Frank Won't Fix CEO Pay - Back when the financial crisis hit, there were few things more irritating to Americans than seeing huge bonuses go to the top dogs at big corporations. Two years later, and apparently nobody cares. 98.5% of companies that put their executive pay plans up for a vote by shareholders have received a resounding 'a-ok', the Wall Street Journal reports. The votes, of course, weren't inspired by big companies themselves. They grew out of the Dodd-Frank financial overhaul, which took on the issue of executive pay after the finance wizzes at AIG used their $170 billion in bailout money to pay themselves $165 million in bonuses, which, needless to say, ticked off the American public.  After all, some 80% of Americans still think CEO pay is too high, according to a recent Bloomberg poll. There are a bunch of reasons. First, let's just re-visit how corporate pay got so wildly out-of-whack in the first place. In 1965, the average CEO in the U.S. got paid 24 times as much as the average worker. In 2007, CEOs got paid 275 times the average bean counter. Why? Mostly because CEOs get a lot of say in their own pay, since they tend to choose their own directors and chair the board that figures those kinds of things out.

Dodd-Frank-Created Stats Office Comes Under Fire - For the most part, Treasury’s new Office of Financial Research has gone unnoticed as Washington and Wall Street agonize over other aspects of last year’s Dodd-Frank financial-overhaul law. Indeed, the office’s mandate to description as a provider of data and economic analysis to federal regulators hardly sounds like ingredients of controversy. But the new office and the man in charge of setting it up – former chief U.S. economist for Morgan Stanley, Richard Berner – felt some heat this afternoon. The subject of an oversight hearing Thursday, the investigating subcommittee’s chairman, Rep. Randy Neugebauer (R., Tex.) criticized the office’s data-collecting mission as “Orwellian” in his prepared remarks, and painted an image of powerful bureaucracy with no limits on how much it can spend or what information it can demand from the industry, a characterization echoed by many of his Republican colleagues. Author and investor Nassim Taleb, one of the witnesses at the hearing, described the office in his prepared testimony as an attempt to create “an omniscient Soviet-style central risk manager.”

Grilling Elizabeth Warren - Midway through consumer advocate Elizabeth Warren’s appearance before the House Oversight Committee on Thursday, Tennessee Democrat Jim Cooper had heard enough. Republicans had been grilling Warren all morning, often on the basis of confusion or misinformation, and frequently with an openly hostile tone. It wasn’t quite as uncivil as Warren’s last, infamously contentious appearance before a Republican-led House committee. But it was bad enough for Cooper, who said Warren had endured “more rudeness and disrespect than I have ever seen a committee witness treated [with]. That is not the American way.”The debt limit duel might be Washington’s testiest issue. But few other topics seem to produce as much acrimony on Capitol Hill as the feisty consumer advocate and the Consumer Financial Protection Bureau, opening on July 21, that she helped to conceive and create, and which Republicans are determined to declaw.

Elizabeth Warren Out as Possible Head of Consumer Financial Protection Bureau - Yves Smith - We have said for some time Warren was not going to get head the new consumer financial protection agency. Obama was not willing to ruffle the banks, and Geithner, who is is most powerful Cabinet member, would not stand for it). Nevertheless, we are disappointed by this outcome. And it seems a bit churlish for this news to be leaked the day after she ran the gauntlet with the House Oversight Panel. From Bloomberg: President Barack Obama has chosen a candidate other than Elizabeth Warren as director of the new Consumer Financial Protection Bureau, according to a person briefed on the matter. The president’s choice is a person who already works at the consumer agency, the person said today. Obama may make the nomination as soon as next week, another person briefed on the administration’s plans said. The choice is presumably Raj Date, a former McKinsey staffer and banking industry executive (Capital One and Deutsche Banka) whose name was floated a month ago.  But the Republicans nevertheless lost no opportunity to find opportunities to kick Warren. In a further sign of how petty and dysfunctional Washington has become, not only have the Republicans said they will approve no one for the CFPB post (and they’ve stymied the approval process for other important government posts) but they are denying pay to any recess appointees to key agencies.

Regulators Are Said to Weigh Softer Derivatives Rules - Federal regulators are considering backing off a plan to curb Wall Street’s control over the derivatives market, another potential win for the big banks. Last fall, the Commodity Futures Trading Commission proposed rules that would prevent a bank or financial firm from controlling more than 20 percent of any one derivatives exchange or trading facility. Now, regulators are discussing lowering the cap, according to people with knowledge of the matter. The rule, stemming from the Dodd-Frank financial regulatory overhaul, was aimed at tearing down monopolies in the $600 trillion market, which played a central role in the financial crisis.But as DealBook reported on Thursday1, Wall Street has since begun a fierce behind-the-scenes effort to delay or water down many of the regulatory changes passed by Congress in the aftermath of the crisis. Regulators recently agreed to put off the derivatives rules for up to six months.

Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble? (Report) The Carbon Tracker initiative is a new way of looking at the carbon emissions problem. It is focused on the fossil fuel reserves held by publically listed companies and the way they are valued and assessed by markets. Currently financial markets have an unlimited capacity to treat fossil fuel reserves as assets. As governments move to control carbon emissions, this market failure is creating systemic risks for institutional investors, notably the threat of fossil fuel assets becoming stranded as the shift to a low-carbon economy accelerates.  In the past decade investors have suffered considerable value destruction following the mispricing exhibited in the boom and the more recent credit crunch. The carbon bubble could be equally serious for institutional investors – including pension beneficiaries - and the value lost would be permanent.  We believe that today’s financial architecture is not fit for purpose to manage the transition to a low-carbon economy and serious reforms are required to key aspects of financial regulation and practice firstly to acknowledge the carbon risks inherent in fossil fuel assets and then take action to reduce these risks on the timeline needed to avoid catastrophic climate change.

As a Watchdog Starves, Wall Street Is Tossed a Bone - Robert Khuzami, the Securities and Exchange Commission’s head of enforcement, said his division was underfunded even before Dodd-Frank expanded its responsibilities.  The economy is still suffering from the worst financial crisis since the Depression, and widespread anger persists that financial institutions that caused it received bailouts of billions of taxpayer dollars and haven’t been held accountable for any wrongdoing. Yet the House Appropriations Committee has responded by starving the agency responsible for bringing financial wrongdoers to justice — while putting over $200 million that could otherwise have been spent on investigations and enforcement actions back into the pockets of Wall Street.  A few weeks ago, the Republican-controlled appropriations committee cut the Securities and Exchange Commission1’s fiscal 2012 budget request by $222.5 million, to $1.19 billion (the same as this year’s), even though the S.E.C.’s responsibilities were vastly expanded under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The report stressed, “With the federal debt exceeding $14 trillion, the committee is committed to reducing the cost and size of government.”

Hedge Fund Execs: The gamblers rake it in, at our expense – Dusty - Les Leopold speaks regularly to groups about how our system is flawed and favors these fucks who do nothing but bet against America and our economic needs. His recent piece is about these smarmy fuckwads who operate said Hedge Funds and they do it with little, if ANY, regulatory oversight. From Leopold’s writeup, via Alternet, one eye-popping fact: … the top 10 hedge fund elites make on average nearly $1 million an HOUR. Ok, I know A-Rod and his ilk are way over-paid, but one deserves a million bucks an hour. I don’t give a rat’s ass what they do. Corporate vultures that are betting against us really do not deserve that level of pay. At least Oprah and Tiger work for their money. Hedge fund exec’s really don’t do shit for their pocketed largesse. To really get your goat..let me tell you what tax rate they get to use, drumroll please… To add enormous insult to our grievous injuries, these hedge funds managers only pay a 15 percent federal income tax rate (instead of 35 percent) on nearly all of their obscene incomes. That’s because of a tax loophole that allows them to declare their income as capital gains — they call it “carried interest.”

Credit Suisse Discloses U.S. Inquiry Over Taxes - Credit Suisse disclosed Friday that it was being investigated by the Justice Department to see whether its private banking unit helped Americans evade taxes, raising the possibility that the bank could face legal proceedings similar to those that led its Swiss rival, UBS, to pay a costly settlement and open its books to American tax authorities. Citing “a broader industry inquiry,” Credit Suisse said it had previously received subpoenas and other information requests from the Justice Department and other government agencies regarding the cross-border services that its private banking arm provided to its rich American clients. The bank also said it was told it was “a target” of the investigation on Thursday.

Democrats Pounce as Oversight Panel Calls Off Hearing - Republicans called off a congressional hearing on what went wrong at the Financial Crisis Inquiry Commission, and Democrats are saying thats because the Republicans didnt like what they found during an investigation. The Democrats say that commission documents requested by House Oversight Chairman Darrell Issa (R., Calif.) included emails showing Republican commission member Peter Wallison trying to persuade his colleagues to use their positions to help House Republicans overturn the Dodd-Frank financial regulation legislation. Mr. Issa’s staff said that the hearing had been “postponed to allow additional review and analysis of material.” Aides to Rep. Elijah Cummings (D., Md.), the top Democrat on the Oversight Committee, released their analysis of the materials gathered by the committee Wednesday morning, shortly after the hearing was to have started. A spokeswoman for committee Democrats said “the facts in this case did not present the messaging opportunity that [Republicans] were hoping for.”

Democrats Release Scathing Report Of Republicans Who Sat On Financial Crisis Commission -  The Democrats on the House Oversight Committee have just released a scathing report on the Republicans that sat on the Financial Crisis Inquiry Commission, accusing them of being driven by politics rather than seeking to find the truth about the cause of the crisis.  Dems reviewed over 400,000 internal documents and found that Republican Commissioner Peter Wallison told fellow FCIC Republicans "to use their positions on the commission to help House Republicans in their efforts to repeal the Dodd-Frank Act." Remember, the FCIC panel was bipartisan, and eventually released three different reports on what caused the crisis, one of which was a Republican dissent spearheaded by Wallison. The internal documents were originally requested by GOPers who accused Democrats of partisanship. "The documents... raise a host of new ethical questions about Republican Commissioners and staff, including evidence that they leaked confidential information to outside parties on multiple occasions," the report says. (Full report embedded below)

The FCIC Investigation, Wallison on the GSEs and the Conservative Echo Chamber  - There’s been a lot of discussion of this report released by the House’s Committee on Oversight and Government Reform, titled An Examination of Attacks Against the Financial Crisis Inquiry Commission.  The report discusses questionable conduct by the Republicans who served on the FCIC, especially in regards to leaking documents.  A reader at Barry Ritholtz’s site said: “Based on this report, I would think that a broader investigation is certainly warranted. There were certainly major ethics violations here, and potentially some criminal ones as well.” I want to comment on two of the things brought up, both related to a member of the FCIC named Peter Wallison, who is also a fellow dealing with financial regulation for the American Enterprise Institute.  He, along with another person named Ed Pinto, have been at the center of the campaign to blame the GSEs for the crisis.

Evil > Stupid - Krugman - Atrios likes to say that the eternal question, as you look at absurd policy debates, is whether these people are evil or stupid. In the case of the Fannie-Freddie-did-it discussion, we seem to have an answer. Mike Konczal reads the Democratic report on conduct at the Financial Crisis Inquiry Commission (pdf), which has some fairly shocking evidence about Peter Wallison, who has been pushing the clearly false line that Fannie and Freddie were actually leading the charge into high-risk lending. As Konczal says, all of this stuff relies on a form of three-card monte: you talk about “subprime and other high-risk” loans, lumping subprime with other loans that are not, it turns out, anywhere near as risky as actual subprime; then use this essentially fake aggregate to make it seem as if Fannie/Freddie were actually at the core of the problem. But was this self-conscious? Do these people know what they’re doing? Yes.

It Was Debt What Did It - Paul Krugman - Never mind William Galston’s strange belief that debt-deleveraging is a new theory, unknown to Keynesian economics; Mian and Sufi are in fact doing terrific work. They have been testing the effects of household leverage by looking at cross-sectional evidence, in particular county-level US data. Here’s the chart I found most compelling: What you can see is that there was a drop in demand even in low-debt counties during the OGWAGD (Oh God we’re all gonna die) period that followed the fall of Lehman; but since then demand in these counties has fully recovered. What’s holding the economy back despite the easing of the financial crisis per se, the evidence suggests, is the overhang of household debt. This does not say that there’s nothing policy can do. On the contrary, debt-deleveraging models say that fiscal policy can help bridge the gap while households pay down debts, and that debt relief — either directly or via inflation that erodes the real value of debt, can make a big difference.

Three Additional Points on the GSEs, AEI and FCIC Report - Mark Calabria refers to David Min’s critique of the AEI arguments that the GSEs caused the financial crisis as a “CAP-AEI Food Fight.”  And from your point of view, this may be the framework that you’d likely use.  The conservative think tank says A, the liberal think tank says not A, the answer is probably in the middle somewhere.  In a lot of cases, that’s probably a smart approach. But we are talking about one of the biggest and most examined markets in the world – the United States mortgage market.  And what do other people who have looked into this issue find?  From Min’s recent paper, with a few sources made clear: "Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.”

Felix Salmon Misreads AAA Bond Demand to Say “Overcaution” Caused Crisis - Yves Smith - Lordie, I can’t believe someone who professes to understand markets has written, at length, that caution, no, “excess of overcaution,” was a major contributor to the criss. Or has Felix Salmon been spending too much time with lobbyists from ISDA and SIFMA? I hate seeming rude, but Felix has a habit of tearing into Gretchen Morgenson for errors much less significant than the one he made in a post today. He wrote, apropos this chart, which comes from FT Alphaville: The big-picture thing to remember when looking at this chart is something which I’ve said many times before — that it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds. Now anyone who had read the Financial Times in 2006-early 2007 or was in the credit markets then would know that this statement, “it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution” is demonstrably counterfactual. All you had to do was look at the spreads for risky assets. There was a simply astonishing compression between the yields of perceived-to-be-risk-free assets, such as Treasuries and their toxic counterfeits, the AAA rated tranches of CDOs and CLOs, and risky assets, like the lower-rated tranches of the same bonds, as well as junk bonds. If there was “overcaution” you would have seen a wide spread between AAA bonds and lesser-rated bonds.

SEC Charges JPM with Regularly Rigging Muni Bond Markets Across the Country For Years - Such serious charges of bribery and corruption that are settled with fines and no admission of guilt despite overwhelming evidence often initiated by the States, is a merely the cost of doing business when one is occasionally discovered in an ongoing confidence game. This global financial cartel robs billions from the public on a regular basis across a wide range of financial and commodity markets.  The fines are paid, a highly compensated individual takes the nominal 'punishment' while keeping the proceeds, the politicians and regulators are paid, and the fraud continues on. As Bloomberg TV snarkily observed today, the $238 million dollar fine represents less than ONE day's take for JPM, only six hours work in the markets. The stock was up on news of the favorable settlement.  Where is the reform? Where is the justice? Where is the deterrence?

Jamie Dimon Is Running A "House Of Ill Repute" - JP Morgan agreed to pay $211 million last week to settle allegations that it cheated local governments in 31 states by rigging the bidding process for dozens of muni bond deals.  With all the coverage on the grim jobs numbers and the stirring launch of Atlantis, you might have missed the news about JP Morgan's settlement. Or maybe you thought it was groundhog day. Friday's settlement was just the latest in a series for the banking giant.

  • In June, JPMorgan paid the SEC $154 million to settle charges it failed to disclose that hedge fund Magnetar not only helped choose the assets in a CDO transaction called "Squared," but also bet against much of the deal.
  • In April, JPMorgan Chase paid $75 million in fines and forfeited $647 million in fees to settle federal charges that it made unlawful payments to win municipal bond business in Jefferson County, Ala.
  • In March 2010, JPM settled for $6 billion with the estate of Washington Mutual, which JPM bought from the FDIC in late 2008 for $1.9 billion. The estate claimed JPMorgan conspired to lower WaMu's sale price by leaking false information about WaMu's finances to federal regulators and potential rival bidders.

Why Prosecutors Don't Go After Wall Street : NPR - When the energy giant Enron collapsed 10 years ago, top executives of the company faced criminal prosecution, and many served lengthy prison terms. In the savings and loan scandal of the 1980s, hundreds of bankers went to jail. But the financial meltdown of 2008 hasn't generated a single prosecution of high-level Wall Street players — even though the Securities and Exchange Commission has brought civil cases against some companies and reached financial settlements. That's a result of new guidelines issued by the Justice Department in 2008, which have allowed prosecutors to take a "softer approach" to corporate crimes. The guidelines — known as deferred prosecution agreements — have permitted financial companies to avoid indictments if they agree to investigate and report their own crimes. "It's a gentlemen's agreement, and it really allows companies to keep their share prices higher and it helps companies continue to do business with the government, but it's a lot lighter [in terms of penalties,]" says New York Times financial reporter Louise Story. "And this [approach] was celebrated on Wall Street."

Are Bank Examiners to Blame for Slow Job Growth? - Simon Johnson - With unemployment back up to 9.2 percent, as reported last week, the hunt is on for an explanation of why job creation has been so slow since the financial crisis of 2008. Some House Republicans think they have found a specific culprit: bank examiners. In the view of Representative Bill Posey of Florida and some colleagues on the House Financial Services Committee, bank examiners are clamping down on otherwise perfectly healthy banks – and forcing them, inappropriately, to classify some loans as “non-accrual” (meaning less likely to be paid back). Mr. Posey has therefore introduced a bill that would direct examiners to regard all loans as “accrual,” as long as payments are still being made – and a hearing was held on July 8 to discuss the merits of the matter. I testified at the hearing and was not supportive of the bill. On the subsequent panel of witnesses, representatives of the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, the relevant regulators, testified even more forcefully against the proposal.

Accounting is destiny - So, unusually, Felix Salmon is wrong: In order for banks to offer principal reductions, two criteria need to have been met: (a) they came into the mortgages via acquisition, rather than writing them themselves; and (b) they bought the mortgages at a discount… Economically speaking…what the banks are doing here does not make sense. Either writing down option-ARM loans makes sense, from a P&L perspective, or it doesn’t. If it does, then the banks should do so on all their toxic loans, not just the ones they bought at a discount. And if it doesn’t, then they shouldn’t be doing so at all. It makes perfect sense for banks to reduce principal on loans valued at less than par on their books, and to refuse to do so for other loans.

Mirabile Dictu! SEC Prods Banks Over Mortgage Litigation Reserves - Yves Smith - When the SEC wakes up and starts acting like a regulator, you know something serious is afoot. The Wall Street Journal reports that the securities agency, spooked by Bank of America setting aside over $20 billion for mortgage-related liability, has sent letters to “a number of banks” asking them to do a better job of disclosing what their legal liability is (the elephant in the room is of course the mortgage mess) and making adequate reserves. Structured credit and chain of title litigation are cutting edge areas of the law. We are in a better position than the banks to be candid about what is afoot, and even so, we’ve gotten a few calls wrong. But it’s also true that many of the key elements of the law are being sorted out in court, and certain issues are too early to call. But I wouldn’t go beyond being a teeny bit sympathetic. The industry has gone into a defensive posture, trying to rely on PR and aggressive salvos by stanch allies, like the American Securitization Forum, or fellow members of the mortgage industrial complex who have as much to lose as they do. There are enough judges that are not beholden to banks and were appalled by the massive fraud on the court perpetrated in the robosigning scandal that the banks can’t expect to get a break simply by being presumed to be credible. The banks simply can’t admit how bad things are. Between eventually needing to take large writedowns on their second lien portfolios (roughly $400 billion among the four biggest banks plus Ally Financial) and their mortgage-related liability, the largest banks have severely impaired if not negative equity.

True Cost Of The Wall Street Bailout - PBS VIDEO - Allison Stewart from Need to Know with Bloomberg reporter Bob Ivry.  We all know about TARP, the Troubled Asset Relief Program, which spent $700 billion in taxpayers’ money to bail out banks after the financial crisis. That money was scrutinized by Congress and the media. But it turns out that that $700 billion is just a small part of a much larger pool of money that has gone into propping up our nation’s financial system. And most of that taxpayer money hasn’t had much public scrutiny at all. According to a team at Bloomberg News, at one point last year the U.S. had lent, spent or guaranteed as much as $12.8 trillion to rescue the economy. The Bloomberg reporters have been following that money. Alison Stewart spoke with one, Bob Ivry, to talk about the true cost to the taxpayer of the Wall Street bailout.

Steve Keen On Banks And Debt - Today we feature a longish (23 minutes) interview with Australian economist Steve Keen (hat tip, Tim Iacocno).  Keen is the author of Debunking Economics (Zed Books, 2001) and a new version covering macroeconomics is coming out this year. His "contrarian" views on how economies actually work are well articulated and make sense. Keen has little patience with the Krugmans or Bernankes of this world, as I described in my post Dude! Where's My Recovery?  Keen first makes the point that banks only make money by "persuading" people to take on huge levels of debt. This is done by inflating asset values and handing out the credit as though it were Halloween candy. That's what occurred during the Housing Bubble when households took on enormous amounts of un-repayable mortgage debt. Keen then makes the point that conventional economics does not take private debt levels into account, presuming instead that all private debt is good!

Unofficial Problem Bank list increases to 1,004 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. This post includes an update to stress rates at the state level (see comments and sortable table at bottom). Here is the unofficial problem bank list for July 8, 2011.  Changes and comments from surferdude808:  The FDIC decided to send Chairman Bair off with a small salute by closing three banks this Friday. The failures were in Colorado and Illinois, but given the 65 failures in the state of Georgia on Chair Bair’s watch, perhaps it may have been more fitting to have another failure in Georgia. This week there were four additions and three removals. The changes result in the Unofficial Problem Bank List having 1,004 institutions with assets of $418.8 billion.

Citigroup Estimates It Has $22 Billion at Risk in Five European Countries - Citigroup Inc. (C), the third-biggest U.S. bank, estimated it has at least $22 billion in loans, trading assets and other “exposures” to Greece, Italy, Portugal, Spain and Ireland. The net figure includes $13 billion in so-called funded exposure as of June 30, mostly in the form of credit to financial institutions and companies, according to an earnings presentation today on the New York-based firm’s website. Sovereign entities account for “a little more than” $1 billion of that amount, it said. The remaining $9 billion is unfunded exposure, mainly to international companies based in the five countries, where Citigroup provides settlement and clearing services, according to the presentation. Estimates were based on the firm’s internal risk measures, it said.

Sheila Bair Skips the Revolving Door - Here’s a bit of shocking news: A Washington regulator is NOT going to work for the industry she used to rule over. We’ve gotten a bit dizzy from the revolving door between Washington and big business. In the latest example, the government’s top mergers cop, Christine Varney, plans to join a big law firm to help push through mergers. President Obama’s former budget chief joined Citigroup. And these two are by no means isolated examples. (We’re looking at you, Robert Rubin. Maybe you too, Tim Geithner.) But today, the outgoing FDIC Chairman Sheila Bair skipped all that and decided to join the Pew Charitable Trusts, a public policy charity. At Pew, according to a news release, Bair will offer advice on how governments “can best ensure fiscal and economic stability and family financial security.” In other words, that’s about 180 degrees from the world of Wall Street and high finance that Bair oversaw as one of the country’s top banking enforcers. Forgive the tortured metaphor, but let’s give credit to Bair skipping the revolving door and opting for the stairs.

Sheila Bair blames Geithner, Paulson and Bernanke for the credit crisis - Former FDIC chair Sheila Bair’s departure from government has been unusual for a number of reasons. First, she is not getting on the gravy train in the private sector that former officials usually do. What’s more is she allowed the New York Times Joe Nocera to pen an exit interview with Bair that was scathing in its condemnation of both the Bush and Obama Administrations in which she served. More compellingly, she has now gone on the record with an Op-Ed in the Washington Post writing those same sharp criticisms herself. Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help. Too many industry leaders, as well as some government officials, compare the crisis to a 100-year flood. “Who, us?” they say. “We didn’t do anything wrong. Nobody saw this coming.” The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society.

Did Sheila Bair Save the US From Complete Financial Meltdown? - Yves Smith - When a moderate (meaning anachronistic) Republican proves to be a more tough minded regulator than Democrats, it serves as yet another proof of how far the county has moved to the right. Bair, in a long “exit interview” with Joe Nocera, says a number of things that would have been regarded as commonsensical and obvious in the 1980s, yet have a whiff of radicalism about them in our era of finance uber alles. For instance: Bear should have been allowed to fail, TBTF banks are a menace (well, she doesn’t say that, but makes it clear she regards them as repugnant), bank bondholders should take their lumps.  Bair was alert to the dangers of subprime, having recognized how dangerous it could be in the early 2000s (when a smaller version of the market blew up, taking homeowners along with it), and was not a believer of the Paulson/Bernanke party line that subprime would be “contained”. She long championed mortgage mods as better for lenders, borrowers, and the economy, and has fought an uphill battle with the Administration on that front. With the IndyMac failure, which put the subprime lender/servicer in the FDIC’s lap, she pushed hard to develop a template for how to do them, which then was ignored by the Administration (they did HAMP instead, an embarrassment which she refused from the outset to endorse).  The piece serves as an indictment of the banking industry toadies in the officialdom, namely the Treasury, Fed, and OCC.

Sheila Bair’s Bank Shot - The rap on her was always that she was “difficult” and “not a team player.” There were times, in Congressional testimony, when she disagreed with her fellow regulators even though they were sitting right next to her. Her policy disputes with other regulators were legion; in leaked accounts, Bair was invariably portrayed as the problem. In “Too Big to Fail,” for instance, the behind-the-scenes account of the financial crisis by the New York Times business columnist Andrew Ross Sorkin, Bair is described as one of Geithner’s “least favorite people in government.” As Paulson, Geithner and the Federal Reserve chairman, Ben Bernanke, raced to bail out banks and companies like A.I.G., Bair resisted, fearing that they were being overly generous by putting the interests of bondholders over those of taxpayers. I couldn’t help recalling that the last female financial regulator to be labeled difficult was Brooksley Born, the head of the Commodity Futures Trading Commission in the mid-1990s. Fearful that derivatives were becoming a threat to the financial system, Born wanted to regulate them but was stiff-armed by Alan Greenspan and Robert Rubin.

Unofficial Problem Bank list declines to 995 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  There is the unofficial problem bank list for July 15, 2011.Changes and comments from surferdude808:  It was an active week for the Unofficial Problem Bank List with 11 removals and two additions. The net result of the changes leave the list at 995 institutions with assets of $416.2 billion, down from 1,004 institutions and assets of $418.8 billion last week. Among the removals are five cures, four failures, and two unassisted mergers.

A brave new banking system – while public is told banking system is healthy FDIC quietly grows troubled bank list by 180 and adds over 1,600 employees in the last two years to deal with bank failures. - The banking system in the United States rests on a very thin layer of faith and that faith has been shaken by the current financial crisis.  The retail banking system is largely a facade that now latches on to taxpayer bailouts to fund speculative investments through their investment banking divisions.  The repeal of Glass-Steagall has been an absolute failure for allowing this commingling of financial functions.  I find it interesting that while we get a public stance that all is well on the banking front, we find that the FDIC keeps adding employees to handle bank failures and the number of problem institutions continues to grow.  Of course this is the kind of information that is buried deep in websites and financial statements while most of the press focuses on distractions.

Dodd-Frank Rules Make Mortgages Less Profitable - Mortgage lender Mike McHugh has already had to license his loan originators, change the way they’re paid, and adopt new underwriting standards -- steps needed to comply with new rules and realities in the wake of the collapse of the housing bubble.  It’s not over yet. McHugh, president and chief executive officer of Continental Home Loans Inc. in Melville, New York, is about to endure even more change as the Dodd-Frank Act, designed to prevent another mortgage-fueled frenzy like the one that led to the 2008 credit crisis, kicks in this summer.   “If you’re not on top of all the issues it’s very, very difficult to stay in business today.” Lots of changes that have already taken place in the almost $11 trillion U.S. mortgage market have nothing to do with Dodd- Frank. Government-backed mortgage securitizers Fannie Mae and Freddie Mac have raised underwriting standards, the Federal Housing Administration more than doubled its fees, and many banks remain reluctant to lend at all. Even without the new law, mortgages are more expensive and harder to get.

FDIC Chairwoman: Mortgage Industry ‘Didn’t Think Borrowers Were Worth Helping’ - Outgoing Federal Deposit Insurance Corporation Chairwoman Sheila C. Bair's revealing exit interview by the New York Times' Joe Nocera1 has generated plenty of buzz. But while the interview provided a comprehensive look at Bair's role from 2006 to 2011, what caught our attention was her characterization of the foreclosure crisis. Bair said that the mortgage's industry's reluctance to provide mortgage modifications stems in part from the industry's "disdain for borrowers2." "I think some of it was that they didn't think borrowers were worth helping," she said. While Bair said that President Barack Obama's "heart is in the right place," she criticized his economic team for taking controversial steps to aid banks while, in Nocera's words, being "utterly unwilling to take any political heat to help homeowners."

Fannie Freddie Phooey -  Krugman - Over at The Big Picture, David Min has a terrific takedown of the claim that Fannie and Freddie caused the housing bubble. Every time you hear or read someone claiming that Fannie and Freddie were responsible for large amounts of subprime/risky lending, you should remember that this is based on essentially phony numbers: people at AEI invented their own definition of subprime, which isn’t the standard definition, and, more important, doesn’t work: the supposedly high-risk loans that F&F were making or buying were, demonstrably, not actually high-risk:

Fannie-Backwards - As the Wall Street crisis unfolded, one prominent financial writer after another weighed in with an important book. Followers of these events have eagerly awaited a book by one of the best, The New York Times’s Gretchen Morgenson. After most of the major topics had been taken, Morgenson chose to focus on mortgage behemoth Fannie Mae and its role in the crisis. Reckless Endangerment, co-written with Wall Street analyst and reform advocate Joshua Rosner (whose name appears on the cover in smaller type), provides a vivid portrait of a corrupted institution, but it gets key facts egregiously wrong.  How did Gretchen Morgenson, one of America’s best financial reporters, get the story of Fannie Mae’s role in the financial collapse so wrong?

Quelle Surprise! DoJ Pushing State AGs to Whitewash Servicing Abuses; Failure to Investigate Confirmed Yves Smith  -The latest report by Shahien Nasirpour at Huffington Post confirms two things you’ve heard here and on some other sites following this sorry affair: first, that Tom MIller, Iowa attorney general who is leading the 50 state attorneys general negotiations on mortgage abuses, is a liar, and second, that any settlement will be a whitewash. Actually, we already knew Miller was a liar. Shortly after the effort was launched, Miller promised that “”We will put people in jail.” He then started walking that back. Not only did he tell Bloomberg that they were NOT pursuing criminal charges, but per an e-mail: I was w/ a European documentary maker this weekend who spoke to Miller a few days ago and said Miller relayed the fraud isn’t so bad, everything will be worked out .. the standard line; he’s already made up his mind. He doesn’t want those European governments demanding their money back. The meeting is a photo-op setup because the too-big-to-fail crowd is scared of put-back liability and shorts; they’re working hard to make it appear they’re doing something to quiet everybody down. Note this message was sent BEFORE MIller made the “jail the baddies” promise that MIller recanted. And it indicates that this entire affair was intended to be an exercise in kabuki theater rather than anything remotely resembling a real investigation. That brings us to MIller’s second lie. After a staffer ‘fessed up that no investigations were being undertaken, Miller maintained that extensive examinations were underway. That, as Nasiripour indicates, confirming earlier intelligence via Gretchen Morgenson, is complete crap.

As Government Nears Accord With Banks, Questions Swirl Over Scope Of Investigation - State and federal prosecutors are pressing to complete a proposed settlement with the nation's five largest home loan companies over alleged mortgage abuses, even though they've only initiated a limited investigation that hasn't examined the full extent of the alleged wrongdoing, according to interviews with more than two dozen officials and others familiar with the state and federal probes. The deal with the mortgage companies would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices going forward, these sources told The Huffington Post. Negotiators met in Washington last week to hash out the settlement. For federal and some state officials, expedience now appears to be trumping other considerations in settlement talks with major mortgage servicers. Despite failing to marshal a strong case proving misconduct during the foreclosure crisis, the government is seeking to craft a settlement quickly, in the hopes that this will inject greater certainty into the financial system, stabilize home prices and add vigor to a flagging economy. But some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness.

Will the AGs Turn the US into a Banktocracy? - “The investigators have yet to gather many documents, conduct depositions or assemble tallies of aggrieved homeowners. They don’t yet have a good handle on the number of wrongful foreclosures, the amount of fraudulent documents filed in local courts or the volume of legal instruments processed by so-called “robo-signers,” the agents that lenders employed to process foreclosure filings en masse without examining the underlying paperwork.”  You call that an investigation? Why on earth would the AGs settle if they have not done any serious sort of workm into the underlying crimes ? To start getting towards that answer, have a go at tonight’s must read muckraking via Shahien Nasiripour, who writes:The deal with the mortgage companies would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices going forward, these sources told The Huffington Post.

Large Banks Responsible for Mortgage Disaster Might Be Able to Buy Immunity for $30 Billion - Hell, why bother spending any money on a settlement? If nobody from Lehman went down—fuggetaboutit. Although, it might be worth it since I doubt anyone actually knows how that fraud soaked debt might metastasize in the future. Via: Huffington Post: State and federal prosecutors are pressing to complete a proposed settlement with the nation’s five largest home loan companies over alleged mortgage abuses, even though they’ve only initiated a limited investigation that hasn’t examined the full extent of the alleged wrongdoing, according to interviews with more than two dozen officials and others familiar with the state and federal probes. The deal with the mortgage companies would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices going forward, these sources told The Huffington Post. Negotiators met in Washington last week to hash out the settlement.

What will the AGs get in return for giving banks immunity? - Shahien Nasiripour has an update on the talks between the big banks and the state attorneys general, with some rather worrying news: under the proposed settlement, the AGs are going to give the banks broad immunity from prosecution, despite the fact that they don’t really have a clue what the banks might have done wrong. Some officials with experience sitting across the negotiating table with major banks say the government is making a critical miscalculation that jeopardizes the public interest by seeking a deal before amassing a credible threat of successful prosecution: In essence, they say, the government would give servicers a blanket pass for widespread alleged acts of fraud while extracting too little in return and operating from a relative position of weakness. “I would never want to go into a negotiation without solid evidence of actual misconduct to hold as leverage over my counterpart,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program, which was crafted to bail out teetering banks. “It would also be very dangerous from a public policy perspective to waive all future claims as part of such a settlement if you do not have a good sense of the size, scope and severity of the underlying misconduct.”

Bank of America $8.5 Billion Mortgage “Settlement” Under Fire - Yves Smith  - We took an immediate dislike to the so called Bank of America mortgage settlement, in which the trustee for 530 mortgage trusts, Bank of New York, has entered into deal in which the bank will pay $8.5 billion to settle not only putback liability (having to compensate investors by buying back loans that never should have been put in the trusts in the first place) but also chain of title liability to investors (otherwise known as “my dog ate your mortgage”; note this would NOT impair the ability of homeowners to raise that issue in foreclosure).  We criticized the deal as being bad for homeowners (as in likely to accelerate foreclosures, rather than alleviate them, as claimed), bad for investors (due to the amount being too low for putbacks and an outrageous sellout based on the waiver for chain of title problems) and rife with conflicts of interest. Indeed, almost immediately after the settlement was announced, a group of investors who had been pursuing their own claims on three of the trusts in the settlement filed a petition as a means of objecting to the deal and its failure to provide a means for investors like them to opt out.  Two public officials, Eric Schneiderman, the New York attorney general, and Representative Brad MIller, who is a member of the House Financial Services Committee, apparently also suspect the pact does not pass the smell test and are asking some tough questions.  As described by both Bloomberg and Gretchen Morgenson of the New York Times, Schneiderman sent a letter to Bank of America and the 22 investors that suggested that he may oppose the deal.

California AG Considering Joining New York, Delaware in Broad Probe of Mortgage Abuses - Yves Smith - We’d said the 50 state attorneys general settlement was wobblier than the press cheerleading would lead you to believe. We’ve also said the California AG, Kamala Harris, was likely to be among the defectors. The odds of that increased today as she met with New York AG Eric Schneiderman to discuss joining the probe that he and Delaware AG Beau Biden have launched, which is the most extensive investigation undertaken to date. It isn’t hard to see why the settlement talks are fracturing. Many AGs are unhappy with Tom Miller’s failure to keep them in the loop, the lack of meaningful investigations, and the high odds that the banks will get a broad waiver, which is tantamount to a big “get out of liability free card”. If you have any doubts whose interests are served by these negotiations, Jamie Dimon, in an investor conference call Wednesday, said he “would do anything to get it done today.” And no wonder why. He also said, per Bloomberg:There have been so many flaws in mortgages that it’s been an unmitigated disaster…We just really need to clean it up for the sake of everybody. And everybody is going to sue everybody else, and it’s going to go on for a long time. Given that California was one of the states worst hit by the mortgage meltdown, its abstention from a settlement deal would have a disproportionate impact. Politically, the fact that the states that have exited and appear likely to exit have Democratic AGs is also more of a blow to the Administration, which has been involved in the negotiations.

Foreclosure fraud investigators forced out at attorney general’s office - A lead foreclosure fraud investigator for the state said she and a colleague were forced to resign from the Florida attorney general's office, unexpectedly ending their nearly yearlong pursuit to hold law firms and banks accountable. Former Assistant Attorney General Theresa Edwards and colleague June Clarkson had been investigating the state's so-called "foreclosure mills," uncovering evidence of legal malpractice that also implicated banks and loan serv­icers. Despite positive performance evaluations, Edwards said the two were told during a meeting with their supervisor in late May to give up their jobs voluntarily or be let go. Edwards said no reason was given for the move. "It all happened very abruptly," said Edwards, who had worked in the attorney general's office for about three years.

CitiMortgage Sued by Iraq War Veteran Over Home Foreclosure - A Citigroup Inc. (C) unit was sued by an Iraq War veteran who claims the lender illegally foreclosed on his home while he was on active military duty.  Jorge Rodriguez, a U.S. Army sergeant, claimed in a complaint filed today in federal court in Manhattan that he was in training in preparation for deployment to Iraq in 2006 when CitiMortgage filed a foreclosure suit against his home in Del Valle, Texas.  CitiMortgage lawyers falsely said in an affidavit that Rodriguez wasn’t on active service at the time, depriving him of protection under the Servicemembers Civil Relief Act, or SCRA, according to the complaint. Rodriguez is seeking to have the suit certified as a class action against CitiMortgage on behalf of other service members whose homes were foreclosed. “This was not an isolated incident,” Rodriguez said in the complaint. Beginning in December 2003, “CitiMortgage initiated thousands of foreclosure proceedings across the United States without adequate safeguards to ensure that service members on active duty were not targeted by CitiMortgage’s foreclosures.”

Social Networking Gone Wild: Foreclosure via Facebook - The phenomenon started in 2008, when an Australian court allowed — no, ordered — a lender who was attempting to foreclose on a home to serve notice on the defaulting borrowers via Facebook, as well as at their Canberra home and a backup physical address. Since then, attorneys in New Zealand, Canada, and, this spring, East Sussex, England, have all authorized mortgage lenders and their attorneys to serve borrowers with foreclosure notices via Facebook, when the borrowers could not otherwise be located. Facebook, which has of course been criticized by consumer advocates over the privacy of users’ personal data, seems to view these cases as a sort of official endorsement: After the 2008 case, the Associated Press quoted Facebook spokesman Barry Schnitt saying the company was “pleased to see the Australian court validate Facebook as a reliable, secure and private medium for communication.” Notably, the Australian court emphasized the fact that the borrowers had not activated any privacy protections on their account in authorizing the foreclosure notices to be served through the social network.

Foreclosures Down on Paperwork Clog in First Half of 2011 - The number of homes taken back by lenders in the first half of this year fell 30 percent compared with the same 2010 period, the result of delays in foreclosure processing that threaten to stall a U.S. housing recovery. Banks seized 421,212 homes in the first six months of the year, down from 529,633 between January and June last year, foreclosure listing firm RealtyTrac Inc. said Thursday. The decline reflects lenders taking longer to move against homeowners who have fallen behind on their mortgage payments. The banks are working through foreclosure documentation problems that first surfaced last fall and an ensuing logjam in some state courts. Lenders also have put off on taking action against delinquent borrowers as U.S. home sales have slowed this year. As the processing delays mount, however, so has the backlog of potential foreclosures — homes that otherwise would have been repossessed by lenders this year. RealtyTrac estimates that 1 million foreclosure-related notices that should have been filed by banks this year will be pushed to next year

RealtyTrac: Foreclosure Activity Off 29 Percent for First Half of 2011 - RealtyTrac® today released its  Midyear 2011 Foreclosure Market Report, which shows a total of 1,170,402 U.S.  properties received foreclosure filings — default notices, auction sale notices  and bank  repossessions — in the first six months of 2011, a 25 percent decrease from the previous six months and a 29 percent decrease from the first half of 2010.  The report also shows that 0.90 percent of all U.S. housing units (one in 111) had  at least one foreclosure filing in the first half of the year. Foreclosure filings were reported on 222,740 U.S. properties  in June, an increase of nearly 4 percent from the previous month, but a  decrease of 29 percent from June 2010. June was the ninth straight month where  foreclosure activity decreased on a year-over-year basis. Default  notices, scheduled  auctions and REOs were all up on a month-over-month basis but down  on a year-over-year basis in June.Foreclosure filings were reported on 608,235 U.S. properties  during the second quarter, a decrease of nearly 11 percent from the first  quarter and a decrease of 32 percent from the second quarter of 2010. The  second quarter total was the lowest quarterly total since the fourth quarter of  2007. All categories of foreclosure were down both on quarterly basis and  annual basis in the second quarter.

Bank Delays May Push 1 Million U.S. Foreclosure Filings to 2012 - Lender delays in processing home- loan defaults will push as many as 1 million U.S. foreclosure filings from this year to 2012 or beyond, casting an “ominous shadow” on the housing market, according to RealtyTrac Inc.  The number of properties receiving a notice of default, auction or repossession plunged 29 percent in the first half of 2011 from the same period last year, the Irvine, California- based data seller said today in a report. About 1.17 million homes got a filing, or one out of every 111 households.  Procedural delays caused by a probe into bank documentation errors, combined with weak consumer sentiment and a jobless rate above 9 percent, are weighing on a property recovery by adding to a backlog of distressed homes, RealtyTrac said. A clogged foreclosure pipeline may prevent real estate prices from finding a bottom as the housing slump enters its sixth year.  “If you accept the premise that foreclosures are the black cloud hanging over the market, we’re not going to get price stability and people won’t leave the sidelines until that cloud is cleared away,”

New Foreclosure Study Finds the More that’s Owed, the Longer the Defaulter Can Stay - Homeowners living in houses worth over $417,000 can live in their homes mortgage-free without fear of foreclosure for more than a year, but those in the less valuable homes are getting thrown out in 300 days or less. Moreover, those with a second mortgage can stay in their home, on average, longer than those with just one mortgage. Those with a second mortgage currently are staying mortgage-free an average of 393 days compared to those with just one mortgage, who are losing their homes after 291 days. According to an analysis of more than 150,000 foreclosures over the past three and a half by the CEO of one of the nation’s leading foreclosure sites, ForeclosureRadar, lenders wait as long as they can to put losses from foreclosed properties on their books. The study found that the deeper underwater you are, the longer you will be able to live in your home without paying a penny on your mortgage. “The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time, said Sean’Toole, CEO of ForeclosureRadar.

Bankers Pessimistic About Future of Mortgage Delinquencies - FICO’s second-quarter survey of bank risk professionals reveals pessimism in regards to expected mortgage delinquencies in the second half of 2011. While 46 percent of respondents expected mortgage delinquencies to rise over the next six months, 18 percent expected them to decline. The numbers were similar in regards to delinquencies on home equity lines of credit, where 46 percent of respondents expected delinquencies to rise, while 22 percent expect them to decline. “This isn’t surprising given the fact that average home equity in the U.S. has dropped from 61 percent in 2001 to 38 percent today,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “With millions of homeowners under water on their mortgages, it is very hard to see the light at the end of the tunnel. It is likely to take years to work through all the troubled mortgages,” Jennings said. The survey also found bankers to be pessimistic about small businesses, with a plurality of respondents predicting higher delinquencies on small business loans.

One reason HAMP failed - A remarkable interagency group of economists wrote a paper that investigated the NPV test that is at the heart of HAMP: for a borrower to get a loan modification, the value of the modification must be on net greater than zero (or in the case of Fannie-Freddie loans, greater than -$5000).  In other words, the losses from expected default must be greater than the losses from modification. An upshot of this rule is that borrowers who are deeply under water get no modifications--because the chance their loan will in the end cure is very small.  This means that borrowers in places that need HAMP most--Las Vegas, Phoenix, Florida, etc.--are least likely to get it, all else being equal. It also underscores a basic point: in places where values have fallen by more than, say, 50 percent, anything less than principal balance relief just delays the inevitable.  When households in, say, Central California want to move or retire, their house sale will not be sufficient to cover their loan balance.   Even moving to make short sales easier would help.  Otherwise, it is hard to see how we can restart the market anytime soon.

Bernanke: Lack of Clarity, Confidence Hurting Housing Market - Major overhauls could help the housing market regain its footing, though the cost of mortgages is likely to rise as the government role fades, Federal Reserve Chairman Ben Bernanke said in congressional testimony. “We have to get our housing finance system back into working order,” Bernanke said at a House Financial Services Committee hearing. The Fed chairman said the housing reform was the main piece of unfinished business from recent financial overhaul efforts. “It would be very helpful if we could begin to get some clarity about that,” he said. Bernanke said mortgage costs would likely rise as the government withdraws subsidies from Fannie Mae and Freddie Mac. “That is a consequence of taking away a subsidy that turned out to be very costly,” he said.

U.S. Tackles Housing Slump - The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president's re-election in 2012. Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.   Mr. Obama said housing remained the "most stubborn" problem facing the country and conceded that a raft of federal mortgage-aid programs were "not enough, and so we're going back to the drawing board." Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.

Realty trade group overreported Chicago home prices - The Illinois Association of Realtors dramatically overreported the median price of condominiums sold within the city of Chicago in May, with the price tumbling 23 percent year-over-year, not rising 10.3 percent as the trade group said. The state Realtors' group acknowledged the error after the Tribune, acting on a tip, questioned the accuracy of the data. In February, questions arose about the accuracy of home sales data as reported monthly by the National Association of Realtors, and whether the trade group had been overestimating the volume of existing home sales since 2007. Possibly as soon as August, the national group will issue revised- and revised downward - national home sales numbers going back at least three years.

Clear Capital Forecasts More Price Declines this Year - Economic consulting firm Clear Capital reported prices nationally have decreased by 3.2 percent in the first six months of 2011 and are forecast to drop another 2.4 percent in the second half of 2011. The new forecast updates the firm’s December prediction that prices would fall 3.7 percent in all of 2011 after falling 4.1 percent in 2010, the firm reported today. But individual markets will vary widely. In the second quarter home prices gained 0.9 percent after nine months of decline. Halfway through 2011, the U.S. REO saturation rate remains at 31.3 percent compared to the 33.1 percent reported at the end of Q1. This number, while historically very high, is clearly trending slightly downward with absorption of REO property. Only five U.S. markets are forecast to produce home price gains in the second half of 2011 including: Washington, D.C., New York, Orlando, Dallas, and San Francisco.

US homeownership rate could fall further - The U.S. homeownership rate could fall another one to two percentage points if credit conditions and the economy remain in the same crisis mode exhibited in 2009, the Mortgage Banker's Association said Thursday. The present-day homeownership rate of 66.4% is in line with historic norms after falling from a 2004 peak of 69.2%, the MBA Research Institution for Housing America concluded in a new study. The report says the 2004 peak was driven by access to cheap credit and a willingness on the part of more buyers in their 20s and 30s to assume higher levels of debt and financial risk when acquiring homes. Post-crash homeownership rates are now at 2000 levels, the report said."The question of why homeownership rates are falling now is really a question of why they were so high during the middle of the last decade,"

AAR: Rail Traffic soft in June - The Association of American Railroads (AAR) reports carload traffic in June 2011 increased 0.9 percent compared with the same month last year (up slightly), and intermodal traffic (using intermodal or shipping containers) increased 4.6 percent compared with June 2010. On a seasonally adjusted basis, carloads in June 2011 were down 0.7% from May 2011; intermodal in June 2011 was down 2.4% from May 2011.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 recovered less than half way.  For the last few months, traffic has been tracking 2010 (little growth from last year).  According to the AAR, carloads for 14 of 20 commodities they track were up in June, but carloads for coal were down, and that really impacts overall traffic.  The second graph is for intermodal traffic (using intermodal or shipping containers): June 2011 was a better month for U.S. intermodal traffic than for U.S. carload traffic, but intermodal growth slowed. U.S. railroads originated 1,152,432 intermodal trailers and containers in June 2011, up 4.6% over June 2010.

Fed: Consumer Spending Down $7,300 Per Person Since Great Recession Began - Timothy Geithner engaged in some painful truth talking the other day on the slow pace of the economic recovery. The Treasury Secretary stated that for many people “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.” New research from the Federal Reserve Bank of San Francisco offers one stark explanation for why we’re stuck in this long slow slog. In a word: spending. No, not the federal spending that is front and center as Washington lurches to some sort of debt/deficit deal. We’ve got a consumer spending problem. Namely, that we’re not spending anywhere near what we were shelling out before the Great Recession began. Kevin Lansing, an economist at the Federal Reserve Bank of San Francisco, took a look at how our current personal spending compares to what we would have spent if we had continued at the hectic, bubble-induced pace that ensued from 2000 until the Great Recession began in December 2007. According to Lansing, average per-person spending was $7,356 less (in inflation-adjusted dollars) than if our pre-recession spending spree had continued apace, or hundreds of billions of dollars in total. That works out to $175 less per month that we’ve each been circulating back into the economy. Which goes a long way to explain why the economy isn’t exactly humming these days.

Industrial Production increased 0.2% in June, Capacity Utilization unchanged - From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.2 percent in June after having edged down 0.1 percent in May. For the second quarter as a whole, total industrial production increased at an annual rate of 0.8 percent.The capacity utilization rate for total industry remained unchanged at 76.7 percent in June, a rate 2.2 percentage points above the rate from a year earlier but 3.7 percentage points below its average from 1972 to 2010. This graph shows Capacity Utilization. This series is up 9.4 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 76.7% is still "3.7 percentage points below its average from 1972 to 2010" - and below the pre-recession levels of 81.2% in November 2007.  Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in June to 93.1. Both industrial production and capacity utilization have been moving sideways recently. This was below the consensus forecast of a 0.4% increase in Industrial Production in June, and an increase to 76.9% for Capacity Utilization.

Business stockpiles rose for 17th month in May -Businesses added to their stockpiles for a 17th consecutive month in May. But sales fell for the first time in nearly a year, a sign that many companies could be forced to trim supply levels if the economy weakens. The Commerce Department says business supply levels grew 1 percent in May. Sales fell for the first time in 11 months. It was the worst showing for sales since June of last year. May's rise in inventories pushed total stockpiles to $1.51 trillion. That's up more than 14 percent from the recent low of $1.32 trillion reached in September 2009, when businesses were slashing inventories to control costs in the wake of the deep recession. Inventories rose at all levels of business. Stockpiles held by manufacturers rose 0.8 percent. Inventories held by wholesalers rose 1.8 percent. Retailers only increased their stockpiles 0.4 percent. That small rise reflected a 0.7 percent increase in inventories of autos and auto parts and declines in inventories of furniture and building materials. Clothing stockpiles increased 1 percent and inventories of stores such as Wal-Mart and Macy's rose 0.5 percent

Traffic at L.A. and Long Beach ports falls in June - The nation's busiest seaport complex saw its first year-to-year cargo decline in 19 months in June, down 4.4% compared with the same month last year. Trade experts and port officials said the numbers may reflect a return to a more traditional seasonal shipping pattern this year, adding that it was not necessarily a sign of an economic slowdown. "We had a very strong June, July and August last year with gains averaging 32% compared to 2009," said Phillip Sanfield, spokesman for the Port of Los Angeles. That port and the neighboring Port of Long Beach are the largest and second-largest container ports, respectively, in the nation. "Given that kind of exceptional summer, it's not surprising that we're not exceeding them." But port customers were looking anxiously for positive signs, given the national debt stalemate in Washington, continuing high unemployment in the U.S., Middle East unrest, European debt problems and other issues. "There's still a lot of uneasiness and uncertainty out there,"

LA Area Port Traffic in June: Imports Decline -Import traffic declined at the LA area ports in June. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down 0.3% from May, and outbound traffic is up 0.5%. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of June, loaded inbound traffic was down 5% compared to June 2010, and loaded outbound traffic was up 7% compared to June 2010.  Exports have been increasing, although bouncing around month-to-month. Exports are up from last year, but still below the peak in 2008.  Imports were down from last year, and are below the levels of June in 2005 through 2008 too. In May, LA port traffic suggested in increase in trade with China (and other Asians countries), and this month the data suggests a decline in imports with Asian countries. Combined with a decline in oil prices, I expect the trade deficit to decline sharply in June.

U.S. Import Prices Fall for First Time in a Year - Prices of goods imported into the U.S. dropped in June for the first time in a year as oil and food expenses retreated.  The 0.5 percent fall in the import-price index followed a revised 0.1 percent gain in May, Labor Department figures showed today in Washington. Economists projected a 0.6 percent decrease for June, according to the median estimate in a Bloomberg News survey. Prices excluding petroleum fell 0.2 percent, the first decline since July 2010.  Falling costs will benefit companies like Nike Inc. (NKE) and Hanesbrands Inc. that are dealing with more expensive inputs eating into margins. Today’s report supports Federal Reserve Chairman Ben Bernanke’s forecast that elevated commodity costs will moderate as supply constraints wane.  “The drop is really reflective of what we’re expecting for the second half of the year with weaker energy and food prices,”

June consumer prices record largest drop in a year (Reuters) - U.S. consumer confidence hit a near 2-1/2 year low in early July and manufacturing output stalled in June, further frustrating expectations of a quick economic growth rebound in the second half of the year. Worries about stubbornly high unemployment pushed the Thomson Reuters/University of Michigan's index of consumer sentiment to 63.8, the lowest since March 2009, a report showed on Friday. Economists had expected the index to climb to 72.5 from 71.5 in June. Separate data from the Federal Reserve showed manufacturing output stagnated last month partly due to supply disruptions in the auto sector related to the earthquake in Japan. The reports were the latest in a series, including weak retail sales and employment, to suggest the anticipated step-up in growth in the second half of the year might not be as strong has initially thought. "We still expect an improvement in the second half, but the question is how much can we grow?"

Inflation Falls: Is the Economy Saved or Doomed? - Inflation in June fell for the first time in a more than a year. The Consumer Price Index (CPI), which is the government's most widely watched gauge of what the things average Americans buy cost, fell 0.2% last month. The drop was mostly driven by a fall in gas prices, which were down nearly 7% alone in June. The question is whether this is a good sign for the recovery, or another sign that we are headed for a double dip. Are we at the end of the soft patch, or the beginning of a worse patch? For much of the past year, inflation has been the recovery's biggest boogieman. Many said higher food and gas prices were slowing spending. And indeed, consumers seemed to be opening their wallets late last year and in January. That spending, though, came to a grinding halt in February and March. And that is exactly the time when gas prices in particular started to rise. The economic recovery has slowed since then suggesting that indeed rising inflation was a problem. But here's the rub: Inflation, as long as it is relatively modest, is the sign of a health economy. Higher inflation means there is higher demand in the economy.

Retail Sales increased 0.1% in June - On a monthly basis, retail sales increased 0.1% from May to June (seasonally adjusted, after revisions), and sales were up 8.1% from June 2010. From the Census Bureau report:The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $387.8 billion, an increase of 0.1 percent (±0.5%) from the previous month, and 8.1 percent (±0.7%) above June 2010.  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales have been mostly moving sidways since March. Retail sales are up 16.6% from the bottom, and now 2.5% above the pre-recession peak. The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.4% on a YoY basis (8.1% for all retail sales). This was about at expectations for no change in retail sales. Retail sales ex-autos were unchanged, and gas station sales declined 1.3% last month as prices fell.

Retail Sales in U.S. Stagnate as Unemployment Hurts Consumers - Sales at U.S. retailers stagnated in June, highlighting weakness in consumer demand that accounts for 70 percent of the economy.  Purchases rose 0.1 percent, the Commerce Department said today in Washington. Sales excluding autos were little changed, the poorest performance since July 2010. Wholesale prices fell more than forecast in June on lower energy costs, the Labor Department said.  Americans contending with declining home values and unemployment above 9 percent are holding back on spending, prompting retailers such as Target Corp. to sweeten discounts. Another report today showed that first-time claims for unemployment benefits fell last week to the lowest level since April, indicating dismissals may start to abate.  The 0.1 percent increase reported by the Commerce Department in Washington today compared with the median forecast of a 0.1 percent drop in the Bloomberg News survey of 80 economists. Excluding auto sales, purchases were little changed, the weakest performance since July 2010.

Retail Sales Laugh of the Day: "Falling Gas Prices Held Back Retail Sales"; Weakest Performance Since July 2010 ; Auto Sales - One cannot help but laugh at the first line in the Associated Press article Retail sales up slightly in June after May drop : "Consumers spent more on cars and in big chain stores in June but falling gas prices held back retail sales." For months on end, everyone has been shouting how rising gas prices have held back retail sales. Today we are told falling gas prices have held back retail sales. Apparently gas prices hurt retail sales whether they are rising or falling. Allegedly auto sales are up. I rather doubt they are. Auto sales are counted as soon as cars are shipped to dealers. Inventory stuffing is what is up. It remains to be seen if consumers buy those cars, and at what prices. Without auto sales, retail sales were flat, following a decline last month. This was a weak set of back-to-back retail sales reports.

Dollar Stores Find Splurges Drying Up - Sales and profit growth have started to slump at the deep-discount retailers called dollar stores, after a robust performance during the recession, a sign that even fairly cheap toys and other small indulgences now are a stretch for some consumers.  In the past several weeks, Dollar General Corp., Family Dollar Stores Inc. and Dollar Tree Inc., the country's three largest chains that sell sharply discounted food, household staples and other items in modest-size stores, all have missed their quarterly earnings targets.  All three retailers cited transportation costs due to rising diesel-fuel prices as a major reason for their earnings shortfalls. But the chains also said their price-sensitive customers, pummeled by high unemployment, stagnant wages and soaring gasoline prices, are buying more food and other basics like cleaning products, which have relatively low profit margins, and fewer higher-margin discretionary products, such as apparel and home decorative items.

Americans Continue to Keep a Close Hold on Spending – Gallup - Overall self-reported daily consumer spending in stores, restaurants, gas stations, and online averaged $69 per day during June -- unchanged from May, and essentially the same as the $67 average of June 2010. Upper-income spending (among Americans making $90,000 or more annually) averaged $124 per day in June -- essentially the same as the $126 of May and not much better than the $119 average of June 2010. Although these Americans are likely to have more disposable income to spend freely when they choose, they continue to hold back and to spend within the "new normal" range -- which is far below what they were spending three years ago.

Consumer Sentiment Tumbles - Consumer attitudes hit a wall in the middle of July, falling to the lowest level since March 2009. The preliminary Reuters/University of Michigan index of consumer sentiment moved to 63.8, from 71.5 the month before. It had been expected to hit 71.0, and it will be revised at the end of the month. The report’s preliminary current conditions index was 76.3 from 82.0, while the expectations index was 55.8 in July, from 64.8 last month. The view on inflation softened, with the one-year forecast standing at 3.4%, from 3.8%, while the five year forecast was 2.8%, from 3.0%.

As Government Aid Fades, So May the Recovery - An extraordinary amount of personal income is coming directly from the government.  Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.  By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.  In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.  “If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s

Just 18,000 New Jobs in June Leads to Another Rise in Unemployment - The Labor Department reported that the economy created just 18,000 jobs in June. It also revised down the previous two months' numbers, bringing the average rate of job growth over this period to 87,000 jobs a month. The slow job growth led to another rise in the unemployment rate, which edged up to 9.2 percent. The employment-to-population (EPOP) ratio fell to 58.2 percent, the low hit in December of 2009 and again in November in 2010. This means that the job growth thus far in the recovery has been just sufficient to keep pace with the growth of the labor force.The decline in EPOPs hit most groups, but black women saw the sharpest falloff, with their EPOP declining by 0.9 percentage points to 52.8 percent, another new low for the downturn. The EPOP for black women is 7.8 percentage points below the pre-recession peak in 2007. The EPOP for blacks overall edged down by 0.1 percentage points to 51.1 percent, also a new low for the downturn. By education level, those with some college appear to be the big losers at the moment. Their unemployment rate rose by 0.4 percentage points to 8.4 percent, while their EPOP fell by 0.2 percentage points to 63.9 percent, the latter being a new low for the downturn.

From Bad to Worse - Abysmal.  That's the only way to describe the latestjob's report. The whole thing stunk. And, on top of that, the unemployment rate has been heading higher for the last 3 months. It's now at 9.2 percent a full two years into the recovery. That's unprecedented. Where are the jobs, that's what everyone wants to know. . The stock market has regained most of the ground it lost since it touched bottom in March 2009, but the real economy is still stuck in the mud. Just look at the data. Here's a clip from economist Tim Duy who sums it up perfectly:  "...the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady." Get the picture? It's all bad. And guess what? Those "18,000 new jobs" falls within the Labor Depts margin for error, so there could actually be "no new jobs". Will that wake up Obama? Probably not. Look; unemployment is over 9% and rising. The states are firing tens of thousands of teachers and public employees every month because they need to balance their budgets and they're not taking in enough revenue.  And the 10-year Treasury has dipped below 3 percent (as of Monday morning.) In other words, the bond market is signalling "recession", even while the dope in the White House is doing his utmost to slice $4 trillion off the deficits. Get with the program, Barry, or resign. That would be even better. Then maybe we can find someone who's serious about running the country.

Where Are the Jobs, Dammit!? - The Labor Department's June jobs report was a mess of bad news. The jobless rate increased to 9.2 percent, job growth was anemic (a measly 18,000 new jobs were created), hourly wages decreased, 272,000 workers left the labor force, and more. The report was cause for alarm—and within moments of its release partisans on all sides were yelling (via email press releases). The reaction boiled down to this: Republicans and conservatives are blaming Democrats for failing to slash the federal debt, lower taxes, and wipe out regulations, all of which, they claim, stifle job creation (even if taxes are at a historic low and President Obama and the Republicans negotiated a deal last December that extended the Bush tax cuts). Congressional Democrats are blaming GOP obstructionism. And progressives are excoriating the GOP's obsession with deficit reduction and the Obama administration's acceptance of this misplaced focus on the debt. In a statement, Obama acknowledged that "the debate here in Washington has been dominated by issues of debt limit," not jobs creation. But he did not assume any blame for that and called for continuing negotiations on debt reduction and for jobs-related programs, including an infrastructure initiative, patent reform, and trade deals.

Our National Jobs Emergency - Last Friday's employment report landed with a loud thud. Only 18,000 net new jobs in June? How could that be? One Wall Street economist said he thought it was a misprint at first. He was not alone. The horrific June employment number made it two in a row. With the latest revisions, job growth in May is now estimated to have clocked in at only 25,000 jobs. So that's 25,000 and 18,000 in consecutive months. Given the immense size of total U.S. payroll employment (around 131 million) and the sampling error in the survey, those numbers are effectively zero. Job creation has stopped for two months.  If we were at 5% unemployment, two bad payroll reports in a row would be of some concern yet tolerable. But when viewed against the background of 9%-plus unemployment, they are catastrophic. And going beyond the headline jobs numbers reveals an even bleaker picture.  The fraction of the population that is employed (58.2%) is now lower than it was when the recession officially ended in June 2009 (59.4%). The share of the unemployed who have been jobless for more than six months is now a stunning 44.4%. In a strong labor market, that number would be in the teens. I could go on. All this adds up to a national jobs emergency. Tragically, however, it is not being treated as such. When is the last time you heard one of our national leaders propose a serious job-creating program?

Some Fed Officials Worried About Job Market - Federal Reserve officials, at their last meeting, expressed concerns that the weakening job market might hold back the economic recovery.  Fed officials said they expected the economy would pick up in the second half of the year after slowing this spring. But the outlook for both employment and inflation were unusually uncertain, given the sluggish growth and a jump in energy prices this year.  The minutes cover the Fed’s June 21-22 meeting. At that meeting, the central bank lowered its economic forecast but kept a pledge to leave interest rates at exceptionally low levels for an extended period.  “The recent deterioration in labor market conditions was a particular concern ... because the prospects for job growth were seen as an important source of uncertainty in the economic outlook,” the minutes read.  Fed policymakers met shortly after the government released its May employment report. Last week, the government offered an even gloomier jobs report for June.

The Tenacity of a Textbook Truism - Listen to the Obama administration as it vainly attempts to counter bad employment news with increasingly feeble metaphors. Last month, President Obama said, "there are always going to be bumps on the road to recovery." This month, his Council of Economic Advisers Chairman Austan Goulsbee blamed the dismal BLS employment situation report on "headwinds faced in the first half of this year." The takeaway message should be that it is important not to read too much into any one monthly metaphor. What the two images have in common is that they refer to some sort of vehicle traveling in a direction with a velocity toward some destination: recovery. Meanwhile, economists cling to more amorphous and thus, presumably, more robust figure of speech -- "growth." It goes without saying (doesn't it?) that something that gets bigger, grows. A plant grows as it metabolizes sunlight, water and nutrients into chlorophyll. A dirt pile grows as a backhoe scoops buckets out of the earth and dumps them in one place. They are the same, no?

One reason why joblessness is so bad and so persistent -  There is a new Kaufmann study by E.J. Reedy and Bob Litan and it echoes some of the themes raised in TGS: The United States appears to be suffering from a long-term leak in job creation that pre-dates the recession and has the potential to persist for an unknown time. The heart of the problem is a pullback by newly created businesses, the economy’s most critical source of job creation, which are generating substantially fewer jobs than one would expect based on past experience. Look at Figure A in the pdf, job creation from start-ups has been falling since the 1980s.  And from the conclusion: …the conclusions from the data analyzed here are pretty clear, and they are not heartening. Employer businesses have been starting in fewer numbers, with fewer employees, growing slower, and, therefore, generating increasingly fewer new jobs for the U.S. job market.

Why Are Wages Still Rising? (Wonkish) - One reason comparisons between current events and the 1970s are so wrong — and fears that stagflation is just around the corner are so wrong (and have been wrong for three years running) — is the absence of any surge in wages: But some people have asked me, with all this unemployment, why are wages still rising at all? Well, one answer is that there is still some leapfrogging going on, with wages rising because they’re expected to rise, a process I wrote about when trying to explain why we need a concept like core inflation. But I suspect that’s not the whole story, that downward nominal wage rigidity — the great reluctance of employers to demand, and workers to accept, actual wage cuts — is also at work.

No, We Can’t? Or Won’t?, by Paul Krugman - If you were shocked by Friday’s job report, if you thought we were doing well and were taken aback by the bad news, you haven’t been paying attention. The fact is, the United States economy has been stuck in a rut for a year and a half.  Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems (reminder: this “short run” is now in its fourth year), that we should focus on the long run instead.  This gets things exactly wrong. The truth is that creating jobs in a depressed economy is something government could and should be doing. Yes, there are huge political obstacles to action — notably, the fact that the House is controlled by a party that benefits from the economy’s weakness. But political gridlock should not be conflated with economic reality.  Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.

The Unemployed Somehow Became Invisible - GRIM number of the week: 14,087,000.  Fourteen million, in round numbers — that is how many Americans are now officially out of work1.  Word came Friday from the Labor Department that, despite all the optimistic talk of an economic recovery, unemployment is going up2, not down. The jobless rate rose to 9.2 percent in June.  What gives? And where, if anywhere, is the outrage? Lose your job, and it will take roughly nine months to find a new one. That is off the charts. Many Americans have simply given up.  But unless you’re one of those unhappy 14 million, you might not even notice the problem. The budget deficit, not jobs, has been dominating the conversation in Washington. In some ways, this boils down to math, both economic and political. Yes, 9.2 percent of the American work force is unemployed — but 90.8 percent of it is working. To elected officials, the unemployed are a relatively small constituency. And with apologies to Karl Marx, the workers of the world, particularly the unemployed, are also no longer uniting.

Are Jobless Benefits Keeping the Unemployed Complacent (and Invisible)? - In an article on Sunday, I wrote about why our unemployment crisis has been largely ignored by Washington. Among the major factors I cited were that unemployed workers are less likely to vote than their employed counterparts. Additionally, the jobless are not as politically organized as they once were because they are more geographically dispersed and because the institutions that organized them have become weaker. Several readers wrote to me emphasizing another factor that I had nodded to only briefly in the article: that many unemployed people are still receiving benefits nearly two years into their unemployment spell, whereas in the past benefits typically lasted a few months. While jobless workers today may not be living comfortably, they are at least able to get by, meaning that they have less need to resort to more radical organizing. Some of the community organizers I spoke with for the article agreed with this argument. “I’ve been involved with the unemployed since the mid-’70s, and this is the least amount of organization we’ve seen,”  “In every other recession it was a major struggle to extend unemployment benefits.”

The Concentrated Pain of Job Loss - I wanted to add one other explanation — to those Catherine Rampell cited, in her much-discussed Sunday article — for why unemployment has not become a larger political issue. Given how high unemployment is, there are surprisingly few people who have experienced unemployment in the last couple of years. This is the flip side of the historically high average length of the unemployment: joblessness is concentrated among a subset of the population, rather than affecting a larger group of people for shorter periods of time. One set of numbers from the Bureau of Labor Statistics makes the case. In 1982, the unemployment rate averaged between 9 and 10 percent — and fully 22 percent of the labor force experienced unemployment at some point during the year. In 2009 (the most recent year of data), the unemployment rate also averaged between 9 and 10 percent, but only (or maybe “only”) 16.4 percent of the labor force experienced unemployment at some point during the year.  Why? Among other things, temporary layoffs were more common in the past than today.

Unemployment? Who Cares? - High unemployment has become the new normal. Two years after the official end of the recession, the monthly refrain of poor jobs reports showing an unemployment rate stalled at about 9 percent does little to increase any sense of political urgency.The monthly employment numbers, released Friday, were more bad news, showing that for the second month in a row, employers added barely any jobs in June. The sound of indignation can be heard outside of Washington. Twenty-six percent of Americans surveyed in the latest New York Times/CBS News Poll named unemployment the most important problem facing the country (27 percent cited the economy in general).The A.F.L.-C.I.O. and other unions keep demanding “Good jobs now!” Progressive think tanks like the Economic Policy Institute carefully monitor employment trends. Many economists, including the professionally prominent members of the Employment Policy Research Network, insist on the need for more attention to the issue.  But this is not something the country can achieve with jobs-oblivious politicians. Why isn’t unemployment reduction front and center on the policy agenda? More specifically, why has the debate over deficit reduction shoved it aside?

Media Culpa? Coverage of Jobs vs. Deficit - I’ve suggested several different explanations for why the jobs crisis has gotten so little attention in Washington, especially compared to the deficit. In response, a lot of frustrated readers e-mailed me to argue that I’d left out one other explanation: the media. Major news organizations have devoted much more air time, ink and pixels to America’s debt concerns than to the 14-million-person army of jobless workers, they argued. As a reader named Cindy writes: If any of these big media conglomerates really cared about the millions of people that are being tossed like road kill, they would be doing something to help us organize and give us the coverage we need to be heard once and for all.  Complaints about media coverage do appear to be supported by a cursory review of articles from the last two years. One can argue about the extent to which policy makers guide news coverage, and it appears that both Washington and news organizations have been emphasizing long-term debt reduction over near-term job growth. That balance may change, though, in light of Friday’s weak employment report, and as more workers exhaust their jobless benefits.

The U.S. has waged a war on jobs - -- The U.S. seems to be shocked that its economy isn't creating many jobs, and each monthly report on the unemployment rate and the number of new jobs somehow stimulates more handwringing. I'm not an economist, labor or otherwise, but simple observation suggests one significant contributor to the nation's job crisis -- for a long time, maybe even decades, we have been waging war on jobs and those who hold them. At a board meeting of a human capital software company I had attended, the managing director of a major venture capital firm asked the CEO to describe the company's outsourcing strategy. The VC then proceeded to tell us that it was increasingly common for the venture community to evaluate investment opportunities partly by whether the company had a strategy for off-shoring work to less expensive locales. The logic was that shrewd business people -- the sort that deserved financial backing -- would have thought through how to lower their labor costs, even while their product or service was being developed, and then over time as the business grew and matured.  This meeting took place nearly a decade ago, and what was then a new way of thinking is now taken for granted in the start-up and VC communities.

Job Cutters May Reap What They Sow - For an individual company, keeping down labor costs is a smart move. But the U.S. economy as a whole suffers when weak labor markets hold back consumer spending. The same companies that are laying off workers today will soon wonder why they have no customers later on. Two years into the recovery, and it still feels like recession in the U.S. labor markets. Job growth — which in turn generates more income for consumers — can only gather a head of steam if two trends are in place: layoffs diminish and businesses go on a hiring spree. The U.S. Labor Department said Tuesday that the number of job openings stood at 3 million in May — the same lousy number posted in each month since February. Hiring stood at 4.07 million in May, but, again, that number hasn’t improved at all this year. Without better labor demand, it is no wonder the jobless rate is stuck around 9%.

The President's Jobs Plan (Not) - Robert Reich - What did the President do in response to last week’s horrendous job report — unemployment rising to 9.2 percent in June, with only 18,000 new jobs (125,000 are needed each month just to keep up with the growth in the potential labor force)? He said the economy continues to be in a deep hole, and he urged Congress to extend the temporary reduction in the employee part of the payroll tax, approve pending free-trade agreements, and pass a measure to streamline patent procedures. To call this inadequate would be a gross understatement. Here’s what the President should have said:

Top Obama adviser says unemployment won't be key in 2012 - President Obama’s senior political adviser David Plouffe said Wednesday that people won’t vote in 2012 based on the unemployment rate. Plouffe should probably hope that’s the case, since dismal job figures aren’t expected to get any better for Obama and the economy on Friday.

The great jobs debate - The economy has been growing for nearly two years since the Great Recession— but someone forgot to tell the American worker. Twenty five million Americans are still underemployed, out of work, working part time, or out of the workforce altogether. For perspective, that number is the same as the population of Texas. Something is broken. Has Washington given up on the unemployed? Or has the economy been fundamentally transformed under the pressures of globalization, technology, and a housing bust?The Atlantic and McKinsey & Company brought together some of the top minds in business, government, and the world of ideas, each to answer the same question: What is the single best thing Washington can do to jumpstart job creation? Check back here each day through July 22 for more entries.

How many jobs are needed over the next year to keep the unemployment rate steady? -Dean Baker writes: We Need 90,000 Jobs Per Month to Keep Pace With the Growth of the Population In an article on the June employment report the NYT told readers that the economy needs 150,000 jobs per month to keep pace with the growth in the population. Actually, the Congressional Budget Office projects that the underlying rate of labor force growth is now just 0.7 percent annually. This comes to roughly 1,050,000 a year or just under 90,000 a month.Here is the CBO report that Baker mentions: CBO’s Labor Force Projections Through 2021 The number of jobs needed per month to keep up with population growth depends on the rate of population growth, and the participation rate. We also have to be clear on the time frame we are discussing. The CBO report is through 2021, and the CBO is projecting the participation rate to fall to 63% by 2021 due to an aging population. If, instead, we asked how many jobs are needed over the next year to keep the unemployment rate steady using the CBO projection of the participation rate, the answer is very different. The following table uses the CBO projections and provides an estimate of the jobs needed per month (per the household survey1) to hold the unemployment rate steady.

Q: When Will The Jobs Come Back? A: Not For A Long Time - This chart from The Heritage Foundation is rather sobering: Job creation in the first six months of the year was barely enough to keep pace with population growth. If the economy immediately began creating jobs at the pace it did in the 2003-2007 expansion (+176,000 jobs/month) then unemployment would not return to its natural rate (5.2 percent) until mid-2018. The new normal.

Number of the Week: 5% Unemployment Could Be Over a Decade Away - 162: Number of months it would take at this years pace of job growth for unemployment rate to fall to 5%. U.S. employers have added 757,000 jobs to their payrolls in the first half of this year. That actually wouldn’t be so bad if there weren’t so many people out of work. The June unemployment rate of 9.2% was well above the 5% it logged in December 2007, when the recession got under way. What would it take to get the unemployment rate back down to 5%? Much stronger growth in jobs — or a whole lot of time. Here’s a back-of-the-envelope calculation: The unemployment rate, based on a Labor Department survey of households, is the share of the work force (people with jobs plus people seeking jobs) who are unemployed. Out of a workforce of 153.4 million people, there were 14.1 million unemployed in June. Next, we have to factor in labor force growth. If we assume that it grows at the same pace as the Census projects the working age population – people aged 16 and over – will increase by about 1.4 million people next year. With employment growing just a smidge faster than the labor force, then, the unemployment rate would still be a disappointingly high 8.9% in June 2012.

This Time Really Is Different - As the economy goes down the drain, those who want to believe that America's problems are temporary face an unsolvable dilemma: how do you spin this ongoing disaster in such a way as to maintain your delusions about the future greatness of the United States? The latest jobs report was a case in point—"ugly" was the preferred word for describing it. John Mauldin is one of those who will grasp at any straw to remain hopeful about the future. I'll quote from his latest newsletter What Happened To The Jobs? The US jobs report came out this morning, and it was simply dismal... I saw some headlines and talking heads in the mainstream media saying the poor number was due to “seasonals,” and I just shook my head. If you are that reflexively bullish when presented with what was clearly a bad report, how can you be taken seriously? Mauldin alludes to a problem I have with almost everybody in this society who thinks they know something about our socioeconomic problems:  how do I take them seriously? I have this problem with John Mauldin, too. Mauldin is an unabashed died-in-the-wool optimist who simply refuses to admit that the American story may not have a Happy Ending. To show us just how bad things really are, Mauldin puts up the Employment/Population chart and then purports to explain why things are so bad.

The Factory Age Isn't Over - The number of factories in the United States employing more than 1,000 workers fell by one-third from 1997 to 2007, leaving 1,014 such factories. This probably will not surprise you. The shattered windows of empty factories have become a familiar sight. But a new study from the Federal Reserve Bank of Minneapolis puts an interesting twist on this familiar narrative. It reports that most of those factories did not close. They simply employ less people. Of the factories that fell from the list of large employers, the study found that 48 percent still employed more than 500 people. Another 7 percent employed from 250 to 500 people. The remainder either had closed or employed fewer than 250 people. The numbers predate the recession, making it likely that more of those factories have since closed or shed workers. But particularly at this moment, as millions of Americans struggle to find work, the study offers a reminder that our manufacturing base is to some extent a victim of its own success. In 1950, the United States Steel Corporation employed 30,000 workers at its plant in Gary, Ind. Today that factory employs only 5,000 workers. But they produce more steel: 7.5 million tons a year now, compared with 6 million tons then.

Nearly 5 Workers for Every Available Job - More bad news on the job market front: the number of jobless workers per job opening stayed flat at 4.7 in May, according to a new report from the Labor Department. That is more than twice the average ratio seen during the boom years that preceded the Great Recession. As Henry Mo, vice president for economics at Credit Suisse, observed in a note to clients on Tuesday, “Even if all job vacancies were filled overnight, almost 11 million workers would still be left unemployed.” The quantity of actual hiring stayed flat, too, and the number of separations, both voluntary and involuntary, rose slightly.  These trends in separations may not sound like something to celebrate, but one silver lining may be that they eventually could lead to more job openings. Part of the problem with the labor market is that there is so little churn; that is, companies aren’t hiring partly because no one is leaving. Hopefully having more separations will give companies reason to ramp up hiring, and hopefully that will lead to having more jobs on net. I realize, though, that that’s a lot of hopefullys.

One more sign of struggles on the job creation front - Atlanta Fed's macroblog - Hot on the heels of the bleak employment report for June, the U.S. Bureau of Labor Statistics yesterday released another important bit of labor market information: the May Job Openings and Labor Turnover Survey, commonly known as JOLTS. Calculated Risk accentuated the positive: "In general job openings (yellow) has been trending up—and job openings increased slightly again in May—and are up about 7% year-over-year compared to May 2010. "Overall turnover is increasing too, but remains low. Quits increased again and have been trending up—and quits are now up about 10% year-over-year (usually a sign of more confidence in the labor market)." The hires and quits angle was noted at Modeled Behavior as well, but at Zero Hedge Tyler Durden isn't in the mood for even muted optimism: "There was nothing to smile about in today's May JOLTS release from the BLS." Durden focuses first on the job openings piece of JOLTS:"Those expecting a pick up in job openings (traditionally the key requirement for an [sic] sustained increase in NFP) will have to wait some more, after the May number came at 3.0 million, the same as April."

Why are men gaining jobs more quickly than women? - Why are women having a more difficult time finding work than men?During the job-killing economic contraction of 2007 to 2009, men accounted for about seven in 10 positions eliminated. It was deemed the "mancession1." But since the anemic recovery started in June 2009, men have picked up about 768,000 jobs and women have lost a further 218,000, according to a much-discussed Pew study2 that came out last week. It has turned into a "hecovery3." The overall trend of men losing more jobs then gaining them back faster is by this point old news4. Heather Boushey, an economist at the Center for American Progress, described the phenomenon for Slate back in January5. But the Pew report introduces a new wrinkle. Economists do not really know why employment has rebounded for men but not for women.

Employers Still Ruling Out Jobless Applicants - Employers are still discriminating against unemployed people in their online job ads despite an increase of scrutiny on hiring practices, a new report by the National Employment Law Project has found. HuffPost reported back in June 2010 that a number of job postings on sites such as Craigslist, and explicitly ruled out jobless applicants using the language "must be currently employed," or "no unemployed candidates will be considered." According to the new NELP survey of a number of "heavily-trafficked job posting websites," employers have continued to screen out applicants solely because they are unemployed. [.....] As of June, nearly 6.3 million U.S. workers had been out of work for six months or longer, according the Bureau of Labor Statistics. The average length of unemployment has steadily risen to almost 40 weeks, and there were nearly five job applicants for every job opening as of the most recent data in May.

The Start-Up of You - The rise in the unemployment rate last month to 9.2 percent has Democrats and Republicans reliably falling back on their respective cure-alls. It is evidence for liberals that we need more stimulus and for conservatives that we need more tax cuts to increase demand. I am sure there is truth in both, but I do not believe they are the whole story. I think something else, something new — something that will require our kids not so much to find their next job as to invent their next job — is also influencing today’s job market more than people realize.  Look at the news these days from the most dynamic sector of the U.S. economy — Silicon Valley. Facebook is now valued near $100 billion, Twitter at $8 billion, Groupon at $30 billion, Zynga at $20 billion and LinkedIn at $8 billion. These are the fastest-growing Internet/social networking companies in the world, and here’s what’s scary: You could easily fit all their employees together into the 20,000 seats in Madison Square Garden, and still have room for grandma.

U.S. Corporations Don't Make Jobs Like They Used To - With every month's employment survey, economists and journalists have to find new ways to write the headline "Job Report Surprises and Disappoints." It's getting difficult because the news is so dependably awful and the Thesaurus is only so thick. But it's time to at least drop the word "surprises" and understand that the private sector does not work for workers the way it used to. Thomas Friedman on Silicon Valley:  Facebook is now valued near $100 billion, Twitter at $8 billion, Groupon at $30 billion, Zynga at $20 billion and LinkedIn at $8 billion. These are the fastest-growing Internet/social networking companies in the world, and here's what's scary: You could easily fit all their employees together into the 20,000 seats in Madison Square Garden, and still have room for grandma.  Right on, but it's not just the valley. Here's a look at the 10 most valuable companies in the world in 2011 vs. 1964 in order of market cap (in red) with their number of employees (in blue). The decline of the wired telecommunications industry and manufacturing correlated with the rise of companies that could make much, much more money with much, much fewer workers (Walmart excluded).

The US labor market: European levels without the European safety net - Rebecca Wilder -Jobs growth is a lagging indicator of economic activity, so the June report confirms that the US economy has been in a deep rut (Marshall Auerback calls it a 'fully-fledged New York City style pot hole'). Yes, the US economy is growing; but sub-2% really 'feels' like stagnation, if not recession for many. As always, Spencer provides a fantastic summary of the employment report here on AB: 'bad news', he says. I call it abysmal, both relative to history and on a cross section. The chart below illustrates the unemployment rates across the G7 spanning 1995 to 2011. Across the G7 economies, the level of the US unemployment rate is second only to France. The chart above illustrates the same time series as in the first unemployment chart, but the rates are indexed to 2005 for comparability. France's high level of unemployment is structural. In contrast, the US level of unemployment is NOT, not even close. The chart illustrates the maximum number of months that a worker can claim unemployment insurance for the year 2007. In normal times, French workers can collect benefits for up to 23 months by law, where the US worker collects for just 6 months. The tax and benefit policies data are updated infrequently, and listed on the OECD's website (excel file link).

Create a Special Job Credit for the Long-Term Unemployed - When unemployment numbers go up, as they have for the past few months, everyone gets scared. But the problem in this job market is not so much that unemployment is rising, as that it's not falling.  The result is that people who are thrown out on the job market stay there. Research shows that long-term unemployment takes a toll on skills, industry knowledge, and psychological well-being--what economists call "human capital". This makes long-term unemployment our greatest priority; if we do not get those people into work soon, many will never return. When employers do start hiring again, they will look to the sizeable pool of shorter-term unemployed. By the time demand is robust enough for them to dip deep into the reserve army of labor, it may be too late for many of them. One suggestion is to give them direct incentives to choose the long-term unemployed over those who are already in work, or out of work for only a short time. How? We could exempt new hires from both the employee and the employer sides of the payroll tax, one month for every month that they were unemployed.  This will cost the government something of course--but not nearly as much as supporting them on welfare, disability, or early retirement--or the prison system.

The Great Recession May Be Over, but American Families Are Working Harder than Ever - The Hamilton Project - Brookings -  In previous postings, we have looked at the median earnings of both men and women to explore their long-term employment and earnings trends. For men, we found that earnings have been on the decline because of stagnant wages and declining employment. For women, earnings have increased rapidly as more women entered the labor force armed with higher levels of education—able to command higher salaries.  This month we explore the trends in earnings and employment for America families, looking both at two-parent and single-parent families. Indeed, the question about how men or women are doing separately may not capture how the average family is doing. To help tell the full story we examined the earnings for households with children during the past thirty five years. The numbers suggest that the typical American family is earning more, but almost entirely because parents are working more—not because they are earning more per hour. This is one more indicator that, even before the recession, the labor market was presenting challenges for many American families.

Waging War On Wages: The Global Contest For Jobs - Last Friday's U.S. Employment Situation report—having startled so many in the economic forecasting dodge—is so profoundly illustrative of what we have been saying that it is appropriate to comment once more. There are many ways to gauge the status of employment in any country, and the U.S. is so rich in data points that economic professionals tend to either over-analyze matters or reduce them to simplistic talisman such as the official unemployment rate. During most periods, basic trends suffice in establishing policy. But in times of global change and new macroeconomic challenges it is of vital importance that we focus on the indicators that really address the salient matters facing us. The U.S. is facing perhaps its greatest economic struggle—not just since the 1930s, but possibly in its history. We are faced not merely with domestic problems that we are in control of remedying, but also with the results of changes to the global playing field that make the contest in which we are engaged seem unfamiliar, as though we are visitors on another team’s home turf. So much is this the case that we aren’t able to score the game in a manner that makes clear who is winning and who is losing, or what strategies to employ that might enable the U.S. to prevail in a comeback. Let’s try to change that, below.

Where a Minimum-Wage Increase Would Bite -Although advertised as a well-deserved raise, another federal minimum-wage increase would eliminate paychecks for some of America’s lowest-skilled workers. Last week I explained how I estimated that the July 2009 federal minimum-wage increase reduced national employment by about 800,000. That 800,000 is the sum of employment impacts for each of several demographic groups and can therefore be used to estimate which groups were most affected by the wage increase. The basic economics of the minimum wage suggests that employment impacts will be greatest among groups with the lowest hourly wages. Teenagers employed part time have particularly low hourly wages, and the hourly wages for teenagers employed full time are not much greater. The percentage impact on people 20 and over working full time should be essentially zero, because 98 or 99 percent of them would make more than the minimum wage anyway (see Table 1 of this paper).

Disappearing Teen Jobs and the Minimum Wage, Part 2 - Is there really a connection between the rise of the minimum wage and the disappearance of teen jobs from the U.S. workforce over time?  Our first chart presents the BLS' data for the Employment-to-Population Ratio for individuals between the ages of 16 and 19. Although Invictus is mainly concerned with the period from 1997 onward, we'll go back to 1980 so we can pick up any previous trends:  What we see in reviewing the chart is that there seems to be a fairly clear break in the overall trend in the teen employment-to-population ratio. Before 2002, we find this ratio was consistently above 40%, but that after 2002, it has fallen below this level.  In our next chart, we'll look at the mirror image of this chart - the teen non-employed to population ratio, which shows the percentage of the U.S. teen population who are not employed:  Speaking of the rising minimum wage over time, here is the level of the federal minimum wage from 1980 through 2011: Now, let's overlay these last two charts together and see what we can see!Examining the chart from 1997 onward, we see that there appears to be very little correlation between the increase in the non-employed portion of the U.S. teen population and the federal minimum wage.

Overtime, Not Wage Increases, Drive Income Growth - Working families’ incomes have grown in recent decades. But the gains came mostly because they worked longer hours than because of wage increases, according to new research by the Brookings Institution‘s Hamilton Project. Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains. The median income for two-parent families rose to $70,000 in 2009, for working 3,500 hours a year on average, compared with working about 2,800 hours in 1975 to earn $56,600 (in 2009 dollars).  Median wages for men in two-parent families, adjusted for inflation, declined 7% over the 35-year period, putting them at $46,400 a year in 2009, the latest year for which such data are available, the research found. Women, meanwhile, entered the labor market and increased the overall number of hours worked by each family — earning enough to more than offset the men’s wage drop.

Benefits Take Hit Amid Weak Job Market - The anemic job market doesn’t just mean it’s tough for many people to find a job. It also means that those who have jobs may also be getting fewer benefits. A few family-related benefits have taken a hit since the recession, and haven’t recovered, according to the Society for Human Resource Management’s (SHRM) latest annual survey of 600 employers’ benefits’ offerings. Only 25% of employers offer paid family leave, about unchanged from 2010 and down from 33% in 2007, says the survey, released late last month. Other casualties include assistance with adoption expenses, which tumbled to 8% from 20% in 2007; elder-care referral services, down to 9% from 22% in 2007; and mentoring programs, which fell to 17% from 26% in 2007. Another important family benefit is holding its own: Paid leave specifically allocated for new parents has been more stable, with 16% offering paid time off for new mothers and new fathers, down just a fraction from 2007, the survey shows.

Doug Smith: The Maximum Wage - We face severe and growing income inequality with negative effects on people and the economy. Yet, no surprise, the ‘can’t do’ right wing continues a scorched earth campaign against the minimum wage. These self-promoting haters actually prefer no wages and indentured servitude – for example using prisoners to replace employees and cheerfully promoting ‘internships’ for the unemployed.  They glory in income inequality and wish it to expand instead of contract. Enough of that. They are destroyers of the American Dream.  But people who seek to shrink income inequality — to insure life, liberty and the pursuit of happiness for all and not just some — must now focus as much on the maximum wage as the minimum wage. So, be it proposed: “That any enterprise receiving taxpayer funds shall not compensate that enterprise’s highest paid person in an amount greater than twenty-five times what the lowest compensated person receives.”

A Visit to the Warehouse of Soul-Crushing Sadness -This is a warehouse where people ship stuff for big online companies that you've definitely heard of. The company, which I won't name, provides staffing for a nationwide logistics contractor that handles getting those Internet purchases from their origin—usually Chinese factories—to your doorstep. She kicked off my visit with a tour around the warehouse floor. First stop: Workers standing at tables, taking items out of a bulk box and putting them into different boxes with shipping labels on them. And that's...pretty much it. For efficiency purposes, every step of every process has been broken down and separated out so that almost everyone does the exact same motion over and over. The people at the next stop are standing at tables and putting labels on boxes, over and over. Sweating. "It's hot in here," I said. It was like 90 degrees outside. "Don't you guys have air conditioning?" "We do, but it's controlled by the big guys in the suits." Susie said everybody wears hats and coats during the winter because it's freezing inside.. "There's no circulation in there," Susie said, shaking her head. "How much do these people make?" About $9 an hour.  Technically, these workers are all temps, no one has been hired as a real employee for two years

Blacks' economic gains wiped out in downturn - A generation that played by the rules and saw progress falls out of the middle class. First, Goldring's husband fell ill, and they drained savings to pay for nursing homes before he died. Then Goldring lost her executive assistant job in the Baltimore hospital where she had worked for 17 years. The cruelest blow was a letter from the bank, intending to foreclose on her home of almost three decades. Millions of Americans endured similar financial calamities in the recession. But for Goldring and many others in the black community, where unemployment is still rising, job loss has knocked them out of the middle class and back into poverty. Some even see a historic reversal of hard-won economic gains that took black people decades to achieve.

Black men survive longer in prison than out: study (Reuters Health) - Black men are half as likely to die at any given time if they're in prison than if they aren't, suggests a new study of North Carolina inmates. The black prisoners seemed to be especially protected against alcohol- and drug-related deaths, as well as lethal accidents and certain chronic diseases. But that pattern didn't hold for white men, who on the whole were slightly more likely to die in prison than outside, according to findings published in Annals of Epidemiology. Researchers say it's not the first time a study has found lower death rates among certain groups of inmates -- particularly disadvantaged people, who might get protection against violent injuries and murder. "Ironically, prisons are often the only provider of medical care accessible by these underserved and vulnerable Americans,"  "Typically, prison-based care is more comprehensive than what inmates have received prior to their admission,"  The new study involved about 100,000 men between age 20 and 79 who were held in North Carolina prisons at some point between 1995 and 2005. Sixty percent of those men were black.

Poverty in America, Part I - If jobs are not coming back, then we as a nation need a conversation about poverty in America. As of August 2011, it will be three years since the global financial meltdown. In three years, the Savior State has borrowed and blown $6 trillion maintaining the Status Quo, and the Federal Reserve has printed almost $3 trillion and shoveled that vast sum into "risk assets" to keep housing on life support and the stock market rising. The Fed has also devalued and debased the dollar, stealing wealth from the citizenry and holders of U.S.-denominated debt in the process, to serve two goals: 1) spark inflation and thus avoid deflationary deleveraging of the nation's fast-growing mountain of debt, and 2) to enable servicing that debt with cheaper dollars.  None of these grandiose manipulations has healed the economy or fixed the structural problems which made the meltdown inevitable.  The Status Quo has two basic methods of buying the citizen's complicity: a vibrant economy that supports a middle class that thus has a stake in maintaining the Status Quo, and cash bribes to everyone else to keep quiet, i.e. "social benefits" a.k.a. entitlements and welfare. This renders everyone either dependent on cash payments from the Savior State or a stakeholder in the Status Quo.

Down But Not Out - Back in June, The Lookout put out the call for readers who had been unemployed for six months or longer to write in with their stories. We received over a thousand emails and around 5,000 comments. Zack’s got a write up of the picture we got of the long-term unemployment crisis after going through 6,000 submissions, and we built out this Tumblr to house 50 of the most vivid storiesMy family is eating stir fried dandelions out of yards to keep from starving. I am college educated and cannot pay rent. I have not had a penny income so far this year. We were turned down for food stamps. We are natural born U.S. citizens.

Food Stamps: The Struggle To Eat - WHEN the dismal news came on July 8th that the unemployment rate had risen fractionally to 9.2%, both Republicans and Democrats declared the data proof of the folly of the other party’s policies. How, Republicans asked, could Democrats even consider raising taxes when the economy is so weak? How, Democrats retorted, could Republicans advocate big cuts in the safety net when so many Americans are in desperate need? As the haggling over raising the legal limit on the federal government’s debt reaches a climax (see Lexington), the feeble state of the economy is making the budgetary trade-offs involved ever less appealing. Take food stamps, a programme designed to ensure that poor Americans have enough to eat, which is seen by many Republicans as unsustainable and by many Democrats as untouchable. Participation has soared since the recession began (see chart). By April it had reached almost 45m, or one in seven Americans. The cost, naturally, has soared too, from $35 billion in 2008 to $65 billion last year. And the Department of Agriculture, which administers the scheme, reckons only two-thirds of those who are eligible have signed up.

Car Sleepers – The New American Homeless - Santa Barbara boasts a classic laidback California lifestyle, with uncongested beaches, wholesome cafes and charming Spanish-style architecture. Of course there’s a hefty price tag: nestled between the gentle Santa Ynez mountains and the inviting Pacific Ocean are multi-million dollar homes. But in this sun-washed haven of wealth, many live far from the American dream. In a car park across the street from luxury mansions, the evening brings a strange sight. A few cars arrive and take up spaces in different corners. In each car, a woman, perhaps a few pets, bags of possessions and bedding. Across the street from homes with bedrooms to spare, these are Santa Barbara’s car sleepers. Homeless within the last year, they are a direct consequence of America’s housing market collapse.

Not Scarcity, But Surplus is the Problem - They were discussing scarcity last week at Economist's View. But to my mind scarcity isn't our core problem. I wrote (and then edited a bit for this post): Yes, scarcity of resources is fundamental to econ theory, and it's a real concern, not just an abstract factor for calculations. But less often mentioned is the truism that human beings, working in concert, produce surplus. Generally this is very great surplus. In any society beyond the most desperately poor, this surplus is sufficient at least to support the 1/3 to 1/2 of the population who cannot support themselves-- children, and the elderly and disabled... This surplus ... inevitably leads to the specialized class we would call the wealthy. This clan has existed as far back as we have written records. They may be more useful, or less useful, to their host societies, but they can only exist when those societies produce large surplus. Economics talks about managing scarcity, but ... our real problem is managing the surplus.

Of The 1%, By The 1%, For The 1% - Americans have been watching global protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret. It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran.

The new “Let them eat cake!” - In the midst of this prole-crushing economic emergency engineered by wealthy speculators and their political puppets, we now find ourselves watching those same modern-day Marie Antoinettes at once celebrating their station and begging for sympathy as if they were the real casualties of the decade-long economic slowdown they created. And, more recently, there was that searing image of President Obama convening a $35,800-a-plate Upper East Side dinner with "a committee of bankers, private equity executives and hedge fund managers" as the economy burns. But appalling as those examples are, they pale in comparison to the recession's 10 most egregious sets of "Let Them Eat Cake" moments, comments and actions. These are the ones that truly deserve a place in the history books. View the slide show

Rise in risk inequality helps explain polarized US voters - – A new study of political polarization in the United States suggests that changes in the labor market since the 1970s has helped create more Republican and Democratic partisans and fewer independents. The growth in partisanship has to do with people's current income and – importantly – their expectations of job security, said Philipp Rehm, author of the study and assistant professor of political science at Ohio State University. At one time, many voters were "cross-pressured" – when looking at what they earned now and their risks of losing that income, they felt torn between Republican and Democratic policies. The result is that they were natural independents, Rehm said. But since the 1970s, a growing number of workers have found their current incomes and beliefs about their job security have converged – in other words, their preferences aligned completely behind either Democratic or Republican policies. Rehm calls these people natural partisans. "Americans who feel cross-pressured – liberal Republicans and conservative Democrats – have faded in number and importance, leaving only liberal Democrats and conservative Republicans,"

State employees brace for budget-cut-driven layoffs across Connecticut - The Malloy administration moved quickly to slash jobs after the State Employees Bargaining Agent Coalition failed to ratify a $1.6 billion concessions package, but bumping rights and other requirements will extend the process for months. As a 24-year veteran of state government, Gina Grasty Peele, who works in Stamford for the state Workers Compensation Commission, is not as nervous about pending layoffs as junior colleagues. If she is among the 6,600 state employees Gov. Dannel P. Malloy says must be cut to balance the budget, Grasty Peele has the option of displacing or “bumping” someone with less time on the job, sending them to the unemployment line instead. “It’s kind of ’survival of the fittest’ right now economically,” she said. “Yeah, I’d have to do it. I have a young child I have to take care of. (But) I hope it would never be put in my hands to have to make that choice.” And whoever Grasty Peele replaced might have a similar opportunity to secure another government position, perpetuating the amount of time it takes just to get one body off the Connecticut government payroll.

‘Madness Abounds’ as Fake Candidates Confuse Wisconsin Recalls - Wisconsin voters will choose among real and fake Democrats this week to challenge six Republican senators in recall elections that may derail the agenda of Governor Scott Walker. The primaries are the opening skirmish in a state at political war. The six districts in tomorrow’s races have Republicans running as Democrats, hoping to win the nomination and effectively render the Aug. 9 recall votes meaningless. On July 19, there will be two primaries and a full-fledged recall aimed at Democratic senators who fled the state in February in hopes of blocking the measure, which touched off weeks of protests across the nation. State election law allows open primaries, which means that voters can participate regardless of partisan affiliation. It also allows members of one party to enter another’s primary.

Wisconsin Democrats defeat fake candidates in primary election - Democratic Wisconsin Senate candidates overwhelmingly defeated their fake rivals Tuesday night in the Democratic primary election. Based on unofficial results, Democratic candidates Nancy Nusbaum won by 65 percent of the vote, Sandra Pasch won by 67 percent, Shelly Moore won by 54 percent, Fred Clark won by 67 percent, Jessica King won by 69 percent, and Jennifer Shilling won by a whopping 71 percent.  They will now face off against their Republican opponents in the coming weeks. Chris Taylor also defeated six opponents to replace former state Rep. Joe Parisi (D), who vacated his seat in April. The Wisconsin Republican Party entered six fake Democratic candidates into the race to force Democratic primary elections in Wisconsin and delay the general election.

California Revenue $440 Million Above Estimates, Controller Says -- California, the most populous U.S. state, collected 3.7 percent more revenue in June than projected, a gain of $440.5 million, as the economy expanded, the controller reported. Personal income taxes were 6.8 percent, or $410 million, higher than projected in May, Controller John Chiang said in a statement. Sales taxes were 0.8 percent above estimates, or $21.8 million, while corporate taxes were up 7.2 percent, or $156 million. Still, June revenue was $350 million less than the $1.2 billion in additional revenue on which Governor Jerry Brown and Democrats based their new budget, Chiang said. That $86 billion spending plan signed into law June 30 filled what remained of a $26 billion deficit with $12 billion in spending cuts and a forecast of an equal amount in higher tax revenue from a recovering economy.

Subsidy Cuts Could Reduce State Deficits - The Center on Budget and Policy Priorities estimated last month that state deficits around the country total $103 billion for fiscal year 2012 (, h/t Dylan Matthews). Republican governors and legislatures have exploited these crises to slash Medicaid, education, and workers' rights. But there's another way: go after state subsidies to business. Some of my best-known research has been to estimate the amount of subsidies to business given by state and local governments, going back to my 2000 book, Competing for Capital: Europe and North America in a Global Era. In my new book (, I update those estimates, showing that state and local governments give almost $50 billion in tax incentives and other subsidies to attract investment (what are generally called “investment incentives) and a total of $70 billion in all sorts of subsidies to business. Since data on local subsidies is much harder to obtain than that of state governments, unless I had better information for an individual state, in both books I estimated local subsidies to be the equivalent of state subsidies.

Judges Vow To Shut 11 Courts - The state’s top judges, angered by budget cuts approved Monday, urged Governor Deval Patrick yesterday to stop appointing new judges and said they have no choice but to close 11 courthouses and lay off employees. In a strongly worded statement, Roderick L. Ireland, chief justice of the Supreme Judicial Court, and Robert A. Mulligan, chief justice for administration and management, said the budget Patrick signed jeopardizes the right of every person, guaranteed by the Massachusetts Constitution, to swift justice. The request for a moratorium on judicial appointments was submitted in a separate letter sent to the governor by the seven justices of the Supreme Judicial Court, four of whom are Patrick appointees. After years of budget cuts, they said, the court system does not have enough support personnel for additional judges and would have to lay off three staff members for each judge appointed.

Pa. Budget Cuts Economic Development By 35 Percent -- Attracting out-of-state businesses and helping revitalize communities is getting a bit tougher for state officials under a new Pennsylvania budget that cuts more than $114 million from the Department of Community and Economic Development. The 35 percent funding reduction to the agency affected dozens of programs and imposed consolidations designed to make recipients work together, regionalize or compete head-to-head. The reduction is the latest in a series of cuts that have left the DCED with a $213 million budget, down from $327 million last year and $631 million just four years ago. The new spending plan eliminates all remaining legislatively directed spending referred to as walking-around money, or WAMs. The Corbett administration said it's trying to make the agency run more efficiently.

26 Percent Property Tax Hike Approved for DeKalb County - Tuesday, the DeKalb County Board of Commissioners approved a 4.35 mill tax hike 4-3. The 26 percent tax hike for the 2011 budget will add $50 million in revenue, according to the AJC. According to Commissioner Elaine Boyer, who voted against the hike, a home worth $300,000 that had no change in value would see a more than $400 tax increase. “Each dollar that goes to DeKalb County government is one less dollar available to feed a family, fill up a gas tank or look for a job,” Boyer said in a press release. “Utility bills are higher and food is skyrocketing. We are all cutting our budgets, yet the county has refused to embrace layoffs or significant budget reductions.”

Budget cuts hit Louisiana state parks, museums - In the heart of the summer tourism and vacation season, Louisiana's state-run recreational areas, parks and educational pastimes are shrinking visitors' hours and cutting staff to cope with lessened funding as the new budget year began July 1. Military history enthusiasts and fans of football great Eddie Robinson can explore museums celebrating their interests only three days each week. Children on summer vacation will have less time to splash and swim in state-run pools. Visitors to Louisiana's historic sites and a trail of small museums crisscrossing the state will find trimmed-down schedules. With the start of the 2011-12 fiscal year, limitations were announced to operating hours at state parks and pools, and a dozen small museums around north and central Louisiana slashed their hours.

Budget impasse, shutdown enters 2nd week - There are no new talks scheduled as Minnesota's government shutdown enters its second week. Political gridlock stemming from disagreements between Democratic Gov. Mark Dayton and Republican legislative leaders on how to deal with a $5 billion state budget deficit has idled 22,000 state employees, closed 66 parks, halted 100 road projects and inconvenienced Minnesota's taxpayers. The National Conference of State Legislatures says Minnesota's government shutdown is now the longest of any state in nearly a decade. Four states besides Minnesota have had partial shutdowns since it started keeping records in 2002, lasting from a few hours to nine days. Minnesota had a partial shutdown in 2005. A deal was reached in the early hours of the ninth day and state employees started returning to work that day.

Minnesota shutdown stirs debate over who gets paid - While thousands of Minnesota employees go without paychecks because the state government is shut down, many lawmakers are still being paid. And the list of workers whose services are deemed "essential" includes the governor's housekeeper and his personal chef.  The political leaders whose budget dispute caused the shutdown are still entitled to collect their pay, and more than half of them are. Democratic Gov. Mark Dayton and the Republican Senate majority leader have both declined their checks, as have some rank-and-file lawmakers of both parties. But many others are still collecting checks, including the Republican House speaker.  The shutdown began its 11th day Monday, keeping 22,000 state employees at home without pay. The impasse has halted 100 road projects, closed 66 state parks, barricaded numerous highway rest stops and cut off many services. In that time, Dayton and GOP leaders have met just twice to discuss their differences.

Cautionary Lessons From State’s Shutdown - The shutdown of the State of Minnesota has forced the opening of a new hearing room here, where pleas have flowed forth, one after the next, for a week. May local officials dredge so barges can get through here along the Mississippi River? Might 41 State Patrol officers not quite done with field training be deemed essential and sent back to work like others in the patrol? Could state workers sign the adoption forms for a Minnesota couple who had been sitting in a Texas motel room with their new baby for the last week, unable to cross state lines without the paperwork? If the outlines of a government shutdown are simple — politicians cannot agree on how to spend money, so everything stops — the details are not. Since Minnesota officially closed its doors on July 1, the deadline by which the state’s political leaders were required to settle on a budget for the fiscal year, officials here have found themselves wandering a new labyrinth. With the broadest shutdown in state history entering its second full week and no sign of a compromise on the horizon, political leaders in Washington, facing their own standoff and looming deadline, may want to ponder Minnesota. 

Minnesota running out of booze, cigarettes due to government shutdown - MillerCoors has been ordered to pull all of their beer products from Minnesota store shelves. The Minnesota Department of Public Safety told the Star Tribune that the products had to be removed because the company did not renew their brand label registration before a government shutdown began. The liquor industry has become the latest victim of a government shutdown in Minnesota. The Minneapolis Star Tribune reported Tuesday that bars, restaurants and stores are already running out of supplies because many of them must renew their $20 state-issued alcohol purchasing cards before replenishing inventories. Already 425 establishments have been left with expired cards and it’s just expected to get worse. Another 116 cannot buy liquor because they can’t pay their delinquent tax bills. “This is going to treadmill across the whole state the longer [the Republican lawmakers] hold out,” Democratic Gov. Mark Dayton told the paper. “It’s going to hit every bar and restaurant that needs a liquor license.”"

Impacts of Minnesota shutdown piling up - As the longest government shutdown in Minnesota history reaches its 14th day today, an ever-increasing number of state employees, businesses and non-profits are feeling the consequences of the stalemate over how to solve the state’s $5 billion deficit. “It’s really hard on the people who rely on our services,” says Christine Durand, a spokeswoman for the Minnesota Council of Nonprofits. “Non-profits don’t run on air, these are critical services that need money to survive.” Durand says almost every one of the 35,000 non-profit organizations her council represents has made cutbacks during the shutdown, including the Minnesota AIDS Project, which has reduced its staff of more than 57 to 29 full- and part-time employees, according to public policy director Amy Brugh. “We’re in a state of disarray,”

Calif. treasurer prepares to borrow $5B in short-term loans if feds default over debt ceiling - California’s state treasurer said Wednesday that he’s preparing contingency plans to borrow as much as $5 billion for the state in case the federal government misses its Aug. 2 deadline to raise the nation’s debt ceiling. The state was preparing to take out short-term loans to cover day-to-day state operating expenses if the federal government begins to run out of money to pay its bills, Treasurer Bill Lockyer told the Sacramento Press Club. “We’re hoping to do our borrowing before Aug. 2,” he said."  Lockyer, a Democrat, said he’s prepared to act in case talks between Republicans and Democrats in Washington, D.C., remain at an impasse. That could force the federal government to default on loan obligations and shortchange states on health care and education funding.

Moody's Puts 7,000 Municipal Ratings Tied to U.S. on Review - Moody's Investors Service placed 7,000 municipal ratings on review for possible downgrade after it warned the U.S. may lose its Aaa investment grade. The ratings company said in a note that potential downgrades would affect $130 billion in municipal debt including mortgage-backed bonds secured by the U.S. or agencies such as Fannie Mae and Freddie Mac. Moody's said any downgrade to the U.S.'s Aaa investment grade would automatically cut those 7,000 municipal ratings by the same degree. A second category of municipal lenders, those whose repayment is less directly linked to the federal government, also would be reviewed for possible action, Moody's said."

Six New Jersey cities on watch for downgrade: Moody's (Reuters) - Six struggling New Jersey cities were warned on Tuesday their credit ratings might be downgraded by Moody's Investors Service, the rating agency said, citing the loss of state aid. The cities of Camden, East Orange, Passaic, Paterson, Union City and the state capital of Trenton were all placed under review for possible downgrades of their credit ratings. Moody's said it would complete a review within 90 days. The rating agency said the action was prompted by a the state's reduction in transitional aid -- to $10 million from $149 million -- in its fiscal plan for the year that began July 1. The $139 million cut translates to the six cities seeing a loss in annual revenue, ranging from 2 percent to 38 percent, Moody's said. "Moody's believes all of the affected cities will have difficulty making up the budget gap created by the cut," Moody's said in a statement.

Ogden teachers get take-it-or-leave it contract deal - Teachers employed by the Ogden School District will get letters over this holiday weekend, informing them they have 20 days or fewer to sign a new contract or they will lose their jobs. After months of contract negotiations with the teachers’ association, the school district announced Thursday that it will bypass the representative body and offer a take-it-or-leave-it contract deal to its individual teachers. The letters sent to teachers end with the words: “Please note that should we not receive your signed contract by 4:00 p.m. on July 20, 2011, we will declare your current position open for hire.” District Superintendent Noel R. Zabriskie said his word of choice to describe the school board’s decision, and the features of the new contract, is “bold.” Doug Stephens, president of the Ogden Education Association, one of the organizations representing teachers in negotiations, said he is shocked. “It is unprecedented in the state of Utah,” Stephens said. “It’s crazy. No school district or school board has ever done this before. This is a horrible thing.” that, under the new contract, teachers who sign will receive a 2.93 percent increase in salary, with 1.6 percent a cost-of-living raise. The raise money will come from the district’s rainy day fund.

Philly Sacrifices 26 School Kitchens to the Austerity Gods - As negotiations over the 'debt ceiling' drag on, one thing is clear: Austerity is coming to the United States. No matter what—whether the Republicans accept minor tax hikes as part of a deal; whether bond investors freak out or don't freak out; whether Obama and the Democrats completely cave in to GOP insanity or just partially cave (as they already have)—the federal government will slice spending by about $1 trillion over the next decade, most likely including cuts to important social-insurance programs like Medicare and Medicaid. Let's be clear: Slashing government spending at a time of lingering 9 percent unemployment and stagnant wages is imbecilic. You don't have to be John Maynard Keynes to understand that when corporations stop hiring and investing, the federal government has to fill the gap, not widen it. And as the University of Texas economist James K. Galbraith has demonstrated numerous times over the past year, the most-dire problems facing the nation are the related ones of underemployment and underinvestment in vital infrastructure, not budget deficits or the national debt. Our existing fossil-fuel-based infrastructure—roads, bridges—is crumbling. And if we're going to transition to a post-fossil-fuel economy, we'll need to build up decentralized electricity grids, wind and solar energy capacity, mass transit, local and regional food systems, and more—investments that aren't being made at nearly a sufficient rate by private actors.

The Relentless Christian Crusade to Prevent Kids from Learning Science - In decades past, state legislators passed laws flatly barring the teaching of evolution or requiring “balanced treatment” between creationism and evolution. Those efforts were struck down by the courts. Undaunted, Religious Right activists returned with a host of new ideas and presented them to friendly lawmakers. They advocated teaching the “weaknesses” of evolution, asserted that public school teachers had a free-speech right to attack evolution in class and even advocating pasting anti-evolution disclaimers in science books. When courts rejected those gambits as well, the creationists retrenched and relabeled. Creationism became “intelligent design” (ID), a concept that its proponents swore was not necessarily religious (although they were unclear on who the designer could be other than God). That gambit floundered in court as well, bringing us to the newest incarnation of creationism: Teach the controversy. Under this approach, evolution is falsely branded a “controversial” idea that is losing support even in the scientific community. Thus, students must be taught to engage in “critical thinking” about its flaws, and, for good measure, controversies over global warming and human cloning will be discussed as well.

High School Grade Inflation: 1991 to 2003  - Following up on a recent post on college grade inflation, there's also evidence that grade inflation is taking place at America's high schools.  In a study by the college entrance exam company ACT, it found evidence of significant grade inflation between 1991 and 2003 for high school students taking the ACT exam.  While ACT scores remained stable between 1991 and 2003, the chart above shows that the average high school GPA increased for ever ACT composite score over that period.  From the study: "Each point on each curve represents the average GPA for all students in 1991 and 2003 who earned that specific ACT Composite score.  The curve for 2003 is higher at every Composite score point than the 1991 curve, which is evidence of the existence of grade inflation.  However, the amount of grade inflation varies for different Composite score values: it is highest between the scores of 13 and 27 and steadily lower with Composite scores above 27. This is because students with high ACT Composite scores tend to have higher GPAs, and there is less room for these GPAs to increase over time because GPA cannot exceed 4.00.

Community College as a Bridge to New Skills - On Sunday, I wrote about how vocational programs could help keep students in high school, and in turn, engage them enough to continue to college. But in the course of the recession and its aftermath, many of those who have flocked to community college programs in health care, manufacturing, aerospace, biotechnology and other vocational subjects are those who lost their jobs during the downturn. “Individuals that did not have high-end skills were the first to be hit” during the recession, said Gary Green, president of Forsyth Tech. “And they are having the most difficulty in the job market today.”Although hiring is still sluggish, those employers who have openings say they often have a hard time finding qualified applicants, because many of the workers who are currently unemployed don’t have the skills that employers require. Mr. Green said the college’s biggest challenge was money. The federal government provides Perkins grants to states to help finance improvements to vocational programs at both the high school and community college levels. Such resources often help technical departments buy new equipment to keep up with changes in industry. But for the fiscal year 2012, the Obama administration has requested a 20 percent cut in funds for career and technical education.

Cal State Hikes Tuition 12 Percent - A California State University Board of Trustees committee Tuesday approved a 12 percent tuition hike for undergraduate students, a move officials said was prompted by a steep cut in state funding. The board's Finance Committee -- which includes a majority of the members of the full Board of Trustees -- approved the fee hike during the trustees' two-day meeting in Long Beach. The full board is scheduled to approve the tuition hike later today. "The enormous reduction to our state funding has left us with no other choice if we are to maintain quality and access to the CSU,'' Chancellor Charles B. Reed said. "We will focus on serving our current students by offering as many classes and course sections as possible. "We will also be able to open enrollment for the spring 2012 term, which is critical for our community college transfer students,'' he said.

A History of College Grade Inflation - We’ve written before about some of the work of Stuart Rojstaczer and Christopher Healy, grade inflation chroniclers extraordinaire. They have put together a new, comprehensive study of college grading over the decades, and let me tell you, it is a doozy. The researchers collected historical data on letter grades awarded by more than 200 four-year colleges and universities. Their analysis (published in the Teachers College Record) confirm that the share of A grades awarded has skyrocketed over the years. Take a look at the red line in the chart below, which refers to the share of grades given that are A’s:

How Will Colleges Innovate? - That’s the question that Jeffrey Selingo poses over the The Chronicle of Higher Education:[I]f current economic trends continue, much of traditional academe is going to be forced to change. Families can no longer use their house as an ATM. States are making tough choices about the size of government, and public colleges are often left at the end of the line. And now the federal government is likely to cut back on many of its fiscal promises to deal with an out-of-control deficit.The bottom line is that we’re likely to face a future where students and their families pay a lot more of the cost of a college education out of pocket. Without grants and loans as a safety net, students are probably going to make different choices than they do now (read: less expensive choices). We’re likely headed toward a future where smaller, struggling colleges need to move to new models of doing business, while elite, wealthy colleges continue to support the current model. Selingo then summarizes several ideas that were bandied about in a meeting of academic “disruptors” and disruptive innovation guru Clayton Christensen of Harvard Business School.

Obama rejects GOP call to ‘screw students’ - Now that House Majority Leader Eric Cantor (R-Va.) is effectively negotiating on behalf of all Republican lawmakers, he’s taking the lead in recommending specific cuts during talks at the White House. The House majority leader, who did most of the talking for the Republican side, said those taking out student loans should start paying interest right away, rather than being able to defer payments until after graduation. It is a big-ticket item that would save $40 billion over 10 years. At one point, sources say, President Obama pushed back against the mounting menu of spending cuts while the tax column on the negotiating sheets remained blank. He asked the Republican leaders how they expected him to take their proposals seriously. “I’m not going to do that,” Obama said. “I’m not going to take money from old people and screw students,” not without some compromise on the tax-increase side.

As Bad As the Democrats Can Be, Republicans Are Worse: The Student Loan Edition - It's as if Republican House Whip Eric Cantor wants to be a cartoon villain: the Daily Beast's Howard Kurtz reports, one group that Cantor is apparently fine with making pay more is American college students. Cantor, at the White House for budget negotiations, apparently proposed that students who take out student loans should immediately start paying interest, rather than getting to make payments after graduation: As Monday's White House budget talks got down to the nitty-gritty, Eric Cantor proposed a series of spending cuts, one of them aimed squarely at college students. The House majority leader, who did most of the talking for the Republican side, said those taking out student loans should start paying interest right away, rather than being able to defer payments until after graduation. It is a big-ticket item that would save $40 billion over 10 years. According to Kurtz, Obama rejected Cantor's proposal out of hand, saying that he didn't want to "screw students." Cantor's proposal comes at a time when American students are already overwhelmed by student loan debt. In 2008, the average debt that a college student graduated with was a whopping $23,000.

Report: Cook pension fund headed for disaster - Over the next 30 years, an aging population will bankrupt Cook County's pension fund, and only a series of flawed and difficult solutions are available head it off, according to a series of reports prepared for the Cook County Board. Today, the fund is healthy -- with $8.6 billion in assets compared to only $1 billion in liabilities; however the same report projects if nothing is done by 2038, liabilities will exceed assets by $5.1 billion and the fund will run out of money entirely. The office of Commissioner Bridget Gainer, chairwoman of the pension subcommittee, and Gary LeDonne, senior benefits adviser for the fund, declined to explain how this large asset surplus turns into an equally large unfunded liability. According to an actuarial report, it appears an aging baby boom population will gradually mean more retirees will have their pensions financed by fewer employees. There are 23,165 existing employees paying into the fund with 15,333 retirees. Of those active members, 16,608, or 71.7 percent are more than 40 years old. Only 157 are under the age of 25.

Recession's toll: About five years of retirement - Here’s one of the ways the recession and financial crisis has changed many people’s lives: They’ll be spending more years at the office. A new survey of Americans 55 and over finds that those older Americans now expect to retire at age 69, on average. A decade ago, they expected to retire at 64. The survey of about 1,000 people 55 and over was conducted by Harris Interactive for SunAmerica, which sells variable annuities and other investment products. So what’s keeping us at the office longer? Blame the recession and weak stock market gains over the past decade. That’s left many people more worried about whether they’ll have enough money to fund their golden years. Forty-four percent of those surveyed said they feel “secure” about their financial situation these days, compared with 62 percent who felt that way before the recession began.

On Early Retirement - This week, AARP released a Social Security calculator, designed to demonstrate to the bevy of 50 and 60 somethings out there on the verge of retirement, that it is better to wait till age 66 to file for benefits, instead of taking a reduced monthly stipend at age 62. This, of course, assumes there is a large group of people out there, who would otherwise work till age 65 or 67, but are simply lazy and waiting to take their Social Security benefits so they can put a bumper sticker on their car proclaiming “I’m Spending my Children’s Inheritance,” move to Leisure World and enjoy the senior vida loca. This is a wrong assumption. They are not slackers. They are people who, rather, are suffering from the vicissitudes of life in 2011. If they are unemployed, they are much less likely to find work than people younger than themselves. Others fear they won’t be able to keep up much longer. As economists know, our nation’s productivity gains have been made by longer hours – men in professional and managerial jobs often put in 50-hour workweeks. Sixty ain’t the new 40 or even the new 50, and no amount of wishing is going to make it so.

Medicaid cuts start today: Payment to be reduced up to 7% in 2nd round - The latest round of South Carolina Medicaid cuts, which include reductions in payments to doctors and hospitals, takes effect today. Physician payments for Medicaid, the state- and federally funded health insurance program for the poor and disabled, will be reduced by up to 7 percent and patient co-payments for some doctor visits will increase by $1. The S.C. Department of Health and Human Services expects the reductions, which first were announced in early June, will cut an estimated $125 million in state costs for the fiscal year that began July 1. It is the second round of Medicaid cuts in three months. The state's 3 percent across-the-board cuts from April also remain in effect.

Quinn’s Medicaid reduction means five-month payment delay - Moline hospital may have to cut back its support groups and classes because of dwindling state funding due to Gov. Pat Quinn's order to spend $276 million less on Medicaid. “Our total reimbursement ... will drop about a half-million to a million bucks,” said Pagliuzza. Only 10 percent to 15 percent of Trinity's patients are eligible for Medicaid, which is only 8 percent, or $20 million, of the hospital's revenue, said Pagliuzza. The hospital's Medicaid costs will not change, Pagliuzza said. Trinity will just have to wait longer to be paid. Lawmakers balanced the 2012 state budget by dragging out Medicaid payments to 110 days. Quinn's order June 30 to cut Medicaid spending will increase the payment cycle again, to 162 days. Illinois hospitals had been getting paid every 30 days because of the federal stimulus, but that stimulus expired July 1.

Assisted living homes evict residents due to Medicaid reimbursement cuts - Assisted living centers across Montana face cuts to the amount of reimbursement they will receive from Medicaid. Primrose Assisted Living Care in Billings told a Korean War veteran Tuesday that he will be forced to move out in 30 days unless the Governor finds a way to redistribute funds. While this is the first eviction for Primrose, it won't be the last for assisted living centers across the state. About 800 elderly and disabled people in Montana are in assisted living homes on the Medicaid waiver program. "Nobody wants to kick any of these people out, but we can't afford to provide care for them at $65 a day. These people are not going to vanish just because their funding vanished," Primrose Assisted Living Care owner Cindy Johnson said. Medicaid rate cuts to hospitals, mental health centers, and group homes are set to take effect on August 1st, but none are as steep as the cuts faced by those in assisted living.

State in a bind on Medicaid funding - Facing the addition of hundreds of thousands of new enrollees to Georgia’s Medicaid system, the state is re-examining the program — searching for more cost-effective ways to provide care. Medicaid is already facing a $180 million shortfall this fiscal year; meanwhile, officials say the 600,000-plus people expected to join its rolls under the federal health care overhaul starting in 2014 could cost the state an additional $2.1 billion by the end of this decade. Medicaid and PeachCare for Kids currently provide health care to roughly 1.7 million low-income Georgians. “We can’t afford who we have on Medicaid right now,” said state Sen. Renee Unterman, R-Buford. “I don’t know how on earth they think we can add more people onto the system.” The state Department of Community Health plans to hire a consultant to evaluate the $6 billion-plus program and identify potential options to redesign it, as well as study ideas emerging in other states. A complete review is expected by year’s end.

Medicare, Medicaid Cuts Would Only Shift Rising Costs - The $350 billion or so in potential cuts to Medicare and Medicaid over 10 years that were identified in budget negotiations would shift the cost of medicine to public hospitals, the states and individuals, but wouldn't do much to tackle rising health-care costs themselves. House Majority Leader Eric Cantor (R., Va.) this week presented a list of proposed cuts to the White House as part of the broader negotiations to reach a deficit-cutting deal. The cuts include lower federal payments to hospitals with many poor patients and to state Medicaid programs, new patient copayments for clinical lab work, and reduced payments to nursing homes and rural hospitals. The cuts would come on top of about $500 billion in cuts to Medicare payments made to allow passage of the 2009 health care bill.Medicare is the federal health care program for those 65 and older. Medicaid is the federal and state program for the poor. Health-care analysts on the left and right say negotiators are pushing the limits of what can be cut without more-fundamental structural changes to the programs.

TANF Block Grant No Model for Other Safety Net Programs - While some leading conservatives have hailed the Temporary Assistance for Needy Families (TANF) block grant as a model for reform for Medicaid and other safety net programs, TANF’s poor response to the recent recession highlights the weaknesses of a block-grant structure. Here’s the opening of our new report on this issue: Leading conservatives in Congress – including House Budget Committee Chairman Paul Ryan – as well as some conservative activists and commentators have recently cited welfare reform and the TANF block-grant structure as a model for reshaping the federal-state funding relationship in other programs for low-income families, such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps). The TANF block grant, however, is not the shining success that they suggest. The recent recession has exposed serious weaknesses in TANF’s ability to respond to significant changes in the economy, resulting largely from its block-grant structure. Under TANF, federal funding does not rise when caseloads increase in hard economic times – unlike TANF’s predecessor, Aid to Families with Dependent Children (AFDC), under which the federal government shared the costs of increased caseloads with the states.

The Bankrupt Claim of Medicare Bankruptcy - Some policymakers seek to justify radical changes in Medicare by claiming that the program is nearing “bankruptcy.”  Some of these same people also call for repealing the Affordable Care Act — a step that would make Medicare’s long-term finances much worse.  Here, from our new report on the issue, are three basic facts.

  1. Medicare is not nearing “bankruptcy.” The 2011 report of Medicare’s trustees finds that Medicare’s Hospital Insurance (HI) trust fund can pay 100 percent of the costs of the hospital insurance coverage that Medicare provides through 2024.  At that point, the payroll taxes and other revenue in the trust fund will still be sufficient to pay 90 percent of those costs. The other major parts of Medicare — Part B, which pays for physician and outpatient costs, and Part D, which pays for outpatient prescription drugs — cannot run short of funds. 
  2. The Affordable Care Act has significantly improved Medicare’s long-term outlook. The trustees project that the hospital insurance program faces a shortfall over the next 75 years equal to 0.79 percent of taxable payroll — that is, 0.79 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period.  The Medicare actuary estimates that if Congress repealed health reform, HI’s long-term shortfall would increase from 0.79 percent to 3.89 percent of taxable payroll (see chart). 
  3.   Medicare faces substantial long-term financial challenges stemming from the aging of the population and rising costs throughout the health care system.  But replacing it with private health insurance, as the House-passed budget would do, would represent a big step in the wrong direction.

The 'Don't Steal From Medicare For Socialized Medicine' Phenomenon - Underscoring the challenges of changing social policy, a study by a Cornell professor shows that half of Americans who get any kind of help from the federal government - including 40 percent of those on Medicare - believe they 'have not used a government social program.' Sigh. 'No one ever went broke underestimating the intelligence of the American public.' - H. L. Mencken"

US Survival Statistics - The above data are from the CDC and show the percentage of Americans surviving at each age for three different points in history - 1900, 1950, and 2006.  I would expect the pattern to be fairly similar for other developed countries.  The point, apropos of yesterday, is that there was a lot more progress from 1900 to 1950 than there was from 1950 to 2006.  Here's the same idea but broken out in more detail by decade: Again, you can see that progress has been getter slower and slower, and most of the progress has come from eliminating things that kill young people, with much less improvement in the chronic conditions that see off the middle aged and the elderly. But to achieve this slowing progress requires spending a larger and larger fraction of US GDP on healthcare: And note that GDP has itself been growing a few percent a year on average.  Maybe there'll be some massive breakthrough in the future that will change this situation, but there's sure no evidence of it in the data at present.  Rather than being immortal via being uploaded into a computer in a few decades, it seems a lot more likely that we'll all continue to die of chronic diseases somewhere between age 70 and 100.

Census: Share of children in US hits record low - Children now make up less of America's population than ever before, even with a boost from immigrant families. And when this generation grows up, it will become a shrinking work force that will have to support the nation's expanding elderly population — even as the government strains to cut spending for health care, pensions and much else.  The latest 2010 census data show that children of immigrants make up one in four people under 18, and are now the fastest-growing segment of the nation's youth, an indication that both legal and illegal immigrants as well as minority births are lifting the nation's population.Currently, the share of children in the U.S. is 24 percent, falling below the previous low of 26 percent of 1990. The share is projected to slip further, to 23 percent by 2050, even as the percentage of people 65 and older is expected to jump from 13 percent today to roughly 20 percent by 2050 due to the aging of baby boomers and beyond.

America’s inefficient health-care system: another look - America’s health-care system differs from its counterparts in other affluent nations in a number of ways: greater fragmentation among payers and price-setters, stronger incentives for overuse of advanced diagnostic and treatment technology, higher administrative costs, less access to care for some. We might therefore expect it to perform less efficiently — to achieve poorer health outcomes for a given amount of expenditure (see here, here, here). The following chart is sometimes viewed as evidence in favor of this hypothesis. The chart plots life expectancy at birth by per capita health expenditures as of 2007. Twenty affluent nations are included. Among these countries the U.S. spends by far the most money on health care and yet has the lowest life expectancy. Here’s a better way to compare. This chart shows trends in life expectancy by trends in health spending from 1970 to 2008. The United States still stands out, and in a big way. In every one of these countries rising health spending initially is associated with large increases in life expectancy, up to expenditures of about $500 per person and life expectancy of around 74 or 75 years. After that, the trendlines remain positively sloped but the payoff per dollar of extra spending diminishes somewhat. .

Most Hospitals Face Drug Shortages - The vast majority of U.S. hospitals have restricted the use of life-saving chemotherapy drugs and other critical-care medications in the past six months to cope with unprecedented shortages, according to a survey released Tuesday. More than 80% of hospitals surveyed by the American Hospital Association reported they had to delay treatment, and nearly 70% said patients received less effective substitute drugs. Three out of four hospitals reported rationing or restricting the use of drugs in short supply. For some drugs, such as a leukemia drug called cytarabine, there are no effective substitutes.  The survey of 820 hospitals was released by the AHA on Capitol Hill as part of push for legislative action. A separate survey commissioned by the American Society of Health-System Pharmacists estimated additional labor costs for hospitals to deal with the shortages at $216 million a year. Pharmacists and technicians spend about 17 hours a week managing drug shortages. Most of the drugs in question are generic and not highly profitable, and are now made by only one or two companies. Teva Pharmaceutical Industries Ltd. and Hospira Inc. are two of the bigger producers of generic drugs.

Mass psychosis in the US: How Big Pharma got Americans hooked on anti-psychotic drugs - Aljazeera - Has America become a nation of psychotics? You would certainly think so, based on the explosion in the use of antipsychotic medications. In 2008, with over $14 billion in sales, antipsychotics became the single top-selling therapeutic class of prescription drugs in the United States, surpassing drugs used to treat high cholesterol and acid reflux. Once upon a time, antipsychotics were reserved for a relatively small number of patients with hard-core psychiatric diagnoses - primarily schizophrenia and bipolar disorder - to treat such symptoms as delusions, hallucinations, or formal thought disorder. Today, it seems, everyone is taking antipsychotics. Parents are told that their unruly kids are in fact bipolar, and in need of anti-psychotics, while old people with dementia are dosed, in large numbers, with drugs once reserved largely for schizophrenics. Americans with symptoms ranging from chronic depression to anxiety to insomnia are now being prescribed anti-psychotics at rates that seem to indicate a national mass psychosis.

Bad bug: Gonorrhea strain resists all antibiotics - For several years, public health officials have been concerned that gonorrhea, one of the most prevalent STDs in the world, might become resistant 1to the last widely available antibiotics used to treat it, a class of drugs called cephalosporins.  Now, it has. In the space of one week, infectious disease specialists have received a one-two punch of bad news that confirms those fears, including the discovery of a new, cephalosporin-resistant strain of the bacteria. The percentage of U.S. gonorrhea cases that are resistant to the two cephalosporins used to treat it, cefixime, taken orally, and ceftriaxone, injected, is on the rise, according to the Centers for Disease Control and Prevention's latest Morbidity and Mortality Weekly Report. Then Sunday, a Japanese-European team presenting data at the International Society for Sexually Transmitted Disease Research meeting in Quebec City, Canada, publicly announced the discovery of a new strain of gonorrhea, H041, that displays a strong resistance to ceftriaxone.

Scientists unveil tools for rewriting the code of life - MIT and Harvard researchers have developed technologies that could be used to rewrite the genetic code of a living cell, allowing them to make large-scale edits to the cell’s genome. Such technology could enable scientists to design cells that build proteins not found in nature, or engineer bacteria that are resistant to any type of viral infection.  The technology, described in the July 15 issue of Science, can overwrite specific DNA sequences throughout the genome, similar to the find-and-replace function in word-processing programs. Using this approach, the researchers can make hundreds of targeted edits to the genome of E. coli, apparently without disrupting the cells’ function.

Welcome to the Age of GMO Industry Self-Regulation - As I reported last week, the USDA's recent surprise decision not to regulate genetically modified bluegrass poked yet more holes in an already-porous regime for overseeing GM crops—essentially to the point of regulatory collapse. There were a few important strands I wasn't able to wrestle into the story. The main one is an odd letter that USDA secretary Tom Vilksack sent Scotts Miracle-Gro as an addendum to the agency's response to Scott's GM bluegrass petition. Vilsack's letter, dated July 1, acknowledges concerns that GM bluegrass will contaminate non-GM bluegrass—that is, that the Roundup Ready gene will move through wind-blown pollen and work its way into non-modified varieties. This is the process known as "gene flow," and it has already been well-established for GM corn and other modified crops. Since bluegrass shows up (among other places) in cow pastures, organic dairy and beef farmers face the risk of suddenly having their animals nosh on fields full of a GM crop, which would jeopardize their organic status.  What's Vilsack's response? USDA therefore strongly encourages Scotts to discuss these concerns with various stakeholders during these early stages of research and development of this GE Kentucky bluegrass variety and thereby develop appropriate and effective stewardship measures to minimize commingling and gene flow between GE and non-GE Kentucky bluegrass.

All eyes on the potato genome - A global effort has finally cracked the complex genome of the potato, which is published today in Nature. The not-so-humble potato (Solanum tuberosum) is the world's fourth most important food crop and is vital for global food security. It has proved surprisingly economically stable compared with major grain crops such as rice, wheat and maize (corn): when wheat prices more than doubled on the international markets in 2008, and peaked again in 2010, potato markets stayed the same. Despite its importance, sequencing has been delayed by the genetic complexity of the common commercial potato. Its genome comprises more than 39,000 protein-coding genes, and it is a highly heterozygous autotetraploid - this means that it has four copies of every chromosome, and often considerable variation among the corresponding four copies of each gene. This is in contrast to the two copies in most human cells.

Corn-Crop Stunner for Morgan Stanley Means U.S. is Overestimating Supply -  U.S. corn supplies may be smaller than expected this year, according to analysts including Morgan Stanley’s Hussein Allidina who were surprised by a government forecast for the second-highest planted acreage since 1944. The U.S. Department of Agriculture raised its estimate on June 30 to 92.282 million acres, after all 31 analysts in a Bloomberg survey anticipated a decline because of flooding and unusually wet weather in the Midwest. The USDA report sent corn futures in Chicago to the lowest level this year and prompted Goldman Sachs Group Inc. to cut its price forecast. The USDA underestimated planting delays and the risk of yield loss before the harvest, Allidina said. The government plans to resurvey farmers in North Dakota, South Dakota, Minnesota and Montana, where some areas got triple the normal rainfall in May and June. There also are no signs that demand is slowing for corn from the U.S., the world’s largest grower and exporter, he said. “The acreage number, there is little doubt in my opinion, will be revised lower,” Allidina, Morgan Stanley’s head of commodity research in New York, said in an interview.

China's Hunger for Corn Turns Market on Ear - A Chinese buying spree for U.S. corn is putting on display the ability of Beijing to reshape grain markets as well as the cost of food globally. China this past week bought 540,000 metric tons of U.S. corn for delivery after August, according to the U.S. Department of Agriculture, more than the 500,000 tons the agency forecast that nation would buy in an entire year. The news drove corn prices higher on Thursday and Friday, to settle at about $6.75 a bushel, giving new life to the market after a three-week slump.  Now, traders believe that China is on the brink of buying millions of metric tons of U.S. corn, which would shatter the USDA forecast and keep U.S. grain supplies tight even as farmers tend to what is expected to be a record-large corn crop. U.S. grain companies have long fantasized about China turning to foreign crops to feed its population, but the West hasn't had much luck guessing when that would happen. Although China is one of the world's great agricultural powers—it is the world's largest producer of wheat and rice, and the second-largest producer of corn, behind the U.S.—Beijing's ability to feed its population is one of its most sensitive domestic political issues. Beijing has a policy of food self-sufficiency, stating that Chinese farmers will supply at least 95% of grains such as corn and wheat. But the country has recently emerged as the world's biggest importer of soybeans; devouring nearly a quarter of the soybeans grown in the U.S.

To Go With All That Meat, China Is Importing Unprecedented Amounts Of Cheese - A lot has been written about how China's growing taste for meat with rattle the global food supply. The region is also consuming incredible levels of cheese, according to Bloomberg Businessweek: Wholesale cheddar-cheese prices have rallied 49 percent this year as the U.S. shipped more than twice as much to Asia in the first four months of 2011 as a year earlier, U.S. Dairy Export Council data show. South Korea, the region’s biggest buyer, almost tripled imports while China’s more than doubled. The cheese boom pushed milk futures to a four-year high this week and is increasing costs for Kraft, the world’s second- largest food company, and Costco Wholesale Corp., the largest U.S. warehouse-club chain. Surging global demand for food will boost U.S. farm exports to a record $137 billion in the year ending on Sept. 30, the government said in May. This is great for farmers, mixed for vendors and, once again, bad for the world food supply.

Ethanol Now Consumes More Corn Than For Animal Feed for First Time, Corn Prices Reach Record High - Financial Times --  "U.S. ethanol refiners are consuming more domestic corn than livestock and poultry farmers for the first time, underscoring how a government-supported biofuels industry has contributed to surging grain demand. The U.S. Department of Agriculture estimated that in the year to August 31 ethanol producers will have consumed 5.05 billion bushels of corn, or more than 40% of last year’s harvest. Animal feed and residual demand accounted for 5 billion bushels."  As the chart above illustrates, this also "underscores how a government-supported biofuels industry has contributed to surging, record-high corn prices." 

Food and water - It seems likely enough that one of the largest global security issues in the next fifty years will be food and water. There is a brewing food crisis underway already, with prices for staple grains rising world wide, and poor countries are beginning to experience the consequences. But a crisis in fresh water seems not too far in the future as well. Both these necessities depend on inherently scarce resources: arable land and large sources of fresh water. Along with energy, these goods are crucial to every person and every country in the world; and this in turn suggests the possibility of serious conflict over these resources in the future.  Rising food prices create social unrest at the national level long before they lead to famine or malnutrition. International grain markets have been unstable over the past decade, with periodic upward spikes in prices. And grain riots have occurred as a consequence in a number of developing countries.  So what makes food and water a global security crisis? How does the possibility of dearth at the family level get transformed into the possibility of international conflict?

House GOP Moves to Gut the Clean Water Act - On Thursday, the House passed a bill that effectively eliminates federal oversight on water standards. The bill rolls back the Clean Water Act,  returning most oversight to the states, and passed with almost all Republicans and a handful of Democrats supporting it. The measure has a title that sounds kind of pleasant—the "Clean Water Cooperative Federalism Act of 2011"—but when you read it you realize it's really just an effort to return us to the days of the Cuyahoga River fire and Love Canal. crunched the numbers and found that interest groups that supported this motion—like the National Mining Association and the West Virginia Coal Association—gave 94 percent more money to House members who voted in favor of the bill than they did to those who voted against it. Those interest groups gave 61 times as much money ($13,588 total) to Democrats who voted for it as they gave to Dems who voted against it (just $224). There's a reason that a federal clean water protection plan was signed into law in 1972: States weren't doing a particular good job of keeping their rivers from catching fire as it was.

Water nationalisation: Is it such a bad idea? - In an interview by Newsweek in 1995, Ismail Serageldin, Vice-President for Environmental and Socially Sustainable Development at the World Bank, highlighted the rising importance of water in international disputes: “Many of the wars of this century were about oil, but those of the next century will be over water”.This column explores whether nationalising the provision of water can help avoid the sort of desperation that might make this statement come true. Part of the problem is attributed to the mismanagement and waste of water resources. The poor performance and corruption of publicly-owned water monopolies has left more than one billion people in developing countries without any access to clean and safe water, and 40% of the world's population without access to safe and clean sanitation services

Drought in 14 states means disaster for many — The heat and the drought are so bad in this southwest corner of Georgia that hogs can barely eat. Corn, a lucrative crop with a notorious thirst, is burning up in fields. Cotton plants are too weak to punch through soil so dry it might as well be pavement.  Farmers with the money and equipment to irrigate are running wells dry in the unseasonably early and particularly brutal national drought that some say could rival the Dust Bowl days.  “It’s horrible so far,” said Mike Newberry, a Georgia farmer who is trying grow cotton, corn and peanuts on a thousand acres. “There is no description for what we’ve been through since we started planting corn in March.”  The pain has spread across 14 states, from Florida, where severe water restrictions are in place, to Arizona, where ranchers could be forced to sell off entire herds of cattle because they simply can’t feed them.  In Texas, where the drought is the worst, virtually no part of the state has been untouched. City dwellers and ranchers have been tormented by excessive heat and high winds. As they have been in the southwest, wildfires are chewing through millions of acres.

THE GREAT DROUGHT OF 2011 Is America's Worst Since The Dust Bowl - Fourteen states are suffering from a drought so early and severe that it's already causing comparisons with the dust bowl years of the 1930's. According to a story in The New York Times, farmers are running wells dry, crops aren't growing and livestock can't be fed. David Miskus with the National Oceanic and Atmospheric Administration says the reason for the drought is simple. "A strong La Niña shut off the southern pipeline of moisture.” This year looks to be as bad as the record breaking drought of the 1950s. But this time, things are different in the drought belt. With states and towns short on cash and unemployment still high, the stress on the land and the people who rely on it for a living is being amplified by political and economic forces, state and local officials say. As a result, this drought is likely to have the cultural impact of the great 1930s drought, which hammered an already weakened nation. In the ’30s, you had the Depression and everything that happened with that, and drought on top,” . “The combination of those two things was devastating.”

US Drought 2011 Rivals the Dust Bowl - 25 Percent of the U.S. is suffering under a severe drought that some say will rival that of the ‘Dust Bowl’. The drought conditions began during 2010 and continue to worsen into the summer months of 2011. The states that are affected the worst are Texas, Oklahoma, New Mexico, Louisiana, and Georgia, followed by parts of Arizona, Colorado, Kansas, Arkansas, Mississippi, Alabama, Florida, South Carolina, and North Carolina. According to The New York Times, last month, the United States Department of Agriculture designated all 254 counties in Texas natural disaster areas, qualifying them for varying levels of federal relief. More than 30 percent of the state’s wheat fields might be lost, adding pressure to a crop in short supply globally.“Even if weather patterns shift and relief-giving rain comes, losses will surely head past $3 billion in Texas alone, state agricultural officials said. ”

Dust Bowl II? - There's a lot more drought news these days (they gave me a quote all the way at the end of the story).  By some measures, particularly the US Drought Monitor, things look pretty bad.But the time-series plot at the NY Times doesn't go back very far in time.  If it did, the current drought would look much less exceptional.  Also, the areas with severe drought are not very productive agricultural areas.  The midwestern bread basket looks just fine right now.  Although the productive Mississippi Valley looks dry, crops there are irrigated, which should mitigate the damages. Perhaps more importantly, standard drought indicators don't predict crop outcomes especially well.  I wish they'd emphasize extreme heat more than drought. I think we need our own "extreme heat indicator."  With any luck, we'll have one soon... A larger concern could be the heat wave about to hit the midwest.  This is a bad time for extreme heat because corn plants are probably close to the flowering stage.  If it turns out as hot or a bit hotter than expected, and if that heat sticks around awhile, it will start looking real bad for corn yield.

Big Water Users Get Flak in Drought - A record dry season left West Palm Beach, Fla., with just 22 days worth of fresh water last month, prompting new rules restricting residents to once-a-week watering schedules for lawns and plants. But with a 2.6-acre estate in neighboring Palm Beach that features a 37,000-square-foot home, a pool and lush tropical landscaping, Terry Allen Kramer is accustomed to using more than 120 times the amount of water consumed by the average customer in the region. And she isn’t alone. Some of her neighbors in this tony island enclave—whose water is supplied by West Palm Beach—use more than one million gallons of water a month to keep their properties green. That disparity has drawn calls for a water-pricing arrangement that includes surcharges, at least while drought conditions last, and has spawned tension between the tract-home crowd and the more affluent.

After Story on Monster Heat Wave, NBC Asks “What Explains This?” The Answer: “We’re Stuck in a Summer Pattern”! - The media loves to report on stories about how public concern about global warming is waning — even if the polling data doesn’t support that view. Ahh, but when it comes to actually connecting the dots between extreme weather we’re now experiencing and global warming, well, that story is apparently too hot to handle — even when the data does support that view. The southwest is in an uber-hot drought, but the NY Times says no dots to connect to global warming — a story Climate Central’s Andrew Freedman also criticized.  Similarly, no dots for the Arizona wildfire story or the Dust Bowl story.  And TP Green’s Brad Johnson noted that last week’s “CBS News piece on 2011′s extreme weather ignored global warming.” Now I don’t think that every story on extreme weather needs to mention climate change.  But it’s different if that story is on one or more record-smashing extreme events that scientists have linked to global warming AND if that story explicitly asks the question why are these events all happening at once.  Then yes, as NCAR’s Kevin Trenberth explained, “It is irresponsible not to mention climate change in stories that presume to say something about why all these storms” are happening.

Will North America be the New Middle East? -  The climate problem has moved from the abstract to the very real in the last 18 months.  Instead of charts and graphs about what will happen someday, we’ve got real-time video: first Russia burning, then Texas and Arizona on fire.  First Pakistan suffered a deluge, then Queensland, Australia, went underwater, and this spring and summer, it’s the Midwest that’s flooding at historic levels. The year 2010 saw the lowest volume of Arctic ice since scientists started to measure, more rainfall on land than any year in recorded history, and the lowest barometric pressure ever registered in the continental United States.  Measured on a planetary scale, 2010 tied 2005 as the warmest year in history.  Jeff Masters, probably the world’s most widely read meteorologist, calculated that the year featured the most extreme weather since at least 1816, when a giant volcano blew its top. Since we’re the volcano now, and likely to keep blowing, here’s his prognosis: “The ever-increasing amounts of heat-trapping gases humans are emitting into the air put tremendous pressure on the climate system to shift to a new, radically different, warmer state, and the extreme weather of 2010-2011 suggests that the transition is already well underway.”

Millions of African Climate Refugees Desperate for Food, Water - The worst drought in 60 years is causing a severe food crisis in East Africa. In Kenya, the world's largest refugee camp is overwhelmed as 10,000 climate refugees from across the drought-stricken region arrive each week seeking water, food and shelter. "The overcrowded Dadaab refugee camp in Garissa continues to receive new arrivals at alarming rates. The current number of registered refugees, 353,921, is four times its capacity," The epicenter of the drought has hit the poorest people in the region in an area straddling the borders of Kenya, Ethiopia and Somalia. The UN's Office for the Coordination of Humanitarian Affairs, OCHA, estimates that 10 million people across the Horn of Africa are caught in a deadly combination of failed rains and soaring global food prices. More than half of the refugees are children. Child malnutrition rates in some areas have climbed to twice the emergency threshold amid high food prices that have left families desperate, the agency says. Supplementary and therapeutic feeding programs are struggling to keep pace with the rising needs.

Monsanto and Gates Foundation Push GE Crops on Africa - Skimming the Agricultural Development section of the Bill and Melinda Gates Foundation web site is a feel-good experience: African farmers smile in a bright slide show of images amid descriptions of the foundation's fight against poverty and hunger. But biosafety activists in South Africa are calling a program funded by the Gates Foundation a "Trojan horse" to open the door for private agribusiness and genetically engineered (GE) seeds, including a drought-resistant corn that Monsanto hopes to have approved in the United States and abroad. The Water Efficient Maize for Africa (WEMA) program  was launched in 2008 with a $47 million grant from mega-rich philanthropists Warrant Buffet and Bill Gates. The program is supposed to help farmers in several African countries increase their yields with drought- and heat-tolerant corn varieties, but a report released last month by the African Centre for Biosafety claims WEMA is threatening Africa's food sovereignty and opening new markets for agribusiness giants like Monsanto. The Gates Foundation claims that biotechnology, GE crops and Western agricultural methods are needed to feed the world's growing population and programs like WEMA will help end poverty and hunger in the developing world.

The world’s largest human experiment part two: why Europeans (and everyone else) should be worried - In part one of what will become a long-running series I briefly outlined two recent papers published in the renowned peer-reviewed journal, Chemical Research in Toxicology, which revealed the horrifying effects of Monsanto’s best-selling glyphosate-based Roundup herbicide.  These two independent and highly rigorous studies found that Roundup caused critical cell damage including necrosis, a horrendous process in which cells break down and release their contents into the surrounding area, creating widespread, unmitigated cell death. The Monsanto formulation was found to be much more devastating to human cells than the glyphosate herbicide alone. The studies that comprised the bulk of part one of this series were published in an American journal, yet the people of the United States seem, on the whole, ignorant of the dangers of Roundup and the specifically modified Roundup Ready genetically modified seeds made to be able to absorb the toxin and live.

Is weedkiller killing trees? - An herbicide introduced last fall as an ideal weedkiller is now the chief suspect in the death of thousands of trees in central Ohio and beyond. "This is the lawn-care industry's Katrina," said landscaper Mark Wehinger, referring to the devastating 2005 hurricane. Wehinger, a partner in the Dublin lawn-care company Environmental Management, estimates that the herbicide has killed more than 1,000 of his customers' trees. The herbicide, called Imprelis, was introduced by DuPont in October but was not widely used until this spring. It was quickly adopted by lawn-care companies and golf-course managers after being touted for its effectiveness in fighting weeds such as dandelions and for its relatively small environmental footprint.  Industry sources estimate that 75 percent of central Ohio landscapers and golf courses switched to Imprelis this year. Three or four weeks after the herbicide was applied, workers and homeowners noticed that some trees' branch tips curled and browned, and needles began dropping from evergreens. Damage ranged from bare and twisted treetops to skeletal trees barren of needles.

New Herbicide Suspected in Tree Deaths - A recently approved herbicide called Imprelis1, widely used by landscapers because it was thought to be environmentally friendly, has emerged as the leading suspect in the deaths of thousands of Norway spruces, eastern white pines and other trees on lawns and golf courses across the country. Manufactured by DuPont and conditionally approved for sale last October by the federal Environmental Protection Agency2, Imprelis is used for killing broadleaf weeds like dandelion and clover and is sold to lawn care professionals only. Reports of dying trees started surfacing around Memorial Day, prompting an inquiry by DuPont scientists. “We are investigating the reports of these unfavorable tree symptoms,” said Kate Childress, a spokeswoman for DuPont. “Until this investigation is complete, it’s difficult to say what variables contributed to the symptoms.” DuPont continues to sell the product, which is registered for use in all states except California and New York. The company said that there were many places where the product had been used without damaging trees.

Forests soak up third of fossil fuel emissions: study - Forests play a larger role in Earth's climate system than previously suspected for both the risks from deforestation and the potential gains from regrowth, a benchmark study released Thursday has shown. The study, published in Science, provides the most accurate measure so far of the amount of greenhouse gases absorbed from the atmosphere by tropical, temperate and boreal forests, researchers said. "If you were to stop deforestation tomorrow, the world's established and regrowing forests would remove half of fossil fuel emissions," he told AFP, describing the findings as both "incredible" and "unexpected". Wooded areas across the planet soak up fully a third of the fossil fuels released into the atmosphere each year, some 2.4 billion tonnes of carbon, the study found. At the same time, the ongoing and barely constrained destruction of forests -- mainly in the tropics -- for food, fuel and development was shown to emit 2.9 billion tonnes of carbon annually, more than a quarter of all emissions stemming from human activity. Up to now, scientists have estimated that deforestation accounted for 12 to 20 percent of total greenhouse gas output.

Phosphate: A Critical Resource Misused and Now Running Out…If you wanted to really mess with the world’s food production, a good place to start would be Bou Craa, located in the desert miles from anywhere in the Western Sahara. They don’t grow much here, but Bou Craa is a mine containing one of the world’s largest reserves of phosphate rock. Most of us, most days, will eat some food grown on fields fertilized by phosphate rock from this mine. And there is no substitute. The Western Sahara is an occupied territory. In 1976, when Spanish colonialists left, its neighbor Morocco invaded, and has held it ever since. Most observers believe the vast phosphate deposits were the major reason that Morocco took an interest. Whatever the truth, the Polisario Front, a rebel movement the UN recognizes as the rightful representatives of the territory, would like it back. Not many people would call phosphate a critical issue or one with serious environmental consequences. But even leaving aside the resource politics of the Sahara, it is an absolutely vital resource for feeding the world. It is also a resource that could start running low within a couple of decades — and one we grossly misuse, pouring it across the planet and recycling virtually none of it.

The Scoop on Poop: Turning Sewage Sludge into Energy and Dollars - Waste water treatment is an expensive, energy-intensive process. But it’s also a potentially rich renewable energy source. A few fearless UpStarts are developing technologies and services that can convert dirty sewage sludge into clean energy, cutting pollution and costs while making a profit. Companies like BlackGold Biofuels, XEBEC, Quasar, and EnerTech are taking the most vile waste products that clog sewers and erode critical infrastructure, and are turning that waste into a valuable resource of renewable energy.  Likewise, cities and regions such as San Francisco CA, Rialto CA, and Quebec, Canada are harvesting sewage to power the processing plants and generate a new stream of income. The U.S. produces 7 million dry tons of waste per year.  Managing this massive amount of waste is a heavy burden that occupies about 20% of the EPA’s entire budget and 4% of the nation’s electricity use.  According to the EPA, America is having difficulty keeping up with the growing amount of sludge (i.e poop) that Americans produce, as waste water investment needs have been rising at $11 billion per year.  According to a Clean Watersheds Needs Survey report to Congress from 2008, waste-water utilities will need to invest $298 billion over the next two decades to keep up services.

Exxon submits draft clean-up plan in Montana oil spill - ExxonMobil on Saturday submitted a draft clean-up plan of its Yellowstone River oil spill to the U.S. Environmental Protection Agency. Few details were immediately available of the draft report submitted by Exxon, which according to an EPA order should spell out how the oil giant will monitor the environment, clean up pollutants, restore damaged areas on the Yellowstone and dispose of hazardous wastes. Exxon turned in the report, which was ordered by the EPA, as a congressional panel said it would examine pipeline safety following the rupture that released crude oil into one of America’s most pristine rivers just 150 miles downstream from Yellowstone National Park .

Summer Midwest flooding could rival 1993 as most expensive in history - Heavy rains this summer could trigger floods that would rival America's most expensive flood disaster of all-time, said NOAA in a press release yesterday. The most expensive flood in America occurred in 1993, when torrential summer rains caused a $25 billion flood along the Missouri River and surrounding regions of the Upper Midwest. Record 100-year flooding has already occurred along many stretches of the Missouri, Souris, James, North Platte, and other rivers in the Upper Midwest over the past month. With rivers running high and soils completely saturated this summer, just a small amount of rain could trigger more flooding, including areas that have already seen major to record flooding.  The Army Corps of Engineers announced this week that runoff into the Missouri River Basin above Souix City, Iowa during June was the highest single runoff month since records began in 1898. June 2011 runoff into the Missouri River Basin above Sioux City was 13.8 million acre feet (maf.) The previous record was 13.2 maf in April of 1952; May of this year now holds the record for 3rd greatest runoff, 10.5 maf. The May and June combined runoff totaled 24.3 maf, just short of the normal total annual runoff for the entire basin which is 24.8 maf. Four federal levees and 11 non-federal levees have breached or overtopped across Iowa, Kansas, Nebraska and Missouri so far this year along the Missouri River.

Experts expect more Missouri River levee failures - Several hundred thousand acres of rich Midwestern farmland and even some urban areas near the Missouri River are at risk of flooding this summer during months of historically high water that experts fear will overwhelm some levees, especially older ones. Engineers who have studied past floods say the earthen levees in rural areas are at greater risk. "Most of the levees are agricultural levees. They're not engineered. They're just dirt piled up," said David Rogers, an engineering professor at Missouri University of Science and Technology. So far, most levees have held along the 811 miles the Missouri travels from the last dam at Gavins Point in South Dakota to its confluence with the Mississippi River near St. Louis. The flooding thus far has covered more than 560,000 acres of mostly rural land, including nearly 447,000 acres of farmland. The water has forced some evacuations, but the extent of the damage to may not be clear until it recedes. That's not expected to happen until the fall as the Army Corps of Engineers says it needs to continue releasing substantial amounts of water from upstream reservoirs inundated with heavy spring rains and melt from an above average Rocky Mountain snowpack.

Soldiers watch over levees - The military helicopter's black shadow dances on an engorged Missouri River as the aircraft slowly loops the flood-encircled Fort Calhoun Nuclear Station — the same left-leaning turns the pilot navigated two days prior. Warrant Officer Boe Searight, 32, with the Nebraska Air National Guard wants the infrared camera mounted under the chopper to record similar flood scenes for levee experts on the ground to compare. He and his colleague Chief Warrant Officer 2 Eric Schriner also are looking for new signs of trouble for the flooded plant. “Keep daily eyes on it and see if anything changes,” says Schriner, 31. Far below, on mosquito-infested riverbanks, two-person crews with the Nebraska National Guard and Iowa National Guard patrol the Omaha and Council Bluffs levees in mud-caked boots.

Little hope of agreement on limiting global emissions - A former UN special envoy on climate change believes there is little likelihood of agreement on a new deal being reached before the Kyoto Protocol expires next year.Even if nations can find a successor to the binding agreement to curb carbon emissions, they will not be able to put it in place in time to take effect before Kyoto expires at the end of next year, said Dr Han Seung-Soo. Dr Han is also a former prime minister of South Korea who served as the UN special envoy until 2008.Representatives of almost 200 nations are to meet in South Africa in November for the last scheduled climate talks. "Even if we agree, it's too late," said Dr Han, who now serves on the UN's panel on global sustainability.

Climate Change Reducing Ocean’s Carbon Dioxide Uptake - We now know that as the ocean warms up, its ability to act as a carbon “sink” is diminishing.  We are seeing a dangerous, amplifying carbon-cycle feedback. The study’s news release explains: As one of the planet’s largest single carbon absorbers, the ocean takes up roughly one-third of all human carbon emissions, reducing atmospheric carbon dioxide and its associated global changes. But “whether the ocean can continue mopping up human-produced carbon at the same rate” wasn’t entirely clear. “Previous studies on the topic have yielded conflicting results.” Back in 2007, I reported that the long-feared saturation of one the world’s primary carbon sinks had apparently started.  Most, but not all, studies have suggested the ocean was either losing its ability to absorb CO2 or soon would (see list here). This new study, however, is different and more comprehensive than previous ones: The analysis differs from previous studies in its scope across both time and space. One of the biggest challenges in asking how climate is affecting the ocean is simply a lack of data, McKinley says, with available information clustered along shipping lanes and other areas where scientists can take advantage of existing boat traffic. With a dearth of other sampling sites, many studies have simply extrapolated trends from limited areas to broader swaths of the ocean.

A Look Into the Ocean’s Future - There is simply no exaggerating the importance of the oceans to earth’s overall ecological balance. Their health affects the health of all terrestrial life. A new report by an international coalition of marine scientists makes for grim reading. It concludes that the oceans are approaching irreversible, potentially catastrophic change.  The experts, convened by the International Program on the State of the Ocean and the International Union for Conservation of Nature, found that marine “degradation is now happening at a faster rate than predicted.” The oceans have warmed and become more acidic as they absorbed human-generated carbon dioxide from the atmosphere. They are also more oxygen-deprived, because of agricultural runoff and other anthropogenic causes. This deadly trio of conditions was present in previous mass extinctions, according to the report.  The oceans’ natural resilience has been seriously compromised. Pollution, habitat loss and overfishing are dangerous threats on their own. But when these factors converge, they can destroy marine ecosystems.

NSIDC, Report of July 6, 2011: Sea ice enters critical period of melt season - Arctic sea ice extent for June 2011 was the second lowest in the satellite data record since 1979, continuing the trend of declining summer ice cover. Average ice extent fell below that for June 2007, which had the lowest minimum ice extent at the end of summer. However, ice extent this year was greater than in June 2010. The sea ice has entered a critical period of the melt season: weather over the next few weeks will determine whether the Arctic sea ice cover will again approach record lows. June ice extent was lower than normal in much of the Arctic, but the Kara Sea region had particularly low ice extent. Ice has also started to break up off the coast of Alaska in the Beaufort Sea. These open water areas absorb the sun's energy, which will help to further ice melt through the summer.

Recent melt rates of Canadian Arctic ice caps are the highest in four millennia - There has been a rapid acceleration in ice-cap melt rates over the last few decades across the entire Canadian Arctic. Present melt rates exceed the past rates for many millennia. New shallow cores at old sites bring their melt series up-to-date. The melt-percentage series from the Devon Island and Agassiz (Ellesmere Island) ice caps are well correlated with the Devon net mass balance and show a large increase in melt since the middle 1990s. Arctic ice core melt series (latitude range of 67° to 81° N) show the last quarter century has seen the highest melt in two millennia and the Holocene-long Agassiz melt record shows the last 25 years has the highest melt in 4,200 years. The Agassiz melt rates since the middle 1990s resemble those of the early Holocene thermal maximum over 9,000 years ago.

Battered West Coast a lesson on warming, study finds - Severe erosion along the West Coast during the winter of 2009-2010 offers a look at, and lessons for, a warming world with rising sea levels, a new study finds.  A natural El Nino cycle that warms the Pacific Ocean produced those severe conditions, but computer models suggest that similar damage could come from sea level rise tied to human-caused greenhouse gases. "If these trends continue," U.S. government and academic experts wrote in their study, "the combination of large waves and higher water levels, particularly when enhanced by El Ninos, can be expected to be more frequent in the future, resulting in greater risk of coastal erosion, flooding, and cliff failures." Lead author Patrick Barnard, a coastal geologist with the U.S. Geological Survey, told that the study serves as a platform "to understand the broad coastal impact of conditions we are likely to experience more frequently in the future."  In California, the researchers found that winter wave energy was 20 percent above average for the years dating back to 1997, resulting in shoreline erosion that exceeded the average by 36 percent.

"Early warning of climate tipping points" - A climate 'tipping point' occurs when a small change in forcing triggers a strongly nonlinear response in the internal dynamics of part of the climate system, qualitatively changing its future state. Human-induced climate change could push several large-scale 'tipping elements' past a tipping point. Candidates include irreversible melt of the Greenland ice sheet, dieback of the Amazon rainforest and shift of the West African monsoon. Recent assessments give an increased probability of future tipping events, and the corresponding impacts are estimated to be large, making them significant risks. Recent work shows that early warning of an approaching climate tipping point is possible in principle, and could have considerable value in reducing the risk that they pose.

Economists Find Flaws in Federal Estimate of Climate Damage - Uncle Sam's estimate of the damage caused by each ton of carbon dioxide is fundamentally flawed and "grossly understates" the potential impacts of climate change, according to an analysis released July 12 by a group of economists. The study found the true cost of those emissions to be far beyond the $21 per ton derived by the federal government.The figure, commonly known as the "social cost of carbon," is used by federal agencies when weighing the costs and benefits of emissions-cutting regulations, such as air conditioner efficiency standards and greenhouse gas emissions limits for light trucks. A truer value, according the Economics for Equity and the Environment Network, an umbrella organization of economists who advocate for environmental protection, could be as high as $900 per ton—equivalent to adding $9 to each gallon of gas.  A second, separate report released July 12 buttressed the argument, finding that the government routinely underestimates the benefits of avoiding climate change when conducting cost-benefit analysis on regulations aimed at reducing greenhouse gas emissions.

Climate change could kill one in 10 species by end of the century -  Climate change is speeding up the rate at which animals and plants are becoming extinct. By the end of the century, one in 10 species could be on the verge of extinction because of the effects of global warming, a study has found. The findings support the view that the earth is currently experiencing a global mass extinction where the rate at which species are being lost is many times greater than the historical extinction rate. It is the sixth great mass extinction in the history of life on earth. Scientists said that previous predictions of how fast species are being lost because of climate change match the actual observed losses. They calculate that around 10 per cent of species alive today could be facing extinction by 2100. Ilya Maclean and Robert Wilson, of the University of Exeter, examined nearly 200 previous predictions about how climate change may affect the extinction of species and compared them with about 130 reports of changes already observed. The aim was to judge the accuracy of estimates made by scientists in the past about climate change predictions in relation to species extinction. They concluded that the observed threats matched well with the actual threats, based on real observations.

Fire to Become Increasingly Important Driver of Atmospheric Change in Warming World - How the frequency and intensity of wildfires and intentional biomass burning will change in a future climate requires closer scientific attention, according to CSIRO’s Dr Melita Keywood. Dr Keywood said it is likely that fire — one of nature’s primary carbon-cycling mechanisms — will become an increasingly important driver of atmospheric change as the world warms. “Understanding changes in the occurrence and magnitude of fires will be an important challenge for which there needs to be a clear focus on the tools and methodologies available to scientists to predict fire occurrence in a changing climate.” She said the link between long-term climate change and short-term variability in fire activity is complex, with multiple and potentially unknown feedbacks.

GOPer to DOE: Don't tell the kids! - A Republican congresswoman wants the Energy Department to stop promoting energy efficiency to kids. Rep. Sandy Adams (R-Fla.) has introduced an amendment to the Energy and Water spending bill that would limit funds for any DOE website “which disseminates information regarding energy efficiency and educational programs to children or adolescents.” The “Energy Kids!” site2 has a potpourri of energy-related information for kids, parents and teachers, ranging from science fair project suggestions to puzzles, an activity book and scavenger hunt. Kids can even earn a certificate3 for completing an expedition with “Energy Ant.” In introducing her amendment Thursday night, Adams flipped through blown-up charts of cartoons and jokes from various DOE websites, including the Energy Efficiency and Renewable Energy’s “Kids Saving Energy.”

Gillard Unveils Australia Carbon Tax to Cut Coal - Prime Minister Julia Gillard unveiled Australia’s first tax on greenhouse gas emissions from July 2012 to reduce dependence on fossil fuels and encourage renewable energy in the world’s biggest-coal exporting country.  Australia expects to raise some A$27.8 billion ($30 billion) in three years by making polluters pay an initial charge of A$23 ($24.74) a ton of carbon dioxide, then lifting the price by 2.5 percent a year, plus inflation, Gillard said today in Canberra. The tax will switch to a cap-and-trade system in 2015, while the plan provides about A$47 billion through 2020 to help households and industries and spur renewable energy.  Gillard, Australia’s least popular prime minister for 13 years, wants to cut emissions in the developed world’s biggest per-capita polluter to at least 5 percent below 2000 levels by 2020. She already has support from the Greens party and the three independent lawmakers needed to pass the program after plans to price carbon and tax profits of miners cost her predecessor, Kevin Rudd, his job.

Something for everyone - I’m glad we finally have a carbon price. My guess is that the roll out of the tax will be less contentious than currently appears. The leader of the opposition may want a referendum on the issue but in my view, but once it’s in place, the tax will give way to famous Australian pragmatism (you can’t unscramble an egg and other such wisdom) and simply become a part of the furniture. The package of reforms looks reasonably well balanced between the strictures of economic thought and political reality, which I have no real complaint about. After all, what should we expect from our politicians if not politics, which is the game of balancing interests. I can, therefore, live with specific industry assistance to manufacturers and the steel industry. There are national interest arguments for these industries that balance efficiency-based arguments. However, there are two significant points to the package that I do take issue with, basically because they undermine the entire reason for pricing carbon through markets in the first place.

Exploiting China's Coal While It's Still Underground - China is pushing forward with a new strategy for expanding access to coal energy that could also reduce its environmental impact: turning coal into clean-burning gases in the ground. At a U.K.-Chinese summit in Beijing late last month that included British prime minister David Cameron and Chinese premier Wen Jiabao, a $1.5-billion commercial partnership was launched to gasify six million tons of buried coal per year and generate 1,000 megawatts of power. The project in Inner Mongolia's Yi He coal field is being advanced by the state-owned China Energy Conservation and Environmental Protection Group, and U.K.-based Seamwell International, a newly formed developer of underground coal gasification (UCG) technology. UCG is promoted as a relatively clean method of exploiting coal seams that are too deep or thin to be tapped economically using conventional mining. Such seams in Inner Mongolia hold an estimated 280 billion tons, according to Seamwell. UCG can also generate electricity from coal with less air pollution, greenhouse gas emissions, and water consumption than existing coal-fired power plants.

Utility Shelves Ambitious Plan to Limit Carbon - A major American utility is shelving the nation’s most prominent effort to capture carbon dioxide from an existing coal1-burning power plant, dealing a severe blow to efforts to rein in emissions responsible for global warming2. American Electric Power3 has decided to table plans to build a full-scale carbon-capture plant at Mountaineer, a 31-year-old coal-fired plant in West Virginia4, where the company has successfully captured and buried carbon dioxide in a small pilot program for two years. The technology had been heralded as the quickest solution to help the coal industry weather tougher federal limits on greenhouse gas emissions. But Congressional inaction on climate change diminished the incentives that had spurred A.E.P. to take the leap.  Company officials, who plan an announcement on Thursday, said they were dropping the larger, $668 million project because they did not believe state regulators would let the company recover its costs by charging customers, thus leaving it no compelling regulatory or business reason to continue the program.  The federal Department of Energy had pledged to cover half the cost, but A.E.P. said it was unwilling to spend the remainder in a political climate that had changed strikingly since it began the project.

Coal Industry Commits Suicide, NY Times Gets Story Half Right - Well, it’s good to see the N. Y. Times get the story half right.  A major American utility is shelving the nation’s most prominent effort to capture carbon dioxide from an existing coal-burning power plant, dealing a severe blow to efforts to rein in emissions responsible for global warming. Yes, “American Electric Power has decided to table plans to build a full-scale carbon-capture plant” that would also bury CO2 underground.  The real story here, which the NYT glosses over, is that the only hope for the coal industry (at least in a world that is itself not suicidal) is an immediate, very well-funded effort to demonstrate and deploy carbon capture and storage, as I wrote in December 2008 [see "the coal industry chooses (assisted) suicide"]. This will take at least 10-years from the time the industry (and government) gets serious — and probably much longer (see “Is coal with carbon capture and storage a core climate solution?“). The NY Times story has a much more egregious error: President Obama spent his first year in office pushing a goal of an 80 percent reduction in climate-altering emissions by 2050, a target that could be met only with widespread adoption of carbon-capture and storage at coal plants around the country. Says who?

Why America needs to move beyond coal: Five economic indicators - Coal still plays a dominant role in the U.S. energy mix, accounting for almost 45% of American electricity production. But the economics of coal continue to change, making the resource look far less attractive today than it once was.

    • 1. While coal prices become more volatile, natural gas prices appear more stable (and the cost of renewable energy is dropping fast).
    • 2. The delivered price of coal increased three times faster than inflation over the past five years.
    • 3. States dependent on coal had the highest electricity price increase in the past five years.
    • 4. U.S. Coal mining productivity has declined 20% since 2000.
    • 5. Rising international demand and recognition of environmental costs will continue to drive coal prices upward.

That debt ceiling - Economists don’t agree on much. They do agree that not raising the U.S. debt ceiling would be somewhere near “cataclysmic.” The only sensible question is around striking a deal between raising taxes and cutting government spending. Most likely it will need to be a combination of all of the above. Economists (and scientists) don’t agree on much. They do agree that not lowering the U.S. (and global) carbon debt ceiling would be somewhere near “cataclysmic.” The only sensible question is around striking a deal between raising carbon taxes, capping emissions directly, investing in research & development, or some more indirect measures. Most likely it will need to be a combination of all of the above

Putin calls for international consensus on greenhouse gases…The global community must reach an agreement on cutting greenhouse gas emissions and Russia will continue negotiations to that end, Prime Minister Vladimir Putin said on Friday. "Though the negotiations were held in a very tough manner, they were still unsuccessful. We will continue the talks, because I personally think that the global community should go to the end and agree on common rules in this sphere, without shifting the burden to anybody else, but sharing it," Putin told workers at the MMK steelworks in Magnitogorsk during a visit. The first period set out in the Kyoto protocol, in which levels of greenhouse gas emissions are to be cut by the developed nations, ends in 2012. Developed and developing countries have not yet agreed on a further binding climate change regulation regime. The next session of the United Nations Framework Convention on Climate Change (UNFCCC) will be held at the end of 2011 in South Africa's Durban.

'Aggressive' decay eats at power-plant scrubbers - The Electric Power Research Institute, which is funded by utility companies, is investigating reports of "aggressive" corrosion in scrubbers across the nation. "Our findings, so far, show it's fairly widespread through the industry," said John Shingledecker, senior project manager in the research institute's fossil materials and repair program. Without a fix, corrosion threatens plant shutdowns and costly repairs, both of which could affect Ohioans' power bills. Scrubbers are key weapons in the fight to reduce pollution at coal-fired power plants. They were installed to help meet a federal mandate that coal-fired power plants cut 71percent of their sulfur-dioxide emissions by 2014. ... There are about 360 operating scrubbers at U.S. power plants. They are used mainly to catch sulfur dioxide, a key ingredient in the smog and soot pollution that plagues U.S. cities, including Columbus.

An Aggressive Ruling on Clean Air But Another Dirty Water Act - The Environmental Protection Agency [last] Thursday issued a welcome and overdue rule compelling power plants in 27 states and the District of Columbia to reduce smokestack emissions that pollute the air and poison forests, lakes and streams across the eastern United States. The regulation reflects the E.P.A.’s determination to carry out its mandates under the Clean Air Act despite fierce Congressional opposition, and bodes well for progress on a host of other regulatory challenges the agency faces. That’s the good news from a NY Times editorial this week.  The good EPA move on clean air, however, was matched by a bad  Congressional move on clean water, as another NYT editorial explains:Republicans in the House of Representatives — with the support of some key Democrats — seem determined to destroy the intricate and essential web of laws and regulations protecting the country’s environment. Their latest target is the hugely successful 1972 Clean Water Act. On Wednesday, the House approved the cynically named “Clean Water Cooperative Federalism Act,” a bill that would strip the Environmental Protection Agency of its authority to oversee state water quality standards and to take action when the states fail to measure up.

High levels of radiation detected in Northwest rainwater -- A Seattle nuclear watchdog group is accusing the federal government of failing to keep the public informed of radiation from the Fukushima nuclear disaster. In the days following the earthquake and tsunami in Japan, the U.S. began monitoring radiation from Japan's leaking nuclear power plants. Most of the public attention went to the air monitoring which showed little or no radiation coming our way. But things were different on the rain water side. "The level that was detected on March 24 was 41 times the drinking water standard," said Gerry Pollet from Heart of America Northwest. He reviewed Iodine 131 numbers released by the Environmental Protection Agency last spring. "Our government said no health levels, no health levels were exceeded.When in fact the rain water in the Northwest is reaching levels 130 times the drinking water standards," said Pollet. Elevated rain water samples were collected in Portland, Olympia and Boise, which had the highest.

Radioactive waste leaks at nuclear plant - Federal nuclear safety inspectors are investigating a radioactive waste leak at SCE&G’s atomic power plant in Fairfield County. An estimated 100 gallons of liquid waste spilled at the utility’s V.C. Summer plant, apparently from a pipe that leaked, according to the U.S. Nuclear Regulatory Commission. The discovery was made late last week. State, federal and SCE&G officials say they have found no signs the material left the SCE&G nuclear plant or posed any threat to the public, but they are continuing to investigate.  Roger Hannah, a spokesman for the NRC, said the spill appears to have been linked to a failing pipe that led to a discharge point at the facility. “It’s something we’re looking at,’’ Hannah said. “Anytime you have a leaking pipe, it’s something you don’t want.’’

‘Melt-through’ at Fukushima? / Govt report to IAEA suggests situation worse than meltdown - Nuclear fuel in three reactors at the Fukushima No. 1 nuclear plant has possibly melted through pressure vessels and accumulated at the bottom of outer containment vessels, according to a government report obtained Tuesday by The Yomiuri Shimbun. A "melt-through"--when melted nuclear fuel leaks from the bottom of damaged reactor pressure vessels into containment vessels--is far worse than a core meltdown and is the worst possibility in a nuclear accident.The possibility of the situation at the plant's Nos. 1 to 3 reactors was raised in a report that is to be submitted to the International Atomic Energy Agency. If the report is released as is, it would be the first official recognition that a melt-through has occurred.

Worse than a ‘melt through’ – a ‘melt out’? — See Graphic  - Unimaginable “terrible reality”, but might be going on deep inside the reactor building basement —. International Atomic Energy Agency released on July 6 (IAEA) report to the government in Unit 1 to 3 “through” molten acknowledged that possibility. This is the core melt (melt down), the nuclear fuel, penetrate the reactor pressure vessel, they pouring outside containment to further “melt-through” but that the state (see right).But “at the Fukushima Daiichi more desperate situation,” you said, is Assistant Professor Hiroaki Koide of Kyoto University Reactor. “The melt-lump of uranium is the fuel melted, defeating even the bottom of the containment, and I believe that it is not at that Meri込N on the ground melted the concrete beneath the reactor building. Part of the core of nuclear fuel soluble exceed the 2800 ℃ (can not be measured because the current temperature of the high radiation dose.) weight of the melt is also 100t. steel pressure vessel and containment would melt at about 1500 ℃ from the melt should have fallen on the floor of the reactor building basement. some of which eroded the floor of the basement, some would have melted the contaminated water to flow to the surrounding walls”

Japan’s Nuclear Crisis Extends To Agriculture Sector - Contaminated meat with radioactive cesium was found to have been distributed to at least 11 prefectures throughout Japan, of which some has already been eaten, officials told Kyodo news agency Tuesday. Even though government officials have stated that consuming small amounts of the contaminated beef would not harm human health, Japan’s nuclear crisis has continued to worsen and growing concerns are further spreading, as nationals fear immediate and long-term impacts. Among the 11 prefectures to which the meat of the six contaminated cows was shipped from the Fukushima Prefecture farm are Tokyo, Shizuoka, Osaka, Kanagawa and Ehime prefectures, as well as Hokkaido, Aichi, Tokushima and Kochi. Officials have confirmed that some of it had already been eaten in restaurants and sold in supermarkets. On Monday, high levels of radioactive cesium were detected in straw fed to cattle at a farm in Minamisoma, Fukushima Prefecture with an average of 75,000 becquerels of the radioactive isotope per kilogram (2.25 pounds), which is about 56 times the allowable limit.

High levels of radiation turn up in Japanese beef -Japanese beef from cattle raised in the region of the country’s damaged nuclear reactors registered high levels of radioactive cesium, officials in Tokyo said, prompting Japan’s central government to mandate an expansion of its meat monitoring program. The Tokyo metropolitan government said this weekend that testing had detected radiation levels of three to six times the legal limit in beef from 11 cows shipped to Tokyo this month from Minamisoma city, located just outside the 20-mile no-go radius around the Fukushima Daiichi power plant. The level of contamination is not high enough to cause any acute symptoms even if consumed. The limits are set according to risk from prolonged consumption. But the finding suggests gaps in Japan’s food safety program in the wake of the earthquake and tsunami disaster that battered the nuclear plants in March. “The message is 'get your safety survey protocols together otherwise people will simply not buy from that area,'

Radiation Raises Food-Safety Concerns in Japan - Beef contaminated by radiation from Fukushima prefecture has been eaten by consumers in Japan, intensifying food-safety concerns and stoking criticism against a government testing program that checks only selected products.  About 437 kilograms (963 pounds) of beef from a farm in Minami-Soma city, 30 kilometers from the stricken Fukushima Dai- Ichi nuclear station, was consumed in eight prefectures, according to the Tokyo metropolitan government, which detected the first case of tainted beef from the farm earlier this month.  Four months after a record earthquake and tsunami crippled the power plant in Fukushima, site of the worst nuclear disaster since Chernobyl, local government offices are struggling to check every farm product due to a shortage of testing equipment, staff and budget. Prolonged exposure to radiation in the air, ground and food can cause leukemia and other cancers, according to the London-based World Nuclear Association.  “The government’s mishandling of the issue is deepening food-safety concerns,”

Radioactive meat circulating on Japanese market - A Japanese health official downplayed the dangers Tuesday after cesium contaminated meat from six Fukushima cows was delivered to Japanese markets and probably ingested. Goshi Hosono, state minister in charge of consumer affairs and food-safety, said he hoped to head off any overreactions. 'If we were to eat the meat everyday, then it would probably be dangerous,' Hosono said at a news conference Tuesday. 'But if it is consumed only in small portions, I don't think it would have any long-lasting effects on the human body.' The meat, delivered late last month, has made its way to consumers and most likely has been ingested, the Tokyo Metropolitan Government said Monday evening. This was preceded by another recent discovery of radiation in the meat of 11 cows delivered to Tokyo from the same farm."

Beef Contamination Spreads in Japan After Fukushima Radiation Taints Straw - More beef from cattle in Japan that ate straw tainted by radiation has found its way into the food supply, deepening concern about the safety of meat as the country struggles to contain the spread of the contamination. Cattle at the farm in Asakawa, about 60 kilometers from the crippled Fukushima Dai-Ichi nuclear station, were fed with rice straw containing 97,000 becquerels of cesium per kilogram, compared with the government standard of 300 becquerels, said Hidenori Ohtani at the livestock division of the Fukushima prefectural government. The farm shipped 42 cattle in the past three months to slaughterhouses in Tokyo, Kanagawa, Chiba and Miyagi prefectures, which were processed into meat and sold to distributors, he said. The discovery comes a week after the Tokyo metropolitan government said it detected beef tainted by radiation for the first time, underlining the severity of contamination caused by the stricken station in Fukushima, site of the worst nuclear disaster since Chernobyl. Japan’s government may restrict beef shipments from all of Fukushima prefecture after the finding, Kyodo News reported today, without citing anyone.

Fukushima cleanup may take decades -- Prime Minister Naoto Kan predicted Saturday that decades from now Japan will still be struggling with the aftermath of the Fukushima nuclear disaster. Kan's statement was the first government acknowledgment of how long the cleanup process is likely to be, the Russian news agency RIA Novosti reported. Tokyo Electric Power, which owns the reactors hit by the March 11 earthquake, said removing the melted nuclear fuel will only begin in 2021, NHK, the Japanese public broadcasting company, said. The Japan Industrial Atomic Forum reported almost two-thirds of the country's 54 nuclear reactors are out of service, the highest ratio since 1979, Japan Today said. That was when many reactors suspended operations following the near-meltdown at Three Mile Island in Pennsylvania.

Japanese Prime Minister Naoto Kan Calls For Phase-Out Of Nuclear Power - Japanese Prime Minister Naoto Kan said in a television address to the country Wednesday that Japan1 should decrease and eventually eliminate its reliance on nuclear energy. “We will aim to bring about a society that can exist without nuclear power,” he said.  The statement was Kan’s clearest yet about the appropriate long-term energy goals for a country dealing with the worst nuclear crisis in a quarter-century2. But Kan did not address the strategy behind such a phase-out or its potential economic toll.  For four months now — as the earthquake-damaged Fukushima Daiichi nuclear plant 3has leaked radiation — nuclear energy and its future4 here have polarized Japan, with thousands of protesters demanding its abandonment and some government officials insisting it remains necessary. Before this week, Kan had remained publicly ambivalent, calling for a boost in renewable energy sources but giving few clues about the government’s views on long-term nuclear reliance.

Japan's Nuclear Crisis: A Question Of Trust - TWO weeks after Japan’s trade minister gave the all-clear to restart nuclear-power plants that had been shut for maintenance, Naoto Kan, the prime minister, ordered on July 6th that they should first undergo rigorous stress tests. The inverted sequence showed that only a cursory examination had taken place. Hideo Kishimoto, a mayor in southwestern Japan who had earlier given his local power company permission to restart the Genkai nuclear-power plant, retracted his approval. “I can’t trust the government,” he said.  It is a refrain heard throughout Japan, aimed not only at national politicians but also at the power companies, bureaucrats, academics and the media who had given assurances that the country’s nuclear plants were disaster-proof. A country that has long been governed by informal bonds of trust is seeing them start to fray. The meltdown at the Fukushima Dai-ichi power plant is forcing a re-examination of Japan’s most influential institutions.

Reactor reaction: 5 countries joining Japan in rethinking nuclear energy - It can hardly come as a surprise that embattled Japanese Prime Minister Naoto Kan announced today his country would move away from nuclear fuel and toward renewable energy sources like solar, wind, and biomass. After all, the March 11 earthquake and tsunami brought the country to the brink of nuclear disaster. And the area around the Fukushima nuclear plant remains a no-go zone four months later (check out this ebook from Foreign Policy on Japan's post-Fukushima future). Anti-nuclear sentiment has grown ever since -- making it a major political issue.  There are legitimate questions, nevertheless, about whether Japan could actually shift away from nuclear power. Japan is incredibly dependent on nuclear energy -- the country's 54 nuclear reactors account for 30 percent of its electricity; pre-earthquake estimates noted that the share to grow to 40 percent by 2017 and 50 percent by 2030. The prime minister today offered few details on how he'll transition away from nuclear reliance.    Japan joins a list of nuclear countries that have grown increasingly skittish about the controversial energy source since the disaster in March:

Spiegel: The Western Culture of Waste: We Should Be Outraged! At Ourselves - Since the announcement of Germany's new nuclear phase-out and its coming energy revolution, a specter has haunted the country. It's called "eco-dictatorship." The people warning us against its dangers, ironically, have not been known as passionate defenders of the democratic process. Germans want to end nuclear power and turn to renewable energy, but they keep buying SUVs. Global carbon emissions and oil consumption have risen sharply over the last two environmentally conscious decades -- and the trends will continue, as long as Westerners keep discovering new "needs."

Ukraine Tackles its Nuclear Waste Problem - Government officials cut the ribbon at the opening ceremony of a complex for the production of steel drums and iron-concrete containers to be used for storing Chernobyl toxic waste. The factory is in Slavutich, a city 35 miles from the Chernobyl nuclear power station. Waste from the Chernobyl complex will be stored in the the containers at a special disposal “Vector.” [Igor Rudnicki, Head of Ukrtransbud Corporation]: “They they will be placed in special storage facilities, which will be closed with concrete. Some will be concreted, some will be completely covered with a layer of soil. In this way the waste will be stored for 300 years.” The complex plans to produce over 34 thousand steel drums and 700 iron-concrete containers a year.

Chesapeake to spend $1 billion to hasten natural gas adoption as fuel - Chesapeake Energy, a major producer of natural gas from shale, said it would invest $1 billion over 10 years in companies to hasten the adoption of natural gas as a fuel for trucks and cars. It said it had purchased $150 million of convertible bonds in Clean Energy Fuels Corp., where natural gas promoter T. Boone Pickens owns a major stake and sits on the board. Chesapeake chief executive Aubrey K. McClendon said it would help underwrite 150 liquefied natural gas refueling stations along highway trucking routes. Chesapeake also paid $155 million for a 50 percent ownership stake in Sundrop Fuels, a privately held cellulosic biofuels company in Colorado that will use the funds to build a biomass-based gasoline plant. That plant will use natural gas as a feedstock.

Pickens Losing to Koch in Natural-Gas Feud - T. Boone Pickens, who’s been saying for more than a year that Congress was poised to pass his plan to subsidize natural-gas vehicles, may not have been expecting opposition led by fellow billionaire Charles Koch. Pickens, 83, the chairman and chief executive officer of BP Capital LLC., a Dallas-based energy investment fund, has spent $82 million since July 2008 promoting the use of domestically produced natural gas to power cars and trucks, according to Jay Rosser, his spokesman.  Koch Industries Inc., Dow Chemical Co. (DOW) and the American Conservative Union all have weighed in since May against a Pickens-backed bill that would provide tax breaks to purchase natural-gas fueled trucks. The critics say it would provide unwarranted subsidies to companies such as Clean Energy Fuels Corp. (CLNE), a Seal Beach, California, maker of natural-gas fueling stations in which Pickens is the biggest shareholder. “We do not believe government should be picking ‘winners and losers’ in the marketplace,”

Fluids From Hydraulic Fracturing Killed Trees, Study Says - A study that argues for more research into the safe disposal of chemical-laced wastewater resulting from natural gas drilling found that a patch of national forest in West Virginia suffered quick and serious loss of vegetation after it was sprayed with hydraulic fracturing fluids. The study, by researchers from the United States Forest Service, was published this month in the Journal of Environmental Quality. It said that two years after liquids were legally spread on a section of the Fernow Experimental Forest, within the Monongahela National Forest, more than half of the trees in the affected area were dead. The researchers said that the disposal section was less than half an acre in size “to minimize the area of forest potentially affected by the fluid application.” About 75,000 gallons were applied over two days in June 2008. The study’s author, Mary Beth Adams, a soil scientist, said that if the same amount had been spread over a larger area, less environmental damage to the forest would probably have been resulted. She said that there was little information in the scientific literature about such impacts and that the study indicated that “there are potential effects of natural gas development that we didn’t expect.”

Get ready for the North American gas shock - Stoneleigh: In this era of global bubble-blowing we have seen speculative fever flourish in relation to many different asset classes. At the peak of a bubble the euphoria can be palpable, and the perception that 'it's different this time' confers a sense of invulnerability that justifies throwing caution to the wind.  Speculators cease to worry about how much they pay for an asset, since they think someone else will always pay more later. Unfortunately for those caught up in powerful swings of herding behaviour, it's never different this time. Boom inevitably turns into bust, because the supply of Greater Fools is not infinite after all. We have been witnessing just such a dynamic playing out in the North American natural gas market in recent years, with a particular focus on the shale gas that is touted as being the key to energy independence. The hype over a supposed 100 year supply of cheap, clean energy has been pervasive. Vast sums of money have been committed as a result, despite very little critical evaluation of the real world prospects, at least in the public domain.  Conventional supplies of natural gas peaked 10 years ago, and concern over supply began a few years later. Considering that natural gas provides some 20% of electricity and 60% of home heating (more in the north east), it is not surprising that apparently imminent supply problems would have been a cause for concern.

Canada Has Plenty of Oil, but Does the U.S. Want It? - Alberta—In a 21st-century oil boom, this sparsely populated Canadian province has become one of the world's newest petroleum powerhouses. Foreign investors are piling in, and Alberta plans to double production over the next decade. The problem is that the U.S.—the biggest consumer of Alberta petroleum—may not want the additional oil. Most of Alberta's 1.5 million barrels of daily exports are extracted from oil sands, or bitumen. Turning this tar-like substance into oil is an energy-intensive process that generates lots of carbon dioxide, a gas suspected to contribute to global warming. Almost all the oil produced ends up in the U.S., where environmentalists and some powerful Democrats have lined up against importing any more of the stuff. Washington remains ambivalent about a proposed expansion of a pipeline that could nearly double exports from Alberta to the U.S. Another line—proposed to pipe Alberta oil to the Pacific, where it could be shipped to Asian markets—is opposed by native Canadian groups. "Alberta will be in a very difficult position" if either one of the two pipelines don't go forward, Alberta's Energy Minister Ron Liepert said. "By 2020, we'll be landlocked in bitumen. We have to get it to market, and right now we don't have the infrastructure in place."

Path appears clear for oil pipeline from Canada - At a town hall meeting in Pennsylvania in early April, President Obama was asked about a bitter fight between industry and environmentalists over a proposed $7-billion, 2,000-mile pipeline to ship crude from Alberta’s oil sands to Gulf Coast refineries. Because the pipeline crosses the U.S.-Canadian border, a decision on a permit is pending at the State Department. Obama avowed neutrality: “If it looks like I’m putting my fingers on the scale before the science is done, then people may question the merits of the decision later on.” But a 2009 cable from the U.S. Embassy in Ottawa suggests the scale may have already been tipped. The cable, obtained by WikiLeaks, describes the State Department’s then-energy envoy, David Goldwyn, as having “alleviated” Canadian officials’ concerns about getting their crude into the U.S. It also said he had instructed them in improving “oil sands messaging,” including “increasing visibility and accessibility of more positive news stories.”

‘The Watchdog’: House Committee Wants To Drop Proposal To Expand Offshore Drilling Oversight - House Republicans want to drop one of the key components of the Interior Department’s overhaul of the troubled agency responsible for oversight of offshore drilling — expanding the enforcement of regulations to contractors. Though BP and rig owner Transocean have been largely blamed for last year’s Deepwater Horizon disaster, contractor Halliburton has come under scrutiny for its cementing work on the job. The presidential commission investigating the tragedy uncovered documents showing that several separate tests by Halliburton indicated the cement was “unstable,” yet didn’t report all of those results to BP. Halliburton, which has claimed that those were preliminary tests, did admit that it did not perform a stability test on the actual cement recipe used on the well. The oil services giant has rejected blame for the failed cement job and pointed the finger at BP.

BP calls on U.S. to halt payments for oil spill damages - After approximately $4.5 billion paid out to victims of BP's record-breaking Gulf of Mexico oil spill, the company is urging U.S. officials with the Gulf Coast Claims Facility to halt further compensation. Citing an improving Gulf coast economy, the British oil giant said in a 29-page letter (PDF) released to the press that it does not expect any more residents or businesses to "incur a future loss related to the oil spill." "Multiple lines of evidence demonstrate that, to the extent that portions of the Gulf economy were impacted by the spill, recovery had occurred by the end of 2010, and that positive economic performance continues into 2011, with 2011 economic metrics exceeding pre-spill performance," the company added. Despite BP's rosy outlook on the future of its Gulf damage payments, many fishermen claim to still be experiencing the spill's ill-effects, with harvests of crab and oysters plunging significantly over last season.

Lies, Damned Lies, and Big Oil Statistics  -There are now three kinds of lies: lies, damned lies, and big oil statistics, to update the famous quip by noted 19th century British Prime Minister Benjamin Disraeli. Once again an analysis funded by the oil industry of proposals to eliminate some of their large tax breaks finds that this would be bad for the oil industry and the rest of us, too. And once again these results are sharply contradicted by the official analyses of nonpartisan government economists. The latest biased report from an oil-industry-funded outfit is “Repealing Tax Deductions on U.S. Energy Companies Exacerbates Federal Deficit, Increases U.S. Debt” by Joseph Mason, a Professor at Louisiana State University. The report was “prepared with the support of the American Energy Alliance,” which receives oil industry funds. The study unabashedly relies on other oil-industry funded research to support its false claims. In the report, Mason attempts to evaluate the impact of eliminating two special subsidies enjoyed by the oil industry:

Trading away cheaper petrol - A LATE return to a subject I blogged on a few weeks ago—the surprising decision by America's Department of Energy to allow traders to bid for crude oil released from America’s Strategic Petroleum Reserve (SPR).  The announcement of the SPR release on June 24th caused the price of Louisiana Light Sweet (LLS), the type of oil held in the SPR, to fall $7 in a week. The price-fall was short lived; LLS has since exceeded its pre-SPR release price (see chart, which starts on June 22nd). The American petrol-pump price followed LLS down in late June before returning to its pre-SPR release level last week. The Department of Energy releases petrol-pump prices weekly. The next data due on Monday will tell us whether pump prices have followed LLS above its pre-SPR level.

Petroleum Propaganda 101: Develop vs Deplete by Richard Heinberg  - The following POP QUIZ is brought to you in part by the American Petroleum Institute: Which sounds better? A) The Obama administration should be doing more to develop U.S. oil-and-gas reserves. Or, B) The Obama administration should be doing more to deplete U.S. oil-and-gas reserves.  If you answered “A” give yourself a pat on the back. But you’ll also want to brace for impact, because you fell right into a trap built by the API and its Republican friends like House Speaker John Boehner (R-Ohio) who endorsed development with patriotic gusto on Monday, July 4. Of course we should do more to develop our resources. Sounds great! How can any sane person take issue with that? It’s a trick question. Let me explain: What does it mean to develop non-renewable resources? Extract, mine, dig up, disperse, burn. When we develop muscles or skills, we have more at the end of the process than when we started. When we develop non-renewable resources, we have . . . less.

US Oil Consumption -The above graph shows US weekly petroleum products supplied (EIA) along with a nine week centered moving average to try to smooth out the noise a bit.  Data begin in 2000 and go through the week of July 1st 2011.  You can see that the high prices since the beginning of 2011 were causing a contraction in oil consumed (and I assume this was important in the economic slowdown in Q2 of 2011).  Since the end of April, when prices peaked, consumption has started to rise again.  Here's a closer-in graph just showing 2009-2011, along with prices: Absent other developments*, I'd expect that a continuation of this trend will lead to an improvement in the US economy in the second half, which in turn will lead to higher oil prices again.

Saudi Oil Production Up 450kbd in June  - At least according to the OPEC MOMR out this morning.  Well, well, well - maybe we really are going to see 10mbd in July, notwithstanding my increasing scepticism.  Or then again, who knows? The graph above shows five different estimates of Saudi oil production (left scale) with the average being the heavy black line.  The red line (right scale) is the oil rig count in country according to Baker Hughes. KSA is now back up to the oil production level immediately before the great recession.  Historically, they have never maintained this level very long, yet alone gone beyond it.  It will be interesting to see if they can now do so.  (They brought on a couple of mb/d of new projects in the period 2005-2008, but some of us think a lot of that might have only offset declines in older fields).

Refiners in northeast Asia decline more Saudi crude (Reuters) - Saudi Arabia's offer of additional crude in August drew scant interest from refiners across northeast Asia who declined supplies beyond contracted volumes, while one buyer each in India and Southeast Asia accepted extra barrels of light oil.  Ten refiners in China, Japan, South Korea and Taiwan turned down the Saudi offer, traders said on Monday, as oversupply of high-quality Russian ESPO crude prevails in the region and China's crude imports tumbled 11.5 percent in June from a year earlier to their lowest in eight months.  Limited demand for extra barrels from Asia, the world's fastest-growing market, would leave the Saudis with few options to find homes for additional cargoes. Top exporter Saudi Aramco was expected to have raised output to near 10 million barrels per day (bpd) in June. "If buyers do not ask for more, I think Aramco will not provide more," said a trader with one of the northeast Asian refiners. "Maybe they will switch the grade only. Arab Heavy is still tight for summer."

OPEC report: Crude production growing-- OPEC's crude oil production rose by 500,000 barrels a day in June but was short of expected demand later in the summer, the group said Tuesday in Vienna. The Organization of Petroleum Exporting Countries also said in its report medium-term oil demand appeared more delicate and its growth rate probably would slow slightly next year, reported.  The OPEC ministers' report warned widespread economic uncertainty, particularly U.S. oil demand, makes predictions difficult.  OPEC reiterated its belief a big seasonal upswing in demand would come later this summer, said. Even after the production increase from Gulf countries, the world still would need an extra 1.4 million barrels a day from the group in the third quarter to fully meet this demand, the report said.

Mexico's 1st half oil production down 1 percent, continuing 6-year slide - Mexico’s state-owned oil company says crude production fell by about 1 percent in the first half of 2011, as compared to same period last year. Petroleos Mexicanos says the steady decline in oil output that began around 2005 “has begun to be reversed.” The company says daily output dropped to about 2.56 million barrels in the first six months of 2011, about 27,000 barrels lower than the same period of 2010. Pemex says in Wednesday’s statement the drop would only have been 0.6 percent, if it weren’t for adverse weather, maintenance and shutdowns. Production fell from 3.4 million barrels a day in 2004 to about 2.57 million barrels per day in 2010. Last year’s output was about 1 percent lower than in 2009.

Petrobras Says Brazil Oil Reserves Similar Size to North Sea - Brazil’s oil reserves, including recent discoveries in deep waters of the Atlantic Ocean, are of a similar size to those found in the North Sea, said an exploration official at Petroleo Brasileiro SA. (PETR4) The U.K. and Norway held about 62 billion barrels of reserves in the North Sea before the deposits were developed, Francisco Nepomuceno Filho, Petrobras’s London head of exploration and production, said in an interview in London today. “Brazil as a whole could have a potential of the same size of the North Sea, including Norway and the U.K.,” Nepomuceno said. “Those two countries grew a lot and had huge development.” Brazilian reserves that sit miles below the floor of the Atlantic Ocean trapped under layers of rock and salt hold an estimated 50 billion barrels of oil, according to the country’s oil regulator. Lula, the largest discovery in the Americas in over three decades, had the country’s most productive well in May, yielding 36,322 barrels a day of oil and natural gas.

Oil Production: Running to Stand Still - Data from the International Energy Agency published Wednesday amply demonstrates the key problem with world oil supply today—we are running faster and faster just to stand still. In June, Saudi Arabia responded to rising oil demand, against the protests of fellow OPEC members, by pumping an extra 700,000 barrels a day of oil, according to IEA data. This is no mean feat—equivalent to more than half U.K. oil output—and takes Saudi oil production to its highest level in almost five-and-a-half years. So what effect did this major effort have on the crucial balance between oil supply and demand? Very little. The gap between how much oil the world needs for the third quarter and total OPEC production shrank from just 1.5 million barrels a day in May to 1.3 million barrels a day June. Oil prices are also close to the peaks they reached in early June, before the Saudis raised production and prior to the IEA’s release of 60 million barrels of emergency oil stocks over 30 days.

Global Oil Supply up in June - Both the IEA and OPEC have now released figures for total liquid fuel supply in June (see above), and both show a sharp increase, mainly due to OPEC, particularly Saudi Arabia.  However, levels have still not reached those prior to the loss of Libyan production in February/March (still less returned to the pre-Libya trend). Here's the picture since 2000, also with prices on the right hand scale:Oil prices first rose when Libya went offline, and then fell again with the resulting slowdown in the global economy. Here is the graph of price versus production. This month, I've added a notional orange envelope for the (smaller) oil shock we've been experiencing in late 2010-2011.  The shape of this is very uncertain of course, as is the future development.  If the global economy continues to recover, then I expect oil demand to butt against supply limits and prices to rise again.  On the other hand, if events in Europe were to dramatically worsen and start to affect the real economy of the larger countries there, then demand, and prices, could fall further.

World oil markets face production shortfall in second half - The International Energy Agency may not have a solution but no one can accuse them of no longer understanding the gravity of the problem. In their June report, the IEA warned that unless OPEC could increase production by at least 1.5 million barrels a day, world oil demand is going to surpass available supply during the second half of the year. It means if there is not enough supply to match the 89 million barrels of oil the global economy is expected to burn every day, world oil prices have only one direction to go. With no obvious end in sight to the Libyan conflict, and sectarian violence against oil fields and refineries suddenly on the rise in Iraq ahead of the scheduled US troop withdrawal, the prospects are not promising for OPEC to increase supplies. This is even more evident given the region’s largest producer, Saudi Arabia, has little more to offer other than unwanted sour, heavy oil to add to the global supply mix.

Countdown to $100 oil - a date with history? - On two past occasions, the average annual oil price has hit $100 per barrel and this has been followed by recession. At time of writing (7th July) the annual average for Brent was $95.4, on course to breach $100 some time in September. Will history repeat itself? Or has the global economy grown immune to high energy prices? A simple model that has become popular among bearish peak oil commentators is that high oil prices, caused by growing scarcity of cheap oil, may lead to recession. As consumers spend more on gasoline and other energy services such as electricity and natural gas the amount left over to spend on iPads, wine and vacations becomes less, causing recession throughout non-energy parts of the economy. High energy prices also lead to inflation that in a monetarist world should be squashed by higher interest rates though central bankers seem all too aware now that higher interest rates and high energy prices would kill economic growth in many OECD countries and in so doing drive many major, over indebted, economies toward insolvency.

The Relationship Between Hunger And Petroleum Consumption-Part 3 - Parts 1 and 2 looked at the relationship between the global hunger index (GHI) and per capita petroleum consumption. Here in part 3, I describe the relationship between per capita petroleum consumption and another potential indicator of hunger—body mass index (BMI). Most people are familiar with BMI, not as a measure of hunger, but rather quite the opposite—an over-abundance of food leading to unhealthy levels of weight gain. Roughly speaking, or speaking roughly, adults with a BMI of 25 of more, are considered to be fat or “overweight” while a BMI of 18.5 or less is considered thin or “underweight.” My idea, or hope, was that there would be a broad range of BMI measurements reported for both developed and undeveloped countries, and, this would allow me to use BMI as an alternative indicator of “hunger.” That is, if petroleum consumption is important to food production, then countries with high per capita petroleum consumption rate would have a higher percentage of the population in the “overweight” category (BMI > 25) than countries with a low per capita petroleum consumption rate. Or, countries with a low per capita petroleum consumption rate would have a higher percentage of people in the “underweight” category (BMI< 18.5) than countries with a hign per capita petroleum consumption rate.

The Link Between Peak Oil and Peak Debt – Part 1 The economy is closely linked with the physical resources that underly it. Most economists assume debt can rise endlessly, just as they assume GDP can rise endlessly. But if there really is a limit that prevents oil supply from rising endlessly, it seems to me that there is also a corresponding limit that prevents debt from rising endlessly. As I analyze the situation, it seems to me that here is really a two-way link between peak oil and peak debt: 1. Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth. As far as I am concerned, though, this decoupling is simply an unproven hypothesis–the normal connection is that a flattening or decline in energy supply causes a slowdown or actual decline in economic growth, and this slowdown causes a shift from an increase in the amount of debt, to a decrease in the amount of debt, as it did for US non-governmental loans in 2009 and 2010 (Figure 1). 2. Once debt growth peaks (shifts from growth to decline), we can expect a feed-back loop that will tend to make the peak oil decline even worse than it would otherwise be. In the current post, called "Part 1", I will cover the first of these two issues; I will cover the second issue in Part 2.

U.S. Trade Deficit Unexpectedly Surges on Oil - The trade deficit in the U.S. widened in May to the highest level in almost three years, reflecting a surge in the cost of imported crude oil. The gap grew 15 percent to $50.2 billion, exceeding all forecasts of 73 economists surveyed by Bloomberg News and the biggest since October 2008, Commerce Department figures showed today in Washington. Exports held near April’s record. A weaker U.S. dollar and growing economies overseas may keep bolstering demand for American-made products, benefiting companies like Smithfield Foods Inc. (SFD) The deficit may narrow as the recent drop in oil costs and a slowdown in consumer spending curb imports, indicating trade will help prop up the world’s largest economy. “Oil has obviously come off, so you’re going to have a significant drop back there,” “This quarter, trade will certainly make a strong positive contribution to GDP growth. We’ve had rapid growth in developing countries.”

Wake Up America -- Our $50.2Bn trade deficit for May was more than the $42.7Bn that economorons expected. They cannot grasp the concept that when oil is at $100, it tends to add to the trade deficit.  That's right, last May (2010), we imported 357M barrels of petroleum products and paid $27.7Bn for them but this May, we imported 350M barrels and paid $38.7Bn for them. If you pay MUCH MORE MONEY for the same stuff - THAT's INFLATION! On the bright side, China's FX reserves jumped yet another $153Bn in the quarter. It can be a long wait before China has to admit it has problems with its economy. The difference between China and the US is that we borrow money to buy things from them - a subtle but important distinction!   Of course a little inflation isn't stopping the unstoppable US consumer as ICSC Retail Store Sales are up 0.4% for the week and up 5.5% year over year. The strength in sales is attributed to demand for seasonal goods tied to hot weather and back-to-school sales but it seems a bit early for back-to-school so I'd have to say the truth is that they haven't got a clue why sales are picking up despite weakening Consumer Confidence.   We’re also watching that budget debate in Congress but the process is a total joke.

Russia's Mad Dash to Growth - Two weeks ago, I returned from Ulaanbaatar, Mongolia. The biggest concern for most companies I met with there is the shortage of diesel needed to run the mining operations. It seems Russia boosted export levies last month in a stupid political attempt at price fixing. Russia was running out of gas because refineries couldn't produce enough light-oil products like gasoline and diesel to feed all the new cars. (Russian GDP grew 4% last year; car imports increased 25%.) When they cut off the flow, Mongolia suffered. The country imports 90% of its oil from Russia. Russia is in similar bind to many Middle Eastern countries in that its own wealth is limiting the amount of oil it can export — the very thing that made it wealthy in the first place. This situation has since changed. Last week, Moscow reversed its high export tariffs and is now sending more diesel to Mongolia. But the Mongolians are well aware of their dependence on Russia, and are hastening to build their own refinery and develop their oil business.

Tin Production — A Classic Case Of Limits To Growth - The tin production story is out there is in plain sight, but only those directly involved in supplying the tin ore, refining it, consuming tin metal or trading commodities are paying any attention. Bloomberg's Bear Market in Tin Ending as Shortages Mean PT Timah’s Profit Advances 55% explains what's going on now, and what's been going on for years now— Erfandi’s fleet of bamboo rafts are dredging 33 percent less tin ore from the rivers of Indonesia's Bangka Island than in 2008, as miners fail to keep pace with consumption that jumped 14 percent in two years.The vessels operating in the world’s largest exporting nation are hauling up no more than 40 kilograms (88 pounds) of ore daily, from 60 kilograms, as reserves get depleted, said the 46-year-old foreman. Miners from China to Peru are also struggling to meet demand for the metal, used to solder components in almost all electronic equipment... The market will be in deficit for the fourth time in five years, Barclays Capital says...

Why We Care About the Price of Water in China - An American trucker barreling down Interstate 95 bemoaning the high price of diesel fuel might never imagine that one of the things driving up his bill is the way water in China is being mispriced. But the truth is, water shortages are indirectly causing increased use of diesel generators for electricity in China, and that, in turn, is helping raise diesel prices in the U.S.  Smarter pricing could help China -- and the rest of the world -- avoid further problems allocating water resources, and mitigate some of the side effects.  Coal plants generate most of China’s electricity. Hydropower is the second-biggest source. Water is clearly essential for hydropower, but a lot of it is needed for coal power, too -- to mine the raw material, to process it and then to cool the power plants that burn it. In 2010, coal-fired electricity in China used more than 30 trillion gallons (114 trillion liters) of water, or about 20 percent of the country’s total consumption. And over the coming decade, roughly 40 percent of the nation’s increase in water demand will be associated with coal power, China’s Ministry of Water Resources says.  This development is exacerbating an already severe shortage in China. The country accounts for about 15 percent of the world’s consumption of fresh water. Yet its supplies are limited, and pollution is a significant hazard.

ScientificAmerican: Experts Skeptical about Potential of Rare-Earth Elements in Seafloor Mud - There in the mud, just waiting to be scooped up, is a natural resource deposit potentially worth billions and billions of dollars. It contains chemical elements needed by automakers, by manufacturers of consumer electronics and by green technology developers—elements for which China currently holds a global near monopoly.  The catch? The mud, which is enriched in the technologically crucial metals known as the rare-earth elements, is beneath thousands of meters of water in the Pacific Ocean. Extracting resources from such depths brings technological, economic and regulatory hurdles, all of which would have to be overcome before deep-sea rare earths become an ingredient in tomorrow's catalytic converters, wind turbines and computer screens. As a result, experts say, it will be many years—if ever—before that seafloor resource is tapped. The deep-sea rare earths came to light in a study by a group of Japanese researchers, which was published online July 3 in Nature Geoscience. The researchers analyzed more than 2,000 samples of Pacific seafloor sediment and found high concentrations of rare-earth elements. (The 17 rare-earth elements include the lanthanide series—from lanthanum to lutetium on the periodic table—plus yttrium and scandium.) They estimated that there could be more than 100 million metric tons of rare-earth compounds in the seafloor mud. And a preliminary estimate showed that one square kilometer of seafloor mud around a sampling location known as site 1222 could provide one fifth of the world's annual supply of rare earths. But the reality is that extracting that mud is not yet feasible for a number of reasons.

China's fresh rare earths export quotas restore cuts (Reuters) - China on Thursday issued a second batch of quotas for exports of rare earths this year -- virtually making up for previous cuts -- after its commerce minister met with his EU counterpart to discuss this and other thorny issues between the two trading partners. The announcement of 15,738 tonnes in the second batch of quotas for 2011 adds to the first round of 14,446 tonnes announced late last year. It also comes just a week after the World Trade Organization ruled against China's curbs on a different mix of raw materials but which some trade partners say could set a precedent. The WTO's ruling last week that China had breached trade law by curbing exports of eight raw materials led Europe and the United States to say that meant China should also be forced to increase exports of 17 rare earths. "We feel that a total of around 30,000 tonnes this year is a reasonable number given that Beijing probably does not want to cut the quota a lot, as that could bring more criticism from foreign countries," said an analyst at a foreign-invested fund in Beijing.

Nike, Adidas, Puma 'Using Suppliers Pouring Toxic Chemicals into China's Rivers' - In a year-long investigation, undercover activists collected water samples from discharge pipes at factories belonging to two of China's largest textile manufacturers which tested positive for dangerous chemicals, including hormone-disrupting alkylphenols that are banned in Europe. The organisation named a host of international brands in a 115-page report titled "Dirty Laundry", including Abercrombie & Fitch, Converse, Lacoste, Calvin Klein and Chinese sports giant Li Ning, as having business links with the two textile processing plants. More than 70 per cent of China's rivers and lakes are polluted as a result of China's three decades of economic boom, and Greenpeace campaigners called on major brands to use their influence to force the industry to clean up its act. "Currently many of the highlighted brands take a 'not in my product' approach towards hazardous chemicals, only restricting them in their final products," said Li Yifang, the group's Toxics Campaigner. "Such policies essentially give suppliers the green light to discharge hazardous waste water as long as the chemicals are not found in the products. We are asking brands to take a more comprehensive approach and eliminate all hazardous chemicals throughout their supply chains." Photographs and video showed campaigners in biohazard suits creeping in at night to take samples from the Youngor Textile Complex on a Yangtze River tributary in Ningbo, near Shanghai and the Well Dyeing Factory in the Pearl River Delta near Hong Kong.

Chongqing - The Largest Construction Site In The World By some accounts, Chongqing is the largest metro area in the world with a population of some 32 million. They ought to call it the largest construction site in the world. This is a place that, if you believe the official numbers, posted 17% GDP growth in 2010. It doesn’t take too long to figure out how that happened. Driving around town, I found that Chongqing is in such a building frenzy, they’re actually tearing down perfectly good (and reasonably new) buildings and infrastructure, and rebuilding them. To give you an example, next to my 45-story downtown hotel was a building site where the constant drone of jackhammers signaled to me that there was some breaking of concrete going on. The new tower under construction had reached the 11th floor, but then they decided to tear it down and start all over again with something even bigger (102-stories).

China’s June inflation rises 6.4% - China’s consumer prices accelerated to a-three-year high in June as food prices soared 14.4%, according to data released Saturday, reaffirming expectations that Beijing won’t be in a hurry to relax its monetary stance even if it may not aggressively pursue more interest-rate increases.  Monthly data released by the National Bureau of Statistics of China showed the consumer price index for June climbed 6.4 % from the same period the year before. Many economists had expected the rise to be between 6.2% and 6.4%.  That increase compared with a 5.5% jump in May, which was itself the fastest rise in CPI since a 6.3% increase in July 2008. The Daiwa economists wrote ahead of the data release that they expected June data to “disappoint the market, again.”

PBOC chief suggests not to overreact to inflation - China's central bank chief Friday suggested markets shouldn't over react to a large rise in year-on-year inflation for June, saying that month-on-month figures are a better gauge of prices. "It's better to use month-on-month inflation (data)...seasonally adjusted and annualized," said People's Bank of China Gov. Zhou Xiaochuan. "In China, we use the year-on-year inflation figure without seasonal adjustment: that's the problem," Zhou told a financial conference. "You always try to think about the base effect." China does publish month-on-month inflation figures, though they aren't seasonally adjusted. Those data have already been showing a slightly less worrisome trend. Month-on-month inflation peaked in February, rising 1.2%, and the increase was only 0.1% in April and May.

Slow China Growth Leaves Wen Few Options - China’s economy probably grew the least in almost two years last quarter, contributing to a global weakening that Premier Wen Jiabao confronts with more limited scope for policy response than during the 2008 world recession. The government is forecast to report July 13 gross domestic product rose 9.3 percent from a year before, according to the median estimate in a Bloomberg survey, down from 9.7 percent the previous quarter. With data two days ago showing consumer prices climbed the most in three years in June, any easing in the central bank’s monetary stance risks escalating price pressures. China’s slowdown was underscored by the weakest import gain since 2009 in June, limiting the chance for the U.S. and Europe to export their way out of their own domestic challenges. A 58 percent jump in bank credit in 2009-2010 and concern that local governments may default on loans leaves Wen with less room to unleash the scale of stimulus that aided the world in 2008. “Any significant policy loosening or introduction of another big stimulus right now would run the risk of plunging the Chinese economy into a real hard landing, with inflation running out of control and government debt and bad loans piling up,”

China GDP Hints at ‘Soft Landing’ - China’s gross domestic product grew 9.5% from a year earlier in the second quarter, the National Bureau of Statistics said Wednesday, down from 9.7% growth in the first quarter, but slightly faster than expectations for a 9.4% rise. Industrial production growth also surprised on the upside, rising 15.1% from a year earlier in June, up from 13.3% in May, and defying economist expectations for a slowdown to 13.1% growth. The strong data may keep pressure on Beijing to continue tightening policy. Economists react:

Is this the soft landing? - THERE has been a fair amount of anxiety over the state of the Chinese economy of late. News of unexpectedly large debt burdens among Chinese local governments generated a wave of concern that recent Chinese growth has been entirely unsustainable. As the government was forced to turn off the credit tap, some supposed, property prices would fall and a hard landing would result. That seems an unlikely scenario to me. Chinese debt burdens are manageable and its property market dynamics are quite different from those that prevailed in western bubbles markets prior to the crash. That doesn't mean that all is entirely well in China, however. Many observers have taken some comfort in the latest GDP report from China. Output rose 9.5% year-on-year in the second quarter. That constitutes a moderate slowdown from growth in the previous quarter, and was a little above expectations. It would seem that the government's efforts to slow credit growth have not precipitated an uncontrollably rapid downturn in activity.

Bank of China Exec: China's Forex Reserves "Excessive" - China's current foreign exchange reserves are too high and $1 trillion would be enough, the state-run Economic Information Daily reported on Wednesday, citing an executive from Bank of China Ltd.  Wang Yongli, an executive vice president at BoC, was quoted as saying that the excess amount was the culprit behind the nation's stubbornly high inflation. China's foreign exchange reserves rose to $3.198 trillion at the end of June, up from $3.044 trillion at the end of March, cementing even further its position as the world's largest holder of foreign exchange reserves, according to official data. China's foreign exchange reserves accumulate as the People's Bank of China, the central bank, prints domestic currency to buy up billions of dollars of foreign exchange inflows each month, which swells the money supply and pushes inflation. To mop up liquidity, the central bank issues sterilization bills and raises banks' reserve requirement ratios, offsetting the money created. Wang didn't elaborate on how he concluded that $1 trillion would be enough or say what should be done with the "excess" portion.

Would a stronger renminbi narrow the U.S.-China trade imbalance? (NY Fed) The United States buys much more from China than it sells to China—an imbalance that accounts for almost half of our overall merchandise trade deficit. China's policy of keeping its exchange rate low is often cited as a key driver of that country's large overall trade surplus and of its bilateral surplus with the United States. The argument is that a stronger renminbi (the official currency of China) would help reduce that country’s trade imbalance with the United States by lowering the prices of U.S. goods relative to those made in China. In this post, we examine the thinking behind this view. We find that a stronger renminbi would have a relatively small near-term impact on the U.S. bilateral trade deficit with China and an even more modest impact on the overall U.S. deficit.  Our discussion focuses first on how the appreciation of the renminbi would affect U.S. imports of Chinese goods and then on how it would affect U.S. exports to China. The recent behavior of U.S. imports from and exports to China is shown in the chart below. To close the gap between them, a stronger renminbi would need to markedly raise U.S. exports and/or lower U.S. imports. Although we do not believe that this adjustment is likely in the near term, we close with some observations on why the bilateral balance can be expected to shrink over the long run—owing largely to forces other than the renminbi.

Currency Manipulation in Favor of U.S. Consumers - From a WSJ article today "China Boosts Lead in Global Exports" about China's exports setting several new records in June:  "China's critics, including members of the U.S. Congress, say an undervalued currency unfairly helps Chinese exporters."  Don Boudreaux responds on Cafe Hayek:  "Overwhelmingly, the beneficiaries are non-Chinese consumers (including Americans) of China’s subsidized exports. In contrast, the people unfairly burdened are exclusively Chinese citizens – both as consumers forced to pay higher prices at home, and as taxpayers forced to fund Beijing’s practice of purchasing U.S. dollars in order to depress the price of the yuan against the dollar. It is, in fact, obscenely unfair for Beijing to oblige the Chinese people to hand over chunks of their wealth to Americans, even the poorest of whom is far richer than is the typical man or woman in China.": The chart above helps to show how American consumers have benefited from China's "unfair" currency policy by comparing the overall increase in prices (CPI: All items) since 1998 to the price increases for clothing and toys, which are both mentioned in the  WSJ article as examples of China's export dominance in labor-intensive products. 

Japan Stock Futures Fall as Yen Rises as Moody’s Reviews U.S Credit Rating - Moody’s Investors Service put the U.S., rated Aaa since 1917, under review for a credit-rating downgrade for the first time since 1995 on concern the government’s $14.3 trillion debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured. Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Fed last month completed a program to buy $600 billion of Treasury bonds that aimed to stimulate the economy by reducing borrowing costs, boosting stock prices and spurring consumer spending

No matter how hard I try, I can’t think of anything outrageous - When visiting GMU in 2009, I was asked for my most outrageous belief.  I tried to use my view of the crisis.  But they wouldn’t accept that example.  Later I tried to satisfy them with a post claiming that India would have the world’s largest economy within 100 years.  I thought that was a fairly outrageous prediction, as most people think of India as a poor country.  Later I learned that it’s not really that outrageous, and moved the date up to 70 years out in order to be more provocative.  Now I’m going to move it to 50 years.  That’s right, in less than 50 years India will have the world’s largest economy.  Maybe 40.  A recent paper by Willem Buiter and Ebrahim Rahbari contains the following table: By 2050, India’s per capita GDP will be almost 75% of China’s per capita GDP, and India’s will be rising faster.  That’s just 39 years out.  Meanwhile the UN says that by 2050 China will only have 76.5% of India’s population.  That means the total GDP of India will be almost as large as the total GDP of China by 2050, just 39 years from now.

Inflation severs Russia’s material comforts - While the collapse of communism in the 1990s destroyed most Russians’ standard of living, something resembling a middle class began to appear again between 2000 and 2008, as real incomes doubled and oil revenues kept wages and pensions well ahead of inflation. However, since the onset of the economic crisis in 2008, real incomes have been stagnating as wages have been frozen – while inflation gallops on. Since the onset of the economic crisis in 2008, which saw gross domestic product fall 8 per cent in 2009, wages in most sectors have been frozen, while inflation, temporarily damped by the crisis, has now picked up. In the first quarter of 2011, real wages fell 2.9 per cent, driven by higher inflation than expected. While official inflation for the year sits at a little more than 9 per cent, many think this statistic is fudged. Over the past five years, official statistics show prices rising 62 per cent but most Russians feel much greater increases.

International loan shark - THE International Monetary Fund is at a critical juncture. Its leadership crisis brought new attention to the Fund and sparked some worthwhile discussions (perhaps it should be led by a non-European?). But good leadership is not the IMF’s problem; even post-crisis, some question its purpose. Amar Bhide and Ned Phelps have a provocative take on the Fund this week. They point out that the Fund was originally intended to maintain the Bretton Woods exchange-rate regime, where currencies were pegged to the dollar. If a country couldn’t cover its trade deficit the IMF would lend it dollars. After the world abandoned Bretton Woods people expected floating currencies to make the IMF unnecessary, because exchange rates should adjust to keep trade deficits from getting too big. That didn't happen, and the IMF's services continued to be necessary.

Smoke On Europe’s Eastern Horizon? - With so much emphasis being placed on what has been happening farther to the South, economic realities on Europe’s Eastern periphery have largely been escaping the close scrutiny of media and analyst attention. In the wake of the belated recognition of the region’s vulnerability which followed the bout of acute stress experienced during the post-Lehman crisis, a new consensus has now emerged (for an in-depth study of the Latvian example see this piece) that the IMF-guided programmes put in place at the time have essentially set things, if not entirely straight then at least on the right track. In particular, as a result of the extensive fiscal discipline and willingness to sacrifice shown a much brighter future now awaits these countries well to the sidelines of all those horrible Greek debt concerns.

What will happen with Greece? - Here is my latest NYT column, excerpt: If you are a euro optimist, you might believe that the day of reckoning for Greece will be stalled long enough for Portugal, Ireland, Spain and possibly Italy and Belgium to recapitalize their banks and trim their government budgets. You might believe that of the Greeks will eventually default, but that by the time the contagion effects are checked, the Greeks will have pulled in some aid, and the global impact will be a mere hiccup instead of a new financial crisis. If you are a pessimist, you might see such a response as an unworkable plan of naïve technocrats. Here’s your line of reasoning: At some point along the way, democracy is likely to intervene: either Greek voters will refuse further austerity and foreign domination, or voters from northern Europe will send a clear electoral message that they don’t support bailouts. And there’s a good chance one or both of those events will happen before a broader European bank recapitalization can be achieved. In an even bleaker scenario, bank recapitalization won’t be realized anytime soon and those same economies will show few signs of growing out of their debts. A broader financial crash will result, and it won’t be contained by an easily affordable bailout.

Greece’s Choices in Debt Crisis Are All Daunting - WITHOUT outside help, Greece1 is probably insolvent right now. In evaluating the country’s prospects, it’s worth asking what it would take for Greece to pay all of its bills and what kind of damage we might expect along the way. The answers are to be found not only in statistics — like the debt-to-G.D.P. ratio, now running at more than 140 percent for Greece, and headed higher — but also in human sentiments and solidarities. A considerable amount of Greek patience and German flexibility and sacrifice are minimum prerequisites for turning back a major disaster in the making.  To put matters in perspective, the Greek economy is less than 2 percent2 of the overall economy of the European Union3. That seems a manageable size for an aid-based solution; estimates in the neighborhood of 200 billion euros in aid (close to $300 billion) are common. The real difficulty is in maintaining global financial confidence while the losses are distributed in an orderly manner.  That isn’t as easy as it may sound. About 30 percent of the Greek debt is held by Greek sources, including the banks and the Greek government, in its social security funds. A default on the latter assets would mean that the Greek government was defaulting on itself. It would still have to come up with much of that money or face a total political and economic meltdown.

Great Read: Greek PM Sends Open Letter To President Of The Eurogroup Saying: Our Problem Is Your Problem - Great reading here...Greek PM George Papandreou has sent an open letter to Eurogroup President Jean-Claude Juncker basically saying: In the end, this isn't just a Greek crisis, and without serious eurowide reforms -- like a Eurobond -- the contagion will spread. There's a lot correct here. Original letter in Greek here, translation here

EU stance shifts on Greece default - European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.  The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.  “The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations. Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.

European leaders to consider default as part of Greek rescue - EURO ZONE finance ministers are considering a fundamental revision of their strategy in the Greek debt crisis ... At issue as the ministers meet today in Brussels is whether they agree to look again at a German debt-swap plan in which Greek investors would be urged to exchange their bonds for debt with a longer maturity. This plan was scrapped weeks ago on the basis that it would lead to a default rating on Greek debt, something which is resolutely opposed by the European Central Bank. Also on the table is the revival of a plan rejected four months ago in which the euro zone bailout fund — the European Financial Stability Facility — would intervene in markets to buy Greek debt at a discount to its original value. Consideration may also be given to another lowering of the interest rate on Greece’s rescue loans.

Euro Chiefs Weigh Greek Options in Debt Crisis - European finance chiefs clashed over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis. Finance ministers weighed how to get private bondholders to maintain their exposure to Greek debt in a way that doesn’t prompt credit-rating companies to declare a formal default. Forcing bondholders to chip in would be “fatal,” Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels today. “We will now in the eurogroup discuss the proposals on the table and their impact with respect to a Greek insolvency or classification as an insolvency.” Bonds of debt-strapped countries plunged, the euro sank and stocks dropped amid concern that European governments are powerless to prevent the financial distress spreading from Greece. Italy’s effort to build a firewall against the spreading crisis formed the backdrop to today’s meeting of finance ministers that will consider a new package for Greece on top of the 110 billion euros ($155 billion) pledged last year.

True Europeans now need a ‘plan B’ - George Soros - Europe’s political establishment continues to argue that there is no alternative to the status quo. Financial authorities resort to increasingly desperate measures in order to buy time. But time is working against them: the two-speed Europe is driving member countries further apart. Greece is heading towards disorderly default and/or devaluation, with incalculable consequences. If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a plan B. A Greek default may be inevitable, but it need not be disorderly. And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Ireland’s financial position, too, could become unsustainable – the rest of the eurozone needs to be ringfenced. That means strengthening the eurozone, which would probably require wider use of Eurobonds and a eurozone-wide deposit-insurance scheme of some kind. Generating the political will would require a plan B for the EU itself. The European elite needs to revert to the principles that guided the union’s creation, recognising that our understanding of reality is inherently imperfect, and that perceptions are bound to be biased and institutions flawed. An open society does not treat prevailing arrangements as sacrosanct; it allows for alternatives when those arrangements fail.

Statement by the Eurogroup - Ministers reaffirmed their absolute commitment to safeguard financial stability in the euro area. To this end, Ministers stand ready to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate. Proposals to this effect will be presented to Ministers shortly. Ministers discussed the main parameters of a new multi-annual adjustment programme for Greece, which will build on strong commitments to fiscal consolidation, ambitious growth-enhancing structural reforms and a substantial privatisation of state assets. Ministers welcomed the reinforcement of monitoring mechanisms of the programme of Greece, the nomination of the board of the privatisation agency, which comprises two observers representing euro area Member States and the European Commission, and agreed to provide extended technical assistance to Greece. They called upon the Greek government to sustain its on-going efforts to meet these commitments in full and on time.

Euro zone shifts to accepting possible Greek default - European Union leaders are poised to hold an emergency summit after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts and stop contagion to Italy and Spain. "There will be an extra summit this Friday," a senior euro zone diplomat told Reuters, suggesting policymakers have been seized with a new sense of urgency after markets started targeting Italian assets. A French government source said Paris was in favour, although the timing was not yet fixed, and in Spain, European Council President Herman Van Rompuy said he had not ruled out a meeting. Earlier, Germany's finance minister had said a second Greek rescue package could wait until September after euro zone finance ministers effectively accepted that private creditor involvement meant a selective debt default was likely, despite the European Central Bank's vehement opposition to such a move. "We have managed to break the knot, a very difficult knot," Dutch Finance Minister Jan Kees de Jager told reporters.

Greek State Budget Deficit Widens 28% in First Six Months - Greece’s central-government deficit widened 28 percent in the first half of the year as both revenue and spending missed targets set out in the 2011 budget plan. The shortfall, which excludes outlays by state-owned institutions and companies, increased to 12.8 billion euros ($18 billion) from 10 billion euros a year earlier, preliminary data released today by the Athens-based Finance Ministry showed. Ordinary spending increased 8.8 percent between January and June to 33.2 billion euros, compared with a budget target of 31.9 billion euros, the ministry said. Net revenue decreased 8.3 percent to 21.8 billion euros, missing the budget plan’s goal by 3.3 billion euros.

Greek budget gap widens, misses targets - (Reuters) - A deeper-than-expected recession caused Greece's central government deficit to widen by almost one third in the first half of the year, widely missing an interim budget target under the country's bailout plan, the finance ministry said on Monday. Budget slippages amid the recession caused the government last month to agree even harsher austerity measures in a bid to qualify for its second EU/IMF rescue package in one year. "The current shortfall of revenues is expected to be covered in the second half of the year, as a result of the tax measures of the 2011-2015 mid-term budget plan," said the finance ministry. The central government deficit stood at 12.78 billion euros ($18.28 billion) between January and June, higher than a 10.37 billion euro target for the period, the government said in a statement. Net budget revenues dropped 8.3 percent year-on-year to 21.81 billion euros, compared with a 25.08 billion euro target. Spending before payments on the country's debt increased 4.5 percent to 25.62 billion euros, 7.1 percent above target.

Debt-Sale Hype Under Fire in EU—It is one of Wall Street's few certainties. Ask a banker selling bonds or shares how their deals are doing and the answer is invariably: "Lots of interest from investors." Now a European self-regulatory body is looking at whether that perennial optimism might have at times been misleading for investors in the European debt markets, according to people familiar with the matter.  The International Capital Market Association, or ICMA, is examining whether banks have been improperly exaggerating the amounts of investor demand they are seeing in certain bond sales, including for debt issued by European governments, these people say.

EUR Plunges After Lagarde Intimates On Greek Bankruptcy - It appears that the market refuses to be baffled with bullshit any longer. The EURUSD just took a big tumble following a report that Christine Lagarde, the IMF's new boss, announced that her new agency has not yet discussed Greek aid details, and made it clear that "nothing should be taken for granted on Greece." Since the only thing that is being taken for granted is that Greece will be bailed out, it is easy to see why the EURUSD just lopped off 60 pips in seconds. Not very surprisingly, this fits with what the Chairman of Commerzbank Martin Blessing told the Frankfurter Allgemeine Zeitung earlier. It appears that the dining room table is being set for what the EUR's chef believe will be a brief feast on the Greek carcass, following the country's plunge into SD, or temporary default status. What will happen next, however, is the same thing that happened when Lehman filed: sheer panic, as a global bank runs ensues, and the USD, not to mention gold, all go parabolic. The only possible brief saving grace is once again China, which just reported that its FX reserves rose from $3,197 billion to $3.233 billion. The bulk of that money is now going to purchase EURs and keep Europe afloat one more day.

Greece set to default on massive debt burden, European leaders concede - European leaders bowed to the inevitable and conceded that Greece is likely to default on its massive debt burden, which would be a first among the 17 countries using the euro. They also abruptly shifted tack in the eurozone debt crisis by raising the possibility of using the eurozone's bailout fund to buy back Greek debt on the markets, meaning sizeable losses for Greece's private investors and reduced debt levels for Athens. Following 12 hours of fraught negotiations in Brussels haunted by the risks of contagion in the eurozone spreading to Italy, now being targeted by the financial markets for the first time in the 18-month crisis, the 17 governments of the eurozone pointedly failed to rule out a sovereign debt default by Greece. A statement said that, at the meeting, the European Central Bank "confirmed its position that a credit event or selective default should be avoided". There was no declaration of governments' support for the ECB position. Jean-Claude Juncker of Luxembourg, president of the Eurogroup, and Olli Rehn, EU commissioner for monetary affairs, both declined to offer one.

Hallo, anybody there? Eurozone about to suffer a cardiac arrest - In the absence of a policy response, the eurozone’s financial system may implode within a few days.  El Pais’ front page story ran with the headline that Europe was close to the abyss. The paper writes in an editorial that Germany, the Netherland, Finland and Austria stood in the way towards a solution of the crisis, and accused politicians in these countries to react hysterically.  Eurozone finance ministers, who met in Brussels yesterday, continued their petty squabbles, and only inched towards further action – impressive in its own right on a normal day – but nothing that will impress the financial markets now. See here the mainly procedural statement of the eurozone issued late last night. The most important informal agreement has been a consensus to increase the flexibility of the EFSF, but this decision has yet to be fleshed out in sufficient detail, and it is not clear yet whether this will involve secondary market bond purchases by the EFSF, which would require a change to the EFSF treaty. The FT has a more positive take on this, saying that EFSF bond purchases were under active consideration, and were also advocated by the Institute for International Finance.

EU Revives Buyback Idea as Crisis Hits Italy - As exploding bond yields in Italy and Spain brought the crisis closer to the heart of the euro area, Europe’s search for answers took it back to proposals that were scuttled by Germany earlier this year. After a nine-hour meeting, the 17 euro ministers issued a six-paragraph statement pledging to flesh out details of a new strategy to end the 21-month-old crisis “shortly,” without setting a timeline. The decision to have another look at reinforcing the European Financial Stability Facility, the 440 billion-euro ($618 billion) bailout fund that was beefed up only last month, came after talks with bondholders over a “voluntary” rollover of Greek debt ran into a threat by credit-rating companies to put Greece in default. Finance ministers offered varying interpretations of the commitment to explore a wider range of options. For Dutch Finance Minister Jan Kees de Jager, who insists on getting bondholders to roll over Greek debt, the pledge includes the possibility of the “selective default” opposed by the ECB. Europe’s lunge back to basics came after Greek Prime Minister George Papandreou complained that a “cacophony” had sowed “panic” that overwhelmed the budget cuts that he pushed through his parliament amid street riots last month.

Italian Debt Adds to Fears in Euro Zone - With fears growing that Italy could become the latest victim of the euro zone’s sovereign debt crisis, and with plans for a second Greek bailout deadlocked, top European officials are to meet on Monday to wrestle with the mounting threats to the currency union.Euro zone finance ministers had previously scheduled two days of talks to begin on Monday afternoon in Brussels. Over the weekend, a meeting of more senior officials was also set for Monday morning.A spokesman for Herman Van Rompuy, the president of the European Council, denied that the senior officials would discuss the market’s fears about the precarious state of Italy’s finances. But another official, who requested anonymity because he was not authorized to speak publicly, said Italy would most likely be on the agenda. On Friday, the spread of 10-year Italian government bond yields over their German equivalents widened to 236 basis points, the most since the introduction of the euro, and the country’s blue-chip stock market index, the FTSE MIB, fell by 3.5 percent.

Exclusive: EU calls emergency meeting as crisis stalks Italy (Reuters) - European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy. European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.Van Rompuy's spokesman Dirk De Backer said: "It's a coordination, not a crisis meeting." He added that Italy would not be on the agenda and declined to say what would be discussed.However, two official sources told Reuters that the situation in Italy would be discussed. The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis. A second international bailout of Greece will also be discussed, the sources said.

Italy under speculative attack; crisis meeting in Brussels today - There will be an emergency meeting in Brussels today, in which Herman van Rompuy, Jose Manuel Barroso, Jean-Claude Juncker, Olli Rehn, and Jean-Claude Trichet, seek a solution to the eurozone debt crisis, which deteriorated dramatically on Friday. Italy is now under a speculative attack from a number of US-based hedge funds. 10-year Italian bond spreads have reached 2.446% this morning, and Spanish spreads 2.865%, levels that are not sustainable. The euro dropped by 2 cents to $1.4186.  (The recent spat between Silvio Berlusconi and Giulio Tremonti, and in particular Tremonti’s warnings about a threat to the civil society, have spooked investors, who now regard Italy as unable to meet its debt obligations in the long run. Italy has a different category of problem than Spain and Portugal, in particular a much lower rate net external debt. But the country’s total debt to GDP ratio of 120% is too high given the extremely low rate of productivity growth. In the absence of economic reforms – which are politically not in sight – the country is insolvent. This is not the result of the financial crisis. On the contrary, the crisis somewhat diverted attention away from a problem that has been lingering for years.)

China Ratings Agency Puts Italy On Watch For Downgrade - Chinese ratings agency Dagong Global Credit Rating Co. said Monday it is putting Italy's sovereign debt on negative watch for a possible downgrade. The Italian government's debt accounts for 119% of gross domestic product, with most of the debt coming due in the next five years, Dagong said in a statement. Dagong has often issued controversial ratings. In November last year, it cut its rating on the U.S. to A+ from AA, with a negative outlook. It ranks the U.S. as a riskier borrower than China. Italian debt is in focus at the moment, as spreads between 10-year Italian and German bond yields reached a record 2.47 percentage points on Friday. Dagong said in its statement that it will downgrade Italian debt if the government's debt-financing costs continue to rise.

Europe: Bond Yields up Sharply for Italy, Greece, Ireland and Portugal - This doesn't look good ... (see table below).  The Greek 2 year yield is up to a record 31.1%. The Portuguese 2 year yield is up to a record 18.3%. The Irish 2 year yield is up to a record 18.1%. And the big jump ... the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising. From the Telegraph: Italy debt contagion fears hit markets as top EU officials meet Herman Van Rompuy, the president of the European Council, will meet European Central Bank President Jean-Claude Trichet and Jean-Claude Juncker, the chairman of the Eurogroup, for talks in Brussels at around midday, ahead of a meeting of the 17 euro zone finance ministers later on Monday.  Mr Van Rompuy's spokesman described the gathering as a "coordination, not a crisis meeting". He added that Italy would not be on the agenda, as ministers focused on thrashing out terms of a second Greek rescue package. The meeting comes as the Financial Times reported that leaders are prepared to accept that Athens should default on some of its bonds.

Italian, Spanish, Portuguese Bonds Slump as Contagion Spreads -- Italian and Spanish bonds tumbled and German bund yields sank to a more than seven-month low as contagion from Greece’s debt crisis threatened to spread to bigger economies, stoking demand for the safest assets. Ten-year Italian yields soared to the highest in 10 years. The spreads investors demand to hold Italian, Portuguese and Spanish debt over bunds widened to euro-era records. German Finance Minister Wolfgang Schaeuble said “there’s no discussion whatsoever” of doubling the European Union’s rescue facility after Die Welt reported yesterday that the European Central Bank is seeking to increase the pool to 1.5 trillion euros ($2.11 trillion) to cover an Italian crisis. “There’s pronounced risk-off sentiment,” said Michael Leister, a fixed-income analyst at WestLB AG in London. “You can clearly see the market is worried. We are seeing a self- fulfilling prophecy, where yields increase due to contagion and then the market gets worried about the high funding costs, as do the rating agencies.” Yields on 10-year Italian bonds increased for a sixth day, climbing 41 basis points to 5.71 percent, the most since 2000. The spread over German bunds widened to 303 basis points, a euro-era record.

The cost of Europe's dithering - ALL along, it has been clear that sovereign-debt troubles in Greece, Ireland, and Portugal were primarily a political challenge, rather than an economic challenge, for the euro zone as a whole. Insolvency was and remains a serious issue for these smaller peripheral economies, but because they're small there was no question of Europe's ability to handle the mess, only a question of how costs might be shared. There was a risk, however, that a badly mismanaged effort to deal with the debt mess in these small countries could shake market confidence in the debt of other and larger economies, most notably Spain and Italy. If Spain were plunged into a Greek-like situation, the fiscal math of the crisis would suddenly grow much more difficult. And should Italy fall into serious trouble. As a Schumpeter post from Friday put it: If Spain has long been considered too big to fail, then a full-blown Italian debt crisis would be cataclysmic. The country’s bond market is the third-largest in the world, after America’s and Japan’s. That post goes on to make a critical point: sovereign and bank exposures to Italian debt are far larger than are exposures to the debts of any other troubled country. If there have been fears that a Greek default might require a new round of bank recapitalisations, well, one shudders to think of the impact on banks of an Italian restructuring.

Italy Evolves Into E.U.’s Next Weak Link - Throughout Europe’s debt crisis, Italy1 has largely managed to steer clear of the troubles that engulfed its more profligate Mediterranean neighbors. But the contagion that started in the euro zone’s smaller countries is suddenly moving to some of its largest. As Greece teeters on the brink of a default, the game has changed: Investors are taking aim at any country suffering from a toxic combination of high debt, slow growth, and political dysfunction — and Italy has it all, in spades. In recent days, Italy has become Europe’s next weak link after Greece, Ireland and Portugal and Spain ... Italy’s banks are sound; they never speculated in a housing bubble. The current annual budget deficit is low, at around 4.6 percent of its gross domestic product. And while Italy issues the largest amount of bonds of any euro zone country, Italians own about half the debt, making it less vulnerable to the follies of financial markets.  But with interest rates rising, Italy’s economy is not growing fast enough to cover an accumulated debt load of 120 percent of gross domestic product, the second-highest in Europe, after Greece. The International Monetary Fund expects growth to rise only slightly, to 1.3 percent in 2012.

Plunge Brings Debt Crisis to Italy - The plunge in Italian markets overshadowed policy makers’ efforts to fix Greek finances as the euro-region’s debt crisis infected Europe’s largest borrower. Italian bonds fell for a seventh day and the nation’s borrowing costs jumped by more than half at an auction of 6.75 billion euros ($9.4 billion) of bills today. Stocks pared declines after falling to a two-year low. Warnings by Moody’s Investors Service and Standard & Poor’s over Italy’s ability to trim debt, coupled with infighting in Silvio Berlusconi’s government over a budget-cutting plan, fueled the sell-off. “Italy coming under severe market pressure, being the third-largest economy and a founding member of the EU, signals that the sovereign and banking crisis has reached a deeply systemic phase,”. The rout in Italy underscored Europe’s inability to contain the crisis that began in Greece in October 2009 and led to bailouts in Ireland and Portugal. Finance ministers last night failed to agree on how to share with creditors the cost of a second bailout for Greece to be financed primarily by its European Union allies, including Italy.

Debt Contagion Threatens Italy - Throughout Europe’s debt crisis, Italy has largely managed to steer clear of the troubles that engulfed its more profligate Mediterranean neighbors. But the contagion that started in the euro zone’s smaller countries is suddenly moving to some of its largest. As Greece teeters on the brink of a default, the game has changed: Investors are taking aim at any country suffering from a toxic combination of high debt, slow growth, and political dysfunction — and Italy has it all, in spades. In recent days, Italy has become Europe’s next weak link after Greece, Ireland and Portugal and Spain, harmed in particular by a power struggle between Prime Minister Silvio Berlusconi2 and his finance minister, Giulio Tremonti. The dispute threatens to turn the euro zone’s third-largest economy, after Germany and France, into one of its biggest liabilities. On Monday, the Italian government struggled to rein in the tensions, as fears rose that political paralysis could make it harder for Italy to embrace the austerity demanded by outsiders to reduce one of the highest debt levels in the world. European policy makers also sought to figure out how they would put out a bigger fire if Italy were to succumb.

Euro in Crisis: Is the Italian Domino Falling? - There have been some rumbles about Italy for a while.  Italy's budget deficits are relatively modest compared to, say, Ireland, but their debt is about 120% of GDP.  The government has passed a plan that will balance the budget by 2014, but as with most such plans, most of the cutting comes later, while the current cuts are small.  This may well be sensible fiscal policy, given the current economic climate, but it is not reassuring to the markets. Mike Shedlock estimates that Italy needs to borrow about €356 billion ($500 billion) in 2011 to cover its deficit, and roll over outstanding debt.  Their 10-years are now trading at something north of 5%.  Most of the estimates I've seen say that a debt death spiral becomes likely when rates hit somewhere between 6-7%, because the debt service costs start blowing up the budget deficits. If Italy goes, it's not clear that the rest of Europe can save them.  In the FT, Neil Dennis says people are talking about doubling the euro bailout fund to €1.5 trillion--or about three times the size of TARP.   In the event that things really go south on the Italian peninsula, I don't think there's enough money in the rest of Europe to provide a rescue package.

Eurozone Leaders Fiddling as Rome Starts to Burn? (Updated) - Yves Smith - Worries about the Eurozone have heretofore been depicted as afflicting the periphery. But even though Italy is geographically on the margin, if the crisis engulfs it, it irreparably damages the core. And that time seems to be upon us. European leaders have managed to muscle their way through an existential crisis with eleventh hour patch-up remedies that have worked for as little as days and sometimes as long as months. But the spectacle of the Greek rescue being retraded while in progress (Greece was told to take an austerity bullet to prevent default for now, but insufficient take-up of the debt rollover, an outcome that was clearly widely known, since it was discussed in the Financial Times, has led the powers that be to deal with nasty realities and consider the “D” word, for at least some of the bonds. That in turn led to a market freakout which continues today.  Ambrose Evans-Pritchard of the Telegraph explains why this escalation of the crisis looks so dire: Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy’s €1.84 trillion stock of public debt is about to rise very fast.

Exposed Italian banks - AN ITALIAN Finance Ministry presentation in March 2000 trumpeted the “extraordinary liquidity” of Italian bonds, a result of Italy having, “total outstanding debt [greater] than that of France and Germany together”. In those heady first days of the euro, Italy presented its national debt as a virtue. For financial institutions searching for a risk-free asset denominated in the new global currency, Italy promised an endless supply of euro-denominated bonds.The result has been widely reported in recent days; Italy has the third largest stock of outstanding bonds, after America and Japan. Banks across Europe, and the world, are heavily exposed. Too big to fail and to save, it is feared the scale and reach of Italian government borrowing could break the euro zone. Yet as analysts scurry to tot up exposure of foreign banks to Italian bonds, something to mull: Italians own a higher proportion of their government’s debt than the residents of any other euro-zone country (Spain follows close behind). The chart at right is from Barclays Capital.

Italian Bonds Snap Six-Day Drop on Speculation ECB Bought Country’s Debt - Italian and Spanish bonds rose on speculation the European Central Bank bought the debt of the euro region’s most-indebted nations to stabilize markets amid concern that the debt crisis is worsening. Greek 10-year yields fell the most in almost two weeks while equivalent-maturity Spanish yields retreated from a euro- era record reached earlier. Italian bonds rose, with yields below 6 percent after breaching the level for the first time since 1997. The 27 European Union finance ministers continued meetings today after euro-region officials said late yesterday that they may revive bond buybacks to ease Greece’s debt woes. An ECB press officer declined to comment on whether it bought so-called peripheral euro-region bonds today. “The suspicion has to be that there has been some unofficial central bank activity this morning, be that the ECB, or Asian central banks or a combination of the two,” . “The hurdles of the T-bill auctions from Italy, Greece and, to a lesser degree, Belgium, were overcome successfully.”“Speculation of central bank involvement encouraged short positions in peripherals to be closed,”

EU Will Support Banks Failing Stress Tests - European Union governments committed at a meeting Tuesday to backstop banks that fail stress tests. Ahead of the publication of financial-sector stress test results on Friday, officials said all vulnerable banks must recapitalize themselves, be recapitalized by their governments or restructure. "These measures privilege private-sector solutions but also include a solid framework for the provision of government support in case of need, in line with state aid rules," according to a statement from the economic bloc's 27 finance ministers. At the meeting, ministers said their governments either have action plans ready or would have them in time for publication of the test results, said Polish Finance Minister Jacek Rostowski. However, he added: "It's not the case that everything has to be in place ... although in the majority of countries most things are in place." The EU Commission's internal market commissioner also put rating agencies on warning in comments following the meeting, saying that a proposal to increase regulatory oversight would come this November

Will Italy Bring Down the Eurozone? - Forget Greece. The biggest question mark in the never-ending eurozone debacle is now Italy. European markets have been getting slammed over fears that Italy may be the next domino to fall. But why is Italy -- whose debt problems have until now been on the back-burner -- suddenly feeling the heat? First, eurozone finance ministers have been humming and hawing about whether they're going to throw more money in the rescue pot for flailing economies like Italy. That's making investors in eurozone debt worry that no one will be there to pick up the slack when these strung-out economies finally flop. Yields on Italy's 10-year bonds have been hitting just below 7%. Above 7% , bond investors typically start to fall off, which makes it even harder and more expensive for Italy to borrow and keep its wheels spinning. As was the case in Greece and Portugal, hitting the 7% mark could set Italy on the path to default.

Moody’s downgrades Ireland to Junk with negative outlook - Bloomberg reports that Moody's has downgraded Irish debt to junk (Ba1) with a negative outlook (further downgrades possible). This wasn't a surprise ... “The key driver for today’s rating action is the growing possibility that following the end of the current EU/IMF support program at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals." The Irish 10 year yield is up to a record 13.3%. But most yields were down today (see table below).

Why the euro is not worth saving - This crisis has exposed the fact that – unlike the EU itself – the eurozone's monetary union was always a rightwing project Although there is currently little basis for the concern that Italy's interest rates could rise high enough to put its solvency in jeopardy, financial markets are acting irrationally and elevating both the fear and the prospects of a self-fulfilling prophesy. The fact that the European authorities cannot even agree on how to handle the debt of Greece – an economy less than one sixth the size of Italy – does not inspire confidence in their capacity to manage a bigger crisis. The weaker eurozone economies – Greece, Portugal, Ireland and Spain – are already facing the prospect of years of economic punishment, including extremely high levels of unemployment (16%, 12%, 14% and 21%, respectively). Since the point of all this self-inflicted misery is to save the euro, it is worth asking whether the euro is worth saving. And it is worth asking this question from the point of view of the majority of Europeans who work for a living – that is, from a progressive point of view.

Ireland Cut to Junk Rating by Moody’s - Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as European Union finance ministers struggle to contain the region’s sovereign debt crisis. Moody’s Investors Service cut Ireland to Ba1 from Baa3, citing the probability that Ireland will need additional official financing and for investors to share in losses before it can return to the private market to borrow. The outlook remains “negative,” Moody’s said in a statement yesterday. In Spain, Finance Minister Elena Salgado said the nation might need to endure even deeper spending cuts in 2012 than those currently planned. Ireland, which had a top Aaa rating just over two years ago, has suffered after a real-estate boom collapsed, fueling bank bailouts and a surge in the country’s debt. “The downgrade underlines the need for something more radical in terms of a European solution,”

Moody's Downgrades Ireland From Baa3 To Junk - Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. The key driver for today's rating action is the growing possibility that following the end of the current EU/IMF support programme at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals. As stated in Moody's recent comment, entitled "Calls for Banks to Share Greek Burden Are Credit Negative for Sovereigns Unable to Access Market Funding" (published on 11 July as part of Moody's Weekly Credit Outlook), the prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt. This is a key factor in Moody's ongoing assessment of debt-burdened euro area sovereigns.

Ireland cut to 'junk' status on bailout fears - Ratings agency Moody's on Tuesday cut Ireland's bonds to junk status and warned of further downgrades as the eurozone economy struggles to pull out of a financial crisis. Moody's Investors Service said it reduced Ireland's government debt ratings by one notch, to Ba1 from Baa3, saying there was a "growing possibility" that the country will need more bailout aid in late 2013 when the current European Union-International Monetary Fund support program ends. Moody's also cited the "increasing possibility" that private sector holders of Irish debt will have to take part in any talks on a second rescue program "in line with recent European Union government proposals."

Euro states should hand over debt powers-Bini Smaghi - Euro zone countries should let a supranational organisation issue their sovereign debt, European Central Bank Executive Board member Lorenzo Bini Smaghi said in a German newspaper on Tuesday. "In a certain framework, the euro zone states should pass the emission of sovereign bonds to a supranational organisation," Bini Smaghi said in a guest contribution for Handelsblatt newspaper. "That would ensure that each individual country would not take on more debt than agreed in the framework of stability programmes. We would have a real debt brake." He also said that inefficient decisions in the euro zone led to "risks of transfers".

Greece needs more aid by Sept. 15 - minister (Reuters) - Greece needs a fresh tranche of international aid by Sept. 15 and is prepared to push new austerity measures and privatisations to secure the lifeline to deal with its debt crisis, its finance minister said on Tuesday. Evangelos Venizelos said world financial markets were using Greece as an excuse for an attack on the euro and that whatever Athens did, markets would never be satisfied. He promised that Greece would stick rigorously to its reform and revenue targets to secure continued EU/IMF funding. "Everybody knows that Greece is not the problem. Greece is the excuse for an attack on the euro," Venizelos told a news conference on his return from a Eurogroup finance ministers' meeting in Brussels. Greece's hopes for more funding were kept alive after the socialist government passed a package of budget cuts, tax rises and privatisations to make the 230-billion-euro economy more competitive, despite political opposition and street violence.

Tom Ferguson on How Banks’ Refusal to Take Haircuts Stokes the Euro Crisis (video) Tom Ferguson gives a crisp overview of some of the recent events in Eurozone crisis and how the desire to save banks from losses is making matters worse.

Greece’s Issuer Default Ratings Cut to CCC From B+ by Fitch on Lack of Aid - Greece had its long-term foreign and local currency issuer default ratings cut to CCC from B+ by Fitch Ratings because of the lack of an aid program for the debt-laden country.  The country’s short-term foreign currency issuer default rating was also cut, to C from B.  The downgrade reflects the absence of a new, fully-funded and credible program for Greece by the European Union and the International Monetary Fund, Fitch said. That’s coupled with more uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook, Fitch said.

General Marshall on the Aegean - It should now be clear to even the most blinkered observer that the Greek economy is in desperate need of help. Unemployment is 16% and rising. Even after a year of excruciating spending cuts, the budget deficit still exceeds 10% of GDP. Residents don’t pay taxes. The system of property registration is a mess. There is little confidence in the banks, and even less in the government and its policies. Since the economy needs help, here’s a novel idea: provide some. Now is the time for the European Union to come forward with a Marshall Plan for Greece. Rather than piling more loans onto the country’s already unsustainable debt burden, the EU should offer a multi-year program of foreign aid. The Greek government and donors would decide together the projects that it financed. These could range from building new solar and wind power-generating facilities, in order to turn Greece into a major energy exporter, to updating its ports to help make it a commercial hub for the eastern Mediterranean. The EU should contemplate this option, because, for starters, it bears more than a little responsibility for Greece’s plight.

Satyajit Das: “Progress” of the European Debt Crisis - In little over a year since the announcement of Greece’s debt problems, the European debt crisis has ebbed and flowed with markets oscillating between euphoria (resolution) and despair (default or restructuring). The European Union’s (“EU”) “confidence boosting”, short term “liquidity enhancement” programs, unfortunately, have failed to resolve deep-seated structural problems. The most recent concern about the peripheral countries was triggered by concern about Greece. Having repeatedly failed to meet economic targets prescribed by the EU, European Central Bank (“ECB”) and International Monetary Fund (“IMF”), Greece needs additional financing or a fresh bailout to meet its financial commitment. The debate has several separate and conflicting dimensions. The first is whether Greece can or will implement the required actions to rehabilitate its economy and finances at tremendous cost to its population. A related issue is whether the plan, entailing further austerity, even it is implemented will actually succeed. The second is whether commercial lenders, who helped fuel Greece’s debt binge, should accept some losses, bearing some of the cost of the restoration of Greece’s finances.

Europe at impasse on Greece, IMF backs investor role -The IMF joined Germany on Wednesday in pushing for private sector investors to help cut Greece's debt mountain as the euro zone sought to break an impasse on how and when to grant the country urgent aid. With Germany hanging back, euro zone officials struggled even to set a date for leaders to meet to agree a way forward, raising fears financial markets might exploit a policy vacuum with a new onslaught on the bloc's high debtors. "The principle of having a euro chiefs' meeting is accepted by the main players, including Germany," said one EU diplomat, adding that it was likely to happen next week despite earlier signals from Berlin that there was no rush to finalize a second package of aid. First, however, countries have to agree how to involve private sector investors in tackling Greece's debt burden, a key demand of Germany before it signs off more support for Athens. The International Monetary Fund backed the idea, saying in its latest review of Greece's troubles: "Comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing.

Greece needs additional 71 billion euros in new EU aid: IMF - Greece needs an additional 71 billion euros ($100.6 billion) in European Union aid and 33 billion euros from private creditors to weather its debt crisis, the IMF said Wednesday. The International Monetary Fund , in a report on the state of its May 2010 rescue loan to Athens, said it intended to continue its financing program but noted stiff challenges to recovery. Market sentiment has sharply soured against Greek debt, the IMF noted, pushing back its estimate for the eurozone country's return to the debt markets to the second half of 2014. The prior estimate was for early 2012. "For the purpose of this assessment exercise, it is assumed that voluntary rollovers/maturity extensions reduce financing needs by 33 billion euros through June 2014," the IMF wrote in a section titled "Private sector involvement." In the following paragraph, "Official support," the IMF said: "Additional support from euro area member states of 71 billion euros is assumed through June 2014," in addition to the 80 billion euros pledged in the May 2010 rescue.

Greece now, America in due course - Video + Transcript: PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. In Greece, the Parliament has passed the austerity measures. And judging by the reaction of the stock markets and investors, everyone was rather pleased with that. Stock markets shot up for the next few days. The euro went up. There was even optimism about the future of the economy. But that’s kind of the whole point. It was all optimism on the stock markets and bond investors. In fact, that’s how the whole story’s been covered. It’s all from the point of view of speculators. But what does what’s happening in Greece have to do with ordinary Americans? Now joining us to talk about this is Michael Hudson. Michael is a distinguished research professor at the University of Missouri-Kansas City. He’s the author of Super Imperialism: The Economic Strategy of American Empire. And he joins us now from New York City. Thanks for joining us, Michael.

‘EU states to rescue bank test failures’ - European countries will support banks that fail stress tests if those lenders cannot raise capital from investors within six months, according to a draft EU document seen by Reuters.  The paper, being prepared for EU finance ministers to approve on Tuesday, is an about-face from promises by G20 policymakers in the wake of the financial crisis that taxpayers would never have to bail out banks again.  The European Banking Authority is due to announce next week the results of its latest stress tests of the region's top lenders - 91 in all - in another attempt to reassure investors that European banks have been rebuilt against future shocks.  This latest round of tests has been touted as being more rigorous than previous attempts in which few banks failed, and finance ministers' officials are drawing up plans for how to deal with the fallout. .

Italy and Spain must pray for a miracle - If the ECB's Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago - and I think he is - it is hard see how the threat is any less serious right now.  Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.  Yields on Italian 10-year bonds hit a post-EMU high of 5.3pc on Friday. This is not just a theoretical price: the Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy's €1.84 trillion stock of public debt is about to rise very fast.  Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. France alone has $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements.  "We believe the European sovereign crisis might be entering a new phase with contagion reaching the larger economies,"

US hedge funds bet against Italian bonds - US hedge funds are placing large bets against the value of Italian government debt, directly shorting the bonds of the eurozone’s third-largest economy. The funds have increased the size of short positions in the last month, speculating that investor concerns over the country’s ability to fund itself may spread from Europe’s periphery to Italy, according to investors in the funds briefed on the strategy.  On Friday, yields on Italian government debt – the largest bond market in Europe – hit their highest levels since October 2002. Italy is now borrowing at its biggest premium over German bunds, the benchmark for the region.  The move followed the surfacing last week of tensions between Silvio Berlusconi, prime minister, and Giulio Tremonti, Italy’s finance minister, over the country’s proposed austerity programme. As Italy’s funding costs rise, the value of its existing debt falls, creating a profit for those who have shorted it by borrowing the debt to sell and buy back at a later date.  The funds are using the strategy in preference to buying credit default swaps, as attempts by the European authorities to avoid a technical default that would trigger CDS pay-outs for Greece have raised questions about the effectiveness of such derivative instruments, according to the investors.

Euro Falls to Two-Week Low as Leaders to Meet Amid Contagion Concerns - The euro dropped against most major peers after Die Welt reported that the European Central Bank is seeking to expand a fund to include help for Italy, following a coordinated rescue for Greece by the European Union and International Monetary Fund. “Italy is a very large economy, and if indeed we do see contagion spread toward Italy, then the ECB, EU and IMF will need to come up with a totally different plan to deal with it,”  “Ongoing sovereign concerns are proving to be a real drag on the euro.” The yield on Italy’s 10-year bond rose to a nine-year high of 5.27 percent on July 8, driving the premium over German bunds to a euro-era record of 244 basis points. The bailout fund may have to be doubled to 1.5 trillion euros ($2.13 trillion) to cover a crisis in Italy, the ECB said, according to the German newspaper Die Welt. The Financial Times cited unidentified senior officials as saying European leaders are prepared to accept that Greece should default on some of its bonds.

Markets rocked as debt crisis deepens - video - Europe’s debt crisis escalated on Monday as Italy and Spain saw their borrowing costs soar by record amounts, hitting bank shares and stock markets globally. Italy, the eurozone’s third-largest economy and home to the continent’s biggest bond market, saw the premium it pays to borrow over German debt rise by more than a quarter to 3 percentage points, a euro-era high. Spain’s benchmark borrowing costs rose above 6 per cent, also a euro-era high. The sharp market moves came as a consortium of large European banks with holdings of Greek bonds demanded that the European Union commit itself to a buy-back of the debt, possibly with billions in government money. Without quick action, they warned, countries such as Spain and Italy could be sucked under. “It is essential that euro area member states and the [International Monetary Fund] act in the coming days to avoid market developments spinning out of control and risk contagion accelerating,” said a six-page paper presented to eurozone finance ministers by the banks on Monday. Late on Monday night, the ministers attempted to respond to the pressure, announcing at the close of an eight-hour meeting that they had reopened the possibility of using the eurozone’s €440bn bail-out fund to repurchase Greek debt on the open market.  The move had previously been blocked by Germany and the Netherlands, but could cut Greece’s debt burden significantly.

Satyajit Das: European Debt – Wrong Diagnosis, Wrong Treatment! - The EU response has relied on two mechanisms – the ECB and the European Financial Stability Fund (“EFSF”). The ECB has financed the beleaguered countries by buying their bonds in the secondary market (around Euro 75 billion) and also by financing banks, against collateral of increasingly questionable quality such as Greek government bonds. There are allegations that the ECB and other European central banks have also used the Euro-zone payments system to lend money (around Euro 300 billion) to the crisis-stricken members. All this while the ECB has publicly been critical of banks, which are “addicted” to and substantially reliant on ECB financing. The “temporary” EFSF due to terminate in 2013 proved poorly designed. Instead of the touted Euro 440 billion, the fund had only the ability to lend around Euro 250 billion, due to structural flaws. The EFSF is now to be replaced by the “permanent” European Stability Mechanism (“ESM”) which will have lending capacity of Euro 500 billion, the originally proposed level. The Euro 500 billion ESM facility too has deep structural flaws. It relies on a similar mechanism to the original EFSF to achieve its AAA rating – a system of separate guarantees and capital. The Euro 500 billion fund is theoretically backed by Euro 80 billion in cash and Euro 620 billion in guarantees from Euro-zone members.

Euro Hit by New Market Jitters: Merkel Urges Italy to Stick to Austerity Measures – SPIEGEL - German Chancellor Angela Merkel urged Italy on Monday to pass an austerity budget to demonstrate that it is undertaking the reforms needed to restore confidence in the euro zone, as the currency slid against the dollar on concerns that Italy could be the next nation to fall victim to the debt crisis. 'Italy must itself send an important signal by agreeing on a budget that meets the need for frugality and consolidation,' she told a joint news conference with Icelandic Prime Minister Johana Sigurdardottir in Berlin. 'I have full confidence that the Italian government will pass exactly this kind of budget, I discussed this yesterday with the Italian premier,' said Merkel."

Italy to bolster austerity plan, pass it by Friday — Italy's finance minister says the government's package of austerity measures will be strengthened and passed in both houses by Friday. Giulio Tremonti sought to reassure markets during a speech to a banker's association meeting in Rome that Italy would speed reforms and austerity measures that seek to balance the budget by 2014. But he also said that the pressure on markets in recent days was not a problem "of a single country, but of the structure of Europe." The acceleration of the austerity measures — initially set for passage by August — has eased pressure on financial markets. The Milan stock exchange was trading up 1.4 percent to 18,765 points, while the 10-year yield dropped to 5.45 percent, after touching 6 percent a day earlier. ...

Sarkozy wants a summit, but Merkel does not want to go - Reuters reports that there will be an emergency EU summit this weekend, following another day of awful news for the eurozone. Italian 10-year yields shot through 6% at one point, before settling at 5.7% in the afternoon, on the news that Giulio Tremonti headed back for talks with Italy’s opposition, amid signs that the Italian parliament may be passing Mr Tremonti’s budget with a few days.  Yesterday’s highly volatile trading underlines the markets’ acute nervousness in the eurozone’s third largest economy. Moody’s downgrade Irish debt to junk status, citing concerns over a selective default of Greece.  Reuters quotes Willem Buiter of Citigroup as saying: "We're talking a game changer here, a systemic crisis. This is existential for the euro area and the EU." He called for the EFSF to be increased to €2 trillion.  There was some confusion yesterday about whether a summit would be held. France was in favour. Van Rompuy said he did not rule it out. But Berlin was notably cool on the idea. Merkel said she sees no need, and the Germany finance ministry even said a Greek deal could wait until September. The purpose of this summit would be to halt the contagion of this crisis and fix the uncertainty surrounding the second Greek loan programme. But it was not clear last night whether such a programme could, in fact, be negotiated in time. The Institute of International Finance disagreed, saying a solution would have to be found quickly, or the markets would spin out of control.

Germany digs in heels over Friday summit on Greece - Euro zone plans for a leaders' summit on a second Greek rescue were thrown into doubt by Germany on Wednesday, raising fears markets may exploit a policy vacuum with a new onslaught on the bloc's high debtors. Berlin stuck to its line that Greece was funded until September so there was no rush to finalize the details of a second package. "There are no concrete plans for a special summit," a German government spokeswoman said. Others were less sanguine. Italian central bank chief Mario Draghi, soon to take the helm of the European Central Bank, and Ireland's premier both said a definitive plan was needed and quickly -- echoing a strongly-worded attack from Greece's prime minister earlier in the week. Ratings agency Moody's downgraded Ireland's credit to junk status on Tuesday and said that, like Greece, it would need a second bailout. Minds have been focused even more sharply by a market attack on Italy which, if it required assistance, would overwhelm the euro zone's existing rescue funds.

Moody's downgrades Irish bank debt - Rating agency Moody’s has downgraded the Government-guaranteed debt ratings of five Irish financial institutions to junk status, indicating that Allied Irish Banks, Bank of Ireland, Anglo Irish, Irish Life Permanent (ILP), and EBS Building Society now all carried a ”negative outlook”. It follows Moody’s downgrade of Irish Government debt to junk status on Tuesday evening.

Irish bond yields hit record highs - Irish bond yields hit record highs again today following Moody’s downgrade of Irish debt to junk status on Tuesday evening. Irish 10-year bonds fell for a seventh consecutive day, raising yields by 12 basis points to a euro-era record of 14.11 per cent. European stock markets enjoyed a relief rally yesterday as investors speculated that the recent sell-off sparked by Italian contagion fears may have been overdone, and that a solution to the currency bloc’s sovereign debt crisis may yet be found. However, this was short-lived as Greek and Italian debt markets were today again on the slide. Greek two-year notes slumped, raising yields on the securities by 207 basis points to 32.11 per cent.Italian bonds also fell, with yields on 10-year government securities increasing five basis points to 5.59 per cent while two-year note yields rose seven basis points to 4.13 per cent.

Irish bond yields soar to record highs on 'junk' status - IRELAND SAW its bond yields soar to record highs yesterday after it became the third member of the euro zone to have its credit rating cut below investment grade. European stock markets enjoyed a relief rally as investors speculated that the recent sell-off sparked by Italian contagion fears may have been overdone, and that a solution to the currency bloc’s sovereign debt crisis may yet be found. Spanish and Italian debt markets recovered somewhat on hopes that Europe may “sort something out”, a Dublin trader said. However Irish bonds moved in the opposite direction following Moody’s downgrade of Irish debt to junk status on Tuesday evening. Yields on Irish two-year money broke through the 20 per cent level yesterday, while 10-year paper traded just above 14 per cent. Not only did these yields represent euro-era records, they also surpassed anything seen during the currency crisis of the 1990s.

Europe must be decisive on euro crisis, says Kenny - EUROPE HAS to respond “comprehensively and decisively’’ to the economic crisis, Taoiseach Enda Kenny told the Dáil. “Ireland will contribute to that,’’ he said. Mr Kenny said there was no point in having a EU Council meeting tomorrow unless there was a decision, or set of decisions, on the European situation. He said that Moody’s, a credit rating agency, had pointed out that Ireland was in a very different set of circumstances from other countries. “Therefore if a council meeting is to be held on Friday, it must be one that will grasp the nettle and set out Europe’s response to the contagion which is clearly causing anxiety and concern. With Italy having a debt of €1.8 trillion, or 120 per cent of GDP, the situation is obviously a cause for serious concern.’’

Euro zone leaders summit on Greece seen next week-diplomats  (Reuters) - Leaders of countries in the euro zone are likely to meet next week to discuss a second aid package for Greece as well as private-sector involvement in reducing the country's debt burden, EU diplomats said on Wednesday. "The principle of having a euro chiefs' meeting is accepted by the main players, including Germany," said one EU diplomat, adding that it was likely to take place next week. He said the exact timing would depend on the length of time it took to reach agreement on how private-sector investors could be involved in reducing Greece's debt burden.

Crisis? What crisis? - This was the day when the German government said that it could see no reason for a European summit, and when a German bank pulled out of the stress tests on the grounds that it failed them. As the eurozone financial crisis is spreading to Spain and Italy, where spreads were rising again after a short reprieve, Germany’s demonstrative complacency suggests that the risk of a big accident in the next few days has increased.  The news that a planned summit cannot be held this weekend may also suggest that the technical preparations for an agreement on Greece have not yet succeeded. The Ecofin ended in gridlock on Tuesday, overwhelmed with complexity, and there may not be enough time to prepare the groundwork for an emergency summit. Reuters quotes diplomats as saying that a summit was now most likely to take place next week.  A German finance ministry spokesman pointed out that despite uncertainty about the second aid package for Greece the country is financed until mid September. The Berlin finance ministry also hinted that the partial debt buy back by Greece with money from the EFSF was an option Germany may consider.

Merkel hides behind procedures, leaving eurozone on the brink of collapseThe FT reports that Angela Merkel yesterday came under pressure not to foot drag on a decision on Greece, as Italian and IMF officials warned her that continued delay would undermine the eurozone’s stability. The latest Italian bond auction was oversubscribed, with 15 year bonds priced at 5.9%, a full percentage point higher than a month ago. Italy’s Senate yesterday approved the financing bill and parliament is expected to approve the bill today. But investors are now focusing attention back on the EU’s sluggish process to get an agreement for Greece, and Merkel’s decision to delay a eurozone summit for as long as possible.  After the auction, Italian 10-year spreads continued to widen again from 2.8% to 3%, as market participants shifted their focus back to the stalled negotiations in Brussels. Giulio Tremonti talked about a “crisis moving through the world like a mutant”. He appeared to compare the German chancellor to a first class passenger on the Titanic. “Today in Europe there is an appointment with destiny.  Just as on the Titanic, not even first class passengers can save themselves.” The IMF also said that European leaders “need to come to closure” on the vexed bondholder debate.  But Ms Merkel, who is currently on a trip to Africa, said she would only attend a summit once an agreement has been reached.

Stress-Test Magic Makes Greece’s Bust Disappear - Better disclosure is no substitute for bad accounting. Europe’s lords of finance are going to give it a try anyway.  Tomorrow, the European Banking Authority plans to release its latest stress-test results for 91 banks in 21 countries. The good news for investors who believe in transparency is that the reports will disclose how much sovereign debt each lender held on its books at the end of last year, by country and maturity. The reports will also include detailed breakdowns of the banks’ sovereign-related derivative positions.  It’s a different story when it comes to measuring the capital cushion each bank has on hand to protect against future losses. The stress tests’ designers are letting the banks value the vast majority of their sovereign-debt holdings based on what they hope to be paid eventually, rather than those assets’ market values. That’s just like last year’s widely ridiculed tests, regardless of the growing likelihood that Greece, Ireland or Portugal will default.

Germany’s Helaba Snubs EU Stress-Test Regulator in Run Up to Publication -Germany’s Landesbank Hessen- Thueringen snubbed the European Union’s bank stress tests two days before the publication of results, refusing to give the European Banking Authority permission to publish all of its data. The bank, known as Helaba, disputes the EBA’s measurements of Core Tier 1 capital, the factor by which banks are said to have passed or failed the tests, because they don’t include some instruments allowed by German regulators. The lender said it passed the exams with a capital ratio of 6.8 percent, counting contractual changes around state funds of 1.92 billion euros ($2.71 billion), not included in the EBA results. German regulators had already been critical of the EBA. Bafin Chairman Jochen Sanio last month said the EBA lacks “clear, defined corporate-governance structures, which alone could guarantee process legitimacy.” Helaba’s move “challenges the very validity of the tests” because the EBA “doesn’t have the authority to force anyone to participate” in the exams, James Babicz, head of risk at analytics company SAS U.K., said in a telephone interview.

Contagion: Looking Ahead to Spain and Italy - The past week has been a busy one for people worried that the Greek debt crisis will soon spread to other countries. Ireland and Portugal have long been seen as susceptible to going the same way as Greece, but recently Italy has joined the group of countries seen to be potentially vulnerable. So like many, I’ve been thinking a lot about contagion this week. But even though it seems to be common knowledge in the business press that if and when Greece defaults the crisis will immediately deepen for other countries, cogent explanations for why that might happen have been scarce. So I think it’s helpful to try to get more specific about why we think the crisis might or might not spread further to Spain or Italy. That will help us better understand whether those fears are real or overblown. Most of the economic literature about contagion has focused on its applicability to currency crises, such as the EMU crisis of 1992-3 or the “Asian Flu” of 1998. However, the logic is similar when applied to sovereign debt crises. As a reminder, here’s a list of some of the explanations that have been put forward to explain previous episodes where financial crises spread from country X to nearby and similar country Y:

Spain - Next on the Eurozone Debt Hit List?  - Now that the world's markets are all aquiver once again about the Eurozone debt and the spectre of the debt issues facing Ireland, Spain and Italy are making the front pages of the world's newspapers, I thought I'd take a brief look at the last of the PIIGS nations - Spain. By way of introduction, Spain is Europe's third largest nation in area and had a population of 47,150,800 citizens at the beginning of 2011.  Spain’s main exports include motor vehicles, foodstuffs, pharmaceuticals and machinery.  According to the IEA, Spain produced only 2500 BOPD in 2010 necessitating the import of 1.438 million BOPD, making the country highly susceptible to oil price changes.  Spain's Consumer Price Index was up 3.5 percent on a year-over-year basis reflecting higher energy costs.   In the first quarter of 2011, Spain's Gross Domestic Product grew by a tepid 0.8 percent on a year-over-year basis to €270.620 million and by 0.3 percent on a quarter-over-quarter basis.  Here is a graph showing Spain's GDP growth history since 2004 when compared to the other Eurozone nations:

What do Spain and Vietnam have in common? - Rebecca Wilder - Roughly a 25% chance of defaulting over the next 5 years. That's what the credit default swap market is telling us. Vietnam's long-term rating is B1 by Moody's, BB- by S&P, and B+ by Fitch (not that these ratings really 'mean' anything). Spain's current rating is high investment grade - Aa2, AA, and AA+ by Moody's, S&P, and Fitch, respectively. Italy's is in good company as well, the low BBB camp (Croatia and Hungary, for example). Italy is currently rated mid- to low- A by all three rating agencies. My model (not shown) rates Italy BBB and Spain BBB+ based on economic and structural fundamentals on a cross-section of 76 emerging and developed countries. The chart above illustrates the shift in CDS pricing from 2 years ago (X-axis) to today (Y-axis). The red line is the 45-degree line. All sovereigns above the red line saw a point-to-point increase in CDS spreads spanning the last two years. There are a lot of European economies populating the upper-left area of the chart. Is Europe going to end up with a few investment grade credits alongside a host of below-investment grade credits?  We'll see. Finally, a bird's-eye view of CDS-land. Remarkable.

Italy, Spain under fire as debt crisis spreads (Reuters) - Key Italian and Spanish government bond yields hit their highest levels in 14 years on Tuesday on worries euro zone policymakers were stalling over efforts to resolve the debt crisis and avert a disorderly Greek default. Euro zone finance ministers late on Monday promised cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors but failed to set a deadline to act, drawing Italy and Spain deeper into the crisis. Dutch Finance Minister Jan Kees de Jager stoked market ire by saying a selective default for Greece was no longer being excluded. Italian 10-year yields jumped more than 30 basis points on the day to break above 6 percent for the first time since 1997, approaching the 7 percent level analysts see as an unsustainable cost for Italy's borrowing needs.

EU Hunts for Debt-Cut Tools in Overhaul to Tame Spreading Crisis -- European finance chiefs hunted for ways to cut Greece's debt burden, floating ideas from bond buybacks to a temporary default in an overhaul of a strategy that has failed to contain the debt panic. As a surge in bond yields in Italy and Spain brought the crisis closer to the heart of the euro area, Europe dusted off previously discarded plans under the glare of markets that have lost confidence in governments' ability to still the turmoil. "They are taking it one step a time and you never get ahead of the snowball," . "You need a fundamental shift that deals with the whole crisis." The brainstorming at a two-day Brussels meeting whipsawed financial markets, sending 10-year Italian yields to a 14-year high before bonds recovered. The euro fell to a four-month low. Milan's stock index dropped to its lowest in two years before rebounding.

Italian Debt Risk Puts France’s BNP Paribas, Credit Agricole on Frontline -  French banks, including BNP Paribas SA and Credit Agricole SA (ACA), have the most at risk from the euro- region’s debt crisis infecting Europe’s largest borrower, Italy. At the end of 2010, French banks carried $392.6 billion in Italian government and private debt, according to data from Basel, Switzerland-based Bank for International Settlements. That’s the most for financial institutions from any foreign country and more than double held by German lenders. “They’re on the frontline,” “French banks like BNP Paribas have taken substantial positions in Italy when the market opened up to foreign players and now they face the downside.” Italian stocks and bonds have been roiled on concerns about the country’s ability to trim debt after warnings by Moody’s Investors Service and Standard & Poor’s and infighting in Silvio Berlusconi’s government over a budget-cutting plan. Italy’s woes may overshadow efforts to fix Greece’s finances, which have left European policy makers struggling to find a strategy that won’t spark a region-wide debt panic.

Shades of 2007: Funding Stresses Hit European Banks - Yves Smith - Can you smell the napalm?  The tone of the market is beginning to feel like 2007: serious signs of danger, like interbank funding stresses, combined complacency and denial. Gillian Tett describes the disconnect between the rising panic in Washington over the debt ceiling impasse, as the formerly-disciplined Republican party is unable to rein its Tea Partiers, who are happy to throw Molotov cocktails and don’t care if a firestorm results, versus calm on Wall Street. Intrade pegs the odds of default at 60%, Tett puts them at 40%, while analysts see the probability at 10% at most, and Mr. Treasury Market views it as pretty much zero. In 2007, investors had, in Minksy fashion, been conditioned by the Great Moderation, abundant liquidity, and the Greenspan put to believe nothing that bad could happen, and if it did, investors would be able to exit with their hides intact. Now, these reflexes have been reinforced by the Bernanke put and Geithner’s attentiveness to the needs and wishes of banks. The assumption is that even if the Congressional gridlock continues, Timmie will find a way to keep paying Treasuries, even if everyone else suffers. The troubling bit is that the Administration has said it’s unwilling to consider any of the creative ways out of this mess suggested in op ed pages and in the blogosphere: use of the 14th Amendment, canceling Treasuries held by the Fed, or using other loopholes to have the Fed monetize the debt. But Geithner dissed those ideas..

Greek, Irish, Portuguese Note Yields at Records -  Greek, Irish and Portuguese two-year notes led declines by securities from Europe’s most indebted nations, while German bunds rose before the publication of stress tests that may show European banks need more capital.  Yields on notes of the three nations to accept international bailouts reached euro-era records, while German 10-year yields headed for a second straight week of declines as investors favored the safest assets amid concern the region’s debt crisis is worsening. Regulators will release test results for 91 banks to help reassure investors that the region’s lenders have enough capital. The yield on Greece’s two-year notes surged 118 basis points to 32.39 percent as of 12:58 p.m. in London, and earlier reached 34 percent. Ten-year Greek yields rose 36 basis points at 17.44 percent. Ireland’s two-year note yield was 84 basis points higher at 22.16 percent, a euro-era high. Spanish 10-year bond yields rose six basis points to 5.92 percent while equivalent-maturity Italian debt yielded 5.67 percent, four basis points more than yesterday.

Europe Looks for Hope in Bank Test Results - Europe’s festering debt crisis may well be approaching its own post-Lehman Brothers moment, when fear of the unthinkable finally prompted British and American governments to take radical action and force most of their capital-thin banks to accept government money — whether they liked it or not. But to the frustration of many, Europe seems far removed from such a drastic move. Instead, the euro zone’s top banking supervisor will announce on Friday the results of its latest examination into the health of its financial institutions. It is an exercise that an increasingly desperate European Union hopes will quell investor fears that the region’s banks have become too impaired by holdings that may be seriously overvalued to provide the loans needed to stimulate economic growth. While European finance ministers pledged this week that they would have a backstop plan for vulnerable banks, in practice that task will be left to national banking regulators, who have varying levels of resources and political will.

Eight European Banks Fail Stress Tests With $3.5 Billion Capital Shortfall - Eight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion).  The banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.  The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.  “Any institution failing the stress test could be left facing funding challenges, the potential loss of stakeholder confidence and the risk of a credit-rating downgrade,” . “Experience has shown the premium the riskier institutions might have to pay to retain some of their depositors could increase to an unsustainable level.”

Eight Banks Fail European Stress Tests - Here is the page for the European Banking Authority (EBA) - EBA Press release (pdf) - Stress Test Summary report (pdf) From the WSJ: 8 Banks Fail EU 'Stress Tests' Eight banks flunked the European Union's "stress tests," with a combined shortfall of €2.5 billion ($3.54 billion) in capital under a simulated worst-case economic scenario, the European Banking Authority said. The EU regulator said Friday that another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system. By awarding a relatively clean bill of health to the vast majority of Europe's banking industry, the tests are likely to be greeted with skepticism. Only €2.5 billion in capital needed? And the banks are reported to hold an aggregate €1.1 trillion euros in government debt from Greece, Ireland, Portugal and Spain? I think investors will remain skeptical.

IMF urges Italy to take 'decisive' action on deficit — The International Monetary Fund urged Rome to be decisive on cutting its deficit as investors dumped Italian bonds and the country's leaders rushed to pass a massive austerity plan. Amid worries that Italy could follow Greece and Portugal into a financial maelstrom and require a bailout, the IMF praised Italy's reform program that has already cut its current deficit to 4.5 percent of GDP, down from 5.3 percent, in the past two years. It also said the country had moved well to force banks to boost their capital strength. But it said the government needs to move firmly to "rationalize" expenditures -- to set better priorities and make cuts -- even as growth has plummeted to a stagnant 0.1 percent per quarter on the back of low domestic demand and rising unemployment.

Berlusconi Vows to Hasten Passage of Italy’s $56 Billion Deficit Reduction - Italian Prime Minister Silvio Berlusconi vowed to hasten passage of a 40 billion-euro ($56 billion) deficit-cutting plan to stop a market selloff that threatens Europe’s single currency.  The “crisis prompts us to speed up” approval of the budget cuts, the premier said today in an e-mailed statement, his first public comments on a rout that saw Italian stocks lose almost 7.5 percent over two sessions and bond yields soar to the highest in a decade. Speaking of the austerity plan, Berlusconi pledged “to bolster its content and draw up additional measures aimed at balancing the budget by 2014.”  The government sold 6.75 billion euros of 12-month bills today, its first auction since borrowing costs began soaring amid concern that Italy may follow Greece, Ireland and Portugal in seeking a European Union-led bailout. After the sale, Italian stocks emerged from a bear market, defined as losses of more than 20 percent from a previous high, and yields on 10-year Italian bonds retreated from a euro-era high of 6.02 percent.

Debt-ridden Italy faces meltdown, European finance ministers fear - Italy has reached breaking point and is set to hold four fixed-rate bond auctions on Thursday, aiming to sell €3-€5billion (£2.6-£4.4billion) of debt. Success at the auctions is essential so that Italy, the EU’s third largest economy, can demonstrate it is not in danger of losing access to market funding. However, the debt sale would still leave Italy short of the estimated €175billion (£154billion) it needs to fund itself for this year. The sale is also crucial for the stability of markets around the eurozone, including Britain. The International Monetary Fund has warned Italy that it had to ensure ‘decisive implementation’ of spending cuts. Italian government debt is now more than 120 per cent of the country’s annual economic output

Italy Yields Jump at Auction Before Senate Confidence Vote -- Italy sold five-year bonds at the highest yield in three years and the government was forced to call a confidence vote on an austerity package that aimed to show the nation can tame Europe’s second-largest debt burden. The Treasury priced 1.25 billion euros ($1.8 billion) of the bonds, the maximum set for the sale, to yield 4.93 percent, the highest since June 2008 and up from 3.9 percent at the previous auction on June 14. It was the first sale of longer- term debt since Italy’s 10-year yield reached a 14-year high of 6.02 percent on July 12. Italy also sold 1.72 billion of 15- years bonds and 2 billion euros of bonds due in 2017 and 2023. The failure of European Union policy makers to complete a second aid package for Greece and contain the region’s debt crisis fueled concern about the sustainability of Italy’s 1.8 trillion-euro debt, which is larger than that of Greece, Ireland, Spain and Portugal combined. The market selloff that also sent Italy’s benchmark stock index to a two-year low led Prime Minister Silvio Berlusconi to push for speedy passage of 40 billion euros in deficit cuts to balance the budget in 2014.

Italy money supply plunge flashes red warning signals - Monetary experts are increasingly disturbed by the pace of money supply contraction in Italy and most recently France, fearing that it could prove a leading edge of a sharp economic slowdown over the winter. "Real M1 deposits in Italy have fallen at an annual rate of 7pc over the last six months, faster than during the build-up to the great recession in 2008," said Simon Ward from Henderson Global Investors. Such a dramatic contraction of M1 cash and overnight deposits typically heralds a slump six to 12 months later. Italy's economy is already vulnerable – industrial output fell 0.6pc in May, and the forward looking PMI surveys have dropped below the recession line. "What is disturbing is that the numbers in the core eurozone have started to deteriorate sharply as well. Central banks normally back-pedal or reverse policy when M1 starts to fall, so it is amazing that the European Central Bank went ahead with a rate rise this month," Mr Ward said.

Italy Eyes Privatization as Market Tension Eases - The Italian government bolstered an austerity package on Wednesday, announcing its intention to sell stakes in state-owned companies, while political consensus on debt-cutting measures helped calm nervous markets.Economy Minister Giulio Tremonti said the four-year austerity package, aimed at bringing the budget into balance by 2014, would be approved by Friday and promised to step up privatisation moves once the crisis was over. Bond markets have targeted Italy, the euro zone's third largest economy, because of doubts about its ability to sustain one of the world's heaviest debt burdens. "We must begin a process of privatisation once the crisis period, which has blocked everything, is over," Tremonti told a meeting of the Italian banking association in Rome. According to the text of an amendment to the austerity package, the government will approve "one or more programmes for the disposal of state shareholdings" by December 2013. With opposition parties promising not to block the austerity package, a nervous calm returned to markets after a selloff this week sent yields on 10-year Italian bonds to a record 6 percent.

Italy Too Big to Bail Out as Crisis Enters ‘New Phase’: Chart of the Day - The euro’s fate may lie in the hands of Italian bondholders as the region’s debt crisis threatens to envelop the Mediterranean nation, according to Credit Agricole Corporate & Investment Bank. The CHART OF THE DAY shows Italy’s government debt burden, the euro area’s largest at 1.8 trillion euros ($2.6 trillion), dwarfs those of Greece, Ireland and Portugal, which already received bailouts, and Spain, which has the next-highest borrowing costs. German Chancellor Angela Merkel is under pressure from coalition partners to limit its contribution to sovereign bailouts. The European Financial Stability Facility currently has a lending capacity of 250 billion euros. “If Italy gets to the point where its debt auctions start to fail and it loses access to the market, it becomes difficult to imagine who would have the kind of money that would be required to rescue it,”

Italian, Spanish, Irish, Portuguese Bonds Decline as Debt Crisis Spreads - Italian two-year note yields surged the most in over a year, as the nation’s borrowing costs rose at a debt sale and contagion from Greece’s debt crisis spread across the 17-nation euro region.  Yields on notes from Ireland, Portugal and Greece soared to euro-era records, while German bunds advanced for the fifth time in six weeks as Europe’s politicians clashed over how to craft a new rescue plan for Greece involving private bondholders. Spanish and Italian 10-year bonds slumped, sending yields to the most since the euro’s inception in 1999, as borrowing costs rose to a three-year high at a sale of five-year Italian securities. France, Spain and Germany plan to sell debt next week.  “The market isn’t looking at fundamentals, it is just worried about contagion,” . “There’s been growing infection across most of the euro-region issuers and it’s hard to see what the catalyst is going to be to get confidence back into the markets with all the issuance next week.”

Britain facing a £43billion hit if the Italian economy collapses - Britain faces losses of nearly £43billion if the Italian economy collapses, according figures compiled by the Bank of England. The level of exposure was revealed as Eurozone nations met in Brussels amid warnings that the financial contagion is spreading to Europe’s third biggest economy. British banks and investment houses risk losses of £7.9billion if the Italian government defaults on its debts and another £5.7billion if Italian banks collapse. Financial firms face losing another £29.2billion should Italian companies fold as the debt crisis spirals. Last night, a meeting of Eurozone ministers, to which Britain is not invited since the UK is not part of the single currency, discussed plans for a fresh bailout of Greece. A Treasury source said: ‘The important thing is to get the Greek bailout sorted out, which will spread confidence through the Eurozone

Britain's total debt to top £2,000,000,000,000 - The full scale of Britain’s fiscal black hole will be revealed on Wednesday when the Government adds another £1,200billion of debt to its books. The Treasury will publish full accounts for all Whitehall departments to give taxpayers an idea of what the public finances would look like if it was a company. The move will for the first time bring into one place the future liabilities of accrued pension liabilities for public sector workers and the future costs of schools and hospitals built using the private finance initiative. Experts suggest that this will add an estimated £1,200billion from debt in the accounts of 1,500 public bodies to the Government’s books. Adding in the official national debt figure of £909billion, it takes the overall total debt bill to more than £2,000 billion, as at the end of 2009/10. It will allow taxpayers to be able to view the public finances as if Britain was a company listed on the London Stock Exchange.

U.K. Long-Term Finances ‘Unsustainable’ Without Action, Budget Office Says - Britain’s long-term public finances are on an unsustainable path without tax increases or spending cuts as an ageing population boosts expenditure on health, care and pensions, the government’s fiscal watchdog said. Governments will need to tighten fiscal policy after March 2017 by 3 percent of gross domestic product, the Office for Budget Responsibility said. Chairman Robert Chote said the report doesn’t require a policy response from the current government. “Nothing we say today should be construed as a call for a bigger fiscal tightening over the next four years,” Chote told reporters in London today. “But an ageing population does have fiscal costs.” The absence of tighter policy would push Britain’s net debt above 100 percent of economic output by about 2058 from 66 percent this year, the OBR said.

Age of austerity to continue for decades, warns OBR - Britain must brace itself for decades of austerity, even after enduring chancellor George Osborne's spending squeeze, to pay the price for an ageing population, according to the independent Office for Budget Responsibility (OBR). The OBR, which was set up by the chancellor to produce independent projections of the public finances, says in its report that the rising cost of health care and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably. Without fresh tax rises or spending cuts, the OBR says, the government's debt will hit a trough of 60% of gross domestic product (GDP) in the mid 2020s, compared with below 70% now, before rising rapidly to hit 107% by 2060-61. Although the deterioration in the public finances is more than a decade away, the OBR is urging politicians to make long-term decisions now, to prevent the economy drifting into a debt crisis as the population ages. The warning is expected to receive a warm welcome inside the Treasury, which has moved quickly since the coalition took power to limit escalating pension and health bills."

U.K. Unemployment Claims Climbed Last Month at Fastest Pace Since May 2009 - U.K. unemployment claims rose at their fastest pace since May 2009 last month, casting doubt on whether the economy is generating enough jobs to offset the deepest government budget cuts since World War II.  Jobless benefit claims rose by 24,500 from May to 1.52 million, the highest level since March 2010, the Office for National Statistics said today in London. The median forecast of 21 economists in a Bloomberg News Survey was for a gain of 15,000. Unemployment measured by International Labour Organization methods fell by 26,000 to 2.45 million people in the quarter through May.  Prime Minister David Cameron is counting on private companies to keep creating jobs as his government eliminates more than 300,000 public-sector posts to tackle the budget deficit. Today’s figures may provide ammunition for opposition politicians who say the pace of cuts is undermining the recovery.

The debt crisis will change the way we live in Europe - THIS is not just about the indebtedness of Greece; nor that of the other weak eurozone countries; nor about the future of the euro; nor, as we will learn today, that the liabilities of the British government are far higher than the official figures suggest; nor even the real possibility that the US itself may default in the next three weeks if Congress cannot agree to an increase in its borrowing limit. We are seeing all of this of course. But we are also catching a glimpse of something even bigger. This is the way in which the entire role of governments in Western democracies is starting to shift — has to shift — as they look across the chasm between what they are expected to do for their electorates and the resources they have available to do it. We are beginning to see how government 50 years from now will be quite different from anything in our lifetime. 

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