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

Saturday, July 30, 2011

week ending July 30

U.S. Fed balance sheet shrank in latest week   - The U.S. Federal Reserve's balance sheet shrank in the week ended July 27 with reduced holdings of federal agency debt securities and mortgage-backed securities, Fed data released on Thursday showed.The Fed's balance sheet dipped to $2.848 trillion in the week ended July 27 from $2.855 trillion in the week ended July 20. For balance sheet graphic: link.reuters.com/buf92k Meanwhile, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $897.3 billion from $904.2 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $112.4 billion from $114.0 billion a week earlier. Meanwhile, the Fed's overnight direct loans to credit-worthy banks via its discount window averaged $2 million a day in the week ended Wednesday, compared with an average daily rate of $6 million last week.

Fed Balance Sheet Shrinks In Latest Week - The Fed's asset holdings in the week ended July 27 decreased to $2.867 trillion, from $2.875 trillion a week earlier, it said in a weekly report released Thursday. However, the Fed's holdings of U.S. Treasury securities climbed to $1.638 trillion on Wednesday, from $1.634 trillion. Thursday's report showed total borrowing from the Fed's discount lending window fell to $11.97 billion on Wednesday from $12.53 billion a week earlier. Borrowing by commercial banks fell to $5 million, from $26 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts fell to $3.451 trillion, from $3.454 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts inched down to $2.719 trillion from $2.722 trillion in the previous week. Holdings of agency securities dropped to $731.96 billion, from the prior week's $732.57 billion.

FRB: Recent balance sheet trends - Credit and Liquidity Programs and the Balance Sheet

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 21, 2011 

NY Fed Accepts GSEs As Reverse Repo Counterparties - --Government mortgage lenders Fannie Mae (FNMA) and Freddie Mac (FMCC) are now eligible to participate in a Federal Reserve facility designed to drain liquidity from the financial system.  The Federal Reserve Bank of New York said Wednesday that following an announcement in late May setting the parameters of participation, government-sponsored enterprises Fannie Mae and Freddie Mac will now be allowed to participate in what the central bank calls reverse repurchase transactions.  The tool allows the Fed to tighten liquidity by loaning securities on the Fed's books to a widening array of commercial and investment banks, money market funds and now the GSEs, in exchange for cash.  The reverse repos are part of a suite of tools the central bank will use to tighten financial conditions. While few think the Fed will be tightening anytime soon given the economy's current woes, the central bank has nevertheless been preparing for that day.

Effects of the Fed's large-scale asset purchases - Some Federal Reserve officials apparently have a rule of thumb for thinking about the impact of the Fed's large-scale asset purchases. I was curious to compare those estimates with the numbers that would come out of my own research. When principal is repaid on assets currently held by the Federal Reserve, reserve deposits of the payer's account with the Fed are debited. The result is that the Fed's balance sheet contracts: both the Fed's assets (its security holdings) and its liabilities (reserve deposits) decline whenever assets mature. Brian Sack, Executive Vice President of the Federal Reserve Bank of New York, offered this assessment on Wednesday of what it would mean if the Fed were to decide from here on to let the assets it currently holds mature without rolling them over: If all asset classes in the SOMA were allowed to run off, the portfolio would decline by about $250 billion per year on average over the first several years. Under the interpretation of the policy stance noted earlier, this shrinkage of the balance sheet would amount to a tightening of policy. However, one should realize that this step represents a relatively gradual and limited policy tightening.

Fedspeak on Quantitative Accommodation -In case you haven’t heard of him, let me introduce Brian Sack. As Executive Vice President at the New York Fed, he’s the guy in charge of implementing the Federal Reserves’s monetary policy efforts including all the purchases of agency securities and Treasury bonds in QE1 and QE2  (LSAP1 and LSAP2 in Fedspeak, where they are known as large-scale asset purchases). Sack gave an interesting speech last week on the Fed’s $2.654 trillion portfolio. Among other things, he reiterated the Fed view that the impact of the portfolio comes from the owning, not just the buying: The pace of the Desk’s purchases fell back sharply at the end of June, as we moved from expanding the portfolio to simply reinvesting principal payments. In particular, our purchases slowed from an average pace of about $100 billion per month through June to an anticipated pace of about $15 billion per month going forward. We do not expect this adjustment to our purchases to produce significant upward pressure on interest rates or a tightening of broader financial conditions, given our view that the effects of the program arise primarily from the stock of our holdings rather than the flow of our purchases..

A very secret agent - There is a charade playing out in Washington at the moment in respect of the completely meaningless "debt ceiling" which the US maintains as a relic from the days of the gold standard.  We are told that at the US Treasury's account at the Federal Reserve Bank there will soon be no more taxpayers' dollars, and therefore the Fed will soon be unable to make any more payments or issue any more cheques on behalf of the Treasury. The money has run out.  This is nonsense. It is a myth, and moreover it is a myth that Federal Reserve chairman Ben Bernanke exploded in his recent testimony to a US congressional committee.

Congressman Sean Duffy: We had talked about the QE2 with [congressman] Dr [Ron] Paul. When - when you buy assets, where does that money come from?
Ben Bernanke: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
Duffy: Does it come from tax dollars, though, to buy those assets?
Bernanke: It does not.
Duffy: Are you basically printing money to buy those assets?
Bernanke: We're not printing money. We're creating reserves in the banking system.

But ask yourself the question: if paper money is not being printed, then what exactly is being created? What are these "reserves" to which Bernanke - and indeed the Federal Reserve Bank's very name - refers?

Fed under fire over default talks - Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default. With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating. They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or “repo”, market. “The responsible government people aren’t engaging and I bet a piece of it is they are really not sure what to do,” said one person on the industry side. Another said: “We don’t have any information from them. For the government shutdown [when budget disagreements nearly closed down the federal government] at least we had a road map.” “We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and as Treasury details its specific plans.”the Fed said.

Raghuram Rajan doesn't want the Fed to "do something" - Here’s Rajan: Recoveries are rarely without blips, especially when they are as weak as this one. But, regardless of whether the factors behind the latest slowdown are fleeting or enduring, there will be calls on the US Federal Reserve to do something. What does that mean?  Does he want them to do nothing?  What would it mean to do nothing?  Keep interest rates unchanged?  Keep the money supply unchanged?  Keep expected inflation unchanged?  Keep the price level unchanged?  Set the money supply at zero?  He doesn’t say.  Bernanke did QE2 because core inflation had fallen to 0.6%.  If Rajan disagrees with the Fed’s 2% implicit inflation target, then say so.  And he should tell us what he favors instead.  “Do nothing” is not a policy. There is, however, scant evidence that the real problem holding back investment is excessively high wages (many corporations reduced overtime and benefit contributions, and even cut wages during the recession). Wage reductions are exactly what you’d expect to see if sticky wages are a problem..  Rajan has things exactly backward.  BTW, the sticky wage theory applies to all output, not just corporate investment.

Fed Watch: Is Structural Change the Primary Challenge? - Given that thoughts of high structural unemployment continue to emerge in Fed thinking, the topic bears ongoing scrutiny. Especially so for me personally, as I have long seen the need for structural shifts that address the US current account deficit - but should such adjustments require persistently high unemployment rates? Some affirmation of my general story comes via David Altig, who recently posted this chart: Note the shift in relative growth patterns – less consumption, more investment, and net exports at least a less negative drag. This seems consistent with a shift away from the externally supported pattern of household consumption so evident in the past decade. And in discussing the general disappointment with the strength of the recovery, Altig says:  The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?

Lagarde: fiscal, not Fed, policy needed for jobs -The Federal Reserve is too often seen as a panacea for the US’s economic ills. This no doubt owes much to its dual mandate to both maintain price stability and promote employment, despite there being little monetary policy can do to influence structural unemployment. And so Christine Lagarde’s comments today that there has been a rise in structural unemployment in the US – and that, by implication, fiscal policy should shoulder more of the burden for creating jobs – is to be welcomed. The United States could be facing another jobless recovery. Again, that’s why we’ve advised against fiscal consolidation that is unduly hasty – even as we stress the importance of getting fiscal consolidation plan agreed soon. We’ve also recommended active labour market policies to stem the rise in structural unemployment, and measures to ease adjustment in the housing market (for example, mortgage relief).  Ms Lagarde’s comments are likely to be applauded by the Fed; they echo those Ben Bernanke made to Congress last week. Less welcome will be Ms Lagarde’s hint that officials from major economies must consider the global implications of their policy actions – a charge levelled at the Fed by officials in emerging markets when it rolled out QE2 (though the IMF is unconvinced the asset purchases did have significant repercussions elsewhere).

Lacker Says Fed Stimulus Could Lift Inflation, Not Growth - Federal Reserve Bank of Richmond President Jeffrey Lacker said additional monetary stimulus would likely raise inflation further while not providing a substantial lift to economic growth. “Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth,” U.S. central bankers have kept their benchmark lending rate in a range of zero to 0.25 percent since December 2008 and expanded the central bank’s balance sheet to $2.8 trillion in total assets in an effort to support growth. Lacker said the debate over the debt limit in Washington may cause businesses to pull back on investment. “There are a wide array of things that I think are impeding businesses’ willingness to make risky commitments,” Lacker told reporters after his speech. The fiscal stalemate in Washington may “contribute adversely” to business investment decisions, he said.

Fed’s Bullard: Rising Inflation Makes New Stimulus Unlikely - A changed inflation environment makes additional Federal Reserve stimulus for the economy unlikely, a Federal Reserve official told Dow Jones Newswires Friday. In an interview, Federal Reserve Bank of St. Louis President James Bullard said while he doesn’t see a need for the central bank to offer assistance beyond what it is already doing, “I think the inflation outlook does make it a much tougher decision than it was last summer” when one of the major threats to the economy was the prospect of falling price pressure potentially tipping over into deflation. Now, “you’ve got rising inflation, and headline inflation is pretty high compared to a year ago. It could even go even higher,” Bullard said, noting “in that case you have be very circumspect” about doing more to help the economy, even in the face of anemic growth. The official was interviewed on the sidelines of the Rocky Mountain Economic Summit, held in Jackson Hole, Wyo. He also gave a speech at the event and expressed support for what he referred to as “ultra-easy” monetary policy, which consists of zero percent short-term rates joined with Treasury buying to keep the Fed’s balance sheet steady at around $2.6 trillion.

Fed’s $16 Trillion Dollar Secret Slush Fund Props Up Our Way Of Life: While the world waits with baited breath on the Contrived Drama of the Debt Ceiling, the real show has already been played out,secretly and behind the scenes. The first audit of the privately owned and foreign owned Federal Reserve by the GAO,has turned up $16 Trillion dollars of loans all over the world to prop up the global fiat empire. This massive money creation is over and above Hank Paulson’s $700 billion dollar heist of the American public. It is also in addition to QE1 and QE2 that resulted in an illusionary recovery of the economy. All of this money printing has done nothing to create any economic growth and it never will. The scary part is that this was done with no oversight or accountability . (Thank God we have someone like Ron Paul to hold these Elite accountable and expose their crimes before the collapse.) “As a result of this audit,we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world. This is a clear case of socialism for the rich and rugged,you’re-on-your-own individualism for everyone else.” Senator Bernie Sanders VT (Get the full report here.)

Bill Buckler Puts Things Back Into Perspective: "Of The Total US $15 Trillion Market Capitalization, The Fed Provided About Half Of That" - On a surprisingly quiet night, during which many, chief among them the President of the US, were expecting some fireworks, it is easy to get lost in all in your face political farce, while ignoring, and even blissfully forgetting, the real financial details behind the scenes. Luckily we have Bill Buckler, whose latest edition of "The Privateer" puts everything right back in perspective, and reminds us that "in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this - a total of $US 7.75 TRILLION - was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this “audit”), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that." And here we are, haggling over $30 billion here, and $50 billion there...

Inflation volatility does not go up with inflation - The story used to be that inflation was bad for an economy because greater levels inflation led to greater levels of inflation uncertainty. Uncertainty isn't exactly the same as volatility, but in practice we often equate the two when we economists do empirical work.  So, while I'm not a macro guy, a long, long time ago I wrote a paper for a graduate macro class on the link between inflation and inflation uncertainty. I just used standard time series analysis to predict inflation and then looked at my prediction error in relation to the level of inflation.  I didn't see much of a link even then. Today I see even less of one.  To be honest, I haven't run the regressions.  I'm just looking at this picture from FRED. Back in the seventies and early eighties we might have logically conflated levels of inflation with inflation volatility.  But today, and over the past decade, inflation has been low and inflation volatility quite high.

Inflation Expectations and Behavior: Do Survey Respondents Act on Their Beliefs? NY Fed -Surveys of consumers’ inflation expectations are now a key component of monetary policy. To date, however, little work has been done on 1) whether individual consumers act on their beliefs about future inflation, and 2) whether the inflation expectations elicited by these surveys are actually informative about the respondents’ beliefs. In this post, we report on a new study by Armantier, Bruine de Bruin, Topa, van der Klaauw, and Zafar (2010) that investigates these two issues by comparing consumers’ survey-based inflation expectations with their behavior in a financially incentivized experiment. We find that the decisions of survey respondents are generally consistent with their stated inflation beliefs.

Our short debt maturity - Looking only at debt-gdp ratios misses this point, from John Hussman: Still, it’s precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can’t be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.

Repress, then inflate - I SEE that Tyler Cowen is pointing to John Hussman on debt maturities and the possibility of inflating away the debt: Still, it’s precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can’t be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. This isn't quite right. There are two ways to inflate away debt. One is to conduct a surprise burst of inflation that ends before much of your debt needs to be rolled over—that is, before markets can demand much higher interest rates, eliminating the benefit of the inflation. The other is to simply force institutions to buy your debt at below-market rates: Between 1945 and 1980 negative real interest rates ate away at government debt. Savers deposited money in banks which lent to governments at interest rates below the level of inflation. The government then repaid savers with money that bought less than the amount originally lent. Savers took a real, inflation-adjusted loss, which corresponded to an improvement in the government’s balance-sheet.

Fed's Beige Book: "Pace of economic growth has moderated" - Fed's Beige Book: Reports from the twelve Federal Reserve Districts indicated that economic activity continued to grow; however, the pace has moderated in many Districts. The six Districts nearest the Atlantic seaboard reported a slowdown in activity since the previous Beige Book report; activity was little changed in the Atlanta District and unchanged or slightly improved in the Richmond District. Of the other six Districts, the Minneapolis District reported political and weather-related disruptions that temporarily slowed growth, and the Dallas District slowed to a moderate pace of growth. The remaining four Districts continued to grow modestly.  Consumer spending increased overall, with modest growth of nonauto retail sales in a majority of Districts.... Manufacturing activity was reported as continuing to increase since the last report in all but two districts, although many noted that the pace of growth had slowed. 

Fed survey shows growth is slowing across much of U.S -- The economy worsened in much of the country, including the Philadelphia area, early in the summer, hampered by high unemployment, weak home sales, and signs of a slowdown in manufacturing. A survey released Wednesday by the Federal Reserve found that weak consumer spending, slow job growth, and tight credit were restraining growth into the second half of the year. The survey was conducted in June and early July. In the Philadelphia area, economic activity continued to grow but "at a very slow rate," the Fed said. In particular, the region's manufacturing, bank lending, and housing prices were sluggish. Among local manufacturers, food, apparel, chemicals, rubber, metals, and electronic companies reported declining demand. But area retailers offered a brighter view, reporting stronger sales than a year ago. "Shopping trips and a willingness to spend were aided by falling gas prices," the Fed said. "Consumers continue to search for value, and retailers continue to respond with merchandise at lower price points." Local banks said there was little change in lending volume, including weak demand from small businesses.

Chicago Fed: Economic growth below average in June - No surprise (this is a composite index) ... from the Chicago Fed: Index shows economic growth again below average in June The Chicago Fed National Activity Index increased to –0.46 in June from –0.55 in May; however, the index remained negative for the third consecutive month. Three of the four broad categories of indicators that make up the index improved in June, but only one made a positive contribution to the index.  The index’s three-month moving average, CFNAI-MA3, declined to –0.60 in June from –0.31 in May, remaining negative for a third consecutive month and reaching its lowest level since October 2009. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. 

Fed's Williams: The Economic Outlook - From San Francisco Fed President John Williams: The Outlook for the Economy and Monetary Policy Some excerpts on housing:  One of the most important currents holding back recovery has been housing. The collapse of the housing market touched off the financial crisis and recession. In most recessions, housing construction falls sharply, but then leads the economy back when growth resumes. As you well know, that snapback hasn’t occurred this time.  Today, housing construction remains moribund and residential investment as a share of the economy has fallen to its lowest level since World War II.. We simply built too many—in fact, millions too many—houses during the boom and we are still feeling the effects of this overhang. One daunting challenge for such a recovery is the huge number of homes in foreclosure. Almost 7 million homes have entered into foreclosure since the first quarter of 2008 and some 2 million are still in the foreclosure process. In addition, there is a shadow inventory of homes currently owned by delinquent borrowers. When you add up unsold new houses left over from the boom, homes for sale by owners, foreclosed residences for sale by lenders, and the shadow inventory of houses at risk of distressed sale, you come up with a massive supply overhang.

The US economy: July's not looking any better - Rebecca Wilder - Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion. Economists have put their 'hope' into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we're talking about jobs and the welfare of American families here. I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving. First, the bellwether of the state of the US labor market - weekly initial unemployment claims - continues to disappoint. In  Second, the US Energy Information Administration releases weekly estimates of distillate fuel oil supplied to the end user in thousands of barrels per day (real). Given that diesel fuel is a primary input to construction and commercial and industrial trucking, the weekly series serves as a high-frequency indicator of domestic demand for goods that are transported across the country.

Economists are terrible forecasters - why trust them anyway? - Rebecca Wilder - The herd that is 'consensus' clings to this hope that GDP will bounce back smartly in Q3 and Q4, where all the while some pretty miserable data and financial conditions are staring us in the face. On May 26 I worried about the 'soft patch'. July 24, the data doesn't look too much better. This week we get the Q2 GDP report from the Bureau of Economic Analysis, of which the mean growth forecast from 69 polled economists by Bloomberg is 1.8% Q/Q SAAR. That may change as we near Friday (unlikely by much), but those same economists (on Bloomberg) are forecasting a 3.2% bounceback in Q3. Alas, after the huge forecast miss in the first half of the year, I no longer put much stock in what economists expect by way of GDP growth just one quarter ahead (some yes, but broadly no).The chart illustrates the one-step-ahead quarterly forecast of the Philadelphia Fed's Survey of Professional Forecasters (SFP). For example, 2011 q3 represents the SFP mean real GDP growth forecast (% Q/Q, SAAR) for the third quarter of 2011, which was conducted in Q2 2011 (May 13, 2011, specifically). They do okay looking broadly at the business cycle; but the SFP point-to-point forecast error is huge. And they're really terrible recession forecasters: the average error is -2.1%.

Why Economists (On Average) are Terrible Forecasters - My colleague, Rebecca Wilder, had a post at her site entitled Economists are terrible forecasters - why trust them anyway?. The reason why economists as a general rule are lousy forecasters is obvious: there are no penalties to being wildly wrong.Prominent examples abound. Dow 36,000 anyone? No housing bubble in 2005. I can go on forever, but these aren't even as bad as it gets. At least these are bad forecasts of the future. There are plenty of bad forecasts of the past, or even the hypothetical past, too. My favorite example, in fact, of a bad forecast came in 2002, when a group of prominent policy economists, advisors to the then President, told the world that barring the 2001 recession, the US would have enjoyed double digit growth in fiscal 2002. And nobody said peep. It wasn't front page in the newspapers. It wasn't in the newspapers at all! Nobody involved paid any price for it, except the public who had to endure the policies "supported" by such an incredibly inane analysis. In fact, just about everyone involved went on to bigger and better things - Governor of Indiana, Dean of the Business School at Columbia, etc.

Lots of ground to cover - In my last post I noted that the pace of the recovery, now two years old, is in broad terms similar to that of the first two years of the previous two recoveries. The set-up included this observation: "Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery." The context of the depth of the downturn is not, of course, irrelevant. One way of quantifying that context is to look at measures of the "output gap," that is, the difference between the level of real gross domestic product (GDP) and the economy's "potential." An informal way to think about whether or not a recovery is complete is to mark the time when the output gap returns to zero, or when the level of GDP returns to its potential.There are several ways to estimate potential GDP, but for my money the one constructed by the Congressional Budget Office (CBO) is as good as any. And it does not tell a pretty story:

Kauffman Foundation: Bloggers Are Gloomy On The Economic Outlook - The Kauffman Foundation’s latest quarterly survey of “leading economics bloggers,” which generously includes yours truly, reports that “optimism is out; pessimism is in,” according to the press release. Tim Kane, the survey’s director and a scholar at the foundation, says: "This quarter's survey provides an unprecedented level of pessimism about the state of the U.S. economy among top bloggers.” In the wake of this morning’s encouraging news on last week’s initial jobless claims, perhaps the pessimism is already out of date. In any case, you can find the full survey here. As a preview, here’s how bloggers responded to the question: How do you assess the overall condition of the U.S. economy right now?

Econ Blogger Survey Charts! - - Optimism is out; pessimism is in among the country's top economics bloggers as they look to 2012 and beyond, particularly regarding jobs. A new Ewing Marion Kauffman Foundation survey released today shows that only 50 percent of respondents anticipate employment growth, a decrease of 20 percent from second quarter. "This quarter's survey provides an unprecedented level of pessimism about the state of the U.S. economy among top bloggers," said Tim Kane, the survey's director and a senior scholar at the Kauffman Foundation. "But, it also contains a handful of unique questions submitted by bloggers themselves that offer new perspectives and new directions forward." The full set of web-ready images of the survey charts are presented below:

Reports confirm decelerating economy - The latest evidence on the economy suggests that the tense standoff between Congress and the Obama administration over raising the debt ceiling is coming at a terrible time — not in a period of robust or even passable growth, but at a time the U.S. economy is barely eking out any expansion at all. “We had lost momentum even before the debt limit really became a big issue,” said James F. O’Sullivan, chief economist at MF Global. “It’s never a good time for something like this, but if we were coming off of six months of 250,000 job growth [per month] we would be much more able to withstand this. The economy does look vulnerable now.”

As Growth Slows, U.S. Recovery Seems to Repeat a Pattern - Earlier this year, as the economy began to sputter, Ben S. Bernanke, the chairman of the Federal Reserve, was asked about the historical evidence that recoveries from financial crises were always painfully slow. Mr. Bernanke responded that the pattern was clear but the reasons were not. He suggested that a nation that made the right choices could do better. History is not destiny.  It seems increasingly unlikely that the United States will prove his point. Twenty-five million Americans still could not find full-time jobs last month. And hopes for the second half of the year are under the cloud of a political crisis that has cast doubt on the government’s willingness to pay its bills.  Roughly four years since the start of the financial crisis, and two years since the official end of the resulting recession, what has taken hold in their wake is a new kind of great moderation — an era of slow growth.

US economy: GDP growth much weaker than thought: "US economic growth is much weaker than first thought, government figures show. The economy grew at an annualised rate of 1.3% in the second quarter, the Commerce Department said. Economists had forecast growth of 1.8%. And in a surprise move, first-quarter growth was revised down sharply from 1.9% to 0.4%. This evidence of economic weakness increases the pressure on the government as it attempts to increase its borrowing limit. Slow growth makes it more difficult for the US to tackle its deficit. If Congress does not raise the debt limit by 2 August, the US government could face funding shortfalls that it cannot meet by extra borrowing."

Advance Estimate: Real Annualized GDP Grew at 1.3% in Q2 - Note: This release contains a number of revisions. The recession was significantly worse than in earlier estimates. Last quarter (Q1) was revised down to just 0.4% real GDP growth.  From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent. The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q2 at 1.3% annualized was below trend growth (around 3.1%) - and very weak for a recovery, especially with all the slack in the system.A few key numbers:

• Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. 
• Investment: "Real nonresidential fixed investment increased 6.3 percent in the second quarter, compared with an increase of 2.1 percent in the first.

• Real federal government consumption expenditures and gross investment increased 2.2 percent in the second quarter, in contrast to a decrease of 9.4 percent in the first.

Q2 GDP Rises By A Weak 1.3% -- Economic growth remained sluggish in the second quarter, the government reports. Real GDP rose at a 1.3% annualized pace during April through June, the slowest pace since the recession ended. That’s up from the anemic 0.4% rate in Q1, but no one will confuse the latest number as anything other than a weak performance. The best you can say is that the growth rate is once again moving in the right direction. The trick is whether it’ll continue moving higher. The main drag on economic growth in Q2 was the virtual standstill in consumer spending. Personal consumption expenditures, which represent more than two-thirds of GDP, rose at annual rate of just 0.1% in the three months through June—the slowest pace since the recession was formally declared at an end in June 2009 via NBER. Durable goods in particular took a hit, dropping 4.4%. None of this is particularly surprising. It’s been clear for some time that the economy slowed in the spring. Today’s GDP report, like all GDP reports, formally restates what was already clear by monitoring the economic news as it arrived.

Advance Estimate Shows Weak Second Quarter GDP Growth -The advance estimate of GDP growth for the second quarter of this year is 1.3 percent: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent. And, if that news isn't discouraging enough, previous estimates were revised downward. For example, growth in the first quarter is now estimated to be just .4 percent, and GDP growth in the fourth quarter of 2008, i.e. at the worst part of the recession, was revised downward from -6.8 to -8.9 percent. Why are we talking about cutting the deficit immediately and running the risk of making this even worse? It's time for Congress to wake up and realize that this problem, particularly troubled labor markets, should be their first priority?

Economic Growth: Worse Than We Thought - The good news six months ago was that the United States economy, as measured by gross domestic product, had completely recovered all the losses it suffered in the recession. The revised G.D.P. numbers put out by the government today make the recent history, which we thought was pretty poor, even worse. Even with a small gain in real G.D.P. in the second quarter, the total size of the economy, $13.27 trillion in 2005 dollars, is $55.9 billion, or 0.4 percent, smaller than the revised number for the fourth quarter of 2007. The revisions indicate the economy was larger before the downturn than we had thought and is smaller now. We are now told that during the recession, the economy shrank by 5.1 percent. That is a full percentage point more than the 4.1 percent the old numbers showed. The recovery has also been slower.  The changes are pretty much across the board in the G.D.P. numbers. Personal consumption expenditures fell by a full percentage point more than previously thought. Gross private investment — on such things as buildings and planes and computers — declined by 34.2 percent during the recession, 2.6 percentage points more than previous estimates.

Yet another discouraging GDP report - The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 1.3% during the second quarter of 2011, and revised down its estimate of first-quarter growth to an even more anemic 0.4%. We knew the first half of the year was disappointing, but this is even weaker than most of us were anticipating.  The downward revisions to previous quarters give a picture in which the level of real GDP is still not back up to where it had been before the recession started in 2007:Q4. The latest numbers boosted our Econbrowser Recession Indicator Index up to 14.4% for 2011:Q1. This is an assessment looking back at the first quarter using today's reported GDP figures, and is based on growth rates rather than levels. Although the growth has been very disappointing, so far it is not looking like a new economic recession.

America's economy: Distress signal | The Economist - It has long been clear that America's recovery sagged worrisomely in the first half of 2011. This morning's  second-quarter GDP report reveals, however, that despite concern, most observers were too optimistic in their assessment of the economy's strength. Even more distressing, a series of revisions to past figures reveals a recession that was substantially worse than previously understood, which has left America in a bigger hole than imagined. America's economy expanded at a 1.3% annual pace in the period from April to June of 2011. That was less than economists expected. Personal consumption growth slowed dramatically behind a drop in purchases of durable consumer goods, largely attributable to higher automobile prices associated with supply disruptions in the wake of the Japanese earthquake. Investment growth continued at a moderate pace. Businesses kept spending on new equipment, and residential investment was a small but positive contributor to output—a rare occurence in recent years. Net exports added slightly to growth, thanks mostly to a big drop in imports. But adding to the weight of the decline in consumer spending was the drag from cuts to government spending and investment.

America and the terrible, horrible, no good, very bad GDP data - The recent GDP figures paint a bleak picture. My spreadsheet does too: There was a revision of past GDP performance and it was very bad. The graph above shows quarterly changes in Real GDP per capita, annualised. Of course the big hit was 2008 Q4 but notice that 2011 Q1 has gone negative. I don't think this is the beginning of an annual decline of Real GDP per Capita but it can certainly be seen to presage one later on. A very sad thing to notice about the new release of these GDP figures is that Real GDP hasn't yet passed its previous peak yet.Real GDP peaked in 2007 Q4 at $13.326 trillion, then bottomed out in 2009 Q2 at $12.6413 trillion and has grown since then to reach $13.2701 trillion in 2011 Q2. 15 quarters - nearly 4 years - in which real GDP remained below the peak. As far as my spreadsheet tells me, there is no other period in postwar US history where it has taken this long (and counting) for the economy to at least equal its previous peak. Both the 1974 and 1982 recessions took 9 quarters to reach this level.

Stagnation Nation - Krugman - The GDP estimates for second quarter are out, and they’re ugly. Basically, very weak growth for the first half of 2011 — indeed, growth well below the economy’s potential, so we’re actually losing ground in the effort to reduce the gap between what we should be producing and what we’re actually producing. This is a recipe for rising, not falling, unemployment. What’s causing the stagnation? A big factor is falling government spending: “government consumption and investment spending” has been falling sharply as the stimulus runs out and state and local governments slash. Anyone talking about fiscal austerity should know that in practice we’re already doing it, with the usual results. So given a stagnant economy suffering from falling government spending, what is all our political debate about? Spending cuts! After all, we have to appease those invisible bond vigilantes, who are suckering us in by cutting long-term rates to 2.87% as of right now.

The Q2 US GDP report - just terrible - Rebecca Wilder - The Bureau of Economic Analysis today reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This (newly revised - see below) acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases - GDP minus net exports - was weaker than the headline, increasing 0.7% on the quarter and matching the pace seen in the first quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing - remember these are annualized rates, not q.q rates. Below the hood, the pace of personal consumption expenditures slowed markedly, +0.1% in the second quarter compared to +2.1% in the first. Some of the drag to consumption will bounce back in the third quarter, as auto sales and the supply chain disruptions dissipate - durable goods decreased 4.4% over the quarter. On the bright side, real nonresidential fixed investment picked up markedly, up 6.3% in the second quarter and tripling the pace seen in the first. Real net exports contributed a large 0.58% to the headline growth number, as real exports maintained a healthy pace and imports decelerated markedly over the quarter.

Charting the Disappointing Economic News -The sad economic story in this morning’s GDP release can best be told with three simple charts. First, economic growth in this recovery has been even slower than previously thought, and has averaged less than 1 percent so far this year. This is the main reason why unemployment has remained so high. And the recession was even deeper than previously estimated. Second, inflation has been higher in the past two years than previously estimated. The broad GDP price index inflation rate has averaged 2.4 percent so far this year Third, this recovery looks even worse in comparison with the sharp 1983-84 recovery from the deep 1981-82 recession. Real growth in the past eight quarters has averaged only 2.5 percent and has never exceeded 4 percent.

What does lower US GDP mean for Canadian monetary policy? -  Nick Rowe - Assume you are Governor of the Bank of Canada. Your job is set monetary policy to bring inflation to the 2% target in the "medium term". You are just about to conclude a meeting where you will decide what target for the overnight rate you will set at the next Fixed Announcement Date. You have tentatively agreed on R% as the new target. Then someone bursts into the meeting room and shows you Stephen's graph. The US GDP data for the last 2 years have been revised down. The US economy has been much weaker than you thought it was. How do you respond to the news? Do you raise R, lower R, or leave R the same? I think most people's immediate reaction would be to lower R.  But that reasoning is wrong. You have not learned that there will be a weaker US economy than you thought it would be in future compared to the present. What you have learned is that the US economy was weaker than you thought it was in the past 2 years. And you already have Canadian data over the last 2 years.

Real GDP still below Pre-Recession Peak, Chicago PMI declines, Consumer Sentiment Weak -  From the Chicago Business Barometer™: The overall index decreased to 58.8 in July from 61.1 in June. This was below consensus expectations of 60.2. Note: any number above 50 shows expansion.  The employment index decreased to 51.5 from 58.7.   GDP: Not only has growth slowed, but the recession was significantly worse than earlier estimates suggested. Real GDP is still not back to the pre-recession peak.  The following graph shows the current estimate of real GDP and the pre-revision estimate (blue). I'll have more later on GDP. The final July Reuters / University of Michigan consumer sentiment index declined slightly to 63.7 from the preliminary reading of 63.8 - and down sharply from 71.5 in June.  In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. However, even with lower gasoline prices, consumer sentiment declined sharply - possible because of the heavy coverage of the debt ceiling charade.

The 2009 NGDP shock keeps looking worse - I’m reluctant to even do this post, as the GDP figures keep getting revised downward, suggesting my former comments are “inoperative.”  Fortunately for me the revisions keep strengthening my argument.  First the BEA said NGDP fell about 2% between 2008:2 and 2009:2.  Then last year the figures were revised sharply lower, especially for 2008:3, which showed that the recession got much worse before Lehman.  NGDP fell 3% between 2008:2 and 2009:2.  Now we have another revision, and the fall is nearly 4%!  (minus 3.85% to be precise)  What was already the worst AD collapse since 1938 just got even deeper.  What’s up with the BEA?  It isn’t just that they are revising RGDP data from years ago (I suppose a new price index formula could explain that), but they are also sharply revising nominal GDP data from years ago.  They are still getting new reports of nominal output!  Even more bizarre, the nominal numbers are being revised downward by massive amounts, more than $100 billion.  So they are getting new reports that nominal output for early 2009, which they still thought existed a year later in early 2010, did not in fact exist. .

Economic Indicators: 2011 Q2 GDP and Annual Revisions - This morning the Commerce Department’s Bureau of Economic Analysis (BEA) released its advance estimate of Gross Domestic Product (GDP) for the second quarter of 2011. The economy grew at a 1.3-percent pace in the second quarter following 0.4-percent growth in the first quarter.  On the one hand, GDP has grown for eight consecutive quarters.  On the other, our economy has been hit with some pretty heavy headwinds, like sharp jumps in energy prices, stress in European financial markets, and supply chain disruptions from the tragedy in Japan. Today’s report also included annual revisions to previous GDP estimates. Once a year, BEA revises GDP to reflect better information and methodology that has become available since its initial estimates.   New annual revisions tell us that the recession was even deeper than initially reported.  From the fourth quarter of 2007 to the second quarter of 2009 – the trough of the recession – BEA initially estimated the drop in GDP to be 3.7 percent.  With last year’s annual revisions, BEA estimated a drop of 4.1 percent (ouch).  Now, based on today’s data, BEA estimates that GDP fell 5.1 percent (double ouch).   The Bureau of Labor Statistics payroll employment data has also been revised downward, showing yet again that the recession was worse than initially estimated.

GDP: Investment Contributions - According to the Bureau of Economic Analysis (BEA), real GDP is still below the pre-recession peak. The estimate for real GDP in Q2 (2005 dollars) is $13,270.1 billion, still 0.4% below the $13,326 billion in Q4 2007. The following graph is constructed as a percent of the previous peak. This shows when GDP has bottomed - and when GDP has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. This graph is for real GDP through Q2 2011 and shows real GDP is still 0.4% below the previous pre-recession peak.  Note: There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA will release GDI with the 2nd GDP estimate.  The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Are We Running Out of Gas Because the Stimulus Wound Down? - This morning, dismal new GDP figures came out. There were really no bright spots here.  Only 1.3% GDP growth in the most recent quarter, when 1.8% was expected.  Large downward revisions to prior quarters.  As economist Justin Wolfers tweeted this morning, economists have spent the last few months pondering the mystery of the jobless recovery.  Well, it's a mystery no more.  We haven't had a jobless recovery.  We've had a recoveryless recovery.  Naturally, this has led to some discussion of the stimulus, with the implication that the winding down of the American Reinvestment and Recovery Act boosted the economy, and that without it, we're falling back into decline.  Maybe.  But when you look at the data, there's no particularly neat correspondence between spending and either growth, or the subsequent decline.  The correlation with tax cuts is a little better, but it's still pretty underwhelming.  Even if you start playing with lags, it's not neat--I can get the stimulus goosing the economy, or I can get the end of the stimulus causing a downturn--but I can't get both.

The Role of Government Spending - As Congress continues to wrangle over a debt reduction bill that will inevitably cut government spending, Friday’s estimates of second-quarter gross domestic product provided a sobering look at how a decline in public spending and investment can restrain growth. G.D.P. grew at an annual rate of just 1.3 percent in the second quarter, according to the Commerce Department, well below consensus forecasts. First-quarter growth was revised down sharply to just 0.4 percent from an earlier estimate of 1.9 percent. The astonishingly slow growth rate from April through June was due in large part to sluggish consumer spending and an increase in imports, which subtract from growth numbers. But dwindling government spending also held back growth. While federal government spending increased by 2.2 percent in the second quarter, that was all because of a jump in military spending. Excluding military, federal government spending and investment fell by 7.3 percent, a much larger fall than in the previous quarter. State and local government spending, which has been a crimp on growth throughout most of the official recovery, fell by 3.4 percent.

‘Great Recession’ even deeper than thought -The U.S. recession was even deeper than previously thought, a new government report showed on Friday. As part of an annual revision of data on U.S. gross domestic product, the Commerce Department said that the economy contracted by 5.1% between the fourth quarter of 2007 and the second quarter of 2009, more than the 4.1% previously estimated. It ranks as the most severe recession in the post-World War II era. As a result of the revision, GDP is now still below the pre-recession peak, economists said. See related story about second-quarter growth. Nigel Gault, chief economist at IHS Global Insight, said the revised data helps explain the weak labor market. Before the revision, it was hard to square an unemployment rate above 9% with the economy’s growth rate.

Productivity “Surge” of 2007-09 melts away in new data - Until this morning, the official data showed that the U.S. productivity growth accelerated during the financial crisis. Nonfarm business productivity growth supposedly went from a 1.2% annual rate in 2005-2007, to a 2.3% annual rate in 2007-2009.  Many commentators suggested that this productivity gain, in the face of great disruptions, showed the flexibility of the U.S. economy. Uh, oh. The latest revision of the national income accounts, released this morning, makes the whole productivity acceleration vanish. Nonfarm business productivity growth in the 2007-09 period has now been cut almost in half, down to only  1.4% per year. This revision has political and policy consequences. Back in March, I analyzed the apparent productivity surge and  argued that it was statistically suspect.  Now the productivity surge of 2007-09 has vanished, and so is the pretense that the U.S. economy was able to sail   through the financial crisis with barely any problems.  It’s time to set a new economic course.

Has the Economy Hit Stall Speed? - If an airplane dips below “stall speed” it starts to drop. If the economy grows too slowly, the same thing can happen, suggests recent research from Federal Reserve economist Jeremy Nalewaik. Looking at the four quarters before a recession, Mr. Nalewaik notes that the economy tends to grow more slowly than it does during other periods of economic expansion. Further sorting through the numbers, he finds that in the four quarters prior to 9 of the 11 postwar recessions, there was at least one quarter where GDP growth fell below 1%.  The 0.4% growth GDP registered in the first quarter doesn’t, in itself, mean the U.S. is headed for a double dip. There were plenty of false positives – periods where GDP grew less than 1% and the economy didn’t subsequently slip into recession. The false positive problem persists even when Mr. Nalewaik uses some sophisticated econometric techniques to crunch the numbers

The US GDP revisions aren't as bad as you think. They're much worse -The BEA's advance estimate for 2011Q2 GDP growth was accompanied by news that 2011Q1 growth had been revised from 1.8% to 0.4%. This is bad enough, but the data revisions are much, much worse than that. Here is a graph of the data that were archived by the St Louis Fed last month, along with the most recent BEA data: This is very, very bad news.

US GDP on Verge of Contraction in 1st Quarter, Mere 1.3% Annual Rate 2nd Quarter; Summary of Massive Revisions; Second-Half Recovery Nonsense – Mish - The stunner of the day is not only an anemic 2nd quarter GDP of 1.3 percent annualized, but of huge revisions all the way back to to 2007. Summary of Revisions:

  • For 2007-2010, real GDP decreased at an average annual rate of 0.3 percent; in the previously published estimates, real GDP had increased at an average annual rate of less than 0.1 percent.
  • From the fourth quarter of 2007 to the first quarter of 2011, real GDP decreased at an average annual rate of 0.2 percent; in the previously published estimates, real GDP had increased at an average annual rate of 0.2 percent.
  • The percent change in real GDP was revised down 0.3 percentage point for 2008, was revised down 0.9 percentage point for 2009, and was revised up 0.1 percentage point for 2010.
  • The revisions to the annual estimates for 2008 and 2010 reflect partly offsetting revisions to the quarters within the year.
  • For the 13 quarters from the fourth quarter of 2007 to the first quarter of 2011, the average revision (without regard to sign) was 0.9 percentage point. The revisions did not change the direction of the change in real GDP (increase or decrease) for any of the quarters.
  • For 2007-2010, the average annual rate of growth of real disposable personal income was revised down 0.6 percentage point from 1.2 percent to 0.6 percent.
  • From the fourth quarter of 2007 to the first quarter of 2011, the average annual rate of increase in the price index for gross domestic purchases was revised up from 1.4 percent to 1.6 percent. The average annual rate of increase in the price index for personal consumption expenditures (PCE) was revised up from 1.6 percent to 1.7 percent, and the increase in the “core” PCE price index (which excludes food and energy) was revised up from 1.5 percent to 1.6 percent.
  • National income was revised up 0.4 percent for 2008, was revised down 0.6 percent for 2009, and was revised up 0.1 percent for 2010.
  • Corporate profits was revised down 1.1 percent for 2008, was revised up 8.3 percent for 2009, and was revised up 10.8 percent for 2010

GDP Revisions and Our Looming Policy Masochism - The economy grew at an unflattering 1.3% annual rate in the second quarter, while first quarter GDP growth has been revised downwards to a wretched 0.4%. Against the backdrop of these abysmal numbers, the US government appears poised to do its best to make matters worse.  Even if the debt limit negotiations generate an agreement, this is likely to entail a rather substantial anti-stimulus over the next couple of years.  When combined with the expiration of the unemployment insurance extensions and of last year’s payroll tax cut, one can expect the US government to shortly be withdrawing somewhere on the order of a quarter of a trillion dollars from the economy. The forecasting group Macroeconomic Advisers estimates that, as a result of the possible debt limit deals alone, GDP will be roughly 0.1 percentage points lower next year, and up to almost 0.5 points lower in 2013. Again, it is useful to remind ourselves that this is purely self-inflicted.  There is no requirement that budget savings be produced equal to the value of the rise in the debt ceiling—this is entirely a result of political strategy and political demands. 

U.S. on verge of double-dip recession - According to new government figures, the economy has hardly grown at all in 2011. The recovery that began in early 2009 is now officially stalled. Some economists will quibble, but I think it is fair to say that the dreaded “double dip” recession is at hand. However it is labelled, the economic relapse is sure to have a big impact on politics. In the immediate term, it will increase pressure on Congress to raise the debt ceiling so the U.S. government can move on to more important issues, such as creating jobs. There is now the alarming prospect of the unemployment rate heading back to double figures over the next few months. It hardly needs saying that this would create problems for President Obama, who has staked his credibility on the economic recovery that began in mid-2009.  When healthy, the American economy grows at an annual rate of close to three per cent. The Commerce Department’s latest report on the gross domestic product (pdf) shows that between April and June, it expanded at an annual rate of 1.3 per cent, and between January and March it grew at an annual rate of just 0.4 per cent. The first-quarter figure is particularly stunning. Previously, the Commerce Department had estimated growth in the period at 1.9 per cent. What is to prevent a similar downward revision to the second-quarter figures? Nobody can say.

GDP numbers make double dip threat real - The US Bureau of Economic Analysis reported the following at 830AM ET: Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.The immediate reaction was a drop in the dollar to record lows against the Japanese yen and Swiss franc, a drop in Ten-year yields to 2.88%, a drop in the Dow Futures to –137 and a rise in the Gold price by $10 to $1626. While the headline number was well below expectations of 1.8%, what must be noted are the major revisions. Q1 2011 is now reported as +0.4%. That’s a major downward revision which demonstrates that QE2 was in fact doing nothing for growth and that the US is already at stall speed even without the negative impact of the European sovereign debt crisis and the debt ceiling fiasco. The double dip scare is real.

It’s still the economy, Congress, not the concocted debt ceiling crisis - Today we learned that the U.S. economic downturn has been much more severe than previously understood and the economy is growing much too slowly to keep unemployment from rising. The economic downturn was 24% deeper than previously assumed, and actual economic output currently stands a staggering $882 billion (5.6%) below potential. The anemic recovery has been losing steam for months, explaining the sharp deceleration in employment growth in May and June. As the U.S. Congress frantically debates an eleventh hour resolution to an artificial crisis of epic proportions, the real crisis in the labor market goes tragically ignored—and it is about to be amplified by bad policy choices. Unfortunately, the only conceivable debt ceiling compromises will further slow economic growth and exacerbate the unyielding crisis in the labor market. Today’s depressing GDP numbers should serve as a clarion call to refocus Washington’s attention to jobs and the economy.

GDP, 2011Q2: Congress, This is Not an Economy You’d Want to Toy With -  GDP grew by only 1.3% in the second quarter.  If there’s good news here, it’s that with new, revised data out this AM, that 1.3% is a gain on last quarter’s 0.4% (take out the inventory build-up from last quarter, which gives you a cleaner look a “final demand,” and we posted a zero!). No wonder the job market is stalled.  We’re living on fumes out there in terms of demand.  Consumer spending, closely tied to the job market, was flat in Q2, and in a 70% consumption economy, that says it all.  Also, state and local governments continue to contract, taking 0.4 percentage points off growth in both of the last two quarters.  According to these data the Great Recession was even worse than we thought.  EG, I thought the nadir in 2008q4 was a cliff-diving -6.8%.  According to today’s revision, we were contracting at an annual rate of 8.9% in that quarter. I’ve got no idea what it would take to get Congress to stop threatening to make this bad economy worse.  But this is not an economy to fool around with.

Will Debt Feud Clip Future Economic Growth?  - Washington's political feuding over the deficit has damaged business and consumer sentiment in an already weak economy, but what remains unclear is whether growth will be constrained in the third quarter or reaccelerate as economists have been expecting. Economists expect to see that second quarter GDP grew at a pace of 1.8 percent when it is released Friday. That would be just below the tepid 1.9 percent growth in the first quarter, a level of activity too sluggish to promote job growth. But now some are also looking to potentially trim third-quarter growth, concerned that forecasts of around 3 percent or more may be too high.Meanwhile, Congress has been struggling to find a deficit reduction plan that satisfies both Republicans and Democrats, and as of Thursday, the House and Senate each had their own separate bills. Some piece of legislation must be agreed in order for Congress to vote to lift the debt ceiling ahead of the Aug. 2 deadline. "It's impossible to say with certainty because we don't really know but anecdotally, when you listen or talk to executives, they're telling you there's a level of uncertainty that's been introduced here, and that affects the economy,"

Dueling Debt Proposals: How Much Fiscal Drag? - MacroAdvisors - The House and the Senate have advanced separate but dueling plans to cut federal spending as a way to break the current impasse over raising the debt ceiling. Both plans would initially limit spending through 2021 with caps on discretionary budget authority while promising to convene commissions to identify more savings later. The Senate plan has a separate cap for spending on the wars in Iraq and Afghanistan. CBO has now scored both of these plans relative to its March adjusted baseline. The scores do not include savings that might come out of the promised commissions, since such savings are merely speculative now. The plans are summarized in the table below.

  • The cuts in primary spending (that is, excluding interest payments) in the House (or Boehner) plan cumulate to just $715 billion ($851 billion including interest).
  • The cuts in primary spending in the Senate (or Reid) plan cumulate to $1.8 trillion ($2.2 trillion including interest).
  • The cuts in the Senate plan are so much larger because that plan quickly cuts budget authority for the wars in Iraq and Afghanistan by well over $100 billion relative to the CBO baseline.
  • The chart shows our estimate of the static fiscal drag (that is, before any multiplier effects or financial offsets) associated with each plan by fiscal year.

Boehner v2 fiscal drag on GDP: 0.1 pp/year over 4 years - MacroAdvisors - House Speaker Boehner has proposed an amended version of his original plan to cut spending as a way to break the deadlock over raising the debt ceiling.  Like the first plan, the “Boehner Plan #2” initially limits spending through fiscal year (FY) 2021 with caps on discretionary budget authority while promising to convene a commission to identify more savings later.  CBO has scored this new plan relative to its March baseline. The score does not include savings that might come out of the promised commissions, since these are speculations now.

  • In the revised plan, cuts in primary spending (that is, excluding interest payments) cumulate to $762 billion ($916 billion including interest) compared to $715 billion in the original plan. 
  • The cuts are now more front-loaded. 
  • The chart shows our estimate of the static fiscal drag (that is, before any multiplier effects or financial offsets) associated with the Senate or “Reid Plan” and the two House or “Boehner Plans” by fiscal year. 
  • We estimate that the new Boehner plan would still slow GDP growth by an average of 0.1 percentage point from FY 2012 through FY 2015.

Debt Fixes' Drag on the Economy - As we explained earlier this week, almost every possible outcome of the current debt talks debacle will most likely be bad for the fragile recovery. Macroeconomic Advisers, an economic forecasting firm, has now estimated how the leading proposals for fiscal consolidation — from the House speaker, John Boehner, a Republican, and the Senate majority leader, Harry Reid, a Democrat — would affect the economy over the next decade. As you can see in the chart below, both legislators’ packages are expected to drag on economic growth, since cutting government spending has ripple effects throughout the economy.  The economic forecasts are based on the Congressional Budget Office’s scoring of the two legislators’ proposals, including two different versions of Mr. Boehner’s plan. He recently amended his original proposal to front-load more of the spending cuts in order to appease some of his more conservative colleagues.  Even so, Mr. Boehner’s proposal still has smaller spending cuts than Mr. Reid’s, and as a result, it hurts economic growth less.

ECRI expects ‘double dip scare’ - Below is a video of Lakshman Achuthan, co-founder and chief operations officer of the Economic Cycle Research Institute (ECRI), talking about the economic outlook for the US. I profiled Achuthan’s views on a broad US slowdown when I wrote in May about why a global slowdown will hit by summer. Now that we are in Summer, both economic and earnings growth estimates are being cut. The question is “what should we expect going forward?” Achuthan answers this in speaking with Matt Miller, Deirdre Bolton and Lizzie O’Leary on Bloomberg Television’s "InsideTrack". He also also discusses corporate earnings. Note that last year we had a slowdown which analyst Albert Edwards could foresee as far back as April. Throughout the summer, many people were using at the change in the ECRI’s leading indicators as a potential sign of a double dip. Achuthan repeatedly assured us there was no a double sip sign, telling Barron’s in June: “While the plunge in WLI growth to a one-year low assures a significant slowing in U.S. economic growth in the coming months, the recent weakness has not lasted long enough to signal a new recession threat.” Timing-wise, this dip is similar. I would say, though, Achuthan seems less optimistic this year than last. Take a look. I think this is a good segment.

U.S., Europe and China: An economic crash in the making - From the air, where those Iowa cornstalks don't conceal a developing convergent tragedy, the world economic situation looks distinctly like a crash waiting to happen. From three directions, the United States, the European Union and China are blindly speeding toward the same intersection. The question is: Will anyone survive to attend the prom? Let me reprise the obvious but seldom discussed. Even if debt-limit doomsday is averted, President Obama has already hocked the farm and sold the kids. With breathtaking contempt for the liberal wing of his own party, he has offered to put the sacrosanct remnant of the New Deal safety net on the auction block to appease a hypothetical 'center' and win reelection at any price. As a result, like the Phoenicians in the Bible, we'll sacrifice our children (and their schoolteachers) to Moloch, now called Deficit. The bloodbath in the public sector, together with an abrupt shut-off of unemployment benefits, would negatively multiply through the demand side of the economy until joblessness is in the teens and Lady Gaga is singing 'Brother, Can You Spare a Dime?' Lest we forget, we also live in a globalized economy in which Americans are consumers of the last resort and the dollar is still the haven for the planet's hoarded surplus value. The new recession that the Republicans are engineering with such impunity will instantly put into doubt all three pillars of McWorld, each already shakier than generally imagined: American consumption, European stability and Chinese growth.

Scott Sumner Puts Foot in Mouth and Chews - Yves Smith - Reader Valissa has taken to providing economist jokes in comments, but the members of the discipline so often seem eager to make themselves the object of ridicule that efforts like hers sometimes seem redundant.  The latest sighting is a remark by Scott Sumner, a professor of economics at Bentley University. As you will see, it criticizes Modern Monetary Theory because it is….realistic.  Too much verisimilitude is a cardinal sin in economics, since it becomes hard to write things up in formulas hard enough to scare laypeople but not so hard that you’d need to be a real mathematician to devise them. So they posit hyper-rational consumers with perfect information and amazing computational powers in pretty simple situations, when in reality people have crappy information and aren’t all that smart and reality is really really complicated and kinda scary too. Which is also enough to make anyone plenty emotional.  Cullen Roche has graciously allowed me to cross post his commentary on the Scott Sumner remark in question, which I suspect will become a classic, in a bad way. From Roche:

Where MMT went wrong – Sumner - Suppose we pick a fairly “normal” year, when NGDP growth and nominal interest rates and unemployment are all around 5%.  It might be 2005, 1995, 1985, whatever.  The exact numbers aren’t important.  Now the Fed does an OMP and doubles the monetary base by purchasing T-securities.  They announce it’s permanent.  What happens?  I acknowledge that interest rates would change and that it’s not consistent with actual central bank practices.  So let’s say they double the base and let rates go where ever they want.  I claim this action doubles NGDP and nearly doubles the price level.  MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all. But here’s the Achilles heel of MMT.  Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost.  So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money.  Fair enough.  But then what?  You’ve got an economy far outside its Wicksellian equilibrium.

Video: Blinder Says Political Gridlock Puts Economy at Risk - The U.S. is shooting itself in the foot with respect to the debate over debt reduction, says Alan Blinder, a professor of economics at Princeton University and a former Fed vice-chairman. Even considering default is a “ridiculous debate” that could lead to a downgrade of U.S. debt, he tells the WSJ...

Insurance cost against US default hits record - The cost of buying insurance against a default by the US rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders. The market for buying and selling insurance on the creditworthiness of the US is thinly traded, denominated in euros and dominated by European and UK banks in London. But trading in so-called credit default swaps has picked up as the threat of a default has grown. In a CDS, a buyer of protection is compensated by the seller should there be a default or missed payment, known as a “credit event”.  “The US CDS market is much less liquid than other sovereign markets as up until recently no one thought the chance of a US credit event was very high,” . “The market is getting nervous over the risk of a default.”  Premiums for one-year US sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009.  In a sign of greater concern of a near-term default, US one-year CDS was trading higher than premiums for the more liquid five-year sector, at about 65bp, for the first time.

Cost of insuring against US default hits record high - The cost of insuring US debt against a default in the next year hit a record high as a stalemate in Washington over raising the country's $14.3 trillion debt ceiling led the calls for Congress to 'lift the cloud of default' over the world's biggest economy. A Republican plan to cut the US deficit faced delay and stiff opposition, piling anxiety onto investors and ordinary Americans hoping for a late compromise to avoid a crippling debt default.  One-year US credit default swaps rose to a record high 85 basis points, up 8 basis points on Wednesday, according to data monitor Markit, surpassing high hit during the 2008 global financial crisis.

US CDS curve inverts for first time ever - Presenting, courtesy of Bloomberg, le chart du jour — an eye opening inversion of the US credit default swap curve:That means, as Bloomberg eloquently put it, that it costs more to insure US Treasuries for one year than it does for five years, for the first time ever. And that’s obviously in both the most liquid US CDS contracts, which are euro-denominated as well as the dollar denominated ones.  But what good is a US CDS contract if denominated in US dollars (and/or euros for that matter)?

Brazil less risky than the US - Should Americans be giving up their passports and moving to Brazil to avoid bankruptcy? That depends on whether you believe in the wisdom reflected in the one-year credit default swap market. Guido Mantega, Brazil’s finance minister, does. He says that the risks associated with Latin America’s largest economy are now lower for the first time than those of the US as measured by the CDS market. “This is the first time the risk of Brazil is lower than the risk of the US,” said the indomitable minister, who is known to be fond of knocking Brazil’s big brother to the north. The creator of the term “currency war”, Mantega has criticised the US for its quantitative easing programmes that he claims have showered the world in easy money, making it hard for emerging markets such as Brazil to manage their exchange rates. “We are happy with this because it shows the solidity of the Brazilian economy and the confidence that markets have in the Brazilian economy,”

UK’s borrowing costs below those of US -  The UK’s benchmark borrowing costs have fallen below those of the US for the first time in 15 months as markets continue to fret about the risk of a US default. Yields on 10-year gilts, which move inversely to prices, were at 2.95 per cent at about midday in London on Thursday, two basis points below Treasury yields. Gilt yields were last lower than Treasuries briefly in 2009 and April 2010 and before that throughout most of 2006. The move comes despite intense worries in the UK about “stagflation”, the toxic mix of little or no growth and high inflation.“You have this combination of weakness of the UK economy and renewed calls for QE [quantitative easing] and the short-term concerns in the US. There are just so many other problems to deal with before you get to the UK,” said Gary Jenkins, head of fixed income at Evolution Securities. Gilt yields have fallen from a high this year of 3.88 per cent in February as the prospect of UK interest rate increases has receded amid poor economic growth.  But the move also comes against a backdrop of sharp fiscal cuts by the UK coalition government, in contrast to the political wrangling in the US about raising the debt ceiling. Bill Gross, the founder of Pimco who runs the world’s largest bond fund, said only 18 months ago that gilts were “resting on a bed of nitroglycerine”. When he made the call, they were yielding slightly more than 4 per cent.

The $1 Billion Armageddon Trade Placed Against The United States - The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it. However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio. You only do this if you see an edge. This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up. I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn't. The number of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross's PIMCO, and the U.S. and Chinese central banks.

Will U.S. Default? $4.8 Billion Investment Says Yes - Investors are spending $4.8 billion to hedge against the possibility that credit rating agencies will downgrade U.S. debt--or worse, that the U.S. actually will default. Doomsayers predict these and other dire consequences if Congress fails to act by August 2 to raise the nation's debt ceiling. Rating agency Standard & Poor's earlier in July warned the U.S. that it risks a downgrade of its top AAA rating to AA status, unless Congress lifts the $14.3 trillion ceiling and reduces total debt by $4 trillion over 10 years. The agency in April lowered its rating outlook for the U.S. from stable to negative. Investors worried at the prospect of a U.S. downgrade or default could protect themselves several ways, say experts. Joe Magyer, senior analyst at the Motley Fool, says an investor could, for example, go entirely to cash. Otis C. Casey, director of credit research for Markit, a financial information services company, says an investor could unload any U.S. debt he might own, such as bonds, and move into some other safe-haven asset, such as gold, whose price has recently hit record highs on fears over the debt fight

Who Is In Worse Shape – the United States or Europe? - Simon Johnson - The United States and Europe seem to be competing hard this summer for the title of “biggest economic problem.” Based on the latest news coverage, Europe might seem to be experiencing something of a resurgence, as last week the euro zone agreed on a deal involving mutual support and limiting the fallout from Greece’s debt problems. In contrast, the United States seems to be mired in a political stalemate that becomes more complex and confused at every turn. But rhetoric masks reality on both sides of the Atlantic. The euro zone still faces an immediate crisis: the can was kicked down the road last week, but not far. The United States, on the other hand, is in much better shape over the next decade than you might think after listening to politicians of any stripe. American problems loom in the decades that follow 2021, so there is still plenty of time to sort these out; the bad news is that almost no one is talking about the real issues.

The Halt and the Lame - Paul Krugman - Simon Johnson writes about who’s worse — America or Europe? Basically I agree with his assessment: Europe has more fundamental problems in sheer economic terms, because it adopted a single currency without the necessary institutions to make it workable. America has a long-run budget problem, but our current mess is entirely political. Unfortunately, that doesn’t make it any easier to solve. What’s extraordinary, though, is the paralysis that has taken over essentially the entire advanced world. America is hamstrung by its crazy right; Europe by its single currency that can be neither abandoned nor accompanied by sufficient reforms to make it work; Japan by lousy demography and monetary timidity that is now deeply ingrained in expectations. Technology continues to advance; resource shortages are not severe enough to pose a major constraint; climate change is terrifying in its long-run implications, but hasn’t inflicted much damage yet. The only major problem we have right now is the one that was supposed to be easy to solve: a simple lack of adequate demand. And we’re totally failing in our response.

USA fact of the day - Of the world’s share of AAA sovereign debt, we issue 59 percent of it.  (Next is Germany with ten percent and then France with nine percent of the total.)  You can read this a few ways:

  • 1. Wow, we really abuse that AAA privilege.
  • 2. Losing the AAA rating would spell disaster for repo markets and the like.
  • 3. The world trusts us enormously, isn’t that wonderful?
  • 4. All of the above.

Can the buck "break the buck"? - Nick Rowe - Obviously not, in any literal sense. But this might be a metaphor worth exploring. Are central banks like money market mutual funds? What happens to the value of the US Dollar, or the Euro, if the risk of sovereign default causes the value of a central bank's assets to fall below the value of its liabilities? If you are looking only for a clear, definite, reliable answer, stop reading now. I don't have one. Think of a central bank as like a money market mutual fund (MMMF). It has liabilities worth $1 each. Those liabilities normally mostly take the form of zero interest bearer bonds we call currency. And it has assets, comprised mainly of short-term interest-paying bonds. Assume those bonds are government bonds. What happens when there's suddenly a risk the government might default, and those bonds suddenly drop in value?

US default could end greenback's reign  - Analysts say a US debt default could cause a credit crunch similar to the one sparked by the collapse of Lehman Brothers at the height of the global financial crisis. US lawmakers failed to reach a deal to lift the debt ceiling at the weekend, ahead of an August 2 deadline. A senior currency analyst at Thomson Reuters John Noonan says markets are starting to prepare for the possibility that the US may default on its loans. "When Lehman Brothers failed we saw credit markets freeze around the world," he said.  "Now that is something that could possibly happen once again if treasuries are downgraded and there is a US default - if that was the case we'd see stock markets come off quite viciously." Market prices are now reflecting the possibility that the US will default on its debt after lawmakers again failed to reach a deal to lift the borrowing limit at the weekend. John Noonan says a debt default in the US could also see the greenback lose its status as the world's reserve currency.

IMF’s Lagarde Says U.S. Dollar May Lose ‘Privilege’ Amid Debt-Limit Crisis - International Monetary Fund Managing Director Christine Lagarde said the dollar’s standing as the world’s main reserve currency may be diminished as U.S. lawmakers fail to lift the nation’s debt limit. The U.S. currency has had an “exorbitant privilege because it was the reserve currency that most central banks had,” Lagarde said in an interview on PBS’s “Newshour” yesterday. “If there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar, it would probably entail a decline of the dollar relative to other currencies.” U.S. lawmakers are negotiating to raise the nation’s $14.3 trillion debt limit by Aug. 2 to prevent a default. The Dollar Index, which tracks the currency against those of six trading partners, slid to an eight-week low this week. The delay may cause “doubts in the mind of those people who reserve currencies as to whether the dollar is effectively the ultimate and prime currency of reserve,” Lagarde said.

Brazil Charges Tax on Bets Against Dollar as Real Rallies to 12-Year High - Brazil imposed a tax on bets against the U.S. dollar and warned it may boost intervention in the nation’s derivatives market in a bid to weaken a currency that reached a 12-year high this week. As part of a new round of currency measures unveiled today, the government levied a 1 percent tax on short dollar positions in the country’s futures market above $10 million in notional value. The government may increase the tax up to 25 percent if needed, according to the decree signed by President Dilma Rousseff and published today in the Official Gazette.
Finance Minister Guido Mantega said that the measures give the government a “bigger arsenal” of tools to defend itself from “speculation” that the real will continue to rally amid global economic uncertainty. “We’re reducing the advantages enjoyed by speculators, and we expect the real will weaken or stop appreciating,” Mantega told reporters in Brasilia.

The Impact of the U.S. Defaulting - The impact could be large and global, as Christine Lagarde points out in this article. “Frankly, to have a default, to have a serious downgrading of the United States’ signature would be a very, very serious event,” said Ms. Lagarde at a meeting of the Council on Foreign Relations in New York. “Not for the United States alone, but for the global economy at large because the consequences would be far-reaching. It would not stop at the frontiers of the United States; it would go beyond.” If the US were to default on the interest on its bonds, private economists say, it would cause banks around the world to write down the value of their enormous holdings of US Treasury securities. At the same time, stock markets around the world would probably plunge. “That would have a devastating effect,”  If banks were to write down the value of their bonds, they would have to raise capital quickly or shutter their doors, Mr. Bryson says. “Their capital base would shrink, and when that happens, they are less likely to make loans,”  “It would spill over very quickly to the real economy.”

Can Treasury just go overdrawn at the Fed? - John Carney has an intriguing post today: what if, in the short to medium term, the debt ceiling really doesn’t matter at all? This is nothing to do with the 14th Amendment or with coin seignorage — this is just the simple mechanics of bank accounts. Treasury has an account at the Fed; at last count it was in credit to the tune of roughly $77 billion. Money’s coming in; money’s going out. Come August 2, it’ll be down to zero. But hey, zero’s just a number. We’ve all gone overdrawn at our bank at some time or another: why should Treasury be any exception?The idea here is that after August 2, Treasury can simply carry on with business as usual. Money will come in to its bank account; money will go out. And the balance will dip below zero: Treasury will have an overdraft at the Fed. You think the Fed’s going to bounce Treasury’s checks? The question is whether the overdraft counts as national debt for the purposes of calculating the debt ceiling. And Carney thinks there’s a good case to be made that it doesn’t:

Yu Yongding Says China Needs to Hold Less Treasuries as Safety a ‘Mirage’ - Former Chinese central bank adviser Yu Yongding repeated his call for China to reduce its Treasury holdings amid an impasse among policy makers on raising the U.S. government’s debt limit. “U.S. bonds are not safe, but people think they are safe,” Yu, a researcher at a Beijing institute under the Chinese Academy of Social Sciences, told reporters at a briefing in Mumbai, India, today. “That is a mirage.” President Barack Obama’s administration and Democrats and Republicans in Congress are locked in a standoff over what kind of deficit-cutting measures to tie to an increase in the nation’s $14.3 trillion debt ceiling. The Treasury Department has said the U.S. exhausts its borrowing authority on Aug. 2 and risks going into default. Yu spoke to reporters before giving a lecture at an event organized by Export-Import Bank of India.

China’s hands tied on U.S. debt threat - China is certainly concerned about the U.S. debt impasse, but unlike in past situations, Beijing has little choice but to cross its fingers and hope its vast holdings of Treasury notes keep their value, according to Chinese market participants. As the top holder of U.S. sovereign debt, the Chinese government has reason to be nervous, but an actual default is not at the top of its list of fears. “At the current moment, they are worried about a downgrade,” but they think a default probably won’t happen since the delay in a U.S. debt-limit hike is due to “typical tactics between the Democrats and Republicans,” Recent statements out of Beijing back this view. In the latest of such comments, two Chinese government economists were quoted in the state-run China Daily on Wednesday as saying a default is unlikely. See report on Chinese economists’ remarks on U.S. debt.

Roach Says Chinese Officials ‘Appalled’ by Impasse on Raising Debt Ceiling - Senior Chinese officials are “appalled” by the impasse among U.S. politicians on raising the nation’s debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd. “Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw” for China, New York-based Roach, 65, said in an e- mailed note today. He said his assessment was based on visits to Beijing, Shanghai, Chongqing and Hong Kong. In another sign of concern within the nation that is the biggest foreign owner of Treasuries, the official China Securities Journal said today that the U.S. stand-off signals long-term dollar weakness that will push up commodity prices and pose inflation risks for the world. In Mumbai yesterday, a former central bank adviser, Yu Yongding, repeated his call for China to reduce its Treasury holdings, adding that a default would be “disastrous.” Roach cited an unnamed Chinese policy maker as saying in mid-July that “we understand politics, but your government’s continued recklessness is astonishing.” In the past, the economist has met with officials including central bank Governor Zhou Xiaochuan.

China's Xinhua Criticizes U.S. Leaders' Actions .A sharply worded commentary from China's state news agency highlighted rising concerns in America's biggest creditor nation over a possible default or downgrade of U.S. debt, as a deadline for compromise in Washington loomed closer. China holds more than one trillion dollars of U.S. Treasury securities and would be among those countries most immediately affected by a U.S. default or credit downgrade. China's frustrations are compounded by its powerlessness to alter its investment strategy in response to growing risk in the U.S. Analysts say China is trapped because there are few markets in the world that are deep and liquid enough to handle its massive foreign-exchange purchases, leaving the country little room to diversify. Two articles on Thursday by the official Xinhua news agency crystallized the Chinese dilemma. In some of the strongest language from China's government on the issue so far, Xinhua castigated U.S. leaders for putting the world economy in jeopardy by their wrangling over the debt limit, calling on them to show " some sense of global responsibility."

China news agency lambastes U.S. for debt crisis (Reuters) - China's state-run news agency has sharply criticized U.S. politicians for flirting with a disastrous debt default, saying the world's largest economy has been "kidnapped" by "dangerously irresponsible" U.S. politics. So far, no Chinese policymakers have publicly commented on the debt standoff. But in a strongly worded commentary, the government-run Xinhua agency said it was "unfortunate and disappointing" that other countries would have to pay if American lawmakers do not raise the U.S. government's debt ceiling before the August 2 deadline. "It is arguably true that the ongoing tug of war in Washington is Uncle Sam's own business, as the United States has not yet defaulted on its debt," Xinhua said in remarks published on Thursday. "However, the ugliest part of the saga is that the well-being of many other countries is also in the impact zone when the donkey and the elephant fight," referring to the symbols of the U.S. Democratic and Republican parties.  The prospect of a U.S. debt default has unnerved global investors because it would hobble the global economy and roil financial markets by raising bond yields and borrowing costs, a point stressed by Xinhua.

China Fears U.S. Debt Default, But Has Few Options - As the U.S. teeters closer to the brink of debt default, the political stalemate is being watched closely by its biggest foreign creditor, China. At last count, Beijing owned almost $1.2 trillion of U.S. Treasury debt.Chinese officials have been quietly expressing their concern, but Beijing's options are limited. As Secretary of State Hillary Clinton met senior Chinese official Dai Bingguo in Shenzhen on Monday, the mood was friendly. But behind the scenes, anxiety in China is rising as the minutes tick closer toward that Aug. 2 deadline. Earlier in Hong Kong, Clinton had tried to calm Chinese nerves. "I'm confident that Congress will do the right thing and secure a deal on the debt ceiling, and work with President Obama to take the steps necessary to improve our long-term fiscal outlook," Clinton said. State Department officials now admit that China has been using diplomatic channels to express its concern. It has sent several official demarches urging Washington to abide by its financial commitments

Clinton Assures China U.S. Will Reach Debt-Ceiling Solution -- Secretary of State Hillary Clinton reassured China, the top holder of American treasuries, that the U.S. will resolve its impasse over the debt ceiling and improve the country's long-term fiscal outlook. "Many have questions about how the United States is going to resolve our debt-ceiling challenge," Clinton said in Hong Kong today. The intense "political wrangling" is part of democratic problem-solving, she said. "I am confident that Congress will secure a deal on the debt ceiling and work with President Obama to take steps to improve our long-term fiscal outlook." The top U.S. diplomat made the remarks as talks over the debt ceiling stalled again in Washington, sending the value of the U.S. dollar down and gold to record highs. Failure to reach an agreement before Aug. 2 risks a default and a cut in the nation's AAA credit rating. Chinese officials have expressed confidence that an agreement will be reached. Characterizing the debt debate as a short-term bump in the road, Clinton held the U.S. "opportunity society" up as a model for the Asia-Pacific. She said that requires attributes that "characterize healthy economic competition not just in Asia but across the world: open, free, transparent and fair."

China and US Debt. TPM’s Kyle Leighton expounds: [T]he debt to ourselves, over $9.747 trillion, is eight times the amount we owe China. The Chinese actually own about 8% of American debt, compared to the nearly 68% of the debt held domestically. Not to say that the $1.16 trillion we owe China isn’t real money. To be sure, the overall amount the U.S. is in debt to other countries is large: we owe $4.595 trillion of the overall $14.343 trillion to foreign states. China is actually the third biggest individual creditor to the U.S., behind the Social Security Trust Fund and the $2.67 trillion the government owes it, and the $1.63 trillion in Treasuries the Federal Reserve has purchased, many through a process called “quantitative easing,” used to increase the money supply in the financial system and subsequently stimulate the economy. Business Insider did a great rundown of the top holders of our debt, and right behind China is U.S. households with $959.4 billion in holdings. And so on.

How fast will the Chinese revalue to dump dollars? - From Andy Lees at UBS this morning: The first chart shows US import prices from China are back to their highs of 2008. The price of US imports from China is going through the roof. The second chart shows the Chinese terms of trade which are similarly getting back to the lows of 2008. Whilst Chinese export prices may be soaring, they are collapsing relative to the price of its imports. Export margins must be collapsing. China's energy inefficiency means its terms of trade will affect it more rapidly than other more efficient countries. The Renminbi has appreciated by 5.67% against the US dollar since the MOF started allowing it to rise in June last year. Over the same period the RMB has depreciated by 14.54% against the euro which is its bigger trading partner - (over that period the euro dollar has risen from 1.1877 to 1.4490). Far from revaluing the currency, China is fast devaluing its currency as its faced with a loss of competitiveness, and yet despite this its FX reserves have soared as its capital account has seen huge inflows.

Read China’s Lips -  Roach - The Chinese have long admired America’s economic dynamism. But they have lost confidence in America’s government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.” China is no innocent bystander in America’s race to the abyss. In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac). Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. Those days are over.

Debt Talks Collapse: Blame Boehner Or Blame Obama, No One Is Happy - Kaboom! The effort to reach a grand bargain on raising the debt ceiling blew up Friday evening. Before the pieces had even hit the ground, both White House aides and congressional Republicans were pointing to them as evidence that they were right and the other side was wrong. In his press conference, President Obama said Republicans wouldn't take yes for an answer. Republicans said the president pushed his luck, asking for tax increases which soured the deal at the last minute. Each side disputed the other's account. This battle of the reconstruction will go on for months. At the same time, amid the he said/he said squabbling, we know reasonably well what each side was willing to do, and what each was unwilling to do. How you assign blame depends on how you see the world. 

Why the Obama-Boehner talks fell apart - Budget talks between President Obama and Speaker Boehner fell apart yesterday after the Speaker called the President and said he would instead negotiate directly with Senate Leaders Reid & McConnell. The President spoke to the press within the hour to begin framing the collapse of the negotiations. He reinforced his theme that he was the reasonable, flexible party willing to compromise to get a deal. I just got a call about a half hour ago from Speaker Boehner who indicated that he was going to be walking away from the negotiations … The President positioned himself as the aggrieved party, trying to understand what went wrong: It is hard to understand why Speaker Boehner would walk away from this kind of deal. I actually think it’s quite easy. The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded.

What Obama Was Willing to Give Away - Paul Krugman - Jonathan Cohn summarizes what seems to have been in the deal that Boehner walked away from; it’s horrifying. Above all, the proposed rise in the age of Medicare eligibility was a real betrayal of both Democratic principles and good government. Progressive reformers, myself included, would very much have preferred a simple single-payer system. Medicare has lower costs than private insurance, and it’s also a much better vehicle for cost control. Also, the simplicity — if you’re a citizen, you’re covered — makes it much less likely that people will fall through the cracks. Most of us were willing, however, to accept the Rube Goldberg scheme actually passed — in which community rating, a mandate, and subsidies are combined to more or less simulate the effects of single-payer — as much better than nothing.  But it’s quite something else to take people who are currently being covered by a rational single-payer system, and force them back into the inefficient, parasitic world of private insurance. That’s terrible. And it’s also politically stupid: if you think for a minute that Republicans wouldn’t turn right around and run ads about how Obama is taking away your Medicare, you’ve been living under a rock.

The WSJ Surpasses Itself -  If you were to write a story about government debt, you’d probably be inclined to write about the two sets of government decisions that produce deficits or surpluses: decisions about expenditure and decisions about revenue. You’d want to do that not only as a matter of fairness, but also as a matter of math.And that’s why, my friend, you would wash out as a WSJ editorialist. They wrote this editorial without any reference to revenues whatsoever. Boom! Gone! Don’t deny reality. Defy reality. ... One of the many traps and impediments facing a Journal editorialist writing about debt is that up until 2009, the US debt burden rose most under the two presidents the Journal most ardently supported: Ronald Reagan and George W. Bush. The debt burden declined most under the presidents the Journal most despises – Dwight Eisenhower, Bill Clinton and Jimmy Carter. It must have taken some hunting, but the Journal managed to find a chart that did just the opposite: federal payments to individuals as a percentage of federal outlays. What’s so great about this chart is that it excludes two of three biggest federal spending programs: Medicare and Medicaid, both of whose costs rose faster in the Bush 2000s than in the Clinton 1990s.

Graphic of the Day: Who Borrowed? Who Loaned? -  A picture says a thousand words. From the NYT today: In particular, who racked up $6.1 trillion in debt? For more graphs, see here and here.

IMF urges swift lifting of US debt limit - The International Monetary Fund has warned the United States to lift its debt ceiling swiftly for the sake of the US and global economy. But, with US politicians battling over a plan to slash the deficit, the IMF executive board called on authorities to only gradually reduce spending, to avert "a disruptive loss in fiscal credibility." "The federal debt ceiling should be raised expeditiously to avoid a severe shock to the US economy and world financial markets," IMF economists said in a report on the US economy. Executive directors called for the US to gradually unwind the extraordinary support provided the economy to deal with the 2008-2009 financial and economic crisis. "Spillovers from credible and gradual fiscal consolidation are limited," it said, while those from a loss of confidence in US debt sustainability "are universally large and negative."

World watches and hopes U.S. will avoid debt "suicide" (Reuters) - Policymakers worldwide oscillated between hope and confidence on Monday that U.S. lawmakers will break a debt impasse that threatens to trigger a default and up-end global financial markets. Asia, which holds close to $3 trillion in U.S. government debt, has a powerful vested interest in Washington finding a workable compromise. Policymakers and economists expected lawmakers would strike a last-minute deal to avert a crisis. The political brinkmanship hit world stocks on Monday and pushed money into safe-haven gold and Swiss francs, ending a brief relief rally over Greece's second bailout package, although there was no sign of panic. But with just eight days left before August 2, when the Treasury Department has estimated it will run short of money to pay all of its bills, the worry level was rising. "Those in direct charge of reserves operations must be more nervous than before, but nobody thinks Americans will choose suicide when they have known solutions," said a senior official at the Bank of Korea, who spoke on condition of anonymity.

Will there be a Fed shutdown? - In a recent blog piece at the CNBC website, John Carney offers this interpretation of the federal debt ceiling (see also Felix Salmon’s more recent comment): “The debt ceiling applies to the face amount of obligations issued under Chapter 31 of Title 31 of the U.S. Code—basically, Treasury notes and bills and the other standard kinds of government debt—and the “face amount of obligations whose principal and interest are guaranteed by the United States Government.” But overdrafts on the Federal Reserve wouldn’t be Treasurys and they aren’t explicitly guaranteed by the U.S. government. “They’re more like unilateral gifts from the Fed. “And guess what? The Treasury is allowed to accept gifts that “reduce the public debt.” Since these overdraft gifts from the Fed would allow the government to spend without incurring additional debt, it seems very plausible to argue that this kind of extension of U.S. credit would be permitted under the debt ceiling.” Carney may indeed be right that the debt limit law might permit this to continue after the debt limit has been reached on August 2. As pointed out by Carney, the legal issue would seem to turn on the question of whether the “overdrafts” to which he refers would be equivalent to federal debt under the relevant legislation.

As deadline looms, Congress scrambles for debt limit deal - Despite ongoing efforts by congressional leaders to hammer out a deal on Sunday for raising the debt ceiling, all indications suggest that the two parties remain far apart on a viable bipartisan agreement just hours before the opening of the Asian financial markets.  House Speaker John Boehner, who abandoned debt negotiations with the president on Friday, says he is working on the framework for a new deficit reduction proposal, which he hopes to unveil on Sunday. But his proposal is expected to include a two-part plan, with two debt limit increases – and Democrats have repeatedly vowed to fight a short-term package.  Nevertheless, Boehner pledged on Sunday to move forward with a his proposal regardless of Democratic opposition.  “The preferable path would be a bipartisan plan that involves all the leaders, but it is too early to decide whether that’s possible,” he said in an appearance on “Fox News Sunday.” “If that’s not possible, I and my Republican colleagues in the House are prepared to move on our own.”

The obvious compromise between the Reid and Boehner plans, by Ezra Klein: When it comes to cutting the deficit, the plans proposed by Senate Majority Leader Harry Reid (read it here) and House Speaker John Boehner (read it here) are much more similar than they are different. It’s when they come to raising the debt ceiling that the consensus cracks apart. Both plans call for $1.2 trillion in cuts to discretionary spending. Both plans envision the formation of a bipartisan “Supercommittee” that will try to find consensus on a larger deficit-reduction package that, if it wins a majority on the Supercommittee, will be immune to amendments and filibusters and be fast-tracked for an up-or-down vote in the House and the Senate. Reid’s plan includes $100 billion in savings from so-called “mandatory spending” like Fannie Mae and agricultural subsidies, $1 trillion in savings from winding down the wars, and $400 billion in reduced interest payments from cutting more than $200 billion in spending. Boehner’s plan doesn’t specifically include any of that, but it’s fair to expect that his bipartisan committee would end up recommending many of the same mandatory savings, that the wars will wind down whether Boehner mentions them or not, and if all that happens, his interest savings will be similar. So the two plans are roughly equivalent in their immediate savings.

Newest Boehner Scheme Could Backfire Badly And Immediately - House Speaker John Boehner (R-OH) reportedly told House GOP in a conference call this afternoon that he's working on a new $3 trillion-$4 trillion spending cut plan and that he plans to make some type of announcement before Asian markets open this week to reassure them that it will be enacted and that there will be no default. Boehner is taking a huge risk by doing this. If a spending cut of that size was adoptable it would have already been adopted and the markets will immediately see through Boehner's remarks to what he's really saying -- that he has made no progress at all with his tea party wing and still has to placate them.

Debt Talks Still At Impasse; Republicans Go For Unilateral, Short Term Gambit - Yves Smith - What will be interesting is if the threat voiced by the Administration, namely, the market reaction, isn’t grim. Equities in general are overvalued given the lack of realistic prospects for top line growth (cost cutting may lead to impressive profits, but it’s a self limiting strategy that has gone way beyond its normal sell by date because a fair bit of the cash has propped up prices via stock buybacks) and fragility in the mortgage markets (as one wag said, he never thought he’d get to short subprime twice). Given recent Eurozone-related volatility, anything less than a percent and a half in equity markets signals concern but is well short of panic. And the real test is what happens in Treasuries.  In fact, a muted market reaction works against dealmaking. Both sides will then be playing against what happens when Treasury has to cut payments and limits spending to tax receipts. With Timmie in charge, the last thing he would not pay is Treasuries, and presumably Social Security is his second priority. But the next threat to the officialdom is what oxen get gored when Treasury has to halt payments and how the public reacts. And the other sword of Damocles is a rating agency downgrade. As we and others have noted, this did not affect Japan’s ability to fund cheaply (an item somehow missing from the discourse is that a central bank for a sovereign currency issuer can control yields across the entire yield curve if it wants to; note I’m not saying that that’s great policy, merely that it can be done). And the reports of the last few days indicate that a lot of players who are in theory required to hold all or a certain portion of assets in AAA instruments are getting waivers or otherwise reorienting their lives so as to be able to continue holding Treasuries. That is a long-winded way of saying there are likely to be disruptions, but there is reason to think they will fall short of doomsday scenarios

11 days until disaster, three options to prevent it - Earlier today, I spoke with David Beers, director of Standard Poor’s sovereign debt department. He explained that it wasn’t economic factors that had put America’s credit rating at risk, nor world events. It was credit-rating agency’s increasing fears that our political system was no longer up to the challenges that face it. “What we’re saying now,” said Beers, “is we question whether despite all the discussions and intense negotiations, if they can’t reach this agreement, will they be able to reach it after the election?”  If we convince Standard Poor’s that our political system has failed, they will downgrade our credit within three months. If they do that, interest rates on our debt will spike, perhaps by 50 basis points, perhaps by more. An easy rule of thumb is that if interest rates rise by 50 basis points, we will lose 600,000 jobs in this country.  At this point, there are three serious options on the table. A $4 trillion deal that includes some revenues, a $1 trillion-$2 trillion deal that’s all spending cuts but leaves much of the job until after the election, and a deal in which Republicans don’t come to a negotiated agreement with President Obama but they grant him the authority -- and let him take the blame -- for raising the debt ceiling. Congress needs to pick one. Time is running short.

Debt Ceiling Charade: The Smart Options - Ezra Klein outlined three possible options: 11 days until disaster, three options to prevent it From a pure economic perspective, here are the best options (#1 is best):

  • Option #1: Eliminate the debt ceiling. The debt ceiling is a joke. It serves no purpose except political posturing. It is not about the deficit - it is about paying the bills, and the U.S. will pay the bills. I've been making this argument for months. Moody's made the same argument last week: Moody's suggests U.S. eliminate debt ceiling  "We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty," Moody's analyst Steven Hess wrote in the report. Unfortunately some politicians forgot the debt ceiling is just for posing, and they have overplayed a non-existent hand.
  • Option #2: Pass a "clean" bill raising the debt ceiling enough to get through the next election (so the politicians don't have to embarrass themselves again). Congress could do this at any time. That is why voters would blame the party controlling the House if the debt ceiling is not raised.
  • Option #3: The McConnell Option. This is the agreement Klein noted to give President Obama the authority to increase the debt ceiling, and try to blame Obama for the increases.

A ‘Unique Opportunity’ on the Debt Ceiling, Lost - Leaders of both parties have said for months that the need to raise the nation’s borrowing limit offered a “unique opportunity” for a bipartisan deal that would constrain the mounting federal debt.  Instead, it is shaping up to be a lost opportunity.  Whatever deal Congress and President Obama devise in this final week to allow the government to keep paying its bills after Aug. 2 and avert an economy-rattling default, it almost certainly will fall short of the compromise that Mr. Obama and Speaker John A. Boehner, Republican of Ohio, nearly struck last week — before details of the negotiations leaked, opponents in both parties protested and Mr. Boehner left the table.  The difference between that attempted “grand bargain” and what Congress is coming up with is not just a matter of dollars. Mr. Obama and Mr. Boehner did tentatively agree to more than $3 trillion in savings over 10 years — at least hundreds of billions more than is called for in the fallback plans now bandied about in Congress to clear the way for a vote to increase the $14.3 trillion borrowing ceiling by next Tuesday.

Debt Limit Analysis | Bipartisan Policy Center - The purpose of this analysis is to shed light on the operation of the debt limit in case Congress does not raise the limit before the federal government runs short of cash and is no longer able to meet all of its obligations. In particular, we have addressed three questions:

  1. What is the date past which the government will be unable to honor all obligations?
  2. If that date is passed without a debt limit increase, what will be the effect on federal spending?
  3. If that date is passed without a debt limit increase, what are the potential consequences in the market for Treasury securities, as well as in other markets and in the broader economy?

Debt-limit talks at a standstill as parallel strategies take shape in House, Senate - Hours before Asian financial markets were set to open Sunday evening, talks over the federal debt limit1 were at a standstill and House and Senate leaders were threatening to pursue two different approaches to averting a government default in a messy legislative showdown. In a conference call with House Republicans, Speaker John A. Boehner (R-Ohio)2 called for the party to unify behind a plan that he declined to detail, saying he would provide more information when lawmakers return to the Capitol Monday. But aides in both parties said they expected Boehner to press ahead with a two-stage strategy that would give the Treasury only about $1 trillion in additional borrowing authority, forcing another debt-limit battle early next year when the parties are embroiled in the heat of the 2012 presidential campaign3. Boehner promoted that strategy4 on “Fox News Sunday,” telling host Chris Wallace that “there’s going to be a two-stage process. It’s not physically possible to do all of this in one step.” In a barbed aside, he added: “I know the president’s worried about his next election. But my God, shouldn’t we be worried about the country?”

At White House, Reid, Pelosi Push Debt Plan With $2.5T in Cuts - Senate Majority Leader Harry Reid, D-Nev., and House Minority Leader Nancy Pelosi, D-Calif., met at the White House for a meeting at 6 p.m. that lasted a little more than an hour. The meeting started an hour after the first of the Asian global markets opened. House Speaker John Boehner, R-Ohio, on Saturday had asked for a debt framework before then, intended to give the Asian markets time to process a last-ditch bid to ward off the market turmoil. Reid is taking a proposal for "at least" $2.5 trillion in spending cuts as part of a debt-ceiling deal, seeking Obama's approval, according to an aide. Both Reid and Boehner are advancing plans to raise the debt ceiling. The biggest difference is that the Reid plan would increase the borrowing limit through at least the November 2012 election, while the Boehner proposal would have two stages – with the debt ceiling increase coming early next year and allowed only if matching spending cuts are enacted. Democrats have said that carrying the borrowing authorization past the election is a make-or-break provision. Republicans want two votes, saying they hope to wring more savings. In a conference call with rank-and-file GOP House members on Sunday afternoon, Boehner said the House and Senate were nearing agreement on a six-month solution, according to one participant

How Harry Reid caused the debt-ceiling debacle - Ezra Klein reckons I’m wrong about the tactical failures among Democrats which led to the current debt-ceiling fiasco and the probable loss of America’s long-prized triple-A credit rating. The big failure, he says, wasn’t at Treasury, and wasn’t at the White House: it was in the Senate. Specifically, this is all the fault of Harry Reid. The reason we’re hitting the debt ceiling, remember, is that the budget passed by both Republicans and Democrats forces us to do so. As a result, the obvious time and place to raise the debt ceiling is when you pass the budget.  And the person who thought it was a bad idea? Harry Reid. Here’s Reid on December 8, 2010: “Let the Republicans have some buy-in on the debt. They’re going to have a majority in the House,” said Reid. “I don’t think it should be when we have a heavily Democratic Senate, heavily Democratic House and a Democratic president.”. As Ezra explains: The election was over. Nancy Pelosi was still speaker of the House. Harry Reid still had 59 Democrats in the Senate. The Bush tax cuts were expiring. Republicans, of course, didn’t want to allow the Bush tax cuts for the rich to expire. They were, in fact, desperate to preserve them. Which meant Democrats had the leverage. What was Reid thinking?

'Super Congress': Debt Ceiling Negotiators Aim To Create New Legislative Body: Debt ceiling negotiators think they've hit on a solution to address the debt ceiling impasse and the public's unwillingness to let go of benefits such as Medicare and Social Security that have been earned over a lifetime of work: Create a new Congress. This 'Super Congress,' composed of members of both chambers and both parties, isn't mentioned anywhere in the Constitution, but would be granted extraordinary new powers. Under a plan put forth by Senate Minority Leader Mitch McConnell (R-Ky.) and his counterpart Majority Leader Harry Reid (D-Nev.), legislation to lift the debt ceiling would be accompanied by the creation of a 12-member panel made up of 12 lawmakers -- six from each chamber and six from each party. Legislation approved by the Super Congress -- which some on Capitol Hill are calling the 'super committee' -- would then be fast-tracked through both chambers, where it couldn't be amended by simple, regular lawmakers, who'd have the ability only to cast an up or down vote. With the weight of both leaderships behind it, a product originated by the Super Congress would have a strong chance of moving through the little Congress and quickly becoming law. A Super Congress would be less accountable than the system that exists today, and would find it easier to strip the public of popular benefits. Negotiators are currently considering cutting the mortgage deduction and tax credits for retirement savings, for instance, extremely popular policies that would be difficult to slice up using the traditional legislative process.

More Shades of TARP: Latest Deficit Ceiling Plan to Establish Extra-Constitutional Legislative Process - - Yves Smith - We commented last night on the parallels between the pressure tactics used to railroad the passage of the TARP and our current contrived debt ceiling crisis. The similarities have increased in a predictably bad way. Even worse than the economic toll radical budget cutting will impose on ordinary Americans is the continued undermining of basic democratic processes.  As with the TARP, we have the drumroll of a purported threat to public safety, namely the possible Destruction of the Financial System as We Now Know It. John Boehner is stoking the panic by saying there needs to be a deal by the opening of trading in Asia or the Market Gods will take their vengeance. Turbo Timmie will no doubt warn of dire consequence of the failure to ink a deal by the supposed drop dead date of August 2 when he makes the rounds on Sunday TV.  Nevertheless, both the Washington Post, which is taking up the deadline hysteria, and the more jaundiced Times are neglecting the most heinous aspect of the latest proposed remedy, which is to circumvent Constitutionally-prescribed legislative procedures. There’s no mention in the Times, and from what I can tell, only this oblique reference in the Post: Then Congress would go to work to produce as much as $3 trillion in additional savings through an overhaul of the tax code and major changes to Social Security and Medicare, the biggest drivers of federal spending. To identify those savings, Congress would create a new bipartisan debt-reduction committee comprising 12 lawmakers from both the House and Senate, an idea offered by Senate Majority Leader Harry M. Reid (D-Nev.).

Let's do this again soon - Republicans are crazier than I imagine possible even taking into account the fact that they are crazier than I imagine possible. Concept due to Brad Delong It appears that the debt ceiling deal under consideration includes $ 1 trillion in cuts, no tax increases and setting up a committee to pretend that there will be $ 3 trillion more. This shows that the Democrats are spineless and that they know the Republicans really are crazy and aren't bluffing. But wait not so fast. There is a stumbling block But the two sides were still fighting over how to force Congress to produce the second round of savings. Boehner wants to set another debt-limit vote early next year, while Democrats are insisting on a plan that would postpone another debt-limit showdown until after the 2012 presidential election.

On Debt Talks, a Lose-Lose-Lose-Lose Situation - Almost whatever happens this week with Washington’s debt talks, the economy will most likely be worse off. Here are the likely scenarios I see:

  • 1) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. As a result, the Treasury stops paying debts it owes. If that happens, the rating agencies downgrade the United States’ debt. The cost of borrowing in the United States government shoots up.
  • 2) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. But rather than default on its debt, it diverts money from other spending into paying back bondholders. That could mean that Social Security checks are not sent, soldiers in Afghanistan and Iraq are not paid, and all sorts of other consequences.
  • 3) Washington comes up with a deal to raise the debt ceiling, but it amounts to less than $4 trillion in savings. Standard & Poor’s has said that just raising the debt ceiling is not enough; without a “credible” plan for at least $4 trillion in savings, the United States might still have its credit rating downgraded.
  • 4) Washington comes up with a deal to raise the debt ceiling that amounts to more than $4 trillion in savings over a near-term horizon. The credit rating agencies are appeased, but such severe austerity measures put the fragile economic recovery at risk.

The Six’s Sense - The Concord Coalition’s Board of Directors released this statement praising the new plan of the Senate’s “Gang of Six”–dubbing them the “Gang of Sense.”  What is so sensible about it?  They explain: Now, the Gang of Six has returned with a bipartisan proposal to cut the deficit by nearly $4 trillion through 2021 and stabilize the growth of debt at a sustainable level. All parts of the budget, including domestic discretionary spending, defense, entitlements and taxes would be subject to scrutiny. Savings targets would be given to the appropriate congressional committees with across-the-board cuts in areas where committees fail to achieve their targets, while protecting those most in need. The proposal is tough but politically viable because it calls for broad sacrifice. Indeed, it is the basic concession to political reality – that no one can get everything they want and all must accept some things they don’t want – that gives the Gang of Six proposal its breakthrough potential.

The Drive to Cut Social Security: Why Are the Gang of Six Scared of Information? - A central theme of the Gang of Six's deficit reduction crusade is lowering the annual cost of living for Social Security. They propose to change the formula so that the annual adjustment would be 0.3 percentage points lower than would otherwise be the case. This cut will add up through time. A typical beneficiary gets close to $1,100 a month, so the Gang of Six would be taking close to $100 from their monthly check when they are in their 90s.  Anyone who questions the impact of such cuts should ask Speaker Boehner about a 9 percentage point increase in the top tax rate.  The rationale for the Gang of Six's Social Security cut is that the current inflation index doesn't take account of the fact that people can switch away from goods with rapidly rising prices to goods with slow rising prices.  However, we know that the elderly have different consumption patterns than the population as a whole. They spend a larger share of their income on health care and less on computers and cell phones. BLS research shows that the rate of inflation experienced by the elderly is actually somewhat higher than the standard index used to adjust Social Security benefits. This research implies that if we are interested in an accurate cost of living adjustment, as the Gang of Six claim, then we might have to increase, rather than decrease, the annual adjustment.

What Were They Thinking? - Someday people will look back and wonder, What were they thinking? Why, in the midst of a stalled recovery, with the economy fragile and job creation slowing to a trickle, did the nation’s leaders decide that the thing to do—in order to raise the debt limit, normally a routine matter—was to spend less money, making job creation all the more difficult? Many experts on the economy believe that the President has it backward: that focusing on growth and jobs is more urgent in the near term than cutting the deficit, even if such expenditures require borrowing. But that would go against Obama’s new self-portrait as a fiscally responsible centrist. Lawrence Summers, Obama’s recently resigned chief economic adviser, said on The Charlie Rose Show in July that he found it “dispiriting” that “all of the energy is on the projected deficits…when the problem right now is that the economy is in danger of stagnating from lack of demand.” The Republicans had made it clear for months that they would use the need to raise the debt ceiling as an instrument for extracting concessions from the Democratic President in the form of more cuts in federal programs. And the President assented to their premise, but only if there should also be some additional revenues. Were they all insane?

The Fatal Delusion - Krugman - Felix Salmon proposes an explanation for the Obama administration’s fecklessness on the debt ceiling: The budget debate, of course, sets near-term taxation and spending. So seeking to make a virtue out of necessity, Treasury entered negotiations over the debt ceiling to do something longer-term: to put in place a decade-long “fiscal straitjacket” which would constrain future Democratic and Republican administrations alike. That would address the Krugman point, and help to cement — rather than weaken — America’s triple-A credit rating.As things turned out, of course, Treasury’s bright idea backfired catastrophically. Far from putting the US on a course of long-term fiscal prudence, it put the country on a log raft with no paddle, careening straight towards a deathly waterfall. In hindsight, attempting to engage the House Republicans on long-term fiscal issues was a silly idea — these are people who think you can raise revenues by cutting taxes. A fiscal straitjacket, necessarily, involves some mechanism for raising taxes; since that was always going to be anathema to the Republicans, there was no point even trying to construct one.

Dan Loeb Blasts Obama's Leadership In Second Quarter Investor Letter: Dan Loeb used to be a huge Obama ambassador. A registered Democrat, recently the hedge fund manager has been casting a vote for the GOP instead. And in his latest investor letter, the Third Point chief blasts Obama's leadership since taking office. Loeb writes that the absence of leadership in Washington at the moment is engendering a horrible business environment, via Dealbreaker: The budget is not the only thing in deficit today, as a paucity of leadership has left the country without a stable framework in which businesses can conduct business, investors can invest, and consumers can consume without a high degree of uncertainty and fear. Then he goes after Obama specifically: There has been much said about who is allegedly the 'adult in the room,' but President Obama has yet to speak to Americans as adults, insisting instead on his preferred technique -- stirring up class warfare. Scaring senior citizens about the possibility of not receiving their Social Security and Medicare checks, lambasting the corporate jet industry, and calling for higher taxes on managers of private partnerships is not a constructive approach to handling a multi-trillion dollar problem that will have a multi-generational impact."

Our stupid self-inflicted debt crisis -- Let me get this straight. The people who have been preaching the most about the dangers of American decline are right now helping to hasten American decline. Because if America defaults on its debt, not only will we find ourselves in a far deeper fiscal hole, but the full faith and credit of the United States will be compromised. In our globalized era, that means America will be considered an unpredictable partner and a second-class power. Worst of all, this will be a self-inflicted wound. It is a direct result of the hyper-partisanship that has been hijacking America's political debates. Now it is compromising our ability to govern ourselves effectively. The markets are viewing Washington's debt dysfunction as badly as Standard & Poor's and Moody's, which have raised the possibility of downgrading their ratings of U.S. bonds. The British government's business secretary, Vince Cable, summed up the situation as he saw it on the BBC this weekend: "The irony of the situation at the moment, with markets opening tomorrow morning, is that the biggest threat to the world financial system comes from a few right-wing nutters in the American Congress."

Budgetary Deceit and America's Decline - Jeffrey Sachs - Every part of the budget debate in the U.S. is built on a tissue of willful deceit. Consider the Republican Party's double-mantra that the deficit results from "runaway spending" and that more tax cuts are the key to economic growth. Republicans claim that the budget deficit, around 10 percent of GDP, has been caused only by a rise in outlays. This is blatantly untrue. The deficit results roughly equally from a fall of tax revenues as a share of GDP and a rise of spending as a share of GDP.  On both sides of the ledger -- spending and taxes -- part of the shift results from the weak economy ("cyclical factors") and part from long-term trends. Spending, for example, is higher in part because of unemployment compensation, food stamps, and other federal spending to help the downtrodden in a weak economy. That's the "cyclical" component. Part of the higher spending reflects long-term patterns, such as rising health care costs and an aging population, as well as America's chronic addiction to wrongheaded wars and military occupations in Africa, the Middle East and Central Asia.

Vital Signs: Increasing Wariness of U.S. Default - Credit-market investors are becoming warier of a U.S. default. The spread on five-year credit default swaps on U.S. debt rose to 0.57 percentage points Monday — the highest since early 2010 — meaning the annual cost of insuring $10 million in U.S. debt against default is $57,000. But during the financial crisis, spreads in the thinly traded market were much higher.

Default In A Liquidity Trap (Very Wonkish) - Krugman - Nick Rowe asks a good question: if we took our models seriously, what would we expect the effects of threatened default to be on the larger economy? His answer is that expected default should work just like expected inflation, which means that if anything it should be favorable right now. I think this is wrong — but in an interesting way. It’s true that, say, a 1 percent possibility that your bond holdings will become worthless within a year is similar to the expectation that inflation will erode those bonds’ real value by 1 percent over the next year. But inflation doesn’t just erode the value of bonds; it also erodes the value of cash. And that’s why expected inflation can help in a liquidity trap: it makes sitting on cash less attractive. The threat of default doesn’t do that. As far as I know, we’re not talking about a loss of confidence in pieces of paper bearing pictures of dead presidents. And that’s why the threat of default isn’t equivalent — and not expansionary. In fact, I’d argue that it is in fact contractionary, because it raises interest rates even in a liquidity trap.

Obama to Banks: We're Not Defaulting - While officials from the Obama Administration raised their rhetoric over the weekend about the possibility of a debt default if the debt ceiling isn't raised, they privately have been telling top executives at major U.S. banks that such an event won’t happen, FOX Business has learned. In a series of phone calls, administration officials have told bankers that the administration will not allow a default to happen even if the debt cap isn't raised by the August 2 date Treasury Secretary Tim Geithner says the government will run out of money to pay all its bills, including obligations to bond holders. Geithner made the rounds on the Sunday talk shows saying a default is imminent if the debt ceiling isn't raised, and President Obama issued a similar warning during a Friday press conference after budget negotiations with House Republicans broke down.  It's unclear if a broad agreement can be reached any time soon, but even if a deal is struck, a complicating issue for lawmakers and the administration is the possibility of a downgrade to the US debt rating, which would cut the triple-A rating on the nation's debt to a lower level.

The Standard and Poor’s Play – Credit Rater Pushing Congress into Big Deficit Deal - After the short White House meeting today, Congressional leaders of both parties met on Capitol Hill to work out an agreement to increase the debt limit. Earlier, House Speaker John Boehner held a conference call with his caucus, where he said he wanted a debt limit plan in place by tomorrow to avoid causing a drop in the Asian markets. This concern about the markets has happened very suddenly. All of a sudden there’s a belief that a clean increase or a small debt deal with a minor amount of spending cuts would not be enough to avoid a downgrade. Standard and Poor’s basically forced this by saying that they would downgrade if there wasn’t a $4 trillion deficit deal in the next 90 days. The claim is that this has been caused by political leaders attaching the debt limit to a deal on reducing the deficit, and the inability to reach an agreement, the political stalemate, has led the markets to lose confidence.  But this is absolutely crazy. The market was up 2% last week. 10-year Treasuries are at 2.96%.  It’s about the perception of someone at Standard and Poor’s. The rating agencies, which played a major role in the financial meltdown, has just up and put a gun to the head of the country and demanded austerity in the middle of a jobs crisis. Are you kidding me?

Debt Ceiling Watch: Ezra Klein Makes a Mistake (Nobooy Knows Department) - He doesn't talk to any investors. Instead he talks to… the people at the rating agencies who brought us the subprime mortgage crisis: And so we get: A small deal won’t cut it: There’s no longer much space to be creative, or incremental, or indecisive, on the debt ceiling. Perhaps there was two or three or four months ago. If we had raised it clean, or attempted the McConnell deal, or invoked the 14th Amendment, or gone for a series of short-term increases, that might have been enough. It isn’t now. Three months ago, all we had to do to keep the markets calm was raise the debt ceiling. Today, if all we do is raise the debt ceiling, there’s a very good chance the markets will turn on us anyway…. It’s about keeping the market confident in our ability to pay our bills, both now and in the future…. And Congress, unfortunately, has made that job a lot harder. A year ago, the market didn’t question our ability to raise the debt ceiling, nor our ability to come to a deficit deal in some reasonable period of time…. But we didn’t take their advice. We yoked the deficit to the debt ceiling….

Moody's Blues, Poor Standards, and the Debt - Paul Krugman - The invaluable Mike Konczal tells us the truth about the rating agencies and public-sector debt: not only do they constantly make mistakes, they do so in a consistent direction. Namely, they hold public-sector borrowers to vastly higher standards than they hold private borrowers. And who says this? The answer is, their own analysis. It’s hard not to see this as essentially ideological: the rating agencies just treat governments as potential deadbeats, by definition. Let me just top off Mike’s discussion with the last time the raters downgraded a major economy’s government. Here’s the 10-year bond rate in Japan: See the downgrade? (It was in 2002). The point is that when S&P or Moody’s speaks, that’s not the voice of “the market”. It’s just some guys with an agenda, and a very poor track record. And we have no idea how much effect their actions will have.

The Biggest Driver in the Deficit Battle: Standard & Poor’s, by Robert Reich - All of America’s big credit-rating agencies — Moody’s, Fitch, and Standard & Poor’s — have warned they might cut America’s credit rating if a deal isn’t reached soon to raise the debt ceiling. ... But Standard & Poor’s has gone a step further: It insists any deal must also reduce the nation’s long-term budget deficit by $4 trillion — something neither Harry Reid’s nor John Boehner’s plans do. If Standard & Poor’s downgrades America’s debt, the other two big credit-raters are likely to follow. The result: You’ll be paying higher interest on every penny you borrow. In other words, Standard & Poor’s is threatening that if the ten-year budget deficit isn’t cut by $4 trillion..., you’ll pay more – even if the debt ceiling is lifted next week. With Republicans in the majority in the House, there’s no way to lop $4 trillion of the budget without harming Social Security, Medicare, and Medicaid, as well as education, Pell grants, healthcare, highways and bridges, and everything else the middle class and poor rely on.

Has S&P Become Our Rupert Murdoch? - Yves Smith - Until recently, no one in the UK dared cross Rupert Murdoch thanks to his influence on the political process.And although Murdoch is going down the same path in the US, of using political power to increase his economic power, the rating agencies seem to have easily trumped him on this one.  Jane Hamsher chronicles the brazen way in which Standard & Poor’s is throwing its weight around in the budget negotiations: Standard and Poors is evidently meeting with high-stakes gamblers and letting them know where to place their bets as they manipulate the global economy.  But they are also playing a much more sinister game. Like a cat toying with a mouse, they are also inserting themselves in the political process and setting themselves up to be kingmaker in the 2012 election. An item in Politico’s Morning Money caught my eye:"S&P’s John Chambers has met with a number of big investors include Pimco’s Mohammed El-Erian. Apparently he is telling them he prefers Reid’s plan." CNN’s Erin Burnett also tweets that the “source who met with Standard and Poors says SIZE of Boehner plan is the problem.MIGHT not be enough to avert downgrade,needs to be closer to $3TR all at once.” If these reports are correct, S&P is meeting privately with big investors and giving them information that they are not giving the public about about what their research says, what position they will take, and what they intend to do with regard to a potential credit downgrade of US debt.

Analysis - United States gets closer to losing its AAA rating (Reuters) - The United States took a step closer to losing its coveted triple-A credit rating over the weekend as a political impasse in Washington reduced hopes of an agreement to meaningfully cut the nation's budget deficit. Although analysts still expect a last-minute deal to raise the U.S. debt ceiling and avoid a default next week, it seems unlikely that Democrats and Republicans will agree before the next election in November 2012 how to find $4 trillion (2.45 trillion pounds) through government spending cuts and revenue increases. Prospects of a budget breakthrough faded as lawmakers missed a self-imposed deadline to produce a deal by the time Asian markets opened for the new week. They still plan to outline proposals on Monday, but both sides appear further apart than ever.

Is it time to abolish the triple-A rating? - It’s looking increasingly likely that the US is going to lose its triple-A credit rating at some point in the next 12 months or so, whatever happens to the debt ceiling. And right now, nobody knows what the consequences of that would be: it’s never happened before. Paul Krugman is trying to put a brave face on things and point out that hey, sovereign borrowing costs didn’t rise in Japan. But the fact is that Japan never got much benefit from having a triple-A rating in the first place. Japan borrows overwhelmingly from its own citizens, who have lots of savings — they don’t give two hoots about what Moody’s thinks of their country’s creditworthiness. The US, by contrast, is very different. Treasury bonds are the ultimate global asset class: they’re the epitome of risk-free safety for investors all over the world. Look at what happened when the subprime bubble burst and the US economy was plunged into the greatest recession in living memory: Treasury prices went up. That’s what happens when you’re the risk-free asset of choice: you’re the beneficiary of the flight-to-quality trade whenever markets get spooked.

Update on the credit rating agency vigilantes - It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade. …what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating. Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction. The full story is here.  These vigilantes are real, but they are being scorned, dismissed, and moralized about rather than heeded.

Maybe a downgrade doesn't matter - TYLER COWEN quotes Politico: It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong?  As psychic blows go, this might be a significant one. Personally, psychic blows don't bother me much. America would obviously prefer not to spend $100 billion more a year on borrowing costs than it does now, but it's worth remembering that that amounts to less than 1% of GDP. The government should shoulder reasonable costs to avoid a downgrade, but I think it's easy to overstate what reasonable costs are likely to be. How serious is a downgrade, really? Markets have given us some sense this week. Over the past few days, it has become clear that a downgrade to America's debt rating is likely. Intrade contracts on the likelihood of a downgrade by the end of the year have surged from about 40 to over 60 and rising. Wall Street is no doubt building expectations of a downgrade into prices. And the result? Well, shares are off a little and borrowing costs are up a very little.

U.S. likely to lose 'AAA' rating, say economists - The United States will lose its top-notch "AAA" credit rating from at least one of the major ratings agencies, said a slim majority of economists in a Reuters poll that also found wrangling over the debt ceiling has damaged the economy. Even though the poll showed only a one in five chance of another recession in the next year, 30 out of 53 economists surveyed over the past two days said the U.S. will lose its AAA credit rating from one of the three big ratings agencies -- Standard & Poor's, Moody's and Fitch. President Barack Obama's Democrats and their Republican rivals have one week left to agree a deficit-cutting plan in exchange for a hike in the legal debt limit, or risk a potentially devastating government debt default in August.

U.S. May Lose Top Debt Rating, BlackRock Loomis Sayles, Templeton Say - BlackRock Inc., Franklin Templeton Investments, Loomis Sayles & Co., Pacific Investment Management Co. and Western Asset Management said the U.S. faces losing its top-level debt rating as officials struggle to raise the $14.3 trillion borrowing limit and reduce spending.  Investors are warning a cut is likely as President Barack Obama and House Speaker John Boehner argue over how to increase the debt ceiling, while also trying to curb borrowing. The government needs to boost the cap by Aug. 2 so it can keep paying its bills, according to the Treasury Department.  The comments suggest that the world’s biggest bond managers are resigned to the fact that the U.S. rating will be cut. Standard & Poor’s, which has rated the U.S. AAA since 1941, said July 14 that the chance of a downgrade is 50 percent in the next three months and it may cut the nation as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit.

Downgrade seen adding $100 billion to U.S. funding costs -A downgrade of the United States' AAA credit rating is a bigger risk than a default and could over time add up to 0.7 percentage point to bond yields, members of a U.S. securities industry group said on Tuesday. "That's on the order of $100 billion over time that we will add to our funding costs," said Terry Belton, global head of fixed income strategy at JPMorgan Chase. Over time, he said Treasury yields could rise 60 to 70 basis points on a credit downgrade -- "a huge number because we're talking a permanent increase in borrowing costs." That would make it more costly for consumers and business to borrow money and could land the economy back in recession. A default on the country's obligations would be even more disruptive, call participants said, and could ripple across financial markets, but was less likely.

Downplaying a U.S. Ratings Downgrade - Some market watchers are playing down the effect of a U.S. ratings downgrade, but if markets take it in stride that could make the underlying problem even worse. Standard & Poor’s has said that it may drop the U.S.’s triple-A credit rating to double-A even if the country raises the debt ceiling and manages to avoid default. S&P is looking for the U.S. to make big structural changes to get its long-run debt in order, and despite some discussion between President Barack Obama and House Speaker John Boehner earlier in the debt-ceiling debate, a broad plan looks dead in the water. That has made a downgrade look likely and has sparked a debate on what effect such an action would have. Moderate think tank Third Way put out a report comparing interest rates in countries that have a triple-A rating with those that have a double-A. The report notes that moving from the neighborhood of Germany, Canada and Hong Kong to the less upscale burg populated by Spain, Japan and Chile could add 0.75 percentage point to bond yields. And some analysts say that could result in the U.S. paying as much as $100 billion more a year in interest on its debt if ratings firms decide to downgrade.

Your daily debt-ceiling update -The latest configuration of the policy proposals is as follows. Speaker of the House of Representatives John Boehner seems to be trying to unify his caucus behind a plan for a short-term increase in the debt ceiling. Reportedly, Mr Boehner is interested in about $1 trillion in spending cuts, which would translate into GOP willingness to raise the limit by $1 trillion. That would get the country into 2012. The proposal is vague, and it's also unlikely to get any Democratic agreement. The president has been adamant in insisting that an increase take the country past the even more highly charged political environment of an election year. Meanwhile, Senate Majority Leader Harry Reid is pushing a plan that would raise the debt ceiling by $2.4 trillion and cut spending by at least that much. Critically, the cuts would spare entitlements and include no revenue changes. There is much to dislike in the proposal, but it has the attractive property that it might be able to get majorities in both houses of Congress.

How we got into this fine mess - For a clear, powerful, and erudite short take on the current debt debacle, there’s no better place to go than Jim Surowiecki. His main thesis is pretty much impossible to argue with: that the debt ceiling should be abolished. If Congress wants to cap the government’s borrowing, it can and should do that in the budgeting process, not with a saber-toothed ceiling which risks devastating the entire global economy. The debt ceiling, it turns out, has been a dangerous anachronism for almost 40 years now: Congress used to exercise only loose control over the government budget, and the President was able to borrow money and spend money with little legislative oversight. But this hasn’t been the case since 1974; Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to. There’s an important lesson here.  Every one of the dozens of times the debt ceiling was reached, there was a small but non-zero probability that something disastrous would happen. And each time, disaster was, predictably, averted. It’s a classic sign of how tail risks are treacherous and breed invidious complacency.

Republican Debunks Myth Of $400 Billion Tax Demand - When John Boehner walked away from a Grand Bargain for the second time last weekend, he claimed he did so because the White House 'demanded" more revenue: Republicans have hammered this point home. The Obama administration has strongly disputed this characterization. Administration officials say they asked for an additional $400 billion, but explicitly stated that it was not a demand, and offered deeper entitlement cuts as an inducement, As the L.A. Times has reported: Obama sensed that Boehner was losing GOP support — "bleeding members left and right," said the senior aide. To compensate, Obama hoped to reel in more votes from Democrats. Securing another $400 billion or so in additional revenue would help solidify Democratic support. Now we know the administration was right because a Republican aide confirms it to Mike Allen:

Video: Shiller & Siegel on How to Clean Up the Debt Mess - With a potential default less than one week away, Jeremy Siegel of the Wharton School and Robert Shiller of Yale debate the possibility of a U.S. financial crisis and what can be done to avert it. Read more about the debate on MarketBeat.

We Discuss the Manufactured US Debt Crisis at The Real News Network -- Yves Smith

When Will Markets React to Debt Ceiling Impasse? - You already know that the Obama administration has set Aug. 2 as the drop-dead day for the U.S. government to get its act together, solve the debt problem and avoid a global finance meltdown. But how much longer will investors sit tight before they hit their panic buttons? Until now, the market reaction to the on-again-off-again negotiations in Washington has been fairly reserved, mostly because the consensus is that neither Democrats nor Republicans want to commit political suicide. But conversations with portfolio managers, strategists and economists suggest many are giving the government until end-of-day Wednesday to show some discernible progress instead of just throw debt-cutting proposals back-and-forth. If it doesn’t do so by then, they say, this game of chicken between Congress and the markets would start to get scarier. There are reasons to make Wednesday the cut-off date.  It’s the day that trades need to get executed if investors want to receive settlement before the weekend.  Here are a few thoughts from market participants on when and how to pull the trigger:

Wall Street And The Debt Ceiling: Unthinkable? - Bond markets remain sanguine about a possible failure to raise America’s debt ceiling by August 2nd, and the subsequent potential for a technical default. But it pays to plan ahead, just in case the politicians lose the last of their marbles.  SIFMA, a trade group for large banks and fund managers, recently gathered members together to discuss issues like how to rewire their systems to pass IOUs rather than actual interest payments to investors, should a default occur. “It’s one of those Murphy’s Law things. If we do it, it won’t prove necessary. If we don’t, we’ll be scrambling like crazy with a day to go,” says one participant. But the moneymen hardly have all the bases covered. “I really thought I understood this market, until I tried to map all of the possible consequences of a breakdown,” sighs a bond-market veteran. That is hardly surprising, given that Treasury prices are used as the reference rate for most other credit markets. Moreover, some $4 trillion of Treasury debt—nearly half of the total—is used as collateral in futures, over-the-counter derivatives and the repurchase (repo) markets, a crucial source of short-term loans for financial firms, according to analysts at JPMorgan Chase.

Prepare for a rough ride, US warns world stock markets - Global financial markets face “stressful days ahead”, the White House warned, as American politicians struggle to agree a deal to cut the country’s record debts. President Barack Obama and senior politicians are locked in talks about tackling a problem which some experts fear could lead it to default on loan repayments. America is due to reach its self-imposed borrowing limit of $14.3 trillion (£8.7 trillion) on August 2. Ken Clarke, the former British chancellor, described the deadlock across the Atlantic as the “next iceberg”. The outline of a deal to reduce spending is expected to be presented to Congress today and negotiations are likely to dominate the next week there. Bill Daley, the White House chief of staff, warned that the talks were moving into “difficult days” and said it was crucial for the confidence of markets and businesses to get a deal soon.

U.S. 30-Year Yields Reach 2-Week High as Debt-Deal Efforts Stall - (Bloomberg) -- Treasury 30-year yields touched a two-week high as Republicans and Democrats failed to reach a deal on the debt ceiling, fueling concern the U.S. faces a credit-rating cut and sapping demand for U.S. government debt. Treasuries fell as the cost to protect against a U.S. default for five years rose to the highest level since February 2010, according to data provider CMA. The Treasury Department reduced the size of its auction of four-week bills for the first time since May, while preparing to sell $99 billion of notes this week. “It seems like we got farther away from a deal over the weekend,”  “There’s a lot of uncertainty out there. People are wondering what the inability to get something done will have on Treasury supply.”"

Debt-ceiling threat has Wall Street scrambling - Without a deal, the most feared scenario is that the U.S. will miss payments on its bonds and default — which financial experts say would be disastrous. While still considered unlikely, the prospect is popping up more in conversations. "No one … could possibly say that there is no chance of a catastrophic outcome," JPMorgan Chase & Co. CEO Jamie Dimon told analysts last week. The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever. Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar's position as the world's reserve currency.

Wall Street Traders Are Postponing Vacations Because They’re Too Scared To Leave The Floor Before August 2 - Trading floors across the country -- which are quiet because trading floors are increasingly empty, and should be more so at the moment because it's summer -- are oddly busy at the moment.  Apparently it's all because of the debt ceiling stand-off. "At Wall Street banks and investment firms, many traders are putting vacation plans on hold so they can be at their desks Aug. 2" the LA Times reports. "Trading floors Street-wide are unusually well populated for this time of year. You will see very few people on vacation," one trader from Knight Capital told the Times. But they're not doing much of anything. Another trader at the NYSE described the situation like this: "We're literally sitting on our hands and just waiting. When you don't know what to do the best thing is to do nothing."

Wall Street braces for US default - US banks have begun making contingency plans for what to do if the US government defaults on its debt or loses its triple-A credit rating, banking sources and analysts said. But the conventional wisdom on Wall Street is that Washington's feuding politicians will still reach a last-minute deal and avert a default, an outcome that President Barack Obama has warned would be economic "Armageddon". "The anecdotal evidence I've heard is that folks are beginning to take steps in case it happens," a former Federal Reserve official with extensive contacts in the banking industry told AFP. Bank of America, Wells Fargo and Citigroup confirmed that they were making plans on how to minimize the damage of a government default or downgrade. "While we have confidence our legislators will reach a resolution, our contingency planning is focused on ensuring we will able to meet our customers' needs should an agreement not be reached,"

Notes Toward Modeling a Risk-Free Rate with Default Possibilities - Brad DeLong asks why it hasn’t been done, if it hasn’t been done.  The biggest problem I can see is that you don’t know how insane the participants are—and that will have a major effect on how much damage is done when. Don’t get me wrong; the damage is already being done; it has been since at least May, and if Barack H. Obama weren’t an idiot, he would have been mentioning that over the past two months.  Unfortunately, the sun is yellow on our world, and counterfactuals are masturbatory, not participatory, acts. So let’s start with what we know: i= r + πNick Rowe apparently would have us believe his (completely understandable) claim that i would not be directly affected by a short-term default. This strikes me as absurd. Even when the economy is working on all cylinders--where G contributes something around 10-15% of growth at most—reducing G to zero for a week is about 2% of 15% or 0.2%-0.3%—noticeable, but arguably rounding error against the difference between π and πe.

A Game Plan for Rational, Self-Interested Republicans - As an unpaid advisor to Boehner and company, here is what I propose: Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections. The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed. Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots. Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans.

Are short term debt limit increases unusual? - In his remarks to the press Friday, the President insisted that any debt limit extension be “through the next election, into 2013.” That’s a bit more than seventeen months. He has threatened to veto a shorter term increase. How does that compare to historic practice? Using OMB data I looked at two timeframes, the last twenty years and the last thirty years. I drew an arbitrary distinction of one year as my dividing line between a short-term and long-term extension. Over the last twenty years Congress and the President have acted 44 times to increase the debt limit. Ten of those 44 times lasted more than a year. The other 34 were for less than a year. Over the past (roughly) 20 years, the U.S. government spent 18% of its time, or more than 3 and a half years, operating under a debt limit increase that lasted for less than a year.

Debt Ceiling Poker-  I've been enjoying all the sturm und drang over raising the debt limit, which is playing out more or less as I'd predicted.  The Republicans finally caved as I knew they'd have to. Mitch McConnell, under extreme pressure, I'm sure, from his billionaire controllers, offered a plan that would have handed off the tough decision-making to Obama, correctly noting in a media interview that the Republicans have a lot more to lose over this battle than the Democrats. It's always been clear to me that the Dems are holding ALL the cards in this matter and the Republicans basically none. The only problem is: Obama can't play poker worth shit! In a gaffe worthy of George Bush II, he even dared them to "call my bluff." Sorry, Barack, you call the other guy's bluff, you don't invite him to call yours. You want him to believe you are NOT bluffing. Sheesh, what a hopeless fool the President I voted for is turning out to be. Also, when the other player folds, you don't entice him to stay in the game by adding more money to the pot.

Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined — Members of the U.S. Congress reported Wednesday they were continuing to carefully debate the issue of whether or not they should allow the country to descend into a roiling economic meltdown of historically dire proportions. "It is a question that, I think, is worthy of serious consideration: Should we take steps to avoid a crippling, decades-long depression that would lead to disastrous consequences on a worldwide scale? Or should we not do that?" asked House Majority Leader Eric Cantor (R-VA), adding that arguments could be made for both sides, and that the debate over ensuring America’s financial solvency versus allowing the nation to default on its debt—which would torpedo stock markets, cause mortgage and interests rates to skyrocket, and decimate the value of the U.S. dollar—is “certainly a conversation worth having.” "Obviously, we don't want to rush to consensus on whether it is or isn't a good idea to save the American economy and all our respective livelihoods from certain peril until we've examined this thorny dilemma from every angle. And if we’re still discussing this matter on Aug. 2, well, then, so be it.” At press time, President Obama said he personally believed the country should not be economically ruined.

Debt Police Go Rogue - As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+. How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it. How did a bunch of unelected corporate suits get the power to wreck the global economy?

The Subliminal Message of Tonight's Speeches: We're Doomed - The speech contained no new information.  It didn't even include new verbiage.  We got the complaints about accelerated depreciation for corporate jets, which could close as much as $2 billion of the $8 trillion or so worth of deficit spending we'll be doing between now and 2021.  The puzzling assertion was repeated that we need "millionaires and billionaires" to do their part; apparently, the "millionaire" category now begins at a household income of $250,000 a year for a married couple filing jointly.  Once again, we were treated to Obama's selfless willingness to pay more taxes to fund the government that is going to make him a rich, rich man after he leaves office.  And the touchingly stated faith that these "patriotic Americans" will do their duty and chip in for a "balanced approach", as they have before.  The only new item, as far as I know, was a pretty decent Reagan quote that led off the speech. So why this urgent press conference?  Coupled with Boehner's rebuttal, the most plausible explanation to my mind is also the most troubling: both sides have given up making a deal, and are now just working on fixing the blame.

Parties Head to Showdown as Obama Warns of a ‘Crisis’ - The Democratic-led Senate and Republican-led House on Monday barreled toward a showdown on competing plans to cut spending and raise the debt limit1 as a resolution to the intensifying crisis remained farther from sight just one week before a possible federal default. With President Obama2 trying to employ the power of the presidency to force an agreement, House and Senate leaders said votes could occur as early as Wednesday on competing proposals to slash spending in exchange for increasing federal borrowing authority that the Treasury Department says will be exhausted Aug. 2, raising the prospect that federal bills will go unpaid.  It was a day of legislative chess moves, back-to-back party caucuses and closed-door meetings that ended with a nationally televised presidential address and a rebuttal by the House speaker, John A. Boehner. Their separate speeches reflected that the two sides are farther apart than ever — just a week ago, the two men were in private negotiations on a “grand bargain” of spending cuts and additional revenue, what Mr. Obama called “a balanced approach.”

Treasury to Weigh Which Bills to Pay -  The Treasury Department1 is preparing to answer a question that it has dodged and rebuffed for months: If there’s not enough money for everyone, who is left empty-handed?  Officials said Wednesday that the department would address the issue later this week unless it became clear that Congress would vote by Aug. 2 to let the government borrow more money.  The outlines of the answer, however, already are clear. Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs.  The implication is that the government will need to pay bills in the order that they come due. President Obama has warned as a result that the government “cannot guarantee” payments of Social Security2 benefits or other popular programs. Officials also have disputed the assertion of some Republicans that the government could prioritize interest payments.

Call him ‘Drama Obama’ - We face a debt crisis largely of Obama’s making. Spending as a percentage of GDP now stands at a startling 25 percent, thanks to Obama’s failed stimulus boondoggle, his healthcare law and just run-of-the-mill spending by Democratic appropriators. Taxes as a percentage of GDP now stand at historic low of 14.4 percent, thanks to a still-sluggish economy made worse by the president signing an extension of the Bush tax cuts. Obama can try to blame Republicans for these tax cuts, but when he had overwhelming majorities in both the House and Senate, he chose to keep those tax cuts in place. Solving this debt crisis requires a math degree, not a degree in drama. It is largely a function of vote-counting (218 in the House, 60 in the Senate) and budget number-crunching (anywhere from $1 trillion to $4 trillion in savings). But instead of looking coldly at the votes and cutting a deal that would pass both chambers, Mr. No-Drama has tried to increase the drama, by putting unnecessary pressure on House Republicans, trying to drive a wedge between John Boehner and Eric Cantor and having dramatic weekend meetings well before the deadline hits.

Even Larry Tribe Now Agrees: Fourteenth Amendment is a Viable Option. So Why Won’t Obama Use It? - Is the much-touted “Fourteenth Amendment option” a viable end run around the debt-ceiling nonsense that threatens to destroy the world?  Charles Grassley thinks so. Bruce Bartlett thinks so. Former president Bill Clinton definitely thinks so: He’s said he’d do it “without hesitation, and force the courts to stop me”. As for whether the courts or anyone else would or could try to stop Obama should he invoke the Fourteenth, even Laurence Tribe, who is known to be close to the Obama administration — close enough to carry its water, as he blatantly did with his pronouncement earlier this month that the Fourteenth Amendment didn’t trump the debt ceiling legislation — has admitted that this is highly unlikely: “This is not a circumstance in which the courts have any plausible point of entry.” Tribe even went so far as to dismiss the threat of impeachment as “not politically a very plausible scenario.” So, knowing all of this, and with so much on the line — why, then, won’t President Obama admit that this is an option? Why, instead, is he pushing to put Social Security and Medicare on the chopping block — and getting various liberal “Veal Pen” groups to echo his call for cutting Social Security? Could it be it’s because he’s been planning to attack Social Security and Medicare — and whatever else is left of the New Deal and the Great Society — all along?

The Political Theater and the Debt Ceiling Crisis: Are We Being Had?: President Obama has said that he will not resort to the various powers open to him to keep the government running should Congress fail to deliver a debt ceiling increase. This is a suspicious statement, as it is not credible that a president would leave troops at war unpaid and without supplies, Social Security checks unsent and stand aside while the US dollar collapses and the credit rating of the US government is destroyed. There are national security directives and executive orders already on the books, as well as the 14th Amendment, that Obama can invoke to set aside the debt ceiling. Congress would sigh with relief that Obama had prevented the lawmakers from destroying the country. So what might be going on? One possibility is that the political theater is operating to bring about otherwise politically impossible cuts in the social safety net. If the drama continues to the absolute deadline without a deal, Obama, who perhaps favors cutting the safety net as much as do the Republicans, would have to accept the Republican package in order that the troops are not cut off from supplies, Social Security checks can continue to go out, and the dollar be saved. Having opposed the Republicans to the last minute, Obama can say that he had no other recourse.

Bad belt-tightening metaphors - A commonplace among politicians that drives me crazy is that "government must live within its means, just like families." The problem is that families don't, at least within the meaning implied by the above statement.  Personal income in the United States is about $12.9 trillion.  Mortgage debt outstanding is about $10.5 trillion.  Consumer credit outstanding is about $2.4 trillion.  So the ratio of consumer debt relative to consumer income is similar to US government debt to GDP.  I am not saying we needn't worry about long term fiscal balance--we do.  As I have said before, we must, among other things, return tax revenues to at least their long-term mean as a share of GDP, and bend the cost-curve for health care--something that Obamacare actually tries to do. But bad metaphors that basically dishonestly flatter people are not helpful.

Debt Ceiling Consequences - If the debt ceiling is not raised at some point the US government will be unable to meet all of its obligations. I assume that they will make their interest payments and bond redemptions on schedule and the shortfall will be in paying social secutiry, medicare, military and other obligations. This will naturally impact aggregrate demand and generate a significant negative impact on the economy. Given the severe weakness in the economy this shock most likely would tilt the economy into a recession. This is rather straight forward analysis, but the more severe situation would be the consequences of the government failing to redeem T bonds and/or T bills or failing to make an interest payment of these debt obligations.

The Debt Ceiling - CBO Director's Blog - In less than a week, according to projections from the Treasury Department, the U.S. government will begin defaulting on some of its obligations unless the Congress and the President increase the statutory ceiling on federal debt. (CBO doesn’t analyze the Treasury’s daily cash management, so we have no independent projection of the date.) The continuing debate about alternative approaches to raising the debt ceiling is taking place against a backdrop of serious ongoing problems with the federal budget and the economy that raise the stakes for decisions about the debt ceiling and budget policy. As CBO provides objective, nonpartisan information and analysis to assist the Congress during this crucial period, I’d like to highlight some of CBO’s work that bears on the various issues at hand.

Debt ceiling wiggle room runs out August 2: White House (Reuters) - The United States has no wiggle room on the debt after next week's default deadline, White House spokesman Jay Carney said on Tuesday, adding he expected a deal to be reached through compromise before then. "The United States hit its debt limit in May, and since May the Treasury Secretary ... has exercised all the wiggle room available to him and that runs out on August 2nd," Carney said. "We don't believe we will get there," he said of default. "We are pushing this to the last minute, and that should not be in the case, but in the end we believe Congress will act appropriately."

All Eyes On August 2 - In the fast-moving world of the debate over the federal debt ceiling (a phrase that I seriously doubt has been used very often in American history), it’s possible and perhaps even likely that, if it dealt on current events, this week’s Fiscal Fitness would be out of date before it appeared in print. For that reason it makes more sense to gaze just slightly into the future — to Aug. 2 — when, depending on whom you believe, either all economic hell will break loose and financial thunderbolts will be hurled from the heavens or we’ll have the fiscal version of Y2K and Aug. 3 will be just another day in the life of the American economy. Let’s start with the most basic truth of all: No one on Wall Street or in Washington really knows what will happen if the debt ceiling isn’t raised by Aug. 2, the date the Treasury says the government will run out of all but the most extreme, embarrassing, untried and not-necessarily-legal cash management options to borrowing. There’s no doubt that on a day-to-day basis, Treasury won’t have enough cash to pay all the bills that are due because the revenues collected at any given time won’t always match the expenses that are supposed to be paid that day.

U.S. May Have Enough Cash to Delay Aug. 2 Deadline for Default - The U.S. Treasury Department may have enough cash to pay the government’s bills for days or even weeks if Congress fails to raise the debt limit before an Aug. 2 deadline, say analysts at UBS AG (UBSN) and Barclays Capital. The date set by the Treasury is a projection for when the U.S. exhausts its authority to borrow, not when it runs out of money. Chris Ahrens at UBS and Ajay Rajadhyaksha at Barclays say the debt limit may not have to be raised next week, in part because tax revenue is coming in higher than forecast. “Having borrowing authority is like having a credit card,” Rajadhyaksha said in an e-mail yesterday. While the Treasury “will no longer be able to use its credit card” after Aug. 2, “it should still be able to pay its bills on Aug. 3, which is ultimately what matters most.” The extra cash may help the nation stave off a default and buy time for politicians to hammer out a deficit-reduction agreement,

Is US default deadline truly Aug 2? Analysts say no (Reuters) - Will the sky fall on Aug. 2 if the U.S. Congress fails to raise the debt ceiling? Not likely, according to analysts, who say that even without the ability to borrow more money, the government could avoid a devastating default for another week or so. That raises the question of how urgently action is needed to increase the nation's borrowing limit. For weeks, President Barack Obama and Treasury Secretary Timothy Geithner have stressed that the U.S. Treasury will run out of room to borrow funds next Tuesday and have warned of dire consequences if Congress does not raise the nation's $14.3 trillion debt ceiling in time.But Treasury officials have never said when the government will run out of cash to pay the nation's bills, and the consensus among Wall Street analysts is that the cash won't run out until about two weeks after the August debt-ceiling drop-dead date. "The first risk of a legitimate default is Aug. 15," . "Cash is not going to be an immediate problem. The debt ceiling space is not going to be an immediate problem."

Debt-ceiling crisis: The U.S. won't "default" after Aug. 2. Something much weirder will happen - The United States is not going to default. Yes, something awful and weird will happen in early August, but it isn't going to be default. The Treasury will need to issue more bonds to make promised payments to the country's creditors, senior citizens, federal employees, and so on. Without that extra cash, the federal government will need to miss 40 to 45 percent of its payments, according to calculations by the Bipartisan Policy Center. But that is not default. Default is too tidy a term for it. The chaos that might hit after Aug. 2 has no precedent, and therefore no name. Still, let's try to be specific. On Aug. 2 or soon after, Treasury will "exhaust its borrowing authority." That does not mean that we "hit the debt ceiling." We hit the ceiling back in May, and since then the country has not been able to issue new debt, only to roll over maturing bonds. "Exhaust its borrowing authority" means that Treasury will no longer be able to fudge the country's finances enough to keep all payments going out on time.

Visualizing America's Cash Outflows Between August 3 And August 15 - We have previously presented this data in tabular format but because we realize that some readers visual learners, here is a compilation of total US Federal obligations (read cash outlays) between August 3 and August 15, this time from Reuters, at which point all the money runs out no questions asked. The total: $246 billion. The day to day totals diverge modestly from what was presented before depending on calendarization, but the cumulative result speaks volumes.

Default by U.S. Can Be Avoided Until September, Silvia Says - The U.S. government can avoid a default for at least a month after the Aug. 2 deadline to lift the debt ceiling set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC. “The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt,” Silvia, who is based in Charlotte, North Carolina, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “There’s a way of getting around this issue for at least another month or two.” Political party leaders are preparing dueling plans for raising the U.S. debt ceiling, unable to break a partisan stalemate over how to tackle the nation’s $14.3 trillion debt by Aug. 2. That is the date when the Treasury Department says its borrowing authority will end. Greater-than-forecast tax revenue might give the Treasury until Aug. 10 before it runs out of cash, Barclays Capital said in a report last week.

Treasury will always be able to make its debt payments - I’m not sure where this meme originated, but people are saying with great confidence these days that Treasury has to borrow money just to pay the interest on the national debt. It simply isn’t true. Here’s Michael Kinsley, last week: even if we shut the government down completely, bills would still be coming in and interest payments would still be coming due, and we’d be unable to pay them. And here’s Chris Wilson, today: If the entire U.S budget were cut to zero, effective immediately—the military, all entitlements, the electricity bill for the Capitol—there still wouldn’t be enough money to cover the payments on old debt that come due every day. The fact is that Treasury can easily cover interest payments from tax revenues alone. We raise about $180 billion a month in taxes; interest payments come to about $30 billion a month. If the government shut down completely and did nothing but collect taxes and pay off the national debt, it would be running a profit of a good $150 billion a month.

Our Real Deficit Problem Has Nothing to Do With Traditional Government - In 1960, the last full year of the Eisenhower administration, taxes were 17.8 percent of GDP and primary spending (excluding interest) was 16.4 percent. Social Security took in and paid out 2.2 percent. Medicare didn't exist. So Everything Else had a primary surplus, with taxes at 15.6 percent and spending at 14.2 percent.
In 2010, in the supposed age of "big government," spending on Everything Else was only 14.7 percent of GDP, and that was swollen by the recession and stimulus spending. By 2021, according to the CBO's alternative fiscal scenario (the pessimistic one), spending on Everything Else will be 13.0 percent--less than in 1960. Everything Else tax revenues--that is, everything except the Social Security and Medicare payroll taxes--will be 12.5 percent of GDP, for a primary deficit of only 0.5 percent. And that's assuming that all of the 2001, 2003, and 2009 tax cuts are extended indefinitely.

Republican Debunks Myth Of $400 Billion Tax Demand - When I began covering the American economy 11 years ago, it was the envy of the world. The last 11 years have not been kind to it. First came the dot-com bust. Then there was the weakest economic expansion in decades, followed by the worst financial crisis and deepest recession in decades. Now we’re suffering through a painfully slow recovery, which Washington may soon make worse.  The malaise obviously has several causes, some of which are beyond our control. One major cause, however, is entirely our doing. We do not spend enough time focusing on our actual economic problems.  We are too often occupied with distractions, rather than trying to answer a simple question: What works? What economic policies have succeeded before and are most likely to lead to the best life for the largest number of people? Instead, we’ve effectively decided that because the United States is the richest, most successful country in the world, it is guaranteed to remain so.

Conspiracy Theories About Republicans and the Economy - In the last few days, several readers, economists and radio hosts have asked me whether I buy the most cynical interpretation of the debt crisis stalemate: maybe Republicans are reluctant to raise the debt ceiling, or are calling for austerity measures that could slow the recovery, because they actually want the economy to do badly. That way voters will demand a change in political leadership, and vote more Republicans into office in 2012.I’m no political scientist, but that sounds a little too Machiavellian even for the most hardhearted of politicians. But more important, I’m also reluctant to believe this conspiracy theory because the conspiracy isn’t necessary. That is, the economy is likely to be in bad shape in November 2012 no matter what happens with the debt talks. As of January, the Congressional Budget Office projected that unemployment in the fourth quarter of 2012 would be 8.2 percent. Macroeconomic Advisers, another respected forecaster, recently published a similar outlook.

Conservative revolt casts doubt on House GOP plan -(AP) — The White House threatened Tuesday to veto legislation pending in the House to avert a threatened default, a pre-emptive strike issued as Speaker John Boehner labored to line up enough votes to pass the measure. Boehner faced criticism from some conservatives in advance of an expected vote on Wednesday. The bill would raise the debt limit by $1 trillion while making cuts to federal spending of $1.2 trillion — an amount that conservatives say is insufficient. The measure also would establish a committee of lawmakers to recommend additional savings of $1.8 trillion, which would trigger a $1.6 trillion increase in the debt limit if enacted. The White House objects to the requirement for a second vote before the 2012 elections.

GOP Delays Debt Limit Vote After Damaging CBO Score - Moments after the Congressional Budget Office released an analysis finding that the House Republicans' debt limit bill falls far short of one their key goals, House Speaker John Boehner (R-OH) decided to rewrite the legislation, and according to GOP leadership, an expected Wednesday floor vote on the package will be delayed until Thursday at the earliest. "We promised that we will cut spending more than we increase the debt limit - with no tax hikes - and we will keep that promise," reads a statement from Boehner spokesman Michael Steel. "As we speak, Congressional staff are looking at options to re-write the legislation to meet our pledge." It's still unclear whether Republicans will adjust the bill by including deeper spending cuts, by reducing the amount of borrowing it authorizes, or both. Their goal is to cut projected spending by at least $1 trillion in the next ten years, and to authorize no more new borrowing authority than they can achieve in savings. As currently written, the legislation falls short of both goals

Read the Reid Plan. Read the Boehner Plan. Get Back to Me. Stop listening to me and read the competing budget plans!  (scribd copies)

The Boehner and Reid Budget Plans Compared -  Today the CBO released its updated score of the Boehner budget proposal and the Reid budget proposal. So we can now do an apples-to-apples comparison of the year-by-year numbers in the two plans, and thereby get a better understanding of the differences between the two. A couple of charts will help.  The first chart shows the impact of the Boehner proposal on federal discretionary outlays. Compared to the March CBO baseline it reduces discretionary outlays by $756 billion over 10 years, which, with interest saving of $156 billion and other smaller changes, reduces the deficit by $917 billion. That is of course a lot less than the $6 trillion in the House budget resolution, but it is a good step in the right direction. The proposal correspondingly increases the debt limit on a nearly dollar-for-dollar basis by $900 billion, which should take us into early 2012. Since this increase will not last through the upcoming presidential election, the proposal also enacts a process to increase the debt limit by another $1.6 trillion with matching spending cuts, which would then last through the end of 2012.

Boehner tries to tame GOP on debt ceiling plan - A dust up among a major House conservative bloc and the prospect of tens of billions of dollars in new spending cuts has Republican leadership feeling as if it quelled an uprising on the right after struggling to line up votes for much of the week. Speaker John Boehner of Ohio, Majority Leader Eric Cantor of Virginia, Majority Whip Kevin McCarthy of California and Chief Deputy Whip Peter Roskam of Illinois continued their hard sell of a two-step debt-limit package, meeting in Capitol offices to close the deal and avoid a default on the nation’s $14.3 trillion debt. Scrambling for votes on his troubled deficit package, Speaker John Boehner1 told GOP lawmakers Wednesday morning to “get your ass in line” behind his debt ceiling bill, saying the Senate will fold and pass it. “This is the bill,’ Boehner said in a closed-door meeting of House Republicans on Wednesday morning. “I can’t do this job unless you’re behind me.”

White House threatens veto of Boehner debt bill -- President Barack Obama's advisers would recommend that he veto a bill authored by House Speaker John Boehner to cut government spending and raise the debt ceiling in two stages, the White House said Tuesday. The House is expected to vote on the Republican bill on Wednesday. Senate Democrats have offered a competing proposal to cut spending and lift the debt ceiling. The Treasury Department says the debt ceiling needs to be raised before Aug. 2 or the government will begin defaulting on obligations

Reid says his plan will satisfy debt rating agencies -- Sen. Harry Reid, D-Nev., today pressed for support of his legislation to solve the debt crisis, citing a report that it would satisfy bond rating agencies and avert a downgrade of U.S. debt while a competing Republican plan would not. In a Senate speech, Reid moved to address criticism of the bill he introduced Monday to allow an additional $2.4 trillion in continued government borrowing, accompanied by $2.7 trillion in spending cuts and other savings. Republicans attempted to characterize some of the savings in Reid's initiative as largely illusory. Sen. Mitch McConnell, R-Ky., said today it was "nothing more than another attempt to pull the wool over the eyes of the American people." While President Barack Obama endorsed Reid's bill in his nationally televised speech on Monday night, House Speaker John Boehner, R-Ohio, said in his televised rebuttal it was "filled with phony accounting and Washington gimmicks."

Credible deficit cuts being proposed by US Congress: S&P official - The head of a top credit rating agency says some of the deficit-cutting plans Congress is considering could lower theUS debt burden to a level that would allow the country to keep its triple-A credit rating. Standard & Poor's President Deven Sharma told a congressional panel Wednesday that previous reports indicating Congress would need to make $4 trillion in deficit cuts over 10 years to retain the top credit rating were inaccurate. Sharma declined to be specific over how much deficit cutting would be needed to win S&P's approval. But he said some of the plans being discussed were in the range of what the agency thinks would be necessary for a credible attack on the US deficit problems. Credit rating agencies assess the riskiness of debt issued by companies and governments. The three major agencies Moody's, Standard & Poor's andFitch Ratings have warned that they may downgrade the US government's triple-A credit rating.

The Real Difference Between the Boehner and Reid Plans - Yesterday, the Congressional Budget Office (CBO) released "scores" for how much spending would be cut under two current debt ceiling plans, one proposed by House Speaker John Boehner (R) and the other proposed by Senate Majority Leader Harry Reid (D). The CBO reported that the Reid plan would save $2.176 trillion over the next ten years while the Boehner plan would save $851 billion over ten years. The real story of the difference between these two numbers is about the way that the CBO scores its reports.  As Ezra Klein noted, "The difference between the two scores says less about the two plans than it does about the maneuvering that led to them, and the CBO itself." For example, the CBO is generally required to assume that programs are set to expire "even if Congress's regular policy has been to extend them."   The two plans are actually very similar after adjusting for these CBO score oddities: each plan is estimated to cut discretionary spending by about $700 billion over ten years.   Close readers may notice that CBO's score for both plans is hundreds of billions of dollars less than the sponsors initially indicated. This is depending on when the CBO's "baseline" of spending is, different spending cut proposals can save different amounts of money.  Here, the CBO used a March baseline instead of the January baseline which had been used to create proposals. The CBO released a blog on their analysis of the Budget Control Acts of 2101 that can be found here.

From Outside the Beltway - Tracking the debt ceiling debate has been something of a monumental task - there are simply too many pieces in motion at any given time. Perhaps even more of a challenge given that it is an insider's game, and I am well removed from that game Indeed, from my perch the only thing that looks certain is that whatever happens will be unambiguously bad for the economy. We are simply looking at degrees of bad – fiscal contraction in the range from mild to severe. The latter – a severe contraction – will almost certainly result if federal spending needs to be slashed beginning next month to maintain servicing the debt, thus preventing defaults to one group of creditors while defaulting on promises to another – the general US public. One view is that the consequences of failure are so severe that failure is not an option.  I wish I could be that confident. Here is my view from the other side of the continent: My fear is that this optimistic assessment fails to sufficiently acknowledge there are two battles. One between Democrats and Republicans, and the other within the Republican party itself. And any outcome that is acceptable to Democrats is internally corrosive to Republicans. So internally corrosive that compromise with Democrats is a monumental if not impossible challenge.

Boehner Revises Debt Proposal as Aug. 2 Nears - Republican leaders were moving ahead with plans to vote on the measure tomorrow, less than one week before a potential U.S. default Aug. 2, and sought to ease party members’ concerns that it wouldn’t cut spending enough. The Congressional Budget Office said Boehner’s new plan would cut $915 billion in spending over a decade, still short of the $2.2-trillion Senate plan. Boehner, when asked by radio host Laura Ingraham whether he told members at a closed-door meeting today to get “your A-word in line” behind his debt bill, said: “I sure did. Listen, this is time to do what is doable.” Boehner’s plan would promise another debt-limit showdown in the 2012 election year unless Republicans and Democrats agree by the end of this year to reduce deficits. President Barack Obama and congressional Democrats insist on extending the nation’s borrowing authority through the 2012 elections, saying continued uncertainty would harm financial markets. An analysis by the nonpartisan CBO of Boehner’s revised plan said it would cut spending by $915 billion, compared with $850 billion for his original plan. This still was less than the $1.2 trillion advertised by party leaders for an initial round of cuts, which prompted leaders to cancel today’s scheduled House vote on the bill.

Republicans put off vote on debt limit - An intensive endgame at hand, Republican leaders abruptly postponed a vote Thursday night on legislation to avert a threatened government default and slice federal spending by nearly $1 trillion. "The votes obviously were not there," conceded Rep. David Dreier, R-Calif., after Speaker John Boehner and the leadership had spent hours trying to corral the support of rebellious conservatives. The decision created fresh turmoil as divided government struggled to head off an unprecedented default that would leave the Treasury without the funds needed to pay all its bills. Administration officials say Tuesday is the deadline for Congress to act. Senate Democrats stood by to scuttle the bill -- if it ever got them -- as a way of forcing Republicans to accept changes sought by Obama. Based on public statements by lawmakers themselves, it appeared that five of some two dozen holdouts were from South Carolina. The state is also represented by Sen. Jim DeMint, who has solid ties to tea party groups and is a strong critic of compromising on the debt issue.

As debt ceiling deadline looms, default or compromise? - Washington awoke Friday morning to a possibility that has been widely shrugged off for weeks, but suddenly seems chillingly real: Could the government actually default? The delay and disintegration of a House vote1 on the debt limit late Thursday is the latest sign that Congress is mired in legislative gridlock just four days before the Aug. 2 deadline for lifting the country’s borrowing authority.  House Speaker John Boehner3 (R-Ohio) vowed to return to his bill Friday, but Thursday’s chaos — hours of private meetings, praying and postponed votes — raises fresh concerns that the country is stumbling toward a possible default and downgrade4 of its credit rating. “I felt for some time that a default was likely,” Rep. Barney Frank5 (D-Mass.), the top Democrat on the House Financial Services Committee, told POLITICO. “Now, it’s more likely than not.”

John Boehners no-confidence vote -- “Get your ass in line1,” Speaker John Boehner had told House Republicans who resisted his plan to raise the debt ceiling and avoid a default But really, it was Boehner’s butt that was on the line – and late Thursday night, he had it handed to him.  For his six-month-old speakership, it was a grievous if not mortal wound. The legislation under consideration was fairly pointless – a solution to a self-inflicted crisis that faced certain defeat in the Senate – but Boehner made it into a test of his leadership. And rank-and-file Republicans returned a vote of no confidence.  After a day of cocky predictions, GOP leaders suddenly pulled the bill from the floor Thursday evening – and when five hours of backroom arm-twisting failed to change enough minds, they called off the night’s vote. Leadership vowed to resuscitate the “Boehner Plan” (or some more conservative version of it) on Friday.

Time Ticks Down As Boehner, House Prepare Another Vote To Nowhere: "Speaker of the House John Boehner's job is on the line as the House of Representatives prepares a vote on his plan to raise the debt limit today. 'His being Speaker is clearly at stake here,' Sen. John McCain (R-AZ) said Thursday night on Fox News. After his spectacular failure to corral the 216 votes for his bill, Boehner is modifying it — likely to include stronger language calling for a balanced budget amendment to the Constitution, and perhaps cuts to Pell grants for college students. While this 'tweaking' may help Boehner bring over the two or three votes he needs to pass his debt limit plan, it also makes it more dissimilar to the on pushed by Senate Majority Leader Harry Reid — and makes the ultimate compromise more difficult. After the Boehner plan passes the House (if it can get that far) it will be, in the words of Reid, 'dead on arrival' in he Senate, where lawmakers were waiting up late last night for the chance to put the kibosh on his plan. President Obama has also threatened a veto, though his advisors call it a 'moot point' because it will never get out of the Senate."

Wow -- Maybe We Really ARE Governed By A Bunch Of Irresponsible Wack-Jobs: "All this time we thought it was just an act. We thought that all that posturing and indignation in Washington about the debt ceiling--about how the Treasury was just making up that stuff about the August 2 deadline and the country had plenty of money and government is too big and we've got to cut spending and so therefore it's totally cool to default--was just a bunch of political hot air. We thought the Congress, the same people who voted for all the spending that is now forcing the country to borrow more money, would do its usual circus dance and keep the charade going right up until the last minute when every TV viewer in the country and tuned in--and then, finally, at the 11th hour, make the only sane and responsible choice here, which is to raise the debt ceiling. But now it suddenly looks like we might have been wrong. Now it looks like we actually MIGHT BE governed by a bunch of selfish, incompetent wack-jobs who put their careers and politics ahead of the country's interests.

Twitter emerges on Washington front line - Twitter has become a front line of the debate on raising America’s debt ceiling, as the official account of President Barack Obama on Friday began sending out the Twitter names of every Republican member in Congress. Frustrated citizens have also used the social media service to vent their frustration with Washington, even as politicians rally supporters with regular tweets. A typical message from @BarackObama on Friday read: “Utah voters: Tweet @OrrinHatch and @SenMikeLee and ask them to compromise on a balanced deficit solution.” The messages went to the presidential account’s more than 9.3m followers. However, there were mixed indications about the campaign’s effectiveness. According to one Twitter user who claimed to have monitored the account, the president lost at least 10,000 followers during the course of the day.  The campaign came at the end of a week during which the president repeatedly asked Americans to use Twitter as a means of lobbying their representatives. “If you want to see a bipartisan compromise ... let your members of Congress know,” the president said on Monday in a televised address to the nation. “Make a phone call. Send an e-mail. Tweet.”

Boehner Fakes Right, Likely To Go Left - The revised debt ceiling increase/deficit reduction bill that House Speaker John Boehner (R-OH) now is pushing toward a vote in the House tonight apparently includes not just a requirement that the House and Senate vote on a balanced budget amendment to the U.S. Constitution, but that the House and Senate must pass the amendment. If the amendment isn't actually adopted by both houses, Congress would be prohibited from considering the second increase in the federal debt ceiling that will be needed later in the year under the Boehner plan. In other words, the new Boehner bill requires not just that the Senate consider the constitutional amendment but actually dictates what the outcome must be. This unambiguously is an attempt by Boehner to appeal to the tea party wing of the GOP to get the votes he needs to get something...or anything...out of the House today. Boehner's thinking is that with debate and vote on final passage of a debt ceiling increase coming as close to August 2 as possible, House and Senate Democrats will provide the votes needed to get the bill adopted no matter what it includes.  So Boehner is appealing to the political right now but will be relying on the left later.

House approves revised Boehner debt ceiling plan - After a belabored and bruising struggle to appease conservatives, the House of Representatives has passed Speaker John A. Boehner's bill to raise the debt limit and reduce the deficit. The bill passed on a 218-210 vote, winning no Democratic support while losing 22 Republicans. It now moves to the Senate, where Democratic Majority Leader Harry Reid has said it will go nowhere. With just four days left before the government can no longer pay all of its bills, Reid is working on a separate proposal aimed at winning support for Republican moderates in that chamber. The House bill was a heavy lift for the chamber's GOP majority, exposing deep divisions between traditional Republicans and hard-line conservatives aligned with the "tea party." Boehner twice delayed the vote this week and revised the bill to win support from his reluctant right flank.

House passes GOP debt bill over objections of Obama, Democrats; Senate votes to table - The House narrowly passed GOP debt-limit legislation Friday after Republican leaders revised it to gain the support of recalcitrant tea party conservatives, but the Senate swiftly moved to block it from consideration in their chamber. Instead, senators moved to replace it with a bipartisan plan that would raise the federal debt ceiling ahead of an Aug. 2 deadline, averting a potentially catastrophic U.S. default. The Senate voted 59 to 41 to table a bill offered by House Speaker John A. Boehner1 (R-Ohio) that would lift the federal debt ceiling. That vote came about two hours after the House passed the bill 218 to2102. House Democrats were united in opposing the Boehner bill while 22 House Republicans broke from their leader despite his intensive lobbying efforts and his attempt to revise to more of their liking. President Obama warned earlier in the day that the House GOP plan had “no chance of becoming law,” and he instead urged Senate Democrats and Republicans to reach a “bipartisan compromise.” He reiterated his objections to a measure that includes only a short-term increase of the debt limit.

Boehner Passes a Debt Plan That Won't Go Anywhere - According to the direst of pundit estimations, Boehner could have found his speakership in jeopardy, as tea partiers and conservative interest groups blasted emails to reporters and pressured House Republicans to vote against Boehner's bill. To appease them, Boehner morphed his bill into something that probably will not end up anywhere near Obama's desk. On Friday, he added a key provision: a requirement for a balanced-budget amendment. Boehner had proposed raising the debt ceiling twice, once now, and again before the 2012 elections. At the behest of conservative members, he placed a condition on the second limit hike. Under the bill passed Friday night by the House, Congress must pass a balanced-budget amendment to the Constitution in order for the debt limit to rise again in 2012. Passing an amendment requires a two-thirds majority in both the House and Senate -- a level of support that simply does not exist.

The House GOP's debt ceiling hara-kiri -  As House Republicans coalesce around a new debt ceiling plan that is even more unlikely to pass the Senate than the previous indubitably dead-on-arrival version, it's not hard to imagine that viewers of this travesty from outside the United States are even more distraught at the dire implications of this evil clown show than those of us who live here. Europe, after all, has its own big problems -- all of which will be exacerbated if the largest economy in the world suddenly devolves into fiscal chaos. Americans have been accustomed to the sight of Tea Party extremism influencing the highest levels of government policy in directions that seem economically foolish, but from across the Atlantic, where they may not have been paying quite so close attention until recently, the notion that the U.S. might just unilaterally decide not to pay its bills must seem rather odd.At the Wall Street Journal's debt ceiling live blog Mark Brown and Todd Buell capture the brewing concern:"There has been a huge bid for anything deemed a safe haven asset, a bid that has been propelled by an imploding euro-zone and a U.S. administration that is seemingly looking to bring its $14 trillion poker game to a spectacular finale by committing collective hara-kiri,"

Debt-ceiling sanity is now in the Senate's hands - Here’s the situation: The House measure cannot and will not pass the Senate; nor should it. It would, among other flaws, subject the country to another punishing and humiliating replay of the debt debate six months from now. It is a fine idea to have a two-step process in which some cuts are agreed on now and a supercommittee is established to find more savings down the road. It is a dangerous idea to harness the outcome of that committee’s work to the further lifting of the debt ceiling. It invites ever more rounds of government by hostage-taking. That leaves the Senate, with the straitjacket of its cumbersome procedures that eat up precious time. Given that the House measure is dead on arrival, the focus then shifts to Senate Majority Leader Harry M. Reid (D-Nev.) Can the leader craft a compromise, two-step measure that would bring enough Republicans on board to get past the 60-vote hurdle? The Gang of Six sympathizers ought to be amenable to the notion of a supercommittee to come up with additional savings.

Senate Quickly Kills Boehner Debt Bill - After a 24-hour delay and concessions to conservatives, the House on Friday narrowly approved a Republican fiscal plan that the Senate quickly rejected in a standoff over the federal debt ceiling that was keeping the government on a path to potential default. Demonstrating the deep partisan divide coloring the budget fight, the House voted 218 to 210 to approve the plan endorsed by Speaker John A. Boehner to increase the federal debt ceiling in two stages. No Democrats supported the measure; 22 Republicans opposed it. The White House condemned it as a “political exercise.” In the Senate, Democrats filed a motion on Friday that started debate, running down the procedural clock while Republicans expressed their opposition. The first vote on overcoming the procedural hurdles would come early on Sunday. Unless the Democrats can win over enough Republicans to cut off debate and move to approve the Reid bill or some variant, the Republicans would be forced to hold the floor continuously, awaiting some kind of deal.

Default fears worsen as US Senate blocks debt-ceiling bill - Congress was earlier warned that it was "playing with fire" and President Barack Obama appealed for a compromise as the Tuesday deadline for a resolution of the debt crisis talks loomed ever closer. The Senate is now instead debating a Democrat plan to avoid a US government default, a spectre that has created fears of a fresh world recession. The Treasury department says that the US will default on its financial obligations on Tuesday if agreement is not reached on raising the debt ceiling. Late on Friday night the Republican-controlled House had passed a bill, which would have lifted the borrowing ceiling only temporarily, by just eight votes. Democrats had opposed it as unacceptable and "extremist" - while conservatives influenced by the Tea party argued that it did not go far enough.  John Boehner, the Republican Speaker of the House, gave an impassioned appeal to his colleagues in the House to approve his plan, slamming his fist on the podium several times.

Fed's Williams Sees No 'Magic Wand' in Event of Debt Default - Federal Reserve Bank of San Francisco President John C. Williams said the central bank doesn't have a "magic wand" to help the economy if the U.S. government defaults on its debts. "Make no mistake -- the Federal Reserve doesn't have a magic wand that will allow the economy to get through a crisis of this magnitude unscathed," the regional bank chief said in the text of a speech in Salt Lake City. "A federal default must be avoided," he said. Williams' comments on the federal budget amplify similar warnings made this month by Chairman Ben S. Bernanke when he delivered the Fed's twice-a-year economic report to Congress. Williams said there's "no question" the nation is on an unsustainable long-run path of fiscal deficits, which must be reined in over the next decade.

Treasury Faces Pressure to Detail Backup Plan - The Treasury Department will face growing pressure Friday to detail its emergency plans to operate the government next week after a House Republican revolt Thursday night complicated efforts for Congress to raise the debt ceiling by Aug. 2.. Treasury has for weeks debated how it would operate after Aug. 2, but officials have said there is nothing they can do to avoid unprecedented and immediate spending cuts. They have urged Congress to raise the debt ceiling instead. But the decision by House Republicans late Thursday to postpone a vote on their plan to raise the debt ceiling will likely push Treasury to spell out its emergency plans to investors, businesses, consumers and foreign governments. These decisions—which U.S. creditors are paid, and which aren't—would have large economic and political consequences, which is why Treasury has kept the details a closely held secret.  The government typically runs a deficit of roughly $130 billion a month, so a large contraction in expenses could cut government spending by close to 40% immediately, analysts have said. Many analysts have said a sharp reduction in federal spending could help push the economy back into a recession.

If we see no debt ceiling deal, the US will prioritise Treasuries -- As I indicated earlier today: The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90 billion in debt matures on Aug. 4 and more than $30 billion in interest comes due Aug. 15. Overall, more than $500 billion matures in August -Bloomberg The Chinese will be pleased. Holders of other government liabilities, not so much. If it comes to this, expect it to be negative for economic growth.

Can Treasury prioritize bond payments? - One of the more curious pieces of rhetoric in this whole debt-ceiling debate is coming from Treasury, which has a vested interest in making failure to raise the debt ceiling sound as bad as it possibly can. To that end, it’s trying as hard as it can to get people to believe that if the debt ceiling isn’t raised, it’ll end up defaulting on Treasury bonds. Here’s Binyamin Appelbaum: Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs. The implication is that the government will need to pay bills in the order that they come due. This is scary — it raises the unthinkable spectre of a payment default on America’s bonded debt. Maybe that’s exactly what Treasury wants: a mini-crash in the bond market could be just the thing to concentrate minds in Congress and impress upon them just how important this issue is. But is it actually true? Does Treasury really have no legal authority to prioritize payments? Appelbaum pointed me to this report from the Congressional Research Service for some background on the law here.

Treasury May Adopt ‘Risky’ Payment Plan as U.S. Deadline Nears - The U.S. is approaching the moment it may have to decide which bills to pay, a prospect Treasury Secretary Timothy F. Geithner has called “unacceptably risky and unfair” to Americans.  The Obama administration will brief the public no earlier than when financial markets close today about priorities for paying the nation’s obligations if the U.S. debt limit isn’t raised by then, a Democratic official said.  Deciding who gets paid and who doesn’t, a process members of Congress have called “prioritization,” is fraught with politically perilous choices for the administration, forcing it to pick among bondholders, retirees and the military, said Mark Zandi, chief economist at Moody’s Analytics. An administration official yesterday said the Treasury will give precedence to making interest payments on government bonds.  “Once you prioritize people, it would scare people and make some very angry,” Zandi said. “If they put the debt payments ahead of Social Security payments, that would create some political repercussions.”

CBO’s Estimates of the Revised Deficit Reduction Plans - CBO Director's Blog - In a blog post on Wednesday, I discussed CBO’s analysis of plans to reduce future budget deficits put forward by House Speaker John Boehner and Senate Majority Leader Harry Reid as part of proposals to raise the limit on the national debt. In the past couple of days, both the Speaker and Majority Leader have proposed revised versions of those plans. CBO’s estimates of the revised versions are described in these letters: Senate Majority Leader Reid’s Plan, Proposed on July 29 -- House Speaker Boehner’s Plan, Proposed on July 27 CBO has not prepared an updated cost estimate for Speaker Boehner’s plan that was passed by the House earlier today, as the changes made to the legislation—related to a balanced budget amendment to the Constitution—would have no effect on our estimate.

Moody's: Boehner and Reid debt ceiling bills won't cut it-- Neither of the debt ceiling bills before Congress would meaningfully alter the country's debt trajectory and thus won't bolster the United States' chance of preserving its AAA rating, a key rating agency said Friday. "Reductions of the magnitude now being proposed, if adopted, would likely lead Moody's to adopt a negative outlook on the AAA rating," Moody's Investors Service said. A "negative outlook" would indicate the possibility that Moody's would downgrade the country's sovereign credit rating within a year or two.  The debt ceiling bill proposed by House Speaker John Boehner and the one offered by Senate Majority Leader Harry Reid would each reduce1 the country's deficits over 10 years by a little more than $900 billion, primarily by capping discretionary spending2, excluding costs in Iraq and Afghanistan.  Neither bill includes proposals to raise more revenue or tackle the entitlement programs -- namely Social Security, Medicare and Medicaid.

S&P warns against US prioritizing debt payments-CNBC - Prioritizing U.S. debt payments to avoid a default would be "deeply disruptive" to the economy, Standard & Poors global head of sovereign ratings said in an interview with CNBC on Tuesday. David Beers' warning comes as Republican and Democratic leaders scramble to agree on a plan to raise the U.S. debt ceiling before the Treasury runs out of cash to service its obligations on Aug. 2. Beers said the Treasury could "theoretically" prioritize debt payments over other government obligations for some time while negotiations continue in Washington. "But it;s worth remembering what that would mean -- it would mean a very sudden fiscal shock that the longer it lasted would filter powerfully through the system," Beers said. "Potentially that would be deeply disruptive to the economy." Beers also said that a small increase in the U.S. debt ceiling would be negative to U.S. ratings. "We would be concerned if we thought that the debt ceiling debate would come back and weapos;d have to go through all this again and again and again," he said. "That would be a negative."

Adventures with yield curves, debt-ceiling edition - A reader emails to ask about short-term Treasury yields, which finally seem to have noticed the debt ceiling debate in recent days: When treasury yields are discussed in the media, everyone seems to default to talking about 10-year bonds. The yields on those remain well below 3%, and indeed have fallen a bit today. On the other hand, yields on 1-, 3-, and 6-month bonds have increased considerably today, with the yield on the 1 month bond exceeding 17bp (up nearly 50% today). It seems to me that there’s no concern among investors about America’s long-term debt, just about its ability to get its act together in the short term. Of the three maturities I noted above, 1-month bonds are the highest. It seems as though investors are pricing in the possibility that payments might be delayed. I put together a little chart from this page, which isn’t a thing of beauty; for one thing, in order to show changes at the short end of the yield curve, I had to switch the y axis to a logarithmic scale.

The long-term implications of a US downgrade - David Boucher, of The Economic Word, asks a very good question via email, about the implications of the US losing its triple-A rating: I was wondering if the state-level impact of a debt downgrade would be different, more severe. From my understanding, Illinois and California have the two lowest ratings of the US states; if the US were to be downgraded and so would a couple of trouble states, would it have an impact on the ability of the Federal Government to lend a hand to those in trouble? And as a result create a Euro-ish type of debt crisis within the US? There’s certainly a general understanding, in the markets, that California is too big to fail: if push came to shove, the federal government would bail it out rather than let it default. But David raises a good point: is the moral-hazard trade going to get weakened if the US loses its inviolability? The way that credit ratings work, any municipalities which currently have triple-A ratings would almost certainly lose those ratings were the US sovereign to be downgraded. As far as I know, there’s no precedent for a sub-sovereign entity to have a higher rating than the sovereign, except in extreme cases where the sovereign is actually in default.

“Is Standard and Poor’s Manipulating US Debt Rating to Escape Liability for the Mortgage Crisis?” - The Politico headline says it all: U.S. credit downgrade worries Obama, Congress more than default It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade As Robert Reich notes, Standard and Poors is the “biggest driver in the deficit battle.” Why would anyone care what the corrupt and disgraced organizations who quite nearly brought down the world economy think about anything at this point? And yet, that is where elite opinion is focused right now: [W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating. This rumbling has been coming from Capitol Hill for a while, which made us start asking questions about what was really going on with Standard and Poors. It felt like there’s a story-behind-the-story driving S&P’s actions in the debt ceiling debate, which appear inexplicable at face value and go way beyond what Moody’s or Fitch have done. And the more we looked at the timeline of events, the more we wondered how the intertwining dramas of a) S&P downgrade threats, b) the liability that the ratings agencies may have for their role in the 2008 financial meltdown, and c) the GOP’s attempts to insulate the ratings agencies from b) are all impacting each other.

Buiter on the 1% chance the US gets it right - We know, we know: there should be a weekly quota for US debt posts. But Wednesday’s note from Citigroup’s Willem Buiter and Ebrahim Rahbari is not your average debt ceiling report. They suggest the debt ceiling impasse is a vaudeville compared to the tragedy that could await. The US faces five scenarios and a downgrade is all but guaranteed, say the authors:

    • Scenario 1 (60% likelihood): The Federal debt ceiling is raised in time. There is a small bipartisan fiscal package. The US sovereign long-term rating is downgraded to AA.
    • Scenario 2: The Federal debt ceiling is raised in time. There is a large bipartisan fiscal package, which is backloaded and not credible (33% likelihood). The US sovereign long-term rating is downgraded to AA, but maybe not initially.
    • Scenario 3 (5% likelihood): The Federal debt ceiling is not raised in time and the US sovereign defaults.
    • Scenario 4: The Federal debt ceiling is raised in time. There is a large bipartisan fiscal package, which is frontloaded (1% likelihood). There is no downgrade.
    • Scenario 5: The Federal debt ceiling is raised in time. There is a large bipartisan fiscal package, which is backloaded and credible(1% likelihood). There is no downgrade.

Not “Bizarro” Would Be Nice - I’m kind of at a loss for words these days, just stunned at the dysfunctional behavior surrounding the debt limit debate. (The fact that I was quoted as saying “geez” about it speaks volumes.)  As Senator McCain put it, it really is “bizarro” to insist on a balanced budget amendment when no one involved is close to being willing to actually do what the amendment would require (a balanced budget). If we knew how to balance the budget and were willing to do it, why would we even need to raise the debt limit? That’s the simple evidence that what’s going on on Capitol Hill is all show and no substance, all acting and no action, all political posturing and no policymaking. If policymakers were serious about doing their job with the real work of getting our fiscal house in order, they’d follow the advice given in the Washington Post’s editorial today: …Given that the House measure is dead on arrival, the focus then shifts to Senate Majority Leader Harry M. Reid (D-Nev.). Can the leader craft a compromise, two-step measure that would bring enough Republicans on board to get past the 60-vote hurdle? . How much in savings? We repeat: There is no rational basis for insisting on a dollar of savings for every dollar increase in the debt ceiling.

Veteran Lawmakers Doubt Aug. 2 Deadline Is Possible - Here is advice from veterans of past budget battles in Congress that went to the brink: This time, be afraid. Be very afraid.  The seemingly unbridgeable impasse between the two parties as the deadline for raising the nation’s debt limit1 approaches has Tom Daschle losing sleep, as he never did when he was a Senate Democratic leader in the mid-1990s and Congressional Republicans forced government shutdowns rather than compromise on spending cuts.  “That was nothing compared to this. That was a shutdown of the government; this could be, really, a shutdown of the entire economy,” Mr. Daschle said. “You can’t be too hyperbolic about the ramifications of all this.”  Democrats and Republicans with legislative experience agree that even if both sides decided Saturday to raise the $14.3 trillion borrowing ceiling and to reduce future annual deficits, it would be extremely difficult for the compromise measure to wend its way through Congress before Tuesday’s deadline, given Congressional legislative procedures.

This Country Defaulted Long Ago - The final collapse of our credit expansion boom approaches. We have a choice over the next week. We could voluntarily abandon further credit expansion by voting for a Balanced Budget Amendment to the Constitution or we can raise the debt ceiling, pretend to cut spending far in the future, and allow our currency system to experience a catastrophic final collapse. We’ll take what’s behind door #2 Johnny. The vested interests in Washington DC and Wall Street only care about power and wealth. They will never abandon credit expansion. It’s their drug. They must have it. They are addicted to it. They will keep injecting it into our system until they overdose America. The mainstream media acts as if not raising the debt ceiling by next Tuesday will result in America defaulting. This is a crock. America chose to proceed on a path to default decades ago. We are just finally reaching our destination. Below are the choices we made as a people and a country to default on our obligations and eventually destroy our country:

Debt Ceiling: What Now? - In the past, when there have been fundamental conflicts, our leaders have found a way to compromise some way or other. Ordinarily, there are ways to broker a deal. If you give me more of this, and one more sweetener, I’ll hold my nose and vote for the compromise. Not this time. President Obama, by insisting that the Republicans accept some tax increases in exchange for spending cuts, is asking Speaker Boehner to commit political suicide. Moreover, given the adamant positions of many new Republican members of the House of Representatives it is not clear that Boehner could deliver a majority to pass legislation containing tax increases. Similarly, it is not clear that Obama and Majority Leader Reed in the Senate could deliver a majority of Democrats to pass legislation that began the inevitable and painful process of reining in entitlement spending. Boehner, by insisting that a deal contain no tax increases and significant spending cuts, is asking the President to commit political suicide. Politicians do not commit political suicide. At least, not knowingly.

What Happens if We Don't Raise the Debt Ceiling? - I thought it was probably time to write down what might unfold over the next few days. I'll start by saying, however, that I have no idea whether we'll get a deal or not.  There is one thing I'm sure of:  Obama is indeed bluffing with the veto threat, and badly.  They could send him a repeal of Obamacare attached to a debt ceiling increase, and he'd sign it.  He is not going to endanger our credit rating, or social security checks, in order to prove a point. Beyond that, I have no idea what is going to happen politically.  Either the GOP is going to pass the Boehner bill, go into conference with the Senate, and come out with something Obama will sign--or they won't.  I tend to think they will because it would be so damn crazy not to.  After a certain point, these things take on a life of their own: it's hard to back down when you're so publicly committed--and when something you want so badly feels like it's almost in reach.  So who knows. Then there's the wild card: will the GOP old guard do a deal with the Democrats if the tea party won't play ball?  I don't know.  It would cost them their jobs, but it would be the right thing to do. But it's hard to get people to do the right thing when it will cost them their jobs.

So This is Despair - It is difficult to describe this emotion. I’m used to disappointment, fairly comfortable with heartbreak, and am well acquainted with rage. But this…this is too much. The timeline as I understand it: the far-right GOP caucus in the House decided to use the debt limit as a hostage to fortune in their decades-long quest to eliminate Social Security and Medicare. The current Democratic president saw this, and in a pure anti-Lakoffian flail that explains everything you need to know about the man, accepted the deranged premise put before him and went to work on the annihilation of the social safety net…but with the proviso that we find some new tax revenues by closing some loopholes…maybe…please? Not good enough. House Speaker Boehner walked away from the debt-limit talks, not once but twice, because he can’t control his caucus and because he had this Democratic president right where he wanted him.

Nationalism, the U.S. debt, and the "party of business... I've been avoiding writing anything about the whole debt ceiling situation, because it just depresses me too much...not just because a U.S. default/downgrade will have a seriously negative impact on my upcoming job search, but because it represents the final nail in the coffin of American exceptionalism, and I am a very strong nationalist. At this point, it matters a bit, but only a bit, whether a deal is cobbled together, whether Obama uses the constitutional option, or whether we mint a bunch of huge platinum coins. Much of the real damage has, it seems to me, already been done. The interest rates at which a nation can borrow are an inverse function of the strength of bond investors' belief that the nation will pay the money back. And the events of this debt ceiling crisis have brought new information to light that will deeply shake investors' belief in the creditworthiness of the U.S. government.  In particular, one piece of information is crucial above all others. This is the fact that the Republican Party is willing to seriously entertain the option of a sovereign default.

Best Buy targets are stopping a debt deal -  The real rub is the way the system now centralises power in the hands of top congressional leaders. In the new system, representatives dole out contributions to their colleagues, to influence votes, as they bid for key positions within each chamber but they also must raise vast sums for national party committees, which the congressional leadership controls.  The leadership’s hold over the swelling coffers of the national party campaign committees, along with the huge fixed investments in polling, research, and media capabilities these committees maintain, provide them with the extra resources they need to cajole and threaten candidates to toe the party line. Entrenched incumbents can sometimes resist, but anyone facing a strong challenger or, especially, candidates in so-called “open seat races,” feel the pinch. They are handed not only money, but the message, consultants, and polling they need to be competitive but could rarely afford on their own. Congressional campaigns thus acquire a more national flavour. They also rely heavily on the endless repetition of a handful of slogans that have been battle tested for their appeal to national investor blocs and interest groups that the leadership relies on for resources.  As anyone can see in the debate over raising the budget ceiling, legislative tactics also shift. Party leaders grandstand by digging in and trying to hold up legislation. They also push hot button legislative issues with no chance of passage, just to win plaudits and money from supporters. Aware that most Americans pay little attention, both parties flood the airwaves with more of the same old same old, hoping that some of it will stick. All this creates legislative leviathans with top heavy, cash-rich leadership structures within each party. Representatives think twice before crossing party lines and national party campaigns rest heavily on slogan filled, expensive, lowest common denominator appeals to collections of special interests. The Congress of our new gilded age is far from the best Congress money can buy; it may well be the worst.

Congress is cutting the wrong spending -Politicians don’t want to cut Medicare. They’re (properly) skittish about cutting Medicaid. They’re terrified of touching Social Security. They worry about tapping defense. But “discretionary spending”? They’re happy to slash away at that. It’s the only spending category that either the Reid or Boehner plans specifically single out for cuts.  Why? Perhaps because it’s called “discretionary spending.” People understand what a cut to Social Security means. But have you ever heard a roomful of activists or a crowd of citizens take up the chant, “when I say ‘discretionary,’ you say ‘spending’ ”?  I thought not. But what if politicians actually had to propose cuts to the programs grouped under the inelegant rubric of “discretionary spending,” rather than to some nameless, faceless category of funds? Well, then the cuts might get a little harder. Because dig into discretionary funding — and, more to the point, “non-defense discretionary funding,” which tends to be what politicians really want to cut — and you find that you’re slashing three types of programs: public investments, support for the poor and disabled and government operations.

An Economy Destroyed - The US government will never default on its bonds, because the bonds, unlike those of Greece, Spain, and Ireland, are payable in its own currency. Regardless of whether the debt ceiling is raised, the Federal Reserve will continue to purchase the Treasury’s debt.  If Goldman Sachs is too big to fail, then so is the US government. There is no budget focus on the illegal wars and military occupations that the US government has underway in at least six countries or the 66-year old US occupations of Japan and Germany and the ring of military bases being constructed around Russia.  The total military/security budget is in the vicinity of $1.1-$1.2 trillion, or 70 per cent -75 per cent of the federal budget deficit.  In contrast, Social Security is solvent.  Medicare expenditures are coming close to exceeding the 2.3 per cent payroll tax that funds Medicare, but it is dishonest for politicians and pundits to blame the US budget deficit on “entitlement programs.”    Entitlements are funded with a payroll tax.  Wars are not funded.  As taxing the rich is not part of the political solution, the focus is on rewarding the insurance companies by privatizing Medicare at some future date with government subsidized insurance premiums, by capping Medicaid, and by loading the diminishing middle class with additional Social Security tax.

Team Obama Fiddles While Debt Ceiling Fires Burn -- Yves Smith - Some historical accounts of the Great Fire of Rome, which destroyed three of the city’s fourteen districts and damaged seven others, depict it as an urban redevelopment project gone bad. Emperor Nero allegedly torched the district where he wanted to build his Domus Aurea. Hence any lyre-playing was not a sign of imperial madness, but a badly-informed leader not knowing his plans had spun badly out of control. President Obama’s plan at social and economic engineering, of rolling back core elements of the Great Deal out of a misguided effort to cut spending in a weak economy, is similarly blazing out of control. The debt ceiling crisis was meant to be a scare to provide an excuse for measures that are opposed by broad swathes of the public. Polls predictably show that voters want five contradictory things before noon: they are against cutting Social Security and care much more about more jobs than about less deficit, but yeah, they’d like that too if they can have it.  While members of the administration may dimly recognize what a firestorm they have unleashed, their crisis responses look to be no better than Nero’s. Obama has severely limited his options by playing up the rigidity of the debt limit. In the meantime, the Republicans are playing chicken and are looking very convincing by claiming the Tea Partiers had removed the steering wheel from the car. As John Kay warned in the Financial Times, this produced a toxic “bidding” dynamic:

So crazy it just might work: The trillion-dollar coin solution - AS THE date on which Treasury runs flat out of money grows nearer, various harebrained ideas to workaround the statutory limit on borrowing and keep paying the bills have been getting more attention. This one, one of my favourites, seems like it just might work: Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds. To prevent the money from contributing to too rapid inflation, the Fed could simply conduct reverse QE—sell some of its enormous stock of government debt to absord some of the new money in the system. Though it's unlikely that inflation would be too serious an issue; indeed, it could be helpful.

Lawyers, Coins, and Money - Krugman - So if something does pass the House, it will demand a constitutional balanced-budget amendment as the price of a second vote next year. I think we can safely say that the political process has failed. Now what? Well, there do appear to be legal loopholes. Jack Balkin gives us the platinum coin option: A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds. And he also gives us the exploding-option option: The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government’s checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. These things sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks? And there is the constitutional option. Ronald Dworkin says that it works — or, at the very least, will put the issue into the courts for a while, which is better than destroying the economy next week.

The $5 Trillion Coin: Gimmicks the government could use to resolve the debt-ceiling debacle. - The countdown clock to the Debtpocalypse now stands at four days, give or take. Soon, the Treasury will start receiving bills it cannot pay, and the United States will fall delinquent on billions of dollars in promised payments to Social Security recipients, government contractors, and so on. Congress remains deadlocked. So, the chattering classes have started getting creative. If you cannot lift the debt ceiling, maybe you can vault over it.One option is coin seigniorage—aka, the "really-huge-coin workaround." The United States has a statutory limit on the amount of paper money in circulation, but no such limit on coins. The Treasury secretary has the authority to mint certain coins of any denomination, with no need for the value of the metal to equal the value of the coin. (It gets a bit technical.) But the idea is that Secretary Timothy Geithner could order the Mint to make a, say, $5 trillion coin. It could then use the coin to buy back and extinguish debt from the Fed, pushing the country back under the ceiling. Or it could deposit it, and the Fed could counteract the inflation by selling government debt.

Monetising the US Gold Stock - Monetising the US gold stock is a tried and true method of keeping the bond bailiffs at bay: the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress

White House Confirms It Will Likely Sign Any Debt Deal Congress Sends: In an accidental moment of honesty, White House Deputy Press Secretary Dan Pfeiffer today admitted on Twitter that President Obama will likely sign any debt deal Congress sends his way. This revelation came in an exchange with Stephen Gutowski, the blogger known as The College Politico. Gutowski asked Pfeiffer: “Do you see a scenario where the house & senate pass a deal but the President doesn’t sign it?” and Pfeiffer responded: “No, bc only something that has R and D support can pass both bodies”. Up until today, the White House has attempted to portray President Obama as the mediator of a grand bargain, but his role has increasingly diminished as Congressional leaders have lost faith and trust in the negotiations taking place in the West Wing. It is now clear that President Obama is on the sidelines, without a plan or position, hoping Congress can solve the impasse without him. When this statement was pointed out, Pfeiffer immediately began to walk back the statement, saying: “no, I said I believed a short term can’t pass congress not shld it”. But that is not the question Pfeiffer was asked.

Policy failure on a massive scale - Leaders in America and Europe are dallying with failure on an epic scale. They are constrained by dysfunctional institutions, it's true. In Europe, the architecture of the currency union is far too underdeveloped to weather a crisis of the current magnitude. In America, the creaking machinery of the legislature is ill suited to settlement of big questions on a short time frame amid divided government. But it's no longer sufficient to blame inadequate policy responses on institutions alone. America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic. The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done. Peripheral debts should be addressed through austerity, sure. But unsustainable debt loads need to be written down. Banks should be recapitalised to prevent trouble in financial markets. Emergency funds should be bolstered to fight sovereign and banking contagion. And substantial fiscal integration must take place, including fiscal transfers to support peripheral economies while they get their budgets in order. The central bank should also stop fighting the phantom of accelerating inflation.

The Centrist Cop-Out, by Paul Krugman - The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation. And Democrats — who would have been justified in rejecting this extortion altogether — have, in fact, gone a long way toward meeting those Republican demands. As I said, it’s not complicated. Yet many people in the news media ... portray the parties as equally intransigent; pundits fantasize about some kind of “centrist” uprising, as if the problem was too much partisanship on both sides. Some of us have long complained about the cult of “balance,” the insistence on portraying both parties as equally at fault on any issue. The cult of balance has played an important role in bringing us to the edge of disaster. For there is no penalty for extremism. Voters won’t punish you for outrageous behavior if all they ever hear is that both sides are at fault.

CBO Testified on Selling Federal Property - CBO Director's Blog - This morning Deputy Assistant Director for Budget Analysis, Theresa Gullo, testified before the House Committee on Oversight and Government Reform on CBO’s analysis of the President’s proposal to expedite the disposal of unneeded federal civilian real property. Such property consists of buildings, structures, and lands owned by the federal government within and outside of the United States. The President included such a proposal in his 2012 budget submission to the Congress in February, and the Administration recently transmitted similar draft legislation to the Congress in the form of the Civilian Property Realignment Act. Today’s testimony focused on: (1) the analysis of that proposal, which was discussed in a letter that CBO sent to the Committee in June, and (2) how a process for disposing of unneeded federal property could be structured to increase proceeds to the federal government.CBO concluded that the President’s proposal was not likely to significantly increase receipts from sales of federal property because we expect that the number of properties sold would not be significantly higher than what would be sold under current law

Why the US is facing these unpalatable decisions - Erskine Bowles, once chief of staff to President Bill Clinton, quipped that he would need to enter a witness protection programme. It was the first week of December, and Bowles and Alan Simpson, a former Republican Senator for Wyoming, had just delivered Congress an unwanted Christmas present. Their report on cutting America's $14 trillion national debt appeared intent on confronting as many Washington taboos as it could in its 66 pages.  The Pentagon would have to stomach reductions in defence spending; tax relief on mortgages would be ditched and levies on gasoline would have to rise. It wasn't just the desire to escape a freezing US capital that meant the report, called The Moment of Truth, was largely ignored by Congressmen and Senators.  It's because taking on the deficit forces America's political elite to confront questions that have so far taken a back seat to efforts to repair an economy still struggling to emerge from its worst setback since the Great Depression of the 1930s.

On All Levels of the Economy, Concern About the Impasse - Economists and analysts are trying to gauge the costs to the economy and consumers if the United States loses its solid-gold credit rating — a move that appears more likely now that the standoff in Washington over government spending has calcified.  Some economists say the effects of lowering the federal government’s credit rating to AA from AAA can be measured in the billions of dollars in increased borrowing costs for the government, and in the billions more that consumers, corporations, states and municipalities will have to pay for their credit. It could also erode consumer and business confidence, slowing even further the economy and job creation.  The prospect of a downgrade by one of the credit rating agencies1 once seemed almost unimaginable. But the impasse in Washington over the government’s deficit and $14.3 trillion debt limit2 has led some global financial players to expect the change. Many Wall Street bankers on Tuesday said they still believed a default would be avoided because its consequences for the markets and economy could be catastrophic. They were less certain, however, what the cumulative effect might be of a downgrade.

Fed and the Debt Limit - Very interesting piece in the FT: Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default. With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating. Banks are concerned about a wide range of operational issues as well as the broader question of how the Fed would support the financial system if there were disruption caused by a failure to raise the debt ceiling. For example, they would like to know whether the Fed would be willing to lend against Treasuries with a defaulted interest payment, which would support the repo market. At a broader level, they would like to know whether the Fed will support the refinancing of Treasury securities by stepping in and buying any unsold stock at auctions.

Little More on the Debt Limit -- NYT:Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs. The implication is that the government will need to pay bills in the order that they come due. President Obama has warned as a result that the government “cannot guarantee” payments of Social Security benefits or other popular programs. Officials also have disputed the assertion of some Republicans that the government could prioritize interest payments. That doesn't sound good...

Top general warns against deep US defense cuts - The nominee to become the top United States military officer warned on Tuesday it would be “extraordinarily difficult and very high risk” to cut $800 billion from defense spending as part of efforts to reduce the nation’s $14.3 trillion debt. Army General Martin Dempsey appeared to push back hard in his Senate nomination hearing against proposals gaining momentum in Congress to at least double President Barack Obama’s slated defense cuts of $400 billion over the next dozen years. “National security didn’t cause the debt crisis nor will it solve it,” General Dempsey, President Obama’s choice to become chairman of the Joint Chiefs of Staff, told the Senate Armed Services Committee in written comments released in conjunction with the hearing.

Editorial: Drop Balanced-Budget Amendment — For Now - IBD - The balanced-budget amendment has become a major sticking point in deficit talks. We think it's a great idea. But if it gets in the way of a deal that cuts spending with no tax hikes, we say drop it — at least for now. Republicans seem to have won the debate over taxes and spending. Now, even the Democrats are scrambling to create a plan that at least appears to cut spending but not raise taxes. This is a huge victory for the GOP — and for fiscal responsibility. It has also pushed hard to include a balanced-budget amendment in a deficit-reduction deal. Coupled with spending caps, a BBA has obvious appeal. It would require not only a balancing of the federal government's books but a gradual shrinking of the government's size. But while polls show that Americans favor a balanced-budget amendment, Democrats in Congress hate it — and will draw a line in the sand over it.

An Unbalanced Budget Amendment - The main argument against a balanced budget amendment is that it makes it more difficult to engage in Keynesian counter-cyclical fiscal policy. The main argument in favor is that without some legal or moral constraint, the ordinary rules of politics will push costs onto unrepresented and unorganized future taxpayers, as Jim Buchanan argued. In order to transcend these arguments I propose an unbalanced budget amendment. The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies. The unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here). A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.

Is there a balanced budget multiplier? - Tim Worstall is bemused by Robert Shiller’s endorsement of the balanced budget multiplier. His bemusement is partly wrong, and partly right. It’s wrong on the grounds that Tim presents. He says it‘s absurd that: People spending peoples’ money in Friedman’s fourth manner (other peoples’ money on other people) will increase general wealth than people spending money in Friedman’s first manner (their own money on themselves). This begs the question, in the proper sense of the phrase. Tim is assuming that the fourth manner and first manner are substitutes for each other. But to Keynesians, they are not. The precise point of the balanced budget multiplier is that it creates spending that wouldn’t otherwise occur. For them, Friedman’s fourth manner doesn’t come at the expense of his first manner at all. It is a free gift.

Pro-cyclical fiscal policy - What got me thinking about procyclicality again was the chatter about cut, cap and balance which the Republicans in the US Congress are proposing. The goal is to reduce deficits. The plan is to cut spending, cap spending increases and pass a balanced budget amendment to the US Constitution.  Balanced budget amendments are another one of these artificial constraints that look better on paper than they do in reality because they are procyclical.  In the euro zone, the stability and growth pact provides a 3% deficit hurdle which almost all of the euro zone breached during the recession. Austerity attempts to meet the hurdle have created larger deficits in the periphery (Spain, Greece, Portugal and Ireland).The same problems were apparent in the US states where balanced budget amendments are the order of the day. Before Barack Obama entered the White House, I asked in January 2009 “Will federal largesse be countered by state and local cutbacks?” By June 2010, it was obvious the answer was yes. That’s what procyclicality means.Everything you need to know about the debt ceiling in one post:

  • What it is: The debt ceiling is a legal cap on the amount of money the Treasury can borrow to fund existing government functions. It essentially authorizes the Treasury to borrow the money necessary to pay the bills incurred by the federal government.
  • Where it came from: Before 1917, Congress authorized the Treasury to issue bonds for specific purposes. But that meant approving every bond separately. To fund World War I, Congress decided to give the Treasury more latitude by instituting caps on how much it could borrow through each type of bond, rather than forcing it to get every new bond approved separately. In
  • How has it worked? The debt ceiling has traditionally been raised as a matter of course whenever Congress passes spending bills requiring more borrowing, though the opposition party has often voted against increases to signal its opposition to the majority’s deficit spending.
  • Why it’s an issue now: Currently, the debt limit is set at $14.3 trillion. Around Aug. 2, the Treasury will exhaust that borrowing authority. Because spending currently exceeds revenues by almost 45 percent, if that happens, we will either have to default on our debt or stop funding a substantial portion of the government

Smash the Ceiling - The truth is that the United States doesn’t need, and shouldn’t have, a debt ceiling. Every other democratic country, with the exception of Denmark, does fine without one. There’s no debt limit in the Constitution. And, if Congress really wants to hold down government debt, it already has a way to do so that doesn’t risk economic chaos—namely, the annual budgeting process. The only reason we need to lift the debt ceiling, after all, is to pay for spending that Congress has already authorized. One argument you hear for having a debt ceiling is that it’s useful as what the political theorist Jon Elster calls a “precommitment device”—a way of keeping ourselves from acting recklessly in the future, like Ulysses protecting himself from the Sirens by having himself bound to the mast. As precommitment devices go, however, the debt limit is both too weak and too strong. It’s too weak because Congress can simply vote to lift it, as it has done more than seventy times in the past fifty years. But it’s too strong because its negative consequences (default, higher interest rates, financial turmoil) are disastrously out of proportion to the behavior it’s trying to regulate. For the U.S. to default now, when investors are happily lending it money at exceedingly reasonable rates, would be akin to shooting yourself in the head for failing to follow your diet.

Not Raising the Debt Ceiling Would be Blessing; Debt Limit Analysis; Interactive Map, You Decide What Not To Pay - Mish - As the chances of a gaseous Congressional compromise to do nothing about deficit reduction grow larger, inquiring minds wonder just what might happen if nothing passes. Contrary to popular belief, the US would not default. Troops would still be paid. Medicare and Medicaid would not stop. The Bipartisan Policy Center has a nice analysis in a PDF on Debt Limit Analysis. Our analysis also shows that the X Date will fall between August 2 and August 9. On July 1st, Treasury publicly reaffirmed their estimate of the X Date as August 2

  • The 14thAmendment does not provide a reasonable basis for challenging the constitutionality of the debt ceiling. The Administration will not attack the debt ceiling on this basis
  • Treasury has no secret bag of tricks to finance government operations past August 2. Treasury will not attempt to “firesale” assets during a crisis.
  • Other ideas are impractical, illegal and/or inappropriate (gold loans, IOUs)
  • There is no precedent; all other debt limit impasses have been resolved without passing the X Date
  • The government shutdown of 1995 –96 does not provide a precedent

How the Deficit Got This Big - With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here — from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions.  Despite what antigovernment conservatives say, non-defense discretionary spending on areas like foreign aid, education and food safety was not a driving factor in creating the deficits. In fact, such spending, accounting for only 15 percent of the budget, has been basically flat as a share of the economy for decades. Cutting it simply will not fill the deficit hole.  The first graph shows1 the difference between budget projections and budget reality. In 2001, President George W. Bush inherited a surplus, with projections by the Congressional Budget Office for ever-increasing surpluses, assuming continuation of the good economy and President Bill Clinton’s policies. But every year starting in 2002, the budget fell into deficit.

Why is America’s Budget Deficit So Large? - Before looking at the projected future deficits, consider what happened in the first two years of President Barack Obama’s administration that caused the deficit to rise from 3.2% of GDP in 2008 to 8.9% of GDP in 2010 (which in turn pushed up the national debt-to-GDP ratio from 40% to 62%). The 5.7%-of-GDP rise in the budget deficit reflected a 2.6%-of-GDP fall in tax revenues (from 17.5% to 14.9% of GDP) and 3.1%-of-GDP rise in outlays (from 20.7% to 23.8% of GDP). According to the CBO, less than half of the 5.7%-of-GDP increase in the budget deficit was the result of the economic downturn, as the automatic stabilizers added 2.5% of GDP to the rise in the deficit between 2008 and 2010.  The CBO analysis calls the changes in the budget deficit induced by cyclical conditions “automatic stabilizers,” on the theory that the revenue decline and expenditure increase (mainly for unemployment benefits and other transfer payments) caused by an economic downturn contribute to aggregate demand and thus help to stabilize the economy. In other words, even without the automatic stabilizers – that is, if the economy had been at full employment in 2008-2010 – the US budget deficit still would have increased by 3.2% of GDP.

Still True Today: Frequently Forgotten Facts of the Debt Debate - If the debt-limit debate had anything to do with reality, every story about it would include a few basic facts. Starting with: President Obama inherited a $1.2 trillion budget deficit.   And: Republican leaders supported the tax cuts and wars that (along with the recession, another pre-Obama phenomenon) created that deficit. Also: Republicans engineered this crisis by attaching unprecedented ideological demands to a routine measure allowing the U.S. to pay its bills. Finally, Obama and the Democrats keep meeting those demands—for spending cuts, then for more spending cuts, and even for nothing but spending cuts—but Republicans keep holding out for more. These are verifiable facts, not opinions. But since they aren’t new facts, and re-reporting them would make “GOP claims” about the crisis look, um, non-factual, they’re rarely mentioned, except as “Democratic claims.” This is a real problem for journalism in an era where—now this is an opinion—one of the major parties has abandoned its grip on reality.  I understand why objective reporters aren’t encouraged to contradict political lies with historical truths, but this hostage drama is one of the prices of our era of amnesia.

Does Everyone Know How Much .2 Trillion Is Over the Next Decade? - It seems unlikely that many people, even among the relatively well-educated readers of the New York Times and Washington Post, have much clue as to how much money is at stake in the battle over the debt ceiling. As some points of reference, the government is projected to spend roughly $46 trillion over the next decade. This means that $2.2 trillion in cuts would be around 4.8 percent of projected spending. However, the impact is likely to be much larger on specific portions of the budget. If Social Security, Medicare, and Medicaid are left off the table, and most of the cuts come from the discretionary portion of the budget (which includes most government investment in infrastructure, education and research), then $2.2 trillion in cuts would come to 15.2 percent of projected spending.  In the extreme case where all the cuts came from the domestic side of the budget, the cuts would be 32.8 percent of projected spending. Finally, it is worth asking how large these proposed cuts are relative to the size of the economy.

Why the Debt Crisis Is Even Worse Than You Think - There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today.  Except it’s not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nation’s financial condition. It includes only a small portion of the nation’s total liabilities. And it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse. That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise.

Between a Rock and a Hard Place: U.S. Fiscal Policy - iMFdirect - The United States faces two pressing challenges to fiscal policy: raise the debt ceiling, and begin the arduous process of reducing deficits and debt. And, right now, this leaves U.S. fiscal policy between a rock and a hard place. How much savings should be found and in what form are crucial questions. So is when to put those savings in effect. By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007. The federal fiscal deficit will be 9.3 percent of GDP this year. That, quite simply, is not sustainable. If left on automatic pilot, debt would continue to increase faster than the economy, until financial markets say “no more.” Credit rating agencies have issued their warnings and, as part of the debt ceiling discussions, the political system has been trying to decide where to find the savings

Spending vs Revenue: The U.S. Debt Crisis in One Chart - Assuming that the current U.S. debt crisis began in 2008, which is more responsible for the current U.S. government debt crisis: excessive government spending or too big a fall in government tax receipts?  We present the answer using data from 1967 through 2010, graphically, below:  At its peak in 2009, we find that the gap between the federal government's spending and its tax collections is much more heavily weighted toward the side of excessive spending. With spending accounting for approximately 62% of the pre-crisis gap, we find that excessive spending by the U.S. federal government in the years since 2007 is primarily responsible for the current debt crisis.

The Truth About Federal Spending - Krugman - The fact is that federal spending rose from 19.6% of GDP in fiscal 2007 to 23.8% of GDP in fiscal 2010. So isn’t that a huge spending spree? Well, no. First of all, the size of a ratio depends on the denominator as well as the numerator. GDP has fallen sharply relative to the economy’s potential; here’s the ratio of real GDP to the CBO’s estimate of potential GDP: A 6 percent fall in GDP relative to trend, all by itself, would have raised the ratio of spending to GDP from 19.6 to 20.8, or about 30 percent of the actual rise. That still leaves a rise in spending; but most of that is safety-net programs, which spend more in hard times because more people are in distress. The CBO breaks out “income security” (Table E-10 in Historical Budget Tables), which is unemployment insurance, food stamps, etc., and also gives us numbers on Medicaid; here’s what they look like as percentages of GDP: That’s another 2 points of GDP, or about half the rise.So we’re still left with a bit, around 1 point of GDP. That’s the stimulus, more or less. And there are two things you need to know about it. First, it’s temporary, and already fading out fast. Second, a large part of the stimulus “spending” was actually aid to state and local governments, intended not to expand spending but to avert a fall — that is, it was about maintaining government, not expanding it.

Understanding the Budget Deficits - Today’s Atlantic column is a follow-up to last week’s on the size-of-government fallacy. In the column, I break down the projected 2021 deficit into three components: Social Security, Medicare, and Everything Else. (It’s important to use 2021, or some year out there, because most of the current spike in deficits will go away as the economy recovers.) I wanted to explain here how I came up with the numbers and talk a bit more about this approach. The Social Security budget is simple: it’s 2021 outlays (mainly benefit payments) minus 2021 receipts (payroll tax); interest on the trust fund doesn’t come into play since that’s an intra-governmental transfer. Payroll taxes of 4.5 percent of GDP are from the January Budget and Economic Outlook (BEO), Table 4-5; outlays of 5.3 percent of GDP are from the June Long-Term Budget Outlook (LTBO), Table 1-2 (it’s the same in both scenarios).You get a deficit of 0.8 percent of GDP. Medicare is more complicated, since Medicare was never designed to be fully self-funding. Medicare Part A (hospital insurance) is supposed to be self-funding like Social Security, but Part B (supplemental medical) was always funded partly by beneficiary premiums and partly by funds from general revenues. Part D (prescription drugs) is also funded like Part B.

Will the Debt Ceiling Make Budget Deficits Worse? - As Democrats argue their case for more taxes and Republicans argue for bigger cuts, what everyone's ultimately hoping is that we've got the growth to justify either one. But there's a pretty good chance we don't -- not only because there are massive uncertainties ahead for the U.S. and global economies -- but also because our official growth forecasts tend to suffer from wishful thinking. That's the gist of a new study by Jeffrey Frankel for the National Bureau of Economic Research, which finds that the United States tends to over-estimate its budget forecasts by a whopping 3% of GDP over a three-year time horizon. 3%, as it happens, is the average size of the U.S. deficit. In other words, says Frankel, "on average [the U.S.] repeatedly forecast a dissappearance of their deficits that never came."The administration's Office of Management and Budget tends to inject more bias into its estimates than the Congressional Budget Office and the Federal Reserve, the paper notes. But even the trustier CBO has proven to be delusional. A chart cranked out by FT's Alphaville shows that, in 2002, the CBO projected we'd be rolling in budget surpluses all the way through this year. Our debt-to-GDP, according to those projections, would have been a piddly 10%.

“Sometimes nothing is a real cool hand” - Perhaps the chilling reason no bill is even beginning to emerge from Congress is raising its ugly head. Could it be that members of Congress and the President, deep down, want to see the US government go cold turkey to a balanced budget? Like taking away the drugs from an addict, might they all believe it’s for our own good and our children’s future to take away the government’s credit card now, before it’s too late?  We know they all believe that because of the deficit we are on the verge of a Greek like financial crisis. We know they all believe we need deficit reduction to prevent catastrophe. We know they all believe the government has been borrowing from China to spend like a drunken sailor, leaving the debt to our grandchildren. We know they all believe we either make the tough choices now, or soon face the undeniable consequences. And we know they all believe that even the most aggressive packages under consideration won’t be sufficient to solve the problem.  They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere.

Republican Leaders Voted for Debt Drivers They Blame on Obama - House Speaker John Boehner often attacks the spendthrift ways of Washington.  “In Washington, more spending and more debt is business as usual,” the Republican leader from Ohio said in a televised address yesterday amid debate over the U.S. debt. “I’ve got news for Washington - those days are over.”  Yet the speaker, House Majority Leader Eric Cantor, House Budget Chairman Paul Ryan and Senate Minority Leader Mitch McConnell all voted for major drivers of the nation’s debt during the past decade: Wars in Afghanistan and Iraq, the 2001 and 2003 Bush tax cuts and Medicare prescription drug benefits. They also voted for the Troubled Asset Relief Program, or TARP, that rescued financial institutions and the auto industry.  Together, according to data compiled by Bloomberg News, these initiatives added $3.4 trillion to the nation’s accumulated debt and to its current annual budget deficit of $1.5 trillion.

Ads by Christian groups pressure lawmakers to protect the poor in debt talks - A new coalition of influential Christian groups is ramping up pressure on President Obama and Congress to shield the poor from spending cuts in the debt-limit struggle1, with one organization launching an advertising campaign Tuesday on Christian radio stations in politically important markets. The ads, airing in the home states of Senate Majority Leader Harry M. Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.), and in the home district of House Speaker John A. Boehner (R-Ohio), feature local pastors declaring the federal budget a “moral document.” “The book of Proverbs teaches that where there is no leadership, a nation falls, and the poor are shunned while the rich have many friends,”. “Sadly, Congress has failed to heed these biblical warnings.”

Austerity is coming to the U.S.A. - I've left the American debt ceiling debate be for the most part so far because I’m not that interested in people jockeying for election time positions while engaging in kindergarten level "fights". Now that the August 2 deadline is just one week away,  I want to shift towards what the inevitable last-minute agreement will mean for the people on the ground. And that will not be pretty. It will be harsh austerity, even if US politicians -and likely media too- will shy away from using the term. Let them. Let them reserve it for what happens in Greece and Ireland if that makes them feel better. A rose by whatever name and all that. Just don't let that fool you. Today it's the US Postal Service closing down 3700 additional offices. Tomorrow it will be Social Security, Medicare and so on and so forth. Last week we saw that the Federal Reserve has spent $16 trillion on bailouts thus far this crisis. The debt ceiling debate is being used as we speak as the first tool to make ordinary Americans pay for this. It's no different from what's going on in Athens and Dublin, and soon Lisbon, Madrid and Rome. The MO of the political/financial system that holds all the levers in our societies is based on a wealth transfer going one way, and a debt transfer going the other.

British Economy, After Austerity, at Zero Growth in the Past Nine Months - What’s amazing about this debt limit debate, and the headlong rush to austerity, is that we have empirical evidence of what can result, in this kind of economy, when you massively roll back spending. We even know what happens when you do that amid the threat of a debt downgrade rather than the fundamentals of the financial markets. All you have to do is look to Britain, which has never been the same since their austerity package was unveiled by the Tories. Britain’s economic recovery remains lackluster as official figures Tuesday showed growth of only 0.2 percent in the second quarter of the year from the previous three month period, in part because of the disruption caused by the wedding of Prince William and Kate Middleton. The statistics office also said the economy during the period was heavily influenced by the aftermath of the Japanese earthquake and tsunami, record high temperatures in April and the start of ticket sales for the 2012 Olympic Games in London. The excuses in this article are ridiculous: did the economy slow down because a lot of people missed the Tube stop at Notting Hill, too? Anyway, didn’t the William and Kate wedding produce a lot of economic activity?

Goldman's Jan Hatzius Explains How Austerity Is Already Destroying Growth This Year: It looks as though no matter what happens in the debt ceiling fight, some seirous 'fiscal consolidation' is coming up. The bad news is that we've already been doing this, and it's hurting growth. Goldman's Jan Hatzius describes what it did in the first half: Some of the weakness in the economy this year is clearly due to the shocks from the Japanese earthquake and the sharp increase in oil prices, and some is probably due to an even lengthier period of downward pressure on aggregate demand from the bursting of the housing and credit bubble. But a review of the spending and tax data at the federal, state, and local level suggests that a significant part is also due to fiscal adjustment. This has been particularly true on the spending side, where the first quarter of 2011 showed the largest negative impact of government spending on real GDP growth since the mid-1980s... This weakness has been evident both at the federal level and among state and local governments. On the federal side, a contraction in defense spending subtracted 0.7 percentage point from growth in the first quarter."

Tea Party fundamentalism is trumping fiscal responsibility - Linda Beale -  The freshmen GOPers from the Tea Party wing of the radical right are close to causing an economic catastrophe because of their ideological fixation on reducing the size of government.    Maybe, like Pete Peterson, the billionaire who wants to break the New Deal Social Security and Medicare programs, they think that an elderly widow living alone on less than $15,000 a year in Social Security is 'enjoying a taxpayer subsidized retirement vacation' (to paraphrase a recent Peterson snide remark on the subject).  These Tea Party radicals are like all other fundamentalists.  They have adopted an absolutist view of the world (that doesn't actually match the factual reality of the world or even the factual reality of the capitalist market system that they claim to foster).  And accordingly, no description of the havoc they are creating will dissuade them from continuing to create havoc. So what's the solution?    Big Business had better get busy, because it will be the biggest loser if these tea party radicals don't buckle under.  Why?  Because the US debt rating downgrade will result in higher interest paid on the US debt, leading to greater debt service needs and lower liquidity for business. 

America’s Locust Years - DeLong - It is hard right now to write about American political economy. Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not.  So, rather than talking about the US debt ceiling, let us think instead about all of the things that the debt-ceiling impasse has prevented the US government from doing during the past six months. The risks imposed by global warming, for example, have not gone away. The employment-to-population ratio in the US remains flat... America faces decaying infrastructure, weakening educational systems, and a dysfunctional health-care system that produces sub-standard outcomes at twice the cost of any other industrial country. Six months have been lost. My view is that the problem would fix itself easily if only the Republican Party of Dwight D. Eisenhower could stage a comeback. It is becoming increasingly clear, however, that the problem is one not only for the US, but for the rest of the world as well.  That America may be gone for good. If it is, the world needs to develop other institutions for global management – and quickly.

U.S. debt situation ‘very worrisome’: Flaherty - Finance Minister Jim Flaherty says he is “relatively confident” that the United States will reach a debt ceiling solution in the next few days. Mr. Flaherty called the U.S. debt situation “very worrisome” but he remained tight-lipped about any contingency plans for Canada in the case of a U.S. default. “We are very concerned,” “This is an issue that has consequences for not only the United States but the global economy because of the reliance of the global economy on U.S. Treasuries.” Still, he acknowledged that global risks have intensified. In particular, he fingered the "uncertain pace" of the U.S. economic recovery as a matter of concern, especially against the backdrop of a "volatile" global situation which includes lingering worries over the European debt crisis.

Michael Hudson: Mr. Obama’s Scare Tactics to Get Democrats to Vote for His Republican Wall Street Plan - In his debt speech last night (July 25), he threatened that if “we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.” This is not remotely true. But it has become the scare theme for over a week now, ever since the President used almost the same words in his interview with CBS Evening News anchor Scott Pelley. Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings – in Treasury bills. The most reasonable explanation for his empty threat is that he is trying to panic the elderly into hoping that somehow the budget deal he seems to have up his sleeve can save them. The reality, of course, is that they are being led to economic slaughter. It is a con. Mr. Obama has come to bury Social Security, Medicare and Medicaid, not to save them. This was clear from the outset of his administration when he appointed his Deficit Reduction Commission, headed by avowed enemies of Social Security Republican Senator Alan Simpson of Wyoming, and President Clinton’s Rubinomics chief of staff Erskine Bowles. Mr. Obama’s more recent choice of Republicans and Blue Dog Democrats be delegated by Congress to rewrite the tax code on a bipartisan manner – so that it cannot be challenged – is a ploy to pass a tax “reform” that democratically elected representatives never could be expected to do.

CBO Testified on the Potential Costs of Health Care for Veterans of Recent and Ongoing U.S. Military Operations - This morning Heidi Golding, one of CBO’s experts on military and veterans’ compensation, testified before the Senate Committee on Veterans’ Affairs on the prospective demands that veterans returning from recent and ongoing military operations will place on the health care system of the Department of Veterans Affairs (VA).  Heidi’s testimony is drawn primarily from the CBO study she wrote last October on Potential Costs of Veterans’ Health Care. CBO’s analysis of VHA’s costs indicated the following:

  • In 2010, VHA spent $1.9 billion to treat 400,000 OCO patients. VHA obligated $4,800 per OCO patient, on average, compared with an average of $8,800 per patient for veterans from all eras who were being treated at VHA.
  • The medical costs associated with VHA’s treatment of OCO veterans could, in CBO’s estimation, total between $40 billion and $55 billion over the 10-year period from 2011 through 2020, depending on the number of military personnel deployed to overseas contingencies in the future and the rate of growth of medical expenditures per person. That amount would be in addition to the $6 billion that VHA had spent on OCO veterans’ health care by the end of 2010.

The Cult That Is Destroying America - Krugman - I don’t mean the fanaticism of the right. Well, OK, that too. But my feeling about those people is that they are what they are; you might as well denounce wolves for being carnivores.  No, the cult that I see as reflecting a true moral failure is the cult of balance, of centrism. Think about what’s happening right now. We have a crisis in which the right is making insane demands, while the president and Democrats in Congress are bending over backward to be accommodating — offering plans that are all spending cuts and no taxes, plans that are far to the right of public opinion. So what do most news reports say? They portray it as a situation in which both sides are equally partisan, equally intransigent — because news reports always do that. And we have influential pundits calling out for a new centrist party, a new centrist president, to get us away from the evils of partisanship. The reality, of course, is that we already have a centrist president — actually a moderate conservative president. Once again, health reform — his only major change to government — was modeled on Republican plans, indeed plans coming from the Heritage Foundation. And everything else — including the wrongheaded emphasis on austerity in the face of high unemployment — is according to the conservative playbook.

Krugman on the Debt Debate: Cults, Centrists and Balance - Paul Krugman laments on his blog that the nation is suffering from “the destructive influence of a cult that has really poisoned our political system.” The cult he identifies is not the right-wing crazies in the Tea-GOP, though they’re bad enough, but the media’s unthinking assumption that the “center” between opposing positions is the responsible position.  Here’s Krugman on The Cult that is destroying America: No, the cult that I see as reflecting a true moral failure is the cult of balance, of centrism.  Krugman goes on to note this media habit means there’s no penalty for extreme behavior, so we get crazier and crazier results. I agree with that, but I think a related problem here is how the media is allowing Mr. Obama and others to define the responsible center.  In the debt reduction negotiations, the President keeps arguing for a “balanced” approach that includes both spending cuts and revenue increases. He wants the media to regard that definition of “balance” as the responsible centrist approach, and I think some have bought that view (eg, see this NYT editorial).  But the country’s actual center does not agree. As Jon Walker and David Dayen’s posts on polling results keep telling us, nothing the President and Democratic leaders (let alone the Republicans) are proposing is close to the political center.

The Guilty Parties - Krugman - There’s actually a simple way to resolve the debt ceiling crisis: non-crazy Republican leaders could support something like the Reid plan — which is, let’s be clear, a huge victory for the right and defeat for progressives — and pass it with limited GOP support and overwhelming Democratic support. Situation resolved. This would, however, probably be the end of these Republicans’ political careers. And the answer is, so? If you believe that default will quite possibly be a catastrophe — and leading Republicans probably do believe that — their unwillingness to take the action I’ve just described means that they are risking America’s future rather than pay a price in their personal political careers. That’s cowardice on an epic scale, even if it’s the kind of behavior we take for granted nowadays.

How to lose the future in one easy step: Boehner budget drastically cuts public investments - In February, President Obama challenged Congress and the nation in both his State of the Union address and 2012 budget to a policy agenda of “winning the future.”  This meant boosting public investments in areas such as education, transportation, energy, broadband, and basic scientific research in order to enhance U.S. global competitiveness and lead to long-run economic growth. Unfortunately, House Speaker John Boehner’s proposal to raise the debt ceiling in exchange for $1.1 trillion in spending cuts over 10 years doesn’t just fail to boost public investments, it drastically cuts them to dangerously low levels. This analysis finds:

  • Boehner’s proposal would cut the non-defense discretionary (NDD) budget by about 18% in 2021.
  • The NDD budget houses 95% of all non-defense public investments—such as infrastructure, education, and basic scientific research.
  • It is nearly impossible to protect these public investments from cuts because they represent nearly half of the total non-defense discretionary budget.
  • The Boehner proposal would slash public investments as a share of the economy by almost 45%, to 1.3% of GDP, the lowest level in over half a century.

Put 15 Million Back to Work Fixing $2.2 Trillion in Infrastructure: the Works Progress Administration - Perhaps all is not lost for the republic's economic future, even as its leaders let this nation hurtle toward the abyss of the Great Depression II. An immensely successful, sensible and practical solution is being signaled by increasingly thunderous shout-outs from prominent people: pundits Paul Krugman, Bob Herbert, Rich Lowry, former Labor Secretary Robert Reich, filmmaker Michael Moore and two new web sites[1] - not to mention millions of voters with long memories and the friends and families of the nation's 15,000,000 unemployed. Their solution? Resurrect the phenomenally successful Works Progress Administration (WPA) of 1935-1943. It put food on the table, kept a roof overhead and put spending money in the pockets of nearly nine million jobless. They built everything from roads, bridges, dams and utility systems to schools and hospitals. They staffed libraries and taught more than a million adults and 90,000 draftees how to read.[2] Why not a WPA-II? We do have that civilian army of 15,000,000 unemployed, which could tackle the $2.2 trillion dollars of vital work needed by 2014 on our ramshackle infrastructure system.

Confidence in Nothing But Government - Economics Professor and New York Times Columnist Paul Krugman has consistently argued that the government has done too little to stimulate the economy in the wake of the financial crisis.  In many ways, he appears to have anticipated the slow growth and continued joblessness that currently plagues the American economy.  For this reason, he has a large degree of credibility with certain audiences who wish President Obama had asked for a larger stimulus package or acted more aggressively to secure an additional fiscal stimulus.   This general line of reasoning suggests that our economic problems stem from too small a dosage of the stimulus medicine.  It’s certainly tempting to believe that government purchases can and should supplement for household and business spending whenever the two are inadequate to maintain full employment.  The problem is that believing that the government can fill this void is also partly what causes the employment and output gap to persist in the first place.  The very medicine supposed to cure the illness actually worsens it by creating uncertainty that diminishes businesses’ willingness to take risks. 

Jobs Deficit, Investment Deficit, Fiscal Deficit - Laura D’Andrea Tyson - Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap – currently around 12.3 million jobs. The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go. As I asserted in my last post (and many other economists, including Lawrence Summers, Alan Blinder, Christina Romer, Peter Orzsag and Robert Shiller, have made this point, too), the jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation. Sadly, current signals from Washington indicate that such measures will not be taken.

Video: Blinder Says in Weak Economy, Focus Should Be Job-Creation, Not Debt - In an interview with E.S. Browning, former Federal Reserve Vice Chairman Alan Blinder says the weak economy means Washington should be creating jobs right now, not focusing on debt. He has some proposals.

Of Loopholes and Potholes - Many Democrats want to close tax loopholes in order to increase revenue. Many Republicans believe that government spending should be cut because it hurts the economy, rather than helping it — digging potholes, as it were, rather than fixing them. But many tax loopholes for big business are potholes for the rest of us. Closing and filling them would cut spending and improve economic efficiency. Special provisions in the tax code often provide specific subsidies to distinct groups. Such tax expenditures have the same effect as spending programs. The word “loophole” implies an opportunity for clever manipulation that leads to unintended results. While some loopholes fit this description, others represent explicit efforts to provide special benefits, reflecting greater political priorities and intense lobbying efforts. Our statutory corporate tax rate, at 35 percent, looks high relative to those of other countries. But the many deductions, credits and other special breaks mean that the effective rate (or taxes actually paid) is much lower — an estimated 13.4 percent of profits over the 2000-5 period, lower than the average for other major industrialized countries.

Taxing and Spending, in Balance - Robert Shiller - THE fight over the debt ceiling1 has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.  The very term “fiscal stimulus” has become tainted. John Boehner, the House speaker, refers to a “misguided ‘stimulus’ spending binge.”2 It’s a label that reflects how many people have come to think of government expenditures to stimulate the economy — as a binge, maybe like an overdose of amphetamines.  Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should at least consider what more we should be doing to deal with the pressing issue of unemployment. Let’s never give up proposing sensible economic policies.  Over the long haul, we should engage in balanced support of the economy, find worthwhile jobs for the unemployed and not inject stimulus for its own sake. That means we need tax increases matched by higher expenditures on public goods. Of course, both ideas aren’t very popular right now — but they should be. Granted, they won’t balance the budget immediately; trying to do so would damage the economy. Instead, we should plan to restore budget balance eventually, with matching additions on both sides of the ledger.

Warped Discourse, Again - Krugman - Just worth reminding everyone: We have a deeply depressed economy — more deeply than we realized, according to the GDP revisions — which is clearly suffering from a lack of demand. Meanwhile, the government is able to borrow at very low interest rates: And what is the political debate about? Spending cuts — which overwhelming evidence now says will depress the economy further — to ward off those invisible bond vigilantes.

My Big Tax Break Looks a Lot Like Your Big Spending: Ezra Klein - There is plenty of spending to cut. For instance, we’ve got one government program that hands people money to buy houses that, in most cases, they would buy anyway. They get even more money if they buy a more expensive house. Over the next five years, that program alone will cost almost $500 billion.  Another federal agency will spend more than $400 billion to reward people for making money by investing and earning capital gains and dividends rather than by going to work and taking their income in wages. I like investors and I participate in the market, but is this really the sort of activity that requires a $400 billion subsidy?  Here’s one I can’t figure out: Why are we sending checks to employers who subsidize their workers’ transportation costs? Is there some reason we want transportation to be included in an employee’s compensation package? Do we want it to the tune of more than $20 billion between now and 2015?  And did you know that every time someone makes a charitable donation, the federal government transfers money into the donor’s bank account? Supporting shelters and museums and Doctors Without Borders is a good deed and all, but is it really something that taxpayers should reward with more than $200 billion in cold, hard cash?

The U.S. Mortage Interest Deduction by Income Level - If the federal government tries to increase the amount of its tax collections by eliminating or limiting the mortgage interest tax deduction, who’s most at risk of seeing their taxes go up? To find out, we tapped the U.S. Congress’ Joint Committee on Taxation’s report on tax expenditures for 2010-2014, which provides the breakdown of how much of the mortgage interest tax deduction is claimed by taxpayer income level for the 2009 tax year. We then used that data to construct the distribution of the mortgage interest tax deduction by taxpayer household income below: As you can see in the chart above, the greatest amount of “losses” to the federal government, at least, from the perspective of a hypothetical government overlord, is represented by taxpayer households who have incomes in the range between $50,000 and $150,000.

Messing With Medicare, by Paul Krugman - I’m no more eager than other rational people (a category that fails to include many Congressional Republicans) to see what happens if the debt limit isn’t raised. But what the president was offering to the G.O.P., especially on Medicare, was a very bad deal for America. Specifically, according to many reports, the president offered both means-testing of Medicare benefits and a rise in the age of Medicare eligibility. The first would be bad policy; the second would be terrible policy. And it would almost surely be terrible politics, too. The crucial thing to remember, when we talk about Medicare, is that our goal isn’t, or at least shouldn’t be, defined in terms of some arbitrary number. Our goal should be, instead, to give Americans the health care they need at a price the country can afford. And throwing Americans in their mid-60s off Medicare moves us away from that goal, not toward it.  For Medicare, with all its flaws, works better than private insurance. It has less bureaucracy and, hence, lower administrative costs than private insurers. It has been more successful in controlling costs. While Medicare expenses per beneficiary have soared over the past 40 years, they’ve risen significantly less than private insurance premiums.

Means-testing Medicare – Krugman - I’ve been thinking about this issue more since Friday’s duel to the death discussion with David Brooks, and have come to the conclusion that this is an even worse idea, on pure policy grounds, than even most liberals realize. The usual argument against means-testing — which is entirely valid — is that it (a) doesn’t save much money and (b) messes up a relatively simple program. The reason it can’t save much money is that there are relatively few people rich enough to be able to afford major cost-sharing. Meanwhile, the good thing about Medicare, as with Social Security, is precisely that it doesn’t depend on your personal financial status — you just get it. Means-testing would turn it into something much more intrusive, like Medicaid. But there’s a further point I haven’t seen emphasized: if you want the well-off to pay more, it’s just better to raise their taxes.

Means testing is a marginal tax increase - Paul Krugman reads his Modeled BehaviorConservative economists love to point out that means-tested programs like food stamps in effect create high marginal tax rates for low-income families, since they lose benefits if they work and earn more. Well, means-testing Medicare would do the same thing: your reward for a life of hard work and accumulation will be higher copays and deductibles.Actually this is a pretty basic Public Finance result. However, it is one that is probably going to take a lot repeating to make it into the conventional wisdom. So, here I go again: means-testing is a marginal tax increase. And, to be clear, its not just a “tax increase” it’s a marginal tax increase. The kind folks who focus on tax incentives should fear most. Cutting Social Security benefits is a marginal tax increase as well. I’ll do more on that when I get the chance but its worth getting the meme started.

Norquist: 'We're not raising taxes' - Anti-tax advocate Grover Norquist, who has been called the most powerful unelected person in the nation, said in Indianapolis on Monday that the federal government needs to avoid default by raising the debt ceiling -- but only by cutting spending. "If you want two-and-a-half trillion in higher debt ceiling, you've got to find two-and-a-half trillion in reduced spending, and we're not raising taxes," he insisted. One reason that tax increases are off the table, Norquist said, is because a majority of the U.S. House has signed the anti-tax pledge that his organization, Americans for Tax Reform, has pushed. Norquist, who formed Americans for Tax Reform in 1986, has succeeded in getting numerous politicians nationwide, including 236 members of the U.S. House and 41 U.S. senators, to sign a pledge promising "to oppose and vote against any and all efforts to increase taxes."

Deadlocked - One line of reasoning from the “no tax hikes” crowd is the inaccurate premise that the very wealthy, the top 0.1%, are job creators. If they’re the “job creators,” it might be in the public interest to protect them from excessive taxation - thereby allowing these top 0.1% to spend money on creating jobs. This is incorrect. The overwhelming majority of U.S. jobs are ‘created’ by ordinary Americans when they spend their paychecks. Consumer spending drives about 70% of our GDP. When average Americans are struggling with high unemployment, which recently popped back up to 9.2%, they are reluctant to spend money on anything beyond basic necessities. The broader U6 unemployment number - which includes the underemployed and “discouraged workers” - is 16.2%.

The so-called 'Fair Tax' proposal and the debt ceiling shenanigans - Linda Beale - The GOP is still at it.  They took a ridiculous pledge put together by Grover Norquist, the government-hating, rich-adoring, tax-fighting 'guru' of the tea party anti-tax movement.  And they are determined to stick to their dogma no matter what it does to the country.  Economic terrorism, in short, continues apace. They want to replace all our current federal taxes with a 'consumption tax'--a sales tax that would be excessively regressive.  Like the changes they want to make to Medicare and Social Security, the adoption of the national sales tax would shift the tax burden to the middle class and poor, even further away from the corporate managers and wealthy who benefit so much from what passes for Tea Party 'policies.  Huckabee testified on the national sales ta before Congress (the House, of course, which is putting on a show of talking about 'tax simplification' and 'tax reform' even while they are holding the country's economy hostage over the debt ceiling and their ideological desire to bring the government down).  He argues that a sales tax would be so 'simple' and that most people can't understand the income tax.

Shouldn't Nonpayers Also Share in Cost of Deficit Reduction? - During his speech last night, President Obama spoke about the need for shared sacrifice in any plan to reduce the nation's debt. He insisted that some taxpayers were not paying their fair share of taxes and that they should pay more taxes as part of a balanced approach to deficit reduction.While the target of the President's remarks were those taxpayers earning over $250,000, he could have just as well been talking about the record 51 percent of Americans who now pay no income taxes and, thus, contribute nothing to the basic cost of government. While some of these households don't earn enough to file a tax return, millions of others have been knocked off the income tax rolls because of the generosity of the credits and deductions that have been created in recent years to help "middle-class" taxpayers. Perhaps some of these nonpayers could share some of the sacrifice of reducing the deficit.

Taxing The Poor: The Only Tax Increase Republicans Support - Throughout the debate about raising the federal debt ceiling, Republicans have denied deal after deal because Democrats insist on adding new revenues to trillions of dollars in spending cuts. Republicans have opposed repealing oil and gas subsidies, removing a tax loophole for corporate jet owners, letting the Bush tax cuts expire, and all other forms of revenue Democrats have suggested. Raising taxes in a weak economy, they argue, is unthinkable — even if conservative patriarch Ronald Reagan did just that. But there is one tax increase some Republicans seem to favor: raising taxes on the working poor, senior citizens, and other low-income Americans.  While they fight the expiration of the budget-busting Bush tax cuts, Republicans have continually cited a report that shows that 51 percent of Americans don’t pay income taxes, even admitting that middle- and lower-class Americans need to shoulder a larger burden in deficit reduction efforts. Here is a sample of Republicans who have made that argument:

Why Do People Pay No Federal Income Tax? - Much has been made of TPC’s estimate that fully 46 percent of Americans will pay no federal individual income tax this year. Commentators have often misinterpreted that percentage as indicating that nearly half of Americans pay no taxes. In fact, however, many of those who don’t pay income tax do pay other taxes—federal payroll and excise taxes as well as state and local income, sales, and property taxes. The large percentage of people not paying income tax is often blamed on tax breaks that zero out many households’ income tax bills and can even result in net payments from the government. While that’s the case for many households, a new TPC paper shows that about half of people who don’t owe income tax are off the rolls not because they take advantage of tax breaks but rather because they have low incomes. For example, a couple with two children earning less than $26,400 will pay no federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero. The basic structure of the income tax simply exempts subsistence levels of income from tax.

Are the Bush Tax Cuts the Root of Our Fiscal Problem? -  Whether revenue should play any role in deficit reduction is at the root of the fiscal impasse between Congressional Republicans and President Obama. One factor underlying the hard-line Republican position that taxes must not be increased by even $1 is their assertion that the Bush tax cuts played no role in creating our deficit problem.In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.. Federal revenue fell in 2001 from 2000, again in 2002 from 2001 and again in 2003 from 2002. Revenue did not get back to its 2000 level until 2005. More important, revenue as a share of G.D.P. was lower every year of the Bush presidency than it was in 2000.

Evil Corporate Tax Holiday Gains Bipartisan Support - The madness that is the proposed tax repatriation holiday is continuing and gathering steam. More and more members of congress are coming out of the woodwork, scratching their chins in contemplative consideration as it were, pretending that they’ve just realized what a great day a corporate tax holiday would be – not that they’ve taken gazillions of dollars from the firms lobbying for it or anything. The latest convert seems to be Nevada Democrat Shelley Berkley. Berkley’s plan is to offer a pseudo-holiday – not the full-fledged happy-ending massage the companies wanted (i.e. a reduction from 35 percent+ to 5.25 percent) but a mere ten-point shave: One thing that people must understand about this tax repatriation business is that it’s a wholly bipartisan affair. It’s not solely the work of evil Republicans. This is a scheme that requires heavies in both parties to help ram the knotty, hard-to-sell legislation through. On the Democratic side, unsurprisingly, the main actor is going to be Chuck Schumer. John Kerry is also involved with this nastiness. Barbara Boxer led the 2004 effort and the failed 2009 campaign to get a holiday, and is rumored to be lurking somewhere in this business.

Could Tax Reform Help Make the Financial System Safer? - Simon Johnson - In the deafening cacophony of Washington-based voices on the debt ceiling, it is easy to miss a potentially more significant development.  There is growing bipartisan interest in tax reform, including changing the corporate tax system to make it more sensible – and a bulwark against financial sector instability. The House Ways and Means Committee and Senate Finance Committee held a joint hearing last week – apparently the first time these two committees have met in this fashion to discuss tax in over 70 years.   The basic premise of the hearing was the question: Did the tax code contribute to the severity of the financial crisis in 2008-09?  At one level the answer is simple: Yes, because the tax deductibility of interest payments encourages families to take out bigger mortgages and companies to borrow more relative to their equity capital.  But where within the tax code should we focus attention, if the goal is preventing similar crises in the future? I testified at the hearing – my testimony is here – and I argued that banks and other financial institutions should be the priority, because their overborrowing was central to past crises and is likely to be a salient issue in the future.

Fear in today’s markets shows failure of Dodd-Frank - If the financial crisis in 2007-2008 was fundamentally about mortgages, as many believe, why are we facing a similar financial crisis today? Here’s the answer: The fundamental problem three years ago was not mortgages. It was the repurchase market and credit default swaps. Mortgages were simply the collateral on the repurchase market and the instruments being insured by the swaps. Any other collateral, any other instrument, could have caused the same problem. Today it’s Greek and U.S. debt. The Dodd-Frank Act tried to deal with credit default swaps. It did almost nothing to fix the repurchase market. The act’s failure to stop runs on the shadow banking system, where repos are the main financing, leaves us as vulnerable to a credit panic as we were in 2007. Mark Thoma, professor of economics at the University of Oregon and blogger at Economist’s View, made this point July 22 at America Public Media: when it comes to the most important problem we need to fix, runs on the shadow banking system – i.e. runs on investment banks, hedge funds, etc. that were at the heart of the financial crisis – the legislation is largely silent.

A thousand cuts - Barney Frank - So the conservative ideologues who want to roll back the Wall Street Reform and Consumer Protection Act, and return to a time when there were fewer regulations to restrain the reckless behavior of the financial-services industry, avoid saying so directly. Instead, they engage in indirect assaults which, if successful, will recreate the conditions that led to the crisis and caused millions of Americans to lose their jobs or homes. Conservative opponents of the law, with a majority of Americans against them hope that the public is too distracted by the showdown over the debt limit, a slow economic recovery, and two wars that it won’t notice the stealth attack on that law. House Republicans have drastically reduced the funding needed by the Securities and Exchange Commission and the Commodity Futures Trading Commission to adopt rules to regulate derivatives - the financial instruments that made AIG a symbol of financial destruction and allow speculators to drive food and energy prices higher. They then say that because the rules have not been adopted it is impossible to create any rules at all.

Collateral Rules Criticized - Some lawmakers and financial firms are resisting rules being written to implement last year's Dodd-Frank law that could require banks to set aside more collateral when they make certain trades in the derivatives market.The law requires that much of the collateral be held in cash or high-quality government securities, such as Treasury bonds. But some critics claim such a requirement could steer more money into U.S. securities just when many investors are getting nervous about the nation's debt load.In a letter Friday, Rep. Darrell Issa (R., Calif.) asked U.S. regulators whether they are trying to "increase demand for Treasury…debt by excluding reasonable alternative forms of collateral?" Recipients included the Federal Reserve, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission.Mr. Issa, chairman of the House Oversight and Government Reform Committee, asked the regulators for information about whether the move also could make it more expensive for companies to borrow."These non-transparent and possibly inefficient rules place our fragile economic recovery at risk while doing little to prevent a future crisis," he wrote.

Once Unthinkable, Breakup of Big Banks Now Seems Feasible - What was made can be unmade. JPMorgan Chase and Wells Fargo may have venerable names, but they and the pseudo-venerable Citigroup and Bank of America are all products of countless mergers and agglomerations. There is no rule of markets that requires a financial system dominated by four cobbled-together, lumbering behemoths. Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors? Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable. Bank of America’s recent quarterly earnings were so weak that investors and commentators wondered whether the bank should sell off Merrill Lynch, the investment bank for which it foolishly overpaid at the height of the crisis. Bank of America trades at half of its book value (the stated value of its assets minus its liabilities), an indication that investors view its asset quality and prospects just a notch below abominable, as Jonathan Weil of Bloomberg News pointed out last week.

The Malevolent Ex-Maestro - Krugman - After playing a key role in creating the greatest economic disaster in three generations, you might have expected Alan Greenspan to lie low. But no, he’s out there issuing opinions, which for some reason still get listened to. Worse: he keeps calling for a return to the very regime he favored before, the regime that led to disaster. Felix Salmon reads his latest, so we don’t have to. It’s terrible on all counts; but the most offensive thing intellectually is the incredible fallacy of claiming that higher capital requirements for banks amount to keeping resources idle. Hello? Bank capital doesn’t consist of canned food or steel ingots held in a vault somewhere, and raising capital requirements doesn’t mean that food or raw materials have be stored in a bunker. All that’s happening when you increase capital requirements is that you are requiring that banks reduce their leverage, financing more of their portfolio from equity and less from deposits or borrowing. And this has nothing to do with resource use; it’s about the distribution of risk. Specifically, raising capital requirements means that if something goes wrong, more of the cost will be borne by the bank’s owners, less by depositors, lenders, and/or whoever (including the taxpayer) insures those deposits or loans.

Canary in the Treasury Coal Mine: Chicago Merc Increases Collateral Haircuts for Treasuries and Foreign Sovereign Debt - Yves Smith  - We had thought the authorities and the banks (no doubt with winks and nods from the Fed) would work to make sure that haircuts on collateral were maintained while the Washington game of debt ceiling chicken played itself out. Either the Merc (more formally, the Chicago Mercantile Exchange) wasn’t on the distribution list or it decided not to play ball. It announced an increase in haircuts on Treasury and agency securities today (meaning Treasuries and agencies are now given less credit than before when posted as collateral). But it increased haircuts even more on foreign sovereign debt. This will force players who have been using any of these assets as collateral that are also pretty fully leveraged to either cut their positions or put up more cash or other collateral. But note the concern stated is “market volatility” rather than creditworthiness per se

Cash Flow Discounting Leads to “Astronomically” Large Mistakes Over the Long Term - Yves Smith  - An article by physicist Marc Buchanan in Bloomberg gives a layperson’s summary of an important paper by Yale economist John Geanakoplos, and Doyne Farmer, a physicist at the Santa Fe Institute. It shows that the conventional use of discounted cash flow models over long time periods, as is often the case when discussing environmental impacts, is fatally flawed. And this finding comes after the publication of a paper by Andrew Haldane and Richard Davies of the Bank of England, which proves what many have long surmised: that businesses use overly high discount rates, which is how you build short-termism into financial models. Needless to say, that assures underinvestment, particularly in infrastructure. Projects with paybacks beyond the 30 to 35 year time frame are treated as having no value at all. From their article: First, there is statistically significant evidence of short-termism in the pricing of companies’ equities. This is true across all industrial sectors. Moreover, there is evidence of short-termism having increased over the recent past. Myopia is mounting. Second, estimates of short-termism are economically as well as statistically significant. Empirical evidence points to excess discounting of between 5% and 10% per year.

America Needs A Miracle -  I have gone to great lengths to point out how this country has been stolen from its citizens over the last 30 years. This has resulted in the ongoing destruction of the Middle Class, a swelling in the ranks of the poor, the waging of costly but pointless Imperial wars, and the financialization of our economy, which has been and continues to be based on debt & gambling rather than productive investment. Rich, powerful special interests stole the country by capturing the law-making and regulatory processes of the Federal government. I can not summarize 30 years of corruption and theft in a single post, but this quote from the Afterword of Yves Smith's Econned takes us part way down the road. A radical campaign to reshape popular opinion recognized the seductive potential of the appealing phrase "free markets." Powerful business interests, largely captured regulators and officials, and a lapdog media took up this amorphous, malleable idea and made it a Trojan horse for a three-decade-long campaign to tear down the rules that constrained the finance sector. The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label "spin". This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, looting, capture, propaganda—can we begin to root them out.

As If We Needed Any More Evidence -  We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords.  Ditto for our supposed intellectuals.  They don't need to rub our noses in it.  But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse.  It's because, simpletons, there were no crimes committed.  Demands to the contrary are just the result of our overheated, plebeian blood.  Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system. I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked.  I'll stick with what we know of facts and law.

Third Way Document Proves Democratic Party Supports Institutionalized Looting by Banks - Yves Smith  - It is one thing to suspect that something is rotten in Denmark, quite another to have proof. Ever since Obama appointed his Rubinite economics team, it was blindingly obvious that he was aligning himself with Wall Street. The strength of the connection became even more evident in March 2009, when Team Obama embarked on its “stress test” charade and bank stock cheerleading. Rather than bring vested banking interests to heel, the administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff.  But now we see evidence in a new paper by the think tank Third Way of an even deeper commitment to pro-financier policies. The Democratic party has made clear that it supports institutionalized looting by banks, via the innocuous-seemeing device of rejecting the idea of writedowns on bonds they hold.   As Michael Hudson has warned: …the war being waged against Greece by the European Central Bank (ECB) may best be seen as a dress rehearsal not only for the rest of Europe, but for what financial lobbyists would like to bring about in the United States. And make no mistake about the role of Third Way. Third Way runs the policy apparatus of the Democratic Party. In Congress, staffers attend regular Third Way policy briefings, where the group hands out pre-packaged legislative amendments in legal form, generic press releases, polling around those policy ideas, and talking points. It’s a soup-to-nuts policy apparatus.

Money market funds cut euro bank exposure - US money market funds have sharply cut their exposure to banks in the eurozone over the past few weeks and reduced the availability of credit, even in stronger countries such as France. The money market funds, historically crucial providers of short term financing to European banks, have withdrawn from all but extremely short-term lending as concerns about sovereign debt have mounted.  While the agreement of a second bail-out deal for Greece might ease nerves, the funds are also stockpiling cash in case US politicians fail to raise the federal debt ceiling, prompting withdrawals from investors. One French financier said: “Up to mid-June, getting three, six or nine-month money was not that difficult. “But now, getting one-week or one-month money is about all we can manage”. People on both sides of financing French banks say the cost of debt has not changed substantially but rather the availability has diminished and money market funds preferring to lend overnight.  Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business.

US money market funds build liquidity - US money market funds are stockpiling cash in case Congress fails to raise the debt ceiling, distorting the short-term market for US government debt and raising borrowing costs for banks and other financial institutions.  While the funds will continue to hold US Treasuries in the event of a downgrade or default, they are building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions. The moves come as Republican leaders in the House of Representatives were planning to bring their plan to raise the debt limit up for a delayed vote on Thursday, but there was widespread uncertainty over the bill’s ability to pass the lower chamber of Congress because of defections among some rank-and-file conservatives and firm opposition from Democrats.  Late on Tuesday, there was further confusion about the Republican plan after Mr Boehner’s office said staffers were attempting to rewrite the proposal in light of an estimate by the Congressional Budget Office that said the bill would save less money over 10 years than Republicans had been aiming for.

Debt Ceiling Impasse Rattles Short-Term Credit Markets - The reverberations of Washington’s impasse over a debt deal are already being felt in the short-term credit markets, a key artery of the economy that daily supplies trillions of dollars of credit. Over the last week, big banks and companies have withdrawn $37.5 billion from money market funds that invest in Treasury debt and other ultra-safe securities, the biggest weekly drop this year. Meanwhile, in the vast market for repurchase agreements, in which many financial firms make short-term loans to one another, borrowers are beginning to demand higher yields. These moves underscore how companies and big financial institutions are beginning to rethink their traditional view that notes issued by the United States Treasury are indistinguishable from cash, even though many experts say they think it is unlikely that the government would miss payments on its obligations. The $37.5 billion drop, reported Thursday in a weekly survey by the Investment Company Institute, echoed what other analysts were seeing.

Lending Markets Feeling the Strain -  Rising signs of strain emerged across financial markets on Thursday as investors pulled out billions of cash out of money-market funds, in turn driving the funds to rein in lending in short-term markets. Financial markets have become increasingly alarmed at the deepening divide in Washington and the potential that the U.S. could be downgraded by credit-rating agencies or, worse, default on its debt.  Banks, meanwhile, are scrambling to design emergency plans to avoid a trading logjam in the huge markets for Treasurys and short-term funding facilities if Congress fails to raise the U.S. borrowing limits by next Tuesday's deadline. Money funds are now largely restricting their lending to overnight, preferring the safety of stashing cash in banks, one senior trader said. That is reducing the pool of cash available to corporations, banks and investors. Money funds are also selling asset-backed securities and other debt, the trader said. Investors pulled $9 billion a day out of money funds this week, according Nomura Securities International Inc. The outflows in the past day could be even higher, traders say. Some $62 billion has left money market funds in the past two weeks, according to the Investment Company Institute.

U.S. default could spark CDS confusion (Reuters) - A U.S. debt default could send the derivatives market designed to protect bond investors into confusion because a missed Treasury payment may have been deemed too unlikely to be fully planned for in the contracts. If the United States does default, investors that sold protection in the form of credit default swaps would theoretically need to pay out around $4.77 billion to buyers, based on outstanding net volumes from the Depository Trust & Clearing Corp. With lawmakers are facing an Aug. 2 deadline to raise the $14.3 trillion U.S. debt ceiling and avert default, some in the industry now question what constitutes a default and whether CDS payments would occur immediately, or if the government would have time to make up a default. A key issue is whether a grace period for the United States to cure the debt is associated with the credit default swaps, as is sometimes the case with similar derivatives contracts.

Companies bracing for U.S. default - The unthinkable is finally becoming reality for U.S. companies, who are beginning to take real steps to prepare for the possibility of a U.S. debt default.  While companies generally expect Washington to resolve the debt-ceiling impasse at the last moment, they are lining up extra sources of financing, and carefully husbanding cash just in case a deal falls through. All the uncertainty comes just as businesses were starting to spend some of their record piles of cash. The confusion is also giving them another reason to delay hiring and investment.  Many companies, chastened by the turmoil in short-term credit markets after the collapse of Lehman Brothers Holdings Inc. in 2008, were already holding more cash than usual. The prospect of trouble in the all-important market for Treasurys is only adding to their worries.  "Our main protection against something like that not going well, or having a rocky outcome, is to have a lot of liquidity," GE CFO Keith Sherin said. The company ended the second quarter with a record $91 billion of cash.GE isn't alone. Companies from Ford Motor Co. to Eaton Corp. stressed the importance of ample liquidity, in view of current uncertainties in the market—from the U.S. debt impasse to troubled European economies.

What Happens to U.S. Companies’ Ratings if Treasury Debt Is Downgraded? - If the U.S. loses its AAA rating, will U.S. companies automatically be downgraded too? The short answer: No, nothing automatic. The longer one: It depends. Here’s S&P on the subject: “Generally a chance in the credit rating or outlook on a sovereign issuer doesn’t necessarily lead to a change in ratings or outlooks on similar rated non-financial corporate borrowers in that country.” S&P hasn’t altered the rating or the outlook for the four remaining AAA non-financial U.S. corporate borrowers: Automatic Data Processing, ExxonMobil, Johnson & Johnson and Microsoft. “However, the ratings assigned to corporate borrowers may be affected by the U.S. debt debate, depending on the depth and length of the standoff,” S&P added. Failure to raise the debt ceiling “especially if a delay persists long enough that the Treasury defaults on any of its obligations” would be a bigger deal, both for the economy and for corporate borrowers — and thus for corporate credit ratings.

Debt Ceiling Dilemma: The Foul Choice Facing Investors -  The big money is trapped. For example, imagine that you are in charge of a money market fund with $100 billion under management and your job is to both cover your expenses and assure a return for your depositors and you are heavily invested in US Treasurys. Or imagine that you are in charge of a public pension with $200 billion under management with the same basic concerns of managing expenses and delivering returns and a heavy exposure to US Treasurys but with a much longer time horizon. In either case, in light of the possibility of a US default what would you do? Where would you put your money right now if you were suddenly of the mind that the $50 billion you had in Treasurys should be placed somewhere else? In reality there are not that many places to quickly move such large sums of money. Further, there might be fiduciary restrictions that limit your investment options to regions, securities types and/or ratings grades or there might be a minimum liquidity requirement for the investment pool.

T-Bills on the Brink - Mr. Travis, president and chief executive of Intrepid Capital Funds, holds $38 million worth of the Treasury bill that matures Aug. 4. It is the first Treasury to mature after the Aug. 2 deadline for Washington to approve an increase to the government debt ceiling. After that time, the Obama administration has said, the government may start defaulting on its debts. Until a few days ago, that scenario appeared far-fetched, but, as gridlock continued in Washington this week, many in the market have been scrambling to figure out which debt would be most in danger of defaulting. Many looked to the Aug. 4 bill owned by Mr. Travis and others as a top candidate.  "I never thought I'd be interviewed about something as mundane as a short-term Treasury bill," Mr. Travis says. "It scares me that we're in this position." Risk-averse holders have bailed out of the bill, as well as others maturing in coming weeks, on the off-chance they may not be repaid.

Wall Street Finally Gets the Gridlock It Was Hoping For - The 2010 election cycle was filled with proclamations that Wall Street would be happy with a  divided do-nothing government1 that would get out of the way of the free market and help clear the way for capitalism to work its magic. But with a seemingly unbreakable impasse2 looming over what the White House has called a drop-dead date of Aug. 2 to get the $14.29 trillion national debt ceiling raised, the allure of gridlock seems to have dimmed. "Gridlock is one of the things that keeps steps marginal and keeps them so they're insignificant and let's the free market dominate the outcomes,"  "In this case, it's a good example of where gridlock can go too far, where a decision that has to be made can't get made." Deadlock, it seems then, is best in small doses and administered only when a patient is not threatening to hemorrhage red ink.

Regulators willing to go easy on banks  - Regulators are willing to be lenient with banks over any temporary decline in capital ratios stemming from a debt ceiling crisis, according to people familiar with their contingency plans. Banks say they are already experiencing an inflow of deposits as nervous investors seek the safety of insured accounts. The increase in deposits swells their balance sheets relative to their capital. Any downgrade in the credit rating of Treasury securities from triple A, which many analysts think is possible, could also increase pressure on the financial system by decreasing the value of assets on bank balance sheets. However, regulators are prepared to take the exceptional situation into account and not punish any bank that breaches the rules. They are reluctant to set out contingency plans while Congress is still debating the debt ceiling – but they see their role in a crisis as easing market concerns. Some analysts have raised the issue of whether Treasuries would be considered as riskier assets and require more capital to be set against them, but rules set by the international committee of regulators at Basel consider both triple A and double A government debt as risk-free. It would therefore take a downgrade of several notches before banks needed more capital. That is seen as highly unlikely if there is any sort of deal on the debt ceiling.

Quelle Surprise! Banks Don’t Want to be in IRA Business if They Can’t Treat Customers as Stuffees - Yves Smith - If you doubt the public need to be protected from their local mob bosses banks, their latest hissy fit is an admission that they can’t make what they deem to be enough profits unless they take advantage of their customers.  This object lesson is IRAs. Bloomberg reports that if brokerage firms who manage IRAs were required to act as a fiduciary, as in put their customers’ interests first, many would exit the business.  The dirty secret of the retail asset management business at brokerage firms is that their profits depend on treating you badly. Unless you are a big enough customer that they would not like to lose you, you are going to be abused (well, take it back, even being a billionaire is not rich enough to be safe from bank predation). The one check on this, ironically, is that salesmen are de facto small businessmen in a bigger corporate umbrella, and their clients are their book of business. They thus have incentives to make sure the customer thinks he is being treated well (whether he is actually treated well is another matter).  The big firms have generally if not completely inferior in-house fund management products they push (inferior by virtue of higher fees and/or not so hot performance). Your “investment advisor” also has an incentive to encourage you to trade if you are in a commission-paying account.

SPECIAL REPORT-Goldman's new money machine: warehouses - A string of warehouses in Detroit, most of them operated by Goldman, has stockpiled more than a million tonnes of the industrial metal aluminum, about a quarter of global reported inventories.Simply storing all that metal generates tens of millions of dollars in rental revenues for Goldman every year. There's just one problem: only a trickle of the aluminum is leaving the depots, creating a supply pinch for manufacturers of everything from soft drink cans to aircraft. The resulting spike in prices has sparked a clash between companies forced to pay more for their aluminum and wait months for it to be delivered, Goldman, which is keen to keep its cash machines humming and the London Metal Exchange (LME), the world's benchmark industrial metals market, which critics accuse of lax oversight.

Rating move shocks CMBS investors - The market for mortgage-backed securitisations, the slice-and-dice deals at the heart of the recent financial crisis, was rocked this week after Standard & Poor’s pulled its preliminary ratings on two transactions worth a collective $2.7bn. Citigroup and Goldman Sachs were on Wednesday forced to cancel the sale of a $1.5bn securitisation backed by commercial mortgage loans, after S&P said it had discovered “potentially conflicting methods” in the way it rates the securities.  Late on Thursday, the agency cancelled the rating for another commercial mortgage-backed securities (CMBS) transaction – a $1.2bn deal by US mortgage giant Freddie Mac. The moves by S&P are highly unusual and have upset investors in CMBS, an important source of commercial credit for the wider US economy.  Preliminary ratings are usually given to deals to enable issuers to market them to investors; rarely do they deviate from final ratings. Citigroup and Goldman Sachs had already priced their CMBS deal, and the transaction was largely contingent on having the S&P rating. “It’s never happened before,”

The FDIC Changes the Base for Deposit Insurance - I confess that since the federal funds interest rate fell to near-zero in late 2008, I haven't paid much attention to it. But Todd Clark and John Lindner of the Cleveland Fed (pp. 5-7) offer a quick overview of some factors that have affected that rate since late 2010. In particular, they discuss a change I  probably should have known about, but had not: apparently, the Federal Deposit Insurance Corporation no longer uses bank deposits as the base for deposit insurance premiums, but now uses the difference between bank assets and bank equity as the base for deposit insurance.  "Historically, the federal funds rate has been the primary instrument of monetary policy. Daily federal funds rates since November 2010 fall loosely into a series of three trends, all of which can at least be partially explained by an event that has influenced market participants. In November, the Fed announced the second round of large-scale asset purchases, which consisted of the Fed buying $600 billion in Treasury securities through the end of June 2011. From early November there was a steady decline in the federal funds rate from about 20 basis points to 17 basis points."

Unofficial Problem Bank list increases to 995 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for July 29, 2011. Changes and comments from surferdude808: After eight additions and six removals this week, the Unofficial Problem Bank List includes 995 institutions with assets of $415.4 billion. Last week the list had 993 institutions with assets of $415.7 billion. For the month, the list experienced a net decline of six institutions and an asset drop of $3.9 billion.

This Is Considered Punishment? - Last Wednesday, nearly lost in the furor over Rupert-gate and the debt ceiling crisis, came the surprising news that the Federal Reserve has issued1 a cease-and-desist order against a Too-Big-to-Fail bank. The bank was Wells Fargo, which was also fined $85 million and ordered to compensate customers it had unfairly — indeed, illegally — taken advantage of during the subprime bubble.  What made the news surprising, of course, was that the Federal Reserve has rarely, if ever, taken action against a bank for making predatory loans. That the Fed would crack down on Wells Fargo would seem to suggest a long-overdue awakening.  Yet, for anyone still hoping for justice in the wake of the financial crisis, the news was hardly encouraging. First, the Fed did not force Wells Fargo to admit guilt — and even let the company issue a press release2 blaming its wrongdoing on a “relatively small group.” The $85 million fine was a joke; in just the last quarter, Wells Fargo’s revenues exceeded $20 billion3. And compensating borrowers isn’t going to hurt much either. By my calculation, it won’t top $20 million.

GMAC Filed Phony Documents To Foreclose On Homeowners - GMAC, one of the nation's largest mortgage servicers, faced a quandary last summer. It wanted to foreclose on a New York City homeowner but lacked the crucial paperwork needed to seize the property.  GMAC has a standard solution to such problems, which arise frequently in the post-bubble economy. Its employees secure permission to create and sign documents in the name of companies that made the original loans. But this case was trickier because the lender, a notorious subprime company named Ameriquest, had gone out of business in 2007. And so GMAC, which was bailed out by taxpayers in 2008, began looking for a way to craft a document that would pass legal muster, internal records obtained by ProPublica show. "The problem is we do not have signing authority—are there any other options?" Jeffrey Stephan, the head of GMAC's "Document Execution" team, wrote to another employee and the law firm pursuing the foreclosure action. No solutions were offered. Three months later, GMAC had an answer. It filed a document with New York City authorities that said the delinquent Ameriquest loan had been assigned to it "effective of" August 2005, three years after Ameriquest had ceased to exist.

The Banks Still Want a Waiver - HOW should banks atone for those foreclosure abuses — all the robo-signing and shoddy recordkeeping that jettisoned so many people from their homes?  It has been four months since a deal to remedy this mess was floated. Not much has happened since — at least not publicly.  Last week, banking executives and state attorneys general met in Washington to try to settle their differences. At issue was how much banks should pay, and how and to whom, to make this all go away. The initial terms, which emerged in March, were said to carry a $20 billion price tag.  But here is a crucial question: to what extent would such a settlement protect banks from future liability? Will the attorneys general strike a deal that effectively prevents them from bringing new, unrelated lawsuits against the banks?  If the releases in any settlement are broad, there will be joy in Bankville. If they are narrow, the banks will probably face more litigation, something they would rather avoid.

Massachusetts Attorney General Signals Likelihood of Nixing “50 State” Mortgage Settlement - - Yves Smith - Let’s briefly cover an important development in the US mortgage saga. I’m told that the Department of Justice is putting the thumbscrews on state attorneys general to sign a mortgage settlement deal this week (how exactly the DoJ can pressure state officials is beyond me, since the Feds typically ignore state investigations until they look like they are about to be end run, but hopefully readers can enlighten me). New York and Delaware, as we already indicated, are out via having launched their own investigations, as is Nevada (ground zero of the mortgage mess) and likely California. We’ve been told Arizona was out a while ago, but haven’t gotten confirmation that that is still true.  We are also told the banks are pressing (as we predicted) for a very broad release, and the announcement today from Martha Coakley, the Massachusetts state AG, strongly suggests she is another dissenter. Per Bloomberg: The banks in settlement talks with state and federal officials are seeking broad releases to protect them from legal claims. Massachusetts Attorney General Martha Coakley said yesterday she won’t support an agreement that includes releases for securitization of mortgages and conduct related to a database of mortgages known as MERS. “Massachusetts will not sign on to any global agreement with the banks if it includes a comprehensive liability release regarding securitization and the MERS conduct,”

Banks Spar Over Loan Settlement  - U.S. banks trying to negotiate a settlement over the home-foreclosure mess have hit a new hurdle: They are squabbling over how to split the tab. The lack of a deal so far among the nation's largest home-loan servicers has already depressed bank stocks, and an extended impasse could further spook investors.  "As time goes on, banks will lose the PR battle,"  The terms of a settlement, he said, are less important than getting it done. "They need to get everything behind them." All sides have agreed to a framework that would govern how banks meet their obligations once a deal is reached. Those include principal reductions on certain mortgages, forgiveness of second-lien loans, restitution to borrowers and dealing with foreclosure-related blight. ... Citigroup is pushing to keep its part of any settlement at about $1 billion ... Wells Fargo ... is discussing a range of $4 billion to $5 billion.

Efforts to Pretend “50 State” Attorney General Deal Moving Forward Looking More Desperate -- Yves Smith - For months, it has looked as if Iowa state attorney general Tom Miller and the Department of Justice has been effectively negotiating on behalf of the banks to try to secure a broad settlement to give the banks a talking point and create the perception that the mortgage mess is on the mend. In fact, it would not stop the train wreck in local courts, since a deal would not restrict the rights of borrowers. But we have long thought that the settlement talks have been a weird PR exercise, in that if the talks were perceived to be getting momentum, they’d actually get momentum. But with no damaging findings from investigations to pressure the banks to the table, the only thing the AG group has to offer is a very broad release, and we’ve heard repeatedly that a lot of AGs regard that as problematic. Three (New York, Delaware, and Massachusetts) have already defected, and we believe Nevada is an undeclared non-participant, and Arizona and California are likely to follow suit.  Moreover, the efforts to try to create the impression that the deal is going somewhere have been laughable. Instead, the reverse has happened. And the AGs were kept in dark by Miller and had that draft sprung on them, which is exactly what you’d expect if someone was working against you on behalf of getting a deal done.  The latest update is comical, if you read between the lines. The deal is cash for a release. Everything else is decoration. And both sides of that deal are falling apart.

Foreclosure Fraud Firings - Every time I think I've seen it all in the foreclosure fraud space, something new comes along and amazes me. This time it's not the banks or their vendors, but an AG. David Dayen at FireDogLake has a disturbing story that the Florida AG fired two assistant AGs who dug too deeply into foreclosure fraud issues. If that's true, the Florida AG is gambling with her own career.

MERS Bows Out of Foreclosure and Bankruptcy Proceedings - Mortgage Electronic Registration Systems, Inc. (MERS) is withdrawing from the foreclosure business. The organization has issued a policy update to its members stating that no foreclosure proceeding may be initiated in the name of MERS and no legal proceedings in a bankruptcy may be filed in the name of MERS. Before a lender or investor starts a foreclosure or files a bankruptcy motion, they must execute an assignment of the security instrument from MERS to themselves as the mortgagee and record the transfer with the applicable county clerk or public land records office, MERS said. Amid an onslaught of court filings and foreclosure-related investigations, MERS proposed a rule change in early March that would ban its members from using MERS as the foreclosing agent. The policy change was officially adopted last week and carries an effective date of July 22, 2011. Fannie Mae, Freddie Mac, several large servicers, and a number of foreclosure attorneys representing lenders have stopped foreclosing in the name of MERS already.

Fannie Mae and Freddie Mac Serious Delinquency Rates decline in June - Fannie Mae reported that the serious delinquency rate decreased to 4.08% in June, down from 4.14% in May. This is down from 4.99% in June of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate decreased to 3.50% in June from 3.53% in May. This is down from 3.96% in May 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.  Now the serious delinquency rate is falling as Fannie and Freddie work through the backlog of loans and either modify the loan, foreclose, short sale, or the loan cures. The normal serious delinquency rate is under 1%. At the current rate of decline, Fannie will be back to "normal" in 2014, and Freddie will be back to "normal" in 2017 or so!

Study Finds Foreclosures Lead to Long-Term Vacancies - The rise in foreclosures in recent years may lead to long-term vacancies, further exacerbating housing prices and the market as a whole, according to Stephan Whitaker, a Cleveland Federal Reserve Bank researcher. In a recent study, Whitaker determined a strong correlation between foreclosures and vacancy rates. Whitaker tracked vacancy rates for 18 months following foreclosures in the Cuyahoga County, Ohio, using data from the U.S. Postal Service to determine vacancies. “Ominously, the data suggest that foreclosure may permanently scar some homes,” Whitaker writes. He continues, “Foreclosed homes still have higher vacancy rates than neighboring houses two to five years after a sheriff’s sale.” Almost all foreclosed homes are at least temporarily vacant, according to the study. However, Whitaker found that foreclosed homes experience high vacancy rates for one year following foreclosure and are more likely to be vacant up to 60 months later than non-foreclosed homes. “In any month from two to five years after the sale, foreclosed homes are two to four times more likely to be vacant than those sold through ordinary transactions,”

Foreclosure Filings Decline in 84% of Largest U.S. Cities as Glut Grows - Foreclosure filings dropped in 84 percent of the largest U.S. cities in the first half of the year as paperwork delays and a glut of seized properties slowed the repossession of homes, according to RealtyTrac Inc.  Notices of default, auction and home seizure fell in 178 of the nation’s 211 biggest metropolitan areas, the Irvine, California-based data seller said today in a report. Cities in judicial states, where courts supervise the foreclosure process, showed the biggest declines from a year earlier.  Foreclosure notices have dropped amid a probe by all 50 state attorneys general into “robo-signing,” the practice by lenders and servicers of pushing through documents without verifying their accuracy. RealtyTrac expects about 2 million foreclosure filings this year, down from a January forecast of as many as 3.2 million.  “The foreclosure pipeline continues to be clogged in many local markets across the country, sometimes by a glut of already-foreclosed properties that are not selling quickly, sometimes by a mountain of improperly filed foreclosures that are blocking the inflow of new foreclosure filings -- and sometimes by both,”

Good News on Mortgage Modifications - Isn't it about time for some good news on mortgage modifications? Here is some, in the form of a paper titled Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts. The authors use data from the Home Mortgage Disclosure Act (HMDA) to assess borrower characteristics against the incidence of loan defaults and modifications on a group of more than 100,000 subprime loans.The first two findings are depressing and not surprising: loan modifications are rare, and minority borrowers are more likely to be delinquent. The good news is that minorities are faring well in seeking modifications. As a descriptive matter, among those 60 or more days delinquent, 11 percent of blacks and 9 percent of Hispanics received a loan modification, compared to 5 percent of whites. In regression modeling that controlled for borrower, loan, and housing/labor market conditions, blacks were slightly more likely to get modifications, conditional on being delinquent, than other races. This effect persists even when researchers control for the fact (also good news in my mind) that borrowers who got a high-cost loan are more likely to get a loan modification. In further analysis, the authors find that blacks receive a similar interest rate reductions to borrowers of other races.

A Good Housing Idea Has Some Traction - I still like this idea of avoiding decreasing the overhang of unsold housing stock by putting foreclosed homes on the rental market instead of the housing market.  So glad to see it getting some attention. Note that according to the piece, Fannie and Freddie would sell foreclosed homes to investors who would agree to keep them on the rental market until the housing market improves and home prices start rising again (then the investors could sell them if they chose to).  So the US gov’t isn’t the landlord, which is a useful policy wrinkle. Maybe try this out in a few places where the housing glut is most severe, like Florida or Nevada.  It’s often useful to start with a pilot program in a few places with new ideas like this—typically, we learn important lessons early on re implementation.

Orwell Watch: Banks Put a Happy Face on Demolishing Foreclosed Homes -- Yves Smith - In the through the looking glass world of reality according to banks, tearing down foreclosed houses is a good thing. Really. The spin that Bank of America is using to justify the notion of bulldozing buildings is that the houses in question are worth bupkis, say $10,000 or less. There’s a wee omission in their discussion. Many if not most of the houses in question have fallen in value because the bank failed to maintain them on behalf of investors. They were stripped for copper and appliances, or got moldy, or had squatters move in and make a mess of the place. I’ve heard numerous stories from not only foreclosure attorneys, but also from readers bidding on properties out of foreclosure. For instance, one attorney told me of a house with a $1.3 million mortgage where the owner had arranged a short sale at $1.1. million. The bank refused to take the offer, foreclosed on the house, sat on it, and eventually sold it for, if I recall correctly, $200,000, which I’d bet was the value of the land. The bank made marginally more in fees via this route and delivered a much bigger loss to investors. I’ve heard similar tales from readers greatly lowering their bids on bank owned properties because they deteriorated so much as the process dragged on. But here is the scam, um, program, via Bloomberg:

Laurie Goodman On Why Another 11 Million Mortgages Will Go Bad: A major bear on the housing market, Amherst Securities' Laurie Goodman has predicted since 2009 another housing crash as banks are forced to liquidate tons of bad loans. Up to 11 million mortgages are likely to default, according to Goodman. This is a frightening figure, seeing as only several million have been liquidated since the crisis began. When it happens, the market will be flooded with supply. Goodman reached 11 million by projecting default rates for non-performing loans, re-performing loans, and underwater loans. Here's a slide from a recent presentation (via The Atlantic):"

MBA: Mortgage Purchase Application Index Lowest Since February - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 5.5 percent from the previous week. The seasonally adjusted Purchase Index decreased 3.8 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.57 percent from 4.54 percent, with points increasing to 1.14 from 0.98 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The following graph shows the MBA Purchase Index and four week moving average since 1990. The four week average of the purchase index is at best moving sideways at about 1997 levels. Of course this doesn't include the large number of cash buyers ... but this suggests purchase activity remains fairly weak.

Case Shiller: Home Prices increase in May - S&P/Case-Shiller released the monthly Home Price Indices for May (actually a 3 month average of March, April and May).This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities). Note: Case-Shiller reports NSA, I use the SA data. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.8% from the peak, and up slightly in May (SA). The Composite 10 is 1.7% above the May 2009 post-bubble bottom (Seasonally adjusted). The Composite 20 index is off 31.8% from the peak, and down slightly in May (SA). The Composite 20 is slightly above the March 2011 post-bubble bottom seasonally adjusted. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 3.6% compared to May 2010. The Composite 20 SA is down 4.5% compared to May 2010. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Prices increased (SA) in 9 of the 20 Case-Shiller cities in May seasonally adjusted. Prices in Las Vegas are off 59% from the peak, and prices in Dallas only off 9.5% from the peak.

Home Prices in 20 U.S. Cities Fell 4.5% in Year - Home prices in 20 U.S. cities dropped in the year ended May by the most in 18 months, adding to evidence the housing market is struggling.  The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent from May 2010, the group said today in New York. The decline matched the median forecast of 32 economists surveyed by Bloomberg News.  A pipeline of foreclosures and uneven demand will keep prices from rising this year, discouraging new-home construction and delaying a rebound in housing. Shrinking home equity and an unemployment rate at 9.2 percent are weighing on consumer spending, which accounts for about 70 percent of the economy.  “Home prices have yet to find a bottom,”  “Buyers are incredibly cautious. They are concerned about the unemployment rate. There is uncertainty about the economic outlook.”

Case-Shiller: Home Prices Fell 4.5% in last 12 months -The Case-Shiller Home Price Indices were released this morning. As usual, I use the seasonally unadjusted numbers to see what is happening. The numbers show that home prices dropped 4.5% in the year to May 2011, with every market down except Washington D.C. Washington has been ostensibly been insulated by government stimulus. However, this factor is likely to recede in the coming months and i suspect that Washington prices will follow the same trend as other markets, whatever that might be. As the house-selling season was kicking into high gear during May when the data were calculated, 16 of 20 markets showed month-to-month increases. The figures and press release are below.

May Case Shiller Composite Misses Expectations, Yearly Drop Biggest Since November 2009 - Remember those June calls after April's (yes, two month delayed) Case Shiller report that housing has hit a bottom? Scratch them. The Case Shiller 20 City composite for May (so why anyone even looks at this is beyond us) just came at -0.05% M/M on expectations of an unchanged print, with the previous revised from -0.09% to 0.44%. On a Year over Year basis the 20 City Composite dropped 4.51% on consensus of a -4.50% drop (the previous -3.96% was revised lower to -4.22%) - this was the biggest drop since November 2009. Washington DC was up 1.3% Y/Y (2.4% M/M) and was the only city to gain on a yearly basis. Minneapolis was down the most: 12%. That said there were some modest improvements in several of the regions: “We see some seasonal improvements with May’s data,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “This is a seasonal period of stronger demand for houses, so monthly price increases are to be expected and were seen in 16 of the 20 cities. The exceptions where prices fell were Detroit, Las Vegas and Tampa. However, 19 of 20 cities saw prices drop over the last 12 months. The concern is that much of the monthly gains are only seasonal.'

A Look at Case-Shiller, by Metro Area - S&P/Case-Shiller home-price data showed a gain for most cities in May amid the usual spring increase, but prices still remain below year-earlier levels. The composite 20-city home price index, a broad gauge of U.S. home prices, posted a 1% increase in May from a month earlier but fell 4.5% from a year earlier. Nineteen of 20 cities in the index posted annual declines in May — just Washington notched an increase. The monthly rises were more widespread with 17 cities climbing. On a seasonally adjusted basis, which aims to take into account the stronger spring-summer selling season, nine cities — Boston, Chicago, Denver, Miami, Minneapolis, New York, San Francisco, Seattle and Washington, D.C. — posted monthly increases. The overall 20-city index was flat on a seasonally adjusted basis. Despite some monthly improvement elsewhere, three markets hit their lowest points since home values started dropping more than four years ago. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

HousingTracker: Homes For Sale inventory down 11.1% Year-over-year in July - Last month, Tom Lawler posted on how the NAR estimates existing home inventory. The NAR does NOT aggregate data from the local boards (see Tom's post for how the NAR estimates inventory). Sometime this fall, the NAR will revise down their estimates of inventory and sales for the last few years. Also the NAR methodology for estimating sales and inventory will likely (hopefully) be changed.  While we wait for the NAR revisions, I think the HousingTracker / DeptofNumbers data that Tom mentioned might be a better estimate of changes in inventory (and always more timely). Ben at deptofnumbers.com is tracking the aggregate monthly inventory for 54 metro areas. This graph shows the NAR estimate of existing home inventory through June (left axis) and the HousingTracker data for the 54 metro areas through July. The HousingTracker data shows a steeper decline in inventory over the last few years (as mentioned above, the NAR will probably revise down their inventory estimates this fall).

HVS: Q2 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q2 this morning. As Tom Lawler has been discussing (see posts at bottom), this is from a fairly small sample, and the homeownership and vacancy rates are higher than estimated in other reports (like Census 2010). This report is commonly used by analysts to estimate the excess vacant supply for housing, but it doesn't appear to be useful for that purpose.  It does show the trend, but I wouldn't rely on the absolute numbers. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate declined to 65.9%, down from 66.4% in Q1 2010.  From Tom Lawler:  The HVS has consistently overstated overall US housing vacancy rates, and consistently understated the number of US households – mainly “missing” millions of renter households – for over a decade... a decent “best guess” for the US homeownership rate last quarter would probably be around 64.2%, or about the same as in 1990. Given the substantial aging of the population over the last two decades, that would imply that homeownership rates for most age groups last quarter were the lowest since the 1980’s.

Pending Home Sales increase in June - From the NAR: Pending Home Sales Rise in June: - The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 2.4 percent to 90.9 in June from 88.8 in May and is 19.8 percent above the 75.9 reading in June 2010, which was the low point immediately following expiration of the home buyer tax credit. The data reflects contracts but not closings. The PHSI in the Northeast slipped 0.4 percent to 68.9 in June but is 19.4 percent higher than June 2010. In the Midwest the index fell 3.7 percent to 79.7 in June but is 26.4 percent above a year ago. Pending home sales in the South increased 4.4 percent to an index of 99.2 and are 19.1 percent higher than June 2010. In the West the index rose 6.4 percent to 107.0 in June and is 16.4 percent above a year ago.

New Home Sales in June at 312,000 Annual Rate - The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 312 thousand. This was down from a revised 315 thousand in May (revised from 319 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in June 2011 were at a seasonally adjusted annual rate of 312,000 ... This is 1.0 percent (±12.5%)* below the revised May rate of 315,000, but is 1.6 percent (±14.1%)* above the June 2010 estimate of 307,000. The second graph shows New Home Months of Supply. Months of supply decreased to 6.3 in June from 6.4 months in May. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal). The inventory of completed homes for sale fell to 60,000 units in June. Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The combined total of completed and under construction is at the lowest level since this series started.

Home Sales: Distressing Gap - The following graph shows existing home sales (left axis) and new home sales (right axis) through June. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared due mostly to distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties. Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Housing Starts: Impact of Changes in Household Size - Below is the long term graph of both total housing starts and single unit starts. If we look at the graph, we notice that there were more starts at the peak in the '70s than during the recent housing bubble . Obviously there were many more multi-unit housing starts in the '70s - and that is a clue. The key to the number of housing starts is household formation. Household formation is a function of changes in population, and also of changes in household size. During the '70s, the baby boomers started moving out of their parents' homes, and there was a dramatic decrease in the number of persons per household. And that led to a huge demand for apartments (the surge in total starts). The table below shows the number of persons per household for every decade from 1950 through 2010 (based on the decennial census data). Also using the decennial census data we can calculate the number of households needed because of 1) population growth, and 2) changes in household size:

At Least Three More Years Before Home Construction Gets Back to Trend - Three more years — that is how much time it is going to take residential construction to get something approaching its groove back, researchers at the Federal Reserve Bank of San Francisco said. If house prices are able to stabilize and appreciate, and the inventory of foreclosed properties shrink, then 2014 will be the year that home-building activity gets back to its “long-run average,” William Hedberg and John Krainer argued in a paper published Monday.Of course, there are some rather large “ifs” in that formulation, as home prices have defied almost all predictions of recovery for some time now, with periods of recovery giving way to weakness in short order. At the same time, that outlook for foreclosed properties remains uncertain as well, and is subject to government and other regulatory factors beyond the normal push and pull of supply and demand.

SF Fed: Residential Construction Won't Fully Recover Until 2014 - There's a new paper from the San Francisco Fed discussing how long it will take for residential construction to rebound to normal levels. Here's the abstract: When Will Residential Construction Rebound? - Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.The paper notes that price adjustment alone is not enough, "a significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed." For example, in this graph showing the predicted path for housing starts, the red line assumes a 50,000 per quarter decline in the inventory of foreclosed homes starting in 2012, which as the paper notes is an optimistic assumption. The black line assumes no decline at all. When foreclosures decline as assumed for the red line, the recovery time improves substantially

Update: Real House Prices and Price-to-Rent - Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here). Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2011), and the monthly Case-Shiller Composite 20 SA (through May) and CoreLogic House Price Indexes (through May) in nominal terms (as reported). In nominal terms, the Case-Shiller National index is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to March 2003.  The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter).  In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to August 2000, and the CoreLogic index back to March 2000.  In real terms, all appreciation in the last decade is gone. This graph shows the price to rent ratio (January 1998 = 1.0).  Note: the measure of Owners' Equivalent Rent (OER) was mostly flat for two years - so the price-to-rent ratio mostly followed changes in nominal house prices. On a price-to-rent basis, the Composite 20 index is back to October 2000 levels, and the CoreLogic index is back to March 2000.

Another Symptom of the Housing Bubble - When we think of the damage wrought by the bursting of the housing bubble, we tend to think of the Great Recession and the broad damage to jobs and incomes.  But there’s another dimension that’s less appreciated: wealth destruction, especially for minority households. A new study out today from the Pew Research Center shows some pretty shocking losses in net worth.  That’s a much broader concept than income, including family assets minus liabilities. For many middle-class households, and especially for minorities, their main asset is not their stock or bond portfolios…it’s their home.  And when its value plummets—or when they lose it—well, the result is in the chart below. Between the mid-2000s and 2009, median white net worth fell about 16%, from around $135K to $113K (in 2009 $).  But black and Hispanic wealth was decimated, falling by over half for blacks and two-thirds for Hispanics. But there’s no getting around that this is a major backslide for minority households, and it will take years, if not decades, for them to climb back.

The Debt Ceiling and Households - Many analysts have emphasized the possibly disastrous consequences of the U.S. failing to raise its debt ceiling. What is less commonly remarked on however are the consequences that a lower credit rating on government debt and higher interest rates will directly have on households, particularly through their mortgages. First, roughly ten percent of Americans with mortgages still have one with an adjustable rate. The interest rates on these mortgages are set to either short-term Treasury bond rates, or to LIBOR interest rates. Therefore, higher Treasury bond rates will immediately translate into higher mortgage costs — lasting for months for some households. Second, interest rates may rise for all new buyers. With a higher Treasury rate, Fannie and Freddie will be required to hike the interest rates they charge to new buyers, as higher Treasury rates mean a higher cost of credit for their operations. As government-backed mortgages represent nearly the entirety of new mortgage originations, virtually all new mortgages will be affected.Finally, as the National Journal suggests, if the government is forced to prioritize its bills, spending on housing finance may suffer, further depressing the market

If Pretend Debt Ceiling Negotiations Lead To Downgrade, Credit Card Users Get Hit First - Whether they are spending more productively or simply spending less, Americans are honoring their obligations and paying their bills. But there is that one group of Americans -- lawmakers in the House and Senate, mostly -- who are out there pretending to have a debate over raising the debt ceiling, and pretending that they may not honor their obligations to pay for the things they voted for over the past few years and default. Of course, this is all fun and games until the nation's credit rating is downgraded from it's current AAA status. And if that happens, you want to know who the first people to take the hit are? Well, they are the very same people who have made an effort to spend responsibly since the financial collapse. Let's go back to the Consumerist: As Credit.com explains, if the U.S. AAA credit rating goes down, interest rates will rise across the board, including the rate you have to pay on your favorite piece of plastic: "So if the U.S. has to pay more to borrow, the prime rate that banks pay to borrow money to lend out to consumers goes up. And guess what happens when this increase makes it all the way down the food chain to the consumer? The vast majority of credit cards have variable rates and they go up and down with the prime rate. So if the prime rate goes up, your variable rate goes up by the same amount."

Poll: Economic pessimism hits 15-year high --Americans are more pessimistic about where the economy will be a year from now than they have been at any time in almost the last 15 years, a new poll Monday showed. In all, 59 percent of those surveyed for a CNN/Opinion Research Corporation poll said they expect economic conditions in the United States to be poor a year from now, while 40 percent expect conditions to be good. That’s the highest percentage since CNN began asking the poll question in October, 1997 Twenty-nine percent of those surveyed said they expect the economy to be “very” poor a year from now, while 30 percent said they think it will be “somewhat” poor. At the same time, just four percent of those surveyed said they think the economy will be in “very” good shape next year, while 36 percent said they think it will be “somewhat” good. Negative outlooks have hit the 50 percent mark or higher only once before, when half of those surveyed in September 2005 said they thought the economy would be in poor condition a year later.

Madness: 39 Things That Are Driving Ordinary Americans Absolutely Crazy - Have you noticed that almost everyone seems really angry these days?  Frustration with the government and with most of the other major institutions in our society seems to grow by the day.  According to a brand new ABC News/Washington Post poll, 80 percent of Americans say that they are either dissatisfied or angry with the government.  Americans are deeply divided about what the solutions to our problems are, but what almost everyone can agree on is that our problems are getting worse.  Watching all of the madness that is going on in Washington D.C. and in our state capitals is almost enough to drive anyone absolutely crazy.  Our nation is drowning in an ocean of debt, jobs are being shipped overseas at an alarming rate, thousands of stores are closing, poverty is exploding, greed has become a national pastime and corruption is seemingly everywhere.  The American people are incredibly frustrated because the vast majority of our "leaders" appear to be too incompetent or too corrupt to deal with our problems.

The Two-Speed Recovery: Consumers Left Behind - The U.S. recovery has been much stronger for finance and large companies than consumers and the labor market, the International Monetary Fund made clear in its annual assessment of the American economy. “The current recovery has been held back by significant adverse feedback loops between housing, consumption, and employment,” the IMF said in its report. The divide becomes clear in a chart the Fund posted comparing postwar economic recoveries. This is the basic breakdown of gross domestic product for separate recoveries through the first seven quarters. “Financial conditions have improved, particularly for large firms that face favorable bond financing terms, but remain tight especially for small firms and real estate. On the bright side, exports and the performance of businesses and the financial sector have improved significantly,” the IMF said. This chart shows how the recovery stacks up for those sectors.

Peacock Syndrome - America's Fatal Disease - Researchers at the University of Texas recently published a study about why men buy or lease flashy, extravagant, expensive cars like a gold plated Porsche Carrera GT. There conclusion was: “Although showy spending is often perceived as wasteful, frivolous and even narcissistic, an evolutionary perspective suggests that blatant displays of resources may serve an important function, namely as a communication strategy designed to gain reproductive rewards.” To put that in laymen’s terms, guys drive flashy expensive cars so they can get laid. Researcher Dr Vladas Griskevicius said: “The studies show that some men are like peacocks.  They’re the ones driving the bright colored sports car.” The male urge to merge with hot women led them to make fiscally irresponsible short term focused decisions. I think the researchers needed to broaden the scope of their study. Millions of Americans, men and women inclusive, have been infected with Peacock Syndrome.

Dead Souls - In a world of dwindling resources, where each person's share of the physical realm decreases over time, it is no wonder that physical reality fails to satisfy. But thanks to the new, intimate, glowing handheld mobile computing devices, the unsatisfactory real world can be blotted out, and replaced with a cleansed, bouncy, shiny version of society in which little avatars utter terse little messages. In the cyber-realm there are no sweaty bodies, no cacophony of voices to suffer through—just a smooth, polished, expertly branded user experience. While riding the subway through the Boston rush hour, I have been able to observe just how well these personal electronic mental life support units work in shielding people from the sight of their fellow-passengers, who are becoming a rougher and rougher-looking crew, with more and more people in obvious distress. By focusing all of their attentions on the tiny screen, they are also spared the sight of our well-worn and crumbling urban infrastructure. It is as if the physical world doesn't really exist for them, or at least doesn't matter. But as Horace already understood over 2000 years ago, "Naturam expellas furca, tamen usque recurret" ("You may drive out Nature with a pitchfork, yet she still will hurry back.") If we ignore the physical realm, the physical economy (the one that actually keeps people fed and sheltered and moves them about the landscape) shrinks and decays. The inevitable result is that more and more of these cyber-campers and their gadgets will drop off the network, shrivel, and die with nary a tweet to signal their demise.

Airline Ticket Taxes Lapse as Congress Fails to Extend Them -At 12:01 AM Saturday morning, the Federal Aviation Administration (FAA)'s congressional authorization lapsed, furloughing 4,000 FAA employees without pay. Operations personnel continue working.The expiration of authorization also means the expiration of the various federal airline ticket taxes:Operators should not collect the 7.5 percent transportation excise tax (TET), segment fees, international facilities fees, Alaska/Hawaii fees or 6.25 percent cargo tax for transportation that occurs during the lapse in FAA reauthorization beginning at 12:01 a.m. on Sat., July 23, 2011. Most travelers are unlikely to see price reductions from this expiration:By Saturday night, nearly all the major U.S. airlines had raised fares to offset taxes that expired the night before. That means instead of passing along the savings, the airlines are pocketing the money while customers pay the same amount as before.

FAA in Partial Shutdown; Air Traffic Unaffected - The Federal Aviation Administration was forced into a partial shutdown Monday after Congress failed to temporarily extend its funding. The agency was ordered to furlough thousands of employees and freeze $2.5 billion in airport construction money. The nation's air travel network remained unaffected, with air traffic controllers and other employees deemed "essential" ordered to work. But nearly 4,000 of the agency's 32,000 employees were put on abrupt unpaid leave. "The fact that Congress can't work this out is exactly why the American people are fed up with Washington," Transportation Secretary Ray LaHood said in a conference call Monday. In California, 206 FAA employees and $131 million in construction funds could be affected, including construction of air traffic control towers at Oakland International and Palm Springs airports. Officials at LAX and Long Beach airports said they would not be immediately affected because their finances allow them to continue projects and be reimbursed by the FAA later.

ATA Trucking index increased 2.8% in June - From ATA Trucking: ATA Truck Tonnage Index Jumped 2.8% in June: The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.8% in June after decreasing a revised 2.0% in May 2011. Here is a long term graph that shows ATA's Fore-Hire Truck Tonnage index.The dashed line is the current level of the index. From ATA: Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes. Unfortunately July will probably be weak based on some comments from UPS, from the WSJ: United Parcel Service Inc., explaining its expectation of flat U.S. package volume in the third quarter, is citing the stalemate over the debt ceiling as a factor.

DOT: Vehicle Miles Driven decreased -1.9% in May compared to May 2010 - The Department of Transportation (DOT) reported Friday: Travel on all roads and streets changed by -1.9% (-5.0 billion vehicle miles) for May 2011 as compared with May 2010. Travel for the month is estimated to be 254.0 billion vehicle miles. Cumulative Travel for 2011 changed by -1.0% (-11.7 billion vehicle miles). This graph shows the rolling 12 month total vehicle miles driven.  In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 42 months - so this is a new record for longest period below the previous peak - and still counting!  The second graph shows the year-over-year change from the same month in the previous year. So far the current decline is not as a severe as in 2008. With the decline in oil and gasoline prices, the YoY decline in miles driven will probably not be as large in June.

Strain at the pump - WHILE everyone is watching markets for any sign of panic, they might direct their eyes to the commodity section of the screen, where prices on West Texas Intermediate—oil—have returned to triple digits. Petrol prices are following suit: In the event of a debt-related calamity, this won't much matter. If, however, an immediate collapse is averted, rising petrol costs could throw yet another wrench in the machinery of recovery. Dear petrol was one of the temporary factors cited by economists, including those at the Fed, as a contributor to disappointing growth performances in the first and second quarters. When oil prices leveled off and began declining, a major source of pressure on household budgets eased, clearing the way for a return to more rapid growth.  I had hoped that emerging-market efforts to tighten policy in order to combat inflation would slow growth in commodity demand and give struggling advanced economies a bit of breathing space. That may have been too optimistic.

Do Gasoline Prices Still Threaten Retail Sales? - Two months ago, I wondered if rising gasoline prices threatened retail sales. At the time, energy costs were rising, taking an increasing bite out of consumer purchases. It looked like a train wreck. Consumer purchases, after all, represent roughly 70% of GDP. But gasoline prices hit a ceiling in early May and have been flat to moderately lower ever since. There’s no assurance that prices won’t resume taking flight, but for the moment there’s been a slight reprieve on the energy-based assault on retail sales. Gasoline sales as a percentage of total retail sales fell in June to 11.5% from the previous month’s 11.7%, as the chart below shows. That’s the first reduction on a monthly basis in a year. It’s unclear if the decline will roll on, but in the interest of giving the economy a boost it’s a no-brainer to hope that lesser percentages are in the cards.

Where Do People Spend the Most on Gasoline?  - What regions see the highest monthly expenditures on gas? Mint.com, a website that tracks personal finances, released some data on cities where people spend the most and least on gas each month. The top three “guzzlers”: San Jose, California ($216); Birmingham, Alabama ($212); and Jacksonville Florida ($203). The top three “teetotalers”: New York, New York ($102); Brooklyn, New York ($104); and Washington, DC ($112).  Perhaps more surprisingly, the ”teetotalers” include St. Louis ($138), Salt Lake City ($130), and Denver ($112).

June Durable Goods: Another Miss - Those who had read our prediction that the Paris Air Show was a harbinger of weaker durable goods will not be surprised to read that June durable goods just came at a very disappointing -2.1% on expectations of an increase to 0.3%, from 1.9% in May. But it wasn't just Boeing's fault: ex-transportation the number was a subpar +0.1% on consensus of a 0.5% beat, with the May reading revised up to 0.7%. The driver according to Bloomberg's Joseph Brusuelas: "decline in transportation bookings, incl. 28.9% drop in non-defense aircraft orders." And that's not all: "Non-defense ex-aircraft, proxy for capex, points to slower growth in coming qtr." This means that as expected not only is Q2 GDP trending now much lower, possibly below 1%, but the weakness is starting to spill over into Q2 data. As AP reports, "Manufacturing has been the stellar performer in the two-year-old recovery. But activity slowed in the spring, reflecting in part supply disruptions following the March earthquake and tsunami in Japan. Manufacturing was also hurt by the hit the overall economy took from higher energy prices which dampened consumer demand."

Orders for U.S. Durable Goods Fell in June - Orders for U.S. durable goods unexpectedly dropped in June, raising the risk that a slowdown in business investment will weigh on the world’s largest economy in the second half of the year. Bookings for goods meant to last at least three years fell 2.1 percent after a 1.9 percent gain the prior month that was smaller than last reported, the Commerce Department said today in Washington. Demand for business equipment, including machinery and computers, also dropped. Manufacturers face a slowdown in consumer spending just as they are poised to rebound from the parts shortages caused by Japan’s earthquake, indicating production may keep cooling. Companies are also cutting back on hiring, which may further temper household demand.

Durable Goods Orders Fall In June, But The Trend Is Still Positive - Today’s durable goods report is disappointing because everyone’s looking for unassailable confirmation that the economy has sufficient wherewithal to forge ahead. The latest numbers out of Washington fall well short of delivering a macro knock-out blow by that standard. The good news is that a close look at the durable goods stats doesn’t look fatal either.  New orders for durable goods slipped by 2.1% on a seasonally adjusted basis in June, reversing May’s 1.9% gain. But the back and forth of late, which feeds into the notion that the economy is stuck in neutral, masks a somewhat rosier trend. In the first half of 2011, for example, durable goods are up by 4.7%. Not too shabby, although it remains to be seen if the pace will continue.  The annual rate of change in new orders for durable goods is still encouraging. For the year through last month, this series was higher by 7.6%, as the chart below shows. Yes, the annual pace has been declining for more than a year, but that’s not surprising. After the initial surge from the early stages of the economic rebound fade, it's inevitable that something approaching a normal level of growth is destiny.

Chicago-Area Manufacturing Remains Muted - The Federal Reserve Bank of Chicago said Wednesday that manufacturing output in the Midwest region was a whisker down in June from May as higher steel and machinery production partially countered a decline among auto makers. The bank’s Midwest Manufacturing Index dipped 0.1% to a seasonally-adjusted 84.0 in June, level with the May report after rounding, with the chemicals sector also gaining ground.

The Auto Industry, Stuck in the Slow Lane - Many of those grasping for a sign of economic optimism these days have pointed to the auto industry. The argument is that as supply chains come back on line following the Japanese earthquake and tsunami, more automobiles will be available for sale to consumers who have been waiting for cars to arrive. But don’t expect a roaring comeback yet. A report released on Wednesday by AlixPartners, a business consulting firm, projects modest sales growth for the foreseeable future. The report forecasts that United States auto sales will reach 12.7 million units this year, up from the 11.5 million of 2010, but still far below the 16-million-plus that the industry regularly posted in the mid-2000s. AlixPartners forecasts 13.6 million sales in 2013, and does not project that the industry will get back to its peak before the recession “in this current cycle.” And in a survey of 1,000 Americans, 83 percent said they had delayed the purchase of a vehicle or planned to wait another year before buying a car.

Sugar in the Tank - When Representative John Mica, a Republican from Florida and chair of the House Transportation Committee released his proposal for the overdue Surface Transportation Reauthorization bill earlier this month, liberals condemned the plan’s lack of investment in infrastructure. They missed, however, a bigger failing: Transportation spending is not just underfunded in this country; it’s broken, and we can’t afford to wait another six years to fix it. House Republicans, though, haven’t proposed sensible transportation policy changes, even ones conservatives should support.  Smart-growth advocates, unions, and environmentalists had been excited by President Barack Obama’s $556 billion proposal for the six-year transportation bill, but Mica’s plan offers a mere $230 billion because Republicans are unwilling to raise the gasoline tax, which pays for federal transportation spending.  Whereas President George W. Bush was happy to cover the shortfall between gas-tax revenues and authorized transportation spending by taking money from general funds, these newly principled Republicans won’t do that.

Autos in the US Economy - Yesterday, I did a simple rough calculation about General Motors to try to get at how much manufacturing job loss one could attribute to foreign competition versus automation and productivity increases. Various commenters objected that my assumptions were too simplistic, particularly in neglecting the domestic content in foreign autos and the importance of shifts in the supply chain over time. To try to address these concerns, I'm going to repeat the exercise using national statistics for the components of GDP and employment by industry.  The GDP statistics are supposed to keep track of the value-added via supply chains and correctly account for foreign versus domestic components of production.  For time reasons I'm going to have to spread this out over a couple of posts. Today, I look at autos as a fraction of GDP from 1967 to 2010. In particular from BEA Table 1.5.5 I took the total US GDP and also US consumption of "Motor Vehicles and Parts". Then from Table 4.2.5 I took imports and exports of "Automotive vehicles, engines, and parts" which I can also divide by US GDP. All of these are shown in this graph:

Long-Term Trends in Durable Goods, Two New Charts - Doug Short had an interesting set of charts on durable goods on his site earlier today. His post, The "Real" Goods on Today's Durable Goods Orders showed "real" inflation-adjusted, population-adjusted charts of durable goods and durable goods ex-transportation. Those charts show just how anemic this recovery has been. I asked Doug for two additional charts, showing "real" inflation-adjusted, population-adjusted charts of durable goods ex-defense, and ex-defense and ex-transportation. Courtesy of Doug Short here are those charts. I asked for those charts because they offer a better picture of "core" durable goods orders of consumers (TVs, furniture, appliances, etc.)The per-capita and real-per-capita charts tell a story of decay, and that decay started with the ascent of Chinese manufacturing and continued even through the housing boom years.

Obama and the other deficit - Hours before the negotiations on the debt limit between President Obama and House Speaker John Boehner collapsed1, political reporters received a missive from Mitt Romney’s presidential campaign that served as a reminder of how irrelevant this kerfuffle might feel next year. The headline read, “Obama Isn’t Working: Where are the Jobs?”  The video2 spoke to the difficulties that recent college graduates are having finding work in a brutal job market. This bit of campaign propaganda went straight at the core of Obama’s political base — young Americans who volunteered for him by the tens of thousands in 2008 and powered him to victory in state after state.The Romney message was more in touch with what voters are worried about than the spectacular show of dysfunction Washington politicians are putting on. Consider a Gallup poll released last week3. Asked what was the most important problem facing the country, 31 percent of Americans said the economy and an additional 27 percent specifically said unemployment and jobs, for a total of 58 percent. Only 16 percent listed the federal deficit or the debt.

Post office ponders closing 1 in 10 retail outlets - The Postal Service is considering closing more than one in 10 of its retail outlets. The financially troubled agency was announcing Tuesday that it will study more than 3,600 local offices, branches and stations for possible closing. Currently the post office operates more than 31,000 retail outlets across the country, down from 38,000 a decade ago, but in recent years business has declined sharply as first-class mail moved to the Internet. In addition, the recession resulted in a decline in advertising mail, and the agency lost $8 billion last year. Most of the offices that face review are in rural areas, but postal officials say they are looking into alternative service, such as locating offices in local businesses, town halls or community centers.

U.S. Postal Service says it might shutter 3,700 post offices - The U.S. Postal Service, which might run out of money in September, said Tuesday it may close as many as 3,700, or 12 percent, of its post offices as customers buy more services online and through locations such as grocery stores. Post offices in every state but Delaware may close, according to a list provided by the USPS. More than half are in rural locations, said Sue Brennan, a spokeswoman for the service. In communities without a post office, the USPS plans to sell stamps and offer services through local retailers. The postal service, which reported a loss of $2.6 billion for the quarter ended March 31, is seeking to cut costs as it approaches its $15 billion borrowing limit. The closings may save $200 million a year by saving costs for labor and for operating the facilities, Postmaster General Patrick Donahoe said at a news conference in Washington.

Are mass layoffs back? - Research In Motion is the latest company to announce big job cuts, signaling a trend that could further damage the economic recovery. The troubled maker of BlackBerry phones is chopping 2,000 jobs this week. Research In Motion's (RIMM) cuts, announced Monday, amount to 10.5% of its work force. That's higher than analysts thought, The New York Times reported, leading some to wonder whether the company is worse off than expected. RIM isn't the only one wielding the ax this summer. Cisco Systems (CSCO) recently announced job cuts of 6,500, rocking a tech sector that had been relatively stable in the recession. Lockheed Martin (LMT) also wants to cut 6,500. Borders is liquidating and laying off thousands of employees in the process. Each of those layoff announcements is devastating for the families involved. Put them together, and we're starting to see a return of sweeping job cuts that could further erode the fragile economy.

Return of Mass Layoffs a Grim Sign for U.S. Workers - Putting pressure on an already lousy job market, the mass layoff is making a comeback. In the past week, Cisco, Lockheed Martin and Borders announced a combined 23,000 in job cuts. Those announcements follow 41,432 in planned cuts in June, up 11.6% from May and 5.3% vs. a year earlier, according to Challenger, Gray & Christmas. Meanwhile, state and local governments have cut 142,000 jobs this year, The WSJ reports, and Wall Street is braced for another round of cutbacks. This week, Goldman Sachs announced plans to let go 1000 fixed-income traders. If these trends continue, we may soon be talking about losses in the monthly employment data -- not just disappointing growth

Merck looks to cut up to 13,000 jobs - Merck, the US drug company, will cut as many as 13,000 jobs, or 13 per cent of its workforce, as it looks to slash costs and invest in emerging markets. The cuts, to be achieved by 2015, follow those announced last year when Merck said it would reduce its staff by 17 per cent. Merck has been looking to achieve the savings it promised when it acquired Schering Plough for $41bn in 2009. Merck expects to achieve additional annual cost savings of $1.5bn. It continues to project $3.5bn in synergies from the Schering acquisition. The company said that 35-40 per cent of the savings would come from the US, and that Merck would also be hiring some workers in low-cost, high-growth countries. The job cuts come at a painful time for the US economy, which is reeling from a prolonged bout of high unemployment and slowing growth. Cuts in the overall pharmaceuticals sector have slowed this year after soaring job losses during the recession.

What’s Wrong With America’s Job Engine? - What's wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: "Sales have come back, but people have not.'' That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.  Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring.  Over the past 10 years:

  • • The U.S. economy's output of goods and services has expanded 19%.
  • • Nonfinancial corporate profits have risen 85%.
  • • The labor force has grown by 10.1 million.
  • • But the number of private-sector jobs has fallen by nearly two million.
  • • And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

How Greedy Corporations Are Destroying America’s Status as ‘Innovation Nation’ -The US economy is a mess. Over two years since the Great Recession officially ended, the unemployment rate is over nine percent, the foreclosure crisis rages on, and households remain loaded up with debt. The fiscal situation of federal and state governments is dire, in part because free-market ideologues think that low taxes are a God-given right. Much of the mess is the result of an economy in which the forces for extracting value have come to dominate the forces for creating value. The most visible venue for value extraction is the gambling casino known as Wall Street. But it is going on throughout the corporate economy as major industrial companies employ most or even all of their profits to do massive stock buybacks for the sole purpose of jacking up their stock prices. In the process, industrial innovation — the generation of higher quality, lower cost products that provide the foundation for economic growth — is suffering from neglect. And yet we need new technologies to solve economic, social, and environmental problems more than ever. For a (still) rich country like the United States, the only way to revive prosperity is through industrial innovation that results in significant job creation.

Maybe the Unemployed Aren't Invisible After All -America is in the worst jobs crisis since the Great Depression, and Washington is fussing about whether it will make good on the debts it has already committed to. What gives?I’ve described a few different theories explaining why the unemployed are invisible, including that unemployed people have low voter turnout rates; they don’t congregate at unemployment offices anymore; the labor unions that used to organize them have weakened; extended jobless benefits have kept these workers complacent; the media haven’t devoted sufficient coverage to unemployment; and the huge unemployment statistics desensitize people to the jobs crisis. But what if the entire premise of my question is wrong: What if the unemployed are actually too visible, and that’s why Washington keeps wanting to talk about everything else? . They know the jobs crisis is the elephant in the room. But they don’t want to talk about it, because almost anything they could do to alleviate unemployment would still not return it to prerecession levels, so they would still be blamed for any remaining pain.

America’s turbulent jobs flight - I had the chance earlier this month to go and see the American worker in action at two plants in North and South Carolina owned by General Electric, the country’s second-biggest exporter.  GE organised the tour for some journalists to show off its high-tech “advanced manufacturing” plants in which it makes jet engines and gas turbines, mainly for export. Jeff Immelt, its chairman and chief executive, now chairs Barack Obama’s council on jobs and competitiveness – an effort to address the jobs deficit. The two plants were examples of why the US, despite the rise of China, is still a manufacturing power. China’s manufacturing output has just overtaken that of the US (depending on how the figures are counted) but the output of each is still double that of Japan and three times that of Germany, according to IHS Global Insight. China has achieved that through low-wage manufacturing on a mass scale while the US has driven up productivity – China’s labour productivity is about 12 per cent of the US’s. The American worker is hugely productive, especially in the southern states where plants are mostly non-unionised.

How America Could Collapse - A few months ago, a friend in the entertainment industry told me of a new business model in Hollywood: hoarding videotapes. Apparently, the earthquake in Japan knocked offline a Sony factory that makes certain types of tape. That factory was also in the tsunami zone, so now there’s a serious tape shortage threatening the television industry. The NBA scrambled to get enough tape to broadcast the NBA finals; one executive told the Hollywood Reporter, “It’s like a bank run.” In the last few years, economists have spent a lot of time and energy thinking about bank runs. Worryingly, there’s been very little consideration of how systemic collapses can happen in another, perhaps more dangerous realm—the industrial supply system that keeps us in everything from medicine to food to cars to, yes, videotape. In 2004, for instance, England closed one single factory, which caused the United States to lose half of its flu vaccine supply.

Help-Wanted Ads Exclude the Long-Term Jobless - The unemployed need not apply.  That is the message being broadcast by many of the nation’s employers, making it even more difficult for 14 million jobless Americans to get back to work.  A recent review of job vacancy postings on popular sites like Monster.com, CareerBuilder and Craigslist revealed hundreds that said employers would consider (or at least “strongly prefer”) only people currently employed or just recently laid off.  Unemployed workers have long suspected that the gaping holes on their résumés left them less attractive to employers. But with the country in the worst jobs crisis since the Great Depression1, many had hoped employers would be more forgiving.  “I feel like I am being shunned by our entire society,” said Kelly Wiedemer, 45, an information technology operations analyst who said a recruiter had told her that despite her skill set she would be a “hard sell” because she had been out of work for more than six months.  Legal experts say that the practice probably does not violate discrimination laws because unemployment is not a protected status, like age or race.

Discriminating Against the Unemployed - As I wrote in an article today, there are many job ads on sites like CareerBuilder.com and Monster.com stating that employers will accept applications only from people who already have jobs or who very recently had jobs. This second condition I find particularly interesting, and not just because it might strike some as unfair. It’s interesting because it may actually favor workers who are less qualified. If you think about it, people who were laid off recently may be, on average, worse candidates than people who were laid off a while ago. After all, people who have been out of work for two years or longer are people who were laid off during the recession. That means many of them were workers whose jobs were eliminated simply because their businesses were doing badly, not because they were personally incompetent. And their first year or so of unemployment occurred as businesses were still cutting jobs, not adding them, so almost no matter how qualified they were, they were stuck in a holding pattern. But more recently, layoffs have been near historic lows and there has been (some) job growth. That means the people laid off in the last few months are much more likely to have lost their jobs because they were poor workers rather than victims of the business cycle.

The Long-Term Unemployment Trap - The New York Times reports that employers don't want to hire people who have been out of work for a long time: For what it's worth, this has always been true. Having a long gap in your resume has always been a problem, and having a long current gap has always been a really big problem unless there's a mighty convincing explanation for it. The difference today isn't that employers have changed, it's that they're so swamped with job applications that they figure they might as well just admit their biases up front. The other difference, of course, is that there are more long-term unemployed than there used to be — far more than in any previous recession. In the past, someone out of work for a year might very well have been someone pretty unmotivated to find a job, and therefore not especially desirable. Today it's far more likely that they're still extremely motivated but there are just no jobs to be had. So ironically, the very recession that's caused a long-term spell of joblessness to be less meaningful in fact has caused it to be more meaningful in practice. It's a way in which cyclical unemployment can turn into structural unemployment, and it's yet another reason we should be using every possible trick in both our fiscal and monetary bags to fight cyclical unemployment and get it under control.

Rampell on the Long-Term Unemployed and Job Searches - I wanted to comment on this great article by Catherine Rampell, The Help-Wanted Sign Comes With a Frustrating Asterisk, which is all about how employers are looking for workers with jobs right now rather than hiring from the long-term unemployed.  Two quick points:- This image of a collection of want ads was in the article: At an event at the FDR Presidential Library on the creation Social Security, there was a blow-up of Great Depression-era ads about discrimination against older workers, a problem that was one of the motivations behind Social Security:These are similar.  Indeed, older workers are more likely to be long-term unemployed at this point in the recession.  From Pew’s recent report on long-term unemployment: Using the CPS data, Pew calculated that the persistent problem of long-term unemployment is occurring across education and age groups but those who are older than 55 are most likely to remain jobless for a year or more.

Trends: Reduced Earnings for Men in America - Brookings - Technological advancement and ever-broadening global markets brought opportunities that increasingly educated American workers raced to embrace. This resulted in steadily rising living standards, generations of children who outearned their parents, and a thriving middle class. But in the mid-1970s, that pattern abruptly changed. Technological change and globalization continued to power both economic growth and the total earnings of the work force. Women, who were entering the market at increasing rates, enjoyed the fruits of that prosperity in rising wages. But the fortunes of a large segment of workers – male workers lacking specialized skills – was unhitched from the engine of growth. Over the past 40 years, a period in which U.S. GDP per capita more than doubled after adjusting for inflation, the annual earnings of the median prime-aged male has actually fallen by 28 percent. Indeed, males at the middle of the wage distribution now earn about the same as their counterparts in the 1950s! This decline reflects both stagnant wages for men on the job, and the fact that, compared with 1969, three times as many men of working age don’t work at all.

The Real Explanation for the "Womancession" - Women are losing out across industries, but what about across occupations? An industry describes what an employer does; an occupation describes what an individual worker does. Someone can work as an accountant for an oil company, a state government, or a health care company—the same occupation across different industries. Here is how job loss looks across occupations: Women have been brutally hit when it comes to a category called “office and administrative support occupations," i.e. those who make workplaces run smoothly. In this occupation, which represents over 17 million workers, women have lost a total of 925,000 jobs while men have gained 204,000 since the recession ended. Looking into quarterly data for the individual job categories that make up this sector, it's clear that there have been extensive job losses among administrative assistants, secretaries, and others who support their offices:

Unemployed baby boomers are struggling to get by - For baby boomers, especially those in their 50s who are too young to qualify for Social Security benefits, today's tough economic reality is at odds with their long-held job expectations. They're supposed to be in the prime of their careers, their peak earning years. Instead, they're fighting simply to stay employed. "People are looking for job security, but it's a different game now," said Sacramento workplace expert Carleen MacKay. "And they're scared to death."You can't hope for the last train back to the good times." Urban Institute research shows that the unemployment rate for both men and women in their 50s ticked up last year, with older men lacking college degrees being hardest hit.People 55 and older who have been laid off take longer than younger people to find new work – 52 weeks, as opposed 35, according to the Bureau of Labor Statistics – and many find they have to cobble together two or three jobs to make a decent income.

Initial Claims Print Sub 400, At 398K, To Be Revised Above 400K Next Week, As NSA Claims Plunge By 104K In The Past Week As expected last week's 418K in initial claims was revised higher to 422K, but the big surprise was this week's drop in claims to 398K on expectations of 415k. The market appears to relish the fact that the streak of 16 weeks of 400K+ prints is broken, although that is quite amusing as next week's upward revision will mean the 400k+ streak will continue. Although one should let the market have its pyrrhic victory for the day. What was truly amazing is that Non Seasonally Adjusted claims plunged from 470K to 366K, a 104K move in one week! Once again the BLS lets everyone have a chuckle on their behalf. The main reason for the drop in claims was New York and Minnesota, which saw a decline in claims of 17,377 and 10,352 due to i) Fewer layoffs in the education related services, transportation, and other service industries and ii) Fewer furloughs in state government. There was also some good news in MI and OH, which saw 7K and 5K drops in layoffs due to 'Fewer layoffs in the automobile industry.' Offsetting the weekly improvement in these states was the surge in California claims by 20,813 due to a 'Return to a five day work week' and a spike in Georgia claims by 6,567 due to 'layoffs in the manufacturing, trade, service, and construction industries.' Those on extended claims reversed their decline and increased by 62K in the week ended July 9. Lastly, continuing claims came worse than expected at 3,703K on expectations of 3,700K, an increase from the unrevised 3698K but a drop from the naturally upwardly revised 3720K.

Vicious Cycles: Why Washington is About to Make the Jobs Crisis Worse - Robert Reich -The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win. This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.  Yet the parallel universe called Washington is moving in exactly the opposite direction. Republicans are proposing to cut the budget deficit this year and next, which will result in more job losses. And Democrats, from the President on down, seem unable or unwilling to present a bold jobs plan to reverse the vicious cycle of unemployment. Instead, they’re busily playing “I can cut the deficit more than you”

Labor Force Participation Rate Update - Here is a look at some the long term trends (updated graphs through June 2011). The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out - although the rate has been declining recently (down to 74.6% in June). The participation rate for men has decreased from the high 90s to 89.0% in June 2011. (down slightly from May)  The next graph shows that participation rates for several key age groups. There are a few key long term trends:
• The participation rate for the '16 to 19' age group has been falling for some time (red). This at 34% in June.
• The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical).
• The participation rate for the '20 to 24' age group fell recently too (perhaps more people are focusing on eduction before joining the labor force). This appears to have stabilized - although it was down to 70.5% in June.

The third graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA). The participation rate is generally trending up for all older age groups.

Economic growth out of thin air - Mobile broadband usage is projected to grow by 35 times from 2009 to 2014. The explosion of wireless broadband demand created by the growth of smartphones, tablets, and wirelessly connected laptops will fast outstrip the current capacity of the wireless spectrum. The demand placed on the wireless spectrum by a single smartphone is the equivalent of 24 traditional cellular phones; a tablet, 122 cell phones. For this reason, as a part of the 2009 National Broadband Plan, the Federal Communications Commission is working towards making 500 megahertz of additional spectrum available over the next decade, 300 megahertz of which will be made available by 2014. The government, however, remains embroiled in the process of developing a plan to repurpose spectrum from its current uses for wireless broadband.

The Vanishing U.S.-E.U. Employment Gap - NY Fed - The employment-to-population ratio—the share of adults that are employed—has historically been much higher in the United States than in Europe. However, the gap narrowed dramatically in the last decade and had almost disappeared by the end of 2009. In this post, we show that the narrowing employment gap is due to three factors: declining U.S. employment rates across almost all age-gender groups; more women working in Europe, particularly prime-age and older workers; and rising employment for older European men. We link most of these shifts to the influence of underlying trends (many reflecting changes in European social policies) and to differences in labor market performance during the Great Recession.

Jobs Woes Make U.S. Labor Market Look More European -The financial crisis has helped to wash away a defining difference between U.S. and European labor markets, economists at the Federal Reserve Bank of New York said Monday. In a posting on the bank’s website, the analysts note that over the last decade, the percentage of workers relative to overall population has moved closely together in the two economic blocs, largely because of lost ground in America. The convergence has several drivers. “The narrowing employment gap is due to three factors: declining U.S. employment rates across almost all age-gender groups; more women working in Europe, particularly prime-age and older workers; and rising employment for older European men,” wrote Christian Grisse, Thomas Klitgaard and Aysegul Sahin, for the New York Fed’s Liberty Street Economics blog

On Jobs, the U.S. Is Turning Into Europe - One of many reasons blamed for (Western) Europe’s stagnant growth in recent decades has been that so many European adults are not working, and are effectively not employable because they have been out of jobs for so long. The United States, on the other hand, has had a much higher share of its population in gainful employment. In fact, between 1980 and 2000, the percent of adults working was on average about 10 percentage points higher in the United States than in Europe. But that gap is closing, according to a new paper from the Federal Reserve Bank of New York. A chart is worth a thousand words: The gap had been narrowing even before the Great Recession, largely as a result of social and economic policy changes in Western Europe. For example, the authors note, in the mid-2000s Germany and Italy deregulated markets for temporary hiring, which enabled more people to find jobs. Reductions to Europe’s traditionally generous pensions have also encouraged workers to work later in life.

The End of Eurosclerosis -  Krugman - I’ve written a number of times about the weird way American perceptions of Europe seem stuck in the past. It’s common to see Europe as a land of stagnant economies and lack of jobs. This vision had some truth in the 1990s, but was becoming less and less true even before the crisis, which hit US employment much harder than European employment. The New York Fed has noticed. Via Mark Thoma, the Liberty Street blog has a piece on the vanishing US-EU employment gap. If you want a simple takeaway, here’s the picture: More detailed analysis shows that the remaining gap comes from lower employment rates in Europe for the young and old; prime-age workers, especially men, are if anything more likely to be working in Europe. And you should note that this European performance comes despite the fact that tax levels and levels of social benefits are vastly higher than they are here. Oh, and as many people have noticed, America now has European levels of joblessness without a European safety net. We’re definitely leading in the misery race.

Where the Job Growth Is: At the Low End - There’s more unhappy news for the millions of Americans hoping for a surge in the number of good, high-paying jobs — a new report concludes that the great bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour. The report by the National Employment Law Project, a liberal research and advocacy group, found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker. According to the report, “The Good Jobs Deficit,” the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak. The report gives additional ammunition to those who argue, like David Autor, an economics professor at M.I.T., that there is a distinct hollowing out of the middle. ...“We should emphasize that it is too early in the recovery to predict whether these trends will continue,” the report said

Employment of Elderly: Supply or Demand? - In reaction to my post last week, Dean Baker, co-director of the Center for Economic and Policy Research, offered some analysis of weekly earnings and concluded that the demand for elderly workers increased during the recession even while it plummeted for everybody else. Supply played little or no role, he said. Generally, I agree that wage rates are an important variable for gauging the relative importance of supply and demand (see, for example, my analysis of labor supply during the summer season, which featured hourly wage rates as one of three key indicators). But in this case, Dr. Baker’s weekly earnings results ran into a few contradictions. First, what was the demand shift experienced by elderly workers that was so large as to completely offset the demand shift purportedly experienced by the rest of the population? Perhaps elderly workers picked up some of the hundreds of thousands of jobs that teenagers and other unskilled workers lost thanks to the minimum wage increases?  Second, a huge increase in demand for the elderly might be expected to reduce their unemployment rates, yet the chart below shows how unemployment rates for the elderly followed very much the same time pattern as unemployment rates for the general population.

BROKE: 10 Facts About The Financial Condition Of American Families That Will Blow Your Mind: The crumbling U.S. economy is putting an extraordinary amount of financial stress on American families. For many Americans, 'flat broke' has become a permanent condition. Today, over half of all American families live paycheck to paycheck. Unemployment is rampant and those that do actually have jobs are finding that their wages are rising much more slowly than prices are. The financial condition of average American families continues to decline and this is showing up in all of the recent surveys. For example, according to a new Gallup poll, 'lack of money/low wages' is the number one financial concern for American families. To make ends meet, many American families are going into even more debt and more American families than ever are turning to government assistance. Right now, more Americans than at any other point since World War II are flat broke and have lost hope. Until this changes, the frustration level in this country is going to continue to grow."

The top-end-of-town have captured the growth - This Report – The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009 – published by the Center for Labor Market Studies of Northeastern University (thanks Stephan) should have received headline attention from all the American media outlets instead of the disgusting venting of religious zealotry that goes under the name “debt ceiling debate” which has dominated media space. The Report was published in May 2011 and seeks to examine the way in which the recovering real output in US is being distributed to beneficiaries – workers, firms etc. It shows that the so-called economic recovery in the US has not delivered any tangible benefits to the vast majority of citizens and has rather, concentrated real gains among the top-end-of-town. Given that the recovery has floated on the fiscal stimulus the findings reinforce the biased nature of policy in the US. That indicates poor fiscal design by an incompetent and corrupt government not that fiscal policy is inherently unsuitable for advancing public purpose. Consider this graph which is taken from Table 14 of the Report mentioned in the introduction. The US Government should resign immediately (including the President and his Administration) for overseeing this failure to advance public purpose.

The Racial Wealth Gap’s Larger Than Ever. Here’s How It Will Destroy Us - When measured by wealth, racial inequality in the U.S. is greater than it’s been since 1984. Anybody truly concerned about the country’s future solvency should be most alarmed by the latter news. The racial wealth gap has been enormous ever since the Census Bureau began measuring it 25 years ago. But it has never been larger than today. The median wealth of a white family is now at least 20 times higher than that of a black family and 18 times that of a Latino family, according to an analysis by the Pew Research Center.  Pew looked at wealth numbers between 2005 and the technical end of the U.S. recession in 2009. It found that the racial wealth gap exploded in that time period, as blacks and Latinos suffered dramatic blows from the collapsed housing market. Median wealth—the net value of your assets versus your debts—fell by 66 percent among Latino households and 53 percent among black households, while it fell just 16 percent among white households. By 2009, median black and Latino families each held less than $7,000 in wealth; the median white family held $113,149.

Recession Study Finds Hispanics Hit the Hardest - Hispanic families accounted for the largest single decline in wealth of any ethnic and racial group in the country during the recession1, according to a study published Tuesday by the Pew Foundation.  The study, which used data collected by the Census Bureau2, found that the median wealth of Hispanic households fell by 66 percent from 2005 to 2009. By contrast, the median wealth of whites fell by just 16 percent over the same period. African Americans saw their wealth drop by 53 percent. Asians also saw a big decline, with household wealth dropping 54 percent.  The declines have led to the largest wealth disparities in the 25 years that the bureau has been collecting the data, according to the report.  Median wealth of whites is now 20 times that of black households and 18 times that of Hispanic households, double the already marked disparities that had prevailed in the decades before the recent recession, the study found.

Heritage Tries to Mislead Us on How Swell Poverty Is - A little late getting to this but Matt Yglesias makes an important point I wanted to expand upon. That is, just because you can afford a number of modern conveniences doesn't mean you're not poor. Similarly, people don't go bankrupt because they can't afford a TV, but because of medical bills (62% in 2007) or job loss. Yglesias: The Heritage Foundation is out with the latest version of its annual poor people aren't poor because electronics are cheap report.....A serious person would follow this up with a discussion of relative prices. Over the past 50 years, televisions have gotten a lot cheaper and college has gotten a lot more expensive. Consequently, even a low income person can reliably obtain a level of television-based entertainment that would blow the mind of a millionaire from 1961. At the same time, if you’re looking to live in a safe neighborhood with good public schools in a metropolitan area with decent job opportunities you’re going to find that this is quite expensive. Health care has become incredibly expensive..

The Shape of Inequality And Its Impact on Growth - The Iron Man (John Irons) makes an important point here: economic inequality doesn’t grow just because folks at the top do better.  It also grows because folks at the middle and bottom do worse. This figure from EPI shows the fanning out of real hourly wages, indexed to 100 in 1973, over the last few decades.  Clearly, the top continuously pulls away from the pack, as can be seen by the lines for the 90th and 95th wage percentiles. But the slide also shows ways in which the shape of inequality, at least re wages, has changed over these years. There was little wage inequality in the 1970s, but in the 1980s, the bottom was falling, the middle flat, and the top rising—a basic fanning out of the wage distribution. The latter 1990s were once again different.  The high end continued to rise but low and middle real wages grew together, and at a pretty decent clip.  The cause of the nice bump was the full employment conditions that prevailed for a few years back then, and as I’ve stressed, that dynamic leads to broad-based growth which pushes back against rising inequality.

Yes, Food Stamps are More Important than Defense - On Friday, in a move that shocked, truly shocked America, President Obama said that food stamps were more important than Defense. Since this sort of prioritization is one of the fundamental differences between the US extreme right (aka Republicans) and the US center-right (also known as the Democrats), the fact that this caused an uproar among Republicans should also stun you. Republicans warn us that slashing America's defense budget until it is only double the next largest nations will cripple us, Democrats call the Republicans meanies, and everyone ignores the point. The point is that food stamps are more important than Defense, for a fundamental reason - it is because we subsidize food stamps that we aren't having food riots like the middle east. Without food stamps, poor Americans would be starving - period. This is both bad for America's public image, but even worse for its civil function, and for its much articulated claims that we are, in fact, getting better rather than worse. Only because of food stamps and related programs can such claims seem even superficially credible. Let's run the numbers.

1,300 state workers to join Florida's unemployment rolls - About 1,300 state workers are being laid off this July, according to Florida's Department of Managment Services. Florida's unemployment rate held steady at 10.6 percent for June. But Miami economist J. Antonio Villamil says he's concerned about the impact of total government layoffs on the state's struggling economy. Many county and municipal governments are considering layoffs as well, to trim their budgets. More unemployment in Florida is not good news, but the government layoffs may not even make a mark in the unemployment rate, says Rebecca Rust, chief economist for Florida's Agency for Workforce Innovation. That's because the rate is drawn from two surveys: a worker count from employers and a random household survey, which may or may not include state workers in July.

States Count Cash While Hoping Congress Reaches Deal to Raise Debt Limit - Arizona is prepared to draw on its $1 billion in cash to cope with a possible federal government shutdown. South Carolina has plans to idle all but its most essential employees. Michigan may have to cut aid to the poor. With Washington in a political deadlock that may stop the federal government from borrowing money as soon as next week, states are preparing for the fallout should the Treasury Department run out of cash. Used to the brinkmanship in their own legislatures, state officials say they expect Congress to reach a deal to head off a shutdown, or that any disruption would last only a few days. “They’re banking on compromise,” He said states typically have enough cash to cover a few weeks of lost federal funding. “It gets worrisome after you get past that.” States are intertwined with Washington, which provided $564 billion, or 35 percent, of the $1.62 trillion they spent in the 2010 budget year, according to the National Association of State Budget Officers. The shutdown could affect programs such as unemployment insurance; Medicaid, which provides health care for the poor; and transportation projects.

Layoff Notices Top 3,000 As Unions Prepare To Vote - As the state employee unions wait to vote on a new concessions agreement, Gov. Dannel P. Malloy announced Wednesday that he has now issued more than 3,000 layoff notices in more than 30 departments and agencies. The notices have been increasing recently —1,157 since last week. The overall total is now 3,008. Although thousands of state workers have received their notices, administration officials say fewer than 160 will have actually left their jobs by week's end. But that will change. The largest number of employees — 1,872 — would leave their jobs during the week of Aug. 22 if the revised concessions deal is not ratified. That includes 57 rookie state troopers who have a six-week advance notification in their contract.

New Jersey's U.S. Attorney's Office looks for volunteer help - Despite the down economy, the New Jersey U.S. Attorney's Office is looking to hire some highly qualified lawyers. There is a catch. The pay is zero. In what's becoming a popular maneuver across the country, New Jersey's U.S. attorney, Paul J. Fishman, is advertising for volunteer prosecutors who can be lured to work free for one year to get prestigious experience in federal courtrooms. "As people leave, we can't replace them," said Fishman, whose staff typically includes 147 lawyers but is down 10 percent because of a hiring freeze. "We're going to start interviewing people on an ongoing basis and hope to have some on board by mid-fall."

California Counties Reel From Tax Hit - Declining home prices are starting to slam California harder than the rest of the nation, in part due to a state law that sets a ceiling—but no floor—on property taxes. . The toll is evident here in Calaveras County, a largely rural area about 100 miles east of San Francisco. Over the past three years, it has seen among the biggest property-tax roll declines of any California county, with the total value of taxable properties down about 5% from last year—and 18% over the past three years—to $5.67 billion. Statewide, assessed values declined 1.8% last year from a year earlier, according to state data.  Calaveras's shrinking property taxes have resulted in cuts to the sheriff's department and public-health services, as well as an effort to cut 10% of the county's budget for the coming year. The tax drop also has pitted the county assessor, who has lowered taxes by re-evaluating home prices, against the head of the county board of supervisors, who said the reassessments have been too aggressive.

Illinois Net Assets Fall $8.4 Billion — In a sign of Illinois’ ongoing fiscal challenges, its net assets deteriorated by $8.4 billion in fiscal 2010, pushing its deficit in that category of financial reporting up to a negative $37.9 billion, according to a new report from state auditor general William Holland.  The deficit tops all other states in the nation, according to Holland’s opinion released late last week on the state’s fiscal 2010 financial results, which are prepared by the state comptroller’s office. The state’s asset deficit has steadily grown. Looking back to fiscal 2003, the deficit stood at $12.8 billion, rising to $20.8 billion in fiscal 2007 and $29.5 billion in fiscal 2009. The deficit in the statement of net assets reflects the difference between Illinois’ liabilities and assets on an accrual basis. The figure takes into account the state’s accounts payable that were $9.1 billion in fiscal 2010 and $55.1 billion of debt obligations, including outstanding bonds and pension obligations. The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers.

Agency seeks to double tolls to pay for $12 billion in projects - Illinois Tollway officials want to double current toll rates to fund a $12 billion, 15-year capital plan that would see the region’s first new tollway since the opening of the Veterans Memorial Tollway, a new interchange in the south suburbs and the reconstruction of the 50-year-old Jane Addams tollway to Rockford. The toll would increase 35 cents for I-Pass users at a typical mainline toll plaza, with cash-paying passenger vehicles continuing to pay double the I-Pass rate. I-Pass users comprise 75 percent of the tollway’s 1.4 million daily users. The hike would be the first toll increase in 28 years. Officials said the proposed increase -- typically from 40 cents to 75 cents -- would bring the cost of a car trip on the tollway system for an average I-Pass customer to $1.18. That's up from today’s average of 63 cents per trip and an increase of $2.75 a week, or $11 a month. Officials said the tollway would still rank 29 among the 41 toll road agencies in the United States in terms of price -– in the bottom third with an average of just 6 cents per mile.

Jefferson County in Alabama May Vote to File Largest Bankruptcy July 28 - Jefferson County, Alabama, may decide this week on filing a record U.S. municipal bankruptcy, according to a meeting notice from the county commission.  The five-member commission meeting on July 28 may also vote on extending a negotiating period with creditors on restructuring more than $3 billion of sewer bonds or a settlement, the notice said.  The meeting will come one day before the end of a 30-day “standstill period” in which the county and creditors led by JPMorgan Chase & Co. agreed to pursue a settlement to end the more than three-year-old debt crisis.  The county, home to Birmingham and a population of more than 658,000, has struggled for more than three years in fiscal distress after a sewer-bond refinancing collapsed during the credit crisis. Its woes intensified when the state legislature refused to act after a court struck down an occupational tax in March. The tax generated about a quarter of the county’s general fund revenue and officials have put more than 500 employees on unpaid leave.

80% chance Jefferson County to file for bankruptcy, commissioner Sandra Brown says -- Jefferson County has an "80 percent chance" of filing the largest municipal bankruptcy in U.S. history and is prepared to make that decision if an agreement with creditors is not reached within one week, a county commissioner said Thursday.  Commissioner Sandra Little Brown made her statements ahead of closed-door meetings with bankruptcy lawyers from Los Angeles and Denver. After the daylong meetings, Brown, the first Democrat on the commission to support bankruptcy, said her mind was made up.  "We must make a decision, and based on the information that was provided to us today, we should make that decision," Brown said. "We have to make it soon. We've got to be ready to pull the trigger for the citizens of Jefferson County. The standstill expires in seven days and we'll be ready for that seventh day, I can tell you that."  A majority of the commission has said bankruptcy is a serious option if an agreement with creditors is not reached.

Ala. county readies for possible record bankruptcy - Alabama's largest county began laying the groundwork Tuesday for what would be largest U.S. municipal bankruptcy after three years of trying to work out a solution with Wall Street to more than $3 billion in debt linked to a massive sewer rehabilitation project tainted by corruption. Officials in Jefferson County hope to avoid new layoffs but may have to raise sewer rates or trim public services. On Tuesday, county commissioners approved resolutions to hire prominent bankruptcy lawyers and to sell bonds later in case money is needed to emerge from a Chapter 9 bankruptcy, the type that can be filed by governments. Two of the five commissioners said there's an 80 percent chance the county will file bankruptcy, and a vote could come at a meeting scheduled for Thursday in Birmingham, the county seat and Alabama's largest city.

Jeffco to decide on $3B bankruptcy Thursday - Leaders in Alabama's most populous county are expected to decide this week whether to file the largest municipal bankruptcy in U.S. history. The Jefferson County Commission will hold a special meeting on Thursday in Birmingham to decide whether to continue trying to work out a deal with creditors or file bankruptcy over a sewer system debt of more than $3 billion. The financial crisis has been hanging over the county since 2008, and Commission President David Carrington says it needs to be resolved. The county has submitted a repayment plan to creditors including JPMorgan Chase to eliminate almost $1.3 billion of the debt, but it's yet to get a response. The bankruptcy filing would be nearly twice as large as the record one filed by Orange County, Calif., in 1994

Residents Soldier On as Alabama County Mulls Bankruptcy - Residents of Jefferson County, Ala., whose commissioners could decide to file the largest municipal bankruptcy in U.S. history on Thursday, are well-acquainted with their local government's financial mess. Services ranging from police response to traffic accidents to the number of security officers for courtrooms already have been cut back. Last month, the county, the state's most populous, laid off nearly 550 workers.  "There are no roads being repaired. If a traffic light goes out, it may stay out for a real long time," said Kevin Hughins, a systems analyst for the county's information-technology department and president of the Jefferson County Employees Association, a workers group. "We're broke," said Sandra Little Brown, one of Jefferson County's five commissioners. She thinks there's an "80% chance" that the county will file for bankruptcy. "I'd rather not be filing for bankruptcy, but our voters are telling us to do something."

Just Before Deadline, County in Alabama Delays Bankruptcy Move - The governor of Alabama, who for months told the county to deal with its woes on its own, has been working behind the scenes in recent days on a state-brokered deal to avert what could be the biggest municipal bankruptcy filing in United States history. On Wednesday evening, a proposal was aired to a small group of lawyers for the county in a private meeting, according to one official present.  Hours before a deadline Thursday, the commissioners agreed to delay the vote on a bankruptcy filing for seven more days, while they reviewed the new offer from the county’s creditors. The proposal would reduce the total amount owed and use state backing to bring down the county’s interest rate.. Jefferson County would get debt relief through the creation of an independent borrowing authority, whose bonds Gov. Robert Bentley has agreed to guarantee. The authority would issue new bonds to replace the impaired ones that creditors now hold.

Moody’s Places 177 Local Muni Issuers on Downgrade Review Amid Debt Debate - Moody’s Investors Service placed 177 top-rated municipal-bond issuers with a combined $69 billion of debt outstanding on review for possible downgrades as it evaluates its Aaa rating of the U.S. government. The change affects 162 local governments in 31 states, 14 housing-finance programs and the University of Washington in Seattle, the company said today in a statement. All have high exposure to federal spending changes and market volatility, Moody’s said. The largest numbers of local issuers on review are in Virginia, with 15, and Massachusetts, with 14, Moody’s said. Moody’s put the U.S. rating under review July 13 as talks stalled in Washington on raising the government’s $14.3 trillion debt ceiling. The company also said a U.S. cut would trigger automatic reductions for 7,000 top-graded municipal credits. On July 19, the company placed Aaa rated Maryland, New Mexico, South Carolina, Tennessee and Virginia on review because of their reliance on federal spending.

“Moody’s Places AAA Ratings Of 177 U.S. Public Finance Issuers On Review For Possible Downgrade Due To Review Of U.S. Government’s AAA Rating” - Moody’s announced today:Moody’s Investors Service has placed under review for possible downgrade the Aaa ratings of 177 public finance credits, affecting a combined $69 billion of outstanding debt. The credits include 162 local governments in 31 states, 14 housing finance programs and one university. A complete list of affected securities and additional analysis is available at www.moodys.com/USRatingActions . These actions relate to Moody’s July 13 decision to place the Aaa government bond rating of the United States under review for downgrade, and reflect the rating agency’s assessment that some Aaa public finance ratings would likely be indirectly affected by potential credit deterioration of the sovereign.  Given that Moody’s and Standard & Poor both say that they’ll likely downgrade U.S. credit even if a debt ceiling deal is reached, it’s looking dire for the above-described entities and bond issues.

Clayton County, Ga. commissioners consider 34 percent increase in property tax rates - Clayton County is considering a 34 percent property tax rate increase in an attempt to prevent a deficit of up to $30 million. Last month, county commissioners adopted a $167 million budget for fiscal 2012 and agreed to seek a five-mill increase that will be put to a vote Tuesday night. Clayton County officials say the assessed values of homes, business and real estate in Clayton County fell by more than $1 billion in the past year. Officials say an alternative was to require county workers to take 14 furlough days. Among other metro Atlanta counties, Cobb County commissioners will vote Tuesday night on whether to accept a 16.8 percent property tax increase and DeKalb County has already approved a 26 percent increase.

Florida Looks For The Lowest Bidder As It Privatizes 30 State Prisons - Florida is seeking bids from private companies to take over management of 30 state prisons in an 18-country area in South Florida. The “fastest privatization venture ever undertaken by the state of Florida” is an effort by Gov. Rick Scott (R) to save the state money by outsourcing prison oversight to the lowest bidder:  In an effort to cut costs, Gov. Rick Scott and the Legislature set a Jan. 1, 2012, deadline to privatize 30 state prisons, road camps and work release centers. [...] The state will hire only one company to run all those prisons, which sets up a high-stakes competitive battle between the nation’s two biggest private prison operators: Corrections Corp. of America, based in Nashville, and the GEO Group of Boca Raton. Both companies already operate prisons in Florida. [...]

California Seeks $5 Billion Loan as U.S. States Work to Avoid Debt Chaos - California will borrow $5 billion today through a temporary loan as U.S. states make plans to cope with any credit-market disruption should lawmakers fail to raise the federal debt ceiling by the Aug. 2 deadline. Proceeds from California’s bridge loan will help pay bills until the state can sell cash-flow notes that had been scheduled for late August. New Mexico is asking agencies to complete requests for federal reimbursement by midday July 29 to ensure the it can get repaid, and Maryland was forced to cut $206 million off a planned bond sale as the debt talks dragged on. “Given the uncertainty in Washington with the debt ceiling, the treasurer felt it was prudent to get a bridge loan,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. “We couldn’t have planned on the president and Congress taking us to the brink.” States and local governments face higher borrowing costs if Congress fails to reach a compromise by the deadline.

Rating Cut May Force Student-Loan Security Sales - A cut in the U.S. government’s AAA grade could force investors to sell asset-backed securities tied to student loans, causing spreads to widen “significantly,” according to Citigroup Inc.  “A ratings downgrade would be a significant blow” to the $250 billion government-guaranteed sector, Citigroup analysts led by Mary Kane said in a July 22 report. “The likelihood of forced selling is elevated.”  Citigroup sees a 50 percent chance of a ratings cut this year as the U.S. struggles to reduce its long-term debt. Many investors buy student-loan securities specifically because they’re so highly rated and a U.S. government credit risk, according to analysts at the New York-based lender. Money managers with rating-based guidelines would be forced to sell into a sinking market, affecting the sector more than other asset-backed debt tied to consumers, commercial mortgages and corporate loans, they wrote.

For-Profit Higher Education Industry Sues to Block Weak “Gainful Employment” Rule -Last week the Association of Private-Sector Colleges and Universities (aka the Career College Assn.) filed suit in U.S. District Court in Washington, D.C., to block enforcement of the U.S. Dept. of Education’s “Gainful Employment” regulation, issued in June.  See here for the complaint.   The for-profit colleges are challenging the agency's authority to issue that regulation.  It requires that, to be eligible to receive federal grant and loan funds, the colleges must show that 35 percent of former students are paying something (even $1) on their student loans (or that they must meet other benchmarks set in terms of debt to income). So let’s back up and put this issue in context.  There is lately a general unease about whether the cost of higher education is worth it, even though income rises and unemployment decreases steadily with successive degrees (except that PhD’s are more likely to be unemployed than those with professional degrees, hardly a surprise).  See here.      Of course there is plenty of room for all sectors of higher education to engage in reflection about the debt burdens students and their families are bearing and to find ways to reduce the cost. Higher education debt looms as the next great threat to sound family finances, once the mortgage crisis subsides. 

COLA cut would hurt oldest retirees the most - Many deficit reduction proposals under discussion reportedly include a lower cost-of-living adjustment (COLA) for Social Security benefits. This change in how to calculate the COLA would reduce it by an estimated 0.3 percentage points per year. This seemingly small cut would erode benefits over time. Under the proposed COLA, an average-wage worker retiring this year would, in 2031, receive $1,754 less in annual benefits. This represents a decline of 5.4 percent in the next 20 years. The COLA cut would affect all Social Security participants, including current retirees. It is even worse than an across-the-board benefit cut, because the reduction compounds over time: the oldest retirees tend to be the poorest ones. Proponents argue that such a cut is a technical fix, based on the claim that the current COLA overstates inflation. However, as EPI economist Josh Bivens explains in a recent briefing paper, the current COLA likely understates the inflation faced by seniors, who devote a much greater share of their income to health care expenses than is reflected in either of these two ways of calculating the COLA.

The Real Cost of Social Security Surplus Raiding - It seems in these debt limit talks some of the "reckless spending" both Republicans and Corporate Democrats are talking about without adding new revenues is entitlement spending. Entitlements that include Social Security. Despite the fact that the Social Security trust fund regularly runs surpluses that are raided for real "reckless spending" such as tax cuts for the very greedy and wars of failed ideology.  Everyone in Washington seems ready to do one thing. Steal your Social Security. Of the proposals made to "insure the solvency" of that program one thing that keeps coming up is lowing the cost of living adjustment, or COLA which means only one thing. Less money for more of the people who need it the most:  Many deficit reduction proposals under discussion reportedly include a lower cost-of-living adjustment (COLA) for Social Security benefits. This change in how to calculate the COLA would reduce it by an estimated 0.3 percentage points per year. This seemingly small cut would erode benefits over time. Under the proposed COLA, an average-wage worker retiring this year would, in 2031, receive $1,754 less in annual benefits. 

Debt Madness Was Always About Killing Social Security - This phony debt crisis has now passed through the looking glass into the realm where madness reigns. What should have been an uneventful moment in which lawmakers make good on the nation’s contractual obligations has instead been seized upon by Republican hypocrites as a moment to settle ideological scores that have nothing to do with the debt.  Even Barack Obama has put cuts in those programs into play, warning ominously that a failure to lift the debt ceiling could cause the government to stop sending out Social Security checks. Why, when the Social Security trust fund is fully funded for the next quarter-century and is owed money by the U.S. Treasury rather than the other way around? Why would we pay foreign creditors before American seniors? The answer, offered as conventional wisdom by leaders of both parties, is that we cannot endanger our credit by failing to back our bonds, even though the Republicans have aroused the alarm of the main U.S. credit rating agencies by their brinkmanship on the debt.

The NYT is Wrong: Officials Do Not Say That Medicare Is Not Sustainable In Its Current Form - That is what Republicans say. Officials, like the Medicare Trustees, say that the program faces a modest shortfall over its 75-year planning horizon. The projected shortfall is around 0.3 percent of GDP or less than one-fifth of the amount that we increased annual military spending since September 11th. The projected Medicare shortfall is down by more than 75 percent from when President Obama took office due to the cost controls put in place in the health care reform bill. In fact, the Congressional Budget Office (CBO) calculates that the Medicare system in its current form is far more efficient than the privatized system advocated by Republicans. CBO's projections imply that switching to a privatized system would add $34 trillion to the cost of buying Medicare equivalent policies over the program's 75-year planning period.

Conservative Origins of Obamacare -  Krugman - Here’s a useful resource for tracking the history of the ideas embodied in the Affordable Care Act. The essence of Obamacare, as of Romneycare, is a three-legged stool of regulation and subsidies: community rating requiring insurers to make the same policies available to everyone regardless of health status; an individual mandate, requiring everyone to purchase insurance, so that healthy people don’t opt out; and subsidies to keep insurance affordable for those with lower incomes. The original Heritage plan from 1989 had all these features. These days, Heritage strives mightily to deny the obvious; it picks at essentially minor differences between what it used to advocate and the plan Democrats actually passed, and tries to make them seem like a big deal. But this is disinformation. The essential features of the ACA — above all, the mandate — are ideas Republicans used to support.

Study Finds That Affordable Care Act Isn’t All That Affordable - A new study published today says that the Affordable Care Act is going to be far more expensive than we’ve been led to believe: The Affordable Care Act will drive health care spending up slightly, to nearly a fifth of the country’s gross domestic product by 2020, while extending insurance coverage to 30 million more Americans, a new report from CMS projects. But health care’s hefty share of the country’s economic output is reached through an average annual growth in medical spending of 5.8 percent over the next decade — just 0.1 percent more than would have been spent without the health reform law, the report claims. CMS published its findings this morning in Health Affairs. The report also projects that once all the data are in, health spending in 2010 will have grown a historically low 3.9 percent — slightly lower than the previous record low growth of 4 percent in 2009. That’s an aftershock of the recession, which cost millions of people their jobs and, consequently, their health insurance, slowing medical spending.

Gov't: Health tab to hit $4.6 trillion in 2020— Government experts say the nation's health care tab is on track to hit $4.6 trillion in 2020, accounting for about $1 of every $5 in the economy. A report out Thursday from Medicare analysts estimates that health care spending in 2020 will average $13,710 for every man, woman and child. That compares with $2.7 trillion this year, or about $8,650 per person. Most of that pays for care for the sickest people. The report from Medicare's Office of the Actuary is an annual barometer of a trend many experts say is unsustainable. But it doesn't seem to be slowing down. A political compromise over the nation's debt might succeed in tapping the brakes on health care costs, but polarized lawmakers have been unable to deliver a deal.

A rising hunger among children - Doctors at a major Boston hospital report they are seeing more hungry and dangerously thin young children in the emergency room than at any time in more than a decade of surveying families. Many families are unable to afford enough healthy food to feed their children, say the Boston Medical Center doctors. The resulting chronic hunger threatens to leave scores of infants and toddlers with lasting learning and developmental problems. Before the economy soured in 2007, 12 percent of youngsters age 3 and under whose families were randomly surveyed in the hospital’s emergency department were significantly underweight. In 2010, that percentage jumped to 18 percent, and the tide does not appear to be abating, said Dr. Megan Sandel, an associate professor of pediatrics and public health at BMC. “Food is costing more, and dollars don’t stretch as far,’’ Sandel said. “It’s hard to maintain a diet that is healthy.’’ The emergency room survey found a similarly striking increase in the percentage of families with children who reported they did not have enough food each month, from 18 percent in 2007 to 28 percent in 2010.

Tax Soda, Subsidize Vegetables - Though experts increasingly recommend a diet high in plants and low in animal products and processed foods, ours is quite the opposite, and there’s little disagreement that changing it could improve our health and save tens of millions of lives.  And — not inconsequential during the current struggle over deficits and spending — a sane diet could save tens if not hundreds of billions of dollars in health care costs.  Yet the food industry appears incapable of marketing healthier foods. And whether its leaders are confused or just stalling doesn’t matter, because the fixes are not really their problem. Their mission is not public health but profit, so they’ll continue to sell the health-damaging food that’s most profitable, until the market or another force skews things otherwise. That “other force” should be the federal government, fulfilling its role as an agent of the public good and establishing a bold national fix.  Rather than subsidizing the production of unhealthful foods, we should turn the tables and tax things like soda, French fries, doughnuts and hyperprocessed snacks. The resulting income should be earmarked for a program that encourages a sound diet for Americans by making healthy food more affordable and widely available.

Drought Withers Smallest Hay Crop in Century - The smallest U.S. hay crop in more than a century is withering under a record Texas drought, boosting the cost of livestock feed for dairy farmers and beef producers from California to Maryland. The price of alfalfa, the most common hay variety, surged 51 percent in the past year, reaching a record $186 a short ton in May, government data show. Hay and grass make up about half of what cattle eat over their lifetimes, so parched pastures are forcing ranchers to find alternative sources of feed, pushing some spot-market corn to the highest ever. Farmers in Oklahoma and in Texas, the biggest producer of hay and cattle, may harvest only one crop from alfalfa and Bermuda grass this year, compared with three normally, said Larry Redmon, a state forage specialist at Texas A&M University. Cattle that usually graze on fields through September or October are instead being sold to feedlots, where they are confined in pens and eat mostly corn. “We’re just running out of grass,”

Tequila gives new biofuel crops a shot - Study finds ethanol derived from agave plants could provide a substitute for petrol and be grown without displacing food crops.The desert plants used to distil tequila could cut emissions from transport by providing an important new biofuel crop, according to new research. Much of the ethanol used as a substitute for petrol is currently produced from corn, especially in the US, and has been criticised for driving up grain prices to record levels. A recent inquiry found that laws mandating the addition of biofuels to petrol and diesel had backfired badly and were unethical because biofuel production often violated human rights and damaged the environment. But the new study found that agave-derived ethanol could produce good yields on hot, dry land and with relatively little environmental impact. The agave plant, large rosettes of fleshy leaves, produces high levels of sugar and the scientists modeled a hypothetical facility in the tequila state of Jalisco in Mexico which converts the sugars to alcohol for use as a fuel.

Genetically engineered maize with synthetic toxin approved for usage in EU food and feed - The non-profit organisations Testbiotech (Germany) and GeneWatch UK have submitted a formal request to the European Commission to re-examine market authorisation of a genetically engineered maize produced by Monsanto sold under brand Genuity VT Triple PRO Corn (event MON89034 x MON 88017) that produces a synthetic toxin, intended to kill insect pests. This maize was approved for usage in food and feed by the EU Commission on 17th of June. It produces a combination of three different insecticidal toxins, one of which is synthesised artificially. Further, the plants are made tolerant to the herbicide glyphosate (known as Roundup).  The organisations are filing a formal request for internal review of the EU Commission´s decision according Article 10 of Regulation (EC) No. 1367/2006 because the legally required high level of protection for consumers, farm animals and the environment are not met and legal requirements for monitoring of health effects have been ignored completely. They argue that the authorisation should be withdrawn.

Organic farmers sue Monsanto - Nearly 300,000 organic farmers are filing suit against corporate agriculture giant Monsanto, who have in recent years squashed independent organic farms from coast to coast. 270,000 organic farmers filed a lawsuit in March 30 in an attempt to keep a portion of the world’s food supply organic. The plaintiffs in the case are members of around 60 family farms, seed businesses and organic agricultural organizations. Led by the Organic Seed Growers and Trade Association, the suit lashes out at Monsanto to keep their engineered Genuity® Roundup Ready® canola seed out of their farms. Organic agriculturalists say that corn, cotton, sugar beets and other crops of theirs have been contaminated by Monsanto‘s seed, and even though the contamination has been largely natural and unintended, Monsanto has been suing hundreds of farmers for infringing on their patent for incidentally using their product. Not only are organic farmers trying to keep things — well, organic — but now many of them are being forced to throw in the towel as Monsanto unfortunately continues a successful war on the competition by suing indie growers that run organic farms. In recent years, Monsanto has acquired more than 20 of the biggest seed producers and sellers in the country, and The Street reports that they have instituted a policy whereas their customers are forced to use their bionengineered seeds — and purchase them each and every year — lest they want to be blacklisted forever.

Feds silence scientist over salmon study - Top bureaucrats in Ottawa have muzzled a leading fisheries scientist whose discovery could help explain why salmon stocks have been crashing off Canada's West Coast, according to documents obtained by Postmedia News. The documents show the Privy Council Office, which supports the Prime Minister's Office, stopped Kristi Miller from talking about one of the most significant discoveries to come out of a federal fisheries lab in years. Science, one of the world's top research journals, published Miller's findings in January. The journal considered the work so significant it notified "over 7,400" journalists worldwide about Miller's "Suffering Salmon" study. Miller heads a $6-million salmon-genetics project at the federal Pacific Biological Station on Vancouver Island.

Dams to Be Removed in Washington to Replenish Salmon - — Beginning late this summer, one of the most promising and pure acts of environmental restoration the region and the nation have ever seen will get under way here, experts say, in the form of the largest dam removal project in American history: the demolition of two massive hydroelectric1 dams, one of them 210 feet high, that block the otherwise pristine flow of the Elwha River, nearly all of which is within the boundaries of this remote national park. For a century, since the first dam was built in 1912 to supply power for the town of Port Angeles and later a lumber mill, salmon2 have been trying, futilely, to follow their genetic GPS upstream on the Elwha. Instead, five miles south of where they enter the river from the Strait of Juan de Fuca, they hit a concrete wall.  Biologists say that will change once the dams are fully removed, sometime in 2014, and that a migrating salmon population that has declined to about 3,000 fish will steadily begin replenishing itself from a small stock carefully perpetuated in rearing channels since the 1970s to preserve their lineage as “transitional species.”

Foreign Policy: Murder By Starvation - Deprived of food long enough, the bodies of starving people break down muscle tissue to keep vital organs functioning. Diarrhea and skin rashes are common, as are fungal and other infections. As the stomach wastes away, the perception of hunger is reduced and lethargy sets in. Movement becomes immensely painful. Often it is dehydration that finally causes death, because the perception of thirst and a starving person's ability to get water are both radically diminished. Thousands of Somalis have already suffered this tragic end, and it is likely to kill tens of thousands more in the coming months. The famine now starving Somalia affects 3.7 million people, according to the U.N. World Food Program. The U.S. Agency for International Development's Edward Carr, who works on famine response, estimates that on current trends Somalia's south could see 2,500 deaths a day by August. For all its horror, starvation is also one of the simpler forms of mortality to prevent — it just takes food. As a result, famine deaths in the modern world are almost always the result of deliberate acts on the part of governing authorities. That is why widespread starvation is a crime against humanity and the leaders who abet it should be tried at the International Criminal Court (ICC).

Vertical Farming: Can Urban Agriculture Feed a Hungry World? - SPIEGEL  Agricultural researchers believe that building indoor farms in the middle of cities could help solve the world's hunger problem. Experts say that vertical farming could feed up to 10 billion people and make agriculture independent of the weather and the need for land. There's only one snag: The urban farms need huge amounts of energy.

The Relationship Between Hunger And Petroleum Consumption - Part 4 - Parts 1 and 2 looked at the relationship between the global hunger index (GHI) and per capita petroleum consumption, and, part 3 looked at the relationship between per capita petroleum consumption and BMI. Here in Part 4, I examine the relationship between the food supply energy for individual countries, as estimated Food and Agriculture Organization of the United Nations, and per capita petroleum consumption. I am interested in this because I think that we are in the midst of peak oil, where petroleum production declines, and therefore petroleum consumption must also decline. I think that this will have negative implications for the world’s petroleum-driven food production system. That is, there will be problems in feeding the world’s growing population as  petroluem consumption declines over the next 10-30 years. My assumption is that large numbers of people will die of starvation if/when the food production system is deprived of petroleum below a certain critical level.

Beef Tainted by Radiation to Be Recalled in Japan as Contamination Widens - Japan will help meat producer groups remove beef tainted with cesium from the market and has directed them to seek compensation from Tokyo Electric Power Co. as radioactive contamination spreads in the country’s food supply. The government will financially support the purchase, storage and incineration of meat from cattle fed with contaminated hay, which may cost as much as 2 billion yen ($25 million), said Hideo Harada, director for livestock policy planning at the Ministry of Agriculture, Forestry and Fisheries. The ministry said today that 2,906 cattle ate tainted feed before shipment. Fallout from Tepco’s crippled Fukushima nuclear plant poses a growing threat to Japan’s food supply as unsafe levels of cesium found in beef on supermarket shelves were also detected in vegetables and the ocean. Prolonged exposure to radiation in the air, ground and food can cause leukemia and other cancers. “Beef containing cesium has already entered into the market,” Harada told reporters in Tokyo today. “We have to prevent it from emerging on consumer tables by checking meat and recalling tainted products from the market.”

Threat to Japan’s Food Chain Multiplies - Radiation fallout from the wrecked Fukushima nuclear plant poses a growing threat to Japan’s food chain as unsafe levels of cesium found in beef on supermarket shelves were also detected in more vegetables and the ocean.  More than 2,600 cattle have been contaminated, Kyodo News reported July 23, after the Miyagi local government said 1,183 cattle at 58 farms were fed hay containing radioactive cesium before being shipped to meat markets. Agriculture Minister Michihiko Kano has said officials didn’t foresee that farmers might ship contaminated hay to cattle ranchers. That highlights the government’s inability to think ahead and to act, said Mariko Sano, secretary general for Shufuren, a housewives organization in Tokyo. “The government is so slow to move,” Sano said. “They’ve done little to ensure food safety.”

Fukushima Teacher Muzzled on Radiation Risks - As temperatures soared to 100 degrees Fahrenheit on a recent July morning, school children in Fukushima prefecture were taking off their masks and running around playgrounds in T-shirts, exposing them to a similar amount of annual radiation as a worker in a nuclear power plant.  Toshinori Shishido, a Japanese literature teacher of 25 years, had warned his students two months ago to wear surgical masks and keep their skin covered with long-sleeved shirts. His advice went unheeded, not because of the weather but because his school told him not to alarm students. Shishido quit this week.  “I want to get away from this situation where I’m not even allowed to alert children about radiation exposure,” said Shishido, a 48-year-old teacher who taught at Fukushima Nishi High School. “Now I’m free to talk about the risks.”

Japan Says Citizens ‘Have No Right To A Healthy Radiation, Free Life’…This video attached to this page was released directly following news that Japan passed a new law to cleanse the internet of “bad” Fukushima news. This footage, from a recent meeting of indignant Japanese citizens and feckless Japanese government types should be a little shocking. Sadly, it’s just more of the same—ineptitude and inaction. Buy denying the rightto avoiding radiation? OK, shocking. The Tokyo meeting was meant to broach the push to expand the evacuation zone around Fukushima—a zone that’s proven inadequately and dangerously narrow. One Fukushima resident asks, “As other people do, people in Fukushima have the right to avoid the radiation exposure and live a healthy life, too. Don’t you think so?” A Nuclear Safety Commission Of Japan rep, when pushed to go beyond his canned non-answer, deadpans “I don’t know if they have that right.” The crowd reacts as you would expect when told they nuclear-threatened welfare isn’t a concern.

Grantham on looming peak dirt - Jeremy Grantham has returned to the subject of finite resources. In his latest quarterly letter, he says he didn’t intend to get quite so doomy on us back in April: We have some nearly infinite resources: the sun’s energy and the water in the oceans.  We have some critically finite resources, but they can be rationed and stretched by sensible, far-sighted behavior to fi ll the gap between today, when we live far beyond a sustainable level, and, say, 200 years from now, when we may have achieved true long-term sustainability.  Such sustainability would require improved energy and agricultural technologies and, probably, a substantially reduced population.  With intelligent planning, all of this could be reasonably expected.  A population reduction could be arrived at by a slow and voluntary decline (perhaps with some encouragement of smaller family size achieved, for example, through greater education). The subject of this lesson in resource finiteness is agriculture. Interestingly, Grantham does not believe water is a “game stopper“. The first big concern is the fertilisers potassium and phosphorous, which although reasonably abundant have some considerable limitations for a growing human population.

Jeff Masters: July 2011 heatwave recap and maximum high temp and maximum low temp records broken - Last week's U.S. heat wave has finally subsided, and most of the Northeast will see some cool highs in the 70s today. Unfortunately, the Midwest, and mid-Atlantic will continue to see high temperatures in the 90s for the rest of this week, and the southern Plains will be forced to continue to endure triple-digits. According to the National Climatic Data Center (NCDC), 2,100 daily high maximum temperature records have been set so far in July 2011, and 51% of those were set last week. 4,734 daily high minimum temperature records have been set so far this month, and 55% of those were set last week. Here's a breakdown of last week's records for the period July 18 through July 24:

  • • 1,076 warmest maximum temperature for the date
    • 90 warmest maximum temperature for the month of July
    • 56 warmest maximum temperature of all time
    • 2,595 warmest minimum temperature for the date
    • 207 warmest minimum temperature for the month of July
    • 123 warmest minimum temperature of all time

It’s a Record-Setting Heat Wave, but the Conservative Media Deny Even That - One way to tell if a nationwide heat wave is truly record-breaking is, well, to look at the total number of records that it breaks.  Even better is to compare the high records with the low records, since we have very good historical data and analysis on that — and it covers the whole nation. Steve Scolnik at Capital Climate analyzed the data from NOAA’s National Climatic Data Center (NCDC) and found, “U.S. Summer Heat Records Continue Overwhelming Cold Records By Over 8:1.”  These large ratios for the summer and the first 23 days of July are a big deal  compared to, for instance, the  average over the last decade of about 2-to-1. But the conservative media can’t even bring themselves to admit that, as Media Matters documents: On his radio show yesterday, Rush Limbaugh declared that “almost no temperature records were broken” during the recent heat wave and that media outlets who reported on “record-breaking” heat were telling “a bunch of lies” to “advance a political agenda of liberalism.”

A Golden Opportunity to Please Conservatives and Liberals Alike - The U.S. Environmental Protection Agency (EPA) has a golden opportunity to opt for a smart, low-cost approach to fulfilling its mandate under a Supreme Court decision to reduce carbon dioxide (CO2) and other greenhouse gas (GHG) emissions linked with global climate change. Such an approach would provide maximum compliance flexibility to private industry while meeting mandated emission reduction targets, would achieve these goals at the lowest possible cost, would work through the market rather than against it, would be consistent with the Obama Administration’s pragmatic approach to environmental regulation, and ought to receive broad political support, including from conservatives, who presumably want to minimize the cost burden of any policy on businesses and consumers.

President Obama and Auto Companies Agree to New Fuel 54.5 MPG Standard - President Obama just announced a new fuel standard for auto companies that will save 23 billion gallons of gasoline by 2030 and avoid the annual emissions of 72 coal-fired power plants each year. The standard requires manufacturers to meet a 54.5 mpg standard by 2025 – an agreement significantly higher than what auto companies fought for. The move is being hailed as a rare environmental win for Obama at a time when Republicans are fighting to roll back almost every major energy and environment program created in the last few decades. The new standard could create more than 60,000 jobs in the auto sector as manufacturers develop new technologies to meet the targets. The United Autoworkers Union was an early supporter of the new standard because of the job-creation opportunities it would create. However, the fuel standard does include a “re-opener” that could allow auto companies to re-negotiate standards after 2021.

Carmakers Back Strict New Rules for Gas Mileage - Four years ago, the American auto industry was so opposed to higher fuel economy standards that executives of Detroit camped out in Washington in an unsuccessful bid to undercut them.  On Friday, when President Obama1 announced even stricter standards — in fact, the largest increase in mileage requirements since the government began regulating consumption of gasoline by cars in the 1970s — the chief executives of Detroit’s Big Three were in Washington again.  But this time they were standing in solidarity with the president, who was also surrounded by some of Detroit’s highest-tech — and most fuel-efficient2 — new vehicles.  While the American carmakers, as well as their Asian rivals, once argued against even minimal increases in government fuel rules, they are acquiescing without protest to an increase to 54.5 miles per gallon by 2025, from the current 27 miles per gallon.

House spending bill slashes environmental protections - Environmental groups are aghast at proposed legislation in the U.S. House of Representatives, which they claim is "larded up with giveaways to polluters and corporate donors." The U.S. House of Representatives began debate Monday on the Fiscal Year 2012 Interior and Environment Appropriations bill. The House Appropriations Committee approved the legislation by a 28 to 18 vote on July 12, allotting $27.5 billion in spending for the Department of the Interior, the Environment Protection Agency (EPA), the Forest Service, and various related agencies.  The legislation includes an 18 percent funding cut for the EPA and a 7 percent cut for the Department of the Interior. "The House of Representatives, led by anti-environmental Republicans, are sharpening their knives to gut key health and wildlife protections that could benefit millions of Americans," Marty Hayden, Vice President of Policy and Legislation at Earthjustice, said in a statement. "These are no small cuts; this is a complete butchering of environmental safeguards."

"The Worst" Enviro Budget Cuts in 35 Years - In all the debate about debts and deficits, it's been easy to forget that Congress is making cuts that, if approved, will have an impact immediately. This week, the House is poised to pass the 2012 spending bills for the Department of Interior and the Environmental Protection Agency—with cuts that congressional Democrats are attacking as Draconian. "This spending bill represents one of the most egregious assaults on the environment in the history of Congress," said Rep. Ed Markey (D-Mass.) at a press conference Monday morning, via The Hill. Appropriations Committee Ranking Member Norm Dicks (D-Wash.) called it "the worst" Interior and Environment Appropriations bill he's seen in his 35 years on the committee in a statement. He also warned that it could get "even worse" as debate on the bill proceeds in the full House this week.

Debt Ceiling Impasse Could Hit Clean Energy Hard - Clean energy could be among the hardest-hit sectors if the U.S. government does not raise the debt ceiling and then defaults on the national debt. If there is a default, it could hurt in direct ways, by stopping payments for cash grants and loan guarantees that support many renewables projects. It could also hit innovation, by putting the Department of Energy program for cutting-edge energy technologies, ARPA-E, at risk. A default could also hit indirectly, by pushing down the value of the U.S. dollar, as well as pushing up interest rates, which would affect financing for renewables projects that require large up-front investment. Any kind of budget deal will have to include large spending cuts. According to a survey of experts by the National Journal, most energy subsidies and tax breaks could be cut back. Subsidies for wind and solar may fly under the radar and survive cuts—at least for a little while.

Debt of a Salesman: Obama, Democrats Poised to Embrace Deal that May Slash Energy, Enviro Spending for Many, Many Years - In one of the biggest strategic blunders of his presidency, Obama has bought into the erroneous Republican frame that the biggest problem facing this country is our national debt.  Worse, he has chosen to be a salesman for a centrist agenda of austerity, not the progressive one of investment. In the past few weeks, Obama has used the presidential bully pulpit to its fully capacity for the first time since taking office.  Sadly, he’s chosen to sell the public on the nonsensical notion that biggest short-term and long-term threat facing the nation is the national debt and over-spending. Gone is any discussion of the things the public cares most about right now — creating jobs and restoring our manufacturing base, as a new poll makes clear (see figure).  Gone is any discussion of the progressive policies Obama himself used to message on, albeit halfheartedly — an investment agenda, energy security, competing with China.  Gone is this lofty rhetoric from a long, long time ago (well, 2010, actually):  “The nation that leads the clean energy economy will be the nation that leads the global economy. And America must be that nation.”

Everyone thinks Obama is doing a bad job on the environment - Yale Environment 360 asked a series of environmental thinkers, activists, and policymakers what they think of Barack Obama's record on the environmental record so far. The overwhelming response was that they didn't think very much of it at all. Here’s climate writer and activist Bill McKibben:President Obama hasn't yet caused "the rise of the oceans to begin to slow" or "the planet begin to heal," and since that was his promise, I guess it's been a less-than-stellar record … The climate bill's failure was a big sticking point with almost every person the publication talked to. Center for American Progress' Joe Romm: Obama's overall record on energy and the environment deserves an F. Fundamentally he let die our best chance to preserve a livable climate and restore U.S. leadership in clean energy -- without a serious fight. Mindy Lubber, who heads Ceres, a sustainability coalition: the President could have intervened personally and earlier by using his bully pulpit to galvanize Americans and policymakers on the urgency and economic imperative for launching the clean energy transition. He also could have better leveraged very strong business and investor support for comprehensive energy and climate policies.

Alpine glacier retreat pushing Europe closer to water crisis - IPS: Future glacier retreat in the Alps could affect the hydrology of large streams more strongly than previously assumed, a new study shows Even though their ice is called 'eternal', many alpine glaciers' lives may come to an end within this century. For 150 years, most of them have been more or less constantly retreating, and since the eighties, their shrinkage has visibly increased.   Long-term measurements reveal that from 1879 to 2010, the Rhone glacier has lost 1266 metres of its original length. The Swiss Alps are often called 'Europe's water tower'. Nearly 60 billion cubic metres of water are stored in its glaciers. Matthias Huss, glaciologist and senior lecturer at the Department of Geosciences at the University of Fribourg explains that glaciers fulfil a balancing function: "They release water exactly when we need it, while storing it in periods when we need it less."

Northeast Passage Open - I think we can safely call this one:

Melting Arctic ice releasing banned toxins, warn scientists - Unknown amount of trapped persistent organic pollutants poses threat to marine life and humans as temperatures rise. The warming of the Arctic is releasing a new wave of banned toxic chemicals that had been trapped in the ice and cold water, scientists have discovered. The researchers warn that the amount of the poisons stockpiled in the polar region is unknown and their release could "undermine global efforts to reduce environmental and human exposure to them." The chemicals seeping out as temperatures rise include the pesticides DDT, lindane and chlordane, made infamous in Rachel Carson's 1962 book Silent Spring, as well as the industrial chemicals PCBs and the fungicide hexachlorobenzine (HCB). All of these persistent organic pollutants (Pops) are banned under the 2004 Stockholm Convention.

Growing threat of wildfires in the Arctic could unleash greenhouse gases from tundra After a 10,000-year absence, wildfires have returned to the Arctic tundra, and a University of Florida study shows that their impact could extend far beyond the areas blackened by flames. In a study published in the July 28 issue of the journal Nature, UF ecologist Michelle Mack and a team of scientists including fellow UF ecologist Ted Schuur quantified the amount of soil-bound carbon released into the atmosphere in the 2007 Anaktuvuk River fire, which covered more than 400 square miles on the North Slope of Alaska’s Brooks Range. The 2.1 million metric tons of carbon released in the fire — roughly twice the amount of greenhouse gases put out by the city of Miami in a year — is significant enough to suggest that Arctic fires could impact the global climate, said Mack, an associate professor of ecosystem ecology in UF’s department of biology. “The 2007 fire was the canary in the coal mine,” Mack said. “In this wilderness, hundreds of miles away from the nearest city or source of pollution, we’re seeing the effects of a warming atmosphere. It’s a wake-up call that the Arctic carbon cycle could change rapidly, and we need to know what the consequences will be.

Detailed Picture of Ice Loss Following the Collapse of Antarctic Ice Shelves An international team of researchers has combined data from multiple sources to provide the clearest account yet of how much glacial ice surges into the sea following the collapse of Antarctic ice shelves. The work by researchers details recent ice losses while promising to sharpen future predictions of further ice loss and sea level rise likely to result from ongoing changes along the Antarctic Peninsula. “Not only do you get an initial loss of glacial ice when adjacent ice shelves collapse, but you get continued ice losses for many years — even decades — to come,” . “This further demonstrates how important ice shelves are to Antarctic glaciers.”

Evidence for climate change is now undeniable – scientists - Disastrous floods, heatwaves, storms and droughts are becoming more frequent because of climate change, and will continue to do so. Scientists say the world can no longer ignore the link between climate change and extreme weather events, and they are urging countries to face up to the growing risks ahead.New Zealander Kevin Trenberth [of] the National Center for Atmospheric Research in Colorado, said events of the past 18 months had been extraordinary. “It’s as clear a warning as we’re going to get about prospects for the future.” Last year was the warmest on record and that warming was directly related to increases in carbon dioxide in the atmosphere, he said.

New NASA Data Blow Gaping Hole In Global Warming Alarmism - NASA satellite data from the years 2000 through 2011 show the Earth's atmosphere is allowing far more heat to be released into space than alarmist computer models have predicted, reports a new study in the peer-reviewed science journal Remote Sensing. The study indicates far less future global warming will occur than United Nations computer models have predicted, and supports prior studies indicating increases in atmospheric carbon dioxide trap far less heat than alarmists have claimed. In addition to finding that far less heat is being trapped than alarmist computer models have predicted, the NASA satellite data show the atmosphere begins shedding heat into space long before United Nations computer models predicted. Scientists on all sides of the global warming debate are in general agreement about how much heat is being directly trapped by human emissions of carbon dioxide (the answer is "not much"). However, the single most important issue in the global warming debate is whether carbon dioxide emissions will indirectly trap far more heat by causing large increases in atmospheric humidity and cirrus clouds. Alarmist computer models assume human carbon dioxide emissions indirectly cause substantial increases in atmospheric humidity and cirrus clouds (each of which are very effective at trapping heat), but real-world data have long shown that carbon dioxide emissions are not causing as much atmospheric humidity and cirrus clouds as the alarmist computer models have predicted.

Climate Scientists Debunk Latest Bunk by Denier Roy Spencer - Long wrong climate science disinformer Roy Spencer has published another deeply flawed article.  That ain’t news.  What is news is that the deniers have a couple of new tricks up their sleeves. First, the disinformers have figured out they should focus on journals that don’t seem to have a very deep understanding of climate science.  In May, it was a paper in a statistics journal, which was ultimately withdrawn because of “evidence of plagiarism and complaints about the peer-review process.”  This time it’s an article in the open-access Remote Sensing co-authored by Spencer. And so Yahoo enables this headline of denier bunk — “New NASA Data Blow Gaping Hole In Global Warming Alarmism” — to spread through the web like so much kudzu.  LiveScience noted in its debunking post: The paper was mostly unnoticed in the public sphere until the Forbes blogger declared it “extremely important.” In fact, as Dessler emailed me, Spencer’s “paper is not really intended for other scientists, since they do not take him seriously anymore (he’s been wrong too many times).”

Pentagon Doesn't Want Dirty Fuels No Matter How Much Congress Loves Them - Remember when gas was 99 cents a gallon? Those days are gone forever. The Pentagon, America's (and the world's) top government consumer of petroleum, has been first to recognize the emerging national security threat of American oil dependence, but House Republicans and fossil-fuel Democrats are eager to ignore the military's judgment on this matter. The discovery of large "elephant field" reserves peaked in the 1970s at about the same time production peaked in the United States. Today, more than half the world's oil has been pumped out of the ground. We could literally drill the United States, the Arctic, and the rest of the world to death without ever raising the production curve; meanwhile, human population continues to grow, which increases demand. This is called "peak oil," and it's a dangerous situation that Shell Oil publicly acknowledged this year. The Pentagon has eagerly invested in alternative energy: the Air Force and the Navy want half their energy from biofuel by 2016, the Army has committed to "Net Zero" installations that consume only as much energy or water as they produce, and the Marine Corps already has alternative and renewable energy systems deployed in the AF-PAK theatre.

Why you can’t fight climate change without peak oil - When it comes to gloom and doom, Hamilton doesn’t disappoint. “Worse than the worst case,” is how he sums up the grim conclusions of the latest science on greenhouse warming. “Hoping that a major disruption to the Earth’s climate can be avoided is a delusion.” But like every climate doomer, Hamilton is really a boomer who sees a happier, more democratic, more just and more spiritually connected life ahead if only humans take advantage of the slim chance we still have to get off of fossil fuels as soon as we can. “The situation is hopeless; we must now take the next step,” Hamilton quotes Pablo Casals. So, we must all go through the stages of climate mourning — to despair at the magnitude of the problem, to accept it as real and then to take urgent and serious action. And to break the political gridlock among the world’s governments, that action may include civil disobedience.

Coal Ash taints groundwater at TVA sites, report finds - A new report says groundwater contamination from coal ash has been found at Gallatin and eight of the nine other Tennessee Valley Authority fossil power plant sites where testing is being done.   Levels of toxic substances found at the Gallatin plant site in Sumner County and at the Cumberland site, 50 miles northwest of Nashville, are high enough that they could create a health hazard, the report says. Beryllium, cadmium and nickel levels are above drinking water standards at Gallatin, as are arsenic, selenium and vanadium at Cumberland.  One major surprise also showed up in the review by TVA's Office of Inspector General: For more than a decade, the TVA had been finding substances in groundwater at its Allen coal-fired plant in Memphis that indicated toxic metals could be leaking from a coal ash pond there.  Arsenic above today's allowable levels was found repeatedly in a monitoring well on the site, which is in a sensitive location. The plant and its ash ponds lie above a deep, high-quality aquifer that supplies drinking water to Memphis and nearby areas

Tennessee Awaits Tons Of German Nuclear Waste - The city of Oak Ridge, Tenn., is anticipating the arrival of nearly 1,000 tons of nuclear waste from Germany. The Nuclear Regulatory Commission approved a plan in June for an American company to import and burn low-level nuclear waste from Germany.  Some of that waste ends up at EnergySolutions' Bear Creek incinerator plant in Oak Ridge. On an asphalt lot between fences topped with razor wire, trucks rumble in and out of the plant, leaving behind giant dumpster-sized boxes full of low-level nuclear waste. "This is definitely typical," EnergySolutions' Greg Lawson says. "It's in and out all day long. I don't know the average number of shipments in and out, but there's a lot going on every day." Lawson says the plant has been safely burning low-level waste from Oak Ridge and other parts of the country for 20 years now. They've even imported waste from Canada and the United Kingdom before. But, a recent deal with a German company to burn up to two million pounds of their waste got the attention of environmental and watchdog groups

Presidential Commission Seeks Volunteers to Store U.S. Nuclear Waste - Nestled more than half a kilometer deep in a salt mine, the plutonium slowly decays, taking some 250,000 years to become uranium. As the U.S. debates what to do with the nuclear waste produced by its fleet of 104 reactors, the radioactive legacy of decades of nuclear bomb-making sits entombed in the U.S. Department of Energy's (DoE) Waste Isolation Pilot Project (WIPP) near Carlsbad, N.M. Now the Blue Ribbon Commission on America's Nuclear Future, a diverse group of former politicians, industry representatives and academics, has delivered its draft report on what to do with the rest of the nation's nuclear waste. In it, the commission calls for "prompt efforts to develop one or more geologic disposal facilities," such as the one built at Yucca Mountain in Nevada that has been mired in controversy, as well as "prompt efforts to develop one or more consolidated interim storage facilities."

Bill Gates on the World Energy Crisis -  If you’re going for cuteness, the stuff in the home is the place to go. It’s really kind of cool to have solar panels on your roof. But if you’re really interested in the energy problem, it’s those big things in the desert. Rich countries can afford to overpay for things. We can afford to overpay for medicine, we can overpay for energy, we can rig our food prices and overpay for cotton. But in the world where 80 percent of Earth’s population lives, energy is going to be bought where it’s economical. People are going to buy cheap fertilizer so they can grow enough crops to feed themselves, which will be increasingly difficult with climate change. You have to help the rest of the world get energy at a reasonable price to get anywhere. It’s great to have the rich world, because we’re there to think about long-term problems and fund the R&D. But we get sloppy, because we’re rich. For example, despite often-heard claims to the contrary, ethanol has nothing to do with reducing CO2; it’s just a form of farm subsidy.

Galactic-Scale Energy | Do the Math Since the beginning of the Industrial Revolution, we have seen an impressive and sustained growth in the scale of energy consumption by human civilization. Plotting data from the Energy Information Agency on U.S. energy use since 1650 (1635-1945, 1949-2009, including wood, biomass, fossil fuels, hydro, nuclear, etc.) shows a remarkably steady growth trajectory, characterized by an annual growth rate of 2.9% (see figure). It is important to understand the future trajectory of energy growth because governments and organizations everywhere make assumptions based on the expectation that the growth trend will continue as it has for centuries—and a look at the figure suggests that this is a perfectly reasonable assumption. When would we run into this limit at a 2.3% growth rate? Recall that we expand by a factor of ten every hundred years, so in 200 years, we operate at 100 times the current level, and we reach 7,000 TW in 275 years. 275 years may seem long on a single human timescale, but it really is not that long for a civilization. And think about the world we have just created: every square meter of land is covered in photovoltaic panels! Where do we grow food?

Galactic scale energy Part 2: Can economic growth last? - As we saw in the previous post, the U.S. has expanded its use of energy at a typical rate of 2.9% per year since 1650. We learned that continuation of this growth rate in any form of technology leads to a thermal reckoning in just a few hundred years (not the tepid global warming, but boiling skin!). What does this say about the long-term prospects for economic growth, if anything?  The figure above shows the rate of global economic growth over the last century, as reconstructed by J. Bradford DeLong. Initially, the economy grew at a rate consistent with that of energy growth. Since 1950, the economy has outpaced energy, growing at a 5% annual rate.  But we need to understand the sources of the additional growth before we can be confident that this condition will survive the long haul. After all, fifty years does not imply everlasting permanence.The difference between economic and energy growth can be split into efficiency gains—we extract more activity per unit of energy—and “everything else.” The latter category includes sectors of economic activity not directly tied to energy use. Loosely, this could be thought of as non-manufacturing activity: finance, real estate, innovation, and other aspects of the “service” economy. My focus, as a physicist, is to understand whether the impossibility of indefinite physical growth (i.e., in energy, food, manufacturing) means that economic growth in general is also fated to end or reverse. We’ll start with a close look at efficiency, then move on to talk about more spritely economic factors.

Fly me to the moon (and let me mine among the stars) Several years ago a young boy asked me during a presentation if we might be able to pipe in oil and natural gas from the Moon or other planets. I thanked him for the idea and explained that the cost of a pipeline would be far greater than the value of any oil and natural gas we might find. But dreams of exploiting mineral wealth on other celestial bodies lurk not only in the minds of young boys, but also in the minds of intelligent and completely sane adults. The most recent iteration of this dream comes from scientists working on fusion energy. It turns out that helium-3, a rare isotope of helium, may be useful as fuel for fusion reactors. The very small quantities of helium-3 available on planet Earth are a byproduct of the manufacture of hydrogen bombs using tritium, a radioactive isotope of hydrogen.  The problem is getting sufficient quantities of the stuff. The solution according to one scientist working on a helium-3 fusion reactor is to mine the isotope on the Moon and bring it back to Earth.  I am reminded of James Howard Kunstler's admonition that during times of great stress mass delusions of deliverance--in this case through technology--are often afoot.

Important to Keep in Mind: How Much Water is Needed to Produce Future Energy? - Looming water shortages, climate change, agriculture, growing populations, and expensive energy are some of the challenges facing our future. Not enough attention is paid to the water requirements of energy production. The above chart shows gallons of water required per Megawatt hour for various energy generating sources. (Note that the chart only includes water used for operation as there is some water involved in the production of solar and wind energy.)  One worry is that as climate change causes water availability disruptions, or flooding for that matter, this could lead to disasters at nuclear power plants. We have already seen a preview of this in the Missouri River flooding this spring at two Nebraska nuclear power plants.

Need a Light Bulb? Uncle Sam Gets to Choose - Though anti-populist in the extreme, the bulb ban in fact evinces none of the polished wonkery you’d expect from sophisticated technocrats. For starters, it’s not clear what the point is. Why should the government try to make consumers use less electricity? There’s no foreign policy reason. Electricity comes mostly from coal, natural gas and nuclear plants, all domestic sources. So presumably the reason has something to do with air pollution or carbon-dioxide emissions.  But banning light bulbs is one of the least efficient ways imaginable to attack those problems. A lamp using power from a clean source is treated the same as a lamp using power from a dirty source. A ban gives electricity producers no incentive to reduce emissions.  Nor does it allow households to make choices about how best to conserve electricity. A well-designed policy would allow different people to make different tradeoffs among different uses to produce the most happiness (“utility” in econ-speak) for a given amount of power. Maybe I want to burn a lot of incandescent bulbs but dry my clothes outdoors and keep the air conditioner off. Maybe I want to read by warm golden light instead of watching a giant plasma TV

Lights Out All Over the World - Much of the world is slowly losing the struggle to supply its people with the electricity required to maintain the industrial lifestyle. Heat waves and droughts — made worse by industry’s profligate burning of fossil fuels — are at the same time increasing demand for air conditioning and reducing the supply of hydro power. Other sources of electricity — fossil-fuel burning and nuclear fission — are afflicted by rising prices and more frequent disasters. United States consumers have not yet felt the sting of the double whammy — rising prices for scarcer supplies — in either energy or food to the extent that poorer populations have, and remain secure in their belief that only the other end of the boat is sinking. But even a casual survey reveals that the other end of the boat is very low in the water indeed. Perhaps the most afflicted country at the moment, electrically speaking, is Pakistan where the Chairman of the National Power Authority says the country is only producing half of its generating capacity due to the lack of money to pay for fuel. One estimate has Pakistan’s industrial production down by 20 to 25 percent, with 400,000 people out of jobs.

Fracking Operations Cause Thousands of Earthquakes in Arkansas - Geologists say fracking wastewater disposal wells in central Arkansas caused an outbreak of thousands of minor earthquakes. The Arkansas Oil and Gas Commission placed a ban on fracking wastewater wells in the area yesterday. A moratorium on well activity had been in place for months as geologists investigated a possible link between fracking activity and the outbreak of more than 1,200 earthquakes that measured lower than 4.7 in magnitude. Fracking is a common term for hydraulic fracturing, a controversial gas drilling method that involves pumping water and chemicals deep underground to break up rock and free natural gas. Fracking produces millions of gallons of wastewater, and the gas industry has been experimenting with different ways to dispose of it. At least three gas companies were injecting fracking wastewater in the area of the earthquake outbreak. The companies were injecting fracking wastewater near an active fault. Steve Horton, an earthquake expert from the University of Memphis, told Truthout that continued fracking activity near the fault could have caused an earthquake strong enough to cause property damage.

Can Fracking Turn Land into ‘Lifeless Moonscapes’?  - In 2008, while closely examining a hydraulic fracturing operation in West Virginia, researchers at the U.S. Forest Service found that the fracking fluids near the well pad were killing trees. And after spraying some additional fluids around the area to test the environmental impact, they saw devastating results (picture above): Almost a year later, in May 2009, the number of trees included in the tally increased to 147, representing 11 species (Table 4). Half of these trees had no live foliage, and two-thirds had less than 35 percent full crown. Although there was some sprouting of tree seedlings and ground vegetation within the perimeter, there were still significant areas of dead ground vegetation in May 2009. Nearby trees outside the application area were nearly fully leafed out and green. The study illustrates the very real environmental risks associated with fracking, again showing why the public should know what kind of chemicals are in fracking mixtures. The study itself notes: “clearly, a better knowledge of the chemical makeup of the drilling and hydrofracking fluids is needed.”

Montana spill tally: Oil on about 60% of shoreline - Teams tallying damage from an Exxon Mobil Corp. oil spill into the Yellowstone River have found contamination along roughly 60 percent of shoreline that’s been inspected downstream from the pipeline break, Montana’s chief environmental regulator said. The tally released Tuesday by Montana Department of Environmental Quality director Richard Opper offers one the first clear gauges of the scope of the spill after weeks of high water slowed access to fouled areas. Just over 40 percent of shoreline inspected to date had light to very light oil. Seventeen percent had moderate oil. Just 1 percent was heavily contaminated. The state says the July 1 spill, which came amid flooding from mountain snowmelt, dumped up to 1,200 barrels of oil, or 54,000 gallons, into the Yellowstone near Laurel. Exxon Mobil says it lost 1,000 barrels.

The Great Gulf Holocaust - As a result of spraying Corexit, many researchers have highlighted the dangers associated with exposure to the oil and the corexit. Dr. Wilma Subra, a chemist and microbiologist, speaking at “Truth Out for the Gulf Forum,” stated that blood tests taken from Gulf Coast residents who have become ill, reveals exposure to crude oil and the subsequent presence of the well known cancer causing agents of Benzene and Hexane at an average of 36 times the expected rate. Subra also found that Corexit produces the Leukemia causing agents of Ethylbenzene and Xylene at 5.7 and 5.68 times the normal expected levels in her test samples. Subra states that “this deadly toxicity is in the air, it’s in the dispersant and it is in the blood of the people."[11] The interconnections between the major media and BP’s Gulf Coast partners will prevent the public from ever hearing the human side of this tragedy. Below are a few examples of what you will not see or read in the corporate controlled media.

Canadian campaign puts the spin on ‘ethical oil’ - Tar sands website promotes a binary world where Canadian oil is ‘ethical’ and the rest is produced by ‘oppressors’. You’ve got to hand it to Alykhan Velshi: for such a tender age, he seems to be remarkably well-versed in the dark arts of spin and misdirection. Many people outside of Alberta believe the Canadian state’s tar sands industry to be the most environmental destructive energy extraction industry in the world. But not Velshi, a 27-year-old neocon political communications adviser, who, until a few months ago, was the right-hand man to Canada‘s immigration minister. This week, he has relaunched a website aimed at extolling the virtues of, ahem, Canada’s “ethical oil“.

Big Oil's Dirty Secret: There's a Serious Spill Almost Daily in America - Three weeks ago, an ExxonMobil oil pipeline pumping medium crude into the United States from from Canada burst, spilling 42,000 gallons of sludge into the immaculate Yellowstone River, the longest free-flowing river in the lower 48 states.Earlier this week, we reported on kayakers helping to scout the river for oil damage. But if you haven't heard of the spill, don't feel bad. Most news outlets don't report on spills this "minor" because they happen quite literally all the time. About 20,0000 oil spills are reported to the U.S. government annually. Of those, approximately 300 are so bad that the Environmental Protection Agency either intervenes itself or oversees private cleanup contractors. In other words, that's about an oil spill per day. Did you know there's a serious oil spill nearly once per day in America? Did you know that oil spills have increased by a lot over this past decade? They have. On Tuesday, the EPA reported that it had found an American bald eagle amongst dozens of "oiled" or dead animals. There was our mascot, drenched in crude.

Coast Guard Testifies It’s Totally Unprepared for an Arctic Oil Spill: “We Have Zero to Operate With at Present.” - The U.S. Coast Guard’s top official says the organization is not prepared for a major oil spill in the Arctic, where oil companies are pushing to Congress and regulatory agencies to allow for more offshore drilling. In a Senate hearing yesterday on Arctic drilling, USCG Admiral Robert Papp countered the oil industry’s claims that it would be prepared for an oil spill, saying:“If this were to happen off the North Slope of Alaska, we’d have nothing.  We’re starting from ground zero today….  We have zero to operate with at present.” By comparison, the coast guard says it had adequate resources to deal with last year’s spill by BP in the Gulf of Mexico. Even with the resources for a rapid response, the Macondo well still managed to leak five million barrels of oil over 86 days:

It's a Feature, Not a Bug: Revolving Doors and Capture in the Oil Industry - I'm always happy to use my favorite phrase ("It's a feature, not a bug") to describe the problems of corporate-state entanglements, and this AP report, which details the incestuous relationship between off-shore gas and oil companies and the regulatory agencies responsible for overseeing them, provides an opportunity.  The revolving door here spins at least as fast as in the banking industry and with the same predictable problematic results, evidenced by the Deepwater Horizon disaster.  Like the financial crisis, rent-seeking and capture explain a lot. Despite the hopes of those who think this can be solved, as the AP report suggests, by better ethics laws or hiring "better" regulators, the revolving door that leads to capture is not a "bug" but a feature - the private sector benefits from being regulated and will always push to be at the table and influence the process. The problem is not regulatory or ethical, but institutional.  As long as there's the dead animal of the state (really: the citizenry) to feed on, the vultures of the private sector will keep showing up to get their share.

Oil: Up or Down?  - Steve Levine has an interesting blog post pointing out the financial market actors are increasingly betting that the price of oil will rise:Oil traders are betting as a herd that they are on the cusp of potentially their most profitable period since the Libyan uprising stoked fears of Saudi Arabian oil being lost to the market.  They have upped their bets on a serious rise in oil prices three weeks in a row -- the first time that has happened since late February-early March, Reuters reports. The reasoning?  Some will say it's a widely expected tightening of oil supplies later this year. But that explanation is not exceedingly persuasive because the long bet has come abruptly. Something more immediate is likelier at work -- such as the federal debt acrimony in Washington.This could be. However I'm also reminded of early 2008 when as the housing market and the stock market went south initially these kinds of financial flows led oil prices even higher. Compare the Dow Jones which started going south in about October 2007

Analyzing the Global Oil Supply: 2012 Is the Year for Peak Oil - Seeking Alpha: "We aren’t running out of oil. The problem is that we are at the point where we just can’t increase the rate at which we extract it. Since 2005 we have more or less been on a plateau when it comes to daily oil production. We are holding at the current level and running awfully hard just to stay there. And why is it so hard to stay at or increase the current level of oil production ? Because we basically stopped finding conventional super-giant high production rate oil fields forty years ago. To be exact,our peak year of oil discoveries was 1965. Every year production rates from those super-giant fields decline and we have to bring many smaller fields on production simply to offset the declines. It is a treadmill that keeps going faster. Here is a chart from ASPO Ireland that details oil discovery by year:"

The scourge of ‘peak oil’ - Energy derived from oil reaches, quite literally, every aspect of our lives. From the clothes we wear, to the food we eat, to how we move ourselves around, without oil, our lives would look very differently. Yet oil is a finite resource. While there is no argument that it won’t last forever, there is debate about how much oil is left and how long it might last. Tom Whipple, an energy scholar, was a CIA analyst for 30 years - and believes we are likely at, or very near, a point in history when the maximum production capacity for oil is reached, a phenomenon often referred to as “peak oil”.“Peak oil is the time when the world’s production reaches the highest point, then starts back down again,” Whipple told Al Jazeera. “Oil is a finite resource, and [it] someday will go down, and that is what the peak oil discussion is all about.” There are signs that peak oil may have already arrived.The International Energy Agency (IEA) recently increased its forecast for average global oil consumption in 2011 to 89.5 million barrels per day (bpd), an increase of 1.2 million bpd over last year.

There’s Only One Part Of The World Where CEOs Aren’t Terrified Of Austerity - Government austerity is sometimes seen as a problem for Greece or the US, rather than the new global regime. A majority of international CEOs, however, said they were worried about austerity in a comprehensive PwC survey. The only region where a majority of CEOs isn't terrified of austerity is the Middle East, where governments hand out as much oil money as they need to keep people happy.In Europe 63% of CEOs agreed that public sector cuts would slow domestic growth. In North America austerity is an even bigger concern, affecting 67% of CEOs. Even more worried are CEOs in East Asia and Africa, probably because government spending drives so much growth in these areas.

China And Iran To Bypass Dollar, Plan Oil Barter System, And A Deeper Dive Into The Iranian Oil Bourse -  China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant.

Number of the Week: China’s Population Bust - 44.6 million: Projected decline in China’s population of 15- to 24-year-olds this decade. China’s era as the world’s go-to provider of inexpensive labor may be drawing to a close. Workers are demanding higher wages and low-end manufacturers in coastal areas have in recent years complained of labor shortages. Largely because of the one-child policy introduced in the late 1970s, the number of children per woman fell to 1.77 in 2000 from 3.78 in 1975, according to the World Bank.Making the problem more acute, many rural parents are less willing to see their children leave home to work in the cities because they want to ensure somebody will be there to take care of them in their old age. The United Nations projects the male population aged 15-24 will fall 18.5% between 2010 and 2020, but that the female population in that age group will fall a sharper 23.9% — a result researchers tie to the confluence of a preference for boys, the one-child policy and the increased availability of ultrasound equipment. That’s made the lack of new job entrants more acute for manufacturers that tend to mainly employ women, such as apparel makers.

China's factory production slows - China's economic boom is showing signs of easing, with factory production growing at its slowest pace in more than two years in June. While the figures do not indicate a sharp drop-off in the country's economic growth, they were slightly worse than anticipated and raised expectations that China's central bank may be less aggressive in tightening monetary policy later this year. Global investors are particularly sensitive to any wobbles in China at a time when the recovery in the US and European economies is faltering. The purchasing managers index (PMI), which provides a snapshot of China's vast manufacturing sector, dropped to a 28-month low of 50.9 in June, the China Federation of Logistics and Purchasing said on Friday. This is down from 52 in May and analysts' forecasts of 51.3. Oil prices slipped on the news, as traders pondered a possible slowdown in energy demand. A separate PMI survey by HSBC showed growth in factory production came close to stalling last month, with a reading of 50.1, and the MNI business sentiment survey dropped to 57.8 from 61.2 in May.

How close is China to the technological frontier? - From Anil Gupta, bad news: To be sure, China’s R&D expenditure increased to 1.5% of GDP in 2010 from 1.1% in 2002, and should reach 2.5% by 2020. Its share of the world’s total R&D expenditure, 12.3% in 2010, was second only to the U.S., whose share remained steady at 34%-35%. According to the World Intellectual Property Organization, Chinese inventors filed 203,481 patent applications in 2008. That would make China the third most innovative country after Japan (502,054 filings) and the U.S. (400,769). But more than 95% of the Chinese applications were filed domestically with the State Intellectual Property Office—and the vast majority cover “innovations” that make only tiny changes on existing designs. A better measure is to look at innovations that are recognized outside China—at patent filings or grants to China-origin inventions by the world’s leading patent offices, the U.S., the EU and Japan. On this score, China is way behind. According to the Organization for Economic Cooperation and Development, in 2008, the most recent year for which data are available, there were only 473 triadic patent filings from China versus 14,399 from the U.S., 14,525 from Europe, and 13,446 from Japan.

Property loans halted in 2nd and 3rd-tier cities -Commercial banks are halting individual property loans in the face of tightening monetary policy and limited lending quota, the China Securities Journal reported Thursday. "We will not accept property loan applications at present, even if it is from a first-time home buyer," a bank staff in Chongqing told the paper. Meanwhile, some banks are mulling over whether to raise the ratio of down payment. "You'd better prepare to pay 40 percent of your home price as down payment, because commercial banks are going to ask more for a property loan," said Gong Hang, a bank staff in Taiyuan, Shanxi province. "It is only a matter of time," he said. Requirements for second-home loans have also become stricter in these cities. Home buyers may have to pay 50 to 60 percent of their home prices as down payments, with lending interest rates 10 to 15 percent higher than the benchmark rate, the paper said.

Health Care Reform Aims to Cover 90% of Chinese Citizens by 2011 - China is in the initial phases of its health care reform campaign, which was formed last year and intends to cover more than 90 percent of all Chinese citizens by the end of 2011. The Chinese government is pouring US$124 billion into the health care program as a part of its US$586 billion economic stimulus package. A quick evaluation of the current health care situation in China reveals the country’s dire need for drastic change in the system. Out of China’s 1.3 billion citizens, 110 million people are above the age of 65, compared with 39.5 million in the United States. China’s current health care system is ill-equipped to deal with its aging population, as most residents residing outside of China’s urban areas must pay out of their own pockets to receive medical treatment. The root of the issue that leads to inadequate health care coverage is the gap between the urban and rural government subsidization. China’s largest cities are expatriate hubs and attract the majority of government funding in most industries. Health care facilities are no exception to this trend, and rural and suburban hospitals often fall through the cracks.

Victor Shih on the Risk of Capital Fleeing China - - Yves Smith - We’ve written about Victor Shih’s work on Chinese banks and wealthy households. He argues that the Chinese financial system and economy are at risk if enough capital moves overseas. While the release of this video is coming at a juncture when the US and Europe seem to be engaged in a beauty contest between Cinderella’s stepsisters, Chinese business have been making aggressive investments in other economies as well, such as agricultural land in Africa, so it’s worth remembering that advanced economies are far from the only targets for offshore funds.  This video gives a short, high level overview of his provocative thesis.

China's High Speed Rail System Has First Major Accident - With all the other horrible events of the weekend, China's high speed rail crash sort of faded into the background.  But the toll is horrific: 43 dead, and hundreds more injured after one high speed train ran into another.  Critics are now arguing that this is the result of cut corners in the construction process:  A picture is beginning to emerge of a network that has been built to unrealistic and politically driven timetables, using a mix of technologies that were given little time to be properly integrated. Chinese media have suggested that work on the line where the accident occurred was rushed. "The hugeness and urgency of the project is unprecedented for CRSC (a contractor for the ministry). Such a complicated project needed to be finished in eight months. It is an extremely severe challenge to the company,"

China’s crumbling infrastructure model -- China’s high-speed rail accident has attracted a lot of attention.  Even the FT Lex coloumn has something to say about it, believing that the pace of investment should be slowed.  While I have been arguing here for a while that investment has to be slowed, it is rather harder to see if the “accident” can really be marked as the turning point of the Chinese investment-led growth model as some believe. Before considering whether it is a turning point, let’s look beyond high-speed rail. And there is a spectacle to see, with more bad news concerning Chinese infrastructure besides the crashing high-speed rail. Four bridges have collapsed just this month on 11 July in Yancheng, Jiangsu, 14 July in Wuyishan, Fujian, 15 July in Hangzhou and 19 July in Beijing. We have 4 bridges collapsed in 9 days, with another one with some sort of structural failure.  Truth be told, we probably all know that things in China aren’t as reliable as we wish.  Is the wave of “accidents” really unexpected?

Fukushima crisis: Nuclear only part of Japan's problems - The earthquake on 11 March triggered the automatic shutdown of reactors at 11 of Japan's 54 nuclear reactors, with a total capacity of 9.7GW.  At the moment, only 18 nuclear reactors are producing power. The rest have either been shut down because of safety concerns or for routine maintenance.  In addition to the nuclear reactors, thermal power plants with a total capacity of 9.4 GW were also shut down following the natural disasters. In total, Japan's power supply capacity in the affected area has been reduced by about 40%, which is almost equivalent to the national capacity of Switzerland or Austria.  In terms of its energy supply, Japan is isolated, having no interconnections with neighbouring countries. The national transmission system is divided into two separate frequency areas - the 60 hertz (Hz) western system and the 50 Hz eastern system. Although the two areas are interconnected using three frequency converters, the total shared capacity is comparatively small (roughly 1 GW). Thus the east of Japan, which includes Tokyo and the tsunami-hit areas, has faced serious power shortages.

Japan Ending Nuclear Age Risks $5 Trillion Economy as Komatsu, Sharp Walk - After the Fukushima nuclear disaster, Prime Minister Naoto Kan said Japan needs to learn to do without atomic energy and 77 percent of respondents in an Asahi newspaper poll published July 12 agreed with him. Shunichi Teramae, the mayor of Kaga city on the border of Kansai, has a different view. “Without nuclear power the Kansai economy will collapse, and so will Japan’s economy,” said Teramae in an interview, adding his town gets no subsidies from the nuclear industry. Abandoning nuclear power risks hollowing out Japan’s industry as companies like Komatsu Ltd., the world’s No. 2 maker of construction machinery, say they can move abroad “whenever we want,” taking jobs and taxable revenue with them, Chairman Masahiro Sakane said. Prime Minister Kan’s nuclear-free vision doesn’t consider all the issues, he said. “Power supply is an uncertain factor for companies and companies don’t like uncertainty,” said Hideo Kumano, an economist at Dai-Ichi Life Research Institute Inc. “A disruption to Japan’s supply chain from power shortages would lead to global supply chain disruptions.”

Worried by inflation, India hikes rates by 50 points - MUMBAI — India’s central bank hiked interest rates by a higher-than-expected 50 basis points on Tuesday, its 11th increase since March last year as it struggles to combat near double-digit inflation. After a meeting in the financial capital Mumbai, the governor of the Reserve Bank of India (RBI) Duvvuri Subbarao argued a hike was required because of rising inflation fuelled by higher fuel prices and manufacturing costs. Subbarao warned that a “certain moderation in growth is inevitable while tackling inflation,” adding that the bank would “persevere with the anti-inflationary stance.” India has the second highest inflation of any major world economy, after Russia, with the latest reading for June putting it at 9.44 percent over 12 months, up from 9.06 percent the previous month.

S&P: says Aust prime RMBS arrears reached near all-time peak - Loans underlying Australian prime residential mortgage-backed securities (RMBS) that are greater-than-30 days in arrears rose to 1.83% in April 2011, from 1.81% in March 2011, according to a report published by Standard & Poor's Ratings Services. This is near the all-time peak of 1.84% reached in January 2009. Subprime RMBS arrears jumped by 83 basis points to 12.05% during the same period, with less than A$2 billion in subprime RMBS outstanding. Despite three new prime issuances, total prime RMBS outstanding fell to less than A$81.5 billion, from A$81.7 billion in March 2011. "The number of borrowers who were already more-than-90 days in loan arrears crept up by 4 basis points to 0.75%, largely contributing to the rise in the proportion of loans that are more-than-30 days in arrears for April 2011. We believe borrowers in severe arrears continue to face financial pressure arising from higher costs of living," Standard & Poor's credit analyst Vera Chaplin said. "Although more new issuance in the coming months would likely dilute the overall arrears level, we believe the underlying financial pressures would remain."

One in five Aussies have no spare money, finds Nielsen poll - THE steel grip on consumer spending has tightened to the point that the number of Australians saying they have no cash is worse than during the global financial crisis. In a disastrous sign for already battered retailers, a Nielsen worldwide consumer confidence poll reveals almost one-in-five Aussies have no spare money after paying for essentials as they face an onslaught of rising utility and food prices. And for the first time since 2009, consumers are focused on reducing every aspect of household expenditure from saving on electricity, gas and phone bills, to cutting down on entertainment, alcohol and new clothes, and switching to cheaper grocery brands. The dismal outlook confirms the nation is entrenched in a culture of saving and acting as though in the gloom of a recession. In fact, one-in-four Australians believes the economy is in recession despite a relatively low 4.9 per cent unemployment, the mining boom and one of the strongest currencies in the world.

Copper Rises as Strike at World’s Biggest Mine in Chile Spurs Supply Woes - Copper rose after BHP Billiton Ltd. canceled shipments from Chile’s Escondida mine, the world’s biggest source of the metal, as a strike extended to seven days. Workers vowed to step up efforts to secure improved bonuses and benefits as management called the strike illegal and refused to negotiate. Prices also gained after Kazakhmys Plc (KAZ) and OAO GMK Norilsk Nickel reported lower copper output. “Near term, we’ve got supply tightness with the strike at Escondida,” Frank Lesh, a trader at FuturePath Trading LLC in Chicago, said yesterday in a telephone interview. “Longer term, we’re looking for Chinese buying to pick up. There’s also underlying demand from the U.S. and Japanese auto industry.”

Latin America learns the price of growth — Latin America is starting to learn the ironic lesson of its stunning economic growth: with it comes rising currencies and inflation which threaten to reverse many of the gains made. Brazil's real soared on Monday to the highest level against the dollar since 1999, when the South American giant delinked from the US currency. The latest jump came despite efforts by the Brazilian government to contain the rise of the real, once seen as a badge of success but increasingly more a burden. The currency has gained 72.8 percent against the dollar from its value in 2002. The same thing is happening, to a lesser extent, in other Latin American economies -- Mexico's peso has firmed steadily against the dollar, as has Peru's nuevo sol and Chile's peso.

The Future of Economic Growth - Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The United States and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis. They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife. Much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output. The consulting firm McKinsey has christened Africa, long synonymous with economic failure, the land of “lions on the move.”

China Advances a Grip on IMF - - The IMF’s new Chinese deputy chief Zhu Min is known by many in the financial capitals in the West for warning as early as 2007 about the dangers of the U.S. sub-prime mortgage market and its dire consequences for the global economy. Wall Street in New York and the City, the financial centre of London, ignored his warning, which contradicted the official position of the world’s premier financial watchdog at the time. The International Monetary Fund (IMF) has since reversed track on financial derivatives and has also embraced Zhu Min’s wisdom, making him first an adviser and now a deputy managing director.  Zhu Min is the first Chinese to occupy such a high-ranking position in the Washington-based global lending institution. His appointment, though, follows a trend of promoting Chinese economists to the highest echelons of the Bretton Woods institutions that have underpinned the global economic and financial order since the end of World War II.

Lagarde: IMF May Need More Financial Resources to Tackle Crises - The International Monetary Fund may need more financial resources in order to tackle continuing economic crises and will likely have to discuss the issue soon, IMF chief Christine Lagarde said Tuesday. During the crisis, the fund doubled its resources to help it provide sufficient financial support to a raft of countries in economic trouble. “The question is, do we still have the level of resources that is now needed and appropriate to address the crisis, the crises,” Lagarde said at a Council of Foreign Relations event in New York. “Maybe it could do with more,” she said, adding, “In the not too distant future, we will probably have to revisit this issue.”

Emerging markets warn IMF over fresh Greek loan plan - Representatives of leading emerging market countries at the International Monetary Fund have warned the fund’s management against pouring more large sums of money into another Greek bail-out with uncertain prospects. The officials said that – several days after a new financing plan from the eurozone authorities – its details were unclear and a proposed reduction in private sector holdings of Greek debt appeared to be inadequate.  Interviews with the Financial Times, along with private conversations with other representatives from non-European economies, reveal several governments unwilling to risk financial contagion by curtailing IMF lending to Greece, but alarmed at the risks the fund was taking.  Concern among shareholder countries on the fund’s executive board poses a challenge to Christine Lagarde, the IMF’s new managing director, who soon must decide how much more money she recommends is lent to Athens. Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.  “Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”

Greek Games - I haven't made up my mind yet about the wisdom of the latest plan to secure the financial viability of Greece within the eurozone, but as a piece of financial engineering it has some very intriguing features. Current bondholders have the option of exchanging their assets for new issues that promise less and deliver later, but are considerably more secure. There are four new issues to choose from, varying with respect to maturity, interest rate, and the proportion of principal that is guaranteed (by highly rated zero coupon bonds or funds held in an escrow account). But these options are designed to be roughly equivalent in present value terms, and it is expected that they will be selected in approximately equal measure by those who choose to participate in the exchange.  Participation is voluntary, so current bondholders can simply choose to do nothing. For this reason, the financing offer does not trigger payouts on credit default swaps.What makes the mechanism strategically interesting is that the payoffs from participation are highly sensitive to the overall participation rate.

Europe’s ideologues took the whole world to the brink of disaster - They never wavered in their faith that EU states would yield sovereignty to save the euro if push came to shove, that monetary union would force the pace towards joint EU government.  So it proves to be, for now. But let us not forget that Europe's ideologues have achieved this only by pushing the world to the brink of catastrophe and holding parliaments to ransom with their great gamble, just as the West's financial elites held parliaments to ransom in the banking crash of October 2008.  Once yields on 10-year Spanish and Italian bonds had blown through 6pc, global leaders knew we risked a second and more dangerous Lehman-AIG debacle within days. You cannot let two world class sovereign states blow up together. "The situation was really grave," said Herman Van Rompuy, Europe's president.  It is why President Barack Obama telephoned German Chancellor Angela Merkel to plead urgency.  It is why Britain's well-briefed Chancellor George Osborne abjured the central credo of Tory policy on Europe for twenty years and more or less urged EMU leaders to embrace fiscal union, warning of "the potential for a set of economic events that could be as damaging as 2008."

Kicking the Can Down the Road One More Time - My friends at GaveKal point out that this is “… the sixth time in 18 months European leaders have announced a definitive solution to the Euro crisis. Should this version of the final bailout be taken any more seriously than the first and second solutions to the Greek crisis in May and September 2010 or the Irish bailout of December 2010 or the Portuguese rescue package of March 2011 or the breakthrough vote in the Greek parliament of last month? The supposedly good news for markets was that the -21% haircuts to be imposed on Greek creditors (as estimated by banker groups) were less than half those suggested a few days ago.” A 21% haircut is a bad joke. If you assume that Greece can afford to spend 10% of their revenues just to pay the interest, which is what they will need to be able to do to get out of their crisis, then the haircuts look more like 75-80%. Sean Egan, the most credible credit analyst in the country, estimated this week that the eventual haircuts on the Greek debt will be 90%.

Spain’s ‘indignant’ protesters rally in Madrid - Two months after they launched a movement against the economic crisis and soaring unemployment, Spain's so-called "indignant" protesters were converging on Madrid again on Saturday. Seven cross-country protest marches were set to reach the city's Puerto del Sol square Saturday evening on the eve of a demonstration through the streets of the Spanish capital. Protesters carrying sleeping bags and groundsheets set off from cities across the country at the end of June, including Barcelona, Malaga, Valencia and Bilbao, to applause from sympathisers. They have stopped in towns and villages along the way, holding meetings at each stop to spread their message of outrage at unemployment, welfare cuts and corruption. In the Puerta del Sol Saturday, organisers were busy setting up tents, tarpaulins and stands. Some of the placards read: "The guilty must pay for the crisis," and "Cutbacks for the rich first."

Greek deal won't mean austerity for France - France will not need to introduce austerity measures in response to increased debt exposure from the euro zone's new rescue plan for Greece, its finance minister said on Saturday. Baroin, who recently succeeded IMF-bound Christine Lagarde, told the newspaper: "France is participating in the form of a guarantee. "...Since last year, European statisticians have told us that the debt of the European Financial Stability Facility (bailout fund) should be linked to each country according to what it guaranteed. "Beyond that accounting impact, France doesn't need to borrow more and our deficit isn't impacted. Neither the EFSF nor obviously France will be impoverished by this plan." Facing an election in 2012, the government aims to cut the public deficit from an estimated 5.7 percent of GDP this year to meet an EU-imposed limit of 3 percent in 2013.

Felix Zulauf on the inevitability of further crisis in Europe - Felix Zulauf spoke to Barron’s Alan Abelson about his thoughts on the European sovereign debt crisis now that Greece has received its second 100 billion euro bailout. Here’s what Abelson says about the conversation: We'll turn our focus on the latest Greek bailout project. And here we're lucky because we managed to enlist our old friend and Roundtable regular Felix Zulauf to guide us from his perch in Switzerland… The rescue blueprint is supposed to provide Greece with financing through 2014…  In other words, as Felix puts it, the banks will take a hit of €50 billion over three years (around 21% of their original investment), while the EFSF and the IMF supply the rest. The bailout blueprint avoids for the time being default and escalating contagion, but in Felix's view it does zilch to ameliorate the causes of Greece's (or anybody else's) fiscal woes. "The politicians," he explains, with only the vaguest of smirks, "obviously believe that the world will get back to good growth and great tax revenues" and the problems will vanish. Which, not surprisingly, he sees as pure, unadulterated hogwash…

Alexander Gloy: Greece – Two Bail-outs and a Funeral - Yves here. Quite a few readers in comments expressed confusion over the announcement of the latest Greek bailout, and some of the details were admittedly a bit murky. This piece will hopefully help clear matters up. Here we go again. Another bail-out. [Sigh.]  First and foremost, let’s call it what it is: a default. Fitch (ratings agency) now rates Greece “restricted default”. This is because some lenders will lose, according to plan, 21% of their “net present value” by exchanging existing debt into new debt (I will not go into detail, since boring and irrelevant). The debt exchange is “voluntary”. The plan expects 90% participation. What if a bank decides not to participate? I’ll try to make this as entertaining and easily readable as possible – but first the details of the bail-out agreed on July 21st:

    • Fresh EUR 109bn EFSF/IMF loans until mid-2014
    • Private sector (read: banks) participation of EUR 37bn
    • EUR 12.6bn from bond repurchases at below par (100%)
    • All EFSF loans extended to 15-30 years with interest rate cut to 3.5% (same relief granted for Portugal and Ireland)
    • EFSF re-tooled: flexible credit lines, purchase of bonds in secondary market, recapitalizing banks
      “Marshall Plan” for Greece (increased investments by EU)

Moody’s Downgrades Greece Three Notches More - Yves Smith - Oh, this is beginning to feel like the crisis all over again in at least two respects: news events taking place on the weekend (well at least from the US perspective) and multiple wobblies happening at the same time. Frankly, Greece should have been rated junk long before it was relegated to that terrain (note this Moody’s downgrade just takes Greece further into speculative territory, from Caa1 to Ca, which is a degree of refinement that many might deem to be irrelevant). And I’m told by a former ratings agency employee that the agencies have absolutely no methodology for rating countries (although given how well their methodologies worked in structured credit, this shortcoming probably means less than it ought to).  But at least the narrative is pretty realistic. From the Wall Street Journal: Moody’s Investors Service slashed the Greek government’s debt ratings three notches further into junk territory Monday, citing the likelihood that private creditors will suffer “substantial” losses on their holdings of government debt…In a statement, Moody’s said the program announced by the European Union indicated that the likelihood of a distressed exchange and a default on Greek government bonds was “virtually 100%.”

Moody's Warns Greek Default Virtually 100 Percent - Moody's downgraded Greece's bond ratings by a further three notches Monday and warned that it is almost inevitable the country will be considered to be in default following last week's new bailout package. The agency said the new EU package of measures implies "substantial" losses for private creditors. As a result, it cut its rating on Greece by three notches to Ca — one above what it considers a default rating. It also put eight Greek banks on review for a possible downgrade.Though Moody's said a Greek debt default is "virtually certain," it noted that the new measures will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. It also said the package also benefits other eurozone countries by "containing the near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt."

On second thoughts...Due to sad events elsewhere, the eurozone crisis has been pushed of the front pages for once, but it rambles on. Bond spreads came down Thursday, but increased on Friday, and more since then. We are not quite back to where we were before the summit – but with 2.669% and 3.022%, respectively, Italian and Spanish spreads remain at a level at which they are unsustainable.  The FT reports this morning that US money market funds, a big source of liquidity providers to the global banking system, have dried up their supply due to the eurozone crisis, and to fears about the European banking system - which were not exactly alleviated by the EU’s mendacious stress tests. Money market interest rates have not gone up, but the supply has dried up for any liquidity of three months or more, and the situation has been particularly severe for Italian and Spanish banks. The share of the two countries’ banks in the prime market funds had gone down from 6.1% in 2009 to 0.8% as of end-June. One additional factor behind the money market funds’ nervousness is the uncertainty over the US debt ceiling, a discussion that will come to a head this week.

Debt Crises, Real and Fake - In the world of government bond markets, never have the haves been treated so much better than the have-nots. The haves can borrow for virtually nothing. The have-nots, if they can borrow at all, must pay exorbitant rates. Yet politicians, even in the countries that investors seem to trust completely, talk of impending budget disaster if spending is not cut immediately. This summer, as the markets offered a ‘‘no confidence’’ vote on Europe’s effort to rescue Greece — and grew notably more worried about Italy and Spain — they appeared to be highly confident about the debt of the United States government. The yield on benchmark 10-year Treasury securities fell back below 3 percent this month, even as the Washington rhetoric about the debt ceiling heated up. That was a sign that investors were not alarmed about a potential United States default, whether in the next few weeks or the next 10 years. If they were, rates would be soaring.

The Perverse Politics of Financial Crisis - In trying to understand the pattern and timing of government interventions during a financial crisis, we should probably conclude that politics have incentives that economics cannot understand. From an economic point of view, the problem is simple. When a sovereign borrower’s solvency has deteriorated sufficiently, its survival becomes dependent on market expectations. If everybody expects Italy to be solvent, they will lend to Italy at a low interest rate. Italy will be able to meet its current obligations, and most likely its future obligations as well. But if many people start to doubt Italy’s solvency and require a large premium to lend, the country’s fiscal deficit will worsen, and it will most likely default. Whether a borrower like Italy ends up in the lap of good expectations or tumbles into a nightmare scenario often depends upon some “coordinating news.” If everyone expects that a credit-rating downgrade will make Italian debt unsustainable, Italy will indeed default after a downgrade, regardless of the downgrade’s real economic effects. This is the curse of what we economists call multiple equilibria: once I expect others to run for the exit, it is optimal for me to run as well; but if everybody stays put, I have no interest in running.

Guess Who's Tanking? - Krugman - Many people feared a calamitous morning in the markets, as investors reacted to the continuing stalemate over the debt ceiling. Well, it has been fairly calamitous — but not for the United States. The big news, instead, is that Italian and Spanish spreads — the difference between interest rates on their bonds and interest rates on (presumably safe) German bonds — have widened drastically again. Last week’s big rescue plan apparently didn’t restore confidence. Sometimes it looks as if the Europeans and the Americans are in a contest to see who can do the most to mess up an economy that should be very strong. Today, surprisingly, the Europeans seem to have won a round.

Containment breached - FOR a few wonderful days, we were all able to pretend that Europe's troubles might not be so unmanageable after all. No more. Monday brought a market reckoning, all right, but it came on the European side of the Atlantic. European equities and the euro are giving back some of their recent gains today, but the real story is sovereign-debt yields. Borrowing costs are up around the periphery, but Spanish and Italian yields are soaring. Yields on Spanish 10-year debt are back above 6%, signalling that Spain remains a strong candidate for an eventual bail-out. It's telling that one of the boldest policy moves the euro zone has made in this crisis calmed markets for all of two trading days. Why such a short respite? The main reason is that the euro-zone periphery is being squeezed from two sides. On the one hand, borrowing costs are high and rising. On the other, growth is faltering. The euro zone's struggling members are back in or close to (or, in Greece's case, never left) recession, and the euro zone as a whole may soon follow suit. With the cost of debt rising and economies contracting, debt burdens are growing ever less manageable. Markets are understandably reacting by demanding a higher risk premium, which increases borrowing costs, prompting new austerity measures, which reduce growth.

Update on Europe - From the WSJ: Europe Rates Resume Climb By Monday afternoon, Spain's [Ten year] debt was being traded at a yield of 6%, or 3.24 percentage points above the rate on German bonds, seen as a risk-free investment. The rate represented an upswing from 5.7% last Thursday, just as news of the new bailout deal for Greece began to emerge. On July 18, the rate hit 6.3%.  Italy was paying 5.5%, up from 5.2% on Thursday, but down from 5.8% on July 18. Yields moved higher today, but are still below the previous peaks. The Greek 2 year yield is up to 28.1% (was above 39%). The Portuguese 2 year yield is down to 15.3% (was above 20%) The Irish 2 year yield is up to 15.4% (was above 23%). The Italian 2 year yield is up to 4.0%. And the Spanish 2 year yield is up to 4.2%. Here are the links for bond yields for several countries (source: Bloomberg):

Spain auction shows no end yet to euro zone nerves - Spain's short-term cost of borrowing climbed to three-year highs at an auction on Tuesday, showing strong EU action on Greece last week has failed to cap worries that Europe's debt crisis could still spread. Spain sold 2.9 billion euros ($4.16 billion) of 3- and 6-month Treasury bills, though demand was lower and yields on both issues were higher than at the last of the regular sales in June. On Tuesday, the Treasury sold 750 million euros of 3-month bills at an average yield of 1.899 percent compared to 1.568 percent at the previous auction and at a bid-to-cover ratio of 6.3 after 9.5 in June. Spain also sold 2.14 billion euros of 6-month bills, with the average yield rising to 2.519 percent, the highest since Dec. 2010, from 1.776 percent in June, while the offer was 2.2 times subscribed after 3.8 times at the last auction

The crisis is back - One of the few safe financial bets in the eurozone is a rise in stock markets/fall in bond spreads right after a European summit. This time, the bull’s party lasted for about a day. The optimism receded on Friday, and by last night the bond markets returned to more familiar territory. El Pais leads its economic section with the declaration that last week’s agreement had failed the test of the markets, where sentiment was not helped by a Bloomberg report that the ratification of the EFSF decision faced opposition in the Slovak parliament. As of this morning, Italian 10-year spreads were a fraction under 3%, and Spanish spreads back over 3.3%, close to their records last week. For both countries, these are unsustainable levels – in the sense that if those spreads were to persist, Italy and Spain would both need to come under the EFSF eventually. But this is not possible, due to the European Council’s decision to increase the flexibility of the EFSF but not its size. The political process remains hopelessly behind the curve.

The Markets, the Pols and the Greek Bogeyman - When Greek finance minister Eleftherios Venizelos met Timothy Geithner in Washington yesterday, did they commiserate about the depradations of the rating agencies which have wreaked havoc on European economies over the last months, and which are now attempting to dictate terms in Washington? Standard and Poor’s has threatened to withdraw the United States’ AAA rating unless a timely agreement is reached on raising the debt ceiling—and unless legislators agree on a $4 trillion package of deficit reduction measures. Greece has suffered repeated assaults from the three unelected Fates, which have now pushed interest payments on the country’s two-year bonds up to 27.7 percent. On Monday Moody’s cut Greece’s rating by three notches to Ca—implicit default—further dampening the squib of euphoria that greeted last week’s European summit agreement on a new bailout for Greece, along with measures meant to contain the crisis and stabilize the Eurozone.

Italian and Spanish borrowing costs rise as Greek bailout fails to convince - Fears that the Greek financial bailout could come unstuck and the eurozone crisis spread further across southern Europe rattled markets again on Tuesday. Spain and Italy were forced to pay a higher price to sell short-term debt amid concerns that last week's Greek bailout had failed to solve the problems in the eurozone. Spain's short-term cost of borrowing hit three-year highs and demand fell at its Treasury bills auction, while yields at a sale of six-month Italian paper hit their highest since November 2008. "The most important point again is the fact that, relative to the last auction, yields are much, much higher," "It shows we may have had some relief last week, but that relief has proved to be rather short-lived." Spanish and Italian benchmark bond yields rose after the auctions, and the premium demanded to hold Spanish debt rather than lower-risk German bonds widened.

Italian, Spanish Bonds Slump on Concern European Aid May Not Be Sufficient - Italian and Spanish government bonds slumped, increasing the yield relative to benchmark German bunds, on speculation Europe’s aid package may not be sufficient to prevent contagion.  German bonds rose for a fourth day and European bank stocks slid as Finance Minister Wolfgang Schaeuble said the government is against a “blank check” for the European Financial Stability Facility to buy bonds of troubled euro members in the secondary market. The yield discount investors are willing to accept for 10-year bunds rather than similar-maturity Treasuries reached the widest in more than five months as U.S. lawmakers struggled to reach an agreement over the nation’s debt ceiling.  “If you look into the details of the EU summit decision, it doesn’t take you long to get to where the weak points are,”   “You still have two countries that are too big to save and are not effectively protected from negative market sentiment. The U.S. debt crisis is also a factor that supports German bunds.”

Italian banks fall as Italy/Bund spread widens (Reuters) - Shares in leading Italian banks Intesa Sanpaolo and UniCredit fell sharply on Wednesday as the yield premium on 10-year Italian government bonds over their German equivalents widened by 15 basis points. Italian banks have reflected the moves of the yields on the government bonds, known as BTPs, because of their exposure to Italian sovereign bonds and worries that the euro zone crisis could spread to debt-laden Italy. The Italian BTP spread over German Bunds expanded by 15 basis points to 305 basis points early on Wednesday. The BTP/Bund yield gap was at around 290 basis points late on Tuesday, according to Tradeweb data. "There's somebody abroad playing the BTP/Bund spread against a basket of (Italian) banks. But the speculative attack doesn't only come from abroad; there's also a political matrix to this," a Milan-based trader said. He cited press reports, including from Wednesday's Financial Times, that envisaged the possibility of a technical government headed by former European Commissioner Mario Monti to put an end to the political instability in Silvio Berlusconi's government.

Credit growth in the euro area - seriously, where is it? - Rebecca Wilder - Today the ECB released details on monetary aggregates for the euro area. According to the statement on the asset side of the consolidated balance sheet of the euro area monetary financial institutions (MFIs): the annual growth rate of total credit granted to euro area residents decreased to 2.6% in June 2011, from 3.1% in the previous month. The annual growth rate of credit extended to general government decreased to 4.6% in June, from 5.7% in May, while the annual growth rate of credit extended to the private sector decreased to 2.2% in June, from 2.5% in the previous month Weak credit growth is entirely consistent with the deteriorating pace of the macroeconomy (see Edward Hugh's post here). How does 2.2% annual credit growth compare to history? Meager. Spanning 2005 to June 2011, loans to euro area households grew at an average 5.5% annual pace, while that to non-financial businesses marked an average rate of 6.8%. According to this indicator, the ECB need not be 'vigilant' at all. Perhaps it's one country, like Germany? One country that will eventually challenge the stability of prices and the financial system. (Nope, not through loans to the private sector.)

Six reasons Europe's debt crisis isn't over - While Washington is gripped in an agonizing and potentially lethal game of chicken over the U.S. debt ceiling, the risk of sovereign defaults still remains much higher across the pond, in Europe. Sure, Europe's leaders are probably feeling good about themselves after finally cobbling together a second bailout of beleaguered Greece last week. They also made some important changes to their approach to the debt crisis that give the euro zone a bit more ammunition to combat the contagion spreading to its weaker members, especially Spain and Italy. However, anyone who thinks Europe has solved its debt crisis is deluding themselves. Even German Finance Minister Wolfgang Schaüble admitted that "it would be a mistake to think that the crisis of trust in the euro area can be solved by a single summit." In my opinion, the latest crisis-busting package lacks the muscle to bust much of anything. Here are my six reasons why the euro crisis will still be with us, for a long time to come:

S&P Expects Second Greek Haircut, New Downgrade - Greece's sovereign debt was downgraded further into junk territory Wednesday, a day after an official from Standard & Poor's told CNBC that the country likely will need a new and bigger debt restructuring within the next two years. S&P cut Greece's long-term credit rating to double-C from triple-C. The debt-riddled country is already the lowest-rated country in the world by the credit-ratings agency, which last downgraded its ratings eight notches on June 13. "The rating has a negative outlook, so we're pretty certain it's going to go lower because, of course, an actual debt restructuring is now on the table," David Beers, S&P's global head of sovereign ratings, told CNBC Tuesday. "We've also expressed the opinion before that we think that any near-term restructuring is probably not the end of the story. There may be another bigger restructuring down the road," Beers said in an interview.

S&P sees 2nd Greek debt haircut, new downgrade: report (Reuters) - A new and bigger restructuring of Greek debt is likely within the next two years, an official from credit ratings agency Standard & Poor's said on Tuesday, adding a further downgrade of Greece's sovereign debt rating was "pretty certain." "The rating has a negative outlook, so we're pretty certain it's going to go lower because, of course, an actual debt restructuring is now on the table," David Beers, S&P's global head of sovereign ratings, told CNBC television. Greece became the lowest-rated country in the world by Standard & Poor's, which downgraded it 8 notches June 13. "We've also expressed the opinion before that we think that any near-term restructuring is probably not the end of the story. There may be another bigger restructuring down the road," Beers said in an interview. Asked when the new restructuring might occur, Beers said: "That's partly in the hands of Greek politics. But it wouldn't surprise us if a second restructuring had to be looked at over the next couple of years."

S&P Downgrades Greece To CC From CCC, Expects Recovery Of 30-50% By Principal Bondholders - Following review of the July 21 statement by the European Council (EC), Standard & Poor's has concluded that the proposed restructuring, in the form of an exchange into discount or par bonds or a rollover into 30-year par bonds, of Greek government debt would amount to a selective default under our rating criteria. In anticipation of the debt exchange, we have lowered the long-term rating on Greece to 'CC' and we have affirmed the 'C' short-term rating. The outlook on the ratings is negative. We view the proposed restructuring as one that would amount to a 'distressed exchange' under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full. While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders."

The next EFSF customer: the crisis is now spreading to Cyprus - Moody’s yesterday downgraded Cyprus to two notches above junk, as the country looks set to become the EFSF’s forth customer. On a day, in which the Italian and Spanish markets came under further pressure, EU officials were headed for special talks with the government in Nikosia, but said no agreement was imminent, according to the Financial Times. Yields on Cyprus’ 10-year bonds were up 0.85pc at 10.18% yesterday, which is above the borrowing rates that forced Ireland and Portugal into the EFSF, the paper remarked.  In another article, the FT noted that the EU’s agreement on a bond swap for Greece, has had seriously negative consequences for Cypriotic banks, who are among the largest lenders to Greece. The Cypriotic banking sector has assets of about seven times the country’s GDP. Cyprus was hit by two further shocks, a political crisis that resulted from the government’s attempt to force through an austerity package, and an explosion at the country’s largest power plant that killed 13 people. The situation in Cyprus was not quite as bad as in Ireland, but the losses faced by the banks were still very large.

Eurofail - Krugman - For some reason events in European bonds markets aren’t making big headlines. But they should be. The interest rate spread between Italian and German bonds is now higher than it was before the big European rescue package was announced. Since the purpose of that package was, first and foremost, to calm markets before Italy and Spain sank into self-fulfilling debt spirals, this is very bad news. Also, German interest rates are plunging. This does not reflect greater confidence in German solvency; if anything, investors are less confident in that respect, as the potential costs of a peripheral bailout start to get reflected in credit assessments of the core economies. What this is surely about, instead, is the growing sense that European recovery is sputtering out, and that the European Central Bank — which sets short-term rates — will eventually call off or even reverse its planned rate hikes, with rates staying low for a long time. In short, what the markets seem to be seeing is disaster on the periphery and the Japanification of the core. And I can’t say they’re wrong.

Criticisms of a communication disaster - Even though the situation remains hopeless, it is no longer deemed to be serious. As bond yields rise back to the pre-summit levels, the congratulatory mood among officials has given way to more recriminations for who is to blame for the poor communication. FT Deutschland echos the criticism of a diplomat who said that EU leaders created confusion after the summit by citing wildly different figures about the scale of the implied debt reduction. He gave as an example the statement by Mark Rutte, the Dutch PM, who suggested in his final press conference that the private sector component was part of the €109bn package. (There was also confusion about the extent to which the agreement would reduce the net debt of Greece.) There was also a lack of clarity as to how the IMF will participate in the programme. Christine Lagarde said the negative market reaction was due to the complexity of the agreement, and the fact that a lot of work has yet to be done to implement the decision. The newspaper noted that there is not even a scheduled meeting for the eurogroup meeting, which is supposed to implement the agreement.

IMF warns France on deficit and slowing growth— France will probably need extra action to cut its public deficit in 2012 and 2013 as falling growth threatens to complicate economic recovery, the International Monetary Fund said on Wednesday. The IMF forecast that growth in France, the eurozone's second-biggest economy, would slow in 2012 to 1.9 percent from 2.1 percent this year. This was sharply lower than the French government's 2012 forecast of 2.25 percent growth. "Progress is being made in fiscal consolidation but more efforts might be needed to reach the 2012-13 targets," it said in a report due for publication later Wednesday but released early by the French economy ministry. It said that without further efforts France was set for a public deficit of 3.8 percent of output in 2013, above the EU three-percent limit and France's forecast. French public debt would peak at 88 percent that year, it added.

Harald Hau: Eurozone Bailout – Tax Transfer to the Wealthy? - Yves here. In comments, a reader recently expressed skepticism that bank bailout represented a massive looting of the public purse. Since the bank PR efforts have been more successful than I realized, it’s important to keep shining a bright light on this issue.  This post by business school professor Harald Hau not only discusses how this transfer from the many to the few works in the Eurozone rescue context, but also illustrates that the banksters have improved their game. And his observation that this bailout favors bondholders, and those constitute the top 5% of the population, is a generous estimate. Remember that the prime objective of this exercise is to spare big Eurobanks any pain, which means the highly paid professionals and executives in their employ are the biggest beneficiaries.

Tax Trio Would Put an End to Euro Arson - The latest effort by European policy makers to contain the debt crisis offers only temporary relief for the euro area. The involvement of private creditors is a step in the right direction, though it is quantitatively too limited, and the buyback program may end up rewarding banks’ shareholders and bondholders. Most importantly, the plan doesn’t address a fundamental problem: Any support designed to backstop Spain and Italy would be funded mostly by Germany, the region’s largest national economy.  The latest measures still involve two massive transfers of wealth. The first is from German taxpayers to those of southern Europe. If the aim is to destroy the idea of Europe for a generation, we could do no better. The resentment of German taxpayers will weigh on the continent for decades. To get a sense of the reaction, consider that Italy was unified 150 years ago, yet even small transfers of taxpayer money from the Treasury to the south of the country prompt the Northern League political party to call for secession.  The second movement of funds in the European rescue is from taxpayers to banks. The 2008 bailouts of the financial industry generated enough populist anger. This time, we may face a revolt.

Greek Bondholders May Shun Rescue as Potential Losses Top 21% - Greek bondholders may resist pressure to reinvest in the nation’s securities as part of a bailout agreement as potential losses exceed the 21 percent estimated by the Institute of International Finance. JPMorgan Chase & Co. calculates the bonds may lose as much as 34 percent of their value, while Rabobank International anticipates losses of as much as 50 percent. That may be high enough to deter money managers from aiding the rescue, leaving European leaders to either foot a bigger share of the bill or compel private investors to chip in to meet a 90 percent participation goal. “Our view is that IIF yield assumption in calculating this is too low,” . “As the market stands right now, the haircut banks will take if they sign up to the IIF proposal would be much higher than 21 percent. The plan might fail as it’s going to be difficult to achieve the required 90 percent rollover rate that the IIF is hoping for.”

Italian Bonds Decline After Borrowing Costs Rise at Nation’s Debt Sale - Italian bonds fell for a second day, increasing the yield spread over German bunds, after the nation’s borrowing costs rose at a sale of 10-year debt and Standard & Poor’s said Greece risks further defaults. Italy’s 10-year yield surged to the most in more than a week amid speculation a probe into a former aide of Finance Minister Giulio Tremonti may force him to step down. German yields fell to near a five-month low versus their U.S. counterparts as American lawmakers pushed conflicting plans to raise the nation’s debt ceiling. Bunds rose for fifth day, the longest streak since April.Italy sold 2.7 billion euros of its 10-year benchmark security, less than the maximum target of 3 billion euros. The debt was priced to yield 5.77 percent, higher than 4.94 percent the last time the securities were sold on June 28, and drew bids for 1.38 times the securities on offer, compared with 1.33 times. In six sales of 10-year bonds this year, the average bid- to-cover ratio was 1.42 and the average yield was 4.81 percent.

Italy says it may default on Greek commitment - If you want to know how the EFSF could implode all of a sudden, you got a glimpse yesterday. Reuters quoted unnamed eurozone officials as saying that Italy may not be able to participate in the next Greek tranche in September, due to the rise in its own borrowing costs, which are now close to the peak last week ahead of the summit. The German-Italian spreads are now at the second highest level we have ever recorded. During a conference call of euro zone finance officials on Thursday, the Italian official said Italy might have to use the "step-out" option, which you can trigger if your own financing costs exceed those of the Greek loans. When a country steps out of the arrangement, other countries will have to make up its share, which in the case of Italy is a whopping 18%.  Sentiment about Italy was not helped by a minor scandal involving Giulio Tremonti over the use of an apartment, owned by a former adviser, who is now himself under police investigation. Tremonti said yesterday that he had resigned “from the apartment”. Corriere della Sera has more on this story.

Moody’s threatens Spain rating cut - Rating agency Moody’s on Friday placed Spain on review for a possible downgrade, citing weak growth and funding pressures, hitting the euro on concerns a Greek rescue package has not laid contagion fears to rest. Moody’s placed Spain’s Aa2 government bond ratings on review for possible downgrade and said funding costs would remain high for the Spanish government in the wake of the Greek package which signalled a clear shift in risk for bondholders. The package set a precedent for private sector participation in future sovereign debt restructurings in the euro area, Moody’s said. “The rating agency ... notes that challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector,” the agency said in a statement. The euro fell after the Moody’s release.

Spain Placed on Downgrade Review by Moody’s - Spain faces a possible downgrade by Moody’s Investors Service as its regions struggle to cut budget deficits and last week’s Greek bailout increases the risk that bondholders will have to pay for further European rescues. Moody’s is reviewing the nation’s Aa2 classification, the ratings company said in a statement today. A cut would probably be “limited to one notch,” Moody’s said. The euro fell. Spain has the same credit rating as Italy, which is also on review for downgrade at Moody’s. “This news is a blow to Europe’s efforts to contain the debt crisis to smaller countries like Greece or Portugal,” . “Rating downgrades, or any threat in this regard, do not gel with highly sensitive market sentiment.” Spain, the euro region’s fourth-largest economy, is trying to rein in a surge in borrowing costs and convince investors it won’t follow Greece, Ireland and Portugal in seeking an international bailout. While European leaders on July 21 agreed to bulk up their rescue fund to set up a firewall around countries such as Spain, the yield on the country’s 10-year bond has again breached 6 percent after falling last week.

Real retail sales in Europe: will German consumers save the day? Maybe, perhaps - Rebecca Wilder - Retail sales in Germany and Spain were reported last week for the month of June. On a working-day and not-seasonally adjusted basis, real retail sales fell 7.0% on the year in Spain. In contrast, working-day and seasonally adjusted real retail sales surged over the month in Germany, 6.3%, and posted a 2.6% annual gain. But the Spanish data is better than the non-seasonal numbers would suggest. In fact, accounting for seasonal factors as in the manner done by the Federal Statistical Office of Germany, Spanish real retail sales posted a monthly gain, 1.2% in June. Don't get too giddy on me - the Spanish data looks awful in a small panel (time series and cross section).  The chart above illustrates the seasonally adjusted level of real retail sales for Germany, Spain, Italy, and the US. Since last year, Spain and Italy have seen a precipitous decline in real retail sales. This decline is especially coincident with the outset of fiscal austerity, as I highlighted in a post last month.

List of Gross External Debt by Country - External debt is the total  public (government) and private debt owed to nonresidents repayable in internationally accepted currencies, goods, or services. This is gross (total) external debt. It does not measure net debt. External debt is different to measures of public (government) debt. See: List of national debt by country.

UK GDP figures show slower growth of 0.2% - Growth in the UK economy slowed in the three months to 30 June, partly because of the extra bank holiday in April. Gross Domestic Product (GDP) grew by 0.2% in the second quarter, according to the Office for National Statistics, down from 0.5% in the previous quarter. The ONS said growth had also been slowed by some other one-off factors, including the Japanese tsunami. Chancellor George Osborne said the growth was good news, but Ed Balls accused him of choking the recovery. 'Safe haven' "The positive news is that the British economy is continuing to grow and is creating jobs," said Mr Osborne. "And it is positive news too that at a time of real international instability we are a safe haven in the storm." But shadow chancellor Ed Balls said that the slowdown was a serious problem for the government and it should take steps to boost growth. "These figures show that last year's recovery has been recklessly choked off by George Osborne's VAT rise and spending review," he said.

What a difference the Bank makes - BRITAIN'S economy faces serious economic headwinds, and the strain is showing. British economic activity grew by just 0.2% from the first quarter to the second, thanks largely to a big decline in output in production industries. Kash, at the Street Light, draws the obvious conclusion:It's not mysterious: when you raise taxes and cut government spending, growth slows. And when you do that during a very fragile and weak recovery, you can push your economy back into recession, or at best, choke off growth almonst completely. That's exactly why, as has been extensively written about both here and elsewhere, austerity during a time of economic weakness is not a good way to beat a budget deficit, and will be largely self-defeating. Given the debt panic sweeping the European continent, Britain's decision to pursue a preemptive fiscal consolidation looks prudent (though the low level of yields on British debt indicate that austerity has been more aggressive than it needs to be, perhaps putting the economy at unnecessary risk). What should stand out, however, is the significant difference in Britain's experience relative to the euro zone's.

Austerity in the UK: 0.2 Percent Growth - We're not the only English-speaking country with a representative government that's high on austerity policy right now. The U.K.'s just gotten its 2nd quarter growth reports after nearly a year of a Conservative/Liberal coalition, cuts, and tax hikes. How's it going? A slowdown in Britain's growth in the second quarter means that the economy is weaker than thought and has no chance of meeting its official growth target this year. The eagerly awaited preliminary GDP estimate for April to June showed the economy growing by 0.2%, rather than contracting. Well, at least this is mostly the fault of tax cuts, which we're not trying here. The fact that the contraction has come before the economy has begun to feel the impact of the VAT rise or the start of the spending cuts, due to bite from April, has also worried ministers. Well, at least their realistic long-term cuts are assuaging the markets. Right? The weak growth is fuelling fears that Britain could lose its AAA credit rating unless the economy picks up sharply in the third quarter.

Feel the Austerity - The Cameron government's austerity plan in the UK is near its one-year anniversary, and its effects continue to exactly match the prediction that any decent Macro 101 student could provide as the correct answer to a final exam question: UK GDP figures show slower growth of 0.2%:Growth in the UK economy slowed in the three months to 30 June, partly because of the extra bank holiday in April. Gross Domestic Product (GDP) grew by 0.2% in the second quarter, according to the Office for National Statistics, down from 0.5% in the previous quarter. It's not mysterious: when you raise taxes and cut government spending, growth slows. And when you do that during a very fragile and weak recovery, you can push your economy back into recession, or at best, choke off growth almonst completely. That's exactly why, as has been extensively written about both here and elsewhere, austerity during a time of economic weakness is not a good way to beat a budget deficit, and will be largely self-defeating.

Don’t put faith in voodoo tax cuts - Remember voodoo economics? With pitifully little evidence, the faith that general tax cuts pay for themselves by driving economic growth has excited the right in the US for a generation. Thankfully, Britain was never seriously infected with the voodoo. Labour and Conservative governments understood that cutting deficits is hard and requires pruning public expenditure and raising taxes. But Britain cannot rest on its laurels. A new wave of voodoo has taken over the US Republican party and the same beliefs are appearing in unlikely places in the UK too. This week’s second quarter figures for British growth were not great. Expansion of 0.2 per cent after six months of stagnation is nothing to write home about. But neither were the data terrible. One-off events – a royal wedding with an additional bank holiday and Olympic ticket sales – reduced the measured growth rate by up to 0.5 percentage points. The economy has disappointed this year and the question is what the authorities should do about it. Two people know the answer – lower taxes. Boris Johnson, Mayor of London, thinks taxes should be cut as a way “of stimulating consumption”. The mayor of London has an unlikely ally in Ed Balls, the shadow chancellor.

Vince Cable calls for action as consumer confidence slides - A sustained decline in living standards, soaring inflation and worries about job prospects sent the UK's main index of household finances down last month to its lowest level since the depths of the recession, adding to concerns that the chancellor, George Osborne, needs to make greater efforts to boost the economy. The Markit household finance index dropped to its lowest level for two and a half years, marking eight months of falling consumer confidence.. Vince Cable, the business secretary, highlighted the growing alarm in cabinet at the poor state of the economy when he said that growth was so worryingly weak that the Bank of England should undertake another round of monetary expansion through quantitative easing. Cable believes that without further action Britain could wait many years for a recovery after being locked into a long L-shaped recession.

The case for more quantitative easing is growing - The latest figures show that Britain’s economy grew by only 0.2 per cent in the second quarter, which the Office for National Statistics says was equivalent to 0.7 per cent after taking account of the extra bank holiday for the royal wedding, and the effects of the Japanese earthquake. One excuse after another! Taking a slightly longer view, the economy has barely grown at all, according to the official statisticians, over the past three quarters. What should be done about this? The answer depends on why growth has slowed down so sharply in the official statistics. One strong possibility is that the ONS is significantly underestimating the true level and growth rate of gross domestic product, as it has done for long periods during previous economic recoveries. Alternative  economic indicators continue to look more buoyant than the GDP figures. For example, business survey data indicate that the economy may have grown by about 1 per cent in the first quarter, and by 0.6 per cent in the second quarter. Furthermore, labour market data have not weakened in the manner that would be expected if the economy had stagnated

1 comment:

Town Crier said...

When we were children we are told of a mystical, magical god that loves all and is just. We are told that governments exist to provide us with justice.
We are told that the cure for despair is hope but having existed in this world for for over half a century I have come to learn a greater truth about god and government that is far from the mystical and magical lessons we are taught in childhood.
Unfortunately many of us would rather continue to drink from the pap than take up a knife and fork and fill ourselves with reality.
I hope and pray all will go well for those in despair.