Fed balance sheet grows to another record size (Reuters) - The Federal Reserve's balance sheet expanded to a record size in the week ended July 6 as the central bank bought more bonds in an effort to support the economy, Fed data released on Thursday showed. The purchases were part of its $600 billion program, dubbed QE2, aimed at stimulating investment and economic activity. The final purchase under the $600 billion program was done on June 30, although the central bank continues to buy Treasuries under a previously announced program using the proceeds from maturing agency bonds and mortgage-backed securities. The balance sheet rose to $2.854 trillion in the week ended July 6 from $2.849 trillion in the week ended June 29.
Fed Balance Sheet Expands In Latest Week As Treasury-Buying Program Ends -The U.S. Federal Reserve's balance sheet expanded in the latest week, as the central bank brought an end to its Treasury-buying program aimed at shoring up the economic recovery. The Fed's asset holdings in the week ended July 6 climbed to $2.874 trillion, from $2.869 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.625 trillion on Wednesday, from $1.617 trillion. The Treasury purchases were completed at the end of June, and Fed officials have signaled it remains unlikely they will start another round of quantitative easing despite recent economic data suggesting the recovery may be flagging. Thursday's report showed total borrowing from the Fed's discount lending window fell to $12.55 billion on Wednesday from $12.85 billion a week earlier.Borrowing by commercial banks slipped to $5 million from $17 million the week before. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.453 trillion, from $3.441 trillion the previous week.Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.716 trillion from $2.702 trillion in the previous week.
Fed Behaving Dangerously, Fed President Says (podcast) Every time the Fed's key policy committee met last year, almost everybody in the group agreed on what the Fed should do. On today's Planet Money, we talk to the one guy who, meeting after meeting, cast the lone "no" vote: Thomas Hoenig, president of the Kansas City Fed. Hoenig thinks the Fed is repeating mistakes of the past, keeping interest rates too low for too long. That risks creating another bubble — and another crash, he says. Hoenig says the Fed's decision to lower interest rates in 2003 helped fuel the credit bubble that led to the recession: ...unemployment is high today because we tried to make it lower, faster than we should have in 2003. We should learn from that. ... I want to see pepole back to work. But I want them back to work permanently. I don't want them back to work until the next bubble pops and we have unemployment back up to 11 or 12 percent
The effectiveness of quantitative easing - This week I attended a conference hosted by the Federal Reserve Bank of St. Louis on quantitative easing. The purpose of the conference, as explained by Bank President James Bullard in his opening remarks, was to answer Stanford Professor John Taylor's challenge to provide research of real-time usefulness to policy makers. The conference featured analyses by 5 different research teams of the effects of recent quantitative easing measures adopted in the United States and United Kingdom. Here are the 5 papers presented at the conference, 4 of which we've already called to the attention of readers of Econbrowser (with links to Menzie's and my earlier discussions provided for convenience):
- Large-Scale Asset Purchases by the Federal Reserve: Did They Work? by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack (see Econbrowser October 2010).
- The Large-Scale Asset Purchases Had Large International Effects by Chris Neely (see Econbrowser July 2010).
- The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment, which is my paper with Cynthia Wu (see Econbrowser August 2010, December 2010, and February 2011).
- The Financial Market Impact of Quantitative Easing by Michael Joyce, Ana Lasaosa, Ibrahim Stevens and Matthew Tong.
- Flow and Stock Effects of Large-Scale Treasury Purchases by Stefania D’Amico and Thomas King (see Econbrowser October 2010).
World, Not Ended - Krugman - QE2 — “quantitative easing 2″, the Fed’s program of buying long-term bonds — ended last week. For a program that arguably did very little, QE2 attracted an amazing amount of vitriol. On one side, it was accused of fomenting “currency wars”, driving up inflation and/or exchange rates in developing countries. On the other, it was claimed that the program was masking the true effects of the US budget deficit, and that interest rates would soar after it ended.Even people who should have known better said stuff like this. And here we are. Strange to say, the world as we knew it has not ended. Interest rates are considerably lower than they were when Bill Gross began making his dire pronouncements: As of this morning, the 10-year rate was 3.09%. And Brazil’s real is still hitting records. Needless to say, nobody will ever admit that they were wrong.
QE2 Shocker: The Whole $600 Billion Wound Up Offshore - On June 30, QE2 ended with a whimper. The Fed's second round of "quantitative easing" involved $600 billion created with a computer keystroke for the purchase of long-term government bonds. But the government never actually got the money, which went straight into the reserve accounts of banks, where it still sits today. Worse, it went into the reserve accounts of FOREIGN banks, on which the Federal Reserve is now paying 0.25 percent interest. Before QE2 there was QE1, in which the Fed bought $1.25 trillion in mortgage-backed securities from the banks. The Fed reports that the accumulated excess reserves of depository institutions now total nearly $1.6 trillion.Interestingly, $1.6 trillion is also the size of the federal deficit - a deficit so large that some members of Congress are threatening to force a default on the national debt if it isn't corrected soon. So, here we have the anomalous situation of a $1.6 trillion hole in the federal budget, and $1.6 trillion created by the Fed that is now sitting idle in bank reserve accounts. If the intent of "quantitative easing" was to stimulate the economy, it might have worked better if the money had been delivered directly to the Treasury. That was actually how it was done before 1935, when the law was changed to require private bond dealers to be cut into the deal.
The debt ceiling and the end of QE2 - This is a trivial point, but I haven’t seen it made. (chart)It will be very difficult to tell whether the expiration of QE2 was the end of the world, or whether it will matter very much at all, until the debt ceiling standoff is resolved. Quantitative easing alarmists tend to take a “flow” view of Treasury bond prices. During QE2, the Federal Reserve was purchasing a substantial fraction of the debt issued by the Treasury, reducing the flow of securities that the private sector was required to absorb. Without the Fed as a megapurchaser, the private sector will have to absorb a larger quantity of debt, and may demand concessions on price (or, equivalently, higher yields) in order to do so. QE2 has ended, but the net flow of Treasury securities to the private sector has not increased. On the contrary, since mid-May net issuance has ground to a halt, as the Treasury has juggled intragovernmental accounts to fund itself without violating the debt ceiling.I have no idea whether the QE2 Cassandras are correct or not. But we won’t have a reasonable test of their hypothesis, even by the rough and ready evidentiary standards of a blogfight, until the US Treasury resumes funding its deficit by selling securities to the public at large.
Why QE 3 Will Merely Keep The Lights On - This is a piece that has been festering in my head for quite some time now and I was waiting for the right moment to pen it. That time is now. In some ways The Bernank made a huge mistake by not launching QE3 right away when he had the chance. Now don’t get me wrong, I am not in favor of any of this nonsense and I think The Bernank’s profession needs to go the way of the dodo bird, but I mean from the perspective of a Central Banker I think he made a big mistake by taking a breather from at least the printing and manipulations that they admit to. The reason I say this is because up until the last month or so The Fed had been essentially telling the American sheeple that all was under control and that since The Bernank had studied the Great Depression and Japan he could save us from all the mistakes that were made back in those less enlightened times. The Fed was saying that they could pull off the equivalent of preventing a serious hangover for someone that chugged an entire bottle of tequila. They basically claimed to have found a way to break the laws of the universe.
How Should the Fed Prepare for the Eurozone Fallout? - Nick Rowe is concerned that the collapse of the Eurozone could lead to another Lehman-type event for the global financial system. He is also wondering what central banks should be doing in preparation for such an event. Nick is not the only one concerned. Others have expressed concerned that financial contagion could arise from credit default swaps on Greek bonds or U.S. money market funds that are indirectly linked to the Greek economy through investments in the core Eurozone countries. Even Fed Chairman Ben Bernanke expressed concern in his last press conference about the indirect exposure the U.S. economy has to Greek crisis: So what can the Fed do? Here is a suggestion: the Fed could say if total current dollar spending begins to plummet because concerns about the financial system are causing investors to rapidly buy up safe money-like assets (time and saving accounts, money market accounts, treasuries, etc.) then the Fed would begin buying up less-safe and less-liquid assets until the investors' demand for money-like assets is satiated such that they return total current dollar spending to its previous level. The Fed would need to stress the "until" part means it would purchase as many trillions of dollars of assets as necessary to restore total current dollar spending.
The Carry Trade and Fed Swap Lines - At the end of June, the Federal Reserve extended its dollar swap lines to the European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Canada. During the panic, up to fourteen central banks were using these lines. Simply put: the dollar is the world’s reserve currency and so the Fed is the world’s lender of last resort. The panic is over now. So what about the carry trade then? Since interest rates are as low as they can go in the US, it makes sense for institutions, domestic and foreign, to load up on USD debt and buy investments wherever the return is highest. Higher interest rates would end the appeal of the carry trade. I am sceptical that the Fed will raise rates anytime soon. You would need a lot more inflation for that to happen. You do have The St. Louis Fed’s James Bullard of “Seven Faces of The Peril” fame out trying to anchor the discussion around headline inflation. However, the consensus at the Fed is going with core inflation -- and right now core inflation is not going into the stratosphere. The same is true for the UK by the way, where inflation is well above the central bank’s target. Note that despite Chinese hikes, Chinese real rates are negative, so it's clear that the Fed and the BoE are not the only ones on easy street.
Fed Releases More Details on Its Effort to Bail Out Lehman and Other Dealers - Yves Smith - Bloomberg has a new story on its continuing efforts to pry more information out of the Fed via Freedom of Information Act requests on who borrowed what when in the runup to the financial crisis. The central bank had refused to provide details of what various needy financial firms had gotten under its single tranche open markets operations program, which was launched in March 2008. Lehman received a peak amount of $18 billion out of a total program size of $80 billion. Now why does all this matter? Perry Merhling, in an earlier post about the single tranche open market operations, underscored that the real significance of this program, along with two others, the Primary Dealer Credit Facility and the Term Asset Backed Securities Lending Facility: the Fed had crossed the Rubicon and had decided to prop up dealers, not just banks. And as the Lehman case illustrates, it was doing so indiscriminately. Lehman was a bigger version of Bear: a subscale player that had placed virtually all of its chips on real estate in an effort to catch up with its bigger peers. Yours truly and other commentators saw that Lehman’s accounting was dubious. The Fed was supporting it without bothering to understand what was going on.
Lehman Borrowed $18B From Secret Fed Program - Lehman Brothers Holdings Inc. (LEHMQ)’s brokerage borrowed as much as $18 billion in four separate loans from a previously secret program of the U.S. Federal Reserve in June 2008, three months before its parent filed the biggest bankruptcy in U.S. history. The program, which peaked at $80 billion in loans outstanding, was known as the Fed’s single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks from March 7, 2008, to Dec. 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the program. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates. The Lehman brokerage, Lehman Brothers Inc., tapped the ST OMO program for as much as $5 billion in short term funding in March 2008, and lower amounts at other times during the month. It took as much as $10 billion in June as the credit crisis worsened, according to Fed data. The maximum outstanding for any period was $18 billion.
Goldman Took Biggest Loan in Federal Reserve Program - A unit of Goldman Sachs1 took the biggest single loan from a Federal Reserve2 lending program whose details have been secret until now. The Goldman Sachs unit borrowed $15 billion from the Federal Reserve on Dec. 9, 2008, the Fed said in data released on Wednesday. The Fed made 28-day loans from March 7, 2008, to Dec. 30, 2008, as part of an $80 billion initiative, the central bank said. The information was released in response to a Freedom of Information Act request by Bloomberg News. The central bank resisted previous requests for more than two years and released information in March on its oldest loan facility, the discount window, only after the Supreme Court ruled it must release the data. When Congress mandated the December 2010 release of other data on the Fed’s unprecedented $3.5 trillion response to the 2007-9 collapse in credit markets, information about its so-called single-tranche open-market operations was not included..
Goldman Took Biggest Loan in Fed Program - Goldman Sachs & Co., a unit of the most profitable bank in Wall Street history, took $15 billion from the U.S. Federal Reserve on Dec. 9, 2008, the biggest single loan from a lending program whose details have been secret until today. The central bank released data for its $80 billion initiative, called single-tranche open-market operations, or ST OMO, which made 28-day loans between March 7, 2008, and Dec. 30, 2008, in response to a Freedom of Information Act request by Bloomberg News. ST OMO is the last known Fed crisis lending program to have its details made public. The central bank resisted previous FOIA requests for more than two years and released information in March on its oldest loan facility, the discount window, only after the U.S. Supreme Court ruled it had to. When Congress mandated the December 2010 release of other data on the Fed’s unprecedented $3.5 trillion response to the 2007-2009 collapse in credit markets, ST OMO wasn’t included.
How the Federal Reserve continues to conduct shadow bailouts for the banking beasts and sets the world economy on FIRE. Fed balance sheet now at a record $2.84 trillion as wages decline and banking profits soar. Fed balance sheet now equivalent to 20 percent of U.S. GDP. The Federal Reserve is primarily concerned with one thing and that is to protect the interests of the banking industry. The Fed has no desire or need to protect the underlying economy. If they can get away with allowing banks to jump from one bubble to another they will do so. The success of the overall economy is only consequential if it aligns with the deeper interests of the banking cabal. This weekend former Fed Chair Alan Greenspan mentioned that simply bailing out Greece was a temporary measure. When pressed he went back into “Greenspeak” and rambled on in his typical obtuse language. The reason why global banks fear Greece is not because of the country itself, but because the country has billions of dollars in debt that global banks hold. These banks do not want to pay for their bad bets and would rather shift the cost to the overall population in general. The Fed balance sheet here in the U.S. is now up to $2.84 trillion, another record that gets no airtime in the press. The Federal Reserve continues with clandestine bailouts only to protect the interests of the banking elite.
QE2 helped the rich and screwed the poor. - When Fed chairman Ben Bernanke last year announced the $600 billion second round of quantitative easing (which within the finance world goes by the nautical-sounding nickname "QE2"), he warned2 that it might have some unanticipated consequences. "We do not have very precise knowledge of the quantitative effect of changes in our holdings [of Treasuries] on financial conditions," he said. One of these side effects turns out to be that, at least in the short term, the rich got richer and the poor got poorer. If the Fed's major goal was preventing deflation, then QE2 has succeeded (with the caveat that we don't know what would have happened without QE2). But there are some other things that happened during the past year:
- 1) Stocks soared. From Bernanke's speech through the end of June 2011, the Dow Jones Industrial Average increased almost 25 percent.
- 2) Speculative assets ranging from Chinese dotcoms to social networking start-ups went crazy.
3) Just as skeptics feared, commodities ranging from oil to silver to cotton to food have also seen dramatic increases in price. For instance, the Reuters/Jefferies CRB index4, which is designed to track global commodities markets, is up more 25 percent since Bernanke announced QE2.
Ron Paul’s Surprisingly Lucid Solution To The Debt Ceiling Impasse - The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself. Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.
Required reserves: much smaller than you think - The blogosphere has already responded in force to Dean Baker’s strange proposal to destroy the $1.6 trillion in Treasuries held by the Fed and use increased reserve requirements to maintain the Fed’s balance sheet once QE is withdrawn. Greg Mankiw poses it as an “exam question”, and rightly observes that the proposal is a mixture of accounting gimmickry and financial repression. (To be fair, the “accounting gimmick” is part of the intent: the idea is to circumvent the statutory debt limit.)But there’s also a simpler, quantitative problem with Baker’s analysis: he doesn’t seem to have any clue how small required reserves currently are. Let’s take a look: Currently, banks need to hold only $80 billion in reserves. And that’s in the midst of an ongoing recession, where consumers and businesses have plowed money into liquid assets and, through interest on reserves, the Fed has eliminated the cost of keeping money in accounts with a reserve requirement. Before the spectacular recent increase, the level of required reserves was closer to $40 billion.
Ron Paul's debt default proposal - Congressman Ron Paul (R-TX) is apparently proposing that the U.S. Treasury simply refuse to pay interest and principal on the $1.6 trillion in Treasury securities currently owned by the Federal Reserve. Dean Baker, Greg Mankiw, Steve Williamson, and Stephen Gandel all seem to think it's not a totally crazy idea. Congressman Paul's position seems to be that he never approved of the Fed's purchases of U.S. Treasuries, so why should taxpayers have to sacrifice to pay back the Fed? The key point to remember here is that it was the Treasury, not the Fed, that initially decided to borrow these sums. Any time Congress spends more than it takes in as taxes, it is imposing a commitment on future taxpayers to make up the difference. The taxpayers owe that money whether the Fed buys the securities or not. The Fed made a determination that by temporarily holding a greater portion of that Treasury debt than usual, it could alleviate some of the suffering and waste that results from unemployment and idle production capacity. Reasonable people can and do disagree about the extent to which the Fed's measures were helpful for that purpose. But that has nothing to do with the commitment on future taxpayers to pay the bill for the previous decisions of the U.S. Congress and President. That commitment was made when the Treasury first issued the securities, and that commitment did not change when the Fed bought those same securities.
Avoiding the word “tax” - Consider the following: when Dean Baker proposes that we cancel the Treasury debt held by the Fed, he’s essentially saying (aside from the temporary accounting gimmick) that we should undertake a long-term shift in the composition of debt, from bonds to money. Why? Most observers suspect that the Fed will eventually pull back the money created through quantitative easing. To so, however, it needs to sell lots of assets—and if half of its assets disappear, this is no longer a viable option. Under Baker’s proposal, then, the Fed will be forced to leave over $1 trillion in excess reserves in the system, until it recapitalizes through profits (far in the future) or is bailed out by Congress (in which case the proposal is completely circular). Debt that would otherwise be issued by the Treasury will be left in the form of money instead. What happens then? Quite possibly nothing. With so many reserves in the system, the premium on reserves will linger around zero—no one will sacrifice yield to hold reserves when equivalent riskless assets are available. The rate paid on reserves, the federal funds rate, and the short-term T-bill rate will all be roughly the same. In this environment, issuing debt in the form of money rather than bonds is completely useless: you can borrow at the same rate with T-bills. Monetization changes nothing.
The Sorrow and the Pity of Another Liquidity Trap – DeLong - Back in the third quarter of 2008, the public held about $5.3 trillion of U.S. Treasury bills, notes and bonds. As the recession hit, tax revenue plummeted, and government spending rose, that total reached $9.4 trillion by mid-2011. We’re on target to have $10.7 trillion outstanding by mid- 2012 -- doubling the Treasury debt held by the public in just four years. Supply and demand tells us that a steep rise in Treasury borrowings should produce a commensurate fall in Treasury bond prices and thus higher interest rates -- and that increase should crowd out other forms of interest-sensitive spending, slowing productivity growth. Yet the market has swallowed all these issues without so much as a burp. By all accounts, it’s smacking its lips in anticipation of the next tranches. At the end of 2008, as the economy collapsed and the pace of net Treasury debt increases quintupled, it seemed we were about to discover that limit. I presumed we had a little time for expansionary fiscal policy to boost the economy -- a year, maybe 18 months -- before the bond-market vigilantes would arrive. They would demand higher interest rates on Treasury bonds, which would begin seriously crowding out the benefits of fiscal stimulus. But it didn’t happen in 2009. It didn’t happen in 2010. And it isn’t happening in 2011. There are no signs from asset prices that the market is betting heavily that it will happen in 2012.
Liquidity Trapped - Krugman - Brad DeLong has a nice piece for Bloomberg about the nature of the trap we’re in. But I’d emphasize something a bit different from what Brad does. His piece is set up as a mea culpa — he should have seen the possibility of this kind of trap, but didn’t. I’d say that’s a very pardonable error compared to the many people who are still denying the nature of the trap we’ve been in for more than 2 1/2 years. Think of it this way: those of us who worried about the liquidity trap (see the macro readings off to the side for background) made two big predictions that ran very counter to the kind of stuff you were hearing on CNBC and reading in the Wall Street Journal. We said that even if the Fed printed lots of money (not really, of course; we’re talking mainly about bank reserves), it would not be wildly inflationary. And we also said that even very large government deficits would not cause soaring interest rates as long as the economy stayed depressed.
The Sorrow and the Pity of Economists (Like DeLong) Not Learning from Their Mistakes - Yves Smith - I hate to seem to be beating up on Brad DeLong. Seriously. As I’ve said before, he is one of the few economists willing to admit error and not try later to minimize or recant his admission (unlike, say, Greenspan). And he seems genuinely perplexed and remorseful. This puts his heads and shoulders above a lot of his colleagues, at least the sort whose opinion carries weight in policy circles. Even with DeLong making an earnest effort to figure out why he went wrong, his latest musings, via a Bloomberg op-ed, “Sorrow and Pity of Another Liquidity Trap,” show how hard it is for economist to unlearn what they think they know. And as the great philosopher Will Rogers warned us, “It’s not what you know that gets you in trouble. It’s what you know that ain’t so.” So it’s important to regard DeLong as an unusually candid mainstream economist, and treat his exposition as reasonably representative if you could somehow get his peers to take a hard, jaundiced look at how wrong they have been of late. DeLong’s mea culpa is about how he and his colleagues refused to take the idea that the US could fall into a liquidity trap seriously. As an aside, this is already a troubling admission, since many observers, including yours truly, though the Fed was in danger of creating precisely that sort of problem if if dropped the Fed funds rate below 2%. It would leave itself no wriggle room if the crisis continued and it had to lower rates further into the territory where further reductions would not motivate changes in behavior.
Fed's Hoenig: Rates should have risen by now - The Federal Reserve should have raised its short-term interest rate target 18 months ago, said Thomas Hoenig, the retiring president of the Kansas City Fed on Thursday according to a report from Dow Jones Newswires. After a speech in Ada, Okla., Hoenig was asked when the Fed could raise rates. Hoenig replied that he didn't know the answer to that. "I thought I had a good explanation for why they should do that 18 months ago." Hoenig said he favors a "non-zero monetary policy." Hoenig is retiring from the Fed is October. He is not a voting member this year. The Fed has kept rates in an historic low range of 0 to 0.25% since December 2008.
Bullard says core inflation is a rotten concept - Whenever I write about core inflation, I hear from readers who think it's a ridiculous concept. After all, it excludes food and energy, which are big -- and sometimes volatile -- parts of many people's budgets. Guess what, folks: An important Federal Reserve official agrees with you. James Bullard, president of the St. Louis Federal Reserve Bank, said in a speech last night that It is time to drop the emphasis on core inflation as a meaningful way to interpret the inflation process in the U.S. What's more, he uses the same common-sense argument that I often hear from readers: One immediate benefit of dropping the emphasis on core inflation would be to reconnect the Fed with households and businesses who know price changes when they see them. With trips to the gas station and the grocery store being some of the most frequent shopping experiences for many Americans, it is hardly helpful for Fed credibility to appear to exclude all those prices from consideration in the formation of monetary policy. The usual argument given for excluding food and energy is that they're too volatile, and that the Fed would whipsaw the economy if it responded to every change in oil prices. During the financial crisis, though, Bullard says the opposite was true:
Fed's Bullard wants to drop core inflation as tool - The Federal Reserve should drop its long-standing focus on core inflation - which strips out volatile food and energy prices - because the concept no longer has much meaning, said James Bullard, the president of the St. Louis Fed, on Wednesday. "I...argue that many of the old arguments in favor of a focus on core inflation have become rotten over the years," Bullard said in a speech to the Money Marketeers of New York University. The consensus of economists has been that headline inflation is too volatile for policy, but Bullard said Fed officials should simply take this volatility into account. Bullard said that core inflation is not a good predictor of future headline inflation. "The FOMC needs to get a better playbook on this question so that the committee can reconnect with American households, who see prices changes daily in many of the items the committee seems to exclude from consideration in making monetary policy," Bullard said. He urged the central bank to adopt an explicit target in terms of headline inflation.
Money Supply Growth Alert - As the above chart (click to enlarge) of the M2 measure of money supply shows, recently there has been a very unusual pick-up in the amount of money in the economy: $76 billion, to be precise, in just the last week. Over the past several years and since 1995, M2 has grown about 6% per year on average, which would equate to about $10 billion per week currently; the latest surge thus stands out as a huge aberration and which warrants close attention. About 80% of the growth in M2 in the past week came from increased savings deposits at commercial banks and thrift institutions (mostly commercial banks). Over a very long period, M2 growth is still averaging only 6% a year, as the chart above shows, and that is quite unremarkable. Indeed, the persistence of 6% annual M2 growth in recent years has been a significant argument against the likelihood of a meaningful rise in inflation. We may now be seeing a significant change in that important fundamental, but of course with only one outsized-growth week, it is premature to jump to conclusions.
Now Ron Paul wants to debase the currency? - Oh dear sweet Jehovah. First Republicans, after spending years warning about the danger of a debt default, decide to not only recommend a U.S. sovereign default, but actively push for one in Congress. Now, after Republicans spent years warning us about the (then nonexistent) possibility of hyperinflation, Ron Paul comes out and suggests a policy that would be a huge step toward hyperinflation. Specifically, Ron Paul wants to have the Fed destroy its holdings of U.S. Treasury bonds. This would be retroactive seigniorage; it would mean that the money that the Fed printed in the past to buy those Treasury bonds was actually printed to pay off the U.S.'s sovereign debt. As any Econ 101 student knows, large-scale sustained seigniorage is what causes hyperinflation. Now, the Fed doing a one-off round of retroactive seigniorage would not be enough by itself to push us into Weimar Republic territory - in particular, because the money has already been printed. But it would also send a signal that the Fed is no longer an independent central bank, and that Congress feels free to strong-arm the Fed into paying off U.S. sovereign debt with printed money at any time in the future. That would be a signal that much more seignorage is on the way, which would push us into hyperinflation. (Tyler Cowen sees this possibility, but rather euphemistically labels the future seigniorage "QEIII".)
The IMF and what lies ahead for the United States - The IMF recently released its "Concluding Statement of the 2011 Article IV Mission to The United States of America". This rather thrilling title conceals an interesting summary of the United States economy by IMF staff who, as the title states, actually make official annual visits to IMF member countries as part of their research. Here are the highlights of what the IMF observed and what they project for the next few years. The statement opens by remarking that present fiscal situation in the United States is not sustainable and that "losing fiscal credibility would be extremely damaging.". The deficit reduction program proposed in February's budget is too harsh in the short-term given the fragile nature of the "recovery" but is simply not sufficient to stabilize the federal debt by the middle of the decade. I guess this is what one would call being caught "between a rock and a rather hard place." The IMF notes that the recovery has been rather slow and that it has recently weakened. As we all know, and the IMF has figured out, it is the high level of household debt, tumbling house prices and stubbornly high unemployment that has depressed consumer consumption levels and construction activity. In contrast, exports have recovered and financial conditions have improved, largely on the backs of "unprecedented liquidity support". All of that QE money has to go somewhere.
Is America facing a Japanese future? - The word “Japan” has become synonymous with economic malaise. Any time an economist wants to describe how bad things could get for an industrialized economy, he or she inevitably says something like the place “could end up like Japan.” And there is good reason why Japan has become a four-letter word in the world of economics. Ever since a gargantuan stock-and-property price bubble deflated in the early 1990s, Japan has never returned to its pre-crisis glory days. The economy slips in and out of recession. Japanese companies seem dazed and confused, and are losing out to more aggressive rivals from South Korea, Taiwan and elsewhere. The welfare of the population has stagnated. Meanwhile, Japan's policymakers and political leaders do a lot of blabbering and very little reforming. They often appear out-of-touch with the real problems of the economy or unwilling to fix the ones they do recognize. Japan's mess is that dreaded “L”-shaped recovery, in which an economy collapses, and then just goes flat, year after year, never quite recovering from its fall. With the recovery in the U.S. so feeble nearly three years after the evaporation of Lehman Brothers, we have to wonder: Is America facing the same future as Japan?
Fed Watch: Grim - The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is. The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession. The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution. Why monetary policymakers are fixated on the pre-1984 period is a mystery.
The chance of avoiding another downturn is now almost impossible - 10 Year bond rates for June 2011 came in at 3.10%. Inflation figures for the same month are due on 2011-07-15 (Friday next week). In order for the US Real 10 year bond rate to remain positive, June inflation needs to have an index reading of 223.496 - which implies a monthly deflationary result of -0.6%. At this point there is very little evidence of a deflationary hit in June (eg soaring US dollar, credit crunch, large drop in sharemarket value). Take a look at my spreadsheet.
Economists: laissez-faire or plain lazy? - Two prominent medical researchers reviewed hundreds of thousands of records on infant and childhood mortality dating back over the last eight centuries. They discovered that over the vast majority of this 800-year period, only around half of newborns survived to adulthood; they concluded that we should not expect our children to live to adulthood. While the absurdity of such extrapolations on health outcomes should be immediately apparent, for some reason, those in policy circles think it is perfectly reasonable to make the same sort of extrapolations when it comes to economic outcomes. Two prominent economists, Ken Rogoff and Carmen Reinhart, did an extensive examination of financial crises over the last eight centuries. They found that the after-effects of these crises tend to be longlasting, with economies often taking a decade or more to get back to normal levels of output. But why would anyone think that this past history any more condemns economies to suffer prolonged downturns from the recent financial crisis than that past history will condemn our children to an early death. Just as we have made enormous advances in public health and medicine, we have reason to believe that we have made enormous advances in economics as well.
The Ideological Crisis of Western Capitalism - Just a few years ago, a powerful ideology – the belief in free and unfettered markets – brought the world to the brink of ruin. Even in its hey-day, from the early 1980’s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year. I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish.
The boom to come - HERE'S your quote of the morning: This is setting up to be the story of 2012 and it is setting up to be a doozy. Inflation creeping higher despite the Feds best efforts to tamp it down. A possible explosion in the growth rate if we get a virtuous cycle of more construction job leading to more household formation, leading to more construction jobs. I'd say that it's likely housing begins contributing strongly to growth within the next few quarters. But I'm less worried about a runaway inflationary boom. One of the main ways monetary policy typically works is through the residential investment channel. If rising rents push up inflation, the Fed will quickly raise rates. That will quickly reduce the appetite for new construction and dampen the upward cycle. But for the first time in some years, a well of substantial pent-up demand seems to be building. That could shift the recovery toward the kind of growth seen after the 1982 recession, if things play out the way Karl Smith sees it. And if the Fed allows it.
Hanging in there - Higher oil prices slowed the economy in the first half of this year. But I don't expect things to get a whole lot worse. One of the first places that higher oil prices can affect the economy is through auto sales. The number of light vehicles sold in the United States in June was 6.9% higher than June of last year. But June 2010 was weak relative to 2010:Q2-Q3, and the last two months clearly signal some softness in auto sales, with oil prices likely one contributing factor. Hardest hit at the moment are Toyota, Honda, and Isuzu, whose year-over-year U.S. sales were down more than 20%. Supply problems in Japan are presumably an important factor. Furthermore, the recent declines in oil prices should make the third quarter a little easier than the second. It's worth emphasizing, however, that the lower gasoline prices that consumers are currently enjoying have nothing at all to do with the strategic petroleum reserve drawdown announced two weeks ago. In fact, crude prices at the moment are back about where they were before the SPR announcement. Amazingly (but I suppose predictably), some commentators are claiming this proves the market is all driven by speculation.
Jobs Data Dim Recovery Hopes - Nonfarm payrolls rose 18,000 last month… Payrolls data for the previous two months were revised down by a total 44,000 to show increases of only 25,000 jobs in May and 217,000 in April. The jobless rate, which is obtained from a separate household survey, increased for the third straight month to 9.2% in June, from 9.1% in May. … Friday’s report showed private-sector employers, which account for about 70% of the workforce, added only 57,000 jobs in June, down from 73,000 in May. The weakness was broad-based. Manufacturing employment remained weak, adding only 6,000 jobs. Economists were expecting a bounce back as disruptions to manufacturing production stemming from Japan’s earthquake should be easing by now. Employment in the battered construction sector was broadly unchanged. The housing sector remains a big drag on the economy. Employment in professional and business services, which had shown strong gains in previous months, rose by only 12,000. Government employment fell by 39,000, the eighth drop in a row, following declines in all levels of government struggling to close budget gaps.
What's next for economy: Slow growth, weak hiring -- Almost no one is satisfied with the current state of the U.S. economy. But economists say the outlook is pretty bleak too. Sluggish economic growth will continue into 2012, if not beyond, with only modest hiring and high unemployment, according to a CNNMoney survey of 27 economists1. The economists predict that gross domestic product, the broadest measure of the nation's economic health, will grow at only a 2% annual rate in the second quarter, little improved from the 1.9% growth rate in the first three months of the year. For the full year, they're projecting growth of 2.6% -- even weaker than in 2010. While they expect growth to pick up to 3% in 2012, that's just barely enough to get employers hiring at a significant pace.Expectations started off strong in 2011, with some economists looking for growth as high as 4.3% in the first quarter2. But momentum waned in the spring after the Japanese earthquake shook the world economy and oil prices rose precipitously. Since then, economists have slashed forecasts for growth3 going forward, with some raising the risk of a new recession4.
Debt Overhang Slows U.S. Economic Recovery - Two years ago, officials said, the worst recession since the Great Depression ended. The stumbling recovery has also proven to be the worst since the economic disaster of the 1930s. Across a wide range of measures—employment growth, unemployment levels, bank lending, economic output, income growth, home prices and household expectations for financial well-being—the economy's improvement since the recession's end in June 2009 has been the worst, or one of the worst, since the government started tracking these trends after World War II. In some ways the recovery is much like the 1991 and 2001 post-recession periods: All three are marked by gradual output growth rather than sharp snap-backs typical of earlier recoveries. But this recovery may remain lackluster for years, many economists say, because of heavy household debt, a financial system still damaged by the mortgage crisis, fragile confidence and a government with few good options for supporting growth.
The next, worse financial crisis - The last financial crisis isn’t over, but we might as well start getting ready for the next one. Sorry to be gloomy, but there it is. Why? Here are 10 reasons.
The Armageddon Caucus - Kruman - In general I’m not big on worrying about how we’re setting ourselves up for the next crisis; after all, we’re nowhere near done with the current crisis. Yet it is worth noting that current trends in our policy and political discourse, in addition to blocking efforts to promote recovery, is also setting the stage for a much worse crisis further down the line. Consider a question some of us ponder now and then: this was bad, but it wasn’t a full replay of the Great Depression. Why?
- 1. Central banks intervened massively to provide liquidity, preventing a replay of the 1931 global banking crisis. They were able to do this because, as an interesting paper I missed (pdf) points out, they weren’t constrained by the gold standard.
- 2. Although there wasn’t much effective discretionary stimulus, automatic stabilizers that didn’t exist in 1931 did a lot to cushion the economy.
So consider, now, what’s going on politically. Gold bugs have taken over the GOP; even if they can’t reimpose the gold standard, they will make it very hard for future Bernankes to do even as much as the current one did to fight the crisis. And there’s a big push on not just to downsize government, but to convert federal programs like Medicaid and unemployment insurance into block grants,more or less ensuring that they will be cut rather than expanding in a slump.
The grand financial recovery myth - 8 charts reflecting the true beneficiaries of four years of taxpayer bailouts. Transfer payments make up 22 percent of household income and public debt surpasses annual GDP. While the economy is recovering in raw GDP terms the working and middle class Americans are having a smaller and smaller piece of the pie. The recovery is disproportionately flowing to a tiny fraction in our population and largely is based on targeted bailouts to the financial sector. After four full years of bailouts and transfers to the banking sector it is clear that the inflation of the stock market has occurred only because of government support of failed banks (many who are now reaping profits overseas). This also explains why unemployment is still stubbornly high and each month we keep shattering records for those receiving food stamps. The upcoming decade if we continue down this path may be known as the great middle class swindle. The evidence is rather conclusive that the current safety net resurrected by taxpayers has largely benefitted the same banking system that has led us down this unfortunate financial path. Let us examine 8 charts regarding the current state of the economy.
We Need A Depression - Now - No, do not raise the debt-ceiling. You heard me: Block the debt ceiling vote. Don’t raise it. America’s out-of-control. A debt addict. Time to detox. Deal with the collateral damage before it’s too late. We need to fix America’s looming credit default, failing economy and our screwed-up banking system. Now, with a Good Depression. If we just kick the can down the road one more time, we’ll be trapped into repeating our 1930’s tragedy, a second Great Depression. Yes, depression. Spelled: d-e-p-r-e-s-s-i-o-n. Wake up America, recessions do not work. Won’t work in the future. Remember that 30-month recession after the dot-com crash? Didn’t work. Why? Because in the decade since that 2000 peak, Wall Street’s lost an inflation–adjusted 20% of America’s retirement money. And what about the so-called Great Recession of the 2008 credit meltdown? Didn’t work either. In fact, made matters worse: Wall Street got richer by stealing from the other 98% of Americans, the middle class, the poor. And now their conservative puppets in Washington want to make matters worse, widening the wealth gap further to benefit the Super Rich.
Politics of Default: Roadmap to Debunk the Dollar - We were one of few who defended the euro when many pundits predicted parity to the U.S. dollar in the spring of 2010, when Greece’s issues first came to the fore. Since then, Old Europe’s currency has had a dramatic comeback, although not without significant jitters along the way. A roadmap is playing out that may lead the euro to debunk the dollar. Not convinced? Let’s look at what is and what isn’t working on both sides of the Atlantic, and how dynamics may play out. If one thing has been working in Europe, it’s the “dialogue” between the bond market and policy makers. Not too long ago, the types of reforms being implemented now would have been unthinkable. What’s more, in many cases, reform is being implemented by weak or minority governments. Reforms may not be implemented at the speed or as thoroughly as promised; as long as the bond market keeps up the pressure, however, an incentive is provided to continue to engage in reform, which makes it each individual country’s responsibility to sort out its problems, and thus influence the speed at which their cost of borrowing is reduced.
The Phantom Bond Market Vigilantes - Yves Smith - Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021.– Rising rates would be a precursor to something worse: a full-fledged fiscal crisis with further sharp increases in yields, declines in stock prices, and a plummeting dollar. -Macroeconomic Advisers as quoted by James Pethokoukis Pethokoukis says “this is bad. Really bad.” My take: this is bogus. really bogus. At a time when the US government is getting free money, borrowing on the short end for zero percent and interest rates are 3%, not 9%, why would anyone believe this stuff? Riddle me this: why aren’t Japanese JGBs yielding 9% instead of 2% all the way out to 30 years when they have debt to GDP of 200%? I’ll tell you why: this piece from Macroeconomic Advisors is another example of bogus, junk economics driven by ideology. The purpose is to scare people into supporting spending cuts to bring the debt burden down. It’s not like you want the US to be like Japan, so there are plenty of reasons and ways to bring the debt burden down without utilising voodoo economics.
U.S. caught China buying more debt than disclosed (Reuters) - The rules of Treasury auctions may not sound like the stuff of high-stakes diplomacy. But a little-noticed 2009 change in how Washington sells its debt sheds new light on America's delicate balancing act with its biggest creditor, China. When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures. The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing. Treasury officials then worked to keep the reason for the auction-rule change quiet, with the acting assistant Treasury secretary for financial markets instructing subordinates to not mention any specific creditor's role in the matter, according to an email seen by Reuters. Inquiries made at the time by the main trade organization for Treasury dealers elicited the explanation that the change was a 'technical modernization,' according to a document seen by Reuters. There was no mention of China.
The Federal Budget Deficit Through Nine Months of the Fiscal Year: About $973 Billion - CBO Director's Blog - In its latest Monthly Budget Review, CBO estimates that the Treasury Department will report a deficit of $973 billion for the first nine months of fiscal year 2011, $31 billion less than the $1,004 billion deficit incurred through June 2010. Revenues increased by $136 billion (or 8.5 percent) and outlays climbed by $104 billion (or 4 percent) from what they were at the same point last year. Individual income taxes, the largest tax source, showed a gain of close to $160 billion, or 24 percent. In contrast, social insurance taxes fell by $34 billion, or 5 percent, because the temporary payroll tax reduction more than offset the impact of higher wages and more employment. Revenues from other sources rose by $11 billion. Combined, individual income and payroll taxes increased by $124 billion, or 9 percent, in the first three quarters of the fiscal year. Of that amount, withheld taxes rose by $52 billion (or 4 percent), reflecting increases in wages and salaries and the net effect of recent legislation: The reduction in withholding because of the temporary payroll tax cut was partially offset by the expiration of the Making Work Pay Credit...
Washington's Books for June 2011 - Heading toward a new debt interest record for 2011? - Now that Washington is working overtime to put a bandaid on the debt ceiling issue (as if that's really going to solve the problem), I thought that I'd do a brief posting on the latest Monthly Budget Review released by the Congressional Budget Office on July 8th, 2011.The CBO estimates that the Treasury Department will report a deficit of $973 billion for the first 9 months of 2011, down $31 billion on a year-over-year basis. Fortunately for the government, revenues are about 8.5 percent higher than last year because outlays are also up but only by 4 percent. The CBO estimates that the deficit for the month of June alone will be $45 billion, down $23 billion from a year ago. On the spending side of the ledger, outlays were down $26 billion from the same month one year ago because of a drop in the estimated subsidy cost of loans and loan guarantees, a $30 billion decrease in spending on Department of Education programs and an upward adjustment of $9 billion on the cost of housing programs. As well, a drop in spending on propping up Fannie Mae and Freddie Mac lowered outlays by a further $11 billion. On the bad side, spending for net interest on the public debt was up $6 billion and outlays for Medicare and Medicaid were each $3 billion higher than the same month one year earlier. These last three spending increases are harbingers of things to come.
GOP and Democrats deadlocked on debt ceiling -- In a word: Deadlocked. President Obama and Congress go back to work today, and one of the big items on their to-do list is a deal to cut the budget deficit and raise the federal debt limit. But CBS News senior White House correspondent Bill Plante reports there are no talks scheduled between Congressional Republicans and the White House over an agreement to raise the U.S. government's debt ceiling. Republicans still refuse to consider any new taxes, and Democrats are just as adamant that a deal needs to include new revenue. Congress has raised the debt ceiling 102 times since it was first instituted in 1917, and 10 times in the last decade. But never before have the stakes been so high - or Democrats and Republicans so unwilling to budge. "Normally what you see in these negotiations is tough stances, but at least some willingness to go - not half-way, but a quarter of the way to where the other side is,"
Obama calls for bipartisan effort to cut spending - US President Barack Obama expressed confidence Saturday that Republicans and Democrats will be able to find a way to cut the nation's burgeoning budget deficit, arguing that no program can be considered off limits in the process. "I?m confident that the Democrats and Republicans in Congress can find a way to give some ground, make some hard choices, and put their shoulders to the wheel to get this done for the sake of our country," Obama said in his weekly radio address. He said, however, that the country's deficit can be cut while making investments in education, research and technology that create jobs. "It means we will have to make tough decisions and scale back worthy programs," the president noted.
Deficit Talks Focus on Taxes - Democrats have floated ideas that could raise tax revenues by some $400 billion over the next decade as they negotiate deficit reductions with Republicans, according to people familiar with the plan, posing the most contentious issue as talks reach a critical stage this week.Republican leaders say they want no tax increases in the deal, though some say they can accept ideas for generating additional revenue along with broader tax changes. Democrats say significant tax increases are required for fairness, to offset the deep cuts to government services that will make up the bulk of deficit reduction. One key question is what kinds of revenue measures Republicans might accept. A second is whether they will approve steps that raise the overall amount of tax revenue the government collects, or insist that new revenue additions be offset by tax cuts elsewhere.
2 Republicans Say They’re Open to ‘Revenue Raisers’ - Two senior Republicans said Sunday that they might be open to raising new government revenue as part of a deal to resolve the dispute over the federal debt ceiling1, but the warned that there was little time to enact a comprehensive deal. Senator John Cornyn2, Republican of Texas, said that he would consider the elimination of some tax breaks and corporate subsidies in the context of a reform of the tax code, provided that the program did not bring an overall increase in taxes. “I think it’s clear that the Republicans are opposed to any tax hikes; particularly during a fragile economic recovery,” Mr. Cornyn said on “Fox News Sunday.” “Now do we believe tax reform is necessary? I would say absolutely.” But he insisted that any such tax reform be “revenue neutral,” meaning that the government would not take in any more money from individuals or businesses than it does now. Senator John McCain3, Republican of Arizona, said he would be willing to consider some “revenue raisers” as part of a broad deal, but he refused to name specific measures.
Tax Increases and Do They Ever Fire Headline Writers? - The headline of the NYT story told readers: "2 Republicans Open Door to Increases in Revenue." However, the second paragraph of the article said: "One of the senators, John Cornyn of Texas, said he would consider eliminating some tax breaks and corporate subsidies in the context of changes in the tax code, provided there was not an overall increase in taxes." Okay folks, "not an overall increase in revenue" directly contradicts "increases in revenue." What the hell is so hard to understand about this? Cornyn said that he would be willing to redistribute the tax burden, he explicitly said that he is not open to increasing revenue. How can the NYT headline say something 180 degrees at odds with reality?
Hiking Taxes on Corporate Jets: Obama’s Version of Waste, Fraud, and Abuse - President Obama’s proposal to raise taxes on corporate jets is the Democratic version of “waste, fraud and abuse”—a political attack on a target of opportunity that has little significance in the real world. Just as pols have long implied that reducing government waste or cutting foreign aid can result in big budget savings, so now the White House is doing the same with a handful of tax breaks for the rich. Obama can do the math—he understands his corporate jet proposal would only trivially reduce the deficit. But the president wants to put the GOP on the defensive for its absolutist opposition to any tax increases. So, he claims, Republicans are willing to jeopardize the credit of the United States in order to protect, as he so dramatically puts it, “millionaires and billionaires.” And I thought he was talking about the NBA lockout.
Could the US default on its debt? (BBC Video) US Senators return to work early on Tuesday to address their country's looming debt limit. The lawmakers have cut short a week-long Independence Day break as President Obama wants them to raise the country's debt cap to prevent the government from running out of money in four weeks time. However, the Republicans and Democrats do not agree over what conditions to attach. Caroline Hepker reports.
Post credit bubble fiscal austerity leads to depression - In the video at the end of this post I speak to RT Television about fiscal austerity in the UK and the likelihood of fiscal austerity in the US. A few thoughts here: Barack Obama says: Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs. Wrong on every single count. This is why the US is probably headed for a repeat of 1938. The President knows better, but he’s saying this stuff anyway. If you have the President spouting this nonsense, you know the Republicans will use it to force cuts that will weaken the economy. The cuts are coming. The President has assured as much through his misguided rhetoric. We’ll just have to see whether the economy in the US is weak enough that they cause a double dip.
Medicare and Medicaid Could Lose Billions in Budget Talks… Obama administration officials are offering to cut tens of billions of dollars from Medicare and Medicaid in negotiations to reduce the federal budget deficit, but the depth of the cuts depends on whether Republicans are willing to accept any increases in tax revenues. Administration officials and Republican negotiators say the money can be taken from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or radically restructuring either program. Before the talks led by Vice President Joseph R. Biden Jr. broke off 12 days ago, negotiators said, they had reached substantial agreement on many cuts in the growth of Medicare, which provides care to people 65 and older, and Medicaid, which covers lower-income people. Those proposals are still on the table when Congress reconvenes this week, aides said, and are serious options that Democrats could accept in exchange for Republican concessions that raise revenues.
Obama offers up billions in cuts to Medicare, Medicaid providers. - The healthcare reform that Obama is now proposing is anything but. They are offering to screw healthcare providers, like nursing homes and hospitals out of billions, instead of inflicting pain directly on the patients themselves it seems. WTF? How does that logic work? From a NYT writeup, which is quoted throughout this post: Administration officials and Republican negotiators say the money can be taken from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or radically restructuring either program. Cutting billions in any form or fashion from M&M most certainly will inflict pain upon the patients of said services. It means the nursing homes and hospitals will have to reduce services offered, unless the patient is willing to pay for certain services themselves. The coalitions that support these service providers are pissed-the-fuck-off. Again from the NYT article: A coalition of hospital lobbyists, worried about the direction of the budget talks, has begun a national advertising campaign to block further cuts in the two health care programs, which account for about 55 percent of hospital revenues.
In debt talks, Obama offers Social Security cuts - President Obama is pressing congressional leaders to consider a far-reaching debt-reduction plan that would force Democrats to accept major changes to Social Security and Medicare in exchange for Republican support for fresh tax revenue. At a meeting with top House and Senate leaders set for Thursday morning, Obama plans to argue that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers should seize the moment to take dramatic action. As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending. Rather than roughly $2 trillion in savings, the White House is now seeking a plan that would slash more than $4 trillion from annual budget deficits over the next decade.
President Looks for Broader Deal on Deficit Cuts - Heading into a crucial negotiating session on a budget deal on Thursday, President Obama has raised his sights and wants to strike a far-reaching agreement on cutting the federal deficit as Speaker John A. Boehner has signaled new willingness to bargain on revenues. The president’s renewed efforts follow what knowledgeable officials said was an overture from Mr. Boehner, who met secretly with Mr. Obama last weekend, to consider as much as $1 trillion in unspecified new revenues as part of an overhaul of tax laws in exchange for an agreement that made substantial spending cuts, including in such social programs as Medicare and Medicaid. The intensifying negotiations between the president and the speaker have Congressional Democrats growing anxious, worried they will be asked to accept a deal that is too heavily tilted toward Republican efforts and produces too little new revenue relative to the magnitude of the cuts. Congressional Democrats said they were caught off guard by the weekend White House visit of Mr. Boehner.
Reports: Obama Pushing for Cuts to Social Security, Medicare - For months, the standard narrative among progressive commentators was that Republicans were outrageously exploiting the debt ceiling deadline to impose drastic entitlement cuts on a resisting and victimized Democratic President (he's weak in negotiations!), but The Post article makes clear that the driving force behind these cuts is the President himself, who is pushing for even larger spending cuts than the GOP was ready to accept: President Obama is pressing congressional leaders to consider a far-reaching debt-reduction plan that would force Democrats to accept major changes to Social Security and Medicare in exchange for Republican support for fresh tax revenue. . . . As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending. This morning's New York Times article similarly makes clear that it is the President who is demanding an even larger "deficit reduction" package than has previously been discussed. This is all in pursuit of "an agreement that ma[kes] substantial spending cuts, including in such social programs as Medicare and Medicaid and Social Security -- programs that had been off the table."
Ideology and economics - Barack Obama says: Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs. For ideological reasons, one might believe that limiting or reducing government is better. However, it does not follow that doing so is a painless exercise. If one does want to see government expenditure reduced for ideological reasons, the question is when and how to do so. Clearly, doing so in an abrupt way after a credit bubble is going to be the wrong way. I believe both President Obama in the US and Prime Minister Cameron in the UK understand this. Still, we have to be clear what is happening here: Post credit bubble fiscal austerity leads to depression. We are making cuts that suck money out of the economy - and there is no confidence fairy that causes businesses or households to compensate for that adjustment as President Obama points to. Rather, the desire to save in the private sector is due to the need for deleveraging in the household sector and Corporates spending like it’s the 50s due to business uncertainty in the business sector.
Obama’s Raw Deal? - Suddenly Republican leaders in Congress, after months of staring down the Democrats over a potentially disastrous debt default, began blinking so fast that they might be signaling in Morse code. Although their message is muddled and illogical -- with House Majority Leader Eric Cantor, R-Va., saying he can accept closing tax loopholes only if such measures are "revenue neutral," thus canceling their budgetary value -- the Republicans now appear to understand that they will be blamed by voters if the negotiations collapse. And Democrats appear to understand that they have the political advantage, as they voiced support for a proposal by Senate Budget Committee chair Kent Conrad, D-N.D., to reduce future deficits by $4 trillion with an even split between increased revenues and reduced spending. But just when the Republicans are showing fear and losing momentum, there is one important Democrat who seems to think it is time to wave the white flag -- and give his enemies a historic victory on the eve of his own re-election bid. According to The Washington Post, President Obama wants "significant" cuts to Social Security and Medicare in exchange for Republican agreement to let tax breaks for the nation's wealthiest families expire at the end of this year.
Killing Old People Is Fiscally Responsible - "The fiscal good has to outweigh the pain," a nameless Democrat told the Washington Post regarding President Obama's latest proposal to massively cut Social Security, against the wishes of the vast majority of Americans, in order to fund a military 670% larger than the next largest in the world, keep in place tax cuts for billionaires, fail to tax corporations or estates or investments or carbon, and balance a budget that nobody gives a rat's ass about balancing when Wall Street comes asking for handouts. Not to put too fine a point on it, Mr. President, but fuck your fiscal good. Whose fiscal good is it? And whose pain? Last week the New York Times said you hoped by hacking away at Medicare to inflict some pain on your base. That way, supposedly, the Republicans would inflict some pain on their base. Then we'd all feel better. Assuming we're all Wall Street banksters. But what if we're actually, almost all of us, the people you criminals call your bases? You, Captain Peace Prize, propose slashing Medicare and Social Security. And, in exchange, according to the Washington Post, Eric Cantor has proposed more tax cuts for free loaders who don't work for a living. What a deal! Let's face it: any bargain seems to look good to you, as long as it kills people. That makes you tough, I guess. You have a list of Americans to assassinate. You have six wars going, and more in the pipeline. You've made clear that Israel murdering unarmed aid workers trying to reach Gaza would be A-OK with you. And "pain" is just the price that other people will have to pay to do without healthcare, food, a roof, a coat, or -- for that matter -- hope. Of all your slogans, we seem to be left with Audacity alone, standing by itself among the ruins.
So It’s Down With FDR’s New Deal And Up With GOP’s Raw Deal. Obama, Say ‘No Deal.’ - Up until (relatively) recently most voters knew that effective social safety programs were important and worthwhile. No longer. It’s been a long slog, but a persistant GOP, utilizing a serious recession and a weak Democrat in the White House, has a golden opportunity to unwind that social spending embedded in the New Deal philosophy and LBJ’s Great Society. Cripes, even the conservative Pete Peterson says raise the payroll cap and SS is solvent for forever. All of the nation’s problems can be solved effectively and fairly without jettisoning social safety nets constructed by three generations of Americans who either lived through or their parents lived through the Great Depression and WWII: Social Security in 1935; the GI Bill after WWII; the Interstate Highway System projects of the 1950s and 1960s and Eisenhower’s warning about the ‘military industrial complex; JFK’s challenge to America to serve their country and to land a man on the moon; Medicare and Medicaid in the 1960s. It’s a long and honorable list of accomplishments that made American the envy of the world. America has the ability to pay its bills. Arguments that it can’t are false.
Cost of Living and CPI-Chained - Menzie Chinn at Econbrowser wrote today: Chained CPI Recent reports ([WSJ RTE] [Bloomberg] [The Hill]) indicate that under consideration as one approach to curtailing entitlement spending growth is to resort to Chained CPI, as opposed to the current official CPI series, which is based on a quasi-Laspeyres formula. From the BLS: Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) I haven't been following this, but chained CPI is a relatively new series (started in 2002), and measures inflation at a slightly lower rate than CPI or CPI-W - and over time this would add up both for Social Security payments and also for revenue (tax brackets would increase slower using chained CPI than using currently). The graph shows the year-over-year change in headline CPI, CPI-W, and chained CPI. There isn't much difference on a year-over-year basis, but notice the blue line is mostly below the other two all the time. Those small differences add up over time as the following table shows.
If Obama cuts Social Security...Wednesday night, the Washington Post reported that on top of the big cuts to Medicare he's already proposed, President Obama is now considering endorsing cuts to Social Security. In making this announcement (which formally embraces the concept of Social Security cuts first proposed by Obama's debt commission), the White House has lost all credibility in arguing that its 2012 political problems are the result of unfair expectations, particularly on the left. At the same time, the White House has finally exposed the strategy behind what so many of its apologists insisted was deft "three dimensional chess" on behalf of old-school liberalism -- and as we see, these tactics have nothing to do with liberalism and everything to do with Orwell-ism. To review: The Wall Street Journal reports that "across a wide range of measures -- employment growth, unemployment levels, bank lending, economic output, income growth, home prices and household expectations for financial well-being -- the economy's improvement since the recession's end in June 2009 has been the worst, or one of the worst, since the government started tracking these trends after World War II."
Democrats Oppose Talk of Cuts to Social Security - Congressional Democrats, who have thrived for decades as guardians of Social Security1, said Thursday that they were not ready to surrender that role to help President Obama get a deal on federal spending and the debt limit2. As word spread that Mr. Obama was considering large savings from the use of a different measure of inflation to reduce the annual cost-of-living adjustment in Social Security benefits, Democrats joined with lobbyists for older Americans to reject the idea. Representative Chris Van Hollen of Maryland, the senior Democrat on the House Budget Committee, said Democrats would oppose changes in Social Security benefits as part of the deficit-reduction talks. “Any discussion of Social Security should be on a separate track,” he said. Representative Nancy Pelosi of California, the House Democratic leader, said, “Any savings should be plowed back into making Social Security stronger.” Representative Xavier Becerra of California, a member of the House Democratic leadership, said, “The cuts in Social Security benefits would grow larger as retirees age, and seniors who rely most on Social Security to pay for basic necessities would receive the biggest benefit cuts.”
No Matter Who Threatens Social Security (Including Obama), It's Filibuster Time - If I’m being charitable, I’ll just assume the White House is floating a trial balloon in order to make the eventual Republican rejection look even worse. AKA “we even offered to cut social security!” But if there’s any reality to this proposal, I hope that at the very least a senator like Bernie Sanders and the few remaining Senate Dems who aren’t spineless or bought off will filibuster. As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending. We’ve broken enough stones in America on the backs of the middle class and the poor. We bailed out the uber-wealthy and didn’t attach any strings as they collapsed the global economy. No more.
The Social Security Deal: Is It Just Politics? - A few quick thoughts on the news that President Obama plans to put cuts to Social Security on the bargaining table for deficit reduction (though he insists it is to “strengthen” the program). He has also proposed cutting the projected debt over the next 10 years by $4 trillion rather than the $2 trillion in cuts that had been the target in earlier discussions. I think this is mostly a political strategy. At this point in the negotiations over the debt ceiling, it’s hard to see how Congress would have the time needed to make any major changes in the debt reduction proposal. It will be hard enough to reach agreement on $2 trillion without involving Social Security at all. Getting to $4 trillion, writing legislation to change Social Security, etc., would take us past the critical date to get the deal done. So I see this mostly as a bargaining strategy for public consumption. The president is saying not only am I willing to consider larger cuts than the other side, but unlike Republicans who won’t agree to equitable tax changes, I am also willing to consider cutting programs that are important to Democrats. In short, he is saying I am being more than reasonable, Republicans are not being reasonable at all.
They're Bamboozling us: GOP extremism and Dem reluctance to fight – Linda Beale - On a post over at Naked Capitalism on Mark Ames: why the American right never liked Naipaul, Sundog's comment reminds us that even Republican-leaning economists are beginning to fret about the outlandish positions taken by the (today) mainstream GOPers: The sad fact of the GOP and the American right more generally is that they're dedicated to destroying the legitimacy of government, organized labor and any form of collective action other than industry lobby groups and what drifts from the miasma of an apocalyptic middle-eastern death cult. Raising the debt ceiling isn’t, as the GOP tries to say, Congress giving itself permission to continue excessive spending: It’s something that’s necessary to pay for past congressional decisions on taxes and spending, and those decisions were made primarily when Republicans were in charge. "Borrowing and spending the GOP way" Mark Thoma has this to say:Republicans are running around with matches threatening to start new fires if they don't get their way, and the administration seems to think calm, rational negotiation in the face of all of this will somehow win the day instead of allowing Republicans to take them to the cleaners yet again.
They're bamboozling us, and Obama is betraying us: failing to use the bully pulpit to shame the GOP, he caves instead on core social justice issues - Linda Beale - Let me repeat the title. They're bamboozling us And Obama is betraying us. Obama is failing to use his bully pulpit to shame the GOP with its ridiculous attempt to double-down on failed right-wing friedmania economic fundamentalism. See Joseph Stiglitz, The Ideological Crisis of Western Capitalism. Sitglitz notes what I have often pointed out--that friedmania is a failing ideology, yet the GOP is pushing that failed ideology, based on ridiculous and proven-wrong assumptions about human society, to the brink, arguing for austerity when we need stimulus, tax cuts when we need tax increases (at least on the wealthy), and more military when we need to end our endless wars and get smart. I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. Instead, Obama is agreeing to let the Republican's adle-brained ideology get a victory in this battle, a victory that will be a resounding defeat for ordinary Americans as it undermines an already shaky social welfare system and favors further the corporate giants that are being advanced by the Supreme Court's radical right and the Tea Party alliance with the economic fundamentalists like the Koch brothers, Heritage Foundation, Cato Institute and others.
Earth to Democrats: It’s Not Just the Tea-GOP Trying to Tank the Economy. Obama Believes Their Argument. - The latest example of Washington’s earned reputation for cynicism has been Democratic leaders like Chuck Schumer complaining that the Tea-GOP leaders are deliberately trying to tank the economy to improve their electoral prospects. So we’re staring at a Constitutional crisis that threatens the credit worthiness of the US unless both parties agree to slash government now and further cripple its ability to function in the future. If al Qaeda were organizing this, it wouldn’t be just conservatives who see it as economic terrorism. I agree that’s exactly what the Tea-GOP is engaged in, but Democrats are not owning up to their own and their President’s complicity in this crisis. Sen. Schumer et ilk are not being honest about how much he, his fellow leaders and President Obama have foolishly embraced the Tea-GOP’s anti-growth, anti-employment theories. As a result, voters are left with no opposition party to rebut the Tea-GOP’s cruel and reckless economic nonsense; there’s no party to propose economic policies that have been shown to work.
Has Nancy Pelosi Been Marginalized in the Debt Debate? - At Thursday’s White House meeting between President Obama and congressional leaders, Treasury Secretary Tim Geithner laid out in stark terms the awful economic repercussions of allowing the debt ceiling to lapse. Everyone in the room agreed that defaulting on U.S. debt would be disastrous and that something must be done. At that point, Nancy Pelosi asked: Why couldn’t the debt ceiling be decoupled from deficit reduction? Her query, after so many weeks of reports and talks centered on deficit reduction tied to a debt ceiling deal, visibly surprised some leaders in the room, several Republican and Democratic sources say. Obama politely informed the House Minority Leader, those same sources say, that that train had left the station weeks ago. To be fair, many Democrats would love to raise the debt ceiling with a clean vote, without conditions, but House test votes last month proved such a move to be impossible in the current climate. And Pelosi had already pledged herself earlier in Thursday’s meeting to passing a large deficit reduction package. So, why not pass the debt ceiling now, she reasoned, and give negotiators more time to hash out the bigger package?
Stockman Calls Out Both Parties on ‘Failed Fiscal Policy’ - David Stockman, who was Ronald Reagan’s budget director, is back, this time eviscerating politicians of both parties for what he calls an “utterly failed fiscal policy.” Speaking on WAMU’s Diane Rehm Show Tuesday by phone from Aspen, Colo., Stockman said “both parties are in denial” and are “rolling the dice” as if “there’s indefinite patience in the global bond market.” Stockman said the “Republican position of no tax increases is absurd” and said Democrats “are way off base” in protecting Social Security, Medicaid and Medicare from spending cuts. Both are essential — and the current weakness of the economy “can’t be an excuse” for cutting the deficit now, he said. Stockman also criticized President Barack Obama for not more aggressively cutting the defense budget to cope with a “post Cold War, post 9-11 defense posture.” On the debt ceiling, Stockman insisted that the only way to get elected politicians to grapple with the nation’s fiscal problem is to avoid raising the debt ceiling to create a crisis that forces action. According to CNBC, Mr. Stockman is short long-term Treasurys.
The Mother of All No-Brainers - The Republicans have changed American politics since they took control of the House of Representatives. They have put spending restraint and debt reduction at the top of the national agenda. They have sparked a discussion on entitlement reform. They have turned a bill to raise the debt limit into an opportunity to put the U.S. on a stable fiscal course.The Democrats have agreed to tie budget cuts to the debt ceiling bill. They have agreed not to raise tax rates. They have agreed to a roughly 3-to-1 rate of spending cuts to revenue increases, an astonishing concession. Moreover, many important Democrats are open to a truly large budget deal. President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way. There are Democrats in the White House and elsewhere who would be willing to accept Medicare cuts if the Republicans would be willing to increase revenues. If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred million dollars of revenue increases.
Paul Ryan Responds To David Brooks: We Won’t Cut Loopholes To Reduce Deficit, Only To Finance More Tax Cuts - As the August debt ceiling deadline looms and Republicans continue refusing to consider revenue increases, conservative New York Times columnist David Brooks excoriated the GOP for its intransigence. Writing yesterday that it “may no longer be a normal party” but rather a movement of “fanatic[s]” with a “sacred fixation” on tax cuts, Brooks slammed the GOP for rejecting a “no-brainer” compromise with Democrats, which would include closing tax loopholes for things like corporate jet ownership. But Brook’s plea for sanity was lost on House Budget Committee Chairman Paul Ryan (R-WI), who responded to the column on conservative radio host Laura Ingraham’s show this morning. Ryan said that if Republicans gave up the loopholes now without securing a deal to lower marginal tax rates overall, they would lose an opportunity to demand new tax cuts in the future:
Buffett: GOP Threatening To ‘Blow Your Brains Out’ Over Debt Ceiling - Republicans are playing a dangerous game by refusing to raise the debt ceiling, according to Berkshire Hathaway CEO Warren Buffett. "We raised the debt ceiling seven times during the Bush Administration," Buffett told CNBC on Thursday. Now, the Republican-controlled Congress is "trying to use the incentive now that we're going to blow your brains out, America, in terms of your debt worthiness over time." If Congress fails to raise the borrowing limit of the federal government by August 2, the date when the U.S. will reach the limit of its borrowing abilities, it will likely begin defaulting on its loans. Buffett, who according to the Washington Post has helped raise money for Democratic candidates like Hillary Clinton in the past, has been highly critical of the actions of the Republican-controlled Congress. In May, Buffett stated at a Berkshire Hathaway shareholder's meeting that if the Congress failed to raise the debt ceiling, it would constitute "the most asinine act" in the nation's history, reports Reuters.
Debt Ceiling Yada Yada - Listening to the radio tonight, I heard some economics commentator give yet another rant about how our debt has reached crisis proportions, we’re borrowing billions a day, the end is near, yada yada. The moderator had the presence of mind to inquire how this could be so, when our gov’t is able to borrow at such low rates. “The bond market is crazy…traders are in denial…it’s a bubble…the end is near…yada yada,” came the reply. I always have the same thoughts when I hear this:–the bond market is global, and it is pricing risk very differently in countries with very different sovereign debt profiles (the figure shows the percentage-point difference in 10 year gov’t bond yields between the US and these other countries): US debt in cheap because it’s a risky world out there and we, along with Germany, remain among the safest bets. Investors may be getting nervous, but the price signals tell us they believe Congress will soon stop screwing around and raise the debt ceiling.
Obama Calls for Debt-Limit Summit - President Barack Obama called a budget-deficit summit Thursday at the White House, suggesting he and congressional leaders are moving closer to a deal that would clear the way for a vote to raise the government's borrowing limit and avoid default. Mr. Obama, speaking at the White House on Tuesday, said he and congressional leaders in both parties made progress over the July 4th weekend. "But I don't want to fool anybody: We still have to work through some real differences," he said. Mr. Obama renewed his demand that tax increases—targeted at corporate jet owners, oil and gas companies and Americans making more than $250,000 a year—be included in a deficit-reduction deal. But House Speaker John Boehner (R., Ohio) rejected that idea. "The legislation the president has asked for—which would increase taxes on small businesses and destroy more American jobs—cannot pass the House, as I have stated repeatedly," Mr. Boehner said in a statement.
Invoke the 14th — and end the debt standoff - On its current course, the United States is four weeks away from defaulting on its debt for the first time in its history. If that happens, businesses will fail. Financial institutions will fail. Home values will decline. Mortgage rates will skyrocket. Spending and investment will all but disappear. Social Security checks will stop being mailed. Everything from military pay to food inspection will be compromised, if not fully cut off. The millions upon millions of Americans who are unemployed or underemployed will be joined by millions more. Across the world, America’s second financial collapse in three years will drag down already fragile economies in Europe, Latin America and Asia, potentially creating a “worldwide depression,” In short, we would be thrown back deep into economic turmoil — only this time with even fewer tools to crawl our way out. With that backdrop, President Obama may find that there is only one course left to avoid a global economic calamity: Invoke Section 4 of the 14th Amendment, which says that “the validity of the public debt of the United States … shall not be questioned.” This constitutional option is one that the president alone may exercise.
Constitutional Crisis? The Political Risks In Ignoring The Debt Limit - While the federal government has been playing chicken with U.S. credit, liberal academics -- and even some Democratic members of Congress -- have begun questioning whether the legislative branch actually has the power under the Constitution to force the federal government to default on its debts. Their argument rests on a unique reading of the fourth section of the 14th Amendment, which seemingly forbids Congress from preventing the country from paying what it owes: "The validity of the public debt of the United States, authorized by law...shall not be questioned." Conversations with experts indicate that the president would likely need one of the most powerful offices in the government to agree with this view before they could blow past the debt limit. And even if Obama got the go-ahead, the White House would have to be prepared for epic political and legal battles with the GOP, which would no doubt follow if Obama took such drastic action.
Will The United States Default? - Simon Johnson - Three views emerge on whether the United States will default on its government debts, as I talk to people on and close to Capitol Hill. The first is, hopefully yes, and this August offers a good opportunity. The second is, possibly yes, but this would be bad, so we need some form of fiscal austerity. The third is, under no circumstances, and any talk of a need for austerity is a hoax. The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. So how can we find our way to fiscal responsibility? We need tax reform. People in the first camp think that the United States government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to gross domestic product or to require a balanced budget could work, but experience suggests a future Congress could always find a way to escape any such constraint. A big part of the underlying problem is that the world has a taste for American assets. Private investors and government wealth managers around the world wring their hands about the trajectory of deficits and debt in the United States – and then buy more of that debt.
What happens on August 3? - Reuters has a fantastic story this evening on the impossible quandary facing Treasury officials should the unthinkable come to pass; purely as a practical matter, it’s far from clear that it’s even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I’m sure could not be implemented overnight — and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress. Realistically, then, the government is likely to breach the current debt ceiling no matter what Congress agrees. At that point — and no earlier — there would be enormous pressure on the White House to pull out the 14th Amendment and declare the debt ceiling unconstitutional, if only for practical reasons: doing so would be a lot easier than trying to reprogram the computers which are set to send out $49 billion of Social Security checks on August 3. Not to mention that no president ever wants to be the person who stiffed America’s seniors on their guaranteed monthly income: a greater failure of leadership can hardly be imagined. On the other hand, saying “enough of you bickering legislators, I’m sworn to uphold the Constitution and do what’s in the best interest of the country” is much more presidential.
What if the Debt Ceiling Isn't Raised? There are few signs of progress in the meetings between President Obama and Republican Congressional leaders about the need to raise the federal debt limit. John Boehner said on Friday that no agreement was “imminent.” One thing that most officials seem to agree on, however, is that failing to raise the limit by the Aug. 2 deadline will have undesirable consequences. Here are some recent statements by American officials and others on the subject:
- -“While some think we can go past August 2nd, I frankly think it puts us in an awful lot of jeopardy, and puts our economy in jeopardy, risking even more jobs.” — House Speaker John A. Boehner, July 8
- -“Potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything. And so our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.” — President Obama, July 6.
-“The United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic.” — Ben S. Bernanke, the -Federal Reserve chairman, July 7.
- -“We don’t need to tell the rest of the world that anytime people in Congress start throwing a tantrum that we’re not going to pay our bills.” — Warren E. Buffett, July 7.
Obama and the debt: A 14th amendment solution? - Does the government -- specifically President Obama -- even need a debt ceiling? Some analysts say no -- Obama can simply order the Treasury to pay its bills even if Congress refuses to raise the $14.3 trillion debt ceiling. "Preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war," Bruce Bartlett writes in Fiscal Times. Like others, Bartlett cites a section of the 14th Amendment to the U.S. Constitution that says, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." "This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting," Bartlett writes. Garrett Epps, writing on The Atlantic's website, said Obama could give a speech saying he has ordered Treasury Secretary Timothy Geithner to "begin issuing binding debt instruments on the world market sufficient to cover all the current obligations of the United States government, even in default of congressional action to meet those obligations."
Why Is Everyone Suddenly Talking About The 14th Amendment? - Until about two weeks ago, the 14th Amendment to the Constitution had never come up in conversation during my closer-to-four-than-three decades of work on the federal budget and Congressional budget process. I'm not exaggerating for effect when I say never: It absolutely wasn't mentioned. In fact, none of the federal budget experts whom I rely on for information, analysis and support — including many of the biggest and most esteemed names in the business — was even aware that the 14th Amendment was applicable in any way to what we do. But it was the heretofore largely unknown Section 4 of the 14th Amendment that set federal budget hearts fluttering and minds racing last week. Section 4 states, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." In most situations that would seem self-evident, which is why federal budgeteers were largely, if not totally, unaware of the provision. If this interpretation of the 14th Amendment is correct, the political implications are obvious and far-reaching: The White House will have a self-executing way around the debt ceiling impasse.
Can Obama declare the debt ceiling unconstitutional? - Back in late May, Tim Geithner literally brandished the Constitution of the United States while declaring — quite rightly — that it is unconstitutional to question US debt payments. A few commentators, Bruce Bartlett among them, reckon that this sets up a possible highly-dramatic endgame to the debt-ceiling negotiations: Democratic senators are warming to the constitutional option for breaking the deadlock on the debt limit and preventing a default. At a press conference on Wednesday, President Obama was asked directly about this by Chuck Todd of NBC News and he refused to rule it out. It goes without saying that provoking a constitutional crisis over the debt limit is a bad idea, but a debt crisis would be worse. At a minimum, the Fourteenth Amendment greatly strengthens the president’s hand in getting the debt limit increased in a timely matter. He should not be afraid to use it. This would be a very dangerous game to play. Congress doesn’t need the debt ceiling to shut down government operations — there’s the budget, too. The 2011 Continuing Resolution expires in less than three month; given that the Republicans in Congress would certainly take any appeal to the Constitution as a declaration of political war, the probability of a government shutdown would skyrocket.
U.S. Treasury secretly weighs options to avert default (Reuters) - A small team of U.S. Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline, sources familiar with the matter said on Wednesday. Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money. But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters. Treasury has studied the following issues: - Whether the administration can delay payments to try to manage cash flows after August 2 - If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt - Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments. The Treasury team has also spoken to the Federal Reserve about how the central bank -- specifically the New York Federal Reserve Bank -- would operate as Treasury's broker in the markets if a deal to raise the United States' $14.3 trillion borrowing cap is not reached on time.
U.S. Treasury Department Says It Sees No Alternative to Raising Debt Limit - The U.S. must raise its debt limit, the Treasury Department said after Reuters reported that officials are discussing legal options to stave off default if Congress fails to amend the ceiling by the Aug. 2 deadline. “As we have said repeatedly over the past six months, there is no alternative to raising the debt limit,” Colleen Murray, a Treasury spokeswoman, said when contacted late yesterday in the U.S. “The only way to prevent a default crisis and protect America’s creditworthiness is to enact a timely debt limit increase, which we remain confident Congress will do.” A team of Treasury Department officials is studying whether the government has legal authority to prioritize its debt payments, CNBC said, citing a report by Reuters that attributed the information to people familiar with the matter. Murray didn’t address whether officials are making contingency plans.
Bondholders May Compete With Farmers If U.S. Forced to Choose in Default - Failure to reach a deal to raise the U.S. debt limit may force President Barack Obama to choose between paying Chinese bondholders or American soldiers, and between Iowa farmers or elderly Social Security recipients. Those are among the dilemmas Obama may confront if talks with Republicans founder and the government falls short of funds needed to pay its bills. Other choices would include whether to sell at cut-rate prices financial assets such as gold in Fort Knox or loan portfolios acquired through the bank bailout, to avoid default and keep government services going. Even if full payments are made to bondholders, interest rates on U.S. debt may still rise, setting off ripples through the financial world that would drive up costs for other borrowers and impede economic growth, said bond traders. “Stopgap measures such as picking and choosing which programs to support would almost be as bad as default itself,”
S&P says US will get lowest rating if it defaults - A Standard & Poor's executive said the agency will give the U.S. government its lowest credit rating if Congress fails to raise the borrowing limit and the United States defaults on its debt. The government reached its $14.3 trillion borrowing limit in May. The U.S. Treasury says it will default on its debt if that limit is not increased by Aug. 2. Should that happen, the U.S. would lose its AAA rating and receive a D, said John Chambers, managing director of sovereign ratings at S&P, in an interview Thursday with Bloomberg Television. "If any government doesn't pay its debt on time, the rating of that government goes to D," Chambers said. A lower credit rating would force the government to pay higher interest rates on Treasury bonds and notes. That would make mortgages and consumer loans more expensive because most loans track the yields on U.S. Treasurys.
Obama Ready to Go Big on Budget Deal? - Every major newspaper is reporting tonight that Barack Obama has been holding secret post-golf meetings with John Boehner and is now pushing for a much larger budget deal than anyone has been talking about so far. Here's the Washington Post: At a meeting with top House and Senate leaders set for Thursday morning, Obama plans to argue that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers should seize the moment to take dramatic action. As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending.
Budget Deal Rumors - So my readers have probably already caught hints and likely are more up on the gossip that I am but let me make this point jumping off of Kevin Drum The Wall Street Journal reports that means testing of Medicare is one proposal on the table, while the New York Times reports that Boehner might agree to $1 trillion in revenue increases in return for the bigger deal, possibly including an end to the Bush tax cuts for the wealthy. A few comments: Unlike a lot of liberals, I’m open to deals on Medicare and Social Security. Obviously the details matter, but means testing of Medicare has always been a reasonable policy option, while small changes to Social Security’s inflation calculations have a lot of support from both liberal and conservative analysts. This isn’t necessarily a disaster. Is anyone taking note that if Obama – as he said he would in response to the Modeled Behavior tweet – keeps not only the Bush Tax cuts but his own tax cuts for the middle class; and keeps the structure of Obamacare intact; and means tests Medicare; and cuts the growth rate of Social Security payments for higher income folks; and goes back to Clinton tax levels on the wealthy that this will represent an enormous increase in the progressivity of the US fiscal code.
Chained CPI: A Link To a Budget Deal? - What is “chained CPI,” and why should you care? One proposal in the budget talks that is getting a serious look from all sides would switch the government’s way of measuring inflation and delivering a big impact on tax, spending, and entitlement programs. How big? It could save roughly $300 billion over 10 years. That big. The idea of using this different measure of inflation, known as a “chained” Consumer Price Index, has won support from numerous deficit-reduction commissions as well as many liberal and conservative economists. To be sure, it’s complicated stuff. But it’s seen as a central way of reducing the deficit because it simultaneously cuts spending growth and increases tax revenues. And many also like it because much of its impact doesn’t come from “cuts” in spending. Rather, it would reduce the “growth” of spending pegged to inflation. And it would affect the way tax brackets and deductions adjust for inflation, so it could appear less like a tax increase than simply raising tax rates.
Chained CPI - Recent reports ([WSJ RTE] [Bloomberg] [The Hill]) indicate that under consideration as one approach to curtailing entitlement spending growth is to resort to Chained CPI, as opposed to the current official CPI series, which is based on a quasi-Laspeyres formula. An Econbrowser discussion of the Chained CPI is here, while a recent comparison of inflation rates measured using different indices is here. I reproduce figure 2 from that post. Note that I seasonally adjusted the chained seasonally unadjusted series I could find; hence, the plotted series is not the BLS's seasonally adjusted series. For purposes of thinking about trends in the level of one series versus another, the seasonal adjustment factor should not be of central importance.
Still ‘Far Apart’ on Debt, 2 Sides Will Seek Broader Cuts - President Obama1, convening budget talks at the White House on Thursday, said Republicans and Democrats were still “far apart” but expressed confidence they could agree on an ambitious deal to prevent the government from defaulting on its debt. Though the president and Congressional leaders did not close wide gaps on the issues of spending cuts or new tax revenues, officials briefed on the talks said, they emerged with a consensus to aim for the biggest possible deal — one resulting in up to $4 trillion in savings — and a recognition of the dire consequences of not acting before Aug. 2, when the government will lose its authority to borrow. “Everyone acknowledged that we have to get this done before the hard deadline of Aug. 2 to make sure America does not default for the first time on its obligations,” Mr. Obama said to reporters after the meeting. “And everybody acknowledged that there’s going to be pain involved politically on all sides.”
Screwing America Under the Cover of Deficit Reductions - The validity of the public debt of the United States... shall not be questioned Except when one wants to screw over Americans by cutting social safety nets under the guise of a debt ceiling crisis. After Congress and the Obama administration ranted and raved for months and under the cover of non-stories like Casey Anthony, we have Obama is putting social security, medicare and social safety nets up on the faux pas debt ceiling negotiation block, to be cut and slashed.After putting controversial cuts to Social Security and Medicare on the table in negotiations with congressional Republicans over a plan to raise the nation's debt ceiling, President Obama still doesn't have a deal in the works. Obama said that both sides in the negotiations would find the ultimate outcome "painful." "I want to emphasize that nothing is agreed to until everything is agreed to," Obama said, One trick is to use a different cost of living adjustment, called chained CPI to actually reduce the meager social security benefits to future retirees. Who are those future retirees? A huge percentage of people have zero funds available to retire on and are counting on social security more than ever. Economist Chinn, ran the numbers on chained CPI. Over 10 years, it would have cut in social security benefits by 3.6%.
Mr. President; You Are Out Of Touch on Debt - President Obama is now suggesting that Medicare and Social Security benefit cuts be a part of a deal to address the federal deficit. This is exactly the opposite of what the American people what. From Pew: On the broad question of whether it is more important to reduce the budget deficit or to maintain current Medicare and Social Security benefits, the public decisively supports maintaining the status quo. Six-in-ten (60%) say it is more important to keep Social Security and Medicare benefits as they are; only about half as many (32%) say it is more important to take steps to reduce the budget deficit. Half (50%) of Republicans say that maintaining benefits is more important than deficit reduction; about as many (42%) say it is more important to reduce the budget deficit. Even a majority of regular Republicans think it is more important to maintain current entitlement benefits than reduce the deficit. It is a position held by people across the political spectrum. There is no legitimate political excuse for Obama to be putting these cuts give that the debt ceiling vote unconstitutional.
What Obama Wants, by Paul Krugman - On Thursday, President Obama met with Republicans to discuss a debt deal. We don’t know exactly what was proposed, but news reports ... suggested that Mr. Obama is offering huge spending cuts, possibly including cuts to Social Security and an end to Medicare’s status as a program available in full to all Americans, regardless of income. Obviously, the details matter a lot, but progressives, and Democrats in general, are understandably very worried. Should they be? In a word, yes. Now, this might just be theater: Mr. Obama may be pulling an anti-Corleone, making Republicans an offer they can’t accept. The Obama plan also involves significant new revenues, a notion that remains anathema to the Republican base. So the goal may be making Republicans look like intransigent extremists — which they are. But let’s be frank. It’s getting harder and harder to trust Mr. Obama’s motives in the budget fight, given the way his economic rhetoric has veered to the right. In fact, if all you did was listen to his speeches, you might conclude that he basically shares the G.O.P.’s diagnosis of what ails our economy and what should be done to fix it. And maybe that’s not a false impression; maybe it’s the simple truth.
Debt limit debate may face filibuster challenge from Sen. Rand Paul - Kentucky U.S. Senator Rand Paul is reportedly prepared to launch a filibuster of any proposal aimed at raising the nation’s debt limit. We’ve not had one minute of debate about the debt ceiling in any committee,” Mr. Paul said Sunday. We haven’t had an appropriations bill in two years. So I’m part of the freshmen group in the Senate that’s saying, ‘no more.’” Mr. Paul, a Republican, added that a vote in support of raising the nation’s $14.6 trillion debt limit is contingent on passing a constitutional amendment aimed at balancing the budget. A number of leading Republicans, including South Carolina U.S. Senator Jim DeMint, have called on members of Congress to pass the proposal, noting that any Republicans voting in favor of a proposal without the amendment will face challenges in 2012. “[W]e will actually vote in favor of raising the debt ceiling next week if we can, but it will be contingent on passing a balanced budget amendment to the Constitution,” the Kentucky Republican said.
Rand Paul: We'll Filibuster Until Debt Ceiling Proposals Are Made - As the August 2 deadline for the debt ceiling approaches, Republicans and Democrats are preparing for battle over the vote. In bold language, Republicans have demanded that major spending cuts accompany any increase of the debt limit. Bipartisan talks on the subject have achieved nothing, as Democrats have sidestepped any mention of the debt ceiling. Some elected officials have grown frustrated with this tactic, especially Tea Party favorite Rand Paul. In a clip from C-SPAN’s “Newsmakers,” the Kentucky Senator announced his intent to filibuster any legislation unrelated to the debt ceiling: I was part of a group this week that said, "No more, we’re tired of talking about extraneous issues." We’ve had not one minute of debate about the debt ceiling in any committee. I’m part of the freshmen group that said, "No more. We’re not going to let them go to any [other] issue if we have a say in it." Next week, we will filibuster until we talk about the debt ceiling, until we talk about proposals,” declared Senator Paul.
A Big Error in the Senate Republicans’ Balanced Budget Amendment - The Republicans want the budget to be balanced by keeping spending down rather than by raising tax revenues. They thus propose limiting spending to no more than 18% of gross domestic product (GDP). That’s in line with average tax revenues over the past four decades, but well below average spending, which has been just short of 21% of GDP. So what’s the problem? The way the amendment would implement the spending limit: Total outlays for any fiscal year shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending before the beginning of such fiscal year,The amendment compares spending in one period (the upcoming fiscal year) to the size of the economy in an earlier period (the last complete calendar year). If the amendment were in force today, for example, spending in fiscal 2012, which starts in October, would be limited to 18 percent of GDP in calendar 2010. That’s a gap of 21 months. As Bruce Bartlett pointed out in analyzing an earlier version of this amendment, that time lag can add up to big money.
The Trouble With Balanced Budgets - I realize they may just be practicing politics, but Senators Olympia Snowe and Jim DeMint serve up a basic misunderstanding of economics in their commentary on The Wall Street Journal’s op-ed page today. Ms. Snowe, a Republican from Maine, and Mr. DeMint, a Republican from South Carolina, write: For the long term, to prevent both this Congress and its successors from hijacking the promise of American prosperity, we also need a balanced budget amendment to the Constitution, like the one we and all 47 Senate Republicans have introduced… Our government has balanced its budget only five times in half a century. Ms. Snowe and Mr. DeMint seem to be suggesting that the federal government is fiscally responsible only when it runs a balanced budget. But that’s not true. The government can run deficits indefinitely, without federal debt rising, so long as one year’s economic growth pays off the previous year’s deficit. Economists typically say that a deficit equal to about 3 percent of gross domestic product — or $450 billion today — qualifies as a sustainable deficit.
Debt Ceiling Schmeiling, Deficit Schmeficit - As Naked Capitalism's Yves Smith points out, the GOP doesn't give a damn about the deficit or the debt ceiling This is all just political games. See Debt Ceiling Hypocrisy, Naked Capitalism; here's an excerpt. During the Bush administration, when a budget surplus tuned to deficit and debt piled up, Republican leaders in Congress voted to raise the debt ceiling 5 times, increasing the limit nearly $4 trillion. We’re talking about Speaker John Boehner, House Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl. Combined, they voted 19 times for a debt ceiling increase without complaint or conditions. When the 2001 and 2003 and 2004 Bush tax cuts were passed, the GOP KNEW that the cuts would cause huge record setting deficits. When they were passed and the war costs for Bush's wars of choice raged on, the GOP KNEW that this would result in huge, unprecedented budget deficits. Remember that the 2001 cuts alone--not needed and opposed by 65% of the American people--cost more than $1.3 trillion over the last ten years. That's 1.3 trillion that would have been in the US coffers to pay workers more unemployment compensation or to undertake drastically needed infrastructure projects, from bridges to high speed passenger trains to waterways to katrina repairs.
In Time of 'Austerity', Pentagon Gets Double Digit Increase - The House on Friday overwhelmingly passed a $649 billion defense spending bill that boosts the Pentagon budget by $17 billion and covers the costs of wars in Iraq and Afghanistan. The strong bipartisan vote was 336-87 and reflected lawmakers' intent to ensure national security, preserve defense jobs across the nation and avoid deep cuts while the country is at war. While House Republican leaders slashed billions from all other government agencies, the Defense Department is the only one that will see a double-digit increase in its budget beginning Oct. 1. Amid negotiations to cut spending and raise the nation's borrowing limit, the House rejected several amendments to cut the Pentagon budget, including a measure by Rep. Barney Frank, D-Mass., to halve the bill's increase in defense spending. Scoffing at the suggestion that "everything is on the table" in budget negotiations between the Obama administration and congressional leaders, Frank said, "The military budget is not on the table. The military is at the table, and it is eating everybody else's lunch."
Could NASA be on the chopping block? - As NASA prepares for the final launch of the space shuttle, it finds itself in a potentially troubling spot. As Washington works to cut spending, without a storied space vehicle, one could ask: is the space program worth it? NASA has an annual budget of some $18 billion. That spending includes $4.5 billion on "science"; $3.7 billion on "exploration"; $3 billion on "cross-agency support" and $6.1 billion on "space operations."The agency has no replacement for the shuttle, so to continue manned space operations, including trips to the International Space Station, NASA will rely on its partnership with Russia to ferry astronauts into space, and potentially on commercial spacecraft. NASA predicts it will save over $2 billion by not operating the Space Shuttle, though that money will be allocated to other programs, including working with the private sector toward development of a shuttle replacement.
U.S. Debt Ceiling: It's All Greek To The Public -The current U.S. debt ceiling of $14.3 trillion is nearly 100 percent of GDP, which was $14.7 trillion in 2010. The political impasse over raising the ceiling concerns whether, and under what circumstances, we should allow the national debt to exceed GDP, moving the country closer to the economic status of Greece. On April 18, Standard & Poor's cited the rising national debt and annual budget deficit when it downgraded the United States' credit outlook to negative. President Obama warned on Thursday that Congress' failure to raise the debt ceiling by Aug. 2 would have a "significant and unpredictable" impact on capital markets and the economy. But polls by Gallup, the Associated Press, and the Wall Street Journal indicate that most Americans do not share his alarm.Strengthened by those polls, Republicans in Congress have insisted on spending cuts rather than tax increases. Democrats want to tie cuts to a closing of tax loopholes and an increase in tax rates on high-income taxpayers. The party sees raising revenue as crucial, but that idea is going nowhere.
Cut federal debt, Americans say, even if that slows economy — Despite lingering anxiety over the Great Recession, Americans by a large margin want their federal government to focus more on cutting debt than on increasing spending even temporarily to boost the economy, according to a new McClatchy-Marist poll. Given a choice, 59 percent of Americans prefer reducing debt even if that slows the economic recovery, while 33 percent prefer new government efforts to stimulate the economy even if it means more federal spending. The public mood helps explain the political environment in the nation's capital, where talk of new stimulus plans for the weak recovery has faded and both major parties are looking at deep cuts in annual federal budget deficits, even if they wouldn't yet reduce the $14 trillion debt. The nearly 2-1 preference for cutting debt comes as President Barack Obama negotiates with Congress over how to reduce the deficits. Obama wants a combination of spending cuts and tax increases; Republicans want only spending reductions.
Poll: Majority Don’t Want Entitlement Cuts To Reduce Deficit - Despite all the talk about cutting the deficit, neither party has wanted to be the first one to put entitlements on the chopping block. A Pew poll released Thursday explains why, as it shows that a robust majority of Americans don't want the government to rollback benefits for entitlement programs, even if those cuts are made to reduce the deficit. Six in ten Americans said it was more important to leave Social Security and Medicare benefits untouched than to make cuts as a way to reduce the deficit, roughly twice as many as the 32% who said the opposite.Further, 61% said Medicare recipients already pay enough of their health costs, while 31% said beneficiaries should pay more money into the program. Those findings come as several reports indicate that the White House may offer cuts to both Social Security and Medicare in exchange for Republican concessions on other fronts. Even Republicans were wary of slicing into those programs, with 47% saying it was more important to preserve Social Security and Medicare, versus 44% who said it was more important to reduce the deficit.
The Federal Debt: Countdown - THE stand-off over America’s debt ceiling has entered strange territory: pretty much everyone agrees the limit will be raised, but it is becoming ever harder to see just how. The Treasury reckons it will run out of cash on around August 2nd. But with time running short, the parties seem as far apart as ever. Taxes are the sticky wicket. While both sides agree that the ceiling should be raised in conjunction with new deficit-reduction measures, they have fallen out over whether to use increased revenues to close part of the gap. The blame for this impasse falls mostly on Republicans. Eric Cantor, the leader of the Republican majority in the House of Representatives and the chief Republican negotiator in talks chaired by Vice-President Joe Biden, greeted a recent proposal to pair $2 trillion in spending cuts with $400 billion in new revenues by walking out on June 23rd.
Debt Limit Options - One idea comes from Peterson Institute economist Joseph Gagnon, a former Federal Reserve official. He suggested to me that the Federal Reserve could temporarily buy some of the Treasury’s $300 billion stock of gold. This would allow the Fed to create cash that the Treasury could use to pay its bills until the debt limit is increased, at which time Treasury could simply buy it back. It would be a purely paper transaction that would have no real effect on the price of gold or anything else. The Fed could simultaneously sell an equal amount of securities from its portfolio to prevent the money supply from rising more than it desires. A more radical solution would be to simply disregard the debt limit altogether on constitutional grounds, an idea I suggested in the Fiscal Times on April 29. University of Baltimore law professor Garrett Epps made a similar suggestion in The Atlantic on May 4. The essence of the argument involves section 4 of the Fourteenth Amendment to the Constitution, which reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
GOP hardens resolve on debt talks after poor jobs report - Emboldened by a weak jobs report, Republicans today doubled down on their argument that Washington can't afford to increase taxes on Americans or businesses as political leaders seek ways to shrink the ballooning federal budget deficit. "Where are the jobs?" House Speaker John Boehner asked at a press conference today after the Labor Department reported that the the unemployment rate rose to 9.2 percent in June. The economy generated just 18,000 net new jobs last month, making it the slowest month for job creation in nine months. "Tax hikes on families and job creators will only make things worse," Boehner said, referring to the ongoing negotiations between White House and congressional leaders to forge a significant deficit and debt reduction deal. Mr. Obama met with congressional leaders on Thursday, seeking a deal that includes $4 trillion in budget savings over a decade. Republicans have insisted on creating a deficit and debt reduction plan as a condition of voting to raise the debt ceiling -- the amount of money that Congress is technically allowed to borrow.
This is what happens when there is a public record - During the Bush administration, when a budget surplus tuned to deficit and debt piled up, Republican leaders in Congress voted to raise the debt ceiling 5 times, increasing the limit nearly $4 trillion. We’re talking about Speaker John Boehner, House Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl. Combined, they voted 19 times for a debt ceiling increase without complaint or conditions.
- June 2002: Congress approves a $450 billion increase, raising the debt limit to $6.4 trillion. McConnell, Boehner, and Cantor vote “yea”, Kyl votes “nay.”
- May 2003: Congress approves a $900 billion increase, raising the debt limit to $7.384 trillion. All four approve.
- November 2004: Congress approves an $800 billion increase, raising the debt limit to $8.1 trillion. All four approve.
- March 2006: Congress approves a $781 billion increase, raising the debt limit to $8.965 trillion. All four approve.
- September 2007: Congress approves an $850 billion increase, raising the debt limit to $9.815 trillion. All four approve.
Ron Paul Suggests Using Fed to End Run Debt Ceiling Impasse -- Yves Smith - As the hour of reckoning approaches, more and more creative ideas to disarm the Republican weapon are being put forward, and an intriguing one comes from, of all places, a Republican, Ron Paul. As described by Dean Baker in the New Republic last week, Paul’s plan is simple – have the Fed cancel some or all of the Treasuries it got via its quantitative easing programs: Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. Baker points out a second benefit. Canceling the bonds The only use the Fed had for those bonds was to eventually sell them back to the public to soak up liquidity when it started worrying about inflation. But the Fed can achieve that end the old fashioned way, by raising reserve requirements. So getting rid of the bonds formally in one stroke really would reduce the debt level, because it saves the interest payments that would have been made to investors after the Fed’s Treasury bonds were sold back in the open market.
Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, twice? - Paul's plan starts with the Federal Reserve. In the last year or two the Fed has been buying up U.S. Treasury bonds in an effort to lower interest rates and boost the economy. The most recent round of that buying has been dubbed QE2, and has come under a good deal of criticism, though most economists agree that it was a generally helpful policy. The result is that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90% of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total Federal debt at $14.3 trillion. Paul's plan: Get the Fed and the Treasury to rip up that debt. It's fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed. A trillion and a half dollars is currently about what spending is expected to exceed tax revenue in 2011. And the deficit is expected to dramatically shrink in 2013 and beyond. So cut the debt by $1.7 trillion and you could run the government as is for at least the next year, and perhaps into 2013.
Ron Paul, Mankiw, and the Government Debt - Ron Paul recently suggested a solution to the debt-ceiling problem"We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve," Paul said. "We don't, I mean, they're nobody; why do we have to pay them off? Paul's logic is the following. The debt ceiling applies to all Treasury debt outstanding, but currently $1.6 trillion of the total $14.5 trillion in Treasury debt is held by the Fed. We all know that the Fed is a large leech sucking our blood, so why not call a temporary truce in the debt-ceiling/budget war by simply defaulting on the $1.6 trillion in debt held by the Fed? Dean Baker likes the idea. He also seems to be thinking like the Fed Chairman of 1937 in that he thinks an increase in reserve requirements would be a great idea. This guy doesn't like Paul's idea as he thinks it would cause a hyperinflation. Now, along comes Mankiw to the rescue. He poses the problem as an exam question, then gives you the solution, in a few lines. What Ron Paul is suggesting is only an "accounting gimmick," and it is actually irrelevant. Now, to work through this, consider two alternative scenarios.
Greg Mankiw and Monty Python - Dean Baker - I felt sort of like the contestant in the "Stake Your Claim Game Show." when I saw that Greg Mankiw had discovered that Ron Paul's plan to destroy the $1.6 trillion in government bonds held by the Fed (which I endorsed) to get around the debt ceiling was "just an accounting gimmick." Clearly Mr. Mankiw is more than the match for me. Of course it is an accounting gimmick. We have an accounting problem (the debt ceiling). It cries out for an accounting solution. However, there is a more serious issue in the second part of the story. If the Fed destroyed the bonds, rather than selling them back to the public as currently planned, it can save the government close to half a trillion in interest payments over the next decade. That sounds like a good deal to me, especially in a context where people are talking about cutting Social Security and Medicare as a way to reduce deficits.
All Greek To Him - Krugman - I’ve been complaining for a while about the Hellenization of economic discourse — the way everyone is being treated as being just like Greece, when in fact Greece — with a long history of fiscal irresponsibility, very high public debt, and a country without a currency — doesn’t bear much resemblance even to the other peripheral Europeans, let alone the United States. So here, via Steve Benen, is Mitch McConnell, declaring “We look a lot like Greece already.” Yep, aside from the fact that everything is different. Here’s debt levels (if you ask me the IMF projections for Greece are too optimistic): Plus there’s the having your own currency thing, and the fact that the interest rate on US 10-year bonds is 3.11 percent, on Greek bonds 16.82 percent. Otherwise we’re exactly the same.
GOP Base: Spending Cuts Now, Or Never - One thing that I hear over and over from my conservative interlocutors on the budget is that they need spending cuts right now because they just don't trust the Democrats (or indeed the Republicans) to make spending cuts in the future. If they don't get the cuts now, the reasoning goes, it will be "jam yesterday, and jam tomorrow, but never jam today." I certainly understand the worry, especially after Democrats and their own leadership pulled the cute trick of enacting a bunch of sham spending cuts in the last round of negotiations. But here's the question: why do you think spending cuts now will be any more likely to stick than spending cuts tomorrow? Anything you enact now, under threat of the debt ceiling, can always be un-enacted tomorrow. Oh, sure, default would make it pretty hard to borrow money to fund new spending. But what makes you think they won't raise taxes to fund new spending instead? You cannot credibly bind future congresses to your will. If people want Medicare more than they fear tax hikes, they'll get Medicare, and tax hikes. And that is true whether or not you default.
Chart of the Day: ‘Out Of Control Spending’ Not Really Out Of Control At All - It's taken as an article of faith in Washington that government has gotten too big, spending is out of control, and government has to tighten its belt, just like everybody else. Even President Obama takes this view. This has meant no small consequences for the federal budget. In the spring, Republicans launched an effort to slash tens of billions of dollars from non-defense discretionary programs -- money the government approves every year to pay for social services and other programs -- from the federal budget. That campaign almost ended in a government shutdown. But a close look at the numbers reveals a few important, and frequently overlooked facts. Domestic discretionary spending is a small sliver of the budget. Our deficit and debts can be traced to the fact that spending on entitlement programs and defense has shot up, and tax revenues have plummeted to their lowest level in decades. But spending on domestic discretionary programs has grown much more slowly. And, if you correct for inflation, and for growing population, it turns out we're spending exactly the same amount on these programs as we were a full decade ago.
Contraction, Still Contractionary - A new paper from the IMF (pdf) puts another nail in the coffin of the doctrine of expansionary austerity. It basically shows that results purporting to show economic expansion following spending cuts and/or tax increases were based on a statistical illusion: an expanding economy can often lead to rising revenue and/or falling spending (e.g. because safety-net spending falls or because the government cuts back in an attempt to cool off inflationary pressures). And as a result, what the Alesina-Ardagna results capture is muddle by reverse causation. The paper corrects this by using the historical record to identify true examples of deliberate austerity — and it turns out that they are contractionary. The multiplier is less than one, but that may reflect the fact that these austerity programs did not take place in the face of a zero lower bound, so they were partly offset by monetary expansion. If we were discussing a politically neutral subject, the evidence here would long since have been considered definitive: expansionary austerity is a doctrine that failed. But since we’re in the political realm, of course, such a convenient doctrine can’t be abandoned. On the contrary, it now seems to be the official doctrine of both the GOP and the White House.
Family Budget Not Equal To Gov’t Budget - Heading into work the other day, I heard a Congresswoman on the radio using a common argument that always sticks in my craw—or it would if I knew what a ‘craw’ was. Here’s the gist: “The federal budget is just like a family budget, and we in government must tight our belts and live within our means just like families do.” First of all, it’s bass-akwards: when families are tightening their belts, the federal government is the one institution that can actually help the economy—and these belt-tightening families—by loosening its belt and running a deficit. That deficit should be temporary and should come down when the private economy climbs up off the mat—which again tweaks the analogy: when families start to loosen, gov’t should eventually start to tighten. But there’s another fundamental way in which this family budget analogy gets misused. Families borrow to make investments and to get over rough patches. They run deficits too. I went into pretty deep debt to finance college and grad school and I’m glad I did. The whole credit system is based on the fact that if we had to pay cash-as-we-go for everything, we’d seriously underinvest.
Right Analogy, Wrong Timing - Should the government budget the way families do? Here's an excerpt from Paul Krugman's latest column: Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.” That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. Actually, the government should budget the way families should. It's just not clear that families actually do what they should. Both families and the government should budget countercyclically -- their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.
Bigger government is needed for the US economy – OSO’s New Deal - The most noticeable thing about this particular recession is just how long it has taken for unemployment to recover - or not recover as the case is. But this is not an isolated case. The 2001 recession took ages for unemployment to recover, as did the 1990 recession. What is obvious though is that the market is just not creating enough jobs. While the cause might be debatable, the result is not. But what is needed to fix this is not just another round of stimulus packages. What is needed is a structural expansion of government spending. In essence, the US government needs to spend more. Of course readers of this blog might wonder if I have changed my mind from recent times when I advocated austerity. While I have advocated spending cuts in the area of military spending I came to the conclusion that the only way the US could ever hope to cut enough spending to make any difference would be to destroy Medicare or Social Security (and I don't use the word "destroy" lightly - you'd be looking at cuts of over 50% to make any difference). The alternative is to raise taxes - and that is the option I have always promoted. What I have done, though, is change my position on the market's ability to recover properly. Now I realise that the economy wouldn't recover - at least not quick enough to make any difference.
A Historical Perspective on Defense Budgets Total U.S. defense spending (in inflation-adjusted dollars) has increased so much over the past decade that it has reached levels not seen since World War II, when the United States had 12 million people under arms and waged wars on three continents. Moreover, the U.S. share of global military expenditures has jumped from about one-third to about one-half in this same period. Some of this growth can be attributed to the wars in Iraq and Afghanistan, but the baseline or regular defense budget has also increased significantly. It has grown in real terms for an unprecedented 13 straight years, and it is now $100 billion above what the nation spent on average during the Cold War. The fiscal year 2012 budget request of $553 billion is approximately the same level as Ronald Reagan’s FY 1986 budget. As a result of this “gusher” of defense spending—to quote former Secretary of Defense Robert Gates—Pentagon leaders have not been forced to make the hard choices between competing programs as they traditionally have. And the ballooning defense budget played a significant role in turning the budget surplus projected a decade ago into a massive deficit that forces the U.S. government to borrow 43 cents of every dollar it spends. As the nation attempts to bring this massive deficit—which chairman of the Joint Chiefs of Staff Michael Mullen calls the greatest threat to our security—under control, leaders from both parties recognize that these unprecedented levels of defense expenditures cannot be maintained.
Will America's budget deficit bring an end to world peace? - Did you know that the U.S. still stations nearly 50,000 troops in Japan? That's pretty amazing when you think about it. The war in the Pacific ended 66 years ago, and there hasn't been a conflict in Northeast Asia since the Korean War of the early 1950s, but America still maintains a hefty military presence in the area. Another bunch of soldiers are parked nearby in South Korea. Why in the world are all those soldiers still there? They're keeping the peace. Not everybody may agree with me on that assertion. I can't imagine Kim Jong Il is too happy that tens of thousands of armed Americans are sitting on his doorstep. But most of the leadership of Asia fully realizes that the U.S. military presence in the region has, without question, provided a stability rarely experienced. The traditional rivalries between local powers (China, Japan and Korea) have been kept at bay. American security allowed Japan, South Korea and most of the rest of the region (including China) to focus on economic development and alleviating poverty. It is because America ensured peace in East Asia that Asians have been able to get rich.
Cowardly Congress Can’t Cut Bloated Defense Budget - The White House and Republican leaders may be locked in a bruising battle over how to slash the long-term deficit, but defense cuts seem to be off the table. This week, House lawmakers are moving rapidly toward approving a $649 billion defense appropriation bill that would boost baseline Pentagon spending by 3.4 percent in 2012. Republicans and Democrats alike talk a good game when it comes to defense spending. But when push comes to shove, they have a hard time cutting the Department of Defense’s budget out of fear of appearing soft on national security. Outgoing Defense Secretary Robert Gates, who last week won the presidential medal freedom, has used his bully pulpit to warn against sharp defense cuts, as has former Defense Secretary Donald Rumsfeld. While President Obama requested even more money in his proposed budget than what is now in the appropriations bill, he said during the current debt ceiling negotiations that he would like to see $400 billion in cuts over the next decade. However, that’s not in the cards this week.
Deficit Reduction Plans Used to Have a Better Balance - Word is that progress is being made on a budget deal that would garner the needed support to raise the debt ceiling. If so, good. But one thing to stay nervous about is whether the share of revenues in the deal is too small relative to the share of spending cuts. This matters not for aesthetic reasons; it matters because if the path to a sustainable budget is lined largely with spending cuts, the damage we’ll do to the ability of government to protect the vulnerable, provide health and income security to retirees, and invest in the future will be too deep. The deal will have come at too steep a price. My CBPP colleague Kathy Ruffing crunched the numbers based on various sources (CBO, CRS, Treasury). The Deficit Reduction Act of 1984 reduced the deficit by 0.5% of GDP over five years (back then, they did five-yr scores), with about an 80/20 split, revenues to spending cuts. The 1987 Budget Summit reduced the deficit by 0.7% of GDP over 5 years, with about a 40/60 split, revenues to spending cuts. The Omnibus Budget Reconciliation Act of 1990 reduced the deficit by 1.4% of GDP, and OBRA 93, by 1.2%.
The budget deals of Reagan, Bush, Clinton and Obama, in one chart - There are two ways to read the current stalemate in the debt-ceiling negotiations. There’s David Brooks’s take, which is that watching Republicans pass up “the deal of the century” should leave conservatives convinced there’s something wrong with the GOP. But you can also read it the opposite way: Democrats control the White House and the Senate, Obama is the most popular national political figure, a balanced approach to deficit reduction outpolls plans made entirely of spending cuts, and yet Democrats are still offering recalcitrant Republicans the deal of the century rather than taking to the ramparts. What’s wrong with them? To put some numbers to this, I asked the fine folks over at the Center on Budget and Policy Priorities to help me break down the deficit-reduction deals passed by Presidents Ronald Reagan, George H.W. Bush and Bill Clinton. As you can see on the graph, in each case, taxes were at least a third of the total, and in Reagan’s case, his massive tax cuts were followed by deficit-reduction deals that actually relied on tax increases. Today, tea party conservatives would be begging Sen. Jim DeMint to primary the Gipper.
Big Business Leaves a Deficit Plan to the Politicians - If you want to understand why cutting the deficit is so hard, you can’t do much better than to look at the Business Roundtable. The roundtable is one of the more moderate big-business lobbying groups. Its president is John Engler, the former Michigan governor, and its incoming chairman is James McNerney, the chief executive of Boeing. When roundtable officials talk about the deficit, they use sober, common-sense language that can make them sound more reasonable than either political party. But the roundtable is actually part of the problem. Rhetoric aside, it consistently lobbies for a higher deficit. The roundtable defends corporate tax loopholes and even argues for new ones. It pushes for a lower corporate tax rate. It favors the permanent extension of the Bush tax cuts. It opposes a reduction in the tax subsidy for health insurance, a reduction that was part of the 2009 health reform bill. Oh, and the roundtable also favors new spending on roads, bridges and other infrastructure.
Randy Wray: Can One Take Billionaire Pete Peterson’s Money and Remain Progressive? - Yves Smith set off a firestorm in her criticism of several progressive groups that have joined forces with Pete Peterson to whip up deficit hysteria. There are three issues that need to be addressed:
1. Can a progressive take tainted money and remain progressive?
2. Did the Roosevelt Institute (in particular) take tainted money and remain progressive?
3. What would a progressive approach to federal budgeting look like?
Let me dispense with the first question rather quickly. Pete Peterson’s money is tainted by his ideology and his mission, however, he has not so far been convicted of felonies. In my view, a progressive can take his money but only on the condition that the money is used to fight his agenda tooth and nail. Turning to the second question, let us first examine the Roosevelt Institute’s defense of its research and the budget produced on Peterson’s purse strings. Here are two attempts, published at FDL:
What history teaches us about the welfare state - In the wake of the economic crash, which has led to soaring budget deficits, Democrats and Republicans are negotiating “to move forward to trillions of spending cuts,” unprecedented reductions in the size of the welfare state. Lost in this debate is an appreciation of the historical origins of the American welfare state — long before FDR and the New Deal, after another epochal financial crash. Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873... For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt... By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. Neither political party offered genuine solutions. Workers, suffering the most without a welfare state, responded with ever-greater militancy. Between 1881 and 1890, there were 9,668 strikes and lockouts... State and federal militias were repeatedly called out to quash labor unrest. .
Long-Term Budget Forecasts for Beginners - In this season of debate over long-term deficits, this is ground zero: That’s the key chart from the Congressional Budget Office’s Long-Term Budget Outlook, published just last month, which I read from cover to cover. The CBO is generally considered the authoritative source of budget projections, and CBO “scoring” has been an important aspect of legislative debates over the past few years. Although politicians from both sides criticize the CBO when they don’t like its results, I think it’s fair to say that it is generally both respected and nonpartisan. Now, when people say that the federal government faces a long-term budget gap, they (including me) are generally starting from the bottom half of this picture: the CBO’s “alternative fiscal scenario.” The alternative scenario is widely considered the most likely path the budget will follow under current policy (although the CBO itself makes no such claim*). That’s probably a close enough approximation for most purposes. But if you’re going to think hard about long-term budgetary paths, you need to be a bit more careful about what it means.
Wanted: Leadership and the Willingness to Fight for Core Democratic Beliefs - Christina Romer: The Rock and the Hard Place on the Deficit Dealing with our nation’s gaping budget deficit is going to hurt. So here is a question for policy makers: What would hurt more, raising taxes or reducing spending? That's an appropriate question to ask about the long-run, though the question is really about the size and role of government, but not in the short-run. In the short-run we should be doing everything we can to bolster the recovery, or at least not make it harder to recover through demand/deficit reduction policies. Why are we even taking a chance on making things worse than they already are? What this shows is how thoroughly the debate has been tilted toward Republican arguments, and the president has to shoulder a lot of the blame for this. Romer notes that there are other paths we might pursue: All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. But that argument has already been lost thanks, in no small part, to the president's acquiescence to Republican ideas.
Macro Policy Moving in a Bad Direction - Mark Thoma quotes Christina Romer: So here is a question for policy makers: What would hurt more, raising taxes or reducing spending? And observes:That's an appropriate question to ask about the long-run, though the question is really about the size and role of government, but not in the short-run. In the short-run we should be doing everything we can to bolster the recovery, or at least not make it harder to recover through demand/deficit reduction policies. Why are we even taking a chance on making things worse than they already are? It is a very good question. Mark's answer: What this shows is how thoroughly the debate has been tilted toward Republican arguments, and the president has to shoulder a lot of the blame for this.
Erring on the side of incaution - THE Obama administration economic team has almost entirely turned over since the beginning of the administration. It's striking to contrast the views being expressed by ex-administration members with those still in charge. Christina Romer—who brought the president a plan for a $1.2 trillion stimulus back in early 2009, when the full scope of the unfolding labour market disaster was only beginning to become clear—has been a consistent voice arguing for more demand-side stimulus and for a focus on medium- and long-term, rather than short-term, deficit reduction. Jared Bernstein has also been plumping for spending on infrastructure and a new payroll tax cut. Peter Orszag was considered one of the administration's deficit-hawks, but here he is suggesting that too much short-run budget cutting would be dangerous, and that a payroll tax to support hiring could be a good idea. And then there's Larry Summers: It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible. There were a set of political calculations having to do with what the Congress could accept that were mostly determined by the president's political advisers and ultimately by the president. I think it in the end we would've been better served if there had been more push to the economy.
Anti-stimulus - Krugman - Here’s the CBO estimate of the effect of the Recovery Act on the deficit — not identical to its likely effect on the economy, but a rough guide — in billions of dollars, by fiscal year (fiscal years start in October of the previous calendar year): Source (pdf). So stimulus has been fading out fast; in effect, we’re pursuing a contractionary fiscal policy. Meanwhile, the underlying source of our slump, the high level of consumer debt inherited largely from the housing bubble, has declined only slightly. And quelle surprise, as Yves Smith would say, the economy is sputtering. If you do the 1937 thing, you shouldn’t be surprised at getting the 1937 result.
Macro Pollicy: The Chance That the Unemployment Rate Will Be 9% or Higher at the End of 2012 Is Now About One-Third... » Paul Krugman listens to Barack Obama: Barack Herbert Hoover Obama: Government has to start living within its means, just like families do. As the most right-wing of Obama's economic advisors, Peter Orszag, says:
- We don't need to cut the deficit right now: we need to increase it this fiscal year, and next fiscal year, and perhaps the year beyond that.
- We don't need to cut spending over 2015-2020: we do need to reduce the deficit over that time frame, but we need to do it by increasing revenue.
- We do need to cut spending--to curb the growth of health-care spending--over the 2020-2050 time frame, and the Affordable Care Act was a bold and brave effort to do so that is highly likely to be successful if its policies are implemented..
Only further stimulus can tackle America’s jobless, wage-less recovery – Laura Tyson - The US economy has just marked two years of recovery from its worst recession since the Great Depression. But few Americans are celebrating; indeed, most believe that the economy is still in recession. No wonder. Although gross domestic product has recovered to its pre-recession peak, employment has not. The employment decline during the 2008 recession was more than twice as large as those of previous postwar recessions, according to the McKinsey Global Institute. Even if June’s employment report is much better than expected, 14m Americans will remain unemployed and more than 8m will be working part-time because they cannot find full-time jobs. More than 2m discouraged workers will have stopped looking for work. The fraction of the population working is near a 25-year low. According to calculations by the Hamilton Project, the US will face a “jobs gap” of about 21m jobs – the number of jobs needed to return the economy to its pre-recession employment level and absorb the 125,000 people who enter the labour force each month. At the current growth rate, that gap will not be filled for another decade.
The Employment Report, and the Need for Maintaining Stimulus The WSJ RTE post title says it pretty clearly: Economists React: Jobs Report an 'Unmitigated Disaster'. Overall employment is being reduced by continuous reductions in government (primarily state and local) employment. Private sector employment growth was 57,000. Hours continue to rise faster than employment in the private sector. More from CR. With the economy clearly in a weak patch, one has to think very carefully about how a fiscal consolidation package is crafted. Various international organizations have weighed in on the need for fiscal consolidation in the US, while at the same time arguing against an overly hasty withdrawal of stimulus (both fiscal and monetary). For instance, in its most recent concluding statement to the Article IV mission on the US (June 20), the IMF wrote: ... Fiscal policy consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging. However, the pace and composition of adjustment should be attuned to the cycle, within a politically-backed strategy that raises medium-term revenues and addresses long-term expenditure pressures. ...
Taylor seems to agree with Keynesians, but claims he doesn't - John Taylor has what I consider to be a pretty good post about the stimulus. He points out that if we evaluate the stimulus' impact using the same models that we used to predict its impact, we don't gain a lot of added value from the backward-looking part of the analysis. That is very true. He then points out the extreme difficulty of evaluating the stimulus (or other policy interventions) without basically assuming your conclusion through the choice of the model used to construct the counterfactual. This is also true. He then presents a paper that he has written that attempts to evaluate the ARRA. According to Taylor, he has clear evidence that the stimulus didn't work. Previous studies purporting to show the failure of stimulus have been less than convincing. So I went into this paper expecting to find serious problems. But instead I found Taylor pretty much agreeing with the Keynesians...
Bad Tayloring - Krugman - Noah Smith says something I’d been meaning to say about John Taylor’s recent work. Taylor actually has a pretty good point: it’s far from clear that the ARRA actually led to much of a rise in government spending, while the tax cuts that made up much of the stimulus were probably largely saved. But Taylor then presents this as an argument against Keynesian economics — whereas it seems to be an argument that Obama wasn’t Keynesian enough. But wait, there’s more. I remember what Taylor was saying early on: he was dead set against any rise in spending, and called for permanent tax cuts (in response to a temporary crisis?) instead. So the position Taylor is taking now seems to be:
- 1. Keynesian economics doesn’t work, as evidenced by the fact that Obama didn’t try it.
- 2. Obama failed utterly by not following the policies I (Taylor) specifically demanded that he not follow.
No, A Bigger Stimulus Would Not Have Worked Either- John Taylor - Paul Krugman writes (citing Noah Smith) that he agrees with the empirical findings in my critique of the revival of Keynesian activism in the 2000s (the stimulus packages of 2001, 2008 and 2009). In particular, he writes that “it’s far from clear that the ARRA actually led to much of a rise in government spending, while the tax cuts that made up much of the stimulus were probably largely saved.” But he then goes on to say that the stimulus was too small. That’s not what I found in my paper. As I stated in the paper, my “results do not lend support to” the view “that the stimulus was too small.” Rather the paper showed that “a larger stimulus package—with the proportions going to state and local grants, federal purchases, and transfers to individual the same as in ARRA—would show little change in government purchases or consumption.”
Could we have had a bigger stimulus? - In general, I think this question tends to get answered the wrong way. The typical response is that Christina Romer initially estimated that we needed a $1.2 trillion stimulus, but then the political team shaved it down to $800 billion, and that’s where the mistake was made. But Romer’s estimates — which were based on private-sector estimates — came before we knew the real size of the recession. A world in which Congress followed Romer’s advice is still a world in which we did much too little, because Romer’s calculations were completed before we knew how bad the recession really was.The Obama administration has taken a lot of heat for predicting (pdf) that the stimulus would keep unemployment from rising above 8 percent. But I’ve always thought the more important information on that chart was the line tracking what would happen if the stimulus didn’t pass. The Obama administration had some reason to offer a rosy estimate of a world with the stimulus bill, but they had much more reason to offer a doomsday prediction of a world without a stimulus bill. With that in mind, look again at the infamous chart that Christina Romer and Jared Bernstein worked up to project the effects of the stimulus in January of 2009:
Subsidizing Profits, Weakening Social Security: The Employer Payroll Tax Cut -These days, it appears as though the main goal of government policy is to give as much money as possible to corporations and the wealthy. This is an area where there has been considerable success, with the profit share of GDP at near record highs and the richest 1 percent holding a larger portion of the nation's wealth than at any point since the late '20s. The proposals for an employer-side payroll tax cut should be seen in this light. The argument being pushed by proponents of the cut is that a temporary reduction in the employer's side of the payroll tax will give them more incentive to hire workers. This argument does not pass the laugh test, but of course, most of the things being said in elite Washington circles these days do not pass the laugh test. As usual, the flaws can be exposed with simple arithmetic. The employer's side of the payroll tax is 6.2 percent. The argument goes that if we temporarily eliminate this tax, then it is cheaper to hire workers, so employers will hire more.
Taxes and Billionaires - The House speaker, John Boehner, suggests that the Republican threat of letting the United States default on its debts is driven by concern for jobs for ordinary Americans. So take a look at one of the tax loopholes that Congressional Republicans are refusing to close — even if the cost is that America’s credit rating blows up. This loophole has nothing to do with creating jobs and everything to do with protecting some of America’s wealthiest financiers. The White House estimates that this would raise $20 billion2 over a decade. But Congressional Republicans walked out of budget talks rather than discuss raising revenues from measures such as this one. This carried interest3 loophole benefits managers of financial partnerships such as hedge funds, private equity funds, venture capital funds and real estate funds — who are among the highest-paid people in the world. John Paulson, a hedge fund manager in New York City, made $4.9 billion last year4, top of the chart for hedge fund managers, according to AR Magazine, which follows hedge funds. That’s equivalent to the average per capita income of 184,000 Americans, according to my back-of-envelope calculations based on Census Bureau figures.
A Cosmic Visitor's Take on Tax - Imagine you are a researcher from a distant planet, part of a team sent to stealthily observe and report your findings. Telemetry has revealed the watery and volcanic nature of our planet, so you focus on the organized activities of Earth's top sentients. Your protocol requires you to identify the biggest common enterprises first and then work your way down. So what would lead your report? What is the biggest human enterprise? Industry? Digital activity? Military? Healthcare? Food production? No, the biggest enterprise, by far, is tax. Tax accounts for close to 30 percent of economic activity in the United States, 40 percent or more in much of the modern world, and in some countries more than half the economy. Not being from another planet, it may come as a surprise to you that tax is number one. After all, tax has become a vile word in America, an epithet and a feared label. But there it is, number one. Because we devote so much to tax, we must love taxes, right? Or at least what taxes buy. Either that or we are crazy because it doesn't make sense to put first that which you hate.
Bill Clinton: Cut Corporate Tax Rate, Broaden the Base, and Enact Repatriation Holiday - Over the holiday weekend, former president Bill Clinton called for lowering the corporate tax rate and broadening the base as a means of brokering a deal over the debt ceiling. Clinton described the corporate tax rate as "uncompetitive," saying, "We should cut the rate to 25 percent, or whatever's competitive, and eliminate a lot of the deductions so that we still get a fair amount [of revenue], and there's not so much variance in what the corporations pay." Later that week, he also voiced support for a "repatriation holiday" on corporate earnings being held abroad. Currently, U.S. corporations are taxed at a combined federal and state rate of 39.3% and by what is known as a worldwide system of corporate taxation. The U.S. corporate tax rate is the second-highest in the world, surpassed only by Japan's top rate of 39.54%. High corporate rates hinder economic growth and reduce the competitiveness of American firms within the global marketplace. But high rates are merely a problem within the even bigger problem of how U.S. corporations are taxed on foreign income.
Who Could Replace Geithner? -- Timothy F. Geithner1 says he is staying in his job as Treasury2 secretary “for the foreseeable future.” But in politics, things can change quickly. And with Mr. Geithner having floated the idea of a departure, the question turns to who could replace him. The usual suspects are known to both Democrats and Republicans: Roger C. Altman3, Erskine B. Bowles4, Gene Sperling5 and Janet L. Yellen6. Others possible candidates being speculated about on Friday include the White House chief of staff, William M. Daley7. Ben White and Carrie Budoff Brown of Politico8 say that Jamie Dimon9, chief executive of JPMorgan Chase10, is “a strong dark-horse candidate.” Dimon has said he is not interested in public office but many on Wall Street believe he would accept the job if asked by Obama. But the White House will have to decide whether Dimon, who leads the most successful bank in the U.S., is too closely aligned with Wall Street. With Mr. Daley, a former JPMorgan executive, the White House would also face another kind of “Government Sachs” image problem if Mr. Dimon were to join the administration.
Bank Regulation’s Capital Mistake - Imagine that the arguments triggered by the Hindenberg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite. Unfortunately, today’s debates about banking reform have just this character. Reversing the robotic gigantism of banking ought to be the top priority for reform. Bankers were once supposed to know every borrower, and to make case-by-case lending decisions. Now, however, banks use models conjured up by faraway financial wizards to mass-produce credit and a range of derivative products. Mass-production favors the growth of mega-banks, so, unlike the misjudgments of lending officers, these behemoths’ defective models have had disastrous consequences. Consider the seemingly heated debate over how much capital banks should hold. Regulators have proposed steep hikes: a Bank of England study, for example, suggested a more than three-fold increase.Bankers, who may really be worried about their own bonuses, warn that higher capital requirements will force them to curtail lending, thus impeding economic growth. In fact, this is all a pointless charade.
Killing Dodd-Frank Softly - If Jim DeMint gets his way, the Senate will vote any day now on repealing the historic Dodd-Frank financial-reform law. While Senator DeMint is receiving a big assist from conservative lobbying groups, his amendment is sure to fail given the Democratic majority. Still, the tireless war against Dodd-Frank - a law that marks its first anniversary next month - will go on. Like the assault on the health-care law, the campaign to roll back financial reform is a sophisticated operation bolstered by big money and animated by ideological fervor. What’s different is that cracking down on Wall Street is popular with the American public, and so - DeMint’s frontal assault aside - much of the push to destroy Dodd-Frank has been carried on over power lunches and in the back offices of congressional committees.
Fed’s Feeble Swipe Fee Rule Is an Unauthorized Sop to Big Banks - The Federal Reserve Board just gave the biggest banks in the United States a $4 billion annual present and flagrantly disregarded the law to do so. As part of the Dodd-Frank Act, Congress passed a provision called the Durbin amendment that regulates the fees that banks charge on every debit card transaction. These fees—swipe fees—are higher in the U.S. than anywhere else in the developed world because of the banks’ anticompetitive practices and are a $17 billion/year boondoggle for U.S. banks, with the money ultimately coming out of American consumers’ pockets in the form of higher retail prices. Congress directed that swipe fees be set as “reasonable and proportional” to the incremental cost of authorizing and clearing a debit card transaction. The Fed responded with a pair of alternative proposed rules. One would have given the banks a safe harbor if they charged no more than 12 cents per transaction, the other if they charged no more than 7 cents per transaction. But when the Fed came out with its final rule on June 29, the safe harbor had changed to 21 cents per transaction plus 0.05% of the transaction amount. While this is a matter of cents on individual transactions, when multiplied by the billions of debt card transactions that occur each year, it translates into a $4 billion annual gift to the banks. This is real money.
An Agency Builder, but Not Yet Its Leader - It is conventional wisdom in this town that the first director of the new Consumer Financial Protection Bureau1 will be anyone but Elizabeth Warren2. She claims not to care. Ms. Warren, who pushed for the creation of the bureau, has waged a tireless campaign on its behalf. In doing so, she may have helped her own prospects for getting the job. In nine months overseeing the bureau’s start-up, she has talked with community bankers in every state, conferred with about 70 members of Congress, conducted dozens of media interviews and met with more than 1,000 banking, business and consumer representatives. Preparing for the agency’s July 21 opening, she supervised the hiring of more than 300 people. To nervous lenders, her message has been as simple and unadorned as her personal style: a new regulator to protect consumers from abusive financial products does not have to punish banks to do its job.
Elizabeth Warren’s Dream Becomes a Real Agency She May Never Get to Lead - Elizabeth Warren’s admirers often refer to her as a grandmother from Oklahoma. This is technically true. It’s also what you might call posturing. Warren is a grandma from Oklahoma in roughly the same way Ralph Nader is a pensioner with a thing about cars. If the grandmother perception is plausible, it’s largely because Warren has a gift for parables and for placing herself in the middle of them as the embodiment of moral force. Warren begins her tale in the spring of 2007, before the housing crash and the financial crisis. She was on a plane back to Boston after a series of discouraging meetings with credit- card company executives. She had tried to sell them on an idea called the “clean card” that grew out of her academic work and her side gig as a guest on such shows as Dr. Phil, where she dispensed empathy and advice to audience members who were one bad check away from losing everything. The concept was simple: Offer the equivalent of a Good Housekeeping Seal of Approval to any credit-card company that disclosed all of its costs and fees up front, no fine print.
Consumer Protection Strategies in Credit and Insurance: Why the disconnect? - From a consumer protection perspective, credit and insurance are intimately related. At its core, consumer protection regulation in both domains is motivated by the fact that consumers routinely engage in complex financial transactions that they may not fully understand or appreciate. And in both domains, firms or market intermediaries can exploit this fact to make additional profits in the short term, though such a strategy creates long-term legal and reputation risks. Despite these similarities, consumer protection regulation in credit is predominantly concerned with disclosure and transparency whereas consumer protection regulation in insurance almost entirely ignores these tools in favor of more prescriptive regulatory approaches. In the credit arena, consumer protection is predominantly concerned with promoting genuine transparency so that consumers can make better decisions and consumer watchdogs can identify potential market problems. Consider initatives aimed at disclosing the true costs of credit cards or making loan data publicly available. Although the Consumer Financial Protection Bureau may adopt some more aggressive regulatory strategies, transparency and disclosure are nonetheless likely to dominate the new agency's efforts, as illustrated by the impressive new mortgage disclosure forms that it recently rolled out.
What's behind GOP attack on product-safety database? - The Republican-controlled House Appropriations Committee has approved a spending bill that cuts off all funding for the Consumer Product Safety Commission's online database of product complaints. What is it about consumer protection that Republican lawmakers don't like? Is it that they want to see their constituents fleeced and flimflammed by businesses? Is it that they don't care? Or is it something as craven as carrying water for corporate interests simply because that's where the money is?Whatever the reason, the Republican-controlled House Appropriations Committee has approved a spending bill that not only slashes the budget of the Consumer Product Safety Commission but also cuts off all funding for a recently launched database of product-safety complaints. The online database is one of the most important consumer tools to emerge from Washington in years. It enables people to report potentially faulty or harmful products, as well as to research goods before making a purchase. "If this bill passes, it will destroy the database," . "They're trying to pull the plug on a vital consumer resource."
Could Restrictions on Payday Lending Hurt Consumers? - Kelly Edmiston of the Kansas City Fed raises many of the key issues in: "Could Restrictions on Payday Lending Hurt Consumers?" A payday loan typically involves a borrower writing a check for, say, $200, and then receiving $170. The lender promises not to cash the check for a couple of weeks. As Edmiston says: "While payday lenders often charge fees rather than interest payments, in effect these charges are interest. Comparing the terms of varying types of loans requires computing an effective, or implied, annual interest rate. For payday loans, this computation is straightforward. A typical payday loan charges $15 per $100 borrowed. If the term of the loan is two weeks, then the effective annual interest rate is 390 percent."Many states have regulated or banned payday loans. "By the end of 2008, 10 states and the District of Columbia had instituted outright bans on payday lending. Other states have passed regulations that indirectly ban payday lending by making it unprofitable. For example, in Massachusetts, the Small Loan Act Caps interest at 23 percent per year. In states that allow payday lending, regulations may indirectly restrict or effectively ban the practice. A variety of such regulations exists. Most states legislate maximum loan amounts, usually from $300 to $500. The limits that states impose on fees vary widely."
Has the U.S. Turned Against Consumers? - Both candidates recognized what was happening in the markets and promised to repeal the Enron loophole that was created in 2000 by the Commodities Futures Modernization Act. This essentially deregulated financial products known as over-the-counter derivatives and loosened capital requirements. It allows traders to run roughshod over our economy, pocketing excessive profits and slowing the pace of recovery. Amazingly, many continue to debate whether or not commodity traders are even responsible for today’s outrageous oil pricing. To industry professionals—among them Fadel Gheit, one of the most respected oil analysts; key members of OPEC; Rex Tillerson, chairman and chief executive of ExxonMobil; and the heads of (PTG:MK)Petronas of Malaysia and (TOT)Total of France—what is taking place is obvious. Not long after these columns were published, Gary Gensler, head of the Commodities Futures Trading Commission, slammed the commodities markets with his sharpest criticisms yet. Gensler pointed out that as of today, 88 percent of recent trades for benchmark West Texas Intermediate Crude are made solely by speculators, not by the real end-users of crude. When speculators make 88 percent of all trades, they’re not just heavily influencing the market. They have absolute control.
Proposal: Central clearing for repos - Central clearing for repurchase transactions could prevent the kind of runs on the repo market that triggered the financial crisis in 2007-2008, writes Jeff Penney, senior advisor to McKinsey & Company, managing member of financial services consulting firm High Line Advisors, and former Merrill Lynch executive. During the crisis and continuing today, most repo agreements are made privately between a borrower and a lender. In central clearing, by contrast, a clearing house sits in the middle of a repurchase transaction, setting standards and acting as the borrower to every lender and the lender to every borrower. Some critics view central clearing as a dangerous concentration of risk, but Penney argues that properly run clearing houses will control risk better than fragmented bilateral agreements and, as the hub of many trades, they can be a valuable source of information for regulators.
Collateral Transformation Services: What Could Possibly Go Wrong? - Risk has an interesting article ($) on the plans by some dealers to offer “collateral transformation” services to derivatives end-users. Requiring most derivatives to be cleared means that end-users will have to post daily variation margin to the clearinghouse (or “CCP”). Here’s how Risk describes the problem: The problem centres on the type of collateral required by CCPs — or more specifically, the fact that many end-users don’t hold enough of it. Clearing houses only accept cash for variation margin, and usually insist on cash or sovereign bonds for initial margin. However, many buy-side users of derivatives tend not to invest in these assets — at least, not in the amounts that might be necessary. ...Clearing members [i.e., the dealers] say they have a solution. ... [C]learing members are responsible for collecting margin from their clients and posting it to the clearing house, charging a fee for the privilege. As an additional service, however, a number of clearing members are also planning to offer collateral transformation facilities — essentially, enabling the client to post non-eligible instruments with the dealer, which will be switched into cash via the repo market and then posted with the CCP. So the plan is to concentrate liquidity risk at the dealer banks? Gee, what could possibly go wrong?
Here’s The Legal Complaint WikiLeaks Is Threatening To File Against Visa, MasterCard - More than six months have passed since Visa, Mastercard, PayPal, and others cut WikiLeaks’ purse strings. And if that blockade lasts six more days, the secret-spilling group plans to take its financial fight to the courtroom. If Visa Europe and MasterCard Europe haven’t re-opened payment WikiLeaks by next Thursday, the group and its payment provider DataCell plan to file a complaint with the E.U. Commission against the two companies as well as the Danish payment processor Teller, according to Sveinn Andri Sveinsson, the Icelandic lawyer for WikiLeaks and DataCell. “They’re boycotting Datacell and Wikileaks without any objective justification,” says Sveinsson. “This is clearly an abuse of their market dominance.” According to Sveinsson, the following complaint was sent to the two companies earlier this month, and will be filed with the E.U. Commission at an appointment Thursday if the situation isn’t resolved by then.
Addicts And Pushers - I got to thinking about the curious double legal and moral standards regarding addicts and pushers in America. Drug pushers who profit from tempting the weak-in-character are condemned both by society and by the law; They’re considered the lowest of the low and given long prison sentences if convicted. OTOH, the addicts created by the drug pushers are treated like” victims” with a “problem”. They’re to be “understood” and “rehabilitated”. But compare the moral and legal treatment of people in the drug trade to that of the people in the debt trade. Today we have an entire “industry” which – with government encouragement and protection – rakes in money by getting people hooked on debt that they have no chance of ever repaying. Sub-prime mortgages, NINJA loans, Home Equity Lines of Credit, credit card debt, title loans, payday loans… “Here kid, sign here – It’ll make you feel good. All your friends are doing it. You can pay me later.” Over the last 100 years the politicians, investment bankers, phony insurance executives, and Wall St. insiders have sold the entire country into wage slavery. So where is the comparable condemnation of the pushers of debt who no doubt destroy more lives than pushers of illegal drugs?
Shadow banking and leaking SIVs - The decimation of shadow banking that began in summer 2007 set in motion the crisis that has since engulfed the global economy. A much-maligned culprit in this process has been the shadow-banking sector. Despite significant shrinkage due to the crisis, shadow banking still represented, in 2010, more than half of outstanding liabilities in the global financial system (Pozsar et al. 2010). Given the crucial role played by securitisation within shadow banking, it is perhaps unsurprising that both the IMF (2009) and the Financial Stability Board (2009) believe that a less fitful and more confident return of securitisation is the key to a sustainable global recovery. In the aftermath of the global crisis and as the turmoil in the sovereign debt market continues, this column argues that policymakers need to get the shadow-banking sector in order if they are to restore confidence in global markets.
Chicago Trading Firm’s Lawsuit Claims Banks Conspired to Manipulate Libor - A Chicago trading firm accused Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and Citigroup Inc. (C) of conspiring to manipulate the London interbank offered rate. The banks drove down Libor to generate billions of dollars in profits from swaps, loans, interest rate derivatives and other financial instruments whose value depended on the rate, Eldorado Trading Group LLC said in a complaint filed July 5 in federal court in Newark, New Jersey. The civil lawsuit is one of several filed in response to probes by the U.S. Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission related to whether there were improper attempts to manipulate Libor. The rate, at which banks borrow from one another in the London interbank market, is a short-term, international benchmark. The banks “had a substantial incentive to manipulate, and in fact did manipulate, Libor downward, in order to increase the income from its interest rate derivatives and similar instruments,” according to Eldorado’s complaint. “This manipulation resulted in billions of dollars in revenue.”
Uncollected Fines Undermine Regulation - It is no secret that government regulators often mete no more than a slap on the wrist for corporate wrongdoers guilty of serious crimes. As I have written here and elsewhere, federal authorities routinely reach settlements in which corporations do not actually acknowledge doing anything wrong and agree to financial penalties. Typically, no individual executives are named in these settlements or held personally responsible for their actions. All this is bad enough and helps explain widespread criminal behavior in corporate America. But now comes worse news from a new study: Many of the fines that the government imposes are never actually paid. According to the article, published in Yale Law & Policy Review by Martin Pritikin and Ezra Ross, the government was owed more than $35 billion in "uncollected criminal debt" in 2006 -- a figure that has soared from $5 billion in 1995. Even as this tally has ballooned, the amount collected annually by the government has stagnated. State and local governments are also failing to collect huge amounts of money in fines.
Looking at Ken Lay and the Lack of Financial Crisis Cases - Kenneth L. Lay, the former chief executive of Enron, died of a heart attack five years ago today. The stunning news came a month after a Houston jury convicted him of securities fraud and three months before his scheduled sentencing. Why does this matter today? The media and public continue to hammer away at the lack of criminal prosecutions related to the financial crisis. In a New York magazine cover story this week, Frank Rich wrote: “What haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression. There has been no legal, moral, or financial reckoning for the most powerful wrongdoers.”
As Wall St. Polices Itself, Prosecutors Use Softer Approach…“Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise?” said Solomon L. Wisenberg, former chief of a Justice Department financial institutions fraud unit. As the financial storm brewed in the summer of 2008 and institutions feared for their survival, a bit of good news bubbled through large banks and the law firms that defend them. Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis. Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive1, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,”
Defining Deviancy Away: How the Justice Department Adopted “See No Evil” Approach to Corporate Crime - Yves Smith - Gretchen Morgenson and Louise Story have a must-read article in the New York Times on an important aspect of our two-tier justice system, in which only little people seem to be subject to the full force of the law. The article describes how, starting with the Bush Administration and continuing under Obama, the Department of Justice decided to exit the business of prosecuting suspected corporate criminals. This section is stunning: But by 2005, a debate was growing over aggressive prosecutions, as some business leaders had been criticizing the approach as perhaps too zealous. In the meeting, the deputy attorney general at the time, James B. Comey, posed questions that surprised some attendees, according to two people there who asked to remain anonymous because they were not supposed to discuss private meetings. Was American business being hurt by the Justice Department’s investigations?, Mr. Comey asked, according to these two people, who said they thought the message had come from others. He cautioned colleagues to be responsible. This is ass backwards. First, it is of absolutely no concern to a prosecutor what the impact of his work is on the quality of life of criminals. Would you ever hear a prosecutor say, “Gee, we better not bust that drug dealer. His mom would be distraught, and think what it would do to his kids”? Prosecutors are in the business of enforcing the law. If there is something wrong with the law, that’s a different question, and remedies should fall to the legislature (but we’ve been plagued with an awfully creative Supreme Court). A ttorneys general do not have social or economic engineering as part of their job description.
Wall Street: Yep, They Still Own the Place - Today the blogosphere features a fight over "business process" patents — things like Amazon's patent for one-click checkout, for example. These have been abused pretty badly, and Wall Street is fighting back. How? They got Chuck Schumer to insert a special provision in a bill that changes the ground rules for challenging business process patents related to “a financial product or service.” It's good to have friends in high places, no? Andrew Ross Sorkin is outraged. This provision "is perhaps the most blatant demonstration of the lobbying power of Wall Street and, just as important, the willingness of Congress to support the interests of the banks, even in the face of clear evidence that the law has no purpose other than to benefit the financial services industry." At the same time, the fact that Wall Street is the only industry getting patent relief from Congress really is a blatant demonstration, in Dick Durbin's immortal words, of the fact that banks "frankly own the place."
Government sponsored enterprises - A few days ago I posted a post on my blog that responds to George Will’s claim in his weekend Washington Post column that the auto bailout was a privatization of profits but a socialization of losses. The full post, which is at Annarborist, and is called I Beg to Differ (in Part) Mr. Will, George Will says: In 1994, Bill Clinton proposed increasing homeownership through a ‘partnership’ between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized. Will’s column discusses a new book by Getchen Morgenson and housing-finance expert Joshua Rosner that Will says “will introduce you to James A. Johnson, an emblem of the administrative state that liberals admire.” Johnson, for those of you who (like me) don’t instantly recognize the name, headed Fannie Mae during (during the 1990s and early 2000s. He says the book details how Johnson and a few others, acting under the guise of compassion, used the government’s backing of Fannie and Freddie loans and the public policy of encouraging homeownership, to hugely enrich themselves.
George Will Spreads Some Lies About the Economic Crisis - Dean Baker - It really is incredible to see such a concerted effort to rewrite history in front of our faces. There is not much ambiguity in the story of the housing bubble. The private financial sector went nuts. They made a fortune issuing bad and often fraudulent loans which they could quickly resell in the secondary market. The big actors in the junk market were the private issuers like Goldman Sachs, Citigroup, and Lehman Brothers. However, George Will and Co. are determined to blame this disaster on government "compassion" for low-income families. The facts that Will musters to make this case are so obviously off-base that this sort of column would not appear in a serious newspaper. But, Will writes for the Washington Post. The first culprit is the Community Re-investment Act (CRA). Supposedly the government forced banks to make loans against their will to low-income families who did not qualify for their mortgages. This one is wrong at every step. First, the biggest actors in the subprime market were mortgage banks like Ameriquest and Countrywide. For the most part these companies raised their money on Wall Street, they did not take checking and savings deposits. This means that they were not covered by the CRA.
Reckless Endangerment of the Truth - If we want to minimize the chance of another financial crisis, it’s important for us to understand how it happened. If we get the causes wrong, our attempts to fix the problems in the financial sector are unlikely to be successful. That’s why I was so disappointed to see the new book by Gretchen Morgenson and Josh Rosner, Reckless Endangerment, blaming the financial crisis on Fannie, Freddie, and Democrats. The book has been highlighted recently by George Will and David Brooks, and it joins a chorus of conservative voices promoting the idea that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis.The dispute over the cause of the financial crisis breaks down along standard ideological lines. Democrats generally argue that the crisis can be traced to misplaced faith in the ability of markets to self-regulate. According to this view, economists, regulators, and politicians on both sides of the aisle came to believe that large, economy wrecking financial meltdowns were a thing of the past. This misplaced faith in markets led to deregulation of the financial sector, less enthusiastic enforcement of the rules that remained on the books, and government inattention to important market failures in the financial industry.
Market Share of Mortgage Debt Outstanding - Mark Thoma is frustrated to see some commentators once again push the view that Fannie and Freddie caused the economic crisis. When this issue arose back in late 2008, Richard Green's figure on the share of mortgage debt outstanding held by type of institution settled the debate for me. That figure showed the GSE's share declined during the housing boom while the asset-back security issuers' share increased. Here is an updated and slightly modified version of that figure: (Click on figure to enlarge.) Source The data is unambiguous here: Fannie and Freddie were not the immediate cause of the housing boom. They may be guilty of a number of things, but directly causing the housing boom is not one of them.
What is the incidence of the Fannie-Freddie bailout? - There is lot of rending of garments and gnashing of teeth that the FF bailout will cost something like $300 billion, including the implicit subsidy to mortgages that are guaranteed (the cash flow cost right now is something like $130 billion). So for an economy whose GDP is roughly $14.5 trillion, this is a little more than two percent of GDP. To whom does the money go? Given that shareholders were essentially wiped out, it goes to largely three places: holders of Fannie and Freddie debt, the US Treasury (which owns preferred shares in the companies) and homeowners. I am curious how this shakes out distributionally. Clearly, homeowners are on average richer than renters, and bondholders are richer than non-bond holders, so the bail-out must have some regressive implications, but it is not clear to me how much so. It is at least worth thinking about.
The final nail in the supply side coffin - The theory of supply-side economics tells us that if you cut taxes on rich people and corporations, the newly liberated moguls and businessmen will take their windfall and invest it, creating jobs and accelerating the rate of economic growth. The benefits of a light hand on the upper class, therefore, will "trickle down" to the working man and woman.Ever since Ronald Reagan first attempted to make supply-side economics a reality and proceeded to inaugurate an era of persistent government deficits and growing income inequality, it has become harder and harder to make the trickle-down argument with a straight face. But we've never seen anything quite like the disaster that's playing out right now.The Wall Street Journal reported on Tuesday that corporate profits are looking quite strong for the second quarter of 2011. Even the Journal can't sugarcoat the basic facts:While the U.S. economy staggers through one of its slowest recoveries since the Great Depression, American companies are poised to report strong earnings for the second quarter -- exposing a dichotomy between corporate performance and the overall health of the economy. But that's just the tip of the nightmare.
Net Lending By Domestic Business - Krugman- A better picture to illustrate the point that cash is not the problem: here’s net lending by domestic business: Bureau of Economic Analysis Data.Before the crisis, businesses were net borrowers, and to the extent that they preferred to rely on internal finance, anything that increased their profits might have led to at least some extra investment. Now, however, businesses are by and large taking in more in profits than they want to invest in expanding their businesses, so they’re lending out the excess, parking it in various securities. There’s absolutely no reason to believe that taxing their corporate jets would reduce investment, or that giving them a tax holiday on repatriated funds would increase investment.
Corporate Cash Con, by Paul Krugman- Watching the evolution of economic discussion in Washington over the past couple of years has been a disheartening experience...; with stunning speed, the lessons of the 2008 financial crisis have been forgotten, and the very ideas that got us into the crisis — regulation is always bad, what’s good for the bankers is good for America, tax cuts are the universal elixir — have regained their hold. And now trickle-down economics — specifically, the idea that anything that increases corporate profits is good for the economy — is making a comeback ... and even some Democrats are buying into it. What am I talking about? Consider first the arguments Republicans are using to defend outrageous tax loopholes. How can people simultaneously demand savage cuts in Medicare and Medicaid and defend special tax breaks favoring hedge fund managers and owners of corporate jets? Well,... a spokesman for Eric Cantor, the House majority leader, told Greg Sargent of The Washington Post ... that anything that leaves more money in the hands of corporations will mean more jobs. That is, it’s pure trickle-down. And then there’s the repatriation issue.
Hello Corporate Profits, Goodbye Worker Pay - As another giddy corporate earnings season approaches, it's worth keeping this in mind: Since World War II, there's never been a worse recovery for jobs and worker pay. And never a better one for corporate profits. Those are the findings of a new study out from Northeastern University, which looks at where U.S. national growth has settled in this economy. Since the recovery officially began in June 2009, 88% of U.S. growth has gone to corporate profits, the study finds, while wages and salaries have only seen a paltry 1% of that glory. So where has the growth gone in the past?During the recovery in the early 90s (in the 6 quarters after the end of the recession), a whopping 50% of U.S. growth went to worker pay, while corporate profits actually declined by 1%. In the recovery that followed the dot-com bust in 2001, jobs and worker pay accounted for 15% of U.S. growth, and 53% went to corporate profits, the study finds. And during the recoveries from the 1981-82 and 1973-75 recessions, jobs and worker pay accounted for roughly 30% of U.S. growth.
Corporations Have Captured 88% Of All Post-Recession Income Growth: Economists at Northeastern University have found where the money that once went to company employees has gone. A new study released by the school shows that "corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent" of growth. The New York Times reports: The study said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery ... The share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades, the study found. “The lack of any net job growth in the current recovery combined with stagnant real hourly and weekly wages is responsible for this unique, devastating outcome,” wrote the report’s authors, Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin and Sheila Palma. According to the Bureau of Labor Statistics, average real hourly earnings for all employees actually declined by 1.1 percent from June 2009, when the recovery began, to May 2011, the month for which the most recent earnings numbers are available.
We Knew They Got Raises. But This? - It turns out that the good times are even better than we thought for American chief executives. A preliminary examination of executive pay1 in 2010, based on data available as of April 1, found that the paychecks for top American executives were growing again, after shrinking during the 2008-9 recession2. But that study, conducted for The New York Times by Equilar, an executive compensation data firm based in Redwood City, Calif., was just an early snapshot, and there were even more riches to come. Some big companies had not yet disclosed their executive compensation. So Sunday Business asked Equilar3 to run the numbers again. Brace yourself. The final figures show that the median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009. The earlier study had put the median pay4 at a none-too-shabby $9.6 million, up 12 percent.
FDIC backs pay clawback in bank liquidations (Reuters) - U.S. regulators will be able to snatch back up to two years of Wall Street executives' pay if they are found responsible for the collapse of a major financial firm, under a rule approved on Wednesday. The provision is part of a broader Federal Deposit Insurance Corp rule laying out the order in which creditors will be paid during a government liquidation of a large, failing financial firm. The 2010 Dodd-Frank financial oversight law gives financial agencies this power to recoup executives' pay. Bankers have complained regulators were too vague in an earlier proposal about what could trigger a clawback. The FDIC's final rule provided some relief by clarifying "negligence" as the standard. The agency was careful to point out that it was not using the more narrow standard of "gross negligence." Acting Comptroller of the Currency John Walsh, who had raised concerns about the standard being too broad, said he was pleased with the changes."I was concerned that it seemed to focus more on job titles than the actual actions that people had taken," he said.
Are Self-Dealing Parties Settling $242 Billion of Bank of America Liabilities for Way Too Little? - Yves Smith - A petition filed by some unhappy investors on Tuesday raises some serious challenges to the so-called Bank of America mortgage settlement. The embattled bank hopes to shed liability for alleged misrepresentations made by Countrywide on loans sold in 530 mortgage trusts with $424 billion in par value. We said it was a bad deal for investors because, among other things, it included a very broad waiver of a very valuable right, that of being able to sue over so-called chain of title issues (in very crude terms, whether the parties to the deal did all the things they promised to do to convey the loans properly to the mortgage trust). This action raises three sets of different issues: the conflicts of interest among the parties trying to push this deal through, the process used to finalize the deal, which this pleading contends were devised to give the other investors short shrift; and the inadequate amount of the settlement, not only for parties that have tried to move their own putback litigation forward, but arguably for all parties. Petition Contesting Bank of America Mortgage Settlement, July 5, 2011 (scribd)
More on $8.5 Billion BofA Settlement Conflicts: 2/3 of Trustee’s RMBS Business is From BofA - Yves Smith - No wonder Bank of New York was so eager to roll the investors to whom it is nominally responsible and sign up for a settlement deal in which it effectively sold their interests out (and didn’t bother even going through the motions of advance notice, much the less consultation). Bank of America not only used the carrot of a very juicy indemnification, it had the stick of the amount of RMBS trustee business it has directed to Bank of New York and presumably could send elsewhere on future deals if it became displeased. In a 2011 paper on mortgage servicing in the Yale Journal on Regulation, Adam Levitin and Tara Twomey present data that shows that over 3/5 of BoNY’s RMBS trustee business comes from BofA/Countrywide. So understand again how this worked: BofA and Countrywide, who Bank of New York is supposed to be monitoring, and directing to do certain things, like buy back bad loans on behalf of the investors, took a big bribe from BofA not to do so (see details in our earlier post). Sweet, no?
Report: $60 Billion Mortgage Servicer Settlement being Discussed - In February, the settlement was rumored to be $20 billion.Then in May the settlement was rumored to be $5 Billion. Now the NY Post is reporting $60 billion!From the NY Post: AGs, banks near $60B deal on foreclosures. America's biggest mortgage servicers are closing in on a deal with federal and state officials to settle some of the thorniest foreclosure fiasco problems -- including the robo-signing issue, The Post has learned. The proposed settlement with the Department of Justice and 50 state attorneys general, once thought to be in the neighborhood of $20 billion, could range as high as $60 billion and include a provision for principal reduction, sources close to the discussions said.But what does "$60 billion" really mean? If the final number is in the $60 billion range, it will probably include already completed principal reductions and modifications. If so, the headline number would be meaningless.
A Template for MBS Settlements and How Safety-and-Soundness Regulation Is Incompatible with Law Enforcement - Over the past couple of years, the Massachusetts Attorney General's office has reached settlements with a number of major banks regarding mortgage securitization. These settlements has received very little notice in the press, but I think they provide a real template for future AG settelements and are worth examining. The Mass AG has gotten a good deal of principal reduction as part of these settlements. Of the $102M paid by Morgan Stanley for its New Century dealings, $52M went to principal reduction. Similarly, check out the remedy chart (below) for the settlement with Goldman Sachs. Granted, it only covered around 700 loans, but it should be the template for any AG settlement. I haven't attempted to calculate what the cost would be for doing that nationwide (it'd be huge), but we'd have a real estate market that was immediately cleared. It might require the recapitalization of our biggest financial institutions, but I've got to think that there are plenty of funds to invest in them once their balance sheets are cleared up.
Nevada Supreme Court: You Gotta Prove Chain of Title - A pair of very interesting foreclosure rulings were handed down today by the Nevada Supreme Court. They provide further evidence that documentation problems are rife in the mortgage industry, including documents showing chain of title. They also provide another example of a state supreme court demanding proof of valid chain of title before permitting foreclosure. Both cases arise from Nevada's foreclosure mediation program. In one case, Pasillas v. HSBC Bank USA, the Nevada Supreme Court ordered sanctions against HSBC for failing to mediate in good faith. What was the failure? HSBC failed to show up at the mediation with the required loan documentation, namely two pages of the mortgage note were missing, the assignment to HSBC was incomplete, a BPO rather than an appraisal was provided. Moreover, HSBC didn't show up at the mediation with authority to settle because it still required "investor approval." The foreclosure mediator refused on these ground to authorize the foreclosure.
Shadow Inventory and REOs Loom Over National Recovery - Several financial sectors suggest economic stabilization and growth, but the nation’s housing market continues to dampen overall conditions, according to the credit bureau Equifax. Equifax, based in Atlanta, has released the results of a study it conducted during the month of May analyzing national credit trends. The company points to shadow inventory and REOs as the two major mortgage market depressors. “Shadow inventory and real estate owned properties are still playing a dominant role in today’s mortgage market and slowing the pace of economic recovery,” said Craig Crabtree, SVP and general manager of Equifax Mortgage Services. Equifax says shadow inventories are contributing to a continued rise in severe mortgage delinquencies and write-offs. Total write-offs in 2010, including first mortgages and home equity installment loans, were $304.6 billion, whereas write-offs for 2006 and 2007 combined were $126.7 billion. In addition, Equifax’s May 2011 research reveals $319.7 billion in first mortgages from 2006 and 2007 vintages are in the first steps of foreclosure. Many of these will be written off as well.
The Housing Horror Show Is Worse Than You Think - You might be tempted to believe that after four years of brutal declines in home prices, the worst of the crisis is over. The Standard & Poor’s/Case-Shiller 20-city index of prices has fallen back to where it was in 2003. Housing prices in Phoenix are at 2000 levels, and Las Vegas is revisiting 1999. Lower prices have made homes more affordable than they’ve been in a generation, and sales have gone up in six of the past nine months. “It’s very unlikely that we will see a significant further decline” in prices, Housing and Urban Development Secretary Shaun Donovan said. Doug Ramsey of Minneapolis investment firm Leuthold Group is a student of asset bubbles, from tech stocks in the late ’90s to commodities in the late ’70s and railroads in the 19th century. His outlook is very different from the HUD Secretary’s. Ramsey says every housing statistic he tracks, including new and existing home prices and the performance of homebuilding stocks, has so far matched the pattern of prices after the bursting of other bubbles, including the Dow Jones industrial average following the crash of 1929 and Japan’s Nikkei after its 1989 peak. It starts with a steep decline lasting three or four years, followed by a brief rally that ends in years of stagnation. The Dow took 35 years to return to pre-crash levels.
Reis: Office Vacancy Rate flat in Q2 at 17.5 Percent - From Reuters: Sluggish economy slows US office market rebound The U.S. office vacancy rate stood at 17.5 percent at the end of the second quarter, according to Reis. The rate was the same as the first quarter, when vacancies posted the first decline in nearly four years.The average asking rent rose 0.2 percent to $27.72 per square foot, according to Reis. Factoring in months of free rent and other concessions landlords offer to attract tenants, the so-called effective rent also rose 0.2 percent in the second quarter, to $22.25 per square feet. This graph shows the office vacancy rate starting in 1991. It appears the office vacancy rate might have peaked - and is now moving sideways. It will be a good sign when the vacancy rate starts falling.
Reis: Mall Vacancy Rates increase in Q2 - From Reuters: US mall vacancies rise in 2nd quarter, rents flat - Preliminary figures by real estate research firm Reis show the vacancy rate at ... regional malls rose to 9.3 percent ... up from 9.1 percent in the first quarter. The picture was even bleaker for U.S. strip malls where retailers gave up over half million more square feet than they rented. The vacancy rate at these local retail strips was 11 percent versus 10.9 percent in the first quarter, almost matching the 11.1 percent record set 20 years ago ...As noted in the article, some tenants are still leaving as their leases expire. This is especially grim for strip malls. To summarize the vacancy reports: Apartment vacancy rates are falling fast, office vacancy rates are moving sideways, and malls are still get crushed.
Changes to Conforming Loan Limit - Back in April, economist Tom Lawler previewed the coming changes to the GSE conforming loan limits on October 1st: FHFA: Where the Conforming Loan Limit Might Fall on October 1 The FHFA has now released the new limits. Here is a Spreadsheet with the current loan limits and the new loan limits (sorted by largest change in limit). The largest changes were for Monterey, CA (decrease of $246,750), Monroe, FL (-$200,750) and Puerto Rico (-$189,250). Maui, HI will see a decrease of $163,250 and San Diego, CA a decrease of $151,250. From the WSJ: Sellers Brace for New Mortgage Caps As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee. ... Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency.
Sellers Brace for New Mortgage Caps - The federal government is readying its first retreat from the mortgage market, with the size of loans eligible for government backing set to decline in October. As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee. That made it easier—and cheaper—for borrowers in pricey housing markets to obtain mortgages, because the government guarantees that investors receive payments on those mortgages even if homeowners default. Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than nine of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government's share.
The Swindler and the Home Loans - HOLDING banks1 accountable for all those disastrous mortgages2 has been remarkably difficult. But last week, a big bank agreed to pay a price: Bank of America announced that it would part with $8.5 billion to settle claims that its Countrywide Financial unit had packaged garbage loans3 into investments4 that were said to be safe. That is good news for investors, as these things go. But another, lesser-known case now winding its way through the courts may help others recover losses from lenders who dealt in risky mortgages and claimed that they had no duty to their customers. The case involves 21 families on Long Island5 and a convicted swindler named Peter J. Dawson. Mr. Dawson, a self-described financial planner6, stole roughly $8 million from his clients, among them elderly parishioners at his church in Uniondale, N.Y. He pleaded guilty in state court in December 2007 and is serving 5 to 15 years in prison. What does this have to do with mortgage lenders? Home loans were central to Mr. Dawson’s theft. He persuaded people who had paid off all or much of their mortgages to take out new home loans and entrust him with the proceeds..
Housing prices: No rebound in sight -- Housing prices are likely to keep falling the rest of this year, and probably won't show much improvement next year either, according to a survey of economists. A CNNMoney exclusive survey1 of 27 economists showed the battered housing market is facing myriad problems and won't turn around anytime soon. Of the 22 who had specific predictions for the closely watched Case-Shiller home price index2, the median forecast was for a 3.9% decline in the second quarter compared to a year earlier, and a 2.9% drop in prices over the course of the full year. Only three economists expect prices to rise this year. The outlook for 2012 is only modestly better -- a 2% increase in home values, with six of the economists forecasting another drop in prices next year. Economists are fairly evenly split on what it will take to turn the housing market around. Nearly half were looking for a significant improvement in the labor market to boost housing3, while the rest believe it will just take time to work through the inventory of foreclosed homes4.
Big Banks Easing Terms on Loans Deemed as Risks - Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk. Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium. Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome. Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.
Banks Commence Wholesale, Unsolicited Mortgage-Debt Forgiveness…It was just a matter of time before wholesale debt-forgiveness became the primary source of wealth in the US. The time is now. The NYT reports that "big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked. Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk." To be deemed in "special risk" one needs to simply have an Option ARM mortgage, and be underwater, even if still current on mortgage payments. End result: an up to 50% cut in the actual mortgage obligation. Next up: everyone in America stops paying their mortgage, or demands a 50% haircut on existing debt, now that the example has been made. And in the meantime, banks will somehow continue to keep the mortgages, which they have now cut by up to half, at par on their books following some brand new, thoroughly senseless announcement by the FASB which says banks can mark anything to whatever price they chose in perpetuity. Because otherwise, the TBTF lenders will suddenly find themselves in a massive deficiency on their Tier 1 capital, also known as completely insolvent.
Mortgage Modification Mystery - Media reports have recently focused on big banks spontaneously offering mortgage modifications, even including principal reduction, to borrowers who are not in default and who haven’t even asked for them. See here. The banks mentioned, JPMorgan Chase and Bank of America, both took over a lot of nasty mortgages from failed financial institutions (Washington Mutual and Countrywide Financial). The modifications seem to be going in particular to current but underwater customers with pay option ARM mortgages (which allowed debtors not to pay for a while and add skipped payments to the principal). Industry analysts have explained the banks’ actions as getting ahead of a problem that could affect their stock prices. See here. Apparently banks have been quietly modifying current mortgages for years, and hundreds of thousands of people, maybe more, have gotten improved deals this way. But there is still a mystery. Why don’t the banks wait for a missed payment or at least a request before making an offer?
Rents Rise, Vacancies Go Down - Apartment landlords are enjoying rising rents and falling vacancies. The average effective rent, the amount paid after discounting, was $997 in the second quarter of the year, up from $974 a year earlier, according to a report scheduled for release Thursday by Reis Inc., which tracks leasing data for 82 markets. Second-quarter rents rose in all but two markets. Vacancies, meanwhile, fell in 72 of the 82 markets during the second-quarter vacancy rate to 6%, the lowest since 2008 and compared with 7.8% a year earlier, according to Reis. But there were some cautious signs in the data. Landlords filled a net 33,000 units in the second quarter, a slowdown from the 45,000 units they filled in the first quarter. That was somewhat surprising because typically, the net "absorption" rate falls faster during the summer as college graduates leave campus and descend on cities in search of jobs. Some analysts said the slower absorption rate could be linked to slower job growth, although it is too soon to know for sure. The peak apartment renting season runs from May to September.
Are there Too Many Homes in America Ctd / There Will Be Inflation / This is the Story of 2012 - A chart on rental vacancies from Ries via Calculated Risk So what do we see directly: Rental vacancies are falling. The rental market is tightening up. We should expect higher rents and thus higher inflation in the near future. However, the story does not end there. Household formation in incredibly low. There are maybe 2 million “missing households.” On top of that both single family and multifamily (apartment) complex competitions are set to tie record lows for 2011. There is a huge demand bulge waiting in the wings. There is no supply coming on line on absorb it. Rental vacancies are already falling. This is setting up to be the story of 2012 and it is setting up to be a doozy. Inflation creeping higher despite the Feds best efforts to tamp it down. A possible explosion in the growth rate if we get a virtuous cycle of more construction job leading to more household formation, leading to more construction jobs.
Obama to extend help for unemployed homeowners to 12 months - The Obama administration is trying to make it easier for homeowners who lose their jobs to keep their homes. The administration today will announce that two programs providing unemployed homeowners a few months' forbearance on their mortgages will be extended to 12 months, said three administration officials speaking anonymously because the program has not been announced. Thousands of homeowners could benefit from the additional time, although not all jobless homeowners will be eligible. The action is being taken as part of the administration's effort to help prevent foreclosures while unemployment remains above 9% and the economy struggles to rebound. In May, 6.2 million people — 45% of the unemployed — had been without work for at least 27 weeks. New figures are due out Friday.
Obama Administration To Extend Mortgage-Free Living For America's Unemployed To One Year - Last week it was discovered that the means by which various big banks are dealing with the Option ARM cliff is by enforcing outright mortgage debt forgiveness, in some cases as large as 50% of the total principal. Which is why it should come as no surprise that the administration, in dealing with the lack of an unemployment cliff, has decided to extend foreclosure-free living for unemployed homeowners from a few months to a year. From USA Today: "The administration today will announce that two programs providing unemployed homeowners a few months' forbearance on their mortgages will be extended to 12 months, said three administration officials speaking anonymously because the program has not been announced. Thousands of homeowners could benefit from the additional time, although not all jobless homeowners will be eligible. The action is being taken as part of the administration's effort to help prevent foreclosures while unemployment remains above 9% and the economy struggles to rebound."
New Housing Program Is Aimed at the Unemployed - Help is on the way from the federal government for some homeowners struggling to make their mortgage payments because of prolonged joblessness. The Obama administration on Thursday announced a beefed-up program that will allow eligible homeowners to skip part or all of their monthly payments for 12 months or more while they search for a new job. Certain homeowners have been eligible to skip payments for three or four months, far shorter than most unemployed people need to get back on their feet. While officials could not say how many homeowners might qualify for the extended grace period, they predicted that tens of thousands would benefit. Mortgage servicers whose loans are backed by Federal Housing Administration insurance will be required to offer payment deferments to eligible homeowners. Roughly 14 percent of active mortgages are backed by the federal insurance.
How the bubble killed the middle class - A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009? But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class? And make no mistake, the middle class has been ruined: Its wealth has been decimated, its income isn't even keeping pace with inflation, and its faith in the American economy has been shattered. Once, the middle class grew richer each year, grew more comfortable, enjoyed a higher living standard. It was real progress in material terms. But that progress has been halted and even reversed. In some respects, the middle class has made no progress in a generation, or two. The prosperity of the middle class has been the chief engine of growth in the economy for a century or more. But now our mass market is no longer growing. How could it? The middle class doesn't have any money.
Consumer Bankruptcy filings Decrease 8 Percent in First Half of 2011 - From the American Bankruptcy Institute: Consumer Bankruptcy Filings Down 8 Percent Through the First Half of 2011 U.S. consumer bankruptcy filings totaled 709,303 nationwide during the first six months of 2011 (Jan. 1-June 30), an 8 percent decrease from the 770,117 total consumer filings during the same period a year ago, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The overall June consumer filing total of 119,768 represented a 5 percent decrease from the 126,270 filings recorded in June 2010. This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov. Note: The spike in 2005 was due to the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005".
ISM Non-Manufacturing Index indicates slower expansion in June - From the Institute for Supply Management: June 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in June for the 19th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.The June ISM Non-manufacturing index was at 53.3%, down from 54.6% in May. The employment index increased in June to 54.1%, up from 54.0% in May. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 54.0%.
Discretionary Services Expenditures in This Business Cycle - NYFed - The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in “discretionary” services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly. In this post, I suggest that the continued sluggishness in these expenditures lends a note of caution regarding the sustainability of recent PCE strength. Because consumption accounts for about 70 percent of output, this in turn raises some concern about the future strength of the recovery..
June Sales: How Retailers Fared - Many large retailers reported their June sales numbers this week, with most of them coming out the morning of Thursday, July 7. Strength was widespread, giving credence to hopes that an economic soft patch in the early spring was transitory. Click here for a chart sortable by company name, category, change in total or same-store sales, and total sales. Click here for May’s chart.
How Retail Spending Heated Up In June - Consumer sentiment may have dropped to a seven-month low in June. But wallets are sending a different message. Retail chains have reported same-stores sales figures that far exceeded the expectations of analysts. The Thomson Reuters Same-Stores Sales Index rose 6.5% in June, far exceeding the 4.9% gain that analysts estimated. Winners include Costco (14% rise in same-store sales, versus a 12.7% estimate), Saks (11.9%, versus 7%), and Limited, which completely crushed expectations. June sales rose 12 percent in June at the women's apparel chain, while analysts forecast a meager 3.8% increase. Stein Mart, JC Penney, and Walgreens were the only stores that fell short of analyst expectations. We shouldn't get too excited about these numbers. Retailers often cut prices in June to clear room for back-to-school and fall merchandise. Still, when we're barraged with messages that consumers are fretting about unemployment and prone to cut back, possibly sending the economy into another tailspin, it's always nice to hear money talk.
Consumer Borrowing in U.S. Rises, Led by Credit Cards - Consumer borrowing in the U.S. rose in May for the eighth straight month, led by a boost in credit card use and student loans. Credit increased by $5.08 billion after a revised $5.67 billion gain in April, the Federal Reserve said in Washington today. Economists projected a $4 billion increase, according to the median forecast in a Bloomberg News survey. Consumers may be ramping up credit-card debt as gasoline prices and unemployment climbed. At the same time, high fuel costs are probably keeping households from spending on big- ticket items like autos. “Even though we’re moving higher, we still have a long way to go,”
Gas Discounts Help Retailers Keep Parking Lots Full - With gas prices locked at well above $3 a gallon, some retailers and manufacturers are trying to get more shoppers back on the road by picking up some costs at the pump. Even shoppers at Wal-Mart, the country’s largest discount retailer, are gassing up at a savings. The company announced last week that in 18 states, shoppers could save 10 cents a gallon at Wal-Mart and Murphy gas stations if they paid with a Wal-Mart credit, gift or prepaid card. Though prices for food and clothing are also increasing, gas prices are having the most direct effect on shoppers’ behavior, retail analysts say. On weekdays, gas sales are down slightly from a year ago. But on weekends, when most people are not commuting and can choose how much to drive — and when retailers want their parking lots full — the declines are much larger, according to MasterCard Advisors Spending Pulse, which issues a weekly gas index.
Gas prices aren't likely to drop much more this summer - Motorists can expect gasoline prices to drift slightly lower over the rest of the summer, but most of the declines are over, analysts said, as the average for a gallon of regular in California reached $3.794 and stood at $3.579 nationally. The price averages are calculated by the Energy Department's Energy Information Administration, which uses a telephone survey of gas stations across the U.S. California's average price fell 4.5 cents a gallon in the last week, according to the weekly survey. Prices have dropped an average of 46.3 cents a gallon since May 2, the department said. Nationally, the price rose an average of 0.5 cent to $3.579 a gallon, largely because of continuing problems with refineries in the Midwest, where the average price jumped by 10.1 cents over the last week to $3.595 a gallon. The national average peaked at $3.965 a gallon on May 9.
As Plastic Reigns, Treasury Slows Its Printing Presses - The number of dollar bills rolling off the great government presses here and in Fort Worth fell to a modern low last year. Production of $5 bills also dropped to the lowest level in 30 years. And for the first time in that period, the Treasury Department1 did not print any $10 bills. The meaning seems clear. The future is here. Cash is in decline. You can’t use it for online purchases, nor on many airplanes to buy snacks or duty-free goods. Last year, 36 percent of taxi fares in New York were paid with plastic. At Commerce, a restaurant in the West Village in Manhattan, the bar menus read, “Credit cards only. No cash please. Thank you.” There is no definitive data on all of this. Cash transactions are notoriously hard to track, in part because people use cash when they do not want to be tracked. But a simple ratio is illuminating. In 1970, at the dawn of plastic payment, the value of United States currency in domestic circulation equaled about 5 percent of the nation’s economic activity. Last year, the value of currency in domestic circulation equaled about 2.5 percent of economic activity.
Americans in Debt: Just How Bad Off Are We? - There are a number of possible reasons the recovery has been slower than expected. Foreclosures. Banks making fewer loans. American companies doing more of their hiring overseas. The adoption of new regulations to stop another financial crisis. My colleague Roya Wolverson has discussed, here and here, the things that could be a continued drag on the U.S. economic recovery, or even send us back into recession. On Tuesday, the Wall Street Journal took a look inside the disappointing recovery and found a different answer for why the U.S. economy could continue to be weak: Consumer debt.Getting rid of debt could be a long and slow process.To get back to a 1990s debt-to-income ratio of 84%, households would either need to pay down another $3.3 trillion of debt, or see their incomes rise $3.9 trillion. That's equivalent to about nine years' worth of income growth in normal times, estimates Credit Suisse economist Dana Saporta.
Are we using tax cuts to make up for declining median household income? - DeptofNumbers reports: I’ve long wondered what median income would look like after taxes were taken into account and if the structure of Lane’s chart might change given the dynamic nature of tax policy. Bruce Bartlett’s recent post on average tax rates for four-person families pointed out the data I needed to make such a comparison. The Tax Policy Center produces annual average tax rates for four-person families at the median income level. Using their historical data I can back out the growth of after-tax median family income since 1980 (just after GDP per capita and median family income start to diverge) and add that data to the chart that Lane produced. …The results, though not earth shattering, are interesting. Prior to 2000, both real (i.e. inflation adjusted) median family income and real median family income after taxes grew at about the same rate. Real median family income has actually declined since 2000, but when you look at after-tax dollars received by households it’s been relatively flat. In other words, the median family has been able to avoid a more substantial decline in income by paying somewhat less in taxes.
Recovery Buster: Why Small Businesses Can't Get Loans - For many economists, small business lending is the safest gauge of the economic recovery's strength. Too bad it's headed in the wrong direction. Loans to small businesses dropped 8.6% at the end of March from one year ago, according to the most recent data from the Federal Deposit Insurance Corporation, which tracks loans of less than $1 million. Another analysis by the Federal Reserve Bank of Kansas City found big banks' loans to small businesses dropped 14% over roughly the same period, according to the Wall Street Journal. That's not just bad news for the mom and pop shops down the street. It's a big hitch in the recovery that could drag down the economy for years to come."Small businesses are the drivers of innovation and job creation in our economy, and they're being suffocated by banks and institutional investors that aren't willing to lend," The Pepperdine study, which polled more than 1,200 entrepreneurs, showed a vast spread between big and small businesses' abilities to access bank capital. Only 17% of businesses with less than $5 million in annual revenue said they secured bank lending over the past six months, whereas 37% of larger private companies -- with revenues of at least $25 million -- said the same.
Great Recession still very much alive on Main Street - This is one anniversary few feel like celebrating. Two years after economists say the Great Recession ended, the recovery has been the weakest and most lopsided of any since the 1930s. After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven't kept up with prices at the grocery store and gas station. The economy's meager gains are going mostly to the wealthiest. Workers' wages and benefits make up 57.5 percent of the economy, an all-time low. Until the mid-2000s, that figure had been remarkably stable -- about 64 percent through boom and bust alike. Executive pay is included in this figure, but rank-and-file workers are far more dependent on regular wages and benefits. A big chunk of the economy's gains has gone to investors in the form of higher corporate profits. "The spoils have really gone to capital, to the shareholders," And an Associated Press analysis found that the typical CEO of a major company earned $9 million last year, up 25 percent from 2009.
Widening GM Truck Supply Reminiscent of 2008 'Bad Habits'-- General Motors Co. stocked Jim Ellis Chevrolet in Atlanta with plenty of Silverado full-size pickups in early 2011, part of a wager on a strong economic recovery. The strategy is backfiring. Supply of Silverado has ballooned to 6 1/2 months worth at the dealership, a figure Frost, 52, calls "a little scary." The Detroit-based automaker, 33 percent owned by the U.S. after its 2009 bankruptcy, has 280,000 Silverado and GMC Sierra pickups on dealers' lots around the country. If sales continue at June's rate, that would be enough to last until November. After GM's truck inventory swelled to 122 days worth of average sales, the company said 100 to 110 will be normal going forward for such a large and complex line of vehicles, compared with 60 to 70 days for most models. Peter Nesvold, a Jefferies & Co. analyst, isn't convinced. Ford Motor Co., which makes similar trucks, is running at 79 days, and Nesvold says GM averaged 78 days on hand at year end from 2002 to 2010.
Some Employment Statistics - The following table summarizes some of the grim labor statistics and compares the current situation (May 2011) with the employment situation when the recession started (December 2007). Since December 2007, the U.S. working age civilian population has increased by 6.157 million people - however the number of people saying the are in the labor force has actually declined. Total nonfarm payrolls are still 6.94 million below the December 2007 level, and private payrolls are 6.69 million lower.Some of the decline in the labor force participation is due to an aging population, but these numbers suggest the U.S. needs 6.94 million jobs, plus some percent of the increase in the labor force, to get back to the 2007 employment situation. On unemployment, perhaps the most staggering number is the 6.2 million workers who have been unemployed for 27 weeks or more.
US labor market: wage and salary growth vs. payroll growth - Rebecca Wilder - The pace of annual jobs growth is too slow to generate strong wage and salary income. Much empirical research has been dedicated to the estimation of consumption functions, generally finding that labor income is the primary driver of consumption (here's a primer at the Federal Reserve Board). However, by extension jobs growth is highly correlated with wage and salary growth, roughly 50% of personal income - this is the relationship I analyze here. Roughly half of the BEA's measure of personal income comes in the form of wage and salary, so called labor income and simply referred to as 'wages' from here on out. This is highly correlated with nonfarm payroll growth, both in nominal and real terms (92% and 79%, respectively, since 1996). The chart below illustrates the correlation between real wage growth and nonfarm payroll since 1982 (I use real wage so as to account for the effects of inflation). The annual pace of real wage gains and jobs growth have declined over time (jobs growth is measured using the nonfarm payroll). Simply eyeballing the data, there's a structural shift roughly around 1996, as listed in the table below. Using these two time periods, 1982-1995 and 1996-05/2011, I estimate a simple model of real wage growth on nonfarm payroll growth. The chart for the 1996-2011 model is illustrated below; and for reference, the regression results across both time periods are copied at the end of this post.
"Jobless and Wageless" Recovery in Pictures; Trends in Jobs and Wage Growth - Please consider a collections of charts from The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009. GDP made a new high but look at the amount of US fiscal stimulus from Congress, monetary stimulus from the Fed, and global stimulus especially China, that it took to achieve that. By the "end" of the recession the US economy shed 7 million nonfarm jobs and 6 million civilian jobs. Since the official end of the recession, there has been a small net loss of both nonfarm jobs and civilian jobs. Mean weekly hours have risen by .5 hours since the recession ended but are still .2 hours below the start of the recession. Thanks to the Fed specifically and central bankers in general, real wages are below where they were when the recession ended."To date, through the first quarter of 2011, the nation’s recovery from the 2007-2009 recession is both a jobless and a wageless recovery. Aggregate employment still has not increased above the trough quarter of 2009, and real hourly and weekly wages have been flat to modestly negative. The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders. Most holders of savings and money market accounts also are net losers due to declining real interest rates which have been in negative territory for many interest bearing and money market accounts."
Historically deep job loss, but not an unusual recovery - Two years since the end of the Great Recession, nearly 14 million Americans are unemployed and the unemployment rate remains over 9% (figures as of May 2011). The stubborn woes of the job market have led many to claim that economic policies enacted in recent years (particularly those strongly associated with the Obama administration) have delayed a more rapid recovery. This claim is wrong. It is important to be clear about the actual root cause of today’s economic problems: the depth and severity of the recession that began in December 2007, the worst since the Great Depression. The pace of private-sector job creation during the economic recovery that began in June 2009 is, in fact, faster than during the previous recovery and in line with the recovery of the early 1990s. The current ongoing decline in government jobs, however, is a historic anomaly.
Economist debates: This house believes that an economy cannot succeed without a big manufacturing base - Welcome to the latest of The Economist's online debates. Our topic for the next few days is one that has divided economic practitioners and commentators for as long as anyone can remember: how important is manufacturing? This old question has had a new lease of life since the financial crisis of 2007-08. To some, this is a cautionary tale of the celebration of finance and the neglect of manufacturing. Some economies that had seemingly come to rely on financial services, such as America's and Britain's, have struggled since. Meanwhile, Germany, a manufacturing power almost written off a few years ago, has performed strongly; and China, the world's workshop, has continued to clock up giddying growth rates. There is more to services than finance, of course; but those who believe that making things is the basis of economic prosperity may see in all this a degree of vindication. Others may say that the truth is more complicated. Japan, another place where prosperity has been built on making (and exporting) things, has stagnated for 20 years. And while China's boom has owed much to manufacturing, India has been enjoying a largely service-based surge. Look over a longer period than the few years since the financial bust, and you see that most rich economies have shifted the bulk of economic output (and to a greater degree, employment) away from manufacturing and towards services, and have done pretty nicely. Maybe manufacturing is not the be-all and end-all.
How America just lost 1 million green(ish) jobs to Europe - Most underplayed economic story of the week: European aircraft manufacturer Airbus "trounced" the traditional U.S. behemoth Boeing at the Paris Air Show, booking a record $50 billion more in orders for new planes. The reason: commercial plane buyers' demands for high fuel efficiency and low emissions. Here's the Associated Press report on how Airbus racked up a whopping 730 new plane orders compared to a measly 142 for Boeing: Airbus has cashed in on airlines' desire to reduce sky-high fuel costs and cut their carbon dioxide emissions. Airbus says the A320neo is 15 percent more fuel efficient than rival aircraft like Boeing's 737 ... Airbus' success cast a long shadow over Chicago-based Boeing, which recorded only $22 billion in orders and commitments, and raised questions over the U.S. planemaker's ability to compete in a market dominated by concerns over high fuel prices. That giant sucking sound you hear is approximately half a million well-paying American jobs leaving Boeing factories in Seattle and other parts of America and heading to Airbus facilities in Toulouse, Seville, and Hamburg (job numbers include both direct, indirect, and induced and are estimates based on numbers from University of Massachusetts, the Center for American Progress, Boeing, and other sources).
BMW layoffs exemplify the evisceration of the middle class - By all accounts, BMW's parts distribution warehouse in Ontario was one of the jewels of the company's system. Supplying dealer service departments throughout Southern California, Arizona and Nevada, it received gold medals from BMW for its efficiency and employed several of the top-ranked workers in the country. In the roughly 40 years its workers had been represented by the Teamsters union, there had never been a labor stoppage. Times being what they are, when a Teamsters committee1 came to the plant in early June to open negotiations over a new contract to start Sept. 1, they thought they might be asked to accept minuscule wage increases and maybe some givebacks on health coverage. They were stunned by what they heard instead: As of Aug. 31, the plant would be outsourced to an unidentified third-party logistics company and all but three of its 71 employees laid off. The union contract will be terminated. Some of the employees might be offered jobs with the new operator, but there are no guarantees. And no one expects the new bosses will match the existing $25 hourly scale or the health benefits provided now.
"Hamster Wheel Economy" - Trimtabs says the U.S. economy added 171,000 jobs in June. However, real wage and salary growth is -2.0% year-over-year when adjusted for 3.6% inflation and 2% payroll tax cut. Via Email ... The U.S. economy added 171,000 jobs in June, reports TrimTabs Investment Research. The June gain follows increases of 127,000 in May and 181,000 in April. “Employment growth accelerated in June after reaching an interim peak in March followed by a slowdown in April and May,” says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “The rapid increase in oil prices earlier this year spooked everyone. Hiring managers put the brakes on hiring until oil prices moderated.” TrimTabs employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. They are historically more accurate than initial estimates from the Bureau of Labor Statistics. TrimTabs cautions that while employment improved in June, the improvement may be temporary. Several other economic indicators suggest that economic growth is likely to remain sluggish for the foreseeable future:
ADP: Private Employment increased by 157,000 in June - ADP reports: Employment in the U.S. nonfarm private business sector rose 157,000 from May to June on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated advance in employment from April to May was revised down, but only slightly, to 36,000 from the initially reported 38,000. Today’s ADP National Employment Report estimates employment in the service-providing sector rose by 130,000 in June, nearly three times faster than in May, marking 18 consecutive months of employment gains. Employment in the goods-producing sector rose 27,000 in June, more than reversing the decline of 10,000 in May. Manufacturing employment rose 24,000 in June, which has seen growth in seven of the past eight months. Note: ADP is private nonfarm employment only (no government jobs).
June Jobs Report: Unemployment Rate Up to 9.2 Percent With Only 18,000 Added Jobs - The Labor Department's employment report, released this morning, showed the unemployment rate increased to 9.2 percent, with employers adding 18,000 jobs in June. The unemployment rate in May was 9.1 percent, after nonfarm payroll employment grew by a modest 54,000 jobs, which the Labor Department revised down to 25,000; much fewer than the 110,000 jobs economists expected to be added. Stephen Bronars, senior economist at Welch Consulting, said many economists had grown more pessimistic since the May report, forecasting 80,000 jobs for June. 'People But employees and employers still face a dilemma over the nation's skills gap. Bronars said the Labor Department's monthly jobs reports have shown increasingly that the state of the labor market differs depending on one's education, experience and training.
June jobs report: Hiring slows, unemployment rises - The job market hit a major roadblock last month, as hiring slowed to a crawl and the unemployment rate unexpectedly rose. The economy gained just 18,000 jobs in the month, the government reported Friday, sharply missing most expectations and coming in even weaker than the paltry 25,000 jobs added in May. It marked the weakest month since September, when the economy was still losing jobs. Economists were eagerly awaiting this month's report, following a dismal report from May1. Since then, predictions for June's report have varied widely. A consensus of economists surveyed by CNNMoney2 predicted a gain of 125,000 jobs for June, but the breadth of forecasts ranged from a meager gain of 21,000 jobs to a solid 237,000. Bringing further disappointing news, the government also revised the numbers for April and May both downward. The unemployment rate rose to 9.2% from 9.1% in May. Economists had predicted the rate would improve to 9%. Overall, the job market is still far from a full recovery. The economy needs to add about 150,000 jobs a month just to keep pace with population growth.
Jobless rate rises to 9.2% as U.S. economy adds only 18,000 jobs - The U.S. unemployment rate rose to 9.2% and the U.S.economy added only 18,000 jobs, the Bureau of Labor Statistics reports. "Employment in most major private-sector industries changed little over the month," the BLS report says. "Government employment continued to trend down." Businesses added the fewest jobs in more than a year. Governments cut 39,000 jobs. In the previous three months, the economy added an average of 215,000 jobs per month. The jobless rate for May was at 9.1%. The Labor Department says the number of jobs added in May was revised down to 25,000. The department says high gas prices and supply-chain disruptions stemming from the Japan crisis and the weak housing market slowed the economy.
June Employment Report: 18,000 Jobs, 9.2% Unemployment Rate - From the BLS: Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. The following graph shows the employment population ratio, the participation rate, and the unemployment rate. Click on graph for larger image in graph gallery. The unemployment rate increased to 9.2% (red line). The Labor Force Participation Rate declined to 64.1% in June (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population. The Employment-Population ratio declined to 58.2% in June (black line). The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. The dotted line is ex-Census hiring. The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).
July Employment Situation – spencer (7 charts) The employment was bad news as payroll employment only rose by 18,000 as compared to the last months disappointing rise of 25,000. Government employment fell 39,000 versus 48,000 in May. Private payrolls expanded only 57,000 that was even weaker than the prior months 73,000. Over the last two months payroll employment was essentially unchanged. Moreover, the household survey reported an employment drop of -445,000. This lead to the unemployment rate rising to 9.2% Historically the household survey tend to lead the payroll survey and the very poor performance of the household survey is extremely discouraging. In addition the average workweek was unchanged so aggregate hours worked only expanded 0.1%. You would never know it from listening to the talking heads, but this recovery is actually stronger than the last recovery. Average hourly earnings fell from $19.42 to $19.41. Both the year over year and compound three month growth rate of average hourly earnings is only 1.9%. Wage growth is approaching a record low. Average wekly earnings growth also continues to slow. The year over gain is 2.5% and the three month growth rate is only 1.8%. Actually, with oil prices falling real weekly earnings ticked up month before last, the only gain in seven months. But this month average weekly earnings actually fell from $652.51 to $652.18 so unless we are experiencing deflation real wages will fall again this month. Given this weakness in wages and earnings it is extremely difficult to see where growth is going to come from.
Jobless agonistes - HOPES had risen in the past week that America’s economic soft patch was ending. They have just been doused with a bucket of cold water. The job market showed further deterioration in June from May, the government reported today. The number of non-farm jobs rose a meager 18,000, lower even than May’s 25,000 number (itself revised down from the original estimate). The two months together mark a dramatic deceleration from the previous three when payroll growth averaged 215,000 per month. The unemployment rate, meanwhile, rose for the fourth consecutive month to 9.2%, from 9.1% in May. It was 8.8% in March. The economic recovery celebrated (if you could call it that) its second anniversary on July 1st, and in that time the unemployment rate has moved a lot while ending up almost exactly where it began. America has made almost no progress closing the output gap opened up by the recession. The U-6 unemployment rate, which includes people who have given up looking for jobs and part timers who want full time work, shot up to 16.2% from 15.8% and the average duration of unemployment hit a new high of 39.9 weeks.
Another Disappointing Jobs Report - Hopes for better news on the U.S. jobs front were dashed as payrolls scarcely grew. Mark Zandi discussed the report with the CNBC crew: (video)
Disappointing - A very disappointing jobs report this morning. You can view the report here: Employment Situation. Bloomberg Highlights 'Employment Situation': Today's employment report is abysmal. We have had two months in a row of essentially no growth. Nonfarm payroll employment in June slowed to a crawl with an 18,000 gain, following a revised 25,000 rise in May, and revised 217,000 in April. Also, the April and May revisions were down net 44,000. Once again, the government sector held down payroll numbers as private nonfarm payrolls outpaced the total with an increase of 57,000 in June, following a 73,000 advance in May. Analysts had projected a 125,000 gain in June. Most major industries were little changed. Growth in private service-providing jobs slowed to a rise of 53,000 after a 70,000 increase the prior month. Leading the increase in June was leisure & hospitality, up 34,000 with professional & technical services, up 24,000. Health care continued to trend upward with a 14,000 boost. On the downside, standouts were educational services, down 17,400; financial activities, down 15,000; and temp help, down 12,000. The government sector shed another 39,000, following a 48,000 drop in May. This latest decrease was led by local government but declines were also seen at state and federal levels. Average hourly earnings also slowed June, coming in at no change, following a 0.3 percent rise the prior month. The average workweek for all workers in June slipped to 34.3 hours from 34.4 the month before. The June figure came in lower than the market projection for 34.4 hours.
Overly Optimistic, Once Again - This morning’s jobs report is terrible. For the second straight month, the economy created only a tiny number of jobs — 18,000 in June, 25,000 in May. Both numbers are far below what’s needed to keep up with normal population growth (roughly 125,000 jobs). For the second straight year, the recovery in the job market has essentially stalled. This chart, showing the share of adults with jobs, offers the best summary you’ll find: The share begins falling in 2007 even before the recession officially began, picked up speed in early 2008 and then began plummeting after Lehman Brothers collapsed in September 2008. The job market began stabilizing in late 2009, as the stimulus and the Federal Reserve’s efforts to battle to the crisis reached their peak. Employment began growing faster than population in early 2010 — but then stalled, thanks to some combination of Europe’s debt troubles, the waning of government action and the general uncertainty in the wake of a financial crisis. By late 2010 and early this year, the situation was improving again — only to slide back again in recent months, this time because of gas prices, Europe (again) and general post-crisis uncertainty (again). The share of adults with jobs, 58.2 percent, is now tied with its low point since this recession began.
Payroll Stunner Full "Pathetic" Jobs Report - Many Charts - Last month I commented things are awful at first glance and simply bad beneath the surface. This month things took a huge turn for the worse.Economists projected a drop in the unemployment rate, I called for a rise to 9.2%. Few were prepared for today's grim numbers.
- US Payrolls +18,000
- Last Month Quietly Revised Lower to +25,000 from +54,000
- US Unemployment Unexpectedly Rises +.1 to 9.2% Despite Drop in Participation Rate
- Since March, Number of Unemployed Rises by 545,000
- Household Survey Number Unemployed Up 173,000
- Household Survey Number of Employed Down 445,000
- 272,000 people dropped out of the labor force, reversing the labor force gain of 272,000 last month.
- Average Weekly Workweek Drops by .1 Hours
- Average Manufacturing Hours Drops by .3 Hours
- Average Private Hourly Earnings Decrease 1 Cent
- There has been virtually no improvement in part-time employment in a full year. 8.5+ million workers want a full time job and cannot find one.
Labor market in full retreat - This morning’s release of the June 2011 Employment Situation report by the Bureau of Labor Statistics showed a labor market in retreat. Virtually every single measure was devastatingly weak: only 18,000 payroll jobs were added, average hours declined, nominal wages fell, unemployment was up in almost all age groups, more than 250,000 workers dropped out of the labor force altogether, and the public sector continued to bleed jobs. Furthermore, a downward revision to last month’s data means that this is the second month in a row with job growth at 25,000 or less. This is a remarkable, across-the-board backslide. The President and Congressional leaders need to stop talking about deficit reduction and start talking about job creation. -
Job Growth Weakens Again In June - The number we've all been waiting for is a disappointment. Net private-sector job creation was a slim 57,000 in June, below even May's dismal 73,000 rise, which was revised down from the initially reported 83,000, the Labor Department reports. There had been hope that May was an anomaly, a one-off affair that would quickly return to the stronger levels of job growth witnessed in February, March and April. As the chart below shows, job creation in the nation's private sector last month was near the weakest since the Great Recession technically ended in June 2009. The comfort margin between growth and contraction is dangerously thin. Looking at the jobs report by sector reveals a mixed bag of modest growth and mild retreats. Job growth in durable goods was a rare bright light, adding 15,000 positions. But there was plenty of offsetting mediocrity and declines, including construction's 9,000 retreat and 15,000 fewer financial activities jobs in June. Even the category of temporary positions tumbled 12,000 last month. If companies are relucant to hire temps, what does that say about expectations? And while the services sector, which employs the bulk of the nation's labor force, managed a familiar gain last month, it was slight: higher by just 53,000—one of the smallest increases in the post-recession period.
June Jobs Report Disastrously Disappointing - If you thought the May jobs report, which seemed to bring an end to several months of 100,000+ new jobs to an end, was depressing then June’s report is going to really depress you: U.S. employment growth ground to a halt in June, with employers hiring the fewest number of workers in nine months, dampening hopes the economy was on the cusp of regaining momentum after stumbling in recent months. Nonfarm payrolls rose only 18,000, the weakest reading since September, the Labor Department said on Friday, well below economists’ expectations for a 90,000 rise. Many economists raised their forecasts on Thursday after a stronger-than-expected reading on U.S. private hiring from payrolls processor ADP, and they expected gains of anywhere between 125,000 and 175,000. The unemployment rate climbed to 9.2 percent, the highest since December, from 9.1 percent in May. The government revised April and May payrolls to show 44,000 fewer jobs created than previously reported. The report shattered expectations that the economy was starting to accelerate after a soft patch in the first half of the year.
Without Dropouts, Jobless Rate Would Be Over 11% - The unemployment rate increased to 9.2% in June, the Labor Department reported, but if the recession hadn’t pushed so many people out of the labor market it would have been much worse. The duration of unemployment continues to increase and sat at an average of 39.9 weeks in June. More than four million people who want jobs, or nearly a third of the unemployed, have been out of work for more than a year. Those are the people are hanging in and looking for work, but a large number have given up altogether. The share of the population in the jobs market, called the labor-force participation rate, fell to 64.1% last month — the lowest level since 1984 when women were still just beginning to enter in full force. The participation rate peaked in 2000 and has been steadily declining since as the effect of women taking full-time jobs plateaued and Baby Boomers began to retire, but the decline accelerated sharply during the recession. The participation rate was 66% at the start of the recession and 65.7% when the recovery started in June 2009. If the participation rate were still at that level, the unemployment rate would be more than 11% right now.
Double Dip? Job Market Recovery Looks Further Off - Forget jobs. Where are the workers? The unemployment rate rose and job growth was nearly non-existent in what was probably the most disappointing piece of economic news since the start of the recovery in mid-2009. The government reported on Friday that employers added just 18,000 workers in June. That was the slowest rate of job growth for the economy since last September. The unemployment rate rose to 9.2%, which was the third month in a row that the job market's most important gauge ticked up. There are more than 14 million people in this country who are out of work. But what was even worse was the fact that for the first time in a number of months, the number of people out looking for work dropped as well.
Falling Wages - Krugman - Ugh. That was a seriously ugly jobs report (pdf). Almost no job creation, with slow private-sector growth offset by falling public-sector employment; a falling employment-population ratio; and (I don’t know how many people have picked this up), an actual decline in wages, albeit a small one. Let me emphasize that last point. My bottom line on the inflation-deflation issue has always been to look at wages; you can’t have a wage-price spiral if wages ain’t spiraling. And they aren’t, to say the least. It’s important to realize, by the way, that stagnant wages are NOT good for recovery; all they do is ensure that the burden of debt relative to income remains high, keeping demand and employment down. The situation cries out for aggressively expansionary monetary and fiscal policy. Instead, however, all the political push is in the opposite direction.
Does John Boehner know what paychecks are made of? - It’s incredibly difficult to work out what is the most depressing part of today’s truly gruesome jobs report. The shrinking number of people in the labor force? The rise in U-6, broad underemployment, to 16.2%? The sharp spike in the newly unemployed? The downward revisions to April and May? The downtick in total hours worked? Maybe it’s the way that people leaving government jobs, for whatever reason, are finding it impossible to find new jobs in the private sector. For me, it’s none of these things — it’s not, in fact, anything inside the report at all. Instead, it’s the reaction to the report from John Boehner: “Today’s report is more evidence that the misguided ‘stimulus’ spending binge, excessive regulations, and an overwhelming national debt continue to hold back private-sector job creation in our country. Legislation that raises taxes on small business job creators, fails to cut spending by a larger amount than a debt limit hike, or fails to restrain future spending will only make things worse – and won’t pass the House. Republicans are focused on jobs, and are ready to stop Washington from spending money it doesn’t have and make serious changes to the way we spend taxpayer dollars.”
Is the employment report a game changer? - Atlanta Fed's macroblog - Well, that was an unpleasant surprise. Anyway you cut it, the June employment report was a big disappointment. (If by chance you are inclined to doubt that, the Wall Street Journal's Real Time Economics blog rounds up representative commentary from the disappointed.) Last month's anemic pace of job creation will almost surely amplify growing concerns about the almost sure-to-be dour final count on gross domestic product (GDP) growth in the second quarter. More specifically, though expectations for June employment growth were pretty modest to begin with, the failure to yet see any sign of momentum in labor markets has to make you wonder about forecasts of a soon-to-be-seen pick-up in economic growth. A pick-up in economic growth in the third quarter is important, as it would help to relieve the anxiety associated with this picture, a version of a chart I first saw in a Bloomberg Economics BRIEF by Richard Yamarone. (The full briefings, which are proprietary, can be accessed here.)
The Jobs Report - Just shockingly bad on every dimension I have glanced at.
- Private payrolls up on 54K.
- Government down 39K.
- Government cut at all levels.
- Construction down
- Manufacturing flat
- Retail flat
- Financial Activities down
- Education and Health flat – yes flat
- Utilities flat
- Information flat
- Wholesale Trade up a smidge
The only bright spots where professional and technical employment growing at 24K and Leisure and Hospitality growing at 34K. Though a surprising amount of the latter looks to be gambling.
Time to Panic (II) - Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month. In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House. This isn’t just a “bump,” but a fully-fledged New York City style pot hole. First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations. In addition the prior two month payroll increases were revised down by -44,000 overall. That’s weak – but not terrible. Dig a bit deeper into the data and it looks absolutely awful: The household measure of employment fell by -445,000. Okay, it’s a noisy number. But this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three. But it gets worse: The work week was down one tenth. Overtime was down one tenth. The labor participation rate at 64.1% was the lowest since 1984. The broad U6 unemployment rate rose from 15.8% to 16.2%. In other words “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”
Temp Help Shows Worrying Downward Trend - Temp jobs were down 12,000 in June and have dropped for three straight months — by 19,000 in all since April, according to the Labor Department. Temp help is often a leading indicator of broader labor market trends. Companies tend to cut temp workers before they start cutting permanent workers. The deceleration seen in the past few months is potentially a very troubling development if it portends a new round of layoffs of permanent workers. At the same time, if the shocks that hit the economy earlier this year — rising oil prices, Japan’s natural disasters — were truly transitory as many economists believe, then temp help may turn up in the months ahead as the economy heals, or at least stop being a drag on job growth. Perhaps that’s a reason to be hopeful.
Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - There were few jobs created in June (only 18,000 total and 57,000 private sector). The unemployment rate increased from 9.1% to 9.2%, and the participation rate declined to 64.1%. Note: This is the percentage of the working age population in the labor force. The employment population ratio fell to 58.2%, matching the lowest level during the current employment recession. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, increased to 16.2%, the highest level this year. The BLS revised down April and May payrolls showing 44,000 fewer jobs were created than previously reported. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the start of the recession. In the previous post, the graph showed the job losses aligned at maximum job losses. In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) increased slightly to 8.552 million in June. These workers are included in the alternate measure of labor underutilization (U-6) that increased to 16.2% in June from 15.8% in May. This is the highest level this year (highest since December 2010). This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 6.289 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 6.2 million in May.
Some Graphs for the Terrible June Jobs Numbers -The jobs numbers are horrible, worse than anyone had thought they’d turn out to be. 18,000 total jobs created, with a decrease of 39,000 government jobs. Let’s get some graphs: This is off household surveys, which is going to be slightly different numbers than the payroll you are seeing for aggregate job creation. The big thing we see is that the labor force shrunk while unemployment increased, a bad sign. Meanwhile, we see a jump in those who are not in the labor force but who want a job – people who have given up actively looking for a job. To zoom into that, let’s take a look at the arrows leaving the unemployment circle. Here’s a graph of how people are exiting unemployment – are they finding work or simply giving up? The unemployed continue to be more likely to drop out of the labor force than find a job. As we’ve mentioned before, the idea that people are more likely to drop out of the labor force than find a job is a brand new phenomenon, one that doesn’t exist in the data going back to when data is first collected in the 1960s.
Labor Force Participation Rate Drops To Fresh 25 Year Low: 64.1% This chart needs no commentary. At 64.1%, the Labor Force Paritipcation rate just dropped to a fresh 25 year low: the civilian labor force declined by 272K from 153,693 to 153,421. And tangentially, the employment to population ratio also slumped to a multi decade low of 58.2%.
The Cost of Austerity - Financial crises have long hangovers, and this one is no exception. In all kinds of ways — consumer demand, the federal deficit, even the weather — the medium-term future is highly uncertain. But this uncertainty, while the main problem, is not the only problem. We are also committing an unforced economic error. We’re cutting government at the same time that the private sector is cutting. It is the classic mistake to make after a financial crisis. Hoover and even Roosevelt made a version of it in the 1930s. The Japanese made a version of it in the 1990s. Now we are making it. Federal payrolls have been roughly flat for years (even as the population has been growing). But state and local payrolls grew over the last decade, by almost 20,000 jobs a month on average. Since the crisis began and state and local taxes began plummeting, though, governments began to cut back. At first, the federal government stepped in, with the 2009 stimulus bill, and sent fiscal aid to states. Then the aid stopped. In round numbers, state and local governments have cut about a half million jobs over the last two years. If they had continued to hire at their previous pace — expanding as the population expanded — they would have added about a half million jobs.
- The number of net nonfarm payroll jobs added in June was 18,000, which is not statistically significant from zero.
- The average duration of unemployment continues to break records, and in June was at an all-time high of 39.9 weeks. In other words the average unemployed worker has been looking for a job for nine months.
- The unemployment rate ticked up to 9.2 percent, and not because more people joined the labor force. In fact, the overall size of the labor force was a little bit smaller.
- As a result, the labor force participation rate — that is, the share of adults who are working or actively looking for work — is just 64.1 percent.
- A broader measure of unemployment, including those who are working part time because they can’t find full-time jobs as well as people who have given up looking for work, rose to 16.2 percent from 15.8 percent.
- The average length of the work week for all private payroll employees fell by 0.1 hour to 34.3 hours in June, a very bad indicator for future job growth.
- Average hourly earnings for all employees on private nonfarm payrolls decreased by 1 cent to $22.99. Again, this does not bode well. Not only are we seeing a jobless recovery, but a wage-gain-less one, too.
- Hiring in temporary help services was flat. Usually we see a bump in temp hiring that precedes more permanent hiring, so this is a disappointing figure too.
Sorry, that’s all I’ve got.
Economists Blame Seasonal Variations for Jobs Miss - Not a single economist among 85 surveyed by Bloomberg News correctly forecast the 18,000 increase in payrolls in June reported by the Labor Department. Estimates ranged from a low of 60,000 to a high of 175,000. The median was 105,000 -- almost six times the actual number. How did economists get it so wrong? Rupkey pointed to yesterday’s report from ADP Employer Services, which showed that companies in the U.S. added 157,000 workers in June, more than twice as many as forecast by economists. “People revised up their numbers basically 24 hours ago on a report that apparently had no merit when it came to forecasting the actual number,” Rupkey said. The ADP report is based on data from about 340,000 companies with more than 21 million workers on payrolls. The Labor Department surveys 140,000 businesses and government agencies. “There’s no specific explanation of the divergence,” said Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, which produces the report with ADP. “The data is collected differently. They’re different samples.” He said the “unusually aggressive” seasonal adjustment factors “may explain at least some of the payroll weakness.” The Labor Department, which houses the Bureau of Labor Statistics, adjusts the employment figures each month to account for things like teachers falling off school payrolls in June and workers finding temporary employment with retailers during the December holiday season.
Bad news from the Northern hemisphere - Another really bad employment report from the US Bureau of Labor Statistics. Employment has been essentially static for the last couple of months, and most of the ground gained in 2010 has been lost. Unsurprisingly, public sector job cuts are leading the way downwards, as the stimulus fades into memory and austerity proceeds at the state and local level.It’s hard to see US unemployment falling substantially any time soon. The decline in the participation rate (it’s fallen by about 3 percentage points of the population, equal to about 5 per cent of the labor force) means that the standard measure seriously understates the severity of the problem. If employment growth were to resume, lots of people would re-enter the labor market, so that unemployment would not decline fast. Turning to the obligatory comparison with Europe, the US unemployment rate is almost exactly the same as the average for the EU-15, but both these averages conceal a lot of variation. The US has higher average unemployment than the core EU economies (except France, which is slightly higher) but much lower than the peripheral economies dealing with sovereign debt crises. On the other hand, there is plenty of variation within the US, and of a truly perverse kind.
If We Added Up All the Hours Worked in the Economy, What Would it Look Like? - If you add up all the hours worked in the economy in June 2011 they are equal to all the hours worked in February of 1999. That’s how much slack there is in the economy. First, we are going to pull a graph we haven’t used before, index of aggregate weekly hours. What’s this? From the BLS’s definition:Indexes of aggregate weekly hours and payrolls. Indexes of aggregate weekly hours are calculated by dividing the current month’s aggregate hours by the average of the 12 monthly figures, for the base year. Indexes are based on 2007 averages for all employees and on 2002 averages for production and nonsupervisory employees. For basic industries, the hours aggregates are the product of average weekly hours and employment of workers to which the hours apply . So you add up all the hours worked in the economy and plot them on a graph, divided by a previous year to set a baseline. So this is total hours, not hours per employee or anything like that. Total hours worked in the economy.How does that look? Here’s the aggregate number of hours worked in the economy for the private sector:
Batten Down the Hatches, an Economic Hurricane is Brewing - Reality returned with a vengeance on Friday as the June Monthly Jobs Report was issued by the Bureau of Labor Statistics (BLS). The report showed that only 18,000 jobs were added to an economy that needs to add around 150,000 jobs per month just to keep pace with population growth. Making matters worse, the reports from the previous two months were downgraded by a total of 44,000, thus removing more jobs than were reported to have been gained in June. Additionally, 131,000 unverifiable jobs were added by the BLS’s “Birth Death Model,” meaning that in reality the nation most likely lost jobs in June, though because of the way the formula works you cannot just subtract the Birth Death Model number from the total to get an accurate count. Looking at the chart above (courtesy of Calculated Risk), dramatically shows just how bad the employment situation is now in America. As you can see, this is the deepest jobs downturn since World War Two and in just a few more months it will become the longest as well. Nothing was structurally fixed by the insanely expensive bailouts and stimulus package—except to transfer huge amounts of money from the taxpayers to the corporate elites and Wall Street.
Comparing Recessions and Recoveries: Job Changes - The chart above shows economywide job changes in this last recession and recovery compared with other recent ones, with the black line representing the current downturn. Since the downturn began in December 2007, the economy has shed, on net, about 5 percent of its nonfarm payroll jobs. And that does not even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession. The unemployment rate — measured by a different government survey, and based on how many people are without jobs but are actively looking for work — ticked up to 9.2 percent in June, compared to 9.1 percent in May (also not a statistically significant change). There are now 14.1 million workers who are looking for work and cannot find it; the figure nearly doubles if you include workers who are part-time but want to be employed full-time, and workers who want to work but have stopped looking.
The Biggest Structural Change of the Great Recession is the Decline in Government Employment - Arnold Kling talks about Patterns of Sustainable Specialization and Trade. Richard Florida has made note of the Great Reset. Tyler Cowen has highlighted zero marginal product workers. When I dig through the data is hard to see evidence that some major technology induced changed has suddenly come upon the United States. The basic globalization factors that have been present for the last two decades are still with us, that’s true. As I frequently try to mention, construction is in an inexplicable depression. Its extremely bad on a scale that is wholly underappreciated by the media at large. Its also a pattern that quite simply can’t be sustainable, doesn’t represent any imaginable reset in US living patterns and would seem to have very high marginal product moving forward. However, there is interestingly enough one sector where these notions make a lot of sense: government. Here is growth in government employment since 1980. I include that to show the impact of the Reagan Revolution.
Discouraged Workers, Especially at City Hall - In the spring of 2010, there was reason for optimism. Jobs were being added and the labor force participation rate was rising. In April 2010, the participation rate — the proportion of adults with jobs or looking for jobs — rose to 65.1 percent. It had been much higher before the downturn, but that was a lot better than the low of 64.7 percent recorded the previous December. This month the rate fell another tick, to 64.1 percent. The last time a rate that low was recorded was in March 1984. The number of state and local government employees fell by 25,000 workers, and is now down 577,000, or 2.9 percent, from the peak reached in August 2008 — the month before Lehman Brothers collapsed.Only once before — or at least since they started collecting the numbers in the 1950s — did state and local jobs fall that far. In July 1982 the number was down 3.1 percent. These figures are seasonally adjusted, and you have to suspect that the numbers will get even worse this fall, when a lot of teachers don’t go back to work.
Austerity USA - Krugman - I’m not the only one making this point, but when you hear Republicans saying that what we need to do to create jobs is slash government spending and cut government payrolls, that’s exactly what has been happening for the past year, as the Obama stimulus has faded out. Here’s government employment (that bulge was Census hiring): And here’s government purchases of goods and services (so it doesn’t count transfer payments like unemployment insurance): Basically, government has been shrinking for the past year — in practice, fiscal policy has been doing exactly what Republicans say it should be doing. Where’s my confidence fairy?
Why is reducing government jobs considered a free lunch? - Politicians love to brag about cutting government work forces. This month, while the private sector added 57,000 jobs, government shed 39,000 jobs, for total job growth of 18,000, which is basically not different from zero statistically. Cutting government jobs not only has consumption effects (people who don't get paychecks can't buy stuff), it also has productivity effects. When the DMV is closed three days a month, people have to wait longer to get their drivers' licenses. When there are fewer cops, crime increases. When there are fewer high school teachers, the ability to offer AP courses drops, etc. I have no idea what the "correct" level of public sector employment is. I also have no idea how much public sector employment crowds out the private sector, but if the crowding out effect is less than one (and with unemployment above nine percent, I am guessing the effect must be less than one), then reducing government employment reduces total employment. But to think that cutting government employment is a magic pill for economic recovery makes no sense.
State and Local Job Losses Are Largest Since 1955 - CBPP - The gloomy employment report for June included the news that state and local governments laid off 25,000 workers. Since shortly after the recession began, they have cut 577,000 jobs — the largest loss since the Labor Department started keeping track in 1955. These devastating layoffs are slowing the economic recovery. Local school districts, counties, and cities cut 18,000 jobs in June, the Labor Department reported. Another 7,000 state workers lost their jobs, leaving state payrolls well below pre-recession levels. June was the eighth consecutive month — and the 28th out of the last 34 — in which total state and local employment shrank. These cuts in public payrolls come in response to the long, deep recession and its aftermath, which have left states and localities without the revenue needed to pay salaries. State revenues remain 9 percent below pre-recession levels.
CHART: Over 500,000 Government Jobs Lost Since Obama’s Inauguration - So should we blame today’s bad jobs numbers on Barack Obama’s big government policies? Again, I doubt it. What we continue to see are decent—though not great—private sector job numbers offset by tumbling public sector employment: For a while temporary census-related jobs masked the underlying trend, but we’ve been steadily shedding government work. Maybe you think that’s a good thing. Certainly most of President Obama’s critics from the right claim to believe it’s a good thing. But what happens when you shed public sector jobs amidst an already weak economic climate is the sharply reduced incomes of the former teachers and whatnot lead to them spending less in their local communities. In total, we have about 500,000 fewer people working for the government since Obama’s inauguration even though the national population is larger than it used to be.
More on those high-paid public-sector workers - William Glaberson reports that judges in New York feel they’re underpaid: New York judges have not had a raise in 12 years, making the state one of the more extreme examples of a growing pay gap nationally between judges and other professionals, including partners at top law firms, who can earn 10 times the salary of the judge before whom they are arguing a case. Now, for the first time in memory, judges are leaving the bench in relatively large numbers—not to retire, but to return to being practicing lawyers. Turnover in New York has increased rapidly in the last few years: nearly 1 in 10 judges are now leaving annually, a new study shows. Recently we have seem some outrage regarding overpaid professors and corporate executives, but I think judges are a better example for discussion. Profs are mostly liberal Democrats and execs tend to be conservative Republicans, but judges are appointed by both parties, which removes the biggest political slant that readers will bring to the story. In New York State, at least a dozen have resigned and explicitly cited the pay.
Why Unemployment Matters - Unemployment is one of the most devastating things that can happen to you in American society. Long-term unemployment is expecially bad--and that's what we're suffering from. It has been at unprecedented highs in this recession. You can see the job market story in three graphs from the BLS JOLTS survey, which measures turnover.The above graph shows separations, hires, and the unemployment rate. What it shows is that separations didn't rise during the recession--except for a brief uptick during the financial crisis, they actually fell. That seems to be because people stopped quitting their jobs, which by late 2009, is offsetting layoffs: Our unemployment problem is not, as in previous recessions, that too many people are entering unemployment. Layoffs and discharges are actually lower than they've been in a decade. Rather, our problem is that people aren't exiting unemployment. And that's a much bigger issue. Human capital is like almost any other form of capital: it is a depreciating asset. The longer you stay out of the workforce, the less valuable you are to potential employers. You lose market intelligence and industry connections. Your technical knowledge and skills atrophy. And as my colleague Don Peck wrote in a devastating piece last year, the psychological effects of long-term unemployment change you permanently.
More Employment: Return of the Teen! and Unemployment by Duration and Education - I know there are policymakers who think the problem is confidence and deficits. But this is incorrect. Misdiagnosing the causes of weak employment growth will lead to the wrong policies... this reminds me of 2005 when I couldn't get any policymakers to pay attention to the housing bubble. Frustrating. Here are a few more graphs based on the employment report. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Two key categories are moving up again. The 27 weeks and more (the long term unemployed) has moved up for two consecutive months and is now at 6.3 million workers, or 4.1% of the labor force. Also the less than 5 weeks category is increasing again and that is very concerning. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). High School Graduates, No College" and "Bachelors degree and higher" declined in June. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment . This is a little more technical. The BLS diffusion index for total private employment was at 53.4 in June, about the same as in May, and for manufacturing, the diffusion index increased slightly to 52.5. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.
For Americas "99ers," jobs crisis is hard to escape - Mary Kay Coyne has just filed what she says is her 1,862nd job application since being thrown out of work three years ago. She is one of millions of Americans whose unemployment benefits have expired -- after 99 weeks in many states -- as the United States suffers its highest level of long-term unemployment since 1948. Coyne had to move in with a friend after benefit payments ran out last year. Now she gets by on Medicaid -- U.S. health insurance for the poor -- and food stamps, contributing what little she can to her friend's household costs. Unlike in much of Europe, the safety net of the U.S. welfare system times out for the long-term unemployed. In 2010, an estimated 3.9 million unemployed Americans exhausted unemployment benefits, according to the National Employment Law Project, an advocacy group that campaigns for lower-wage workers. More than 14 percent of the U.S. unemployed have been out of a job for 99 weeks, or longer.
The Fatalist Temptation - Krugman - I’m seeing more and more pieces like this one, in which pundits look at stubbornly high unemployment and declare that it must be structural — something we just have to live with, or at least something that will take long-term policies (translation — someone else’s problem) rather than mere stimulus, to correct. Bah humbug. Actually, worse than that, because this kind of fatalism corrodes whatever will we might have to actually deal with our problems. Why is unemployment remaining high? Because growth is weak — period, full stop, end of story. Historically, low or negative growth has meant rising unemployment, fast growth falling unemployment (Okun’s Law). Here’s a scatterplot of quarterly data since 1948, with pre-Great Recession observations in blue and observations since 2008 in red: There’s no hint in these data that we’ve entered new territory in which decent growth fails to create jobs; the problem is that we haven’t had decent growth.
Mancession to He-covery - We’ve written many times before about how men bore the brunt of the job losses during the recession, but have been benefiting disproportionately from the modest job growth during the recovery. Indeed, while the number of jobs held by men has grown by 768,000 since the recession officially ended in 2009, the number of jobs held by women today is actually lower than it was at the recession’s end: There are 218,000 fewer nonfarm payroll jobs employing women today than there were two years ago. This decline is partly due to layoffs by local governments, which disproportionately employ women. Today Pew Research Center is releasing a smart report on exactly this phenomenon. Here’s one of the charts from the report, which I suggest you check out in its entirety.
How Long Until Employment Recovers? - Colin Barr awhile back had an article where he discussed the discouraging outlook for the U.S. labor market. It got me wondering how long it would take employment to return to the level where the number of jobs created each month had kept up all along with the population growth rate. Conventional wisdom says that the U.S. economy needs to create 125,000 jobs per month to keep up with population growth. Growing jobs at this rate each month since the start of the recession and assuming the economy starts generating 200K, 300K, and 400K jobs per month produced the following chart: (Click to enlarge) Sigh. And to think most of this could have been avoided with more aggressive but systematic monetary policy.
The Decade-Long Rise in Teen Summer Unemployment - The Wall Street Journal published an editorial last Friday bemoaning high teenage summer unemployment, and blaming the recent rise in the minimum wage from $5.15/hour in 2007 to $7.25/hour in 2009. This summer, about 24% of teenagers will have jobs. If I was in Congress, I would have leaned against voting to raising the minimum wage in 2007. I would rather help the working poor through further expansions of the earned income tax credit. I suspect that raising the minimum wage by 40% from 2007 to 2009 did have a negative effect on teen employment. But even speaking as non-fan of the higher minimum wage, I don't think it's the main cause of the low rates of teen employment. Theresa L. Morisi at the Bureau of Labor Statistics published a useful overview of the long-run pattern of teen summer unemployment patterns about a year ago. Here are some themes I took away from her article
Summer jobs for teenagers: Only 25 percent of American teens have summer jobs, the lowest percentage on record. Why? Are they lazy? - From the 1950s through the 1990s, between 45 and 60 percent of teenagers had summer jobs, with the numbers ebbing and flowing with the business cycle. Today, just one in four American teens has a summer job. Indeed, over the past decade, summer employment among people ages 16 to 19 has plummeted to the lowest level since the government started keeping tabs after World War II. Why? And what are today's teens doing instead? One piece of good news is that they are not merely sitting at home or goofing off with their friends. According to a 2010 analysis by the Economic Policy Institute, the proportion of "idle" teens has actually fallen over the same time period. Nor does the recession explain the drop either. The youth unemployment rate has climbed precipitously, but young Americans started opting out of the labor market long before the economy soured in 2007.
What We Don't Talk About When We Talk About Jobs: Black Unemployment - In a car, you can zip in bare moments from northwest District of Columbia, its streets lined with million-dollar homes and palatial embassies, its inhabitants sporting one of the nation's lowest jobless rates, to Anacostia, a mostly forgotten neighborhood in southeastern D.C. with one of the highest unemployment rates anywhere in America. Or, if you happen to be jobless, upset about it, and living in that neighborhood, on a crisp morning in March you could have joined an angry band of protesters marching on the nearby 11th Street Bridge. They weren't looking for trouble. They were looking for work. Those protesters, most of them black, chanted and hoisted signs that read "D.C. JOBS FOR D.C. RESIDENTS" and "JOBS OR ELSE." The target of their outrage: contractors hired to replace the very bridge under their feet, a $300 million project that will be one of the largest in District history. The problem: few D.C. citizens, which means few African Americans, had so far been hired. "It's deplorable," insisted civil rights attorney Donald Temple, "that... you can find men from West Virginia to work in D.C. You can find men from Maryland to work in D.C. And you can find men from Virginia to work in D.C. But you can't find men and women in D.C. to work in D.C."
How to Create Jobs and Cut the Deficit - Another federal minimum-wage increase would not, as some proponents promise, create jobs, but would reduce employment. A few months ago, The New York Times editorialized that America’s minimum-wage workers “need a raise.” The Center for American Progress said a higher federal minimum wage “encourages spending, investment and economic growth.” Many economists expect the minimum wage, if it has any effect, to raise employer costs and thereby reduce employment, especially among people who are likely to work in minimum-wage jobs, like part-time workers. Federal and state minimum wages have changed a number of times over the years, and each of those instances provides an opportunity to test the employment-reducing hypothesis. .
Income inequalities and social ills - According to Kate Pickett and Richard Wilkinson in The Spirit Level: Why Greater Equality Makes Societies Stronger, income inequalities in a society are a source of a variety of social problems in that society, almost without regard to the absolute level of income in the society. Their basic measure of inequality across countries and states in the United States is the ratio of income from the top quintile to the bottom quintile. (They also sometimes make use of the Gini coefficient.) The quintile income ratio varies across OECD countries from a low of about 4 (Japan) to a high of just under 10 (Singapore). The United States has the second highest ratio, at about 8.5 (figure 2.1). In order to empirically evaluate the impact of a society's income inequalities on social well-being, they construct an Index of Health and Social Problems for each country and US state. The index incorporates --
- Level of trust
- Mental illness
- Life expectancy and infant mortality
- Children's educational performance
- Teenage births
- Imprisonment rates
- Social mobility
In the long run we're all equally dead - ECONOMIST Kenneth Rogoff starts off a new Project Syndicate piece in punchy fashion: Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. Will the endgame be renewed class warfare, with populist governments coming to power, stretching the limits of income redistribution, and asserting greater state control over economic life? There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. That sounds serious. Yet, Mr Rogoff cautions, governments should be reluctant to do too much to address issues of income inequality. Innovations yesterday may have substantially benefited the high-skilled few, but innovations tomorrow may turn the tables. After all, markets have a strong incentive to find and develop alternatives to relatively expensive inputs (like pricey labour). Yet there's something about Mr Rogoff's thesis that's a bit troubling.
Empty Plates For Low-Income Seniors - There’s a long list of reasons that older people suffer malnutrition and weight loss, a geriatrician recently told a Senate subcommittee on health and aging: smell and taste diminishing with age, high rates of depression, medications that that suppress appetite or upset stomachs, disabilities that make it hard to shop and cook. But at the same hearing, an official with Government Accountability Office pointed out another, perhaps more basic problem: poverty. What a new G.A.O. report calls “food insecurity” remains stubbornly high among seniors with low incomes. In 2009, about 19 percent of households with a low-income person over age 60 faced this problem — meaning that the older adult was uncertain of having enough food or unable to acquire enough. In elderly households below the poverty line, nearly a third suffer food insecurity, the G.A.O. found, and in 17 percent of them an older person had to eat less at some point in the past year because he or she simply couldn’t afford food.
A Solution to Mobile Homelessness - Mobile homelessness may be the fastest growing poverty demographic in America today. People lose their job, then their apartment, and do everything they can to keep their vehicle. In most communities it's actually illegal to sleep in a car or RV, making the life of a mobile homeless person even harder. I have been in meetings in Los Angeles where all the stakeholders were concerned, yet no one would step up to allow mobile homeless to park on their property.As many of you know I have been around the country a few times. The "Overnight Parking Program" run by St. Vincent de Paul in Lane County is the only mobile homeless services program I have seen or even heard of to date. I am sure there are others, so if you know of one please comment below.
Chronic Homelessness Jumps 11 Percent in Santa Clara County - There are 11 percent more chronically homeless people living in Santa Clara County this year than in 2009, according to preliminary numbers released today from the county's bi-annual homeless census. Officials released the data, along with findings from the "Housing 1,000 SV" survey this week, during a one-stop "Project Homeless Connect" event in San Jose. Volunteers counted 7,045 homeless residents during the February Santa Clara County Homeless Census and Survey, 41 individuals less than during the same count in 2009. While the total number decreased slightly, there were 250 more chronically homeless, totalling 2,520 county residents who have been without permanent housing for more than a year. Current numbers for Mountain View have yet to be released.
Hard times keep Des Moines shelters full - Winter is typically the peak season for homeless shelters, but demand remained high inside Central Iowa Shelter & Services on the western edge of downtown Des Moines even as summer arrived. About 120 to 130 people have been filing in each evening for a meal and place to bunk, a number that exceeds those of previous years and the shelter's capacity of 116. On some nights, homeless Iowans are sleeping in chairs. "Last year, we were overfull, too, but not this bad," said operations manager Ken Dohmen. "The big change I've noticed is that we're seeing people who would not normally be homeless - people who used to have jobs." There are renewed worries across the country about the economy after a series of up-and-down reports in the past few weeks. Among them: The national unemployment rate climbed to 9.1 percent in May. In Iowa, the number of people who have spent at least a year looking for a job has reached 19,000, according to state data.
‘Food Terrorism’ Next Door to the Magic Kingdom - Think of “food terrorism” and what do you see? Diabolical plots to taint items on grocery-store shelves? If you are Buddy Dyer, the mayor of Orlando, Fla., you might be thinking of a group feeding the homeless and hungry in one of your city parks. That is what Dyer is widely quoted as calling the activists with the Orlando chapter of Food Not Bombs—“food terrorists.” In the past few weeks, no less than 21 people have been arrested in Orlando, the home of Disney World, for handing out free food in a park. Food Not Bombs is an international, grass-roots organization that fights hunger. As the name implies, it is against war. Its website home page reads: “Food Not Bombs shares free vegan and vegetarian meals with the hungry in over 1,000 cities around the world to protest war, poverty and the destruction of the environment. With over a billion people going hungry each day how can we spend another dollar on war?” The Orlando chapter sets up a meal distribution table every Monday morning and Wednesday evening in the city’s Lake Eola Park.
U.S. truckers shocked by agreement with Mexico - Small-business truckers and professional truck drivers, represented by the Owner-Operator Independent Drivers Association (OOIDA), are fuming about a move made today by the government. U.S. Transportation Secretary Ray LaHood is signing a cross-border trucking agreement with Mexico without providing the public or Congress with the final details of the agreement.“If the agreement is good for the U.S. why the hell is he (Secretary LaHood) sneaking down there to sign it?” said Jim Johnston, President of OOIDA. “So much for their supposed transparency. Why not let the public see the details before signing the agreement? Seems like the Administration is dead set on caving to Mexico’s shakedown regardless of the costs to the American public and our tax coffers.” The Association has adamantly opposed opening the border because Mexico has failed to institute regulations and enforcement programs that are even remotely similar to those in the United States and because there would be no relevant corresponding reciprocity for U.S. truckers.
For Mexicans Looking North, a New Calculus Favors Home - The extraordinary Mexican migration that delivered millions of illegal immigrants to the United States over the past 30 years has sputtered to a trickle, and research points to a surprising cause: unheralded changes in Mexico that have made staying home more attractive. A growing body of evidence suggests that a mix of developments are suppressing illegal traffic as much as economic slowdowns or immigrant crackdowns in the United States. Here in the red-earth highlands of Jalisco, one of Mexico’s top three states for emigration over the past century, a new dynamic has emerged. For a typical rural family like the Orozcos, heading to El Norte without papers is no longer an inevitable rite of passage. Instead, their homes are filling up with returning relatives; older brothers who once crossed illegally are awaiting visas; and the youngest Orozcos are staying put. “I’m not going to go to the States because I’m more concerned with my studies,” said Angel Orozco, 18. Indeed, at the new technological institute where he is earning a degree in industrial engineering, all the students in a recent class said they were better educated than their parents — and that they planned to stay in Mexico rather than go to the United States.
Immigrants: Young, Educated & Willing to Pay for the Baby Boomers’ Medicare - Gallup’s survey of would-be immigrants shows that they are young, relatively educated and looking for work. Notice, that 26% of college graduates from Latin America would like to immigrant, many probably to Spain, but many likely also to the US. Over a third of all college graduates from Sub-Saharan Africa would like to immigrate. As America sees a long run shortage of educated workers, out-of-work construction workers and expanding pension age population its harder to see a bigger win-win than moving the worlds educated workers here.
Your State Can’t Afford It: The Fiscal Impact of States’ Anti-Immigrant Legislation - It has been just over a year since the passage of Arizona’s ill-fated anti-immigrant law, S.B. 1070. While opponents have had some successes in a handful of states, far more states rejected anti-immigrant bills. One of the principal reasons for the failure of so many of these legislative efforts was cost. S.B. 1070 and bills like it in other states are expensive to implement at many levels, placing a heavy burden on state and local governments already feeling the effects of a down economy. This brief examines the costs of anti-immigrant legislation from a variety of perspectives, detailing the losses that states such as Arizona have already faced, as well as the future costs that states such as Alabama, Georgia, and South Carolina, which have only just recently passed their own anti-immigrant laws, will have to reckon with. Download this brief (pdf) Read the full brief in your web browser
State layoffs of 1,300 employees hitting home - Millions of Floridians head back to work today after a three-day Fourth of July weekend. But Toni Gugliotta won't be among them. She'll be applying for $275 a week in unemployment benefits instead. The Pinellas County woman is among 1,300 state employees put out of work by the new budget approved by the Legislature and signed into law by Gov. Rick Scott on May 26. Scott kept his promise to reduce the size of the state government bureaucracy. But he did so at the expense of real people with mortgages, health care bills, college tuition payments and credit card payments. Many of them earned less than $30,000 a year after years of state employment. To them, the Scott mantra "Let's get to work" rings hollow. They now join the hordes of Floridians looking for work in a state with an unemployment rate that, while declining, remains in double digits at 10.6 percent. The state agencies that took the biggest hits are the Department of Juvenile Justice and the Department of Children and Families, which together account for most of the layoffs.
Economic Stabilizers: States Are The Key - What’s the biggest need? If you ask me, Matt Yglesias nails it: reforms to provide improved automatic stabilizers. And the focus of those stabilizers, as Yglesias has argued before, should be federal transfers to the states. As Jared Bernstein says, this is an enormous problem. He doesn’t provide an estimate of the total (direct and indirect) cost in jobs and GDP; anyone have one? Certainly, it’s substantial. Liberals and conservatives have legitimate disagreements about the proper number of state and local employees. However, it makes no sense at all to run things so that during good times we hire lots of people, and then during hard times we lay them off – and put every teacher, cop, firefighter, prison guard, and the rest of them into reasonable fear of losing their jobs so that they sit on their wallets instead of spending. And yet that’s the consequences of state balanced budgets; revenues go up during good times and crash when the economy crashes. There’s no principled reason why both parties shouldn’t support some means of automatically pouring revenues into state governments during recessions and then recovering that money when growth resumes.
Monday Map: Child Tax Credit by State - This week's map continues the series started last week looking at the distribution of common tax expenditures. Today we have a map showing the percentage of returns in each state claiming the child tax credit.
No End in Sight as Minnesotans Grapple With State Shutdown — The state of Minnesota screeched to a stop on Friday. State parks were barricaded, and campers, Boy Scout troops and everyone else were sent on their way. Heading into a holiday weekend in a state that savors its summers outdoors, licenses for fishing, hunting, trapping, boats and ATVs were unavailable for purchase. And all around the State Capitol — the place where all the troubles began — the streets were eerily empty and official buildings locked, plastered with hand-taped signs that offered a gentle explanation: “This building is closed until further notice due to the current state government service interruption.” Right up to the midnight deadline on Thursday, Minnesotans, who have been known to boast of their professional, efficient government, had held out hope that the state’s divided leadership could reach a deal on how to solve a looming budget deficit. But in the end, the fundamentally different fiscal approaches of the Republicans and the Democrats here did not change, and Minnesota began its broadest shutdown of services in state history with no end in sight.
Minnesota Lawmakers Set to Discuss Shutdown - Minnesota Republican legislative leaders are returning to the capital in St. Paul today after a long holiday weekend ready to resume talks with Democratic Governor Mark Dayton on ending a government shutdown, said Senator Geoff Michel, the deputy majority leader. “It was probably healthy for the legislature and the governor to get out of St. Paul and get a little perspective,”. Although no meetings were scheduled as of last night, Dayton spokeswoman Katharine Tinucci said in an e-mail, “I expect that to change tomorrow.” Minnesota’s government shut down at 12:01 a.m. July 1 after Dayton, a first-term Democrat, and leaders of the Republican- controlled Legislature failed to resolve a budget dispute in the Midwestern state of 5.3 million. The shutdown furloughed 23,000 state workers, closed parks and agencies, and halted construction projects.
Minnesota leaders fail to break impasse, to meet again (Reuters) - Minnesota's Democratic Governor Mark Dayton and Republican legislative leaders met on Tuesday but failed to break a budget impasse five days into a state government shutdown. Trying to bridge the divide, former Vice President Walter Mondale and former Minnesota Republican Governor Arne Carlson stepped in to announce an unofficial bipartisan panel they hope will come up with an acceptable budget plan by Friday. Dayton and the leaders of the Republican-controlled legislature failed to reach a deal to close a $5 billion two-year budget deficit by the start of the new fiscal year on July 1, leading to the first government shutdown since 2005. More than 20,000 of Minnesota's 36,000 state employees have been furloughed in the shutdown, leaving numerous departments at bare-bones staffing. Prisons, state police patrols and nursing and veterans homes have been maintained.
Minnesota loses its pristine debt rating -- Fitch Ratings downgraded Minnesota's debt ratings in the wake of a government shutdown stemming from a budget dispute. Fitch knocked the state off its triple-A rating pedestal because of its "difficulties in reaching consensus" on its budget gap for the fiscal year that began July 1. Fitch also cited the "increasingly contentious budgeting environment in the state in recent years." A lower debt rating hurts Minnesota because the increased risk means it will need to pay higher interest rates to investors. The state shutdown1 all but essential government services on July 1 after Governor Mark Dayton, a Democrat, and Republican lawmakers failed to make peace over their budget dispute and fill a $1.4 billion gap. They're fighting over whether to raise taxes or cut spending. The rating agency also highlighted Minnesota's reliance on one-time budget fixes during the recession and the likelihood that any budget accord will contain more of them.
Minnesota Shutdown May Cost State Economy $23 Million Weekly -- The economy in Minnesota, whose debt was downgraded today by Fitch Ratings, may lose about $23 million a week in spending power from public and private workers idled by the shutdown of its government, according to Tom Stinson, the state’s economist. The 23,000 state workers laid off in the wake of a partisan budget dispute may get only about half their average $1,000 weekly salary in unemployment benefits, Stinson said in a telephone interview from Minneapolis. That, plus the additional loss from employees of nonprofits and private construction workers, may mean a total $18 million taken from the economy, he said.Stinson also estimated a secondary loss of as much as $5 million in weekly spending power by private workers, especially in the leisure industry, as furloughed employees cut back on spending if the closure drags on for a month or longer, he said. Although the loss is a fraction of the $2.4 billion in weekly state wages, the impact will become more noticeable the longer the closure lasts, he said.
California Prison Psychiatrist Paid $838,706, Data Shows - A chief psychiatrist for California’s overcrowded prison system was paid $838,706 in 2010, more than any other state employee that year, according to payroll figures released today. The doctor, whose name wasn’t released, had a salary range of $261,408 to $308,640, according to data released by Controller John Chiang. The total compensation was raised either by bonuses or payout of unused vacation time or sick days, according to the controller’s office. The 10 highest-paid state employees each earned more than $500,000 in the 2010 calendar year, for a total of $6.2 million, the figures show. All except three were a prison doctor or dentist. The most-populous U.S. state runs the nation’s largest correctional system, with about 163,000 inmates, and is at 175 percent of capacity, according to the Corrections and Rehabilitation Department.
Is California's Past America's Future? - There should be a word for an event that, in being remarkable enough to merit comment, is depressing because it should be normal enough to pass without mention. And if they’re looking for an example, they could turn to California, which is celebrating the prompt passage of its 2012 budget. It’s not a very good budget. But unlike all but five others in the past 25 years, it made it into law before the start of the fiscal year. In California, that’s a big deal. The writer Alison Lurie once said that “as one went to Europe to see the living past, so one must visit Southern California to observe the future.” The north is worth a look, too, particularly Sacramento, where well-meaning but poorly-designed rules have left the political system gridlocked, and where Republicans seem to be looking for inspiration as they consider how to remake Washington.
State Budget Costing Central Coast Cities Millions - Since Governor Jerry Brown signed a state budget into law, cities across the Central Coast are losing millions of dollars. Monterey's Assistant City Manager Fred Cohn says the city lost $3.5 million when the state eliminated redevelopment funds. Now projects like revamping Cannery Row aren't going to happen. The city of Seaside says it's set to lose $9 annually, which could lead to layoffs. Salinas will also lose at least $3 million and for now projects in Oldtown Salinas are stalled. Santa Cruz expects to be out $4.6 million, which will hurt efforts to bring in new businesses through financial incentives. Finally, Watsonville is missing out on $3.6 million because of the loss of redevelopment funds.
N.J. towns taken by surprise at Gov. Christie's $139 million in cuts - New Jersey's struggling cities and towns are out $139 million in state aid that was presumed before Gov. Chris Christie scrubbed the appropriation in a spate of 11th-hour vetoes from this year's state budget. The cuts are so severe that many don't expect them to stand. But if they do, towns will be hit hard: Camden was anticipating $69 million, nearly 40 percent of the city budget being drafted. Trenton, which was counting on $24 million, will see its budget deficit nearly quadruple. And Asbury Park, already awarded $10.4 million, will be unable to balance its $42 million budget -- unless it raises the local tax levy by 101 percent. "They know the consequences -- they know the Camdens, the Newarks, the Trentons, the Asbury Parks, the Patersons of the world can't operate without this money,". "At some point, there will be a $300 million to $325 million supplemental appropriation bill that fixes some of the things that he needed fixed from the line-item veto." Christie unexpectedly wiped out all but $10 million from the program that helps cities and towns through extraordinary financial hardships like increased foreclosures, plummeting real estate values and a high number of successful property tax appeals. That's after reducing $30 million from the program the prior year.
Chicago faces 'difficult choices' to close deficit, treasurer tells conference - The elected treasurer of the US city of Chicago has said that it will take a generation to repair its public finances. Speaking at the CIPFA conference in Birmingham today, Stephanie Neely said that the city was trying to ask taxpayers how many services they were willing to give up in order to close the city's $700m deficit. This is expected to reach $1bn in a few years, and will lead to ‘some extremely difficult choices that will drastically change Chicago for the next generation’, she said. Sharing her experience since taking the post in 2006, she said: ‘In this time of austerity we are going to have to decide what services are essential and what are not.
A City’s Wrenching Budget Choices — When Engine 5 pulled up to a burning house on Woodlawn Avenue early on March 19, the firefighters were told that a man might be trapped in the back left bedroom. As two firemen trained a hose toward that corner, Capt. Don Ragavage crawled through smoke and flames to search for the missing resident. It was an inopportune moment for the water pressure to plummet. But that is what happened when Engine 5’s motor, strained to the limit by 16 years and more than 100,000 miles of hard service, abruptly sputtered and died. Only a month earlier, the fire chief, Buddy Martinette, had lobbied the City Council to replace the cantankerous engine at a session devoted to the latest of Wilmington’s six consecutive budget gaps. “The mechanics really don’t think it will make it,” the chief warned at the time. “You need another mechanic,” shot back Charlie Rivenbark, the Council’s foremost fiscal curmudgeon. Mr. Rivenbark was not smiling, and once the scattered snickers quieted, none of his colleagues took issue. The fire truck fell off the table for the fifth year in a row. Wilmington, N.C., is not Camden, N.J., which laid off half its police force this year. It is not Detroit, which is closing half of its public schools. But like local governments across the country, the City of Wilmington has been demonstrably diminished by five years of unyielding economic despair. That a place like Wilmington, until recently a real estate boom town, would defer a purchase as essential as a fire truck for even one year, much less five, speaks to the withering toll.
U.S. State Cuts Hit Health Care and Education - Florida is firing 1,300 workers. New York is cutting education funding and freezing public employee wages for three years. Arizona is slashing Medicaid coverage.. Over the past six months, governors and lawmakers balanced their fiscal 2012 budgets and protected their credit ratings on the backs of public employees, school districts, cities and Medicaid recipients, all of whom bore the collective brunt of budget-cutting in states from New Jersey to Wisconsin to California. While deficit pressure produced deep cuts in services to taxpayers, bondholders who placed their bets on municipal debt reaped the benefits of the market’s best second-quarter performance since 1992, even after analyst Meredith Whitney predicted as many as 100 municipal defaults valued in the “hundreds of billions of dollars.” States are “making a lot of true cuts,” “You’re seeing it in health care, human services, education. There is definitely some pain in those budgets.”
Ohio budget dismays schools - As Ohio gains a new biennium budget, the state's school districts are preparing for a new reality, one that involves about $800 million less in funding for public schools. School districts that already slashed their budgets, laid off teachers, and froze salaries are weighing whether to ask local voters to raise taxes this November. The new budget, they say, merely pushes more of the burden down to local taxpayers. "It's as bad as I've seen in my 15-year tenure," said Michael Ashmore, treasurer for Batavia Local schools, which recently laid off 16 people to offset at least $1 million less in state funding for next year. The 2,100-student district also is struggling to recoup unpaid local taxes on foreclosed homes. "Over the years, when property tax revenue has not been as high, usually state dollars offset that, but now we're losing money on the local and the state level," he said. The Clermont County district is not alone. Most school districts in Southwest Ohio handed out pink slips or planned dramatic cutbacks and about half are considering tapping local taxpayers because they are expecting less from Columbus.
When did public education become public enemy No. 1? - The notion that all citizens are entitled to an education is deeply rooted in the history of this country. Horace Mann espoused this concept while serving as the secretary of education for the commonwealth of Massachusetts beginning in 1837. He professed that an education for all would produce an enlightened society and citizens who could participate in our form of democracy and contribute to the economic livelihood of the nation. Now, Gov. Tom Corbett and other public officials pontificate the evils of public education. Their rhetoric describes a flawed system. One that is too expensive. They propose drastic reductions in the cost of educating the youth of this nation. The recently passed state budget includes significant reductions to funding for basic education, special education and higher education. Furthermore, he requests — no, demands — that all K-12 public school employees voluntarily agree to a pay freeze or reduction.
CA College Students Brace For State Budget Cuts - California college students are bracing for higher tuition bills and fewer courses and campus services under a new state budget that once again slashes spending on higher education. The budget signed Thursday by Gov. Jerry Brown inflicts the latest blow to California's renowned higher education system, which has helped make the state an economic powerhouse and served as a model for other states and countries. Over the past three years, California's public colleges and universities have seen deep cuts in state funding that have dramatically raised the cost of attendance, forced campuses to turn away qualified students and eroded the quality of classroom instruction. Under the newly approved state budget, the 10-campus University of California and 23-campus California State University will each lose at least $650 million in state funding, a cut of more than 20 percent. The two systems could each face another $100 million cut if the state takes in less revenue than expected. The 112-campus community college system will lose $400 million in state funding and fees will increase from $26 to $36 per unit. The system could lose another $72 million and raise fees to $46 per unit if revenue projections fall short.
UC Office of President preparing to recommend tuition increase to Regents - With cost-cutting and revenue-generating measures in place to fill the bulk of a billion-dollar budget gap resulting from steep cuts in state funding, the University of California staff is preparing to recommend to the Board of Regents that roughly one-quarter of the shortfall be offset with tuition and fee increases, UC Vice President Patrick Lenz said Friday, July 1. Only the Board of Regents can pass a budget or raise tuition. A tuition increase would be among several options presented to the Regents for consideration when they meet July 12–14 in San Francisco. Lenz, the UC system's vice president for budget and capital resources, said it had been determined that an annualized tuition increase of 9.6 percent beyond the 8 percent previously approved by the Regents for the 2011–12 school year would cover nearly $150 million of the $650 million funding reduction in the state budget approved by the state Legislature and signed by Gov. Jerry Brown this week.
California Cuts Weigh Heavily on Its Colleges - The doors to the state’s newest medical school are already open, technically. A gleaming building with new labs is ready to house researchers and students. But when the state budget was approved last week, the plans to open the medical school at the University of California1’s campus here were shelved for at least another year. The compromise to close the state’s huge budget gap included cuts to state agencies of all kinds, but none were as deep as those to the state’s public colleges and universities. The state’s two systems were each cut by $650 million, and they each could lose $100 million more if the state’s optimistic revenue expectations do not materialize. For both systems, the $650 million is roughly a 20 percent cut of operating money from the state. “What we are seeing is the abandonment of the state’s commitment to make California’s education available to all its citizens.” Tuition is expected to rise roughly 20 percent next year, just the latest in series of steep increases. Yearly in-state tuition at California State University will average about $5,500, while at the University of California, it is expected to be $13,200. Programs all over the state are being shuttered, star professors are leaving for colleges in other states, faculty positions are being left unfilled and class sizes are continuing to grow.
Unemployment and education - Here is a very interesting graphic (from Catherine Rampell at Economix) taken from the Federal Reserve of Cleveland: Generally, the more education, the lower the unemployment rate. But as the picture shows, the unemployment rate for high school dropouts instead of being four or five percentage points higher than that of people who have at least a college degree–it’s now more like TEN percentage points higher. Every level of education has a higher unemployment rate than before. But it seems that the least educated have the worst time and that the effect is much greater than in the recession of 2001. My speculation is that the narrowing of unemployment rates between 1992 and 2001 and the great increase in the gap post-2007 has a lot to do with the expansion and expansion in construction employment over this period. It’s just a guess, though. It would be nice to have data on construction employment by educational level.
Are Subsidized Student Loans Worth the Price? - Previous guest blogger Anastasia Wilson has written a post on her own blog comparing the student loan racket (for-profit colleges help people take out lots of federally guaranteed student loans to pay for their tuition, then do a lousy job educating them, walking away with the money and leaving students to default) to the subprime loan racket. The flagbearer for this parallel is Steve Eisman, who has gone from shorting subprime mortgages to now shorting for-profit colleges. In theory, for-profit colleges should not be able to do this. I believe that society should be subsidizing higher education, both because it’s an investment in human capital and because it helps equalize opportunity. But how do you weigh the people who benefit from subsidized loans against the people whose lives are being ruined by them?* Maybe we need another approach, like restricting subsidized loans to public institutions,** or restricting the amount so that it only covers public-school tuition, or switching from a lot of subsidized loans to a smaller volume of cash grants. It’s possible that a few tweaks to the current system could be enough, but I wouldn’t assume that at the beginning.
Bill Gross: How to fix the fractured U.S. job market - A mind is a precious thing to waste, so why are millions of America's students wasting theirs by going to college? All of us who have been there know an undergraduate education is primarily a four year vacation interrupted by periodic bouts of cramming or Google plagiarizing, but at least it used to serve a purpose. It weeded out underachievers and proved at a minimum that you could pass an SAT test. For those who made it to the good schools, it proved that your parents had enough money to either bribe administrators or hire SAT tutors to increase your score by 500 points. And a degree represented that the graduate could “party hearty” for long stretches of time and establish social networking skills that would prove invaluable later on at office cocktail parties or interactively via Facebook. College was great as long as the jobs were there. If we are to compete globally while maintaining a higher wage base, we must train for “middle” in addition to “high” tech. Philosophy, sociology and liberal arts agendas will no longer suffice. Skill-based education is a must, as is science and math. The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today's marketplace.
College education becomes a predator’s lounge for Wall Street and the government - Since 2000 the real cost of college is up by 23 percent yet the real earnings of college graduates is down by 11 percent. The cost of going to college seems to defy the rules of fundamental economics and basic gravity. Over the last decade the real earnings of college graduates has fallen yet the cost of a four year education continues to go up almost oblivious to this fact. These kinds of dislocations in markets typically signify bubbles just like we experienced in the housing market. Home prices soared without any underlying change in fundamentals except the fact that loans were made more accessible. The same can be said for a college education. The cost of attending a college has surpassed virtually every sector in our economy yet college graduate earnings have not enjoyed a similar rise. Then why is the cost soaring? Is it simply because banks know that the government will back every penny in student loan debt? Is it the multi-million dollar workout facilities? Is it the laws that shackle students into debt that isn’t removed even through court ordered bankruptcy? The college dream just like buying a home is part of the American dream narrative and many are willing to go into massive debt without questioning the value of what they are paying for (or going into debt for). The Wall Street and government predators know this.
Retirees risk outliving savings, GAO study warns -- Retirees may have to delay Social Security benefits and buy an annuity to have enough money for retirement, a federal government study suggests. "The risk that retirees will outlive their assets is a growing challenge," according to a study from the Government Accountability Office released Friday. Increased life expectancies and health-care costs coupled with declines in financial markets and home equity over the last few years have "intensified" workers' concerns about how to manage their savings in retirement, the report said. Annuities are insurance contracts that can offer a steady stream of income for life. High-income households generally don't need them, according to experts the GAO consulted. Middle-income households, defined in the study as having a net worth of about $350,000, including their homes, that don't have traditional pensions should consider using a portion of their savings to purchase an inflation-adjusted annuity, the study said. Lower-income families need to accumulate some cash savings first.
Why It's So Hard to Fix the 401(k)? - A few years ago, policy wonks, retirement experts and politicians came up with what they thought was a great way to fix the 401(k) system - automatic enrollment. So in 2006, they passed a law that allowed businesses to put a portion of their employees' money into 401(k) plans without their permission. The employees were of course allowed to opt out, but few did and retirement savings were supposed to soar. Turns out the result isn't as good as people expected it would be. According to a report in today's Wall Street Journal, the automatic enrollment law has actually lowered retirement savings rates, not raised them as expected. The WSJ found that 40% of the people who were automatically enrolled ended up saving less than they would have if they had signed up for a 401(k) on their own. Overall, the savings rate was down as well, according to a number of different 401(k) plan administrators. At plans managed by Aon Hewitt, for example, the average participant contributed 7.3%, down from 7.9% in 2006, when the law was enacted.
Making E-Verify Mandatory: The Perfect Storm - There has been much recent buzzing about AARP's ambiguous, half-denied statements about their (new?) willingness to cut Social Security benefits, and rightly so. But believe it or not, one of the biggest threats to Social Security this summer could come from an entirely different direction, from an initiative whose main target is not even related to social program spending. I'm talking about E-Verify, a proposed system for curbing the legal employment of every single undocumented worker in America. While seemingly immigration-related, a mandatory E-Verify program could cripple the Social Security Administration (SSA) by concurrently draining already-limited funding while imposing heavy burdens on one of the most efficient government programs in existence. Oh yes, and it would threaten the timely distribution of all new Social Security benefits. The Social Security Administration is one of the most efficient government agencies, operating at less than 1 percent overhead costs. Forcing SSA to handle the administrative nightmare of E-Verify is worse than the usual conservative position of "starving the beast" -- because in addition to drastically increasing the responsibilities SSA would be faced with, the agency is already dealing with massive budget cuts that limit its administrative capacity.
Mandatory submission to e-verify program...a few points more - Scott Hochberg's article Making E-Verify Mandatory: The Perfect Storm for Crippling the Social Security Administration and Jeopardizing the Social Safety Net discusses issues regarding the e-Verify system and a move in Congress to make it mandatory for everyone hired for a job in the US. When the Immigration Reform Act took effect in 1987, I was the manager of the SS office in Northern Santa Barbara County in strawberry, broccoli, lettuce and wine grape country. Thousands of migrant workers pass through the area at the height of the picking season between January and May. Many stay with or without authorization so that about 60% of the population is Hispanic and/or non-English speaking/non-US national. You will find similar demographics up and down the California Central Coast in agricultural areas, so there's nothing unusual about this. Farm workers in the area lined up with their new Immigration work visas in hand outside our office door at 6:00A and we interviewed Social Security Number applicants until 5:00P every day from 1987 til mid-1989. It was hard to get anything else done, but the normal operation got busier because of the recession that put maybe 15% of the workforce in our area out of work. Alright, now it won't take much imagination to imagine the same situation but worse, because now every worker would be subject to e-verify. Not just the "obvious illegals," every single one who applied for a job.
Inflation change could cut into Social Security - Once considered untouchable, Social Security is now in play in the debt-ceiling negotiations. And that could mean higher income taxes for many U.S. families in addition to shaved benefits for tens of millions of retirees as they age. Social Security became part of the private discussions between President Obama and Republican House Speaker John A. Boehner on coming up with "something big" for reducing deficits by $2 trillion to $4 trillion over the next decade. White House officials said Thursday that could include a new inflation measure for Social Security that, through a combination of reduced benefits and higher taxes, could produce federal savings close to $200 billion. Low- and middle-income families could be hit. The proposal would represent a reversal for Obama. In contrast to his pledge to target tax increases at the wealthy, high-income families would largely be spared from tax increases that would result from changing the way inflation is measured. Until now, the administration has been adamant that Social Security does not add to the deficit and should not be a part of deficit-reduction talks.
How Much Would A Social Security Deal Cost You? - How much would you lose in benefits if President Obama makes a deal with the Republicans to cut Social Security? The Administration isn't denying reports that just such a deal is in the works. As the President prepares to meet with Congressional leaders tomorrow, the financial security of millions of Americans may hang in the balance. Dealmakers hope to avoid that by hiding the reduction in a lowered cost of living (COLA) adjustment, but it seems wildly optimistic to think a cut of this magnitude can be hidden from the public. It's doubly unfortunate because COLA adjustments should be increased, not reduced. If you have a copy of your statement of estimated Social Security benefits (a document which, interestingly, the government seems to have stopped sending), this chart may give you a sense of how this deal would affect you:
Medicaid increases use of health care, decreases financial strain, improves health - Researchers from Harvard School of Public Health (HSPH), Massachusetts Institute of Technology (MIT), the National Bureau of Economic Research (NBER), and Providence Health & Services have found that expanding low income adults' access to Medicaid substantially increases health care use, reduces financial strain on covered individuals, and improves their self-reported health and well-being. This is the first study to evaluate the impact of insuring the uninsured in the U.S. using a randomized controlled trial, the gold standard in medical and scientific studies. The study will be released as working paper 17190 on the website of the National Bureau of Economic Research (NBER) on July 7, 2011 (www.nber.org). "This study shows that Medicaid substantially expands access to and use of care for low-income adults relative to being uninsured," said Katherine Baicker, professor of health economics at HSPH and co-principal investigator of the study. Medicaid, which is jointly funded by the federal and state governments, covers the health care costs of eligible low-income individuals and families. The 2010 Affordable Care Act expands Medicaid to cover additional low income adults in all states in 2014.
Medicaid’s impact, finally measured - Enrolling in Medicaid significantly improves the overall health and financial stability of low-income Americans, according to a new study co-authored by MIT researchers who’ve used a unique program in Oregon to shine a light on the effects of public health insurance. The research shows that Medicaid recipients are far more likely to receive health care than the uninsured. Citizens with Medicaid are 30 percent more likely to have a hospital stay, 35 percent more likely to have an outpatient visit to a doctor, and 15 percent more likely to take prescription drugs, compared to similar low-income citizens not enrolled in the program. “There has been a lot of genuine uncertainty about whether it makes a difference when you give people Medicaid,” says Amy Finkelstein, a professor in MIT’s Department of Economics and one of the principal investigators of the study. “The short answer from our study is that it does
Arizona Medicaid cuts to go into effect - Arizona's generous Medicaid program will become significantly less generous this Friday (July 8), when the state will begin denying health insurance coverage to childless adults, Capitol Media Services reports. An estimated 100,000 residents will be affected in the first year alone. Republican Governor Jan Brewer has been seeking federal approval for the policy change for months as she makes deep cuts to the state budget. While Arizona can change many aspects of its Medicaid program on its own, changing who can qualify for coverage has has been a far tougher task, given strict eligibility rules under the joint state-federal health insurance program for the poor. With federal approval now in place, Arizona will start turning aside childless adults who are below the federal poverty line of about $18,500 a year for a family of three.
$5,317 – too rich to receive medicaid according to the Governor who spent that on one trip. The Republican Governor who spent over $5000 of taxpayers money travelling to see his son play a sports game thinks that level of salary should disqualify you from medicaid. The man who gave 16,000 of New Jersey’s richest residents a tax cut worth over $1billion a year wants to gut the program provided to 23,000 of the poorest residents in the State. Christie, who was the keynote speaker at the recent National Republicans $1000 a plate dinner is proposing to slash Medicaid eligibility from the current maximum income of $24,645 to $5,317 a year for a family of three. This from the same Party that fought tooth and nail a plan to extend healthcare to 45 million extra Americans. Republicans have lauded him with praise and believe that he represents the future of their Party.
Stories that will make you run screaming into the night - They are actually nightmares for me. They are told to us by Wendell Potter, via CommonDreams. Mr. Potter was a well-paid henchman for the Health Insurance Industry, before he saw the light and bit the hand that fed him. He is now a man that fights against said industry and we should be glad to have him on our side. If only because he knows where all the bodies are buried. I have spent years without health insurance and if you, m’dear reader, have never had that experience..then you just don’t know wtf you are missing. I am now ‘on the dole’, being disabled by three blown discs via a work injury. I have insurance..Medicare. But enough about moi..lets read Mr. Potter’s stories, particularly the following one about the pageant queen:….one of the contestants in the Miss USA pageant revealed during a nationally broadcast interview that she is homeless. Why? Her sick mother could not pay both the rent and her mounting medical bills. Twenty-three-year-old Blair Griffith was evicted along with her mother and brother just weeks after she won the title of Miss Colorado.“I didn’t know what to think” when sheriff’s deputies starting putting the family’s belongings in garbage bags, she said. “It was shocking. And then I saw my mom on her knees crying and begging them, ‘Please don’t do this to me’ and then looking up at me and saying, ‘I’m so sorry.’”
Visualizing the Growth of Complexity in Medicare - How many pages does it take to explain the basics of the U.S. Medicare program? If you answered "a lot more than it used to", you're right! Each year, legal publisher CCH puts out a book simply titled Medicare Explained, which they describe as follows: A book for Medicare beneficiaries and others who need a relatively thorough explanation of the Medicare program with particular emphasis on services covered in institutional settings and services provided by physicians and suppliers. A detailed explanation is provided regarding eligibility, enrollment, benefits, exclusions and payment rules for Medicare Parts A, B, C and D. This book also explains the process for submitting beneficiary claims and filing an appeal. As we saw with CCH's Standard Federal Tax Reporter and the U.S. tax code, the growth of the complexity of the laws and regulations affecting Medicare can be measured by the number of pages this particular book requires each year. Our chart below shows how that's changed for each year in which an edition has been published since 1996:
Medicare IS Means Tested - I keep hearing people referring to the budget talks suggesting the Medicare should be means tested. Medicare is means tested. You might want it to be more so (the current means test only hits the top 5% of beneficiaries by income), but as my colleague Paul Van de Water points out, it already is…means-tested, that is. You don’t believe me? Here’s a table from a Social Security Administration document that explains the means test for Medicare Part B and Part D. Also, this idea isn’t the slam dunk everyone seems to think it is. I understand the appeal and it certainly makes sense to ask for more for a program facing a tight budget from those who can afford it. But the history of social policy leads me to worry about this: once you shift a program from universal coverage to means testing, it’s increasingly vulnerable to deeper means testing until it eventually becomes a poverty program which everyone wants to get rid of.
Medicare Unveils Plan to Cut Doctor Pay by 30% - The Centers for Medicare and Medicaid Services has issued its proposed changes to the 2012 Medicare Physician Fee Schedule, including a long anticipated -- and long-feared -- plan to cut Medicare pay to physicians by 30%. The agency is required to issue the fee schedule based on current payment rules. Using the Sustainable Growth Rate (SGR) formula now in effect, physicians are scheduled for a nearly 30% decrease in reimbursement beginning in 2012. Although similar cuts have been averted almost every year by last-minute Congressional reprieve, CMS cannot assume such a reprieve will occur and must issue its proposed fee schedule as if the payment cut were going to go into effect. The proposed rule, issued Friday, includes a "significant" expansion of the agency's so-called "misvalued code initiative", which CMS describes as an effort to ensure that Medicare is paying accurately for physician services and closely managing payments.
How Health Insurance Affects Health - In the nearly year and a half since Congress passed the health care overhaul, one of the main purposes of the bill — to provide health insurance to people who lack it — has often been lost in the debate. Instead, supporters and opponents of the bill have argued over whether the bill is constitutional, and they’ve argued over whether the bill will cut medical costs more or less than the Congressional Budget Office projects.Those are obviously important issues. But so is the fact that, unlike any other rich country in the world, the United States has tens of millions of people who do not have health insurance and therefore go without some forms of medical care. A new study being released today, by some of the country’s top health economists, aims to estimate the effects of not having health insurance — and the effects are large. The researchers used a lottery that the state of Oregon conducted in 2008 to determine who would become eligible to apply for a limited number of Medicaid slots. The researchers compared the health outcomes of those who won the lottery (many of whom then received insurance) and those who did not (who were more likely to remain uninsured).
The Connection Between Obesity and Poverty - A new report finds shows that Americans are getting fatter and notes worse rates among those with low incomes, but some states don’t exactly fit the pattern. Click to see a map of obesity rates by state. Our colleague Katherine Hobson on the Health Blog points to a study from the Trust for America’s Health and the Robert Wood Johnson Foundation that looks at the increase in obesity rates across the U.S. The report notes higher obesity rates nationally among low-income adults. “More than 33% of adults who earn less than $15,000 per year were obese, compared with 24.6% of those who earn at least $50,000 per year,” the authors state. Comparing poverty rates in the U.S. with obesity rates, a pretty strong correlation emerges. Check out this map on poverty rates from the Census Bureau and look at this map on obesity rates, where you can see a lot of overlap. For example, Mississippi has both the highest poverty rate and the highest obesity rate in the country.
How Much Is a Drug-Resistance Death Worth? Less Than $600 - So, antibiotic resistance: We care about it, right? The World Health Organization does: It made antimicrobial resistance the theme of this year’s World Health Day. The Centers for Disease Control and Prevention does. The journal Lancet Infectious Diseases says it’s a “global health concern.” The major association for infectious disease physicians has pleaded for attention. Two separate sets of legislators have introduced two bills in Congress. You’d think, with all those calls for attention, that combating antibiotic resistance would be a priority in the United States. But if we can take how much we spend to research a problem as a gauge of how much we care about it, then antibiotic resistance is no priority at all. As in: For every death from AIDS, the US federal research establishment awards approximately $69,000 in grant funds. And for every death from MRSA, it awards $570.
WCSJ: Maybe The Biggest Disease Threat Isn’t Infectious At All - I’ve been away the past week at the World Conference of Science Journalists, a biannual gathering that brought 726 writers and broadcasters from 87 countries to Doha, Qatar. Going into the conference, the epidemics panel was my favorite. That’s not because I cheated and made myself one of the speakers, but because it brought into public view so many of the disease-control issues that we talk about here. When I say hidden epidemics, what I mean is this: The diseases that routinely grab headlines are almost never the ones that cost society the most in illness and deaths, and also in money to control and repair them. Think of Ebola, for instance. There has never been a case of human Ebola in the United States. And as I’ve written before, viral hemorrhagic fevers repeatedly have been imported to North America without ever starting an outbreak. Yet whenever Ebola sparks in Africa, it earns scare-font headlines here, as though it were about to rampage across the continent — even though, in all its known engagements with humans, Ebola has killed less than one-tenth of the 19,000 that MRSA, for instance, kills in the US in a single year.
U.S. Could Drop Screening For Deadly Strain Of E. Coli - At a time of rising concern over pathogens in produce, Congress is moving to eliminate the only national program that regularly screens U.S. fruits and vegetables for the type of E. coli that recently caused a deadly outbreak in Germany. The House last month approved a bill that would end funding for the 10-year-old Microbiological Data Program, which tests about 15,000 annual samples of vulnerable produce such as sprouts, lettuce, spinach, tomatoes, cantaloupe and cilantro for pathogens including salmonella and E. coli. Over the last two years, its findings have triggered at least 19 produce recalls, according to the Food and Drug Administration. The commercial produce industry, which has long expressed concerns about the program, this spring suggested ending its $4.5 million funding. In a memo to Agriculture Secretary Tom Vilsack, the USDA's Fruit and Vegetable Industry Advisory Committee complained about "unnecessary recalls" and asked if the funds would be "better utilized elsewhere."
Eating Less Salt May Not Lower Risk of Heart Disease - Contrary to what medical experts have been saying for years, a new study suggests salt may not be as bad for the heart as commonly believed. Researchers from the Universities of Exeter and Plymouth in Exeter, U.K. reviewed data from seven studies with nearly 6,500 participants who reduced their salt intake and found that while eating less salt did lower blood pressure, it did not reduce the risk of dying or of having heart disease. But this finding doesn't mean people can eat as much salt as they want. The authors caution that they don't have enough data to come to any firm conclusions about salt intake and heart disease. "We would require some 2,500 cardiovascular events in over 18,000 trial participants to detect a small reduction in relative risk," they wrote. They also said that the study subjects only moderately lowered their sodium intake, so the effect on blood pressure and heart disease was small. Numerous experts who were not involved with this research weighed in on the findings, and their opinions are mixed. They agree more data are needed to provide a better explanation of the findings and that there are other limitations to the study design, but debate how big a role sodium plays in the development of heart disease
FDA unleashes end game scheme to outlaw virtually all dietary supplements formulated after 1994: In the wake of hundreds of dietary supplements recently being outlawed across the EU, the U.S. Food and Drug Administration has quietly unleashed a regulatory scheme that, if fully implemented, could ban virtually all dietary supplements in the USA that were formulated after 1994. That means nearly all superfoods, multivitamins, detox supplements, and medicinal herbal products we have all come to depend on to prevent disease and boost our immune health could soon be stripped from store shelves and outlawed across the nation. I call it the 'End Game' of the FDA's war against humanity: Phase one was the enforcement of nutritional ignorance by threatening and raiding companies that dared to make truthful health claims on their own websites (http://www.naturalnews.com/021791.html). Phase two involves 'nuking' the entire dietary supplements industry by simply denying the use of nearly all the ingredients presently used in supplement products.
Deadly chemical accident at Tyson chicken processing plant lands 173 workers in hospital - The accidental mixing of two unidentified chemicals at a Tyson chicken processing plant in Springdale, Ark., has landed 173 of its roughly 300 workers in the hospital, according to reports. The two chemicals, which Tyson refused to identify, somehow got mixed together to produce deadly chlorine gas, which sent five of the workers to intensive care, with another 50 remaining hospitalized days after it occurred. Donnie King, senior vice president of poultry and prepared foods at Tyson, said that human error was partially responsible for the mixing of the chemicals, but did not provide further details. Gary Mickelson, a company spokesman, added that the plant does not actually use chlorine gas as part of its processing regimen, despite the fact that chlorine itself is commonly used as an antimicrobial treatment for factory chicken. The whole incident is the type of scenario you might expect to occur at some kind of chemical or other industrial factory, not a food processing plant. And yet millions of people consume Tyson chicken, which apparently is processed with the help of some sort of chemical concoction that, when mixed, creates a gas that the US Centers for Disease Control and Prevention (CDC) says can cause respiratory illness and sudden death."
15 Food Companies That Serve You 'Wood' - The recent class-action lawsuit brought against Taco Bell raised questions about the quality of food many Americans eat each day. Chief among those concerns is the use of cellulose (read: wood pulp), an extender whose use in a roster of food products, from crackers and ice creams to puddings and baked goods, is now being exposed. What you're actually paying for -- and consuming -- may be surprising.Cellulose is virgin wood pulp that has been processed and manufactured to different lengths for functionality, though use of it and its variant forms (cellulose gum, powdered cellulose, microcrystalline cellulose, etc.) is deemed safe for human consumption, according to the FDA, which regulates most food industry products. The government agency sets no limit on the amount of cellulose that can be used in food products meant for human consumption. The USDA, which regulates meats, has set a limit of 3.5% on the use of cellulose, since fiber in meat products cannot be recognized nutritionally.
Food Ark - Six miles outside the town of Decorah, Iowa, an 890-acre stretch of rolling fields and woods called Heritage Farm is letting its crops go to seed. It seems counterintuitive, but then everything about this farm stands in stark contrast to the surrounding acres of neatly rowed corn and soybean fields that typify modern agriculture. Heritage Farm is devoted to collecting rather than growing seeds. It is home to the Seed Savers Exchange, one of the largest nongovernment-owned seed banks in the United States.
The Department of Food Subsidies - The Department of Agriculture no longer serves as a lifeline to millions of struggling homestead farmers. Instead, it is a vast, self-perpetuating postmodern bureaucracy with an amorphous budget of some $130 billion -- a sum far greater than the nation's net farm income this year. In fact, the more the Agriculture Department has pontificated about family farmers, the more they have vanished -- comprising now only about 1 percent of the American population. Net farm income is expected in 2011 to reach its highest levels in more than three decades, as a rapidly growing and food-short world increasingly looks to the United States to provide it everything from soybeans and wheat to beef and fruit. Somebody should explain that good news to the Department of Agriculture: This year it will give a record $20 billion in various crop "supports" to the nation's wealthiest farmers -- with the richest 10 percent receiving over 70 percent of all the redistributive payouts. If farmers on their own are making handsome profits, why, with a $1.6 trillion annual federal deficit, is the Department of Agriculture borrowing unprecedented amounts to subsidize them?
The New Dust Bowl - In the 1930s, Okies saw California's Central Valley as a Garden of Eden. Now it's dying of thirst. The Central Valley, the thin, fertile band running down the middle of California, has long boasted the world's richest agricultural economy, reliably producing more than a quarter of the nation's fruits, nuts, and vegetables. But it's done so in defiance of ecological reality. The 70-year-old irrigation system that has pumped water into the otherwise arid valley is proving increasingly vulnerable to shifting weather patterns. It now appears that waterwise, 20th century California was an anomaly, a relatively wet period in the midst of a historical cycle of severe drought. And the changing climate will only magnify the problem: By the end of the century, scientists predict, Central California could experience temperatures rivaling Death Valley's and face the loss of 90 percent of the Sierra Nevada snowpack, the region's main water source.
How Not to Play the Game - We’ve discussed organic gardening and its associated arts, and we’ve discussed homescale energy production and conservation. At this point, before we go on to the third leg of the tripod, which used to be called “recycling” thirty years ago and deserves a more robust name now, I’d like to step back for a moment and talk a bit about strategy. Yes, there’s a strategy underlying the selection of projects and possibilities I’ve been discussing here. The focus on Seventies-era organic gardening, appropriate technology, and the like is not merely a matter of nostalgia for a time when America seemed to be on the brink of taking its future seriously, before it collectively took the coward’s way out, nor is it simply a recognition that we don’t have a lot of time left and would be wise to concentrate on options that have already had the bugs worked out – though this latter may well be a point worth making. Rather, by some combination of prudence, prescience, and sheer dumb luck, the toolkit of ecotechnic options pieced together by the backyard farmers, basement inventors, shoestring-budget nonprofits and local government initiatives of that time happen to be very nearly uniquely suited to one of the dominant features of the future ahead of us.
Voluntary poverty — it could save your life, but what a hard sell - Poverty is finding middle class families these days these days through unemployment, bankruptcy and home foreclosure, whether they like it or not. And mostly, they don’t like it. But John Michael Greer, author of this year’s The Wealth of Nature: Economics as if Survival Mattered and several previous books on surviving peak oil, suggests that those who haven’t found poverty yet might want to seek it out for their own good. In “How Not to Play the Game,” Greer recommends preparing our households for a future of doing with fewer products and services from the marketplace once peak oil puts an end to our current age of abundance. As we look forward to Greer’s economy of “scarcity industrialism,” he urges us to develop the kind of DIY skills found in issues of Mother Earth News from the 1970s that he has dubbed Green Wizardry. Knowing how to grow and preserve our own food is only the start. For example, Greer has also shown Green Wizards how to make an ultra low-tech cook stove in a wooden box using heated rocks as a cooking source.
The Shape Of Things To Come - Yesterday I laid out why the U.S. will inevitably experience The Great Reset. What comes after that systemic devolution/crisis is unknown, but we can speculate on the shape of things to come. Though we cannot know the outcome, we can certainbly discern the outlines of the crisis itself: 1. Profound political disunity. As I noted in Survival+, this was a key feature of the Roman Empire in its final slide to collapse. The shared values and consensus which had held the Empire's core together dissolved, leaving petty fiefdoms to war among themselves for what power and swag remained. Today we have several types of political disunity. Superficially, the two "political theater" wings of the Demopublicans stage a bitter partisan war over whose vision of the U.S. as a "Plutocracy, but with benefits" holds an increasingly enfeebled political power. But this is all theater and artifice. Neither wing has any vision or values of substance; each slavshly serves their masters, the corporate cartels and financial Oligarchy, while feeding their vast constituencies in the Savior State great gobs of borrowed treasure to maintain the "Plutocracy, but with benefits." The real disunity is between a doomed Status Quo and those willing to deal with reality. Right now those willing to deal with reality are few, but they have the distinct advantage of reality on their side, while the Status Quo has only propaganda, artifice, phony political theater and empty promises.
World Food Prices Climb on Sugar, Dairy Costs - World food prices rose in June as the cost of sugar, meat and dairy increased, adding to inflationary pressure that has prompted central banks across the world to raise interest rates. An index of 55 food commodities rose to 233.8 points from 231.4 points in May, the United Nations’ Food and Agriculture Organization said in a report on its website today. The gauge climbed to an all-time high of 237.7 in February. Food will remain costly in the next few years and price swings will be around “for a long time,” Jose Graziano da Silva, the FAO’s director-general elect, said June 27. The European Central Bank raised rates today for the second time this year and China did so for the third time yesterday in a bid to control inflation partly blamed on food costs. “We’re not yet seeing any break,” Abdolreza Abbassian, a senior economist at the FAO, said via phone from Rome today. “Almost in every country, including in Europe, the issue of higher food prices has already become tangible.”
Poor Countries Seen Likely to Be ‘Hammered’ by Food Costs, Water Shortages - Developing economies will be “hammered” as declining water supply adds to problems confronting farmers who are already struggling to meet food demand, pushing prices even higher, said CH2M Hill Cos. Countries in short supply of water including China will continue to boost food imports, draining resources in some of the largest agricultural producers including the U.S. and Brazil, said Lee McIntire, chairman and chief executive officer. The company provides services from treating waste water and building irrigation systems to cleaning up nuclear sites. Food costs tracked by the United Nations advanced in June for the 10th time in the past 12 months, staying near a record on higher sugar, dairy and rice prices, while meat reached an all-time high. The World Bank estimates higher food expenses have pushed 44 million more people into poverty. “Food prices are going to go up,” McIntire said, without giving a timeframe. “The countries that are trying to grow their economy, I think they’re going to be hammered more and more. They’re going to be short of water.”
As Food Prices Hover at Historic Highs, Extreme Weather and Asian Demand are Poised to Boost Prices Even Higher - Food prices are climbing back to historic levels, the UN Food and Agriculture Organisation (FAO) reports. Prices increased by 1.3% in June due to worries over bad sugar harvests from “a spell of two months without rain.” Food prices are poised to increase: Goldman Sachs said it expected further increases in a wide range of commodity prices this year and into 2012 – in food, as well as energy and metals – on the back of strong demand from Asia. . “We expect this [Asian] demand growth will be sufficient to tighten key commodity markets over the next six to 12 months, particularly for those markets where supply constraints will become binding even on slower economic growth,” In other words, expect more food shortages and high prices. This is good for investors, but bad for the world’s poorest people. The World Bank estimates that these record highs are pushing tens of millions more people into poverty:
Commercially Valuable Fish Species to Hit Endangered Species List - Ahead of a key international meeting on tuna catches, an assessment is painting a bleak picture of the conservation status of some of the worlds most commercially valuable fish species. Bruce Collette, who studies ocean fish at the National Marine Fisheries Service Systematics Laboratory in Washington DC, and his colleagues conducted the first global assessment of the scrombids and billfish, groups of fish that include some of the species with the highest value as seafood, such as tuna and marlin, as well as staples such as mackerel. The team assessed 61 species of fish according to the criteria used by the International Union for the Conservation of Nature (IUCN) in Gland, Switzerland, to produce its Red List of endangered species. In a policy-forum paper published today in Science, the researchers report that seven species are vulnerable, endangered or critically endangered (see Table 1). The IUCN will probably confirm these categorizations in a future update of the list. The assessment comes out just as international representatives from some of the intergovernmental organizations charged with managing regional tuna stocks convene in La Jolla, California, for the Kobe III meeting on 11-15 July. Despite international concern over the number of tuna being caught, these organizations have generally resisted a major clampdown on fishing.
It's A Grand Country, But ---- perhaps we need to get some of the bureaucrats under control. DOE postpones new Energy Star regulations. It turns out that there are minor (cough) problems with the whole program. Popular Mechanics has examples of the fake appliances certified under the program. My favorite: 2. The Feather-Duster Fly-Strip Air Freshener - Ostensibly an indoor air purifier, this item is actually a standard space heater spangled in strips of flypaper, with a feather duster perched up top.The product was submitted without a standard safety file number from the Underwriters' Laboratories. Plus, the product's website did not include a disclaimer required for Energy Star certification. Last but not least, the garish photo submitted with the product's application portrays what is clearly a feather duster rigged to space heater. Nevertheless, these obstacles proved surmountable—the product was approved in 11 days and became listed on the Energy Star website. U 2 Kin B An Inventor!
But probably not the most cost-effective - Fuel economy standards on Independence Day? The Obama administration and the auto industry are locked in negotiations over new vehicle mileage and emissions standards that will have a profound effect on the cars Americans drive and the health of the auto industry over the next decade and beyond. ... Heather Zichal, a White House policy adviser on energy and environmental issues, said fuel economy standards were among the most effective ways to cut emissions and reduce oil imports, top priorities of the president. via www.nytimes.com Note that fuel economy standards are not the most cost-effective way to cut emissions and reduce oil imports. Cap and trade and carbon tax policies could achieve the exact same environmental and national security goals at a lower cost. The reason is that economic incentive-based policies provide the signal (in the form of higher energy prices) to improve fuel economy and pursue other ways of reducing emissions. It is a shame that the political system makes higher fuel economy standards more feasible to achieve. On the other hand, when people focus on gas prices, and politicians feed that behavior, any policy that raises them is DOA.
Will a Vehicle Fleet Average Fuel Economy of 56 MPG Offer a "Free Lunch"? - In the year 2025, there will be plenty of vehicles driving around the United States. If their average fuel economy is 56.2 MPG and if the "rebound effect" isn't a serious factor, then total greenhouse gas emissions from U.S transportation will decline and this would be very good. Rather than relying on rising gasoline taxes and fear of Peak Oil to bring about this increase in fuel economy, the Obama Administration seeks to achieve this fleet composition shift through much tighter CAFE Standards. The NY Times reports that car makers admit that they know how to make these cars but even with gas priced at $4 per gallon they do not believe that drivers want to drive these cars. An interesting issue arises. Do you respect consumer sovereignty or not? For profit firms will cater to the demands of their potential customers. It is true that if the price of gas were $10 per gallon, these households would be more likely to want smaller, more fuel efficient vehicles.
Filling Up In Nebraska: A Conspiracy Theory - I took the picture below when I was filling up the tank earlier today in Nebraska. Weird, right? The higher octane gas (“Plus”) costs $0.15 less per gallon than the regular. I thought it was a mistake in the signage, but no. Along with higher octane, the “plus” contained 10% ethanol—the regular was corn-free.Still, why was it cheaper? I spoke to one native who told me this price differential is pretty recent. I know—don’t draw conclusions from samples where n=1. But I wonder: could it be the case that with ethanol subsidies under attack from all sides, producers and retailers started passing part of the subsidies along to consumers? That way, they build allegiance for the subsidies at the retail level and can warn drivers how much prices will rise if Congress does the right thing and gets rid of the subsidies.
Ethanol Subsidies Besieged - Federal subsidies for corn ethanol have long been considered untouchable in Washington — not least because politicians want the votes of Iowans, who have traditionally held the first nominating caucuses in the contest for the presidency. But this year, cutting the budget deficit holds more allure than courting corn farmers, making a turning point in ethanol politics. In Washington, there is growing consensus that the ethanol industry has reached financial stability, making much government assistance unnecessary. A strong majority of the Senate recently voted to end most of the subsidies. The pressure prompted three influential senators to announce a compromise on Thursday that would drastically cut the financial support and end a tariff on foreign ethanol entirely by the end of July. The White House, which has supported a reduction of the subsidies, said it was encouraged by the latest proposal.
Brazil considers cuts in ethanol - A potential shortfall in the sugar cane crop has Brazil thinking over a change in its ethanol blend from the current 25 percent to 18 percent, according to a report in the authoritative energy journal Platts. Platts reports that “so far this year, ethanol output in Brazil’s center-south region has been 2.9 billion liters, down 29% from the same period of 2010 data from the sugarcane industry association UNICA shows. “Production has been lagging due to a slow start to the harvest due to heavy rains in the center-south of the country.” In the U.S. federal regulators only recent upped the blend limit for ethanol from 10 percent to 15 percent, although retailers are expected to begin pumping the higher blend only after a long transition to new pump systems.
Biofuels land grab in Kenya's Tana Delta fuels talk of war - Mohamed Abdi, 13, points out where his hut used to be. His was the last of the 427 families to leave. "They told us we would be burned out if we didn't go," he said. "They drove machinery round and round the village all day and all night to drive people out. No one understood why, as the village had been there for more than 25 years." The eviction of the villagers to make way for a sugar cane plantation is part of a wider land grab going on in Kenya's Tana Delta that is not only pushing people off plots they have farmed for generations, stealing their water resources and raising tribal tensions that many fear will escalate into war, but also destroying a unique wetland habitat that is home to hundreds of rare and spectacular birds. The irony is that most of the land is being taken for allegedly environmental reasons – to allow private companies to grow water-thirsty sugar cane and jatropha for the biofuels so much in demand in the west, where green legislation, designed to ease carbon dioxide emissions, is requiring they are mixed with petrol and diesel.
Can Biofuels Save Sub-Saharan Africa? - Last week, the journal Nature published a special outlook issue dedicated to the state of, and prospects for, biofuels production in an energy-hungry future. In the article “A New Hope for Africa,” Lee R. Lynd, a professor of environmental engineering design at Dartmouth College, and Jeremy Woods, a lecturer on bioenergy at Imperial College in London, argue that, far from posing a direct threat to the world’s food supply, the development of an African bioenergy industry has a great potential to increase food security for some of the world’s poorest and most vulnerable people. Critics remain unconvinced and highly concerned about the potential effects of land conversion on climate change.Something everyone can agree on is that 800 million people live in Sub-Saharan Africa and a third of them don’t have enough food. By 2050, an estimated 1.95 billion people will be trying to live off the land in that region. Even if everyone in Sub-Saharan Africa were only to be fed as inadequately as they are today, the region would need to more than triple its food production over the next 40 years. For everyone on the continent to have enough to eat, food production would have to more than quadruple.
Worldwide Energy Shortages Triggered by Drought, Subsidies - As the summer heats up, energy shortages are striking around the world—including the oil-rich Middle East.Dubai, part of the United Arab Emirates (UAE), stopped supplying gasoline to the other emirates, because the government can’t afford to continue subsidizing gasoline, which it currently sells at far below global market rates. Now a UAE company has hashed out a deal to turn fast-food fryer oil into biodiesel to fuel vehicles. In Iran, one of the world’s largest natural gas producers, many power plants have run out of natural gas, and are instead burning oil to keep the lights on. Pakistan’s main export is textiles, but with power outages of 12 hours or more a day in many cities, the sector is ailing, forcing an estimated 400,000 people out of jobs. With only 19 of 54 nuclear reactors running, Japan is facing electricity shortages, and the government has instituted a 15 percent cut in electricity use by large users in eastern Japan. Temperatures are high in Japan, and the country may suffer the hottest summer on record, raising fears of heat stroke deaths. South America’s second-largest economy, Argentina, is rationing natural gas through the cold months (it’s winter there). And Tanzania, east Africa’s second-largest economy, is facing indefinite power outages as a result of fuel shortages as well as drought—which has cut power output from the hydroelectric dams that supply more than half its power.
Drought in east Africa the result of climate change and conflict - Aid agencies say that weather in the region has become more erratic and years of war leave populations especially vulnerable. Prolonged drought in the Horn of Africa is the immediate cause of the severe food crisis already affecting around 10 million people in parts of Kenya, Ethiopia, Djibouti and Somalia. Rains have failed over two seasons, with a strong La Niña event having a dramatic impact across the east coast of Africa. Now this year’s wet season has officially ended, there is little prospect of rain or relief before September.How far the current conditions, classified by the UN as “pre-famine” – one step down from “catastrophe” – can be attributed to climate change is not clear. The last intergovernment panel on climate change report suggested that the Horn of Africa would get wetter with climate change, while more recent academic research has concluded that global warming will increase drought in the region.
“Worst Food Crisis of the 21st Century” Driven by “Worst Drought in 60 Years” in East Africa, as Climate Change Makes Reduced Rainfall a “Chronic Problem” - “This is the worst food crisis of the 21st Century and we are seriously concerned that large numbers of lives could soon be lost.” That’s from Jane Cocking, Oxfam’s Humanitarian Director, who along with the Save The Children organization, is calling for $144 million in aid to malnourished East Africans. “Aid agencies are calling it the worst drought in 60 years,” reports ClimateWire/NYT. “… drought remains a major threat with no likelihood of improvement until early 2012. Millions of people in danger from drought plaguing East Africa.” A joint report by the Famine Early Warning Systems Network (FEWSNET), World Food Program (WFP) and the UN Coordination of Humanitarian Affairs (OCHA) sounded the call for action on the dire social and environmental crisis: “The cumulative effects of the failed October to December 2010 rains and the insignificant contribution of early 2011 rains means that food security in lowland and pastoral areas will be classified at emergency levels in the coming months until the next rainy season between October and December 2011.”
U.S. Farmers Fear The Return Of The Dust Bowl - There is not much to be happy about these days in Happy, Texas. Main Street is shuttered but for the Happy National Bank, slowly but inexorably disappearing into a High Plains wind that turns all to dust.. Tumbleweed rolls into the still corners behind the grain elevators, soaring prairie cathedrals that spoke of prosperity before they were abandoned for lack of business. Happy's problem is that it has run out of water for its farms. Its population, dropping 10 per cent a year, is down to 595. In the 1950s a lot of wells were drilled, and the water went down. Now you can't farm the land.' Those wells were drilled into a geological phenomenon called the Ogallala Aquifer. It is an underground lake of pristine water formed between two and six million years ago, in the Pliocene age, when the tectonic shifts that pushed the Rocky Mountains skywards were still active. The water was trapped below the new surface crust that would become the semi-arid soil of the Plains, dry and dusty. It stretches all the way down the eastern slope of the Rockies from the badlands of South Dakota to the Texas Panhandle. For years the Ogallala Aquifer, the world’s largest underground body of fresh water, has irrigated thousands of square miles of American farmland. Now it is running dry. It does not replenish.
China’s Thirsty Problem - CNBC video - Recent droughts and floods in China have highlighted the country's urgent water needs. But critics say Beijing's moves to address the problem quickly, could make matters worse. Cheng Lei takes a closer look in our Sustainable Solutions segment
As Missouri floods, anger spills over at Army Corps - Eight years out of a decade, 1,440-foot-wide floodgates spill not so much as a bucket of the brown water into the Missouri River. Now, with the Missouri flooding at record levels over the past two months, enough is barreling out of Lewis and Clark Lake to cover a football field 3 1/2 feet deep every second. Water will race through the dam at that record rate, ultimately swamping farms and towns for hundreds of miles downstream, through August."When your bathtub is full, you just can't put any more water in it," said Dave Becker, the operations manager for the U.S. Army Corps of Engineers at Gavins Point. "Water is going to spill over." But how did the bathtub get so full? Why did the six huge Missouri River reservoirs - including Gavins Point, the farthest downstream - fill to the brim and force the months-long release of floodwater? The short answer: The Corps could have prevented or drastically held down flooding by opening floodgates sooner. The reasons it didn't - reasons putting government water managers on the spot this summer - rest in a tangle of history, physics, meteorology and politics.
NASA Measures Air Pollution from New Mexico, Arizona Fires - NASA’s Aura Satellite has provided a view of nitrogen dioxide levels coming from the fires in New Mexico and Arizona, USA. Detecting nitrogen dioxide is important because it reacts with sunlight to create low-level ozone or smog and poor air quality. Low-level ozone (smog) is hazardous to the health of both plants and animals, and ozone in association with particulate matter causes respiratory problems in humans. On July 1, Inciweb reported that the Las Conchas fire is currently burning on 93,678 acres and was three percent contained. An infrared flyover at 4 a.m. MDT on July 1 reported 103,842 acres burned. InciWeb is the “Incident Information System” website that reports wildfire conditions throughout the country. The Donaldson fire is estimated to cover 72, 650 acres and is located to the southeast of the Las Conchas fire. Inciweb reported on July 1 that the fire is burning in the Lincoln National Forest and Mescalero-Apache Tribal lands and is not accessible. The terrain is steep and rocky. It is located about 10 miles northwest of Ruidoso Downs, N.M. In east central Arizona, the Wallow Fire is now 95 percent contained, according to InciWeb. Total acres burned are 538,049, including 15,407 acres in New Mexico.
Las Conchas continues to burn - Even as Los Alamos residents settle in back at home, it is no holiday for those fighting the Las Conchas fire. Crews are working on new game plans to whip the largest fire in state history. As the fire spreads across the region and continues to grow mainly toward the east which is on the northwest side of town, new numbers show it has swallowed more than 123,000 acres. The good news it is now 19 percent contained. Investigators believe the fire was started after a tree fell on some power lines near the Las Conchas camping area. Closer to Los Alamos crews are working on setting up a second containment line around the city. Bulldozers will clear brush and make sure if the winds change the fire will not make it to town.
Floods, Droughts And Heat Waves - The Pew Center on Global Climate Change has put together some resources for examining the link between anthropogenic climate change extreme weather events—floods, droughts, and heat waves. No single extreme weather event can be tied directly to global warming, but there is rise in the probability of such events over time. For example, whereas a so-called "hundred-year-flood" used to occur on average every 100 years, now we will get one on average twice a century or four times a century. The chances of such a flood occurring in a given year will have changed from 1/100 to 1/50 or 1/25. These kinds of odds will likely rise as the world gets warmer. The simple statistical concepts involved have been a source of great confusion for the general public, a great number of whom have no interest in Reality in any case. Nevertheless, the Pew Center tries to explain what's going on.
It’s Obscenely Hot: June 2011 Heat Records Crush Cold Records by Nearly 11 to 1 - Steve Scolnik at Capital Climate analyzed the data from NOAA’s National Climatic Data Center and found U.S. heat records in June outnumbered cold records by 2706 to 251 — nearly 11 to 1: I like the statistical aggregation across the country, since it gets us beyond the oft-repeated point that you can’t pin any one record temperature on global warming. If you want to know how to judge whether the near 11-to-1 ratio is a big deal, see “Record high temperatures far outpace record lows across U.S.” As for global temperatures, the anti-science crowd had been crowing that this year’s big La Niña — which they called a “Super La Niña” — would drive temperatures way, way down. But even the satellite datasets, which are more sensitive to the El Niño Southern oscillation, show that how modest and short-lived the temperature dip was [click to enlarge]:It is worth noting the La Niña that is just ending was both longer and stronger than the La Niña of 2008. It is hard to stop the march of global warming – other than through deep reductions in greenhouse gas emissions.
Study: Hottest Decade on Record Would Have Been Even Hotter But for Chinese Coal Plant Sulfur Pollution - That’s the UK Guardian headline for a half-clever new study, “Reconciling anthropogenic climate change with observed temperature 1998–2008.”Last decade was easily the hottest on record, as were the 1990s and, before that, the 1980s — all part of a multi-decadal trend driven primarily by human-caused emissions. We’ve known for a while that warming appeared to slow over a short, cherry-picked time frame of 1998 to 2008 because:
- The starting year (1998) was a very strong El Niño, which temporarily boosts global temps, and the ending point (2008) was a moderate La Niña, which lowers them.
- The end point was near the bottom of “the deepest solar minimum in nearly a century.”
- One key global temperature dataset, the Hadley/CRU one used by the UK’s Met Office, had numerous flaws that led to a slower warming trend than most of the others.
‘Dirty’ coal is good for the environment - From the “it’s an ill wind that blows no good department” comes a report that high-sulphur coal is actually good for the environment. Puzzled global warming enthusiasts have been perplexed about why global temperatures haven’t cooperated by rising over the past 10 years. Now a new research study suggests it’s all because China’s been burning lots of coal, especially the dirty kind that generates lots of sulphur, as Reuters reports. Atmospheric sulphur apparently helps in the formation of hazy clouds that in turn reflect sunlight back into space thus offestting the effects of a rise in so-called greenhouse gases that would normally trap more heat in the atmosphere. It’s sort of a trifecta. Fans of anthropogenic climate change get a reboot of the “it’s all our fault” argument; coal companies can justify the new “feature” of their product; and the world gets to carry on just as it has and will.
Can air pollutiuon lead to depression? -The answer is a 'shocking yes.' New research has linked air pollution to learning and memory problems and even depression. (Medical press)- Long-term exposure to air pollution can lead to physical changes in the brain, as well as learning and memory problems and even depression, new research in mice suggests.While other studies have shown the damaging effects of polluted air on the heart and lungs, this is one of the first long-term studies to show the negative impact on the brain, said Laura Fonken, lead author of the study and a doctoral student in neuroscience at Ohio State University. "The results suggest prolonged exposure to polluted air can have visible, negative effects on the brain, which can lead to a variety of health problems,"
Pollution can lead to brain damage and depression warn scientists - Long term exposure to air pollution could damage the brain and lead to learning and memory problems and even depression, new research has revealed. The tests on mice showed that in the long term dirty air could cause actual physical changes to the brain which in turn had negative effects. While other studies have looked at the impact polluted air has on the heart and lungs this is one of the first to look at the effect on the brain, lead author Laura Fonken noted. She said: “The results suggest prolonged exposure to polluted air can have visible, negative effects on the brain, which can lead to a variety of health problems. “This could have important and troubling implications for people who live and work in polluted urban areas around the world.”
Getting the worm - Glad the birds woke me up at 5:48: The Environmental Protection Agency on Thursday issued new standards for power plants in 28 states that would sharply cut emissions of chemicals that have polluted forests, farms, lakes and streams across the Eastern United States for decades.The agency said the regulations, which will take effect in 2012, would reduce emissions of compounds that cause soot, smog and acid rain from hundreds of power plants by millions of tons at an additional cost to utilities of less than $1 billion a year. The E.P.A. said the cleaner air would prevent as many as 34,000 premature deaths, 15,000 nonfatal heart attacks and hundreds of thousands of cases of asthma and other respiratory ailments every year.While preventing "as many as 34,000 premature deaths" is true, the EPA actually says that the range of prevented deaths is 13,000 to 34,000. At a value of $6 million per life saved, the benefits of the new standards range from $78+ billion to $204+ billion.
Vietnam Era Weapon Being Used to Clear the Amazon - Agent Orange is one of the most devastating weapons of modern warfare, a chemical which killed or injured an estimated 400,000 people during the Vietnam War -- and now it's being used against the Amazon rainforest. According to officials, ranchers in Brazil have begun spraying the highly toxic herbicide over patches of forest as a covert method to illegally clear foliage, more difficult to detect that chainsaws and tractors. In recent weeks, an aerial survey detected some 440 acres of rainforest that had been sprayed with the compound -- poisoning thousands of trees and an untold number of animals, potentially for generations. Officials from Brazil's environmental agency IBAMA were first tipped to the illegal clearing by satellite images of the forest in Amazonia; a helicopter flyover in the region later revealed thousands of trees left ash-colored and defoliated by toxic chemicals. IBAMA says that Agent Orange was likely dispersed by aircraft by a yet unidentified rancher to clear the land for pasture because it is more difficult to detect than traditional operations that require chainsaws and tractors.
Going beyond the IPCC's ‘worst case’ scenarios - In order to see how climate models react over a wide range of greenhouse gas concentrations, researchers in the US have modelled emissions scenarios that are significantly higher than the IPCC’s “worst case” scenarios. They found – perhaps unsurprisingly – that the extent of climate change will be significantly worse than for the IPCC’s A1FI scenario. “Relative to the A1FI scenario, our highest scenario results in an additional 2 °C (3.6 °F) of global mean warming above A1FI levels by 2100, a complete loss of Arctic summer sea ice by 2070 and an additional 43% sea level rise due to thermal expansion above A1FI levels by 2100,” said Ben Sanderson from the National Center for Atmospheric Research in the US. He told environmentalresearchweb: “Our aim was not to be fatalistic, but to use these extreme scenarios in order to better understand the global climate model and the climate system. We felt that, though the scenarios we used may not entirely be plausible, it would be prudent to consider the upper bounds of the range of future emissions scenarios and their potential consequences, as well as the lower bounds which have been already studied in detail.”
Warming Ocean Could Melt Arctic Sea Ice Faster Than Thought - Warming air from climate change isn't the only thing that will speed ice melting near the poles – so will the warming water beneath the ice, a new study points out. Increased melting of ice in Greenland and parts of Antarctica has been reported as a consequence of global warming, potentially raising sea levels. But little attention has been paid to the impact of warmer water beneath the ice. Now, Jianjun Yin of the University of Arizona and colleagues report the warming water could mean polar ice melting faster than had been expected. Their report was published Sunday in the journal Nature Geoscience. "Ocean warming is very important compared to atmospheric warming because water has a much larger heat capacity than air," Yin explained. "If you put an ice cube in a warm room, it will melt in several hours. But if you put an ice cube in a cup of warm water, it will disappear in just minutes."
Warming oceans could melt ice faster than expected - Ice sheets simmering in warmer ocean waters could melt much quicker than realized. New research is suggesting that as oceans heat up they could erode away the ice sheets much faster than warmer air alone, and this interaction needs to be accounted for in climate change models. "Ocean warming is very important compared to atmospheric warming, because water has a much larger heat capacity than air," study researcher Jianjun Yin of the University of Arizona said in a statement. "If you put an ice cube in a warm room, it will melt in several hours. But if you put an ice cube in a cup of warm water, it will disappear in just minutes." The researchers studied 19 state-of-the-art climate models and saw that subsurface ocean warming could accelerate ice-sheet melting over the next century, resulting in greater sea level rise that could exceed 3 feet (1 meter). Glaciers in Greenland and Antarctica will melt at different rates, though. [In Photos: Glaciers Before and After] Given a midlevel increase in greenhouse gases, the ocean layer about 650 to 1,650 feet (200 to 500 meters) below the surface would warm, on average, about 1.8 degrees Fahrenheit (1 degree Celsius) by 2100, the researchers found.
Arctic Death Spiral: Second Lowest June Sea Ice Extent, Lowest June Volume - The National Snow and Ice Data Center’s reported this week: Arctic sea ice extent for June 2011 was the second lowest in the satellite data record since 1979, continuing the trend of declining summer ice cover. Average ice extent fell below that for June 2007, which had the lowest minimum ice extent at the end of summer. However, ice extent this year was greater than in June 2010. The sea ice has entered a critical period of the melt season: weather over the next few weeks will determine whether the Arctic sea ice cover will again approach record lows. Whatever happens in the short-term, the long-term trend in sea ice extent is unmistakable:
On Dangerous Disconnect Between Economics and Ecology - Yves Smith - William Rees is one of the pioneers of ecological economics and is the originator and co-developer of ‘ecological footprint analysis’. This video contains some basic facts about current consumption levels in advanced economies that are attention-grabbing.
UN Warns of "A Major Planetary Catastrophe" - Humanity is close to breaching the sustainability of Earth, and needs a technological revolution greater – and faster – than the industrial revolution to avoid “a major planetary catastrophe,” according to a new United Nations report. The world is facing exploding population, an energy crisis, global climate change, increasingly destructive natural disasters and increasing starvation. Major investments will be needed worldwide in the developing and scaling up of clean energy technologies, sustainable farming and forestry techniques, climate-proofing of infrastructure, and in technologies reducing non-biological degradable waste production, according to The World Economic and Social Survey 2011: The Great Green Technological Transformation, published today by the UN Department of Economic and Social Affairs (DESA).
Like a grenade in a glasshouse – We have maxed out our planetary credit card and borrowed off our kids to repay our debts. Soon, we will have to stop living the high-life. The question is when. It's going to hit hard and it's going to hurt - made worse because most aren't expecting it. They think the world is slowly returning to our modern 'normal' - steadily increasing growth, with occasional annoying but manageable interruptions. After all, the global recession wasn't so bad was it? Sure there was pain and things got shaky but Governments responded, bailed out companies, stimulated economies, got things back on track. While it's still a bit bumpy, Greek wobbles, US debt, extreme weather, high oil and food prices etc, it'll work out. It always does…. If only it were so. In fact we are blindly walking towards the next in a series of inevitable system shaking and confidence sapping crises, deluded in the belief that the worst is behind us. Each crisis will be a little worse than the last. Each one will shake our denial a little more. This is what happens when systems hit their limits. They don't do so smoothly, but bump up against the wall, hitting hard, then bouncing off equally hard. It is the behaviour of a system trying to break through. But if the limits are solid, as is the case with our economic system hitting the limits of the planet - defined by unchangeable physical capacity and the laws of physics, chemistry and biology - then it can't find its way through.
Are We There Yet? - With the country mired in two major wars and millions of Americans unable to find work, improving rail lines, conducting road repairs, and building bike lanes might rank low on the list of national priorities. But here’s the thing: Global climate change isn’t going to wait for the U.S. to get out of the recession, and the federal transportation bill, up for reauthorization this year, offers a prime way of tackling it. At a time when unemployment seems fixed at 10 percent, it also offers an opportunity for the Obama administration to make headway on the jobs front. “[The transportation-reauthorization bill] is arguably the biggest policy lever that can still be pulled by Congress in a way that helps to reduce oil dependence and reduce pollution due to the combustion of oil,” says Deron Lovaas, the transportation policy director for the Natural Resources Defense Council (NRDC), one of the environmental organizations lobbying for a bill that invests more heavily in mass transit.
INLAND: Radioactive loads will move through area - Several Inland cities have issued permits for the transport on local streets of massive loads of low-level radioactive waste from the San Onofre Nuclear Generating Station in San Diego County to a disposal site in the Utah desert, officials said Thursday. The first of four retired steam generators, each weighing 700,000 pounds, will travel through San Diego , Riverside and San Bernardino counties and Nevada to the EnergySolutions depository in Clive, Utah, said Gil Alexander, spokesman for Southern California Edison, which operates San Onofre. Alexander would not divulge the dates or route because of security concerns, but officials in numerous cities said they have permitted or will approve the oversized loads traveling their streets in places where the trucks must leave the freeway to avoid structures such as bridges and overpasses. The cities include Temecula, Riverside, Colton and Hesperia.
OPPD reinstalls nuke plant dam -— The Omaha Public Power District is reinstalling the plastic, water-filled dam that — until bursting — had kept Missouri River floodwaters away from the buildings that house its nuclear reactor. After the Aqua Dam ruptured on June 26, water flowed around the Fort Calhoun Nuclear Station to a depth of more than 2 feet. However, OPPD officials said, the water did not reach the reactor or other critical areas because additional barriers, including sandbags, were in place. Mike Jones, a spokesman for the utility, said Wednesday that the Aqua Dam is expected to be in place by Saturday. The utility has not experienced any significant difficulties in reinstalling the barrier, he said. If completed by Saturday, it will have been out of commission about two weeks. When in place, the Aqua Dam gives employees room to walk around outside of the reactor buildings, making it easier to work.
Fukushima Spews, Los Alamos Burns, Vermont Rages and We’ve Almost Lost Nebraska - Humankind is now threatened by the simultaneous implosion, explosion, incineration, courtroom contempt and drowning of its most lethal industry. We know only two things for certain: worse is yet to come, and those in charge are lying about it---at least to the extent of what they actually know, which is nowhere near enough. Indeed, the assurances from the nuke power industry continue to flow like the floodwaters now swamping the Missouri Valley heartland. The bad news continues to bleed from Japan with no end in sight. The “light at the end of the tunnel” is an out-of-control radioactive freight train, headed to the core of an endangered planet. Widespread internal radioactive contamination among Japanese citizens around Fukushima has now been confirmed. Two whales caught some 650 kilometers from the melting reactors have shown intense radiation. Plutonium, the deadliest substance known to our species, has been found dangerously far from the site.
Japanese Cancer Expert on the Fukushima Situation - Japan's leading business journal Toyo Keizai has published an article by Hokkaido Cancer Center director Nishio Masamichi, a radiation treatment specialist. The piece was entitled “The Problem of Radiation Exposure Countermeasures for the Fukushima Nuclear Accident: Concerns for the Present Situation. Nishio begins by asserting that the Fukushima crisis has caused Japan’s “myth of nuclear safety” to crumble. He has “grave concern” for the public health effects of the ongoing radiation leak. Nishio originally called for “calm” in the days after the accident. Now, he argues, that as the gravity of the situation at the plant has become more clear, the specter of long-term radiation exposure must be reckoned with.Lamenting the poor state of public knowledge of radiation, Nishio writes, “Japan, with its history of having suffered radiation exposure from the atomic bombs, should have the most [direct] knowledge of radiation, but in fact, in the approach to the nuclear accident, has simply fallen into confusion.”
Fukushima residents' urine now radioactive - More than 3 millisieverts of radiation has been measured in the urine of 15 Fukushima residents of the village of Iitate and the town of Kawamata, confirming internal radiation exposure, it was learned Sunday. Both are about 30 to 40 km from the Fukushima No. 1 power plant, which has been releasing radioactive material into the environment since the week of March 11, when the quake and tsunami caused core meltdowns. "This won't be a problem if they don't eat vegetables or other products that are contaminated," said Nanao Kamada, professor emeritus of radiation biology at Hiroshima University. "But it will be difficult for people to continue living in these areas."
Almost Half The Children In Fukushima Test Positive For Radiation - Some 45 per cent of 1,080 children under 15 from the Japanese Fukushima Prefecture have tested positive for thyroid exposure to radiation, a nuclear watchdog report says. The screening was performed by Japan’s Nuclear Safety Commission between March 26 and March 30 in the wake of the Fukushima Daiichi nuclear disaster, the independent body said on Tuesday. Among those who tested positive, the degree of exposure was measured at 0.04 microsieverts per hour or less in the majority of cases. The maximum measured was 0.1 microsieverts per hour in a one-year-old. The government-established threshold for further investigation is 0.2 microsieverts per hour, so no emergency probe will be undertaken, officials said. Earlier, a Japanese civic group and Acro, a French body that measures radioactivity, reported that they had tested ten residents of Fukushima City aged between six and 16. All of them had trace amounts of radioactive substances in their urine.
Almost Half The Kids In Fukushima Have Thyroid Radiation Exposure - Tests show that about 45 percent of children in Japan's Fukushima Prefecture have experienced thyroid exposure to radiation. Japan's Nuclear Safety Commission conducted the testing on 1,080 kids from infants to 15 year-olds and maintains the exposure is minimal and doesn't warrant further examination. In an attempt to explain the exposure to the public, officials are making comparisons to the atomic bombings of World War II. Among children who tested positive for thyroid exposure, the amounts measured 0.04 microsievert per hour or less in most cases. The largest exposure was 0.1 microsievert per hour, equivalent to a yearly dose of 50 millisieverts for a 1-year-old. Scientific surveys of hibakusha from Hiroshima and Nagasaki have indicated that exposure of 100 milisieverts in total could increase cancer morality risk by 0.5 percent.
Radioactive debris dilemma unresolved, growing worse - The government’s master plan to restore the quake-hit region includes moving housing from the coastline to higher ground, creating “eco-towns” that rely on reusable energy and “making Tohoku better than what it was before the disaster.” The goals are ambitious. But the long road to recovery remains stuck at square one, with the government unable to decide how to handle the rubble and radioactive debris that still plague much of the region, not to mention the radioactive waste that is being found far outside of Fukushima. “This is an issue that affects the safety of the public and calls for a certain amount of thorough examination,” Chief Cabinet Secretary Yukio Edano said last month.
Japan groups alarmed by radioactive soil - Soil radiation in a city 60 kilometres (40 miles) from Japan's stricken nuclear plant is above levels that prompted resettlement after the Chernobyl disaster, citizens' groups said Tuesday.The survey of four locations in Fukushima city, outside the nuclear evacuation zone, showed that all soil samples contained caesium exceeding Japan's legal limit of 10,000 becquerels per kilogram (4,500 per pound), they said. The highest level was 46,540 becquerels per kilogram, and the three other readings were between 16,290 and 19,220 becquerels per kilogram, they said. The citizens' groups -- the Fukushima Network for Saving Children from Radiation and five other non-governmental organisations -- have called for the evacuation of pregnant women and children from the town. The highest reading in the city of 290,000 people far exceeded the level that triggered compulsory resettlement ordered by Soviet authorities following the 1986 Chernobyl nuclear disaster in Ukraine, they said."Children are playing with the soil, meaning they are playing with high levels of radioactive substances. Evacuation must be conducted as soon as possible."
Hose rip interrupts cooling of reactor 5 - The crisis-hit Fukushima No. 1 power plant briefly stopped cooling reactor 5 on Sunday to replace a damaged seawater hose, Tokyo Electric Power Co. said. The cooling system was turned off at 10:15 a.m. after a worker on patrol found seawater leaking from the plastic hose in its Residual Heat Removal System earlier in the morning, Tepco said. The makeshift hose, which has a diameter of about 20 cm, was found to have a tear about 30 cm long and 7 cm wide along a U-shaped section. The reactor's temperature was 43.1 degrees as of 8 a.m. Sunday and rose another 5 degrees during the 3½ hours it took to repair the hose, Tepco said. If it hadn't been fixed, the reactor would have reached boiling point about 22 hours later, the utility said. That would cause all its water to evaporate, exposing the rods and causing another core meltdown.
Radioactive Cesium Is Found in Tokyo Tap Water for First Time Since April - Radioactive cesium-137 was found in Tokyo’s tap water for the first time since April as Japan grapples with the worst nuclear disaster in 25 years. The level was below the safety limit set by the government. Cesium-137 registered at 0.14 becquerel per kilogram in Shinjuku ward on July 2 and none was discovered yesterday, compared with 0.21 becquerel on April 22, according to the Tokyo Metropolitan Institute of Public Health. No cesium-134 or iodine-131 was detected, the agency said on its website. “This is unlikely to be the result of new radioactive materials being introduced” into the water supply, Hironobu Unesaki, a nuclear engineering professor at Kyoto University, said today by telephone. That’s “because no other elements were detected, especially the more sensitive iodine,” he said.
Guest Post: Fukushima Cover Up Unravels - As I’ve repeatedly noted, the Japanese government, other governments and nuclear companies have covered up the extent of the Fukushima crisis. Asia Pacific Journal reports: Japan’s leading business journal Toyo Keizai has published an article by Hokkaido Cancer Center director Nishio Masamichi, a radiation treatment specialist. Nishio originally called for “calm” in the days after the accident. Now, he argues, that as the gravity of the situation at the plant has become more clear, the specter of long-term radiation exposure must be reckoned with. Former Minister for Internal Affairs Haraguchi Kazuhiro has alleged that radiation monitoring station data was actually three decimal places greater than the numbers released to the public. If this is true, it constitutes a “national crime”, in Nishio’s words. The Atlantic points out: The reason for official reluctance to admit that the earthquake did direct structural damage to reactor one is obvious. “If TEPCO and the government of Japan admit an earthquake can do direct damage to the reactor, this raises suspicions about the safety of every reactor they run. They are using a number of antiquated reactors that have the same systematic problems, the same wear and tear on the piping.”
Tepco Shuts Down Cooling System At Fukushima Daini Nuclear Power Plant After Sparks Detected - The cooling system at Fukushima's Daiichi sister plant was closed earlier today after Tepco announced that "sparks were detected". According to TEPCO this is no cause for alarm and the situation will be restored back to normal shortly. According to yet other news, after 4 months of lies, TEPCO has started telling the truth. From Reuters: "The operator of Japan's Fukushima Daini nuclear power plant, located near the tsunami-crippled Daiichi plant, on Thursday halted the cooling system at one of its reactors after electrical sparks were detected, Kyodo news agency reported. Tokyo Electric Power , the plant's operator, expects to be able to restore the cooling system at the Daini plant's No.1 reactor before the end of Thursday, Kyodo said." Fair enough. We will be sure to check in later today to validate this latest "fact."
Japan Has Two Reactors Without Approval as Fukushima Raises Safety Concern - Kansai Electric Power Co. and Hokkaido Electric Power Co. are operating two nuclear reactors without approvals, four months after the Fukushima disaster raised concern atomic power in Japan may not be safe. A reactor at Kansai Electric’s Ohi nuclear plant is operating at full capacity without the final go-ahead from the Nuclear and Industrial Safety Agency, Kazushige Maeda, a spokesman for the Osaka-based utility, said by phone. The same applies for a reactor at Hokkaido Electric’s Tomari plant, spokesman Hisatoshi Kibayashi said. Both units started test runs days before the March 11 earthquake and tsunami knocked out power and cooling systems at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, causing three reactors to melt down in the worst nuclear disaster since Chernobyl in 1986. “It’s unusual the reactors are running for four months on a test-run basis, but there is nothing illegal about it,”
Governor of Saga Prefecture Holds Key to Japan’s Nuclear Future… In a nation plagued by weak political leadership, it has fallen to the local governor of an obscure southern prefecture to make a crucial decision that could help determine the future of nuclear power in Japan after the Fukushima Daiichi accident. The governor, Yasushi Furukawa of Saga Prefecture, must decide in coming days whether to support a request by Prime Minister Naoto Kan to restart two reactors at a local nuclear plant that have been shut down since last winter for regular maintenance. There are growing warnings here that if he decides no, and other governors follow his lead, every nuclear reactor in Japan could end up idled in less than a year. That is because Japan’s reactors are legally required to shut down every 13 months for routine maintenance. Thirty-five of the nation’s 54 reactors are now offline, some because of damage from the March 11 earthquake and tsunami, but most because of the maintenance requirement. Unless some of them are turned back on, the last reactor in Japan will be shut down by next April, depriving the nation of the source of almost a third of its electricity.
Fukushima spin was Orwellian - It was an open secret that Britain's decision to back nuclear power in 2006 was pushed through government by a cosy group of industrialists and others close to Tony Blair, and that a full debate about the full costs, safety and potential impact on future generations was suppressed. But the release of 80 emails showing that in the days after the Fukushima accident not one but two government departments were working with nuclear companies to spin one of the biggest industrial catastrophes of the last 50 years, even as people were dying and a vast area was being made uninhabitable, is shocking. What the emails shows is a weak government, captured by a powerful industry colluding to at least misinform and very probably lie to the public and the media. When the emails were sent, no one, least of all the industry and its friends in and out of government, had any idea how serious the situation at Fukushima was or might become. But to argue that the radiation was being released deliberately and was "all part of the safety systems to control and manage a situation" is Orwellian.
Nuclear waste requires cradle-to-grave strategy - After Fukushima, it is now imperative to redefine what makes a successful nuclear power program – from cradle to grave. If nuclear waste management is not thought out from the beginning, the public in many countries will reject nuclear power as an energy choice, according to research that appears today in the Bulletin of the Atomic Scientists, published by SAGE. Some very low level nuclear wastes can go into landfill-type settings. But low level wastes, composed of low concentrations of long-lived radionuclides and higher concentrations of short-lived ones, must remain sequestered for a few hundred years in specially engineered subsurface facilities. Intermediate and high level wastes require disposal hundreds of meters below the ground for thousands or even hundreds of thousands of years to ensure public safety. Intermediate wastes contain high concentrations of long-lived radionuclides, as do high level wastes, including spent nuclear fuel and fuel reprocessing wastes. As well as being extremely radioactive, high level wastes also emit heat. There is no repository for high level nuclear waste disposal anywhere in the world.
Jellyfish Influx Shuts Down Nuclear Reactors -- A large influx of the creatures from the North Sea clogged filters in the water-cooling system. The plant, near Dunbar, East Lothian, uses seawater to cool the reactors. The jellyfish were "sucked in" as part of that process and obstructed the filters which are used to prevent debris and sea creatures entering the system. The operators of Torness say the reactors have been shut down as a precaution and stress there is no danger to the public. "There are no radiological aspects with this event and there has been no impact to the environment." Workers at the plant are now clearing the jellyfish from the cooling filters before the reactors are restarted.
French nuclear power plant explosion heightens safety fears… An explosion sparked a fire at a French nuclear power station on Saturday, just two days after the authorities found 32 safety concerns at the plant. The blaze at the Tricastin plant in Drôme in the Rhône valley sent a thick cloud of black smoke into the sky. A mistral wind sent it south over a nearby motorway on one of the busiest travel days of the year as the French left for their summer holidays. EDF, which runs the power station, said the incident took place in an electric transformer situated in the non-nuclear part of the plant and had not resulted in any radiation leak or any other contamination. A statement issued by the energy giant raised further concerns as it omitted to mention the explosion – only a fire – and did not give the cause of the blaze. "This event happened in the non-nuclear part of the installation and had no radiological consequence on the environment and the population."
Mock attackers 'strike' 24 nuclear plants, 'breach' two -- NRC refused to identify nuclear plants that failed tests, citing 'security' concerns and other sensitivities. Mock commandos who staged attacks on 24 nuclear power plants in pre-announced drills last year were able to "damage" or "destroy" critical targets at two of the plants, according to the Nuclear Regulatory Commission. Each year, about a fourth of the nation's 104 commercial nuclear power plants undergo security tests, which involve several weeks of security inspections and table-top exercises that probe for holes in security, followed by three consecutive nights of "force-on-force" assaults.
Court Ruling Underscores Urgent Need for NRC to Complete Action on Yucca Application - The U.S. Court of Appeals for the District of Columbia Circuit today underscored the importance of the Nuclear Regulatory Commission’s obligation to complete its review of the Department of Energy’s license application for Yucca Mountain. The court’s decision comes almost exactly one year after the NRC Atomic Safety Licensing Board denied the Department of Energy’s motion to withdraw the Yucca Mountain repository licensing application. The Energy and Commerce Committee is investigating the administration’s decision-making process to terminate the Yucca Mountain nuclear repository. The three judges, all in concurrence, each highlighted the importance of the NRC in the case involving the termination of the Yucca Mountain nuclear repository. Chief Judge Sentelle’s ruling states, “The NWPA set forth a process and schedule for the siting, construction, and operation of a federal repository for the disposal of spent nuclear fuel and high-level radioactive waste. At this point in that process, the DOE has submitted a construction license application for the Yucca Mountain repository and the Commission maintains a statutory duty to review that application.”
Q&A: Bill Gates On The World Energy Crisis - Chris Anderson: How has Fukushima changed your perspective on nuclear power? Bill Gates: What happened in Japan is terrible, and there are many reasons it should have been avoided. It’s a 1960s plant design, generation two, put into service in the early 1970s. Emergency planning and execution were quite weak. The environmental and human damage is clearly very negative, but if you compare that to the number of people that coal or natural gas have killed per kilowatt-hour generated, it’s way, way less. The nuclear industry has this amazing record, even equipment from generations one and two. But nuclear mishaps tend to come in these big events—Chernobyl, Three Mile Island, and now Fukushima—so it’s more visible. Coal and natural gas have much lower capital costs, and they tend to kill only a few at a time, which is highly preferred by politicians.
Exxon Mobil says oil leaked into Yellowstone River (Reuters) - A pipeline operated by Exxon Mobil Corp leaked as many as 1,000 barrels of crude oil into the Yellowstone River in Montana and has been shut down, the company said. Exxon officials said on Sunday there were traces of oil up to 10 miles downriver from the site of what they called a "very unusual" event, though the governor of Montana said the spill may have spread further. The U.S. oil company said it had slowed processing rates at its Billings refinery following the leak but did not expect supply disruptions in the area. Exxon found the leak from the EMPCo pipeline early on Saturday morning. The pipeline runs only in Montana, from Silver Tip to Billings. The cause of the leak remains unclear. Exxon estimated the oil release at anywhere from 750 to 1,000 barrels. One barrel of oil is equivalent to 42 gallons (163 liters), and the pipeline typically transports 40,000 barrels a day. "We had no indications that there were any issues with this pipeline,"
Ruptured Pipeline Spills Oil Into Yellowstone River - An ExxonMobil pipeline running under the Yellowstone River in south central Montana ruptured late Friday, spilling crude oil into the river and forcing evacuations. The pipeline burst about 10 miles west of Billings, coating parts of the Yellowstone River that run past Laurel — a town of about 6,500 people downstream from the rupture — with shiny patches of oil. Precisely how much oil leaked into the river was still unclear. But throughout the day Saturday, cleanup crews in Laurel worked to lessen the impact of the spill, laying down absorbent sheets along the banks of the river to mop up some of the escaped oil, and measuring fumes to determine the health threat. Fearing a possible explosion, officials in Laurel evacuated about 140 people on Saturday just after midnight, then allowed them to return at 4 a.m. after tests showed fumes from the leaked oil had dissipated, The Associated Press reported. While the cause of the rupture was not immediately known, Brent Peters, the fire chief for Laurel, told The A.P. that it may have been caused by high waters eroding parts of the river bed and exposing the pipeline to debris.
Teams gauge damage from Exxon spill into Montana’s Yellowstone River; most of oil likely lost - Teams of federal and state workers fanned out Sunday along Montana’s Yellowstone River to gauge the environmental damage from a ruptured ExxonMobil pipeline that spewed tens of thousands of gallons of crude into the famous waterway. An Environmental Protection Agency representative said that only a small fraction of the spilled oil is likely to be recovered.A 25-mile long slick of oil had reached as far west as Hysham Saturday night. An estimated 1,000 barrels, or 42,000 gallons, spilled Saturday before the flow of oil from the damaged pipeline was stopped. The break near Billings in south-central Montana fouled the riverbank and forced municipalities and irrigation districts Saturday to close intakes. The river has no dams on its way to its confluence with the Missouri River just across the Montana border in North Dakota. It was unclear how far the plume might travel.
Debris and Heavy Flow of Water Hamper Cleanup of Oil in Yellowstone River - Specially trained crews streaming into this refinery town to clean up tens of thousands of gallons of oil that spilled into the Yellowstone River from a ruptured Exxon Mobil pipeline over the weekend have found their efforts hampered by a muddy, raging river filled with debris. The Yellowstone River has its origins in the famous park and normally peaks in mid-June but is not expected to crest until the middle of July because of the heavy snows and late runoff. Crews that continue to arrive have had difficulty sopping up oil and putting oil booms around slicks because the river is so active.River banks are unstable, and there are snags, or large dead trees in the water. So cleanup workers, wearing orange life vests and hard hats, are working the mosquito-infested shoreline. Investigators trying to determine the cause of the spill have not been able to get on boats or get close to where the leak occurred late Friday night.
ExxonMobil Oil Spill: Teams Work to Contain Rupture Under Yellowstone River - Teams are working to contain the damage from an oil spill in the Yellowstone River near Billings, Montana, caused by a ruptured ExxonMobil pipeline running under the river, officials said. ExxonMobil is sending clean-up crews to Laurel, Mont. to mop up the thick band of oil on the banks of the Yellowstone River. "We've shut down the pipeline and the segment where the release occurred has been isolated. And, obviously, we've been working in concert with all appropriate state and federal authorities on this," ExxonMobil Pipeline spokesman Kevin Allexon said. "Obviously we are very, very, regretful that this has happened and we are working hard, in collaboration with all the local authorities to make sure we mitigate the issue," he said. Allexon said the company doesn't know what caused the pipe to break.
Yellowstone Oil Spill Has Spread Farther, Exxon Mobil Says - — Oil from a Yellowstone River pipeline has spread at least 15 miles beyond the initial leak, Exxon Mobil acknowledged Monday — five miles farther than the company estimated a day earlier. Exxon Mobil Pipeline Co. President Gary Pruessing pledged to do "whatever is necessary" to find and mop up spilled crude from the 12-inch pipeline that broke at the bottom of the river near Billings over the weekend. As cleanup of up to 42,000 of gallons of oil intensified, Montana Gov. Brian Schweitzer said authorities would review the safety of all oil and gas pipelines that cross state waterways and close those that do not meet standards. "We'll make the decision over the next couple of days whether to shut off some pipelines,". "The last thing I want is for another pipeline to break." The cause of the spill has not been determined, but officials have speculated that surging waters may have scoured the river bottom and exposed the pipeline to debris that could have damaged the pipe.
ExxonMobil, historic flooding join forces to spread oil through Yellowstone River - The oil leaking from an ExxonMobil pipe into the Yellowstone River in Montana spread farther than the company said it anticipated. The reason, according to ExxonMobil’s spokespeople, is historic levels of flooding on the river. By Tuesday, Exxon had 280 people on the case, but still hadn’t managed to fight through floodwaters to reach the break in the pipeline. Exxon says the river is preventing its clean-up crews from going out on foot or in boats to look for oil on the river's banks. Exxon did shut down the busted pipeline, but not before spilling more than 40,000 gallons of oil that they say it’s not yet safe to clean up, due to the floods. The company had been warned twice that it needed to check the pipeline for corrosion and update its emergency plans -- but now that there is actually a broken pipeline and an emergency, it’s obviously all the river’s fault.
Ruptured Montana Pipeline Was Shut Down Before - Exxon Mobil contractors worked to clean up oil along the banks of the Yellowstone River in Billings on Sunday. An Exxon Mobil pipeline that ruptured late Friday along the Yellowstone River in south-central Montana, spilling crude oil1 into the river and forcing evacuations, had been shut down for one day in May because of concerns over the rising waters on the Yellowstone, the company said Sunday. The president of the Exxon Mobil Pipeline Company, Gary Pruessing, said in a conference call that the company decided to restart the line after examining its safety record and determining that the risks of failure were minimal. The pipeline, which is buried about eight feet below the river, runs about 70 miles to Billings, Mont., where it supplies an Exxon refinery. On Sunday, Exxon’s team was joined by federal and state workers who traveled to the affected area to assess the damage. Mr. Pruessing said that company observers flying over the river had seen “very little soiling” beyond Billings.
Governor Says Montana Was Misled on Oil Spill — Gov. Brian Schweitzer1 criticized Exxon Mobil2 on Friday for its handling of the Yellowstone River oil spill3, saying that the company had withheld documents and misled state officials and local residents about the pipeline rupture. He also accused the company of failing to honor open-government laws by denying the state access to Exxon Mobil documents. And as a result, he said, the state is pulling its people from an incident command task force set up to assess and clean up the spill, which occurred July 1. At a public meeting of about 100 people along the river, the governor passed out sample jars for residents to fill with contaminated soil and water for testing. The evidence, he said, could be used in claims against Exxon Mobil. At first, he said, the company reported that the pipe had been turned off within six minutes. Federal records show it was nearly an hour. Company executives also initially said that oil4 had affected just 10 miles of the river, but “now oil has completely inundated the low-lying areas of a state park 40 miles downriver.” Exxon Mobil has maintained that 750 to 1,000 barrels were spilled, but the governor said he believed it could be more.
China oil spill to have long-term impact: report -An oil spill off China’s eastern coast kept hidden from the public for weeks has caused long-term environmental damage that will hurt the area’s fishing industry, state media reported Tuesday. Dead seaweed and rotting fish could be seen in waters around Nanhuangcheng Island in Shandong province, near the site of an oil spill that began “in early or mid-June”, but was only made public on Friday, the China Daily said. “The environmental impact caused by the oil leak is long-term,” the newspaper quoted an local fisheries association official surnamed Xiao as saying. Nanhuangcheng Island is about 75 kilometers (45 miles) from the offshore oil field in Bohai Bay where the leak happened.
Fracking Fluids Poison a National Forest - A new study has found that wastewater from natural gas hydrofracturing in a West Virginia national forest quickly wiped out all ground plants, killed more than half of the trees and caused radical changes in soil chemistry. These results argue for much tighter control over disposal of these “fracking fluids,” contends Public Employees for Environmental Responsibility (PEER). The new study by Mary Beth Adams, a U.S. Forest Service researcher, appears in the July-August issue of the peer-reviewed Journal of Environmental Quality. She looked at the effects of land application of fracking fluids on a quarter-acre section of the Fernow Experimental Forest within the Monongahela National Forest. More than 75,000 gallons of fracking fluids, which are injected deep underground to free shale gas and then return to the surface, were applied to the assigned plot over a two day period during June 2008. The following effects were reported in the study:
- Within two days all ground plants were dead;
- Within 10 days, leaves of trees began to turn brown. Within two years more than half of the approximately 150 trees were dead; and
- “Surface soil concentrations of sodium and chloride increased 50-fold as a result of the land application of hydrofracturing fluids…” These elevated levels eventually declined as chemical leached off-site. The exact chemical composition of these fluids is not known because the chemical formula is classified as confidential proprietary information.
Jon Rynn: A Fracking Mess – Natural Gas is Not the Fuel of the Future - Natural gas is being touted as a fuel of the future, a way to bridge the gap between a dirty energy and clean energy economy. But according to numerous articles and a report from David Hughes at the Post-Carbon Institute, what we may have is another bridge to nowhere (page numbers in this post refer to Hughes’ study). Fracking, the rapidly expanding technique for pulling natural gas out of the ground, may be worse for global warming than coal, ultimately very expensive, and not productive enough to make much of a difference in natural gas supply anyway. While burning natural gas emits about half the greenhouse gases of coal, transporting, processing, and delivering that gas significantly reduces its advantages. And methane — natural gas — is a much stronger greenhouse gas than carbon dioxide for about 20 years. According to a recent study and other research, shale gas actually leads to more greenhouse gas emissions than conventional drilling. An enormous controversy has erupted around this technique, with some making accusations of potentially catastrophic environmental impacts, while others call fracking a ”game changer.” A new study shows that drinking water near fracking sites contains large amounts of natural gas, while proponents claim that none of the toxic chemicals that make up the fracking mixture have contaminated water supplies. New York State has temporarily banned the procedure, although Governor Cuomo has indicated he will lift the ban for most of the state. New Jersey (and France) will probably ban it. The EPA is still studying the issue, but Dick Cheney and company made sure that fracking is not covered by the Safe Drinking Water Act, and states have less expertise, money and motivation to monitor the situation.
How Does The Shale Gas Scam Work? - Last week the New York Times published a series of articles on shady dealing in the shale gas business. I alerted readers to those articles in The Shale Gas Scam Goes Public, and also included links to my own writings about shale gas. Follow the links in that post for background. Today I discuss how the shale gas shell game works, and I'll quote from the Times' Insiders Sound an Alarm Amid a Natural Gas Rush where appropriate. The hype surrounding shale gas development has rivaled that which accompanied the "dot-com" boom & bust, and the Housing Bubble. This is not surprising considering that some of the same flim-flam was involved. However, as with the internet, the shale gas resource is real and it is large. The problem with shale gas is twofold: 1) the gas will be expensive, and is not profitable to produce at current prices; and 2) as respected Canadian geologist Dave Hughes explains, there may be 100 years of gas in these tight shale reservoirs, but it will likely take 800 years to produce it—you've got to poke a lot of very expensive holes in the ground to get the gas. Production decline rates are steep, which is another way of saying that shale gas wells deplete rapidly.
Shale gas’s role in U.S. energy future debated - A U.S. industry group is touting the benefits of natural gas, including the controversial process known as "fracking" or hydraulic fracturing. The American Petroleum Institute outlined to reporters on Wednesday what it believes are the economic benefits of shale natural gas production. API Chief Economist John Felmy said shale natural gas has great economic potential for the energy industry. Production quadrupled from 2006-10 and shale gas production will likely comprise more than 40 percent of U.S. gas production by 2020. API said the most significant trend in U.S. natural gas production is the rapid rise in production from shale formations, which is due in great part to technological advances such as hydraulic fracturing.Natural gas is gas that comes from shale formations through a process called hydraulic fracturing. The process, known as "fracking," has come under fire from environmentalists as being dangerous to underground sources of drinking water. Fracking involves injecting chemicals and sand into shale to break apart rock and release gas. Opponents say the process allows chemicals to leak into drinking water.
Safe, Not Sorry, on Drilling - NYT Editorial - A long-awaited report1 issued July 1 by the New York State Department of Environmental Conservation recognizes hydraulic fracturing’s potential dangers to water supplies and recommends a flat ban on drilling inside New York City’s sprawling watershed. It would ban drilling in the Syracuse watershed, in aquifers used by other cities and towns, and in state parks and wildlife preserves. Nobody doubts the value of natural gas, an abundant, cleaner and more climate-friendly fuel than coal or oil. What worries many people is hydraulic fracturing, in which water, sand and chemicals are blasted into underground rock formations to unlock the gas. The technique has been used, mostly without incident, in hundreds of thousands of wells. But the risks have multiplied as wells are drilled deeper and stretched horizontally to get at remote deposits. A single site can cough up millions of gallons of wastewater laced with carcinogens like benzene and radioactive elements like radium.
France Bans Fracking for Shale Gas - France has become the first country to ban fracking. The drilling technique has come under increased scrutiny due to a rapid increase in its use for the production of shale gas. Bloomberg reports: Energy companies that plan to use fracking to produce oil and gas in France will have their permits revoked and its use could lead to fines and prison, according to the law passed by a vote of 176 in favor, 151 against by the senators in Paris. Under the bill approved yesterday, companies with exploration permits will have two months to declare whether they intend to use hydraulic fracturing. If they do, their permits will be revoked. Fracking, or hydraulic fracturing, pumps water, sand and chemicals underneath shale formations to force out trapped gas or oil. The discovery of massive reservoirs around the U.S. has caused a shale gas boom, driving down prices and encouraging additional investment in natural gas infrastructure. While the U.S. and Canada lead the market, Australia, China India and various European countries have also started using the fracking technique for shale gas.
France First country to Ban Fracking, New Jersey First US State - Last week the French government was the first to enact a law forbidding hydraulic fracturing, also known as “fracking” This technology enables to recover shale gas via the use of massive amounts of water and chemicals. The former remaining afterward polluted, hence the controversy. The law had been discussed by both the lower and upper chambers since March before being finally enacted on June 30th by the Senate with 176 votes in favor and 151 against. It is noteworthy that the senators who voted against the law believed it wasn’t going far enough. Indeed, as Scientific American notes, the vote doesn’t not ban other methods to recover shale gas.
"Apparently successful" U.S. SPR bids 30.64 mln bbls - The "apparently successful" bids for the U.S. Strategic Petroleum Reserve's release of crude oil stocks totaled 30.64 million barrels at an average $107.19 a barrel, data released on Friday by the U.S. Department of Energy showed.
Oil Prices: Speculators unburned - The Economist - IT HAS been almost two weeks since the International Energy Agency (IEA) announced it would release 60m barrels of oil from its member governments’ reserves, apparently in response to “ongoing disruption of oil supplies from Libya”. How is that working out? If the intention was to reduce prices in the medium- or long-term, it has failed. The price of Brent crude fell $5 on the announcement but has rallied since. The price of West Texas Intermediate (mainly produced in America) is trading higher than before the IEA announcement (see chart).. In the meantime, the IEA releases have created an opportunity for another potential speculative play. Some IEA members, including Japan and Britain, released their reserves directly to industry. Some even released refined products, such as diesel or jet fuel, which is only of use in specific industrial settings. In contrast America released 30m barrels (half of the IEA total) of unrefined crude, to public auction. Oil traders are free to bid for it. And it seems they did. The Department for Energy says its auction was heavily oversubscribed with bids from more than 90 parties.
Surprising Impotence - After months of inaction as gasoline prices were rising, President Obama suddenly announced on 23 June 2011 that the U.S. would release 30 million barrels of oil from the Strategic Petroleum Reserve, in a move that appears to be somewhat of a panicked effort to try to claim some credit for a decline in gasoline prices, which have been falling steadily since 5 May 2011. Let's see how the President's action has affected U.S. gasoline prices since the announcement. The following chart from GasBuddy.com shows the three month average retail price for regular gasoline sold in the United states: As best as we can tell, there was a slight dip in the downward trend in gasoline prices around the time of the announcement, which evaporated within a couple of days, as the existing trend quickly resumed its previous trajectory. And since 29 June 2011, there's actually been an increase in average retail gasoline prices across the U.S., which is likely related to travel associated with the extended Fourth of July holiday weekend in the U.S. this year.
China’s Diesel Smile - Did OECD leadership, under severe pressure from a financial crisis in Europe and a newly weakening economy in the US, release government oil inventories in part to please China? Was the IEA’s release of oil reserves a swap for the loosening of China’s capital reserves? (see: Wen Says China Is a Long-Term Investor in European Debt.) Generally here at Gregor.us I avoid exactly this type of geo-political speculation. But weekend remarks from China’s Wen Jiabao that Euroland bond markets would be well supported by China comes after a dramatic move downward in Brent crude—the global grade from which the developing world makes diesel. The dumping of light sweet oil into the Gulf Coast market had its greatest price effect on Brent crude—not West Texas Intermediate—as WTI remains landlocked in Cushing, Oklahoma. Indeed, it is inescapable that OECD policy markers understood that global diesel and gasoil markets, starved for light sweet oil, would be most affected by the release. A swap, in which OECD oil reserves are offered in exchange for China’s continuing reinvestment of capital reserves, is a big win-win (temporarily) for both Western and Asian economies.
Oil settles near $97 per barrel - Some major investment banks are still betting that oil prices will grow next year despite an emergency injection of crude on world markets from the U.S. and other countries. Higher oil prices should eventually push gasoline prices up as well. Benchmark crude climbed as high as $97.48 per barrel Tuesday after Barclays Capital raised its 2012 price forecast for Brent crude, used to price many international types of oil. And Goldman Sachs said the International Energy Agency's decision at the end of June to release 60 million barrels of oil from its reserves won't cool off prices as much as originally thought. Independent oil analysts say prices still could head lower this year. But some think IEA's announcement speaks volumes about its expectations for world oil supplies."I think it's an admission from them that Saudi Arabia might not be able to produce enough oil on its own" to meet increased world demand,
How Long Will Canadian Oil Sand Producers Be Disconnected From World Prices? - Oil sand producers in Alberta can't but help notice the nearly $20 per barrel spread between landlocked West Texas Intermediate and global prices such as Brent Crude. Even the U.S. Department of Energy is charging world oil prices (Light Louisiana Sweet -- whose price mimics Brent) for the 30 million barrels it is releasing from its strategic reserves. So why can't America's leading foreign supplier get top prices as well? The reason for the spread is two fold. The divergence between U.S. and global oil prices mimics the divergence between U.S. and world oil demand. U.S. oil demand is shrinking while world oil demand is booming. Second, brimming storage tanks in Cushing Oklahoma where West Texas Intermediate is priced, are disconnected from global oil markets. The oil stored in Cushing is landlocked and it has no way of getting to world oil markets despite the price incentives for it to move. And with more oil coming from Canadian oil sands, as well as shale oil from the Bakkan formation in the Dakotas, inventories at Cushing are getting even more bloated. Until, of course, those price differentials ultimately compel Canadian oil to find another path to flow.
Bachmann: Energy is ‘the most easy problem for America to solve’ - During a campaign event at Iowa's world-famous (?) Wells Blue Bunny Ice Cream Parlor & Museum this past weekend, Republican presidential candidate Michele Bachmann said that energy is "the most easy problem for America to solve." How, you ask? We have 25 percent of the world's coal here. Trillions of cubic square feet of natural gas here. We just built one of the world's largest lines of natural gas here. We have got more oil in three Western states in shale oil than all of Saudi Arabia. Did you hear that on your local nightly news? Are you kidding? We've got it. I say let's go get it. Now, it's true that Bachmann is always saying crazy sh*t. But this is not Tea Party fringe talk. This is the heart and soul of GOP energy policy. It is their one and only answer to the problem of energy: dig up more fossil fuels. Easy!
Webb, Warner propose offshore Va. exploration - Sens. Mark Warner and Jim Webb introduced legislation Wednesday to open waters off Virginia to gas and oil exploration in 2012 and to redraw maps to encompass more territory for drilling and bring in more revenue. Virginia had been banking on a lease sale of offshore tracts by 2012, but planned East Coast exploration was delayed at least until 2017 after last year’s Gulf of Mexico oil disaster. Webb and Warner also proposed directing half of all leasing revenues back to the state, with a portion going toward land and water conservation efforts. Citing the nation’s dependence on imported oil, Warner and Webb said the legislation is good for the economy and the nation’s security.
United States Can Reduce Oil Dependence By 79 Billion Gallons - That’s the title of Environment America’s press release today. The group lays out some strategic steps to reduce oil consumption in their new report, Getting Off Oil: A 50 State Roadmap to Curbing Our Dependence on Petroleum.Daniel Gatti, Staff Attorney at Environment America stated, “The cost of our oil dependence has grown out of control, from the outrageous price we pay at the pump, to the pollution of the air that we breathe, to our contribution to global warming, to disasters like the Gulf spill last year and the ongoing spill in the Yellowstone River. Today’s report shows how we can bring the United States closer to the day when we will no longer fear the impact of Big Oil on our paychecks, our environment and our public health.” Some of the policies recommended in the report include:
- setting fuel efficiency standards that make 60-mpg cars the norm by 2025
- enacting a Clean Fuels Standard that will stimulate billions in investment in electric vehicles and advanced fuel technologies
- doubling access to public transportation
- enacting policies to encourage telecommuting, smart growth, and biking and walking.
The World Will Never Run Out Of Oil — Might Its Price Tank? - While global demand for oil has moved to an all-time high, one long-established theory suggests that oil production (and consumption) might be peaking out. If this is the case, might its price tank? If one thinks about it, the world will never run out of oil. As oil becomes scarce, consumers will necessarily turn to an alternative before the supply runs out. Whether it is due to a realization that oil is scarce – if only in an economic sense – or due to a concern for global warming, we can see the signs of a shift in consumption. Most automobile manufacturers have some pure electric or electric hybrid car project in development or in production. There are even hybrid Formula One racecars. (What would Enzo think?) It is only a matter of time that the automobile is electric. It seems not too far-fetched that oil consumption might drop.
Oil Jumps to 3-Week High on Upbeat US Job Data - Oil jumped Thursday by the biggest percentage in two months, hitting a three-week high as U.S. data on jobless claims and retail sales came in stronger than expected, raising hopes that economic recovery was gaining traction. Independent data showing U.S. private hiring surged in June set the stage for a possible upside surprise in Friday's U.S. non-farm payrolls report, traders said. After weekly U.S. data showed a surprisingly small decline in oil stocks, ICE Brent crude extended its rally while the U.S. benchmark faltered. The Brent/WTI spread blew out by $3 to top $20 a barrel, the widest since June 20, as production problems plagued North Sea oil supplies and as traders bet that European governments would release fewer barrels than expected under a global injection of emergency stocks that has failed to tame prices. In London, ICE Brent crude futures1 for August delivery settled at $118.59 a barrel, gaining $4.97, or 4.4 percent, their biggest one-day gain since May 9. It hit a session high of $118.70, the highest intraday since June 15.
The Case For $150 Oil - Oil is going to $150 says the cover article in the latest edition of Barron's. Why? Despite the recent selloff, and the mediocre global economic recovery, author Gene Epstein lays out a pretty straightforward case of supply and demand, with the former being the most important part of the equation. As the IEA just told us, spare capacity is tight in OPEC countries, and non-existent in non-OPEC countries. Presuming even moderate global GDP growth means that we're about to see record tightness. This is the key chart from Barron's: The article also cites the work of Morgan Stanley commodity strategist Hussein Alidinan who has done work on tight oil supplies. In a recent strategy deck he presented this chart on the inevitable drawdown of oil inventories placing pressure on OPEC to pump more. You can see a larger version of the chart on this old post.
Liberate U.S. oil - Obama and previous presidents failed by ignoring economics in favour of environmental prescriptions of the day -they lowered highway speed limits, imposed mileage standards, turned down thermostats, subsidized electric and hydrogenfuelled vehicles, and subsidized just about every kind of alternative energy imaginable, from synfuels to nuclear to solar to ethanol to wind. Just about the only thing they didn't do -and the one thing that just about any successor to Obama will do in spades -is aggressively deregulate oil and gas development, both on and offshore. Today's Republican dream of "Drill, baby, drill" will be tomorrow's universal standard. A striking 75% of American voters want more oil and gas drilling in the United States, and the percentage is higher still among Republicans and independents, those to whom a Republican president would be beholden. Of the 9.2 million barrels of oil per day that the United States today imports, six million come from the OPEC cartel. About half of those OPEC imports, or three million barrels per day, could be wiped out in the next decade through the oil industry's existing plans if governments don't intervene.
Brazilian Oil Production The above graph show Brazilian oil production since 1991 through Jan 2011, according to the Oil and Gas Journal. You can see that Brazil is a story of steady growth. Tropical rivers have dumped a lot of organic matter off the coast of Brazil for a very long time, and the result is quite a lot of oil. Reserves have been increasing by leaps and bounds too: That doesn't include things like the Libra find last year, which might contain 8gb of oil, or even 15gb (but the totals aren't proven yet). So it seems unlikely that Brazil is about to slow down in production growth, and the eventual production total is hard to estimate with such large discoveries still being made. Over the last 15 years, the pace of production increases has been a pretty steady 1mbd/decade. We can perhaps expect that to continue (or even increase) for quite some time to come. It's not going to revolutionize the world situation, but it certainly does help to offset those regions that have stagnated or are in outright decline.
US envoy says Iraq critical to global energy needs - The US ambassador in Baghdad said on Saturday that the State Department has asked for a $6.2 billion budget for Iraq in 2012, underscoring that its oil and gas reserves were critical for the world's future energy needs. "This country is on a glide path to increase its oil exports," James Jeffrey told reporters at the sprawling US embassy in Baghdad, the world's largest. The embassy plans to double in size next year to 16,000 personnel, when it takes over many military tasks after US troops pull out of Iraq at the end of this year, including military sales and training of Iraqi security forces. Nearly 50,000 American troops still remain, down from a high of 170,000 after the 2003 US-led invasion. "Right now they are at about 2.2 million barrels (of oil) per day. They could go as high as four to six million within four or five years," he said, noting that energy-related facilities remained vulnerable to insurgent attacks. "There's no other source of millions of new barrels in the pipeline anywhere in the world,"
Exhausted global oil supplies make Arctic the new hydrocarbon frontier - A report completed in 2008 by USGS argued that almost one-quarter of the undiscovered, technically recoverable, hydrocarbons in the world may be contained in an area north of the Arctic Circle. This – in numerical terms – amounts to 90bn barrels of undiscovered, technically recoverable oil, 1,670 trillion cubic feet of technically recoverable natural gas, and 44bn barrels of technically recoverable natural gas liquids in 25 geologically defined areas thought to have potential for petroleum. That would mean the Arctic accounts for around 13% of the undiscovered oil, 30% of the undiscovered natural gas, and 20% of the undiscovered natural gas liquids in the world. About 84% of the estimated resources are expected to occur offshore, says the USGS in figures which the Russians argue hugely underestimate the contribution from their continental shelf. Extracting these hydrocarbons would be hugely expensive using conventional means, but oil companies such as Shell are now building floating liquefied natural gas production systems which would reduce costs. But even high extraction costs can be economically viable because of the soaring value of fuel.
Russia To Deploy Thousands Of Troops To 'Protect The Nation's Interests' In The Arctic - Russia has announced it will send two army brigades, including special forces soldiers, to the Arctic to protect its interests in the disputed, oil-rich zone. Russia, the U.S., Canada, Denmark and Norway have all made claims over parts of the Arctic circle which is believed to hold up to a quarter of the Earth's undiscovered oil and gas. Prime Minister Vladimir Putin said Russia 'remains open for dialogue' with its polar neighbours, but will 'strongly and persistently' defend its interests in the region. Russia's defence minister Anatoly Serdyukov said the military will deploy two army brigades which he said could be based in the town of Murmansk close to the border with Norway. He said his ministry is working out specifics, such as troops numbers, weapons and bases, but a brigade includes a few thousand soldiers.
Energy Resources Saudi prince proposes oil war with Iran - Underlining the escalating cold war between Saudi Arabia and its rival Iran, former intelligence chief Prince Turki al-Faisal proposes the kingdom use its oil power to drive down prices to batter the Islamic Republic's sanctions-hit economy.That would ratchet up tensions in the Persian Gulf and the wider Middle East at a time of unprecedented political upheaval. Iran and other hawks in the Organization of Petroleum Exporting Countries blocked Saudi-led efforts to boost oil production to bring down prices, driven up sharply by the region-wide turmoil, at the cartel's summit in Vienna June 8. But the Saudis have already boosted their production, and industry analysts say Riyadh is likely to reach 9.5 million barrels per day, the highest level in three decades and near the kingdom's maximum capability.
Britain's richest man to build giant Arctic iron ore mine - Britain's richest man is planning a giant new opencast mine 300 miles inside the Arctic Circle in a bid to extract a potential $23bn (£14bn) worth of iron ore. The 'mega-mine' – which includes a 150km railway line and two new ports – is believed to be the largest mineral extraction project in the Arctic and highlights the huge commercial potential of the far north as global warming makes industrial development in the region easier. The billionaire steel magnate Lakshmi Mittal, who is behind the project, wants to exploit a commodity whose value has doubled due to soaring demand from China and India. But the wildlife group WWF, describes the planned mine as a 'game changer' and a test case that could affect all future industrialisation of the far north. 'It is certainly ... of a scale that would be massive anywhere in the world,'. WWF is demanding the company proceeds with extreme caution. Documents seen by the Guardian show that Mittal's company, the world's biggest steel-making group, ArcelorMittal, admits the operations will be undertaken in an area inhabited by unique wildlife including polar bear, narwhal and walrus."
Skills Shortage Has Australia Tapping U.K., Irish Workers - Stung by a looming skills shortage that threatens to derail the region’s once-in-a-generation resources boom, Australia’s mining and petroleum industry is looking to the moribund economies of the northern hemisphere to plug gaps in its work force. Western Australia state’s training and work force development minister Peter Collier will set off Friday on a 10-day tour of the U.K. and Ireland to recruit workers for the A$109 billion (US$116.9 billion) of development projects currently underway in the state. “We face potential labor shortages in the hundreds of thousands,” he said, pointing to government figures saying the state of 2.3 million people risks a shortfall of 150,000 jobs by 2017. Truck drivers can win salary packages well over A$150,000 a year in the Pilbara, a barren, baking hot region in the north of Western Australia which accounts for 40% of the world’s iron ore exports. That compares with typical financial-sector packages of around 100,000 pounds in the U.K.
Japan discovers huge rare earth deposits in the Pacific Ocean - Vast deposits of rare earth minerals, crucial in making high-tech electronics products, have been found on the floor of the Pacific Ocean and can be readily extracted, Japanese scientists said on Monday. "The deposits have a heavy concentration of rare earths. Just one square kilometre (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption," The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology. They found the minerals in sea mud extracted from depths of 3,500 to 6,000 metres (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview. Extracting the deposits requires pumping up material from the ocean floor. "Sea mud can be brought up to ships and we can extract rare earths right there using simple acid leaching," he said. "Using diluted acid, the process is fast, and within a few hours we can extract 80-90 percent of rare earths from the mud." The team found that sites close to Hawaii and Tahiti were especially rich in rare earths, he said.
China, its rare earth minerals and the WTO -China’s wrist’s been slapped by the WTO over its restricting of its exports of rare earth minerals including bauxite, magnesium, zinc and silica of which China is the leading producer according to The Economist this week. This is a topic gaining momentum and has been blogged about on this site on a number of occasions recently (here and here). In 2009 the US, EU and Mexico lodged complaints at the WTO arguing that ”China’s policies gave domestic firms that use these commodities an unfair competitive advantage, while also restricting world supply of these inputs and causing their prices to soar.” Part of China’s defence is that it was driven by its desire to protect the envronment from the pollution caused by the mining of these minerals, rather ironic perhaps from a nation where one new coal fired power station is built every week. Anyway, the WTO has ruled that these restrictions are illegal and now China has 60 days to lodge an appeal.
Peak coal and China - World coal production is dominated by China. China's coal production is projected to peak in 2027 with a peak production level of 5.1 billion tons. World (excluding China)'s coal production is projected to peak in 2027 with a peak production level of 4.1 billion tons. Coal is mainly used for “base load” electricity generation (to meet the part of the electricity demand that requires constant flows) and is an essential input in the iron and steel industry. In 2008, coal accounted for 22 percent of the world’s energy consumption in the industrial sector (including non-energy uses) and 4 percent of the energy consumption in the residential and commercial sector. Coal accounted for 41 percent of the world’s electricity generation (IEA 2010). In 2010, world coal production was 7,273 million tons. Figure 11 shows the annual coal production of the world’s largest five producers. The world coal production and consumption is dominated by China. In 2010, China accounted for 45 percent of the world coal production (by volume) and 48 percent of the world coal consumption (by energy content).
China's local govt debt understated by $540 bln-Moody's (Reuters) - China's local government debt may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, potentially putting banks on the hook for deeper losses that could threaten their credit ratings, Moody's said on Tuesday. China's mountain of local government debt has long been seen as a major risk by investors. The worry is that slower growth in the world's second-biggest economy could set off a wave of loan defaults and hobble its banking system. "Banks' exposure to local government borrowers is greater than we anticipated," Yvonne Zhang, a Moody's analyst, said in a statement. Unless China comes up with a "clear master plan" to clean up the problem, the credit outlook for Chinese banks could turn negative, Moody's said.
Building Boom in China Stirs Fears of Debt Overload - In the seven years it will take New York City to build a two-mile leg of its long-awaited Second Avenue subway line, this city of nine million people in central China1 plans to complete an entirely new subway system, with nearly 140 miles of track. And the Wuhan Metro is only one piece of a $120 billion municipal master plan that includes two new airport terminals, a new financial district, a cultural district and a riverfront promenade with an office tower half again as high as the Empire State Building. The plans for Wuhan, a provincial capital about 425 miles west of Shanghai, might seem extravagant. But they are not unusual. Dozens of other Chinese cities are racing to complete infrastructure projects just as expensive and ambitious, or more so, as they play their roles in this nation’s celebrated economic miracle. But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.
China's ticking debt bomb - China’s remarkable economic rebound after the global economic crisis in 2008-2009 has been a source of envy and puzzlement for the rest of the world. Instead of recession, the Chinese economy has recorded double-digit growth, and is actually showing signs of overheating – a sharp contrast with the stagnation in most Western countries. How did the Chinese do it? Perhaps advocates of ‘Chinese exceptionalism’ are right after all: Beijing has found a secret formula of economic success that has eluded the West. Part of the answer to this mystery was given in late June by the Chinese government. It turns out that Beijing has managed to keep its economy growing during the global slump by resorting to massive bank lending to local governments, which then went on an infrastructure spending binge that’s certain to haunt the country for years to come. If we remember the causes of the economic crisis that has ravaged the United States and Western Europe, the most important one is something euphemistically termed ‘credit boom’ – excessive lending and borrowing that fuelled housing bubbles and unsustainable consumption. China seems to have been afflicted with the same disease, with only one major variation: much of the debt incurred in China has gone into the infrastructure sector, not consumption. So much for Chinese exceptionalism.
China Raises Interest Rates - — China1 on Wednesday raised interest rates for the fifth time in nine months, the latest in a series of moves aimed at cooling the pace of economic growth and the steep price rises that have accompanied expansion. The central bank announced that it was raising the key lending and deposit rates in the world’s second-largest economy, after the United States, by a quarter of a percentage point. The increase had been widely expected by analysts. The central bank said the one-year deposit rate would rise to 3.5 percent, from 3.25 percent, beginning Thursday. The one-year lending rate was raised to 6.56 percent, from 6.31 percent. Signs that inflation in China has accelerated to levels well above what the Chinese authorities are comfortable with have mounted in recent months and prompted Beijing to step up its efforts at reining in the ample lending that fueled growth and helped fan sharp rises in property prices as well as overall inflation.
Guido Mantega Mulls New Currency Measures - Brazil will continue to act to curb the strength of its currency, with restraining excess speculation in the futures and derivatives markets among possible options, the country's finance minister said on Tuesday. "The government will continue to take measures to contain the over-valuation of the exchange rate ... We've taken measures on reserve requirements, we can take measures on derivatives and futures. But these are not measures we will pre-announce," Mantega told reporters. Despite aggressive measures to curb the strength of its currency, including taxes on fixed-income inflows, the real is trading close to its strongest level against the dollar in 12 years. In recent weeks, foreign investors have raised their bets that the real will continue rising to record levels. Last year, Mantega accused governments around the world of deliberately weakening their currencies to boost their export competitiveness, warning of an "international currency war."
Brazil risks tumbling from boom to bust - Back in February, in an earlier Insight column, we highlighted the major build up of consumer debt at extremely high rates of interest, putting a significant cash flow burden on the repayment capacity of borrowers. Since then, the situation has deteriorated further. Pressures are building in the Brazilian credit cycle. The average rate of interest on consumer lending has jumped from 41 per cent in 2010 to 47 per cent most recently in May 2011. This rise from an already elevated level reflects the cumulative effect of tightening by the Brazilian central bank in order to contain inflation. The consumer debt service burden, which stood at 24 per cent of disposable income in 2010, is now slated to rise to 28 per cent in 2011. This compares with 16 per cent for an “overburdened” US consumer and a mid-single digit reading for other emerging markets such as China and India. In short, the cash flow burden is astronomical and rising.
In South Korea, all textbooks will be e-books by 2015 - In South Korea, heavy backpacks laden with textbooks are becoming a thing of the past. The Asian nation announced that it will replace paper textbooks with electronic tablets in all state-run (public) schools by 2015. The move will allow students to download digital textbooks on a variety of platforms, including computers, smart phones, and tablets. South Korea’s education ministry hasn’t yet disclosed which e-tablet make or model it will purchase en masse to make the digital switch, but it has revealed the cost of buying tablets and digitizing material for all of the students in its state-run schools: $2.4 billion. The digital conversion is part of a project to create “smart schools” across the country, according to South Korea’s education ministry. The state says it plans to incorporate “smart” features such as video, animation, virtual reality, and hyperlinks, in its digital curriculum. Korean students are already experimenting with digital learning. Since 2008, hundreds of elementary school students have been testing digital textbooks on tablet-like Fujitsu PCs and Samsung Galaxy3 Tabs
Netherlands fact of the day - Take the case of the Netherlands. Unbeknown to most people, it is world’s third largest agricultural exporter, despite having little land (it has the world’s fifth highest population density). This has been possible because the Dutch have “industrialised” agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world’s most advanced chemical and electronics industries. (That is from Ha-Joon Chang, via Matt Yglesias. Here is the list of largest exporters)
Youth unemployment: A lost generation | The Economist - FOOD for thought: Does this seem like a good use of human resources? And what this chart only begins to hint at is that these high rates have been sustained for a long period, and are unlikely to return to normal levels anytime soon. One in five young Europeans is out of a job and the story isn't much better in America. These are the world's two largest economies. The economic costs are staggering, and the potential political economy impact isn't very comforting either.
Clicks and mortar - Our interactive overview of global house prices and rents. IS HOUSING the most dangerous asset in the world? Any explanation of the recent financial crisis would have the property boom in America as Exhibit A: according to Robert Shiller, an economist and bubble-spotter, house prices were virtually unchanged in real terms between 1890 and the later 1990s, before almost doubling in the ten years between 1997 and 2006. Because buying a house usually involves taking on lots of debt, the bursting of this kind of bubble hits banks disproportionately hard. Research into financial crises in developed and emerging markets shows a consistent link between house-price cycles and banking busts. The Economist has been publishing data on global house prices since 2002. The interactive tool above enables you to compare nominal and real house prices across 20 markets over time. And to get a sense of whether buying a property is becoming more or less affordable, you can also look at the changing relationships between house prices and rents, and between house prices and incomes.
Lagarde’s Challenges - Now that the dust has settled over the selection of the International Monetary Fund’s managing director, the IMF can return to its core business of managing crises. Christine Lagarde, a competent and well-regarded technocrat, will have her hands full with three important challenges. The first, and probably easiest, challenge is to restore the IMF’s public image. The second, and perhaps most difficult, challenge facing Lagarde, is the mess in Europe, where the IMF has become overly entangled in eurozone politics. Typically, the IMF assesses whether a country, after undertaking reasonable belt-tightening measures, can service its debt – and lends only when it is satisfied that it can. The entire objective of IMF lending is to help finance the country while it makes adjustments and regains access to private borrowing.The third challenge for Lagarde concerns the circumstances of her election. It is not inconceivable that a number of emerging-market countries will get into trouble in the next few years. Will the Fund require the tough policy changes it has demanded of countries in the past, or will Lagarde’s need to show that she is not biased towards Europe mean that future IMF interventions will become more expansive and less demanding?
German Factory Orders Rise on Domestic Demand - Factory orders in Germany, Europe’s largest economy, unexpectedly increased in May, led by domestic demand for investment goods such as machinery. Orders, adjusted for seasonal swings and inflation, increased 1.8 percent from April, when they surged a revised 2.9 percent, the Economy Ministry in Berlin said in a statement today. Economists had forecast a drop of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey. In the year, orders rose 12.2 percent, when adjusted for work days. German business confidence unexpectedly improved in June, suggesting companies in Europe’s largest economy are confident they can weather the storm of an intensifying debt crisis in the region. While growth is likely to be “considerably weaker” in the second quarter this “should not be interpreted as an economic slowdown,” the Bundesbank said on June 20.
Why you shouldn't get too excited about the 1.8% increase in German factory orders - Rebecca Wilder - German factory orders increased rather sharply in May, 1.8% in volumes and on a seasonally adjusted basis. The impetus to industrial orders growth on the month was primarily German factories buying capital goods, +2.4%. Factory orders do lead economic activity, so German domestic demand is likely still plugging away. But that's as good as it gets - the report also reveals further evidence of a global economic slowdown. While domestic orders surged 11.3% in May, orders from abroad (EMU countries plus extra-EMU countries) fell 5.8%. The three-month moving average of the index for German factory orders from abroad is now falling at the margin. Of the new factory orders coming from outside Germany's borders, extra Euro-area orders fell a sharp -6.1% over the month (demand from the UK, the US, and presumably Asia). Factory orders from other Euro-area countries fell 5.4% in May.The three month moving averages are stable to down for orders stemming from all sources except for within Germany. The implication is that Germany, which drove 50% of GDP growth in Q1 but holds just a 30% share, will further drive Euro-area economic activity into Q2 via robust investment spending. However, this report is consistent with a crystal clear slowdown in global demand.
Why you shouldn't get too excited about the 1.2% increase in German industrial production: ECB + global slowdown - Rebecca Wilder - Yesterday, I illustrated quite robustly, in my view, that German factory orders are more of a harbinger of bad economic things to come rather than a strong report to get 'excited' about. Well, today I illustrate why you shouldn't get too excited about the 1.2% rise in working-day and seasonally adjusted German industrial activity in the month of May, as reported by the German Federal Statistical Agency. The chart above illustrates the cyclical component of Industrial Production, filtered using the HP Filter (see reference at end of post), and the previous month's PMI survey. The correlation is 64%, so there's a clear signal from the PMI that stabilization of the cyclical IP is afoot. Better put: the trajectory of cyclical industrial activity is going to plateau. So while IP remains robust, German industrial activity is unlikely to push Euro area GDP growth up and up for much longer. So where's the German 'growth' machine going to come from? It must come from domestic demand, of course.
A question for Greece and elsewhere - Suppose that Greece had never adopted the Euro and the terms of its external borrowing had remained subject to “market discipline”, as it had been in the 1990s. Would Greece today be better off or worse off, in real terms, looking forward? This does not seem to me an easy question to answer. On the one hand, Greece’s borrowing on easy terms inspired a great deal of real activity, including valuable development in a variety of sectors. On the other hand, it is now clear that the indiscriminate credit enabled patterns of behavior that were unsustainable, the adjustment from which will be costly and painful. If foreign capital had been available but discriminating, perhaps some of the real activity and development of the 2000s would have not have occurred. But perhaps the activity that would have occurred would have been channeled in different directions, forming patterns that would more sustainable and profitable, and less corrupt.
Was it worth it? - STEVE WALDMAN asks the burning question:Suppose that Greece had never adopted the Euro and the terms of its external borrowing had remained subject to “market discipline”, as it had been in the 1990s. Would Greece today be better off or worse off, in real terms, looking forward? The question is impossible to answer, obviously, but it's worth thinking about all the same. As Mr Waldman indicates, Greece was able to borrow on unrealistically good terms for most of the last decade; somewhat surprisingly, national interest rates converged in the wake of the adoption of the euro. This contributed to Greece's accumulation of debt, and only when market forces began to reassert themselves and peripheral yields diverged from core yields did it become clear that Greece's debt burden was unsustainable.
Greece Awaits Further Rescue - Euro-zone finance ministers signed off on a new slice of bailout money for Greece, avoiding a financial meltdown this month, but left themselves with a heavy task ahead to work out details for a new rescue package for the country. The ministers' agreement in a teleconference call on Saturday evening leaves only the expected approval of the board of the International Monetary Fund before €12 billion ($17.4 billion) is handed over to Athens. The payment is expected by July 15. The IMF said it welcomed the "euro group's commitment to a financing strategy" for Greece.
Euro-Zone Ministers Release Greek Aid -- Euro-zone governments agreed Saturday to pay Greece the next tranche of last year's bailout package and set September as the new deadline for completing a second bailout package for Greece. On a conference call Saturday evening, the ministers said they would hand over their part of the next €12 billion tranche of last year's bailout once the International Monetary Fund had signed off. "Ministers approve the disbursement of the fifth tranche of the current Greek Loan Facility by July 15 following approval by the IMF Board, as originally envisaged," they said in a statement. The ministers signed off their portion of the €12 billion ($17.39 billion) loan tranche in an evening conference call. The International Monetary Fund is expected to approve its part of the loan next week.
Euro Area Backs Greek Payment, Shifts Focus to New Bailout - The euro area approved its share of a 12 billion-euro ($17.4 billion) aid payment for Greece and pledged to complete work in the coming weeks on a second rescue package for the cash-strapped nation to prevent a default. Finance ministers agreed to disburse 8.7 billion euros of loans under last year’s 110 billion-euro bailout by July 15, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament. The International Monetary Fund is due to provide the rest of the July aid installment, the fifth under the 2010 package. The spotlight now turns to a second bailout to which banks and insurers plan to contribute following German demands for taxpayer relief. Euro-area governments and investors will provide 70 percent of new aid that may total as much as 85 billion euros, with the IMF offering the rest, Thomas Wieser, an Austrian Finance Ministry official, said on June 30. “The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path,”
Greece Survives the Summer, Prognosis for Future Not So Hot - European finance ministers agreed to extend more money to Greece yesterday, after the Greeks fulfilled their end of the bargain by passing a severe austerity and privatization package amid mass protests. The finance ministers extended the 8.7 billion euro ($12.6 billion) loan, which added to the 3.3 billion euro loan from the IMF will get Greece through borrowing and debt service for the rest of the summer. This money essentially passes through Greece on the way to European banks, who are the main creditors. But the big lift is coming, with the other 80-90 billion euros promised in the rest of the package. This probably won’t be decided until early fall. But several banks have agreed to take writedowns of Greek debt in order to stave off a wider crisis
Dodger Mania -According to a remarkable presentation that a member of Greece’s central bank gave last fall, the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit. The “shadow economy”—business that’s legal but off the books—is larger in Greece than in almost any other European country, accounting for an estimated 27.5 per cent of its G.D.P. And the culture of evasion has negative consequences beyond the current crisis. It means that the revenue burden falls too heavily on honest taxpayers. It makes the system unduly regressive, since the rich cheat more. And it’s wasteful: it forces the government to spend extra money on collection, even as evaders are devoting plenty of time and energy to hiding their income. Greece, it seems, has struggled with the first rule of a healthy tax system: enforce the law. People are more likely to be honest if they feel there’s a reasonable chance that dishonesty will be detected and punished. But Greek tax officials were notoriously easy to bribe with a fakelaki (small envelope) of cash.
Greece facts (?) of the day - The figure of 53 years old as an average retirement age is being bandied about. So much, in fact, that it is being seen as fact. The figure actually originates from a lazy comment on the NY Times website. It was then repeated by Fox News and printed on other publications. Greek civil servants have the option to retire after 17.5 years of service, but this is on half benefits. The figure of 53 is a misinformed conflation of the number of people who choose to do this (in most cases to go on to different careers) and those who stay in public service until their full entitlement becomes available. Looking at Eurostat’s data from 2005 the average age of exit from the labour force in Greece (indicated in the graph below as EL for Ellas) was 61.7; higher than Germany, France or Italy and higher than the EU27 average. Since then Greece have had to raise the minimum age of retirement twice under bail-out conditions and so this figure is likely to rise further. The graph is at the link.
Finns draw line in the sand of Greek collateral requirement - Reuters has seen the Finnish position document on the new package, and it is not looking good. It looks like another big obstacle will need to be surmounted. The Finnish parliament, whose powers reign above those of the government in eurozone crisis resolution management, decided to attach a collateral requirement to all future loans to Greece. The document said that a collateral requirement was not a Finnish wish, but a rare case of a Finnish line drawn in the sand. But given the political situation in Greece, a collateral requirement, as part of which creditors would end up with a sizeable chunk of Greek assets, is hardly acceptable. The snag is that under the rules of the EFSF, any decision to disburse new aid requires unanimous support of all member states. It is possible, technically, for Finland to opt out of the scheme, leaving others to foot its relatively small share of the programme. But official are extremely nervous about this, as this may send a dangerous political signal.
Look What You Can Buy in the Greek Liquidation Sale! - Yves Smith - Sorry if you were looking for listing of the various Greek assets on offer. You need to be a really heavyweight investor (and have been verified as such) to get a real viewing. And you are late if you are taking interest only now. The Guardian last week visited a road show of sorts in London (note that the properties were being hawked BEFORE the Greek parliament had approved the sale). The potential bidders were very cool: Up for sale are 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece’s national lottery. George Christodoulakis, Greece’s special secretary for asset restructuring and privatisations, said the sell-off would raise €50bn (£44bn) to help pay back the country’s €110bn bailout debt. The private equity bosses gathered in the hotel’s ballroom for the parade of Greece’s national treasures showed little interest in buying anything....investors are put off by bureaucracy, strong unions, corruption and a lack of transparency. “Even in the good times Greece is not a country that attracts investment." But I have no doubt there are properties for sale to suit all budget, apparently including lots of beachfronts. From Aljazeera: (video)
Euro zone warns Greeks on sovereignty and privatization (Reuters) - Euro zone finance ministers have approved a 12 billion euro ($17.4 billion) installment of Greece's bailout, but signaled that the nation must expect significant losses of sovereignty and jobs. Ministers in the Eurogroup gave the go-ahead for the fifth tranche of Greece's 110-billion-euro financial rescue agreed last year, and said details of a second aid package for Athens would be finalized by mid-September. But within hours of Saturday's decision, Eurogroup chairman Jean-Claude Juncker warned Greeks that help from the EU and International Monetary Fund would have unpleasant consequences. "The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would be heading to Athens.
Greece 'will pay for €110bn bailout with its sovereignty' - GREECE received a stark warning yesterday about the cost of the latest bailout in comments which were likely to send a chill down the spines of citizens in other countries that may need further bailouts. "The sovereignty of Greece will be massively limited," Eurogroup chairman Jean-Claude Juncker told Germany's 'Focus' magazine in the interview released yesterday. "One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the eurozone," the Luxembourg prime minister added. Like the Irish, the Greeks are acutely sensitive to any infringement of their sovereignty and any suggestion that foreign "commissars" might become involved in running the country is an incendiary political issue and could trigger more street protests.
Greek sovereignty to be massively limited - Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said. "The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would heading to Greece. "One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.
Greece's Youth Brace For an Uncertain Future - After a dramatic week in which Greek lawmakers passed tough and unpopular new austerity measures, the country must resume cost-cutting as it pulls itself out of its worst recession since the 1970s. It's going to be an especially tough slog for young Greeks like Nikolopolou, many of whom are already jobless or underemployed. According to the Hellenic Statistical Authority (ELSTAT), Greece's unemployment rate has doubled in the last three years to 16.2%. But it's more than 42% for Greeks between the ages of 18 and 24, and 22% for those between 25 and 34. (See photos of the protesters in Athens.) Since late May, Nikolopoulou has joined the sit-in, anti-austerity protest at Syntagma, the square across the street from parliament. The so-called aganaktismenoi, or indignants, have modeled their movement after the indignandos in Spain, where youth unemployment is a whopping 44.3%. Though the demonstrators represents a cross-section of Greece, including pensioners and middle-aged workers, the young Greeks involved in it are among the most energized, "The older Greeks in this movement are fighting because they don't want to lose what they have worked for," he says. "But younger Greeks are fighting to have a future."
Partying on the Edge of the Eurozone Volcano - Yves Smith - The Financial Times has two heated articles (relative to the each writer’s normal emotional register) on the continuing Greece neverending bailout saga, one from Wolfgang Munchau, the other from John Dizard. Munchau and Dizard reach the same conclusion from different fact sets: the latest Greek patch-up exercise is only going to make matters worse, politically and economically. First from Munchau, who has worked himself up to being shrill on the deal structure, which he compares to a toxic CDO:If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer. This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out.It is also inevitable that Greece will default on its coupon payment at some point…The complexity of the scheme is due to the need to persuade the rating agencies not to attach a default rating to Greek bonds.Even Dizard, who normally affects a Greene-land savoir-faire and world weariness, has notched up his rhetoric into dismay and ire: A revenge fantasy invented by the most Europhobic UK Conservative MP could not equal the damage done to the European Union’s reputation by its leadership during the Greek crisis…. Instead, the record of the euro area’s leadership is a sort of anti-Scout Manual of agreements to play with matches in a dry forest and tease nursing bears. Dizard’s beef is that there are well debugged way of dealing with messes like this, a whole panoply of emerging market defaults and restructurings since the Latin American sovereign crises of the late 1970s. But the officialdom hasn’t merely ignored history but affirmatively rejected it:
The ECB versus the euro zone - OVER the past week or so, European leaders have put together the beginnings of a framework for a plan to keep Greece afloat for a while longer. It appears that as part of a second Greek bail-out package, European banks might be willing to voluntarily rollover most of the proceeds of maturing Greek debt into new Greek government bonds. As a piece in this week's Economist makes clear, this would probably be a much better deal for banks than for Greece. What it might also be, according to Standard & Poor's, is a default: Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks. The biggest problem with a default—indeed, the main reason explicit bondholder haircuts aren't on the table—is the second reason given above: in the event of a default, the European Central Bank may no longer accept Greek government debt as collateral. The ECB would not be "unable" to do so, as S&P has it. It has simply threatened that it won't.
S.&P. Warns Bank Plan Would Cause Greek Default - Greece risks being judged in default on its debt obligations if banks are forced to bear part of the pain, Standard & Poor’s said Monday, suggesting that current proposals for rescuing the euro zone’s weakest member may have to be reconsidered. In particular, a plan proposed by the French government and banks “could require private sector debt restructuring in a form that we would view as an effective default,” S.&P. said in a statement. The rating agency also said it was cutting its long-term rating on Greece three notches deeper into junk territory, to CCC from B. Euro-zone finance ministers agreed over the weekend to provide Athens with financing of €8.7 billion, or $12.6 billion, from the €110 billion bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default. But the finance ministers put off the question of how to provide a second bailout, reportedly valued at up to €90 billion, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.
S&P threatens Greece with default rating - French and German banks’ plan to roll over their holdings of Greek debt suffered a blow on Monday as Standard & Poor’s, the credit rating agency, said the move would amount to a default. The proposal to provide up to €30bn ($43.6bn) in financing for Greece had been made conditional on rating agencies not downgrading Greece’s debt. But S&P said in a statement early on Monday that any rollover would be a “distressed” transaction and thus lead to Greece’s rating being lowered to selective default. There was no immediate reaction from the Greek finance ministry to the S&P statement on Monday. This follows a similar statement from Fitch, the third-largest rating agency, who said in a recent letter to the FT “if it looks like a default, we will rate it as a default”. Over the weekend, the European Union warned Greek growth would contract 3.75 per cent this year underlining the challenge facing the country. The downgrade followed the agreement on Saturday by European finance ministers of a loan tranche of €8.7bn to Athens, ensuring the government would be able to meet debt repayments due this month.
EU Rescue Effort May Prompt S&P Default Rating on Greece - Europe’s effort to pull Greece back from the brink may result in a default rating by Standard & Poor’s, exposing a critical flaw in the drive to press creditors to assume a share of the bailout cost. Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks. “It sends all the officials and banks back to the drawing board to think of something new,” “The ECB is saying it won’t accept debt in a default. Someone needs to give in -- either Germany or the ratings agencies or the ECB. One of three will have to compromise.” The S&P statement came less than 48 hours after euro-area finance ministers authorized an 8.7 billion-euro ($12.6 billion) loan payout to Greece by mid-July and said they would aim to complete talks with banks on maintaining their Greek debt holdings within weeks. The International Monetary Fund indicated it would deliver its 3.3 billion-euro share of the payment.
S&P: Greece Debt Plan Is a Default European efforts to forge a second bailout package for Greece involving private creditors ran into a fresh obstacle Monday when Standard & Poor's rating agency said the current proposals would likely amount to a default. The comments from S&P are the first reaction from a rating agency since details of a preliminary plan put forward by French banks—the biggest overseas holders of Greek debt—emerged last week. The European Central Bank has maintained that it won't accept bonds with a default rating as collateral. Hence, averting a selective default rating is crucial to ensure that banks holding Greek bonds aren't shut out from the ECB's liquidity operations for the few days that the country's bonds would be rated selective default. A spokesman for the European Commission said euro-zone governments designing a second bailout for Greece intend to avoid a selective default and expect to have "clarity" on the outlines of the package by the July 11 meeting of finance ministers.
Just when you thought it was safe - S&P said in a statement: "It is our view that each of the two financing options described in the (French banks') proposal would likely amount to a default under our criteria." So much for that. Moody’s issued a terse note saying that it was not party to any ongoing discussions. Moody’s will only comment on a scheme, once it has been decided. Ewald Nowotny, the Austrian central bank governor, made an interesting comment, according to Reuters, saying that the ECB had been in discussions with the rating agencies, and found that attitudes had hardened. He said he was struck by the fact that the agencies were tougher now than they were in respect of the Latin American Brady bonds. Joseph Cotterill of FT Alphaville has a good comment about Europe’s duplicity in respect of rating agencies. We either condemn them, but then we also use them. “After all, what were the French expecting? The rollover proposal is designed as a product of ratings arbitrage. It’s firstly conditional on agencies consenting to rate Greece above default, which is a wide open, self-inflicted exposure to ratings downgrades if there ever was one.”
Fear of Credit Default Swaps Used to Protect Stupid Banks - The New York Times reports that the brilliant analysts at S&P have decided that if the banks that loaned all that money to Greece have to eat any losses, voluntarily or otherwise, S&P will call that a default. If they are correct, those who wrote protection credit default swaps (CDSs) on Greek debt would be forced to pay off on the losses incurred by buyers of protection. In an earlier article, In Greece, Some See a New Lehman, the NYT provided another scare article threatening catastrophe after a Greek default. You’d think there was some kind of conspiracy to protect US and European banks and CDS protection writers from losses they richly deserve. I’m smelling Moral Hazard. Why should anyone care if they lose billions? These articles are designed to scare people, sort of the bankster version of those local TV teasers about lights showing crud on motel bed covers, trying to get you to watch their vapid talking heads.As an opening shot, the NYT reports that European banks have been dumping Greek debt onto the European Central Bank and the IMF, which the NYT explains dumps the losses onto taxpayers. How that happens is a mystery to me. The ECB controls the Euro, and if anyone is worried about the IMF, central banks can print some money just for it. That is glib, but essentially correct, and it isn’t a catastrophe for anyone.
Greece May Have Missed June Primary Balance Target - Greece is at risk of missing a key budget target in June, European Union experts said in a report, a sign of the uphill struggle the country faces as it tries to get its deficit reduction plans back on track. The report, prepared by European Commission budget experts with input from European Central Bank officials and published over the weekend, says that Greece could miss its June target for its primary budget balance, a measure of the government deficit that excludes interest payments on outstanding debt. Government revenue faces "significant" shortfalls that have only partially been offset by lower spending and delayed payments, the report says. "As a result, the quarterly performance criterion on the primary balance could be missed already in June.
The Mosler Plan for Greece - The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms. The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government. By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.
Greece, Default and a Hung Jury - If the major rating agencies all declare bank rollover plans for Greece to be a default, the European Central Bank would almost certainly refuse Greek debt as collateral for its lending operations. That much has been made clear.But S&P’s warning that it would likely classify the French rollover plan for Greece as a default raises a scenario straight out of a John Grisham novel: what if there’s a hung jury? If the ECB strictly applies its longstanding collateral rules, then a default determination would have to be made by all the major rating agencies. The central bank uses the best rating among the major rating agencies to determine whether a debt instrument meets its minimum rules (this is referred to as the “first best” principle.”) ECB officials have repeatedly said that if Greece were to default on its debt, they would reject its government bonds as collateral for ECB loans, which would likely lead to a collapse of the banking system there.
Self-serving French recipe is wrong fare for Greece - A myopic game of chicken. That is the best description I have heard of the to and fro between the European banks and their governments over how best to restructure Greece’s swollen sovereign debt problem. European governments, notably Germany, and the eurozone authorities, notably the European Central Bank, have been so at odds that the public sector response to the issue has been laughably slow. The private sector response – evident in French banks’ proposal – last week to roll over a targeted €30bn ($43bn) of privately owned Greek government debt is laughably self-serving. And yet, it is the French banks’ idea, in the absence of any credible alternative, that now has momentum. The French government has already endorsed it and the rumblings from Berlin – and indeed from the German banks – are that it is a good basic blueprint. French and German financial institutions between them are the biggest holders of Greek sovereign debt, holding about €30bn of a total of €340bn between them. So although the talks to develop the proposal into a credible plan are being organised under the auspices of the Institute of International Finance, it is essentially a Franco-German affair.
Trichet May Save Face With S&P, Fitch Greece Moves - Standard & Poor’s and Fitch Ratings may enable European Central Bank President Jean-Claude Trichet to support a private investor rollover of Greek debt by saying a default rating would be partial and temporary. Trichet put Greece’s fate in the hands of ratings companies when bank officials began saying in May the ECB, which has lent 98 billion euros ($142 billion) to Greek banks, would refuse to accept the nation’s bonds as collateral if any “burden sharing” by private investors produced a default rating. Growing support for a rollover by investors helped push the yield on Greece’s 2-year bond down 327 basis points in a week to 26.11 percent. Trichet and European political leaders have been at odds over creditors’ role in a new Greek rescue after last year’s 110 billion-euro bailout failed to stop the spread of the region’s debt crisis. Germany backed down two weeks ago from its plan to extend maturities on existing Greek bonds. Now, it may be the ECB’s turn to yield to rating-companies’ threats that a rollover would trigger default, or risk the collapse of Greek banks and spreading contagion. “The ECB cannot remove liquidity from the big Greek banks,” . “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?”
Greece Update: Will ECB accept temporary default? - From Bloomberg: Trichet May Save Face With S&P, Fitch Greece Moves: Euro Credit Standard & Poor’s and Fitch Ratings may enable European Central Bank President Jean-Claude Trichet to support a private investor rollover of Greek debt by saying a default rating would be partial and temporary. Many observers think the ECB will back down and still accept Greek government bonds as collateral. By saying the default is temporary - and if at least one rating agency keeps the Greek government bonds above a default rating (even if the rating agency lowers Greece's issuer rating to “restricted default”) - this could give the ECB wiggle room to keep accepting Greek government bonds as collateral. The policymakers appear to have a couple of months to find a solution. The yield for Greek 2 year bonds are up to 27% this morning, and the 10 year yield is at 16.5%. Portuguese and Irish 10 year yields are at (11.6% for Ireland, 11% for Portugal).
Generations of Pork: How Greece’s Political Elite Ruined the Country - The latest tranche of loans from the EU and the IMF has helped buy debt-ridden Greece some time. But the Greeks will find it hard to get back on their feet. Their country has been ruined by three political dynasties, which created a bloated system of cronyism that is hard to change. By SPIEGEL Staff
Spot the pattern - HERE'S a chart showing the yields on 10-year Greek debt over the past three months. See the pattern? There's a spike, followed by a decline, followed by a higher spike, followed by a decline to a higher trough, and so on. European leaders keep taking steps to avert disaster, and each time markets are less assuaged. The latest spike corresponds to the stalemate over the IMF's willingness to continue making bail-out payments without a new, long-term rescue package in place (and the corresponding disagreement over how to rollover Greek debt, plus the drama surrounding the passage of Greece's new austerity plan). The IMF agreed to keep paying, French and German banks seemed willing to sign on to a rollover plan, and Greece got its new austerity programme through parliament. But it wasn't long before trouble kicked up again. Moody's and Standard and Poor's have both suggested that the agreed-upon rollover plan might well constitute a default. Since that's precisely the outcome European leaders were hoping to avoid, this news has sent everyone scurrying to come up with a new and better deal.
Eurozone CDS Spreads Wider - The eurozone sovereign-debt market hasn’t been shaken much by weekend warnings from rating agencies on Greek debt, but the CDS market is showing a bit more anxiety. Italy’s 5-year CDS spread is 12.3 basis points, or 6.7% wider, at 192.8, meaning it costs $192,800 a year to insure $10 million in Italian debt against default, according to Markit data. Spanish and Portugese spreads are each about 3% wider. Greek and Irish spreads are only slightly wider, but then many CDS players have already cashed out on those trades. Bond spreads of eurozone peripheral sovereigns against relatively safe German bunds are all slightly wider today.Moody’s on Tuesday said banks rolling over Greek debt as part of a can-kicking exercise might have to take impairment charges, following S&P’s warning on Monday that the can-kicking exercise could be construed a Greek default. Fitch has already warned of a chance of default.Having the 3 major rating agencies using the “D” word would be a huge problem, meaning the ECB couldn’t accept Greek debt as collateral any more. But for now, 2 out of 3 ain’t bad, as Meatloaf would say.
Germany’s judges hold the euro’s fate in their hands - Whether or not Europe's monetary union survives in its current form, shrinks to a Carolingian core, or shatters, depends as much on abstruse legal arguments put forward on Tuesday in Germany's constitutional court as it does on the parallel drama unfolding on Greek streets. If the eight judges in Karlsruhe rule that Europe's €500bn bail-out machinery breaches of Germany's Basic Law – or Grundgesetz – in any significant way, they risk knocking away the central prop beneath the debt edifice of Southern Europe. The judges have distilled a plethora challenges to the Greek, Irish, and Portuguese bail-outs into three complaints. These include one by a group of professors who argue that the Greek loans subvert the Bundestag, violate the "no bail-out" clause of the Lisbon Treaty, and amount to the creation of a fiscal transfer union, by stealth, without the requisite changes in the German Grundgesetz, and "strike a blow at the constitutional foundations of our state and our society". The judges know the risks. But will they bend enough to satisfy the bond markets when they issue their verdict, probably in September?
Moment of truth for the eurozone - The biggest question in any debt crisis is whether a credible path back to solvency can be found. For Greece, this now seems very unlikely. The same is true, to a lesser extent, for Ireland and Portugal. This raises three further questions. First, how big is any required restructuring? Second, who should bear the cost? Finally, is restructuring enough? If the answer to the last question is No, then one has to ask whether the currency union will last in its current form. On the first of these questions, an analysis by Citigroup provides a negative answer. According to this analysis, by 2014 the ratio of gross debt to gross domestic product will have risen to 180 per cent in Greece, 145 per cent in Ireland and 135 per cent in Portugal. In none of these cases will the debt ratio start moving downwards over this horizon. The analysis also assumes that a percentage point of fiscal tightening would lower growth by half as much. Assume that these countries could borrow affordably in private markets at a gross debt ratio of 80 per cent of GDP. Assume, too, that European governments ensure that the IMF takes no losses. Then, the reduction in value of the rest of the debt would need to be as much as 65 per cent of GDP for Greece, 50 per cent for Ireland and 45 per cent for Portugal. The total “haircut” would be €423bn: €224bn for Greece, €107bn for Ireland and €92bn for Portugal.One can quibble over the figures: these may be too pessimistic. But, without a big restructuring, these countries are now most unlikely to be able to finance themselves in the market on bearable terms.
A Synopsis of The Greek Debt Crisis - The current Greek debt crisis began to gain traction on December 8, 2009 when credit rating agency Fitch downgraded Greece from an A- rating to BBB+, marking the first time in the past 10 years that Greek sovereign debt was rated lower than A-. The downgrade was attributed to the increasing Debt/GDP ratio. Roughly ten weeks later on February 24 and 25 two highly regarded credit agencies, S&P and Moody’s warned that Greece may face additional downgrades to their credit rating. The credit agencies were citing a lack of progress on deficit reduction as a primary concern. Meanwhile Greece was still issuing tens of billions of Euros in new debt to foreign and domestic investors, though having to pay increasingly high interest rates.In response to solvency concerns, on April 12, 2010 Eurozone members and the International Monetary Fund (IMF) committed to provide Greece with a rescue package of €45 billion in loans over the following year. Just eleven days later on April 23, 2010, Greece requested the activation of the rescue package. S&P then downgraded Greek sovereign debt to BB+ (non-investment grade). Facing continuing credit rating downgrades, Greece agrees to implement a €24 billion austerity program on April 30, 2010.
IMF Seen Approving Greek Loan Friday Despite Officials’ Fears - Some International Monetary Fund officials — including executive directors on the Fund’s board — fear the Greece loan program will ultimately prove unsustainable. Despite those concerns, the IMF board is expected to approve the next tranche of loans to Greece to stem the sovereign debt crisis from spilling over into the rest of the euro zone. The IMF’s new managing director, Christine Lagarde, the former French finance minister who helped to negotiate financing for Greece, said the sovereign debt crisis was her top priority and the board would consider the loan Friday.Paulo Nogueira Batista, the IMF representative for Brazil and eight other South American and Caribbean countries, said that although he voted to approve the package last year, “Our chair was very skeptical about the sustainability of the program from the very beginning,” he said in an interview. “We expressed serious concerns since the first meeting about Greece,” he said, adding, “That’s intensified… it’s only gotten worse.”
Barclays Releases Updated Report On Top 40 Greek Debt Holders - A few weeks ago Barclays compiled a useful chart representing the largest holders of Greek debt. Today, the bank's Laurent Fransolet has issued an update "of the table “Top 40 holders of Greek government bonds and Greek debt” (Figure 1), in which we show updated holdings for Q4 10 for AXA and add KA Finanz from Austria to the list. We also clarify that the holder EFG in previous versions is Eurobank EFG." Not surprisingly, despite the refining drill down of secondary exposed parties, the top holders remain central bank and affiliated institutions, explaining the ongoing prerogative to not impair central banks' Greek holdings as a result of a rating agency event of, even selective, default.
Analysis: Default needed to lure long-term buyers back to Greece (Reuters) - Long-term investors standing aloof from the Greek debt crisis want holders of its government bonds to take a loss big enough to slash the country's debt to sustainable levels before they consider returning. Greece is still expected to default at some point and for most investors who have dumped bonds over the past two years and who are crucial to put the ailing economy back on its feet, the longer that is delayed, the longer it will be before they consider looking at Greek assets again. A likely second bailout -- currently under tortuous negotiation -- is seen only as a means to buy time for euro zone banks to provision for eventual losses and protect the bloc's larger economies from contamination, while the reforms attached to the package will be hard to implement in the face of deepening public resentment. "We would buy if the economy manages to reform itself and if the banking sector is self-funded, but I don't think that's going to happen on a five-year view," "Our view is they also need to default before that."
Form and Substance Eupdate - After a month spent reeling from DSK whiplash, Eupdate finds the European landscape little-changed, much noise notwithstanding.Summarizing: Greece has gone through profound political upheaval to enact austerity measures boosting the nominal credibility of its economic program; German banks have continued quietly to unload Greek debt (unto whom?); European politicians have continued loudly to bang the table about bail-ins; and the European Central Bank has continued stoutly to reject all compromise that might reflect on its mammoth holdings of peripheral debt ... that is to say, all compromise on offer. As Adam pointed out last week, the French bank fig-leaf proposal solves none of the problems at hand, though as Wolfgang Munchau pointed out yesterday, it does apply criminal amounts of structured lipstick to the EU bank-sovereign pig. (No, not PIIG.)The one curious thing about this slow-motion train wreck is the extent to which the public sector is embracing crude formalism as its preferred method of treading water, while private market participants are seizing the substantive high ground.
Italy And Systemic Risk In The United States –Simon Johnson - In recent days, Greece’s parliament adopted new austerity measures and Europe’s finance ministers approved another round of Greek loans. So the European debt crisis is under control, right? Probably not. One obvious reason is Standard & Poor’s July 4 threat to declare a default if banks roll over Greek government bonds coming due over the next year. That could force everyone back to the drawing board. Less obvious, but no less worrisome, is Italy. With a precarious fiscal picture, it could be the next to come under pressure. And this time, U.S. banks are in the line of fire, with about $35 billion in loans to Italy and potentially more exposure to risk through derivatives markets. U.S. regulators should call for a new round of stress tests that assume sovereign-debt restructurings in Europe and take a realistic view of counter-party risks in opaque markets such as foreign exchange swaps. Based on those tests, the biggest banks probably need to suspend dividends and raise more capital as a buffer against losses.
Can Italy Grow Its Way Out of Debt? - What follows is simply a follow-up note to my earlier (Elephant in The Euro Room) piece on Italy. The decision by S&P to put Italian sovereign debt on negative outlook, and the subsequent announcement by Moody’s that it was considering a downgrade has been widely commented on by analysts, and it might be interesting to take a look at some of the views that have been advanced on either side of the argument (although for the detailed analysis see me earlier post). But first, a summary of the problem. The first thing to be absolutely clear about is that this issue is not new. As FT Alphaville’s James Cotterill notes: “In the original ‘why the eurozone will break up’ papers of the 1990s and early 2000s, it was never ever high Greek deficits, or Irish (or Spanish) bank losses going on to public balance sheets that were forecast to destroy the single currency. It was always Italy. High-debt, low-growth, Italy”.
Moody's Downgrades Portugal To Ba2 From Baa1, Outlook Negative - And heeeeeere's Moody's to dump on today's no volume levitation and push Portugal further into junk. Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011. The following drivers prompted Moody's decision to downgrade and assign a negative outlook:
1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.
2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund.
Moody's cuts Portugal to junk, warns of second bailout - Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter. There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," Moody's said. Some economists think Ireland may also need additional support, and investors worry Spain and Italy could be next in line for aid. "It goes to show that this whole crisis isn't over just yet,"
Moody’s cites EU’s appalling crisis management as reason for Portugal downgrade - Moody’s cut Portugal’s credit rating to junk grade on concern that the country will need a second international bailout, the FT reports. The long-term government bond ratings were lowered to Ba2, by four notches from Baa1. The agency warned that Portugal will not be able to tap the markets at sustainable rates for some time after 2013 and that Portugal’s new government would struggle to meet its budget deficit reduction targets. Moody’s cited the tortuous negotiations over Greece in its note, warning that although the likelihood of a restructuring in Portugal was lower than in Greece, the European Union’s “evolving” approach to providing further support “implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well.” According to Tagesspiegel, Merkel said she would not rely on the assessment of the rating agencies but on the troika to make up her mind. Her comments unleashed a big debate in Germany yesterday on the role of the agencies, including condemnations that S&P and others were not acting responsibly.
Moody's cuts Portugal to junk; outlook negative - Moody's Investors Service issued a four-notch downgrade on Portugal's rating, placing the European nation into junk as the ratings agency expressed concern about the growing risk of a second round of financing before it can return to the private market. The woes surrounding Portugal come as Greece, another flailing European nation, continues to worry international markets about possible default on its debt. Like Portugal, Greece was also told to cut its budget deficit sharply, but has been unable to do so. Portugal is aiming the cut the deficit to 5.9% of gross domestic product this year, from over 9% in 2010, and then to 3% by 2013.The nation's long-term government bond rating was cut to Ba2, which is two levels into junk, and assigned a negative outlook, meaning further downgrades were possible. Peers Fitch Ratings and Standard & Poor's Ratings Services have each recently cut the country's ratings. They currently rate Portugal at BBB-, which is the lowest investment-grade level and two notches above Moody's new rating.
Private-Sector Requirement May Hamper Portugal, Moody’s Says - Anthony Thomas, a senior analyst at Moody’s Investors Service in London, commented on the possibility that private-sector owners of Portugal’s government bonds may be asked to participate in a bailout of the country as a condition for another European Union rescue. Moody’s cut Portugal’s long-term bond rating today to Ba2, or junk, from Baa1. The outlook is negative. “Private-sector participation under a support program to a fiscally stressed country may be considered a distressed exchange, and therefore a default under Moody’s definition, but we would have to see exactly what is proposed.” “The European Union’s approach is evolving. Clearly nothing has been finalized. But from what we can see, it’s not so much that we don’t think they’re going to provide additional support, but a pre-condition of that additional support could very well be private sector creditor participation.”
Portuguese Bonds Lead Irish, Italian Debt Lower After Downgrade-- Portugal’s bonds plunged after Moody’s Investors Service cut its credit rating, sending yields to records and leading losses across Europe’s most indebted nations on concern the region’s debt crisis is spreading. Irish securities slumped, Spanish bonds fell for a third straight day and the 10-year Italian yield soared to the highest since November 2008 as Germany revived its proposal for a Greek bond swap involving private investors. German two-year notes rose the most in almost two weeks as demand rose at a sale of 3.38 billion euros ($4.8 billion) of the securities. Portugal may not be able to fund itself from financial markets without more international support, Moody’s said. “Portugal is under considerable pressure as it leads another peripheral leg down,” “Underpinning this move is arguably not so much the Moody’s downgrade, but the comments accompanying this action, specifically the note that a further bailout and some form of private-sector support are increasingly likely.”
Portugal CDS Hit Record High After Downgrade - The cost of insuring Portuguese debt against default hit a record high on Wednesday and yields on Portuguese bonds spiked after Moody's cut the country's credit rating to junk1 and warned it may need another bailout. Five-year credit default swaps (CDS) on Portuguese government debt rose 82 basis points to 850 bps, according to data monitor Markit, Reuters said. This means it costs 850,000 euros to protect 10 million euros of exposure to Portuguese bonds. The cost of insuring other peripheral debt against default also rose as Moody's move reinforced concerns that contagion may be spreading to other heavily indebted countries. Five-year Irish CDS rose 42 basis points to 780 bps and the cost of insuring, according to Reuters. Spanish debt against default gained 21 basis points to 297 basis points. The Italian equivalent also firmed 24 basis points on the day to 220 bps.
Portuguese 10-Year Government Bond Yield Soars to 13.05%; Italy, Portugal, Ireland, all Fresh New Highs; Focus On the "Unsaved" - By now, everyone knows that "Greece is Saved" even though 2-year government bonds are trading today at 28.3%, up from 26.62% at the open. Let's turn our attention away from Greece to the "Not Saved Yet" group of countries including Spain, Portugal, Ireland, and the big Kahuna, Italy.
- Portugal 10-Year Government Bonds - 13.05%
- Ireland 10-Year Government Bonds - 12.43%
- Greece 10-Year Government Bonds - 16.82%
- Spain 10-Year Government Bonds - 5.61%
- Italy 10-Year Government Bonds - 5.12%
Please note that 10-year yields in Italy are now approaching 10-year yields in Spain. I don't know about you, but I am sure glad "Greece is Saved". I look for equally impressive results when Portugal, Ireland, Spain, and Italy are "saved".
Italian, Spanish banks sink in euro credit market storm - Despite the euphoria in the headlines after Greece got its latest rescue, traders are still demanding a hefty premium to invest in the debt-burdened governments of Italy, Portugal and Spain. The price of insuring Italian sovereign bonds against default risk has soared 11% since the weekend, when the European Union finally gave Greece the cash to make its July debt payments. Instead of the broad-based relief that you might expect, this actually indicates a new note of caution on the tracks -- and a shifting balance of risk. If, as Standard & Poor's warned Monday, Greece could technically be considered in default if it restructures its debt, then for all practical purposes the long Greek phase of this story is over. Faced with such a scenario, traders have already turned a cold eye to the other fragile economies of the euro zone: Portugal, Spain, Italy. The cost of insuring Spanish and Portuguese bonds surged 3% today and credit default swap spreads on Italian debt, which was previously seen as relatively insulated, soared a full 6.7%. Moody's further fed the fire this morning by hinting that banks holding Greek debt should start writing down the value of their portfolios now. Since those banks are scattered throughout Europe -- and indeed the world -- the news is reviving fear that cross-border contagion could still be in the cards for the euro zone.
The crisis is back again in full force - Moody’s downgrade of Portugal was a crucial moment in this crisis. Peripheral bond spreads shoot up yesterday, approaching previous records during this crisis, as default fear has once again gripped the markets. Germany’s decision to relaunch its idea of an essentially involuntary bond swaps for Greek sovereign debt holders did not help improve market sentiment either. Moody’s downgrade also incited indignant reactions from Portugal. Credit default swaps, the insurance against a government default, surged to 914 points, the highest value ever. The political response to Moody’s downgrade and to S&P decision to kill the French debt rollover proposal) was furious. After S&P correctly concluded that a coerced default should be rated like a coerced default, EU governments and the European Commission reacted angrily, and threatened the rating agencies with a loss of their oligopoly in Europe. Michael Barnier went as far as to call for a ban a rating on countries subject to a European bailout programme, while calling on them to “respect EU rules”. (not clear to us which rule had been broken) Reuters reports that Portuguese bankers want the EU to set up its own rating agency, presumably to give policy-compliant ratings.
EU Seeks to Curb Big Three Rating Firms After Portugal Downgrade - European policy makers lashed out at rating companies after Moody’s Investors Service cut Portugal’s debt to junk, reviving calls to curtail their clout. German Finance Minister Wolfgang Schaeuble said the grip of the big three rating companies had to be broken when asked about Moody’s downgrade. “I have said before that we have to curb the influence of the rating agencies,” Schaeuble told reporters in Berlin today. There’s a need to “break up” the companies’ dominance, he said. European Commission President Jose Barroso said he “deeply” regrets the timing and magnitude of Portugal’s downgrade by Moody’s and said proposals for increasing regulation of the rating companies in Europe would come out this year. The moves by Moody’s “do not provide for more clarity. They rather add another speculative element to the situation,” The commission, the European Union’s executive arm, “is looking into the regulation of rating agencies to determine whether there are some measures that need to be taken with regard to the prevention of possible conflicts of interest and other matters,”
Europe lashes out over downgrades - Senior European officials lashed out at Moody’s on Wednesday, questioning the timing of the debt rating agency’s downgrade of Portuguese bonds this week and threatening new regulatory action against all three major rating agencies. The high-profile criticism follows long-simmering European complaints about Moody’s and its two competitors, Standard & Poor’s and Fitch, centring on whether they have improperly attempted to influence policy-making in the ongoing debt crisis. The Portuguese downgrade – four notches to “junk” status – comes amidst a heated debate over how hard to push private owners of Greek debt to delay repayments from Athens. José Manuel Barroso, president of the European Commission, questioned the timing, and said Moody’s was guilty of “mistakes and exaggerations”. “I deeply regret the decision … and I regret it both in terms of its timing and its magnitude,” Mr Barroso said. “With all due respect to that specific rating agency, our institutions know Portugal a little bit better.” On Tuesday, Angela Merkel, German chancellor, and François Baroin, French finance minister, sought to downplay Moody’s decision, saying it would not affect their decision-making.
Fear of Junk Status: Europe Seeks to Free Itself from Rating Agencies’ Grip - Strange as it may seem, there are still credit rating agencies that give cash-strapped Greece top marks. The experts at Germany's Euler Hermes Rating currently give the Mediterranean country their top AA rating, citing its "very strong business environment." And there is little doubt that Euler Hermes can be trusted. There is only one problem: Their good rating for Greece is not related to the creditworthiness of the state, but to that of Greek companies. When it comes to rating sovereign bonds, that is still done almost exclusively by the three major rating agencies -- Standard & Poor's, Moody's and Fitch -- who are collectively known as the Big Three. The "Big Three" credit rating agencies can determine the fate of entire countries, by deciding whether they are creditworthy or not. Now Portugal is under pressure after Moody's downgraded its debt to junk status. European politicians want to create an alternative, even though they helped give so much power to the agencies in the first place.
Juncker says wants European rating agency - Eurogroup chairman Jean-Claude Juncker said on Thursday he was in favour of having a European credit rating agency and that it was not right to downgrade countries like Portugal just as they were implementing reforms. Juncker, joining the ranks of policymakers who have criticised rating agencies, said they would lose relevance if they continued to act like they have been. European politicians accused credit rating agencies on Wednesday of anti-European bias after Moody's downgrade of Portugal's debt to "junk" cast new doubt on EU efforts to rescue distressed euro zone states without debt restructuring.
ECB announces change in eligibility of debt instruments issued or guaranteed by the Portuguese government - The Governing Council of the European Central Bank (ECB) has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government. This suspension will be maintained until further notice. The Portuguese government has approved an economic and financial adjustment programme, which has been negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund. The Governing Council has assessed the programme and considers it to be appropriate. This positive assessment and the strong commitment of the Portuguese government to fully implement the programme are the basis, also from a risk management perspective, for the suspension announced herewith. The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Portuguese government.
White flag over Frankfurt -The European Central Bank suspended the minimum credit rating threshold for collateral eligibility in the case of Portugal. The ECB’s governing council said it supported the Portuguese adjustment programme, and judged that progress to far had been appropriate. Given the Portuguese government’s commitment to implement the programme in full, the governing council decided to suspend the rules “also from a risk management perspective”. Market participants immediately interpreted the news as signifying that the ECB will continue to supply liquidity irrespective of what the rating agencies do – and this will almost certainly apply to Greece as well. Trichet also ruled out that the ECB will agree a medium-term Irish finance facility. Mr Trichet said this was not a possibility. Oh, and the ECB also raised the refinance rate to 1.5%, as expected. Jean-Claude Trichet did not signal any further rate rises. Micheál Martin, leader of Ireland’s Fianna Fáil, called the decision foolish, and said the ECB was now actively contributing to the crisis. Mr Trichet said the governing council had not decided on a series of further interest rate increases, which suggests that this is the last rise for now. The recent economic data, and sentiment indicators, suggest that economic growth was heading down again.
IMF Greek Loan Decision May Counter Its Own Geithner-Approved Policy Guidelines - The International Monetary Fund may bend its own lending rules to approve the next tranche a Greek loan, and likely won’t provide the details it normally requires for program financing, current and former IMF officials say.The IMF board may counter the very guidelines for assessing a country’s debt sustainability approved by Timothy Geithner, who was head of the IMF’s policy development department in 2002 when the current policies were outlined. As U.S. Treasury secretary, he is now the fund’s most powerful governor and a backer of the IMF bailing out Greece. The ability of a country to pay back its debt is a fundamental factor in IMF board approval of a loan program. “They are changing the rules and will set a precedent”
Exclusive: EU states ready to rescue bank test failures - European governments are ready to bail out those banks which cannot raise capital from investors after the EU details on July 15 which lenders have failed its latest, more vigorous stress test. The European Banking Authority (EBA) announced on Friday the publication date for the results of its check on 91 of the region's top lenders. These will be accompanied by measures to bolster capital for those that failed or nearly failed, in another attempt to reassure investors that European banks can withstand future shocks. According to a separate European Union draft document seen by Reuters, European countries will support banks that fail the stress tests if those lenders cannot raise capital from investors within six months. The paper, being prepared for EU finance ministers to approve on Tuesday, is an about-face from promises by G20 policymakers in the wake of the financial crisis that taxpayers would never have to bail out banks again. An official close to the EBA said all banks that fail must have a plan by September to plug the capital shortfall by the end of this year, as previously agreed by EU finance ministers.
Satyajit Das: Bailing In to Bail Out – The Greek Bank Debt Exchange Proposal - The proposal to extend the maturity of Greek bonds emanating from the Élysée Palace reflects French strengths first identified by Napoleon III: “We do not make reforms in France; we make revolution.” Structured to meet a German requirement that private creditors contribute to the Greek bailout, the proposal falls short of what is actually required. Under the sketchy proposal, for every Euro 100 of maturing bonds, the banks will subscribe to new 30 year securities, but only equal to Euro 70 (70%). Of the Euro 70, the banks, in turn, will only give Greece Euro 50 (50%) and invest the other Euro 20 (20%) in 30 year high quality zero coupon bonds (via a special purpose vehicle) to secure repayment of the new bonds. The new 30 year Greek debt will carry an interest rate of 5.5% per annum with a bonus element linked to Greek growth of up to an additional 2.5% per annum. (graphic) Of the Euro 340 billion in outstanding Greek bonds, banks hold 27%, institutional and retail investors hold 43% and the International Monetary Fund (“IMF”) and the European Central Bank (“ECB”) hold 30%. It is not clear whether non-bank investors are willing to participate in the arrangements. The ECB has previously resisted any debt restructuring, including maturity extension.
The European project is doomed without reform - The collapse of the Soviet empire in 1989 and of the USSR in 1991 have become walled off in Western minds as events from an alien time and place. But they should remind us that the architecture of human governments is not eternal. Communism was once a powerful threat to its capitalist rivals. But when circumstances change, the bright hopes of an age are prone to crash in disillusion. Europe was a bright political project at the formation of the European Community and again when it expanded at the end of the Cold War. Its purpose was not so much power as peace: truly a noble vision. But that noble project was built on an end-of-history economics, on frozen-in-time free-market notions and on dogmatic monetarism linked to arbitrary criteria for deficits and public debt. In the wake of a global financial meltdown, these no longer serve. Unless they are abandoned soon, they will doom Europe as surely as communism doomed the empire of the East.
Italy's debt needs surge as costs rise to euro-era record - Italy risks becoming a debt crisis casualty if bond yields remain at their current levels because annual interest costs will jump by more than $14 billion, according to Gary Jenkins at Evolution Securities Ltd. Yields on Italy’s 10-year bonds yesterday exceeded 5 percent for the first time since 2008, threatening to add an extra 9.7 billion euros ($14.3 billion) to coupon payments, Jenkins, London-based head of fixed income at the brokerage, wrote in a note. The nation has more than 860 billion euros of notes maturing in the next five years, he wrote. Italy has so far avoided being sucked into the crises that have engulfed Greece, Ireland and Portugal, and which threaten Spain. Lawmakers are seeking to balance the budget by 2014 and plan to push deficit-cutting measures worth 40 billion euros though Parliament later this year. “If contagion spreads to the point where Spain is unable to fund itself in the market and there is concern over private participation in any bailouts, it is difficult to see how highly indebted Italy could escape unhurt,”
Italy and their debt - The bronze medal winner! - As one of the so-called PIIGS nations, Italy seems to have flown under the mainstream media's radar screens for the most part. That is, other than Prime Minister Berlusconi's predilection for slightly younger girls and bunga bunga parties, there has been very little coverage of the issues facing the world's third most indebted nation. I thought that a brief look at the fiscal situation facing Italy would be in order especially in light of Moody's threat to downgrade Italy's debt within the next 90 days. Moody's rattled its sabre over Italy's debt for three reasons:
- 1.) Challenges to Italy’s economic growth due to macroeconomic structural weaknesses that will prevent meaningful economic growth and a likely increase in interest rates over time.
- 2.) Risks surrounding implementation of plans that will reduce Italy's more than ample stock of sovereign debt.
- 3.) Risks posed by changing funding conditions for Eurozone nations with high levels of debt (i.e. the Greece, Ireland and Portugal factors).
As source material for this posting, I am referring to the OECD's Economic Survey for Italy for 2011 found on the website for Italy's Department of Treasury among other sources with additional links highlighted in the text of this blog entry.
Italian Yields Reach 9-Year High as Crisis Spreads; Bunds Gain - Italian bonds slid for a fifth straight day, pushing yields to a nine-year high, as contagion from Greece’s fiscal crisis intensified in the region’s biggest government-debt market. Spanish, Irish and Greek bonds also fell. The additional yield investors demand to hold 10-year Italian securities instead of German bunds widened to a euro-era record as data showed the Mediterranean nation’s industrial production dropped. German bunds extended their weekly advance after Moody’s Investors Service downgraded Portugal’s credit to junk on July 5, stoking demand for the safest assets. “If you are talking about a default in Greece where contagion spreads through Ireland, Portugal and Spain, then Italy is the next stop,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “Italy has an awful lot of debt.” The yield on 10-year Italian bonds rose 10 basis points to 5.27 percent as of 10:06 a.m. in London, up from 4.87 percent a week ago.
European Financial Crisis: Italy - A top European analyst put out a research note last night calling Italy "the elephant in the room". Those fears sent the Italian 2 year yield to 3.5% - nothing compared to Greece, Portugal and Ireland, but a significant increase. The 10 year yield increased to 5.3%. From the LA Times: Italy and Spain rocked by fears of spreading debt 'contagion' The “contagion” that has forced Greece, Ireland and Portugal to seek bailouts from the rest of Europe now is threatening Italy, as investors demand ever-higher interest rates on Italian government bonds. The yield on two-year Italian bonds surged to 3.51% on Friday, the fifth straight increase and up from 3.32% on Thursday. On Monday the yield was 3.04%. Likewise, Spanish two-year government bond yields jumped to 3.77% on Friday from 3.66% on Thursday and 3.35% on Monday.
Worries over Italy fuel eurozone crisis- The eurozone debt crisis intensified on Friday amid signs that contagion is spreading to Italy, the currency club’s third-biggest economy. Italian bond yields, which have an inverse relationship with prices, leapt to nine-year highs while the country’s stock market and bank shares tumbled. Worries over Italy also hit the euro, which fell nearly 1 per cent against the dollar. “The mood in the eurozone has changed for the worse this week, with increasing fears of contagion and worries that the crisis could deepen,” said Ken Wattrett, chief eurozone economist at BNP Paribas. “The unstable political situation in Italy and the country’s sluggish economy have not helped.” Domestic political tensions have undermined investor confidence in Italy. On Friday Silvio Berlusconi, prime minister, launched a public attack on his finance minister’s handling of the centre-right government’s proposed austerity package. Tensions between Mr Berlusconi and Giulio Tremonti have come to a head over the finance minister’s austerity budget and his reluctance to endorse tax cuts demanded by the prime minister.
Portugal, Ireland Bond Risk Rises to Record, Default Swaps Show - The cost of insuring against default on Portuguese and Irish government debt rose to records, leading a gauge of the region’s sovereign risk to an all-time high, according to traders of credit-default swaps. Contracts on Portugal climbed 9.5 basis points to 987.5, signaling a 57 percent probability of default within five years, according to CMA prices at 10 a.m. in London. Swaps on Ireland jumped 28 basis points to 883 and the Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 4 to 250. Swaps on Italy increased 8.5 basis points to 226, the highest level since Jan. 12, while Spain rose 2.5 to 305 and Belgium was up 4.5 at 165.5. Greece fell from a record, declining 34 basis points to 2,116
Irish Finance Minister Says EUR3.6 Billion In Budget Cuts Only A Minimum - Irish Finance Minister Michael Noonan said Tuesday that tough austerity for 2012 will involve "a minimum" EUR3.6 billion in cuts for the country to meet its commitments to the troika of bailout lenders--the European Union, International Monetary Fund and European Central Bank.The coalition government will be discussing deficit cuts "in the range of EUR3.6 billion to EUR4 billion" with the troika in the course of the year, Noonan told the Irish parliament.The coalition that swept to power in March is preparing over the coming months its first austerity budget, aiming to reduce a current 10% budget deficit to below 3% of gross domestic product by the end of 2015.Ireland must meet quarterly targets set by the EU, IMF and ECB lenders in return for its EUR67.5 billion bailout deal struck in November 2010.
Irish Begged to Buy Fridges to Boost Economy - Tara O’Neill stands empty-handed and defiant outside a Marks & Spencer store on Dublin’s busiest shopping street. She won’t be tempted to buy anything. “I’ve gotten rid of my credit cards and paid down my overdraft,” “Now we’re in recession. I don’t buy what I don’t have to.” Irish retail sales are falling at more than twice the pace of the average in the euro region, after the government increased taxes and reduced salaries for state workers by 14 percent to help cope with Europe’s worst banking crisis. Consumer spending plunged 1.9 percent in the first quarter from the fourth quarter, the steepest drop in two years, according to figures published last month by the statistics office. With household expenditure accounting for 53 percent of the economy, Ireland’s ability to emerge from its deepest economic contraction in history may depend on persuading people like O’Neill to start spending the cash they have left. The yield on 10-year Irish bonds rose to a record today amid speculation that the nation’s credit rating may join Greece and Portugal in being downgraded to junk.
More Signs Of Eurozone Disintegration, As Denmark Throws Up New Blocks At The Border - This morning, Denmark reintroduced customs checkpoints on its borders with Germany and Sweden, in a move that threatens the integrity of passport-free travel within the EU. The European Commission is up in arms over Denmark's actions, saying that it will "take all necessary steps" to enforce EU law. Since its adoption in 1995, the Schengen accord has allowed people and goods to move freely among most European countries. Proponents of the treaty tout its positive influence on trade. But the treaty has recently come under criticism, particularly in the wake of popular uprisings in Tunisia and Libya which have sent a stream of French-speaking migrants to Italy and France. These two countries angered Europe by temporarily suspending the Schengen treaty in May. Denmark has increasingly been criticized for its "open and hostile atmosphere towards Muslim groups." The Danish government says the new customs controls are really meant to prevent the entrance of organized crime gangs from eastern Europe, and not an influx of Muslim immigrants.
Denmark fences itself off from the EU, raising disintegration fears - Denmark is to put the barriers back up on its borders with Germany and Sweden. The move is not going down well with EU colleagues who say it violates Europe's much-heralded open border agreement. From Tuesday, 50 Danish customs officers will be stationed at the country’s borders to perform spot checks on vehicles. The move is part of a plan approved by parliament last Friday, which also see permanent buildings installed on the borders. The Danish government insists that the re-establishment of border checkpoints is meant to prevent drug flow and illegal migrants from entering the country. The move is regarded as a bad sign by left-wing politicians and the opposition in Denmark itself, where many are seeing it as a concession to nationalists which may damage the country’s economy. It has also been strongly opposed by EU officials in Brussels, and especially by Denmark's neighbor Germany.
ECB signals more rate rises to come, helps Portugal - The European Central Bank raised interest rates for the second time this year Thursday and signaled further policy tightening to come to tackle inflation despite the euro zone's intensifying debt crisis. But it offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, committing to keep providing it with liquidity. "We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet told a news conference after the bank raised interest rates by 25 basis points to 1.5 percent. Economists said before the news conference that use of that phrase would signal a further rate rise in 2011, likely to be in the last three months of the year.
One Interest Rate Hike Closer to Eurogeddon - The ECB today followed through on it plans to tighten monetary policy, the second time it has done so since April. As I have noted before, tightening monetary policy is the worst thing the ECB could be doing right now if it truly cares about preserving the Eurozone in its current form. If the ECB does care it should be easing monetary policy to help bring about a real appreciation in the core countries and real depreciation in the periphery. Even if the ECB is indifferent there is still no justification for tightening monetary policy based on its objectives. For, as Rebecca Wilder notes, inflation expectations are down and the growth in the ECB's targeted monetary supply is tapering off. So this tightening cycle is truly bewildering. Maybe the tightening cycle is to provide cover to the ECB buying up debt from the periphery or maybe the ECB is trying to hasten what seems to many the inevitable downsizing of the Eurozone. Either way, the band Europe has the right diagnosis of what all this really means.
France Must Meet Targets As AAA Loss Would Hit Euro Zone-Commission - France must meet its deficit targets despite presidential elections in 2012 or it risks endangering its AAA rating and the stability of the euro zone, the finance commission at the French senate said Wednesday. France will need to reduce its deficit by EUR20 billion in 2012 to meet the target of bringing the deficit down to 4.6% of gross domestic product from the 5.7% expected this year, the finance commission said. The impact of France losing its top notch rating would not only be a disaster for France, but also the euro zone, Marini said. France is the second largest contributor to bailout mechanisms that use an AAA rating to borrow at low rates and lend to countries that are shut out of markets by prohibitively high borrowing costs. "The triple A of France is the bolt that holds together the fragile edifice of the euro zone. We would no longer be able to talk about programs to ensure the financial stability of countries in trouble if France's AAA was called into question," said Marini, who is also a member of President Nicolas Sarkozy's UMP party.