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

Saturday, August 20, 2011

week ending Aug 20

Fed Balance Sheet Shrinks In Latest Week (Dow Jones)- The size of the U.S. Federal Reserve's balance sheet inched down in the latest week as the central bank maintained a large portfolio of assets following the end of its economic stimulus. The Fed's asset holdings in the week ended Aug. 17 shrank slightly to $2.862 trillion, from $2.876 trillion a week earlier, it said in a weekly report Thursday. The Fed's holdings of U.S. Treasury securities increased to $1.648 trillion on Wednesday, from $1.645 trillion a week earlier. Thursday's report showed total borrowing from the Fed's discount lending window fell slightly to $11.90 billion from $11.91 billion a week earlier. Borrowing by commercial banks dipped to $3 million, from $10 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts edged up to $3.485 trillion, from $3.476 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.752 trillion from $2.742 trillion in the previous week. Holdings of agency securities fell to $732.33 billion from the prior week's $ 734.10 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 18, 2011

How the Federal Reserve boxed itself in - Last week, the Federal Reserve announced it was lowering its forecast for the U.S. economy. The Fed now sees signs that economic growth is decelerating, job creation is soft and that deflation — not inflation — is the greater threat. In response, the Federal Open Market Committee took the unprecedented step of declaring they will leave interest rates at zero until mid-2013. This policy announcement of “Two more years!” is a tacit admission that the U.S. Central Bank has painted itself into a corner. This entire crisis traces itself back in large part to then FOMC chair Alan Greenspan not allowing markets and the economy to flush themselves clean after the dot-com collapse. It seems that nearly every Fed/government policy action has been a response to the problems that error led to.

We just need some sort of sign -  THE Fed's latest policy statement was confusing, even by Fed policy statement standards. The members of the Federal Open Market Committee clearly saw a darkening of the economic picture, likely to produce slower growth and lower inflation than they'd previously expected. And they clearly took action, changing the language of the statement to reflect that the federal funds rate target would most likely be held at the current, low level until 2013. What wasn't so clear, however, was just what the Fed expected that policy change to accomplish. Markets looked it over, thought about it one way and sold off, thought about it another way and bought back in, and then generally went on reading the financial papers, not sure what Bernanke and Co. were aiming for. Given this response, it's safe to say that whatever Mr Bernanke intended the policy to accomplish, its effect was only the mildest of support for the economy. And it's also not surprising that having been left by Mr Bernanke without a clear policy goal or action in mind, markets have gone on responding to bad news by projecting bad economic outcomes. Equities, which had been flat most of the week, dropped sharply today on a raft of bad data. Treasury yields are at record lows. Commodity prices keep dropping.

Blinder: The FOMC Majority is Very Worried - Alan Blinder says the Fed is very worried. and likely to take further action: Meeting on Aug. 9, the Federal Open Market Committee (FOMC) downgraded its near-term assessment of the U.S. economy sharply. Since the Fed's code of conduct mandates the use of Fedspeak instead of English, let me offer a quick translation: "Yikes! Things have sure deteriorated quickly!" The Fed expressed its alarm in two ways, both remarkable. The first was Mr. Bernanke's willingness to push ahead despite a level of discord that is almost unheard of: on a far-from-resounding 7-3 vote. Second, his policy innovation stunned veteran Fed watchers (including me): The Committee more or less promised to maintain the current rock-bottom federal funds rate for almost two more years.In so doing, the Fed violated one of the most revered canons of central banking: Always keep your options open. So why risk the loss of credibility? The answer is that the FOMC majority was so concerned about the health of our economy that they felt a duty to offer some support. But they had used up all their good ammunition long ago. The two-year interest-rate commitment is based on a wing and a prayer.

The FOMC Decides on Monetary Stimulus That is Fraught With Uncertainty and Danger - My initial reaction to the FOMC decision this week was disappointment.  That has not changed, but after reading other observations and thinking about it some more I am now disappointed for other reasons.   Let me explain why.  The FOMC's new declaration that it will likely hold its target interest rate at 0.25 percent until mid-2013 can be viewed as creating new monetary stimulus.  As Matt Rognlie notes, the Fed through this policy has changed the expected path of future short-term interest rates to a lower level, one that implies greater monetary stimulus and thus higher economic activity in the future.  This future expansion, in turn, makes households and firms more likely to spend today because one, it improves their economic outlook and two, it lowers the real interest they face via higher expected inflation. Alternatively, one can take Justin Wolfer's view that this new path of low short-term interest rates in conjunction with the term structure of interest rates means lower long-term interest rates than would otherwise prevail.  This, then, provides the same outcome of another round of QE, but does so without the controversy surrounding the QE programs.

Bernanke Pledges To Screw Your Grandmother For At Least Two More Years -  I wonder what goes through Ben Bernanke’s mind as he sits in his gold plated boardroom in the majestic Marriner Eccles building in Washington DC and decides to screw grandmothers in order to further enrich Wall Street bankers. He just pledged to keep interest rates at zero percent for two more years. Ben is a supposedly book smart man. Does he have no guilt or shame for what he has wrought? How does he sleep at night knowing he has created bloody revolutions around the globe due to his inflationary zero interest policy? People are dying because he has decided that an elite group of Wall Street bankers who recklessly brought down the worldwide financial system in 2008 deserve to be kept alive and enriched at the expense of the many.

Fed’s Bullard Says New Low Interest-Rate Pledge Is Not Signal for More QE -  St. Louis Federal Reserve Bank President James Bullard, who was the first Fed policy maker to urge the round of bond purchases that started last year, said the central bank isn’t signaling a third stimulus program with its commitment to keep rates near zero through mid-2013. “The most likely outcome for the U.S. economy is still that the economy continues to grow at a moderate pace through the second half of the year,” Bullard said late yesterday in a telephone interview. “If the economy is substantially weaker than expected, we could take more action, especially if it was coupled with a renewed deflation risk.” Bullard, who doesn’t vote on monetary policy this year, said he would have dissented against the Aug. 9 Federal Open Market Committee statement that for the first time attaches a date to its pledge to keep borrowing costs in a range of zero to 0.25 percent. Previously, the FOMC promised to keep interest rates low for an “extended period.”

Fed’s Plosser: Rates Will Likely Need to Rise Before 2013 - Last week’s statement by the Federal Reserve that economic conditions warrant keeping interest rates at ultra-low levels until mid-2013 was “inappropriate,” and the U.S. central bank likely will need to raise rates before then, one of the Fed policy makers who dissented from that decision said Wednesday. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, told Bloomberg Radio in an interview said the statement from the Fed’s monetary-policy committee sent an “excessively negative” message about the U.S. economy. The move to link near-zero interest rates to a date “was inappropriate policy at an inappropriate time,” Plosser said. The Fed, he added, should have shown more patience and waited for further data before taking the action. Plosser was one of three members of the Federal Open Market Committee who opposed the decision.

The Don Quixote Economics of Fed Dissenters - Aside from rumblings in Richard Fisher's gut, what are the best arguments Fed dissenters have against further easing? Here's Minneapolis Fed governor Narayana Kocherlakota giving his rationale for opposing the recent change in the Fed's communication strategy: How about a reality check. Let's take a look at the percent change in PCE from the previous year, starting in November 2010. See the "notable rise" in PCE inflation? Try squinting. Of course, Kocherlakota hedges a bit by claiming that the increase occurred during the first half of 2011, which conveniently ignores the subsequent decline (both of which were mainly driven by oil prices). The argument that PCE minus food and gas prices have also increased is equally hyperbolic -- unless a move from 1% to 1.3% inflation is worrisome. What about unemployment? Given that it has come down from 9.8% in November 2010 to 9.1% in July 2011, perhaps further action is unwarranted. Unfortunately, this statistic is misleading. The U3 measure of unemployment ignores discouraged workers; the civilian employment-population ratio gives us a more accurate assessment of the labor market.

Should an Improving Job Market Restrain the Fed? - On Tuesday when the Federal Reserve's monetary policy statement was released, something surprising occurred. Three committee members dissented with that change. We haven't seen this many dissenters since 1992. One was Minneapolis Federal Reserve Bank President Narayana Kocherlakota. On Friday, he released a statement explaining his rationale.  His reasoning boils down to the following:  I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. IThis is actually pretty straightforward. He's saying that we're seeing unemployment fall, so the labor market is moving in the right direction. Additionally, prices are rising at a moderate pace. As a result, the Fed's dual mandate doesn't require additional support. Let's consider each of these claims.

Federal Reserve Might Not Undertake QE3, And It Might Not Help If They Do - With the economy growing at a snail's pace and the job market still disconcertingly weak, economists are wondering whether the Federal Reserve will undertake a new round of stimulus efforts to keep the country from slipping into a double-dip recession. Even if the Fed goes that route, however, it may not have much of an effect. Such a program would be known as QE3 -- a third session of quantitative easing, which the Fed has done twice before. "Quantitative easing" refers to the Fed buying up assets, particularly longer-term Treasury bonds, as a way of pumping more money into the economy and stimulating investment. Both rounds of quantitative easing have occurred during the current economic crisis, with the previous round, known as QE2, lasting from November 2010 to June of this year. Economists gave it decidedly mixed reviews. At the end of QE2, unemployment was still high, GDP growth was discouragingly slow and consumer spending was on the way down. Critics of quantitative easing say that not only was the second round ineffective, but the influx of new money put the country at greater risk of inflation. Nevertheless, stimulus advocates are keeping a close eye on the Fed, looking for signs that QE3 is on the way.

Desperate measures for *really* desperate times - Even from this correspondent’s vacation spot on a rustic Swedish island did he notice how carefully the FOMC’s last statement was scrutinised. And frankly, we’re bored of reading about the potential efficacy of the ideas floated by the Fed as available tools to combat a protracted downturn. You might categorise those as QE2.whatever: exceptionally low rates through 2013, lowering interest on reserves, increasing the average maturity of its holdings. Ditto for the notion of a conventional QE3 (more large scale asset purchases). But Neal Soss of Credit Suisse has a note out Monday that speculates about the potency of a few ideas not mentioned by the Fed — but which he thinks could become necessary if fears of a double-dip prove valid and the US economy falls through a trap door into a Japanese deflationary period. First a warning to Ron Paul any hard-money, Fed-constraining types: your heads might explode if you continue reading. But since FT Alphaville is a worrywart and likes to be prepared, we’ll pass along a few of these ideas for the rest of you to ponder:

Fed Eyes Cash Europe Banks Have in U.S. -  Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter. .The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say. Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks. Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up.

Fed says it is treating U.S., European banks the same (Reuters) - The U.S. Federal Reserve Bank is treating foreign banks the same as their U.S. peers, a policymaker said, putting himself at odds with a report that it was keeping a closer eye on European banks struggling with the continent's debt crisis. Fears about bank funding were one of the reasons for another dismal trading day for bank stocks in Europe after heavy losses in the last two weeks, with the main bank stocks index giving up 7 percent in late trading. The Wall Street Journal said earlier that the Federal Reserve was asking for more information about whether European banks with U.S. units had reliable access to the funds needed to operate in the United States. William Dudley, the president of the Fed's New York branch, said the central bank was "always scrutinizing banks" and that it treated U.S. and European banks "exactly the same." Dudley was responding to the story in the Journal. "This is standard operating procedure, this is something that we do as a matter of course," Dudley told New Jersey business leaders Thursday.

A primer on the new era of monetary policy - I’ve seen a lot of misleading commentary on how monetary policy will work in the next few years, particularly given the Fed’s enormous balance sheet. Many people seem to think that the Fed’s recent money creation is inherently inflationary—if not now, then eventually. Once upon a time, this might have been true. Today, however, the Fed has a tool that renders the size of its balance sheet mostly irrelevant as a constraint on monetary policy: interest on reserves. Monetary policy using interest on reserves is almost exactly the same as old-style monetary policy—in fact, the mechanics are maddeningly simple. Yet there is still a great deal of confusion on this issue, and I think it’s helpful to go back to the basics.

Why the zero lower bound matters - The zero lower bound is not an insurmountable obstacle: by shaping expectations of future interest rates, the Fed can have a tremendous influence on the macroeconomy, even when the current interest rate can’t go any lower. But it’s not irrelevant either: instilling the right expectations is trickier than simply moving around the federal funds rate, and a central bank unprepared to make a visible commitment can be remarkably ineffective. Some economists argue that the zero lower bound is irrelevant, or at least overrated, for other reasons. In his response to an earlier post of mine, for instance, David Beckworth suggested that the Fed’s ability to buy other assets (e.g. long-term Treasuries, or corporate bonds) even when short-term interest rates are zero means that monetary policy retains its effectiveness. This has historically been one of the main arguments against a “liquidity trap”: sure, the Fed can’t do any more by buying 6-week T-bills, but why not 20-year corporate debt? In fact, I agree to an extent: unconventional asset purchases can make a small difference in yields, and possibly a larger difference in times of financial disarray. But they are vastly, vastly less effective than the Fed’s traditional tools, and it takes an extraordinary expansion of the Fed’s balance sheet to have much effect at all.

Monetary Policy Stimulus at the Zero Bound is Hard... Except when it was done in Sweden over the past few years or when it was done between 1933 and 1936 in the U.S. economy.  In both cases short-term interest rates were at 0% and almost all the other characteristics of what a New Keynesian like Matt Rognlie would call a liquidity trap were present.  Monetary policy stimulus, however, proved to be very effective in both economies. In Sweden, monetary authorities were aggressive with quantitative easing--their central bank's balance sheet rose to 25% of the GDP versus the Fed's 15%--and had an explicit inflation target.  This was enough to push nominal spending back to its pre-crisis, long-run growth path.  FDR also used aggressive monetary stimulus--arguably the original QE program--in conjunction with a price level target to spark a robust recovery that saw real GDP growth average around 8% per annum between 1933 and 1936. And it occurred despite a massive deleveraging by an indebted household sector. Unfortunately, this recovery was cut short by a tightening of monetary and fiscal policy in 1937. So maybe monetary policy stimulus at the zero bound really isn't that hard after all.  Maybe we have made monetary policy harder than it really needs to be.

Time to Downgrade the Journal’s Editorial Column - The Journal has launched an attack on Ben Bernanke and the Federal Reserve that is not only remarkable in its brutal mishandling of fact – but also for its possibly lethal intellectual consequences within the conservative world. Precisely because conservatives (rightly) hesitate to use aggressive fiscal policy to fight recessions, it is all the more urgent that we appreciate the reach of monetary policy. If we are pushed by ignorance or passion into a wrongheaded monetary policy, then we will have no answer whatsoever to the question: how do we create prosperity and employment in the near term? So let’s go line by line through the Journal’s misinformation:

Perry on Bernanke: ‘I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas’ | Texas Governor Rick Perry, who entered the presidential campaign on Saturday, appeared to suggest a violent response would be warranted should Federal Reserve Chairman Ben Bernanke “print more money” between now and the election. Speaking just now in Iowa, Perry said, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.” Treason is a capital offense.

Perry Warns Bernanke: It Could Get ‘Pretty Ugly’ in Texas -  Texas Gov. Rick Perry said that things could get “ugly” in the Lone Star State for Federal Reserve Chairman Ben Bernanke if the Fed embarks on another round of quantitative easing. At a house party here, Mr. Perry was asked for his thoughts on the Federal Reserve.  “I‘ll take a pass on the Federal Reserve right at the moment, to be honest with you,” he replied. But he didn’t pass on Fed Chairman Bernanke. “If this guy prints more money,” Mr. Perry said, pausing, “I don’t know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas.” His campaign did not immediately return a request for comment after the event.

Governor Perry on Monetary Policy - From the Washington Post:..."If this guy [Fed Chairman Bernanke] prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”Perry continued by saying that printing more money would be "devaluing the dollar in your pocket, and we cannot afford that. ..." The Philadelphia Fed's August Survey of Professional Forecasters was released on Friday. Ten year CPI inflation expectations are presented below.

Perry compares Fed stimulus to treason  - Rick Perry’s suggestion that it would be “almost treasonous” for the Federal Reserve to print more money has stirred up a heated debate and highlighted the unprecedented degree of political pressure surrounding Ben Bernanke, the Fed’s chairman. “When you’re running for president you have to think about what you’re saying because your words have greater impact,” said Jay Carney, White House spokesman. “Certainly [I] think threatening the Fed chairman is probably not a good idea.” Mr Perry, the Texas governor and Republican presidential candidate, said in response to a question from a voter in Iowa on Monday evening: “If this guy [Bernanke] prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in history is almost treasonous in my opinion.”  The comment by Mr Perry, who holds a permit to carry a concealed weapon and created a media stir last year when he shot a coyote to protect his daughter’s retriever, raised new questions about the use of violent language on the campaign trail.

Giving Aid And Comfort To The Economy - Texas Governor Rick Perry gives his opinion of Fed Chairman Ben Bernanke: “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.” I wonder what Perry considers "ugly." Perhaps he means he'd charge Bernanke with murder, execute him following a conviction based on faulty evidence, and then try to cover it up after the fact?Liberals are clamoring for the Fed to do something to help the economy--in this case printing money. But Perry thinks this would be "treason." Now you might ask, what exactly does an aspiring secessionist like Perry have against treason?  Well it's pretty simple. If the Fed actually helped stimulate the economy, Perry or whomever the Republican nominee is would have a harder time winning the election, because Obama would benefit from stronger growth. So if Bernanke actually helped the American economy, he would help Obama, who in Perry's view has shown "arrogance and the audacity" towards "the values that are important to the people of America." Helping Obama win, albeit indirectly, would therefore be an act of treason.

Fear of a Fed Planet - Castigate Perry for his crude style. Go right ahead. On substance, however, Perry is clearly within the bash-the-Fed mainstream of the Republican Party. His comments came two days after Rep. Ron Paul, R-Texas, scored a strong second place at the Ames straw poll, and eliminating the Fed is one of the causes of Paul's life. Paul lost narrowly to Rep. Michele Bachmann, who was one of the GOP's loudest voices against the Fed's 2010 plan to spent $600 billion on mortgage-backed securities—the second round of "quantitative easing." Both of them voted for Paul's 2010 "audit the Fed" legislation, an effort to crack open the central bank's books that passed with bipartisan support. In the modern GOP, you either hate the Fed or you go home. Fed fatigue isn't just for Republicans. Pollsters ask few questions about the Fed, but the information we do have shows a public that has turned wildly against it. In 2008, according to Gallup, 61 percent of them approved of Bernanke. In 2009, only 36 percent did.

Ignorance, Paranoia, and Implied Violence -  Krugman - Rick Perry: Texas Governor Rick Perry, who entered the presidential campaign on Saturday, appeared to suggest a violent response would be warranted should Federal Reserve Chairman Ben Bernanke “print more money” between now and the election. Speaking just now in Iowa, Perry said, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.” Treason is a capital offense. Actually, what Perry said is even worse than most writing on it has suggested. Yes, he’s showing ignorance of the basics of monetary policy; yes, he appears to have implicitly threatened violence against my former department head. But somehow everyone I’ve read seems to miss the bit about Bernanke playing politics — implying that anything he does would be in the interests of helping Obama get reelected. That’s a hell of an accusation to make — especially when you bear in mind that Bernanke was a Bush appointee.

Ben: Need a Rethink on that Texas Trip - Just when you thought our politics couldn’t get any weirder, I think Gov Rick Perry just threatened to beat up Ben Bernanke for suggesting another round of quantitative easing. I wish I was making this stuff up, folks…I really do…but I’m not. (Does this mean the Fed research team needs to add a new variable into their impact models?…i.e., the estimate of the impact of monetary easing on long-term rates, conditional on the Chairman getting a fat lip.) Perhaps Gov Perry is just looking over his shoulder at Ron Paul, who’s always bashing the Fed (and was a close second to Rep Bachmann in the Iowa poll), but let’s take a look at the economics in play here.

Governor Perry on Monetary Policy - From the Washington Post:..."If this guy [Fed Chairman Bernanke] prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”Perry continued by saying that printing more money would be "devaluing the dollar in your pocket, and we cannot afford that. ..." The Philadelphia Fed's August Survey of Professional Forecasters was released on Friday. Ten year CPI inflation expectations are presented below.

Richard Fisher Doesn’t Know There’s A Recession In Texas - Dallas Federal Reserve President Richard Fisher recently voted against monetary stimulus and explained why in a speech delivered earlier this week. The method is to first start with a long discussion of the relative strength of job growth in Texas, then offer a brief discussion that reveals Fisher doesn’t seem to understand how monetary policy works, and then conclude with a staggering analysis of the Texas labor market which appears to entirely neglect the fact that the unemployment rate in Texas is over 8 percent:

A Foray into Monetary Policy and Tangentially Related Speculations - Yesterday I wrote an Atlantic column about the bizarre situation that the Federal Reserve is in. Ordinarily, we think central bank independence is important because it permits the bank to take unpopular, anti-growth steps when the political branches of government want popular, pro-growth steps. But today we’re in Bizarro world: the political branches are intent on strangling the economy, so the Fed should be ignoring the political winds and stimulating the economy—especially since it’s clear that fiscal policy is off the table. Rick Perry just provided a last-minute dose of color.Obviously Perry and the Republicans don’t want the Fed to stimulate the economy because they don’t want the economy to recover before the 2012 elections. But I think there’s something deeper here, which Mike Konczal gets at in this great post. Konczal summarizes the nineteenth-century gold-standard ideology this way: “Paper money decreases the power of the husband over his wife and the father over his family, loosens the natural leadership that serves as the best protection against ‘effeminate’ manners, and gives us a democracy without nobility.”

Perry attack may portend more political pressure for Fed - Texas Gov. Rick Perry’s broadside against Federal Reserve Chairman Ben S. Bernanke on Monday night was a remarkable departure from the usual approach of major presidential candidates toward the Fed, which has been to make any criticism delicately and politely.Perry was neither delicate nor polite. “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas,” Perry said. “Printing more money to play politics at this particular time in American history is almost . . . treasonous in my opinion.”The comments have provoked widespread criticism, including from Republicans such as former George W. Bush aide Tony Fratto, who called them “inappropriate and unpresidential.”  Bernanke is a thoughtful, even-tempered monetary economist. And it’s worth remembering that he served in Bush’s White House and was first appointed to the Fed chairmanship by Bush. To accuse any Fed chairman who would “print money” of treason is like criticizing the transportation secretary for building roads. It is the job of the Fed, or any central bank, to print money.

Rick Perry and central bank independence - THIS video is receiving a great deal of attention today: In it, Texas Governor Rick Perry, now a candidate for the Republican nomination for the presidency responds to a question about the Federal Reserve by saying, "If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost … treasonous in my opinion." Pundits will debate whether or not Mr Perry is actually advocating violence against the chairman of the Federal Reserve. It doesn't really matter. For one thing, crazier elements of society may interpret the comments this way whatever Mr Perry meant. And for another, even an entirely political threat is dangerous. Fed officials will not acknowledge that political criticism in the wake of QE2 has affected their willingness or ability to act. Yet it would be very difficult indeed to put comments like this entirely out of one's mind.

Money-printing for dummies - News flash:Ben Bernanke and the Fed have been "printing money." That’s supposed to be counterfeiting, according to politician Ron Paul. It’s supposedly treasonous, according to politician Rick Perry (...yes, he actually said that; see this link). But I disagree; I think it’s a laudable, praiseworthy effort in monetary policy by non-politician Ben Bernanke to protect main street from the hardships of stagnation and deflation – in the absence of any help in the way of growth-friendly fiscal leadership from our politicians.   If you have any friends who think printing money is always inflationary, this post is for them. They are only hearing half of the real story from our politicians, and I bet they’d like to hear the other half. Here are several several facts grouped under the two headings “common knowledge” and “well-kept secrets.”

Common knowledge:

  • • The Fed can print money rapidly.
  • • Inflation is too much money chasing too few goods and services. [Keyword: “chasing.”]
  • • Unanticipated inflation is bad; it hurts lenders by forcing them to accept money of lower value as payback for previous loans.

Well-kept secrets:

  • • Printing money is the Fed’s tool to fight deflation.
  • • The Fed can also “unprint” money rapidly.
  • Unprinting money is the Fed’s tool to fight inflation.
  • • Deflation can be triggered or fueled by insufficient money to support the potential production of goods and services.
  • • When newly-printed money is just sitting there not “chasing” anything, it doesn’t cause inflation or cure deflation.
  • • Deflation is bad; it hurts borrowers, frequently forcing them to default on their loans – which in turn hurts lenders as well.

Defending the Dollar, Uneasy Money: After administering a pro-forma slap on the wrist to Texas Governor Rick Perry for saying that it would be treasonous for Fed Chairman Bernanke to “print more money between now and the election,” The Wall Street Journal in today’s lead editorial heaps praise on the governor for taking a stand in favor of “sound money.” First there was Governor Palin, and now comes Governor Perry to defend the cause of sound money against a Fed Chairman who, in the view of the Journal editorial page, is conducting a massive money-printing operation that is debasing the dollar. Well, let’s take a look at Mr. Bernanke’s record of currency debasement. The Bureau of Labor Statistics announced the latest reading (for July 2011) of the consumer price index (CPI); it stood at 225.922. Thirty-six months ago, in July 2008, the index stood at 219.133. So over that entire three-year period, the CPI rose by a whopping 3.1%. That is not an annual rate, that it the total increase over three years, so the average annual inflation rate over the whole period was less than 1%. The last time that the CPI rose by as little as 3% over any 36-month period was 1958-61.

Fading Inflation Fears - Krugman - The Fed dissenters — who oppose telling markets that rates are likely to stay low for a long time — have come in for a lot of well-deserved criticism over their claims that the job market is improving (it isn’t) and that inflation is a serious threat. On the latter front, I and others have pointed out that the rise in core inflation in the first half of 2011 is looking very much like a temporary blip driven by commodity prices. And it turns out that markets, which showed some sign of expecting inflation a few months ago, have now changed their mind. Here’s the two-year breakeven rate, the inflation expectation implied by the difference in yields between ordinary bonds and inflation-protected bonds: Of course, the market doesn’t have to be right; in fact, I’d argue that it was quite wrong earlier this year in expecting 2.5 percent inflation in the near term. The point, however, is that investors seem to have caught on to the fact that the inflation blip was indeed a blip. Only the hard-money men have failed to get it.

Inflation Expectations Falling, Will Narayana Kocherlakota Admit He Was Wrong? - When dissenting from the Federal Reserve Open Market Committee’s modest gesture in the direction of monetary stimulus, Minneapolis Fed President Narayana Kocherlakota did the world the favor of offering an actual explanation for his conduct, which is more than either of the other two dissenters did. He wrote that “Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.”Well, today the Cleveland Fed released its monthly update of inflation expectations and guess what—they’re low and falling:

Should Food Be Excluded from Core CPI? - STL Fed pdf - I revisit the issue of whether food and energy should be removed when forecasting headline CPI. Instead of focusing on volatility, we use the signal-to-noise ratio (SNR) as a measure of the relevant predictive significance of each component of CPI for 12-month-ahead year-overyear headline CPI. Taking this approach implies a tradeoff between a component’s (i) degree of volatility and (ii) degree of correlation with future headline CPI. The greater a component’s SNR, the more useful the component should be in forecasting headline CPI. The chart shows estimates of the SNRs of some of the major components of headline CPI from December 1968 to May 2010 estimated over a 10-year rolling window. The solid black line shows the SNR of energy prices and the dashed black line the SNR of food prices. In the late 1960s, the SNRs of food prices and energy prices were almost identical to those of other components. After the oil crisis of the mid-1970s, the SNR of energy prices dramatically declined and remained low across the entire sample. This low signal strength suggests energy prices will have little predictive content for future headline CPI inflation.

Market Measures of Inflation Expectations? - NY Fed -  Market-implied expectations are often thought of as containing valuable information beyond measures based on surveys of professional forecasters because investors are willing to put money behind their opinions. Market-implied measures are also readily available in real time whenever financial markets are open for trading. Since 1997, the U.S. Treasury has issued Treasury Inflation-Protected Securities (TIPS). These securities allow investors to protect themselves, or “bet,” against unanticipated changes in inflation, as measured by the consumer price index (CPI). Alternatively, investors can seek a similar exposure using a type of financial derivative called inflation swaps. Central banks and investors around the world closely monitor developments in financial markets to gauge expectations of future interest rates and inflation. In this post, we argue that two of the most commonly used market-based inflation expectations measures—TIPS breakevens and inflation swaps—are noisy. Although movements in both measures provide policymakers with valuable information, readings should always be interpreted with care. 

BOOM: 0.5% CPI Buries Hopes For More Fed Easing, Initial Claims Tick Back Higher: Boom: Headline CPI of 0.5% screams stagflation. That's a major jump from -0.2% in the previous month, and it's much hotter than the 0.2% analysts had expected. Meanwhile, initial claims of 408K is a tad weaker than the 400K analysts had expected, and a revised 399K. Stocks are getting crushed this morning. Original post: Two big numbers coming up: Initial jobless claims are expected to come in right on 400K, up slightly from last week's 395K. This is extremely important high-frequency data, and will give us a sense of labor market behavior during the center of the recent financial market storm. Also coming out at the same time: CPI, which is expected to rise 0.2%. Ex energy it's also expected to be up 0.2%. Yesterday's PPI was hotter than expectations. If this number doesn't catch up, that doesn't augur well for profit margins. If this does come in hot, Bernanke is in more of a bind with respect to further easing. So someone is probably going to be in a bind either way. 

Core wholesale inflation up most in 6 months - (Reuters) - Core producer prices rose at their fastest pace in six months in July on strong tobacco and light truck costs, though weak domestic demand was seen keeping inflation pressures under control. The Labor Department said on Wednesday its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, rose 0.4 percent -- the largest increase since January -- after rising 0.3 percent in June. Economists, who had expected a 0.2 percent rise last month in the so-called core rate, said July's gain should not alter the Federal Reserve's prediction of low inflation in the near-term. Producers' pricing power is limited by a 9.1 percent unemployment rate. "There is a high level of unemployment and low level of capacity utilization," said Christopher Probyn, chief economist at State Street Global Advisors in Boston. "I don't think that the U.S. economy is in a position to generate a sustained acceleration in inflation."

Core wholesale inflation up most in 6 months -- Companies paid higher prices for tobacco, pickup trucks and pharmaceuticals in July, driving underlying wholesale inflation up by the most in six months. This measure of inflation, which excludes volatile food and energy prices, is known as the core Producer Price Index. It rose 0.4 percent in July, the biggest increase since January. The overall PPI, which measures price changes in goods before they reach the consumer, rose 0.2 percent last month, the Labor Department said Wednesday. That follows a 0.4 percent drop in June, the first decline in 17 months. Gas prices fell for the second straight month. Food costs rose 0.6 percent, the biggest rise since February. The jump in the core index is unlikely to continue, economists said. One reason is that raw material prices are increasing at a slower pace than the finished goods tracked by the PPI.The PPI has increased 7.2 percent in the past 12 months. That's up sharply from earlier this year but below May's rise of 7.3 percent, which was the biggest in two and a half years. The core index has increased 2.5 percent in the past 12 months, the most since June 2009.

Annual PPI Core Inflation Was 2.5% in July - The report on producer prices for the month of July was released today by the BLS, here is one observation: Annual core PPI inflation (finished goods less food and energy) was 2.5% in July, the highest in two years, but below the 4.7% peak in late 2008, and far below the double-digit rates of the early 1980s (see chart above).  As I have discussed before, the inflationary periods of the 1970s and 1980s were always associated with price increases "across the board" for everything including: energy, food, housing, wages, interest rates, housing prices, and even the core components of the PPI and CPI.  We still don't have that pattern reflected in today's prices, wages and interest rates.  

Key Measures of Inflation in July - Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis ... The gasoline index rebounded from previous declines and rose sharply in July, accounting for about half of the seasonally adjusted increase in the all items index. ... The index for all items less food and energy increased as well, though the 0.2 percent increase was slightly smaller than the two previous months. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.9% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.3% (3.3% annualized rate) during the month. Over the last 12 months, the median CPI rose 1.8%, the trimmed-mean CPI rose 2.1%, the CPI rose 3.6%, and the CPI less food and energy rose 1.8%. On a year-over-year basis, these measures of inflation are increasing, and near the Fed's target. (graph)

Inflation: Is it finally back? - The much larger than expected 0.5% inflation figure today is certainly worrying, even if I wouldn’t go as far as Joe Weisenthal, who says that it “screams stagflation”. For one thing, we had negative inflation in June, of -0.2%, so there might be an element of mean-reversion here. But if you look at the 12-month inflation figures, they’re all pretty high, with a headline number of 3.6% — significantly higher than anybody at the Fed would normally feel comfortable with. The problem is separating the signal from the noise. The Fed has one time-tested way of doing this, which is to strip out food and energy prices: if you do that, inflation was just 0.2% last month, and 1.8% over the past year. Meanwhile, energy costs have gone haywire:

Gold And 10-Year Treasuries' Mirror Image: Stagflation Or Deflation? Bad Outcome Either Way -  With global markets tumbling, investors rushed for so-called safe-haven assets Thursday, sending yields on benchmark 10-year Treasuries to a record low and the price of gold to a record high. A look at their respective charts reinforces the idea that one is the mirror image of the other. (See the video below) Front-month contracts for gold delivery hit $1,824.40 at 10:04 AM in New York, a fresh nominal all-time high, a frequent occurrence nowadays. Only a few minutes earlier, yields on 10-year Treasuries plunged to 1.988%, their lowest level at least since World War II (the FT notes yields hit a 70-year low). (Read Gold Miners Looking Sexier Than Metal-Backed ETFs As Investors Minimize Risk). The apparent explanation is a run to safety, whatever safety may mean. Equities have erased all of their gains from the last couple of quarters, which were fueled by extra loose monetary policy and the Federal Reserve’s second round of quantitative easing, while the U.S. dollar has steadily dropped in value. Emerging market equities have tumbled and the commodity rally has been thrust into reverse.

US Monetary Aggregates Update - Failure to Reform - At the Edges of the Policy Continuum - Dude, where's my deflation? It may seem a little counter-intuitive, that the money supply measurements are growing strongly, at the same time that the growth of consumer credit and spending remains sluggish, with GDP lagging.  Well, perhaps not so sluggish as some might wish to portray, as show in the last chart, but certainly not with enough force to bring back jobs.  The Fed can create money but not real growth. As a reminder, the changes in money supply are not independent, and must be judged in relation to other things in the real economy to determine their nature and its effects. Growth must match growth, and decline, decline, over some reasonable period of time and trend, in relation to population, real transactions ex-financial, or some other measure of genuine economic activity.  That is one of the better arguments, by the way, against the use of a gold standard.  To say that there is not enough gold is ludicrous, since it is just a relative thing, a matter of valuation.  The drawback is that the supply of gold seems to grow stubbornly slow, and may not keep pace with the growth of the economy in response to some event like the industrial revolution. 

Should we debase the currency? - You might wonder if this question is a misguided satire of Keynesian proposals like the ones in this Institute one-pager for boosting employment in a time of weak economic growth. The question is not meant as a satire, though. In fact, many scholars see a deliberate weakening of the U.S. dollar and/or a moderate increase in the U.S. inflation rate as something to be sought after in itself, not just as an unfortunate side effect of monetary or fiscal stimulus. Kenneth Rogoff, for example, recently reprised the classic argument that the burden of debt falls when prices rise across all industries. (Rogoff’s Financial Times article is here. The New York Times discusses his views here.To wit, moderately higher prices obviously allow firms that have debt in dollars to more easily meet their debt-service obligations. Furthermore, increases in prices often bring higher wages, albeit with a time lag, making it easier for consumers to pay off their debts on time. In the United States, this is a relevant point, in light of high debt levels in nonfinancial business and the household sector, which we documented in this recent post. Meanwhile, on the other hand, John Plender reminds Financial Times readers (and perhaps proponents of modern monetary theory) of the possible dangers associated with policies that intentionally or unintentionally invite a spurt of inflation.

Economic consequences of recent oil price changes - Earlier this year, disruptions in Libya and the resurgence of demand from the emerging economies sent oil prices up sharply, a development that many economists believe contributed to the slow growth for 2011:H1. The chaotic markets of the last few weeks saw oil prices drop back down to where they had been in December. Will that be enough to revive the struggling U.S. economy? There is some evidence suggesting that it may be too late. I recently completed a survey of a large number of academic studies that found a nonlinear economic response to oil price changes. One very well-established observation is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms. For example, when oil prices plunged in the mid-1980s, the oil-producing states in the U.S. experienced what looked like their own regional recession. An oil price increase that just reverses a recent price decrease does not seem to have the same economic effects as a price move that establishes new highs.

Gassed out, cont. - LAST week I noted that volatile oil prices have played an underappreciated role in recent business cycles. Over the weekend, James Hamilton published additional analysis of oil-price changes since last year, and he presents some sobering findings. Mr Hamilton points out that the impact of an oil spike is protracted and asymmetric; dear oil continues to hurt growth quarters after the spike, and subsequent price declines do not have a stimulative effect equal in magnitude to the contractionary impact of the rise.  Things get very ugly when runs recent price changes through his model: The price of oil (as measured by the end-of-quarter value for the crude oil producer price index) was 9% higher at the end of 2010 than it had been over the previous year, and the price went up an additional 15% from there during 2011:Q1. The table to the right indicates how much these changes would be predicted to affect GDP growth based on the equation above. For example, if in the absence of the earlier oil price increases we would have seen real GDP growing at a 4% annual rate, given the 2010:Q4-2011:Q1 oil price increases, we would only expect 2.4% growth for 2011:Q3 and 1.6% growth for 2011:Q4 and 2012:Q1.

Smallest Yield Curve Gap Between US and Japan in 19 Years; What's it Mean?; Curve Comparison US, Japan, Germany, UK - Curve Watchers Anonymous notes amazingly low yields across the entire yield curve for the US, Japan, Germany, and the UK. Here is a chart I put together this evening.  Yield Curve Comparison US, Japan, Germany, UK as of 2011-08-15; Data from Bloomberg Government Bonds as of 2011-08-15.  Note the inversion in the German yield curve. Typically this means a recession is on the way, but the results may be skewed by all the EU bailout concerns.  Regardless, other data points especially falling industrial production also suggest Europe is headed for a recession. The austerity measures in Italy, Greece, Ireland, Spain, and Portugal will turn the recession into a mighty one.  Spain and Greece are clearly in recession now, the rest of Europe will soon follow (if it is not in recession already).  Elsewhere curves are flat as a pancake everywhere for three years. With both US and Japan flirting with zero for that three-year duration.

It's getting ugly - Michael Darda sees trouble in the decline of long-term yields and attributes it to a negative velocity shock: The U.S. 30-year “long bond” yield has collapsed below the 2010 lows, an ominous sign, in our view. Although some (mistakenly, in our opinion) associate low rates with easy money, we view the collapse in yields across the Treasury term structure as an unambiguous sign of weaker nominal growth expectations. In technical terms, it would appear that a negative velocity shock is under way...  Broad money velocity in the U.S. is collapsing at the fastest rate since the end of the 2007-2009 recession. In other words, the recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets, which also occurred in 2008 and 2001 as velocity collapsed. Widening credit spreads, a collapsing term structure and flat bank credit also are consistent with low/falling velocity.  In more graphic terms, the recent spate of bad economics news coming from the U.S. and Europe is ramping up the money demand black hole as investors rush back into money and money-like assets.  Velocity is dropping fast because of this spike in money demand and, as a result, current and expected current dollar spending is falling too.  This is, in turn, is causing the economic outlook to decline and is the development to which long-term yields are responding. 

Loose Money Will Keep Economy From Sliding Away - The Federal Reserve is now the subject of more political controversy than at any point since the beginning of the 1980s. The debate centers on what the Washington Post calls its “ultra-easy” monetary policy: Is it hurting or helping the economy? Has the Fed already loosened so much that it has used up its ability to stimulate the economy?  It’s a heated debate, but its premise happens to be wrong. We don’t have loose money, and we haven’t during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate. That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease. But not always.  Milton Friedman looked at Japan’s lost decade and grasped that its low interest rates were, counterintuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that’s what kept interest rates down.

The GDP revisions: What changed? - Atlanta Fed's macroblog -Prior to the U.S. Bureau of Economic Analysis's (BEA) benchmark gross domestic product (GDP) revisions announced three Friday's ago, we were devoting a fair amount of space—here, in particular—to picking apart some of the patterns in the data over the course of the recovery. Ahh, the best-laid plans. As noted in a speech today from Atlanta Fed President Dennis Lockhart:  "The $64,000 question is what's the outlook from here?... the Bureau of Economic Analysis in the Department of Commerce has revised earlier economic growth numbers. These revisions paint a different picture of the depth of the recession and the relative strength of the recovery."  Beyond keeping the record straight, revisiting the charts from our previous posts in light of the new GDP data is a key input into answering President Lockhart's $64,000 question. Here, then, is that story, at least in part.

  • 1. Even ignoring the depth of the recession, the first two years of this recovery have been slow relative to the early phases of the past two recoveries.
  • 2. Consumption growth has been especially weak in this recovery, and the pattern of consumer spending has been more concentrated in consumer durables than has been the case in prior business cycles.

Raw Data on Economic Growth Paints Fuzzy Picture - When the government announced in April that the economy had grown at a moderate annual pace of 1.8 percent in the first quarter, politicians and investors saw evidence that the nation was continuing its recovery from the depths of the financial crisis. The White House called the news “encouraging” and the stock market extended its bull run. Three months later, the government announced a small change. The economy, it said, actually had expanded at a pace of only 0.4 percent in the first quarter.  Instead of chugging along in reasonable health, the United States had been hovering on the brink of a double-dip recession1.  How can such an important number change so drastically? The answer in this case is surprisingly simple: the Bureau of Economic Analysis, charged with crunching the numbers, concluded that it had underestimated the value of vehicles sitting at dealerships and the nation’s spending on imported oil. More broadly, politicians and investors are placing a great deal of weight on a crude and rough estimate that has never been particularly reliable.

Fed’s Pianalto Says U.S. Economy Likely to Grow at 3 Percent Annual Pace - Federal Reserve Bank of Cleveland President Sandra Pianalto said she expects the U.S. economic expansion to advance further and that the central bank’s current monetary stimulus is appropriate. “I expect the economy to continue on a gradual recovery pace over the next few years, with annual growth just above 3 percent a year,” Pianalto said. “I believe inflation will be temporarily elevated this year due to developments in oil and food prices, but I expect inflation to fall back below 2 percent in the next couple of years.” “Given this outlook, I think that the current accommodative stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the FOMC’s dual mandate of stable prices and maximum employment,” . 

The National and Regional Economic Outlook - FRB New York - Dudley speech, video & transcript.

Buffett: U.S. May Pick Up Sooner Than Fed Thinks - Warren Buffett said the U.S. economy may pick up faster than the Federal Reserve expects and that the U.S. and Asia can probably weather the euro-zone debt crisis. The Fed’s announcement last week that it will keep interest rates near zero for two more years was “a very, very stark statement,” the multibillionaire investor said in an interview on the Charlie Rose show aired Monday in the U.S. “I think there’s a chance they’re wrong, yeah. I think it may pick up before then.” The Sage of Omaha said the U.S. is “making progress” in working off the excess inventory from the country’s housing “binge,” according to a transcript of the interview. Other parts of the economy are improving steadily, he said. U.S. fiscal and monetary policy have been pushed “to the limit,” Buffett said, “but fortunately the most important thing in terms of this country ever coming out of recessions has been the natural workings of capitalism.”

Global slowdown underway - it's more than the Japanese supply chain disruptions - Rebecca Wilder - The global economic rebound is slowing markedly. With a tightening bias in emerging markets and a US recovery that continues to disappoint, external demand for any country that 'needs it' - those countries mired in fiscal austerity without monetary autonomy, i.e. euro area countries - is decelerating precipitously.  Exhibit 1: import demand for manufactured goods from 22.5% of the world (see chart at the end of this post) is slowing quickly, even contracting. The chart illustrates the growth of import demand for manufactured goods from the US (12.8% of world import demand in 2011) and China (9.7% of world import demand in 2011) on a 3-month over 3-month annualized and seasonally adjusted basis. Spanning April through June 2011 compared to January through March 2011, US imports for manufactured goods slowed to a 4.9% annualized clip, while Chinese manufacturing imports contracted at a 22.9% annualized pace. US import demand growth peaked at 36.9% in March 2011 (again, on the same 3M/3M SAAR basis), while Chinese import demand growth peaked a bit earlier at 108.2% in January 2011.  One may argue that the sharp slowdown (US) and deceleration (China) of manufacturing imports is a product of supply chain disruptions stemming from the Japanese earthquake and ensuing tsunami. Let's take a look.

A Synchronized Slowdown in Developed Economies - Which of the following nations recorded the strongest economic growth in the second quarter? France, Germany, Italy, Japan, or the United States? This nice chart from today’s Wall Street Journal provides the answer (click for larger version): The U.S. expanded at a tepid 1.3% annual pace in Q2, but that was still better than many other developed economies. Italy grew at a 1% pace, Germany at 0.5%, and France at 0.0%. And then there’s Japan, which contracted at a 1.3% pace. The chart also nicely illustrates just how sharp the GDP declines were in late 2008 and early 2009.  Both Germany and Japan, for example, had quarters in which economic activity contracted at a 15% annual pace or more. By contrast, the worst U.S. quarter saw declines at “only” a 8.9% pace.

Fed’s Lockhart: Recession Risks on the Rise - Economic headwinds from the U.S. and Europe have heightened global uncertainty, Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday, adding to the possibility that the U.S. economy might slip into recession. In a sobering assessment about the growth and monetary policy outlook, Lockhart told the Rotary Club of Florence, Alabama, that recent volatility in global markets was due in large part to Europe’s sovereign debt woes and the U.S. credit downgrade. He characterized investor sentiment as “exceptionally jittery,” and warned that continued swings in price action could harm consumer spending.

Global Recession Warning - Daiwa Capital Markets economist Kevin Lai says Hong Kong Recession Risk Is Global Warning Of nine economists in a Bloomberg News survey, Lai came closest to predicting a 0.5 percent contraction in the city’s economy in the second quarter. Only two of the analysts expected gross domestic product to decline from the previous three months. The government released the data Aug. 12. “Global demand is really weak and we expect the U.S. and Europe will see a sharp slowdown, or near-zero growth, next year,” Lai said in a phone interview in the city today. “A recession is a reality for Hong Kong.”  An 11 percent decline in Hong Kong’s merchandise exports in the second quarter from the previous three months highlights the weakness, Lai said. In a note, he described the economy as the world’s “most externally-driven” and said that a slump has “grave implications.”  The world economy is “entering a new danger zone” and international policy makers need to take steps to restore confidence, World Bank President Robert Zoellick said

The Beginning of the Endgame - When the subprime crisis started, we were told by numerous authorities (including Ben Bernanke) that the problems would be “contained.” But by 2006 it was clear to anyone who studied the toxic instruments that the losses would be in the hundreds of billions. I estimated $400 billion, which just goes to show that I’m an optimist. That crisis spread to banks all over Europe and then back to the US. Authorities used every bullet in their guns, every legal means  to try and stem the tide. And then we had a “Lehman moment” and all at once the markets seemingly froze. It was Bang!” My sense is that the S&P downgrade is like that moment when we were told things would be contained. In and of itself, the downgrade is not that important. What did we learn that we did not already know? The US is headed for a financial crisis if they do not get the deficit under control? This is news? But I think it forces S&P to take a very hard look at France, whose loss of AAA would bring into doubt the whole EFSF mechanism. And Spain and Italy must come under scrutiny if S&P’s move in the US is not to be seen as politically motivated. The main result of the downgrade may not be here in the US but in Europe, where there are already issues. A series of downgrades (which are warranted if the US one was) would be traumatic.

Not dead yet - One very alarming indicator came from one of the lowest readings on record for the Reuters/Michigan index of consumer sentiment. Bill McBride, to whom I always turn when I'm unsure of myself (or, for that matter, better yet when I fancy myself to be in full understanding of what's going on), attributes this primarily to heavy coverage of the debt ceiling debacle. Bill notes that sometimes these big negative swings recover when the news cycle moves on. In support of that view, he provides the following table, which may be very helpful to economic researchers studying this series. We also started out last week with stocks apparently in free fall, another indicator consistent with the view that a new recession could be about to crash down upon us, or at least consistent with the view that that many people were afraid that was happening. The subsequent violent seesaw in the market indexes was something to behold. But here we stand today, as if the whole week never happened. Perhaps it again is best seen as the market struggling to digest the implications of the U.S. credit downgrade, from which, after some dyspepsia, we may be prepared to move on.

A Three Year Plan and Other Topics - Four broad approaches to the aftermath of the banking panic and financial crash of 2007-09 have been proposed: stimulus, forgiveness, somewhat accelerated central bank-mediated inflation and structural reform (aka spending cuts). In the course of making an argument in the Financial Times last week for a little inflation, his preferred option, Harvard’s Kenneth Rogoff supplied a useful reminder. An unusually bold specimen of a structural reform has been proposed by the irrepressible Reuven Brenner, of McGill University’s Faculty of Management, author of eight highly original books and a frequent consultant to banks and hedge funds. His “Three-Year Plan” advocates graduating high school students into the labor force after three years instead of four, and junior college students after one instead of two. Sending four million new workers a year into the labor force and keeping them there until they retire would add something like $1 trillion in wealth per cohort, Brenner figures – assuming starting salaries of $20,000 that, for the sake of argument, never go up, and an 8 percent discount rate – a gain to be realized not just once, but year after year. Moving up the starting line could as save as much as or even more than moving back the retirement age, he says.

Still Wondering About Recession Risk - The debate about whether the U.S. economy is destined for a new recession remains unsettled, thanks to a mixed bag of numbers in the latest round of updates. The strongest case for thinking positively resides, ironically, in the labor market. Initial jobless claims, a key leading indicator, is moving in the right direction again, albeit from elevated levels. As I noted last week, the annual percentage decline in the raw data isn’t normally associated with broad economic contraction, and that's a good thing. But confidence hangs on a thread these days and so tomorrow’s update will be closely watched. One bad number and the crowd may run for cover once more. Yet the stronger pace of jobs creation in July implies that we’ll see better reports on jobless claims, but here too the confidence is thin. The labor market continues to grow, but sluggishly, inspiring analysts to hedge their forecasting bets.

Moody’s Lowers Economic Growth Outlook - Moody’s Analytics said its near-term outlook for the U.S. economy has fallen significantly in the past month wake of the debate over the U.S. debt ceiling and the downgrade of the nation’s credit ratings by Standard & Poor’s . Moody’s Analytics, a sister company to credit-ratings company Moody’s Investors Service, now expects real gross domestic product to increase at an annualized rate of about 2% in the second half of this year and just over 3% next year, compared with its estimate a month ago for growth of 3.5% for the second half of this year and through 2012.The firm attributes most of the expected decline to a loss of business, investor and consumer confidence, noting the economy’s improving fundamentals such as the strengthening of business’s balance sheets and consumers’ strides in cutting household debt.The credit-rating company also said it thinks the odds of a renewed recession over the next 12 months — now at 1 in 3 — will increase if stock prices continue to fall. Moody’s maintains that the odds of a renewed recession rise with each 100-point drop in the Dow Jones Industrial Average. While Moody’s expects the economic recovery will continue, prospects for economic growth and job creation have “diminished substantially.”

Morgan Stanley Just Slashed Its Growth Outlook, While Declaring The US "Dangerously Close" To Recession: Grim commentary from Morgan Stanley's economics team lead by Joachin Fels. The outlook for growth is slashed everywhere around the world: We cut our global GDP growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively. DM growth looks set to average only 1.5% this year and next (down from 1.9% and 2.4% previously), making the BBB recovery even more bumpy, below-par and brittle. EM isn’t immune, but generates 80% of global growth: We now see EM growth decelerating from 7.8% in 2010 to 6.4% (6.6% previously) this year, and further to 6.1% (6.7%) in 2012. Given its 50% (PPP) weight in global GDP, EM generates 80% of global GDP growth. EM policy-makers are likely to cushion domestic growth, but drastic policy stimulus remains unlikely. Why have things turned so bad? Blame politicians: A policy-induced slowdown: The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the US and Europe plus the prospect of further fiscal tightening there in 2012. This is eroding business and consumer confidence and has weighed down on financial markets. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making.

J.P. Morgan further cuts U.S. growth forecast -  Economists at J.P. Morgan on Friday further cut estimates for U.S. economic growth and warned that recession risks are "clearly elevated." While the outlook for third-quarter growth looks only "moderately softer" than previously projected, the economists, in a research note, said they have slashed the outlook for fourth-quarter growth to 1% from a previous projection of 2.5%. They also lowered their first-quarter 2012 growth forecast to 0.5% from 1.5%. "Declining energy prices should help to cushion some of the weakness in the economy, and the still-low levels of cyclically-sensitive spending could reduce the chances of getting a negative GDP quarter. Nonetheless, the risks of a recession are clearly elevated," they said.

JP Morgan Joins the GDP Downgrade Party - JP Morgan joined the increasing band of big banks to downgrade its expectations for U.S. growth in the coming quarters. JP Morgan stated that the risks to its previous projection for 2.5% growth in the fourth quarter “are now very clearly to the downside,” and thus lowered its forecast for growth in that quarter to 1.0%. It also lowered its first quarter 2012 growth forecast to 0.5% from 1.5%. “Declining energy prices should help to cushion some of the weakness in the economy, and the still-low levels of cyclically-sensitive spending could reduce the chances of getting a negative GDP quarter,” said JP Morgan’s analysts. “Nonetheless, the risks of a recession are clearly elevated.” On Thursday, Morgan Stanley downgraded its forecasts for global growth this year and the next, citing weaker-than-expected growth in the second quarter of 2011, along with slower global trade growth and additional austerity measures announced in several countries.Fellow global investment banking and securities firm Goldman Sachs Thursday also made downward revisions to its global GDP growth forecasts.

More downward revisions to economic forecasts - Below are some downward forecast revisions released last night and today. If these forecasts are close, then the unemployment rate will probably increase over the next few quarters too ...

  • From Wells Fargo today:  Based on the evidence we have reviewed ... we have concluded there are now significant downside risks to economic growth over the near term. Our forecast now calls for real GDP to rise 1.6 percent in 2011 and 1.1 percent in 2012 ... it is entirely possible the current downward spiral in the economy and financial markets will become self-reinforcing.

  • From Goldman Sachs today:  In light of the downshift in the data this week, we are cutting our second-half growth forecasts further. We now expect GDP growth of 1.0% in Q3 and 1.5% in Q4, both down from 2.0% previously.

  • From JPMorgan via MarketWatch: J.P. Morgan further cuts U.S. growth forecast - Economists at J.P. Morgan said they have slashed the outlook for fourth-quarter growth to 1% from a previous projection of 2.5%. They also lowered their first-quarter 2012 growth forecast to 0.5% from 1.5%.

  • From Citigroup last night via Bloomberg: U.S. Economic Growth Estimates Cut at Citigroup  [Citigroup cut its 2011 gross domestic product growth forecast to 1.6 percent from 1.7 percent and lowered its 2012 GDP growth estimate to 2.1 percent from 2.7 percent.

With The Economy, Is It 2008 All Over Again? - Earthquakes are followed by aftershocks, which compound previous damage, hamper recovery efforts, and revive fears of a new disaster. That is essentially what has happened over the past 10 days, as the aftershocks of the 2008 Wall Street crash continued to shake the global economy and markets, said Kenneth Rogoff, a Harvard economics professor. As with earthquakes, financial aftershocks are damaging and frightening, but tend not to be as destructive as the original disaster.“A drop of this [past week’s] magnitude hurts,’’ Rogoff said of recent stock price plunges. “It hurts confidence. But will it be as bad as 2008? There’s always a risk. But it doesn’t look like it. It doesn’t have to be.’’The turmoil that rocked stock markets last week has invited comparisons to the economic collapse of three years ago, but conditions today are different. Certainly, the economy is struggling, and most analysts expect a long, difficult recovery that will continue to feel like a recession for millions of Americans.

“The Sequel”: How 2011 Is A Repeat of 2008—Only Bigger, Longer, and Uncut by Bailouts - The structural causes that led to the Global Financial Crisis of 2008 are identical to the structural causes that are leading us to another systemic financial crisis in 2011. The only difference is the kind of debt at the core of the looming crisis: Mortgage-backed securities in 2008, as opposed to European sovereign debt in 2011. And of course, the debt hole in 2011 is bigger than in 2008—a lot bigger.  That’s why I am confident in predicting we are about to have another Global Financial Crisis—I’m calling it The Sequel: Same movie, same players, same story. Only this time around—like all good sequels—the financial crisis we are about to experience is going to be bigger, longer, and uncut by bailouts.  By the way, that is the key difference between 2008 and 2011: We’re not going to have a Hollywood Ending this time around. The governments of Europe and the United States, as well as their respective central banks, do not have any weapons to fight off this 2011 financial crisis, as they did in 2008, for the simple reason that they used them all up—they’re out of bullets, both monetarily and politically.

A Second Great Depression, or Worse? - With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression? The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007. First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked.  Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent.Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner — largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role.

How Austerity Is Ushering in a Global Recession - Robert Reich - Policy makers be warned: Austerity is the wrong medicine. We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all. Europe depends on exports – especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.And as the United States economy sputters, exports to America have been slowing.But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.

Increased Armageddon odds - KEVIN DRUM published a post last night titled, "Watching Armageddon from an armchair", in which he wrote: Watching the world slide slowly back into recession without a fight, even though we know perfectly well how to prevent it, is just depressing beyond words. Our descendents will view the grasping politicians and cowardly bankers responsible for this about as uncomprehendingly as we now view the world leaders who cavalierly allowed World War I to unfold even though they could have stopped it at any time. I had two thoughts when I read the post. One concerns the nature of panic in the journalistic world. The world is not ending, and while a renewed fall into recession across the developed world would be very costly and painful, especially for the unemployed, it probably wouldn't be an unmanageble situation. The problem is that a renewed decline into recession increases the small but not insignificant odds of a true disaster—major debt or financial crisis, for instance, or major geopolitical instability. The kind of thing that isn't at all manageable.

Wow! Philly Fed Index Comes In At Catastrophic -30.7 - Total collapse! The Philly Fed index just came in at -30.7, an epic drop form the +3.2 we saw last month. Estimates were actually for it to go somewhat higher to +2. The situation confirms the bad news we got earlier this week from the Empire Fed. A horrible sign for the economy, as the double-dip scenario looks more real than ever. Markets at lows of the day. Here's the key summary of the report: The survey’s broad indicators for activity, shipments, and new orders all declined sharply from last month. Firms indicated that employment and average work hours are lower this month. Price indexes continued to show a trend of moderating price pressures. The broadest indicator of future activity also weakened markedly, but firms still expect overall growth in shipments, new orders, and employment over the next six months. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart). The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.

Collapse in Philly Fed Manufacturing Index to -30.7; Treasury Yields at Record Low; Stocks Sink, Gold Soars - The Philadelphia Fed Business Outlook Survey plunged to -30.7 with all indicators in decline.  The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart). The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.  Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. About 18 percent of the firms reported an increase in employment, but 23 percent reported a decrease. The percentage of firms reporting a shorter workweek (28 percent) was greater than the percentage reporting a longer one (14 percent). The workweek index fell 9 points.

Markets suffer global turmoil - Benchmark US borrowing costs fell below 2 per cent for the first time in at least 60 years as markets took fright at increasing signs of global economic weakness and equities worldwide. US 10-year Treasury bonds, the linchpin of the global financial system used to price many assets around the world, yielded as little as 1.97 per cent on Thursday, their lowest since April 1950, according to Global Financial Data. There were also savage falls for German and British borrowing costs, which hit record lows. “It is a moment. Why can’t Treasury yields have a 1 per cent handle given where growth is?”  The catalyst for the latest bout of risk aversion – which saw stock markets plunge globally and gold hit another record high – was weaker-than-expected US manufacturing and unemployment data. That came on top of a slew of bad growth numbers from Europe as well as rising fears about the funding of European banks. Bank share prices once again bore the brunt of the equity market sell-off.

Mr. Market Had a Really Bad Day - 08/18/2011 - Yves Smith -  You know things are not normal when a 4%-5% movement in equity markets looks routine.  I’ve been a bit surprised that it has taken investors this long to get the memo that the prospects for the economy (both domestically and internationally) are lousy. The stunning US GDP revisions of last month should have been a wake-up call, but they seemed to be swamped by the deficit ceiling/S&P downgrade theatrics.  In case anyone managed to miss it, advanced economies have decided to put on the austerity hairshirt, which assures near or actual deflation. The concern re the uptick in consumer inflation figures excludes the biggest input into goods costs, namely wages. Commodities inflation seems to be driven by a combination of speculative inflows (which is believed to include hoarding of storable materials, such as metals in China) and emerging economies, particularly China, running at over potential and being too slow to increase interest rates to cool off demand.

US Recession Indicators - August 2011 - Market turmoil edition - According to data from negative Real Interest Rates, another US recession is likely to occur between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely... The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has remained high at 572 in July 2011. As a result of recent market turmoil the numbers for August will be very interesting indeed. Since a recession will not occur until this spread turns negative, and since one indicator shows that a recession will occur within 18 months, we can assume that this indicator will begin to drop down over the next few months. Inflation has already picked up again and, at 3.6%, is the highest it has been since October 2008. Nevertheless since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation.

Treasury Rally Pushes Yields to Record Lows - Treasuries surged, pushing yields on five-, seven- and 10-year notes to historic lows, as investors sought a refuge on concern U.S. growth is slowing and Europe’s sovereign-debt crisis is getting worse.  Yields on 30-year bonds dropped this week the most since 2008 after the Federal Reserve said earlier in August it would keep borrowing costs unchanged until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating. The rally in bonds indicates Fed Chairman Ben S. Bernanke may signal at a conference on Aug. 26 in Jackson Hole, Wyoming, that additional measures to lift the economy are needed.  “Clearly growth continues to be extremely weak,” “There’s still concern for what’s going on in Europe. Despite the downgrade by S&P, investors are looking for safety, and that’s clearly in the Treasury market.”  Yields on 30-year bonds dropped this week 34 basis points, or 0.34 percentage point, to 3.39 percent, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 6 9/32, or $62.81 per $1,000 face amount, to 106 23/32.

Economic Meltdown 2.0 - I have hinted at treasury rates being a litmus test for the economy.  Econintersect Author Doug Short produced a chart yesterday which drove this point home with a vengeance. 10 year treasury is at record lows.  Why would an investor lock in 2.08% money return for ten years.  The only answer rattling around is that too many believe this is the best they will get. If this were an investing post, it could be argued that the sheer quantity of treasuries steals investments from equities or real estate – and is playing a major role in the world equity market meltdown.  If this was an opinion post, I would argue the lunacy of a sovereign state which has its own currency to “borrow” money.  But analysis posts at Global Economic Intersection explore economic events, and try to provide perspective.

Bond markets signal ‘Japanese’ slump for US and Europe - The global credit markets are braced for deflation and perhaps depression. Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in modern American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.  Investors scrambled to buy the bonds of strongest industrial states on Thursday on fears of a double-dip recession on both sides of the Atlantic and a European banking crash, driving down their returns to investors. German yields fell to 2.08pc and Switzerland's 3-month rates have turned deeply negative.  Markets were stunned by a plunge in the manufacturing index of the Philadelphia Federal Reserve to minus 30.7 in August from plus 3.2 in July, one of the most violent falls ever recorded. "It is a catastrophic collapse," . "Markets are in a fearful state right now, and data like this gives them plenty of excuses to panic."  Investors are haunted by fears that European banks may have lost full access to America's $7 trillion markets, leaving them at imminent risk of a dollar squeeze.  

Awesome Wrongness - Krugman - OK, seriously: things are looking really terrible, And crucially, they’re looking terrible in the wrong way, at least if you wanted to believe that political and policy debate over the past year and a half made any sense at all. We’ve been utterly preoccupied with deficits, deficits, deficits; there was supposedly a crisis looming, but a crisis that would take the form of an attack by the bond vigilantes. And here we are, with markets now deeply worried not by deficits but by stalling growth, fearing not fiscal profligacy but fiscal austerity, and with interest rates at historic lows. Instead of turning into Greece, we’ve turned into Japan, except much worse. And policy is replaying 1937. In the past, you could make excuses on the grounds of ignorance. In the 1930s they didn’t have basic macroeconomics. Even in Japan in the 1990s you could argue that it took a long time to realize that the liquidity trap was a real possibility. But we came into this crisis with a pretty good understanding of what was at stake and pretty good analysis of the policy options — yet policy makers and, I’m sorry to say, many economists just chose to ignore all that and go with their prejudices instead.

The Republicans’ new voodoo economics? - When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed. It’s safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be “treasonous” for Greenspan’s successor, Ben Bernanke, to “print more money between now and the election” in an effort to boost the economy. The party’s economic standard-bearer in the House, Paul Ryan of Wisconsin, repeatedly charges the Fed with “bailing out” what he considers President Obama’s reckless fiscal policy and wants the institution stripped of its mandate to promote employment. If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more, routinely labeling Obama’s stimulus as ineffective, or worse, counterproductive. They want balanced budgets, the sooner the better.

Double Dip or Not, the Unemployed Need Help - The big news on the economy today is Philadelphia Fed's report that its index of manufacturing fell precipitously. The index is just for the Philadelphia Fed region, so it may not be representative, but the report notes a close correlation between the Philly index and the ISM index (which is for the economy as a whole) so it's at least worth noting. In addition, the fall in the markets today, which can be attributed at least in part to this news, shows that the financial sector is taking the news and the threat of a second dip seriously. One reason that I don't like the framing of the "are we headed for a second dip" question is that it leads to a sigh of relief when we are told that we might get lucky and merely have an extended period of stagnation instead. It makes it appear that the answer to the "should we do more to help the unemployed" question depends upon whether a double dip is ahead. But an extended period of stagnation or even a slow, slow recovery (which almost seems like a good outcome at this point) are also problematic and cry out for more help for the unemployed.  Unless there is a miracle recovery ahead, and that's pretty unlikely at this point, policymakers need to do what they can to increase the pace of the recovery in any case, not just if there's a double dip. In fact, policymakers should have provided more help already -- at the very least plans should be ready.

Don’t let fiscal brakes stall global recovery - Christine Lagarde - After the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression, by supporting growth, attacking sclerosis of the financial arteries, rejecting protectionism and providing resources to the International Monetary Fund. It is time to rekindle that, not only to avoid the risk of a double-dip recession, but also to put the world on the path of solid, sustained and balanced growth.The situation today is different from 2008. Then, uncertainty came from the poor health of financial institutions. Now, it comes from doubts about the health of sovereigns and the tricky feedback loop to banks. Then the answer was unprecedented monetary accommodation, direct support for the financial sector and a dose of fiscal stimulus. Now monetary policy is more constrained, banking problems will again have to be addressed, and the crisis has left behind a legacy of public debt – about 30 percentage points of gross domestic product higher than before, on average, in advanced countries. So there are no easy answers. But that does not mean there are no options. For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.

China appeals to US to focus on economic recovery  - Chinese commentators are marking a visit by Vice President Joseph Biden by offering a struggling United States advice: Stop flooding your economy with cheap credit. The prescriptions awaiting Biden, who arrives in Beijing later Wednesday, range from cutting government budget deficits to fighting poverty. While similar to the advice of Western analysts, the comments are unusually pointed for China where communist leaders say governments should stay out of each others' affairs, and show the shifting fortunes of the two powers. "The United States has entered a long period of decline," wrote economist Xia Bin, who advises China's Cabinet and central bank, on his blog.

Geithner, Bernanke have little in arsenal to fight new crisis - The men, battle-hardened and more experienced, now have little more than the power of persuasion. No longer can they muster the same range of policy tools and supporters they had in 2008 should the European crisis become an even greater menace to the U.S. economy.Today, Geithner’s options are constrained by gridlock in Congress. Any fresh proposals to invigorate the economy would face Republican skepticism. And instead of devoting his full attention to the country’s flagging economic recovery and mounting threats from Europe, Geithner spent much of the last few months planning for the possibility Congress would not raise the federal debt limit, confronting the government with default. Bernanke, 57, meanwhile, has been pushing the Fed to take a series of steps over the past three years to spur economic growth. But he has exhausted the Fed’s usual tools — for instance, lowering interest rates, which are now near zero — and is facing new opposition from members of the Fed’s policymaking committee who are worried about the risk of inflation or new financial bubbles.

White House Debates Doing Little or Nothing - This is depressing ...from the NY Times: White House Debates Fight on Economy Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors.  But others, including Gene Sperling, Mr. Obama’s chief economic adviser [argue] for bigger ideas like tax incentives for businesses that hire more workers ... Tax incentives are the "bigger idea"? It sounds like the debate is between doing nothing and doing very little.  If I arrived on the scene today - with a 9.1% unemployment rate and about 4.6 million homes with seriously delinquent mortgages or REO - I'd be arguing for an aggressive policy response.

Little or Nothing - Krugman - Calculated Risk says it perfectly: this report in the Times on economic debate within the White House shows a fierce argument between those who want to do very little on jobs and those who want to do nothing at all. If the report is at all correct, this Grand Debate [/sarcasm] isn’t just about political strategy: A series of departures has left few economists among Mr. Obama’s senior advisers. Several of his political advisers are skeptical about the merits of stimulus spending, and they are certain about the politics: voters do not like it. Mr. Plouffe and Mr. Daley share the view that a focus on deficit reduction is an economic and political imperative, according to people who have spoken with them. Voters believe that paying down the debt will help the economy, and the White House agrees, although it wants to avoid cutting too much spending while the economy remains weak. Plouffe and Daley, macroeconomic theorists! And as for the political side, I guess I’m puzzled: you have an obstructionist GOP, and rather than point out that obstruction, you restrict yourself to calling for measures that this obstructionist opposition might actually accept. Doesn’t this mean that voters learn nothing about the extent to which the GOP is in fact blocking job creation?

Herein Lies the Problem, by Jared Bernstein: There’s an article in today’s NYT on the economic debate within the White House. The print version—not the online one—contains this quote from an admin official: It would be political folly to make the argument that government spending equals jobs. Really? I mean, I get the reluctance, and certainly the “spending=jobs” frame, while essentially correct, may not be the right way to frame it. But in fact, the best way to get people back to work right now, with consumers weakened and investment on the sidelines is through more government spending…it should be targeted and temporary, but jeez, the President himself has been making this point, and correctly pointing out that R’s are blocking him on it. Far be it from me—I mean this—to advise the politicals as to what works. But I simply don’t believe it is political folly to tell the truth on this critically important point.

Top White House aides welcome confrontation - We talked over the weekend about a much-discussed New York Times piece on the White House considering its next step on the economy. As the NYT characterized it, there’s a debate underway within the West Wing: Bill Daley and David Plouffe have pushed for modest pragmatism intended to appeal to independents; Gene Sperling and others have pushed to be more ambitious and confrontational. It didn’t exactly paint an encouraging picture. One approach envisions pleading with Republicans to throw some passable crumbs at the economy; the other would pass nothing but would clear the way to hammer the GOP. A White House official told Greg Sargent this afternoon that the NYT piece didn’t tell the whole story.According to the official, who wanted anonymity because officials don’t want to be quoted on record discussing internal messaging deliberations, Plouffe and Daley both favor a confrontational rhetorical approach that will blame Republicans for opposing any and all job creation efforts for purely political reasons; both are leading internal boosters of a message that accuses Republicans of putting party before country.

President Obama's re-election economic policy - A front page story in Sunday's New York Times gave the country the bad news. President Obama is no longer paying attention to economists and economics in designing economic policy. Instead, he will do what his campaign people tell him will get him re-elected, presumably by getting lots of money from Wall Street. The article said that President Obama intends to focus on reducing government spending and cutting programmes like social security and Medicare. This is in spite of the fact that: "A wide range of economists say the administration should call for a new round of stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth." In other words, President Obama intends to ignore the path for getting the economy back to full employment that most economists advocate. Instead, he is going to cut government spending – because his chief of staff and former JP Morgan vice president Bill Daley and his top campaign adviser David Plouffe both say this is a good idea.

Fancy Theorists of the World Unite - Krugman - A number of people have pointed me to this remarkable editorial by Stephen Moore in the WSJ. What’s remarkable isn’t the views; it’s the all-out embrace of anti-intellectualism. It actually denounces “fancy theories” and rejects them because they “defy common sense”. Gosh, if that’s the way the right is going, the next thing you know they’ll reject the theory of evolution. Oh, wait. There’s a lot to critique here, if you have the stomach — among other things the question of what constitutes common sense. I mean, common sense — or at least common sense as the WSJ sees it — would tell you that massive government borrowing would send interest rates soaring. And that’s certainly what the WSJ editorial page told its readers would happen. Only us fancy-schmancy Keynesians said otherwise; and here’s what actually happened:  Similarly, common sense as defined by the WSJ said that a tripling of the monetary base would lead to a huge increase in prices; clearly, one should disregard those fancy-schmancy types who said that the money would basically just sit there. Hmmm:

The Bad Deal - Galbraith -The debt deal will make things clear. The President is not a progressive – he is not what Americans still call a “liberal.” He is a willful player in an epic drama of faux-politics, an operative for the money power, whose job is to neutralize the left with fear and distraction and then to pivot rightward and deliver a conservative result. What Barack Obama got from the debt deal was exactly what his sponsors have wanted: a long-term lock-in of domestic spending cuts, and a path toward severe cuts in the core New Deal and Great Society insurance programs – Social Security, Medicare and Medicaid. And, of course, no tax increases at all. To see the arc of political strategy, recall that from the beginning Obama handed economic policy to retainers recruited from the stables of Robert Rubin. From the beginning, he touted “fiscal responsibility” and played up the (economically non-existent) “problem” of the budget deficit. From the beginning his team sabotaged economic recovery with optimistic forecasts and inadequate programs – in the clear interest of protecting the banking system from reform.

Putin Calls U.S. ‘Parasite’ as Russia Gorges on Its Debt - For Russian Prime Minister Vladimir Putin, the U.S. is a “parasite” because its rising debt weighs on the global economy. For his government, the same debt is the safest possible investment. Russia, the world’s largest energy producer, has boosted its holdings of U.S. debt by more than 1,600 percent since September 2006, according to U.S. Treasury Department data. Russia used surging commodity prices to build the world’s third- largest reserves pile, boosted in part by return on Treasuries. Putin, 58, who oversaw the largest buildup of U.S. debt holdings in Russia’s history as president from 2000 to 2008, may return to the post after elections next year. The country is now one of the world’s 10 largest holders of the securities with $110 billion at the end of June, about 70 percent more than when Putin left the Kremlin. “They are sending out a message” largely for domestic consumption,

Aljazeera: Battle over US debt ceiling is a distraction -  It’s not simply that the country is spending money that it doesn’t have; it’s also a matter of what the money is spent on. Is the debt the result of needed investment - or waste? Unfortunately, the US massively wastes money and resources in three critical areas, especially when compared with our international competitors: military spending, health care, and energy/transportation. The US spends as much money on its defence budget as the next twenty nations combined, and three times more than all conceivable enemies combined (and that figure does not include spending for theatre of war operations in Iraq, Afghanistan and Libya, which amounts to another estimated $1 to $3tn, nor does it include large expenditures by the Department of Homeland Security, National Security Agency, CIA, Veterans Administration, or the parts of NASA and the Department of Energy used for military-related activities). Is that level of spending really necessary to secure the homeland and global stability?

Budget Buster: Pentagon Unable to Account for “Trillions,” Glain Says -The United States military budget accounts for over 40% of the world's annual military expenditures and, at around $700 billion per year, more than 20% of the federal budget. The Federal government wants to curb that spending as part of deficit reduction.Last week's deficit deal calls for up to $350 billion in cuts over the next decade on the departments of Defense, State, Homeland Security and Veterans Affairs, among others. And, if the debt "super-committee" fails to reach a deal on $1.2 trillion in budget cuts, it will automatically trigger an additional $500 billion in cuts over the next decade. Cutting in a bureaucracy as large and convoluted as the Pentagon is no easy task, but Stephen Glain author of State vs. Defense: The Battle to Define America's Empire says there are three issues at the heart of their spending problem.

'Doomsday' defense cuts loom large for select 12 - For the dozen lawmakers tasked with producing a deficit-cutting plan, the threatened "doomsday" defense cuts hit close to home. The six Republicans and six Democrats represent states where the biggest military contractors -- Lockheed Martin, General Dynamics Corp., Raytheon Co. and Boeing Co. -- build missiles, aircraft, jet fighters and tanks while employing tens of thousands of workers. The potential for $500 billion more in defense cuts could force the Pentagon to cancel or scale back multibillion-dollar weapons programs. That could translate into significant layoffs in a fragile economy, generate millions less in tax revenues for local governments and upend lucrative company contracts with foreign nations. The cuts could hammer Everett, Wash., where some of the 30,000 Boeing employees are working on giant airborne refueling tankers for the Air Force, or Amarillo, Texas, where 1,100 Bell Helicopter Textron workers assemble the fuselage, wings, engines and transmissions for the V-22 Osprey tilt-rotor aircraft. Billions in defense cuts would be a blow to the hundreds working on upgrades to the Abrams tank for General Dynamics in Lima, Ohio, or the employees of BAE Systems in Pennsylvania.

Who's Paying the Super-Committee? - The Congressional “super-committee” finally has a roster: we now know the twelve men and women tasked with cutting as much as $1.5 trillion from the federal budget, and quite possibly restructuring entitlements and rewriting the federal tax code. Unlike any other Congressional committee in recent memory, this “super-committee” will wield enormous legislative power. Their recommendations will be fast-tracked in Congress, meaning they cannot be amended and are guaranteed a simple-majority vote in the Senate. If the super-committee does not produce recommendations, or if Congress does not approve them, massive triggers will be activated: $1.5 trillion will be cut from the budget, drawing equally from defense and domestic spending. With this much power concentrated among twelve people, K Street is revving up the money machine to help influence the decisions. “Every lobbyist is going to go through their Rolodex to try and figure out all the connections to the twelve members of the ‘super committee,’ ” Steve Ellis, vice president of Taxpayers for Common Sense, told Bloomberg. One Democratic lobbyist quipped to Politico that he was preparing for the super-committee “by writing twelve really large checks.”

Special interests gave millions to budget panel  - The 12 lawmakers appointed to a new congressional supercommittee charged with tackling the nation's fiscal problems have received millions in contributions from special interests with a direct stake in potential cuts to federal programs, an Associated Press analysis of federal campaign data has found. The newly appointed members -- six Democrats and six Republicans -- have received more than $3 million total during the past five years in donations from political committees with ties to defense contractors, health care providers and labor unions. That money went to their re-election campaigns, according to AP's review.  The congressional committee, created as part of the debt limit and deficit reduction agreement enacted last week, is charged with cutting more than $1 trillion from the budget during the coming decade. If the committee doesn't decide on cuts by late November -- or if Congress votes down the committee's recommendations -- spending triggers would automatically cut billions of dollars from politically delicate areas like Medicare and the Pentagon. The committee's co-chairs -- Sen. Patty Murray, D-Wash., and Rep. Jeb Hensarling, R-Texas -- each received support from lobbyists and political committees, including those with ties to defense contractors and health care lobbyists. Hensarling's re-election committee, for instance, received about $11,000 from Lockheed Martin and $8,500 from Northrop Grumman

Who Pays the Supercommittee? - The 12 members of the “supercommittee” that will try to develop yet another bipartisan fiscal policy proposal have now been named. What types of spending programs and tax breaks should we expect these members to care about most? It might help to look at which industries and individuals give them the most money. MapLight, a nonpartisan research organization, has compiled donation profiles for each of the 12 members, using data from the Center for Responsive Politics. Over the last decade the top donor, by far, was the legal industry, followed by securities and investment:The individual organizations that gave the most money — including both PAC money and employee donations — were the Club for Growth, followed by Microsoft. Top 10 Organization Contributors (PACs and Employees) to Supercommittee Members As all good economists know, incentives matter: Politicians (like all people) are generally reluctant to bite the hand that feeds them. Given that the antitax group Club for Growth is at the top of the list of organizational contributors, for example, we might not be surprised to find that many of the committee members are dead-set against raising taxes. Likewise, donations from the securities and investment industry might indicate that legislators could be reluctant to eliminate the lower tax rate for “carried interest,” which primarily benefits investment managers. Donations from the real estate industry might mean the mortgage interest tax deduction, whose elimination many economists support,  could also be relatively protected.

Wall Street Is Biggest Donor to Deficit Panel Members - Who’s been cozying up to the members of the new Congressional super committee? With the committee set to decide on a whopping $1.5 trillion in federal deficit reduction this fall, lobbyists and corporations are trying to figure out which industries are best connected to the 12 members of the new panel. You can bet that those connections will be pressed to the limit in coming months as companies and sectors scramble to ensure that federal spending they like and tax breaks they depend on aren’t slated for elimination. As it looks at the new committee members, Wall Street may like what it finds. But defense contractors may find themselves wishing they’d ponied up more cash over the years. A new study out Wednesday by the Center for Responsive Politics—and obtained by CNBC—finds that the specific industry sector with the most clout is finance, which was responsible for contributing a whopping 38 percent of the money raised by committee member Rep. Jeb Hensarling (R-TX) since 1990.Overall, according to the center's research, the dozen super committee members have raised more than $50 million from the finance, insurance and real estate sector since the 1990 election cycle.

Getting What You Pay for: The Super Committee's Super-Close Ties to Banking and Finance - The folks at Maplight have released some disturbing numbers on who has been the most generous to the 12 members of the newly-formed Joint Select Committee on Deficit Reduction, fondly known as the “Super Committee.” Maplight reports that the 10 biggest organization contributors (this includes PACs and Employees) to Super Committee Members are…

Club for Growth $990,066
Microsoft Corp. $810,100
University of California $629,495
Goldman Sachs $592,684
EMILY’s List $586,835
Citigroup Inc. $561,081
JPMorgan Chase & Co. $494,316
Bank of America $349,566
Skadden, Arps, et al. $347,356
General Electric $340,935

Hmm. Club for Growth, the biggest spender, is a rabid anti-tax and anti-government group boasting 9,000 members and dominated by Wall Street financiers and executives. And then we naturally find the big banks –the Goldmans, the Citigroups — filling out the list. Guess how these folks feel about paying their fair share in taxes? The 6 Republicans on the Committee have sworn to block any tax increases, even on the banks that helped bring on the 2008 crash that caused this freaking deficit in the first place! But obviously their feelings take precedence over those of the American public, a quarter of whom are out of a job, underwater with the mortgage, or in foreclosure.

Zen Deficit Reduction? - Sunday’s Washington Post had this very hopeful front page story, with several quotes that give me optimism about the willingness of members of Congress to just do better in their deficit reduction negotiations the next time around.  See, it turns out that the great peer pressure of the American public actually works.  Skeptics may ask why the next round should be any different from the last round–it’s not like we were lacking bipartisan policy ideas the last time around–but as the story and in particular Alice Rivlin explain, this time around really is different, politically, just because we’ve already lived through the last time around: Committee members might be eager to have their deliberations at least appear less rancorous than the negotiations over raising the debt ceiling that resulted in the panel’s creation. But the tone of comments also suggests that after that hard-fought battle there might be a brief moment of opportunity to do what has eluded other bipartisan panels and special fiscal commissions. “There’s a potential for a bipartisan deal here. There has been for a while,” said Alice Rivlin, a former White House budget director who chaired the Bipartisan Policy Center’s Debt Reduction Task Force. “The new element is the revulsion of the country and the world at the spectacle that we have just lived through.”

Dueling Op-Eds on Deficit Cutting - Congressional party leaders use rival op-ed pieces Wednesday to reiterate their positions going into the talks of the deficit-cutting super-committee, with Republicans rejecting tax increases and Democrats calling for a “balanced plan.” House Speaker John Boehner (R., Ohio) and Majority Leader Eric Cantor (R., Va.) write in USA Today that lawmakers must make tough choices on reining in spending. “We believe this work can be done without imposing job-crushing tax increases,” they add. “We should be able to move forward on the areas in which we agree on the former, without tying them to areas of disagreement—such as the latter.” In other words, don’t tie spending cuts to tax increases. In The Wall Street Journal, the super-committee’s three Senate Democrats—Patty Murray of Washington, Max Baucus of Montana and John Kerry of Massachusetts—take a different tack, stressing the need for a “balanced plan” that presumably includes both spending cuts and tax increases.

Go ahead. Implement Austerity at your own peril - Via a post at Financial Armageddon I learnt of a paper looking at the relationship of austerity implementation and social unrest. It is recent, dated August 2011. Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009 The Financial Armageddon article shows the first chart of the paper which presents: the relationship between fiscal adjustment episodes and the number of incidents indicating instability (CHAOS). "CHAOS is the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in a single year in each country. The first set of five bars show the frequencies conditional on the size of budget cuts. When expenditure is increasing, the average country-year unit of observation in our data registers less than 1.5 events. When expenditure cuts reach 1% or more of GDP, this grows to nearly 2 events, a relative increase by almost a third compared to the periods of budget expansion. As cuts intensify, the frequency of disturbances rises. Once austerity measures involve expenditure reductions by 5% or more, there are more than 3 events per year and country -- twice as many as in times of expenditure increases."

Obama Pushes for Modifications to Medicare and Social Security - At a town hall meeting in Illinois, President Obama reaffirmed that he will personally push for Congress to make Medicare and Social Security cuts part of any talk about deficit reduction or job creation. From the White House Transcripts:When folks tell you that we’ve got a choice between jobs now or dealing with our debt crisis, they’re wrong. They’re wrong. We can’t afford to just do one or the other. We’ve got to do both. And the way to do it is to make some — reform the tax code, close loopholes, make some modest modifications in programs like Medicare and Social Security so they’re there for the next generation, stabilize those systems. And you could actually save so much money that you could actually pay for some of the things like additional infrastructure right now. “Modest modification” is classic political newspeak code for cuts. The “modest”change Obama indicates he would support, like raising the Medicare retirement age to 67, would cause very real hardship for some older Americans and make every seniors’ Medicare premiums go up.

Gov't May Be Lowballing Medicare Shortfall By $6 Tril - Medicare's long-term liabilities already are among the biggest drivers of future federal budget deficits. But the burden on taxpayers may be $6 trillion larger than official estimates. From 1975-2009, per capita health care costs grew at an average of per capita GDP plus two percentage points. But the Office of the Actuary at the Center for Medicare and Medicaid Services assumes in its 75-year forecast that they will grow at the rate of per capita GDP plus one percentage point in the last 51 years. "Basically, the actuaries assume that health care costs grow slower beginning in 2035," said Douglas Holtz-Eakin, former head of the Congressional Budget Office and now president of the conservative American Action Forum. "But there is no reason to think that they will." The Actuary said in an email statement, "We don't believe using the GDP +1% assumption understates the cost of Medicare," but acknowledged that "it has risen faster than this over the historical period." Medicare's present-value shortfall tops $24 trillion, according to the Trustees' Report for 2011. The underlying assumptions, first set in 2001, have not changed as a result of ObamaCare.

More Budget Foxes, Fewer Hedgehogs - America’s fiscal challenges are often portrayed as a conflict between hawks and doves. The real battle, however, is between foxes and hedgehogs. Both foxes and hedgehogs play important roles in the policy ecosystem in normal times. In times of great change, however, society needs more foxes and fewer hedgehogs. More citizens and leaders who can adapt to new conditions, and fewer who want to preserve the status quo. That’s where we find ourselves today. Despite all the anguish over a debt limit deal, America’s fiscal outlook remains daunting. Little progress has been made on our largest budget challenges. Despite bipartisan efforts, prospects for a grand fiscal bargain remain dim. One reason is that fiscal hedgehogs still have the upper paw on key issues.

How Big Is the Deficit, Anyway? - According to its CBO score, the Budget Control Act of 2011 (a.k.a. the debt ceiling agreement) initially reduced aggregate budget deficits over the next ten years (2012–2021) by $917 billion, with a provision that ensures that deficits will be reduced by another $1.2 trillion (either through an agreement in the joint committee that is ratified by Congress, or through automatic spending cuts). The chatter in Washington is that even with the $1.2 trillion, this is still too small, and there is still this massive deficit hanging over our heads. This is true to an extent, but not the way you are being led to believe.The first question is this: How big is the deficit anyway? The answer is pretty complicated—complicated enough for S&P to mess up (although in my opinion they made a rookie mistake, as I’ll explain later). Warning: lots of numbers ahead, though the only math is addition and subtraction.

Debt Update - As brother Krugman wrote this AM, “the overhang of debt left behind by the housing bubble…is at the heart of our economic problem.” So here are two pictures that check in on the status of the problem.  Both show progress, but both show deleveraging remains underway, not completed. The first is total household debt as a share of total after-tax, or disposable, income.  First, over the course of the 1990s, the ratio was on an upwards glide path, but the slope accelerates noticeably in the 2000s, when credit got cheaper, risk was severely underpriced, and middle-class incomes were stagnant.  Total debt surpassed income (the ratio was greater than one) in 2001, and, as a share of income, grew four times faster in the 2000s (before the bust) than in the 1990s.  Post-bust, the ratio reversed course and you see a clear picture of deleveraging in action. The second picture shows another way of looking at leverage—it’s the share of after-tax income households are spending on servicing their debt—i.e., not the whole debt stock as in Figure 1—just the payments on that stock.

Why This Popular US Debt Visualization Is One Of The Worst Things On The Internet Right Now: The site is getting a lot of attention (including from Business Insider) for its visualization of the American debt situation. This is the money shot: If you stacked up our debt in $1 $100 bills, it would be a huge block bigger than the Statue Of Liberty. It seems designed to invoke the response: WOW! Our debt is really really big, we must have a crisis! But really, infographics like this are dangerous. A stack of $100 bills next to the statue of liberty, overlayed on a soccer field is the least useful way imaginable of comprehending the size of the debt. Want to get a better understanding of the debt? Try this chart, showing the cost of servicing that debt, as a percentage of GDP. It's at multi-decade lows.

Fun With the Arithmetic: That Crushing Debt Burden - It is important to remember that most of the people in Washington debates on economic policy do not know much economics. They tend not to be very good at arithmetic either. That is why they were blindsided by the collapse of the $8 trillion housing bubble that wrecked the economy. As we get endless pontification about the crushing debt burden it is worth touching base with reality on occasion. In that spirit, CEPR brings you the latest data and projections on the ratio of the federal government's interest payments to GDP, courtesy of the Congressional Budget Office (CBO). As the chart shows the interest to GDP ratio is currently at a crushing 1.3 percent, near the post World War II low. However this figure overstates the burden somewhat. Last year the Federal Reserve Board refunded almost $80 billion to the Treasury. This was interest earned on government bonds and other assets it now holds. That leaves a net interest burden of 0.8 percent of GDP, by far the lowest of the post World War II era.

Baffling - The continued systematic pursuit of obviously bad public policy is baffling. It's not like it's good politics. Does the Obama campaign staff really think they are gonna hold PA or OH with trade concessions to Korea? Do they think they will turn out voters in New Mexico on a deportation platform?  This isn't hard. Hire people to build things with the free money the world is offering us.

Backwards Priorities - This point can not be repeated often enough right now. I direct you to the excellent Ryan AventI trust the analyses showing that a long-term fiscal crisis looms, and I note that America's gross debt-to-gdp ratio is uncomfortably high. It's not obviously too high to sustain, however. It's far from obvious that swingeing cuts are necessary to right the fiscal ship—as opposed to, say, moderate increases in revenues combined with a meaningful slowing of the projected rate of growth of health spending. And markets, which should be heeded, could not be shouting any more forcefully that whatever cuts need to be made certainly don't need to be made now.  ...I see Americans as distressed by a dismal economy, frustrated at years of stagnant pay amid rising costs, and outraged by a system of government institutionally incapable of addressing basic concerns. Lampooning American voters as idiots living fat off the government teat obscures the reality of the present situation. Fiscal issues are not and should not be the principal worry in an America with high unemployment and rock-bottom sovereign-debt costs.

Cantor Says No To New Stimulus Spending - House Majority Leader Eric Cantor put a damper on President Barack Obama's plans to include new stimulus spending in the bill to be drafted by the "Super Committee." In a memo to House Republican lawmakers, Cantor called for "policy certainty," including the passage of a full-year budget for the government, as opposed to the "continuing resolutions" that have kept the lights on for the past year. "We must put an end to the policy uncertainty constantly being driven by this Administration," he said. "...That means stopping the discussions of new stimulus spending with money that we simply do not have." Earlier today the White House leaked its plans for Obama to hold a major jobs and debt speech shortly after Labor Day, in which he would encourage the "Super Committee," tasked with making $1.5 trillion in cuts to the federal deficit, to also tackle the jobs problem.

It’s the military, stupid - The U.S. Chamber of Commerce has published a letter to Congress’s new Joint Select Committee, aka the supercommittee, with the changes they would like to see made to the budget and tax code. The supercommittee’s brief is pretty broad; it will be looking at ways to balance the federal budget by raising taxes and/or reducing expenditures. The Chamber, which represents business interests, strongly insists that the supercommittee slash entitlements and reform the tax code by lowering tax rates. From the Chamber letter: The Chamber urges you to consider how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship...the current code needs a comprehensive reform to lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation. The problem with the Chamber’s argument about lowering tax rates to increase our global competitiveness is that the United States already has some of the lowest corporate tax rates in the western world. Here are corporate taxes as a percentage of GDP from the OECD. (Countries in dark green collect the lowest amount of taxes, countries in red collect the highest)

How Safe Are You? What Almost $8 Trillion in National Security Spending Bought You - The killing of Osama Bin Laden did not put cuts in national security spending on the table, but the debt-ceiling debate finally did. And mild as those projected cuts might have been, last week newly minted Secretary of Defense Leon Panetta was already digging in his heels and decrying the modest potential cost-cutting plans as a 'doomsday mechanism” for the military. Pentagon allies on Capitol Hill were similarly raising the alarm as they moved forward with this year’s even larger military budget. None of this should surprise you. As with all addictions, once you’re hooked on massive military spending, it’s hard to think realistically or ask the obvious questions. So, at a moment when discussion about cutting military spending is actually on the rise for the first time in years, let me offer some little known basics about the spending spree this country has been on since September 11, 2001, and raise just a few simple questions about what all that money has actually bought Americans. Consider this my contribution to a future 12-step program for national security sobriety. Let’s start with the three basic post-9/11 numbers that Washington's addicts need to know:

Austerity and Runaway Inequality Lead to Violence And Instability - A study this month by economists Hans-Joachim Voth and Jacopo Ponticelli shows that – from 1919 to the present – austerity has increased the risk of violence and instability:  Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures.

Government Austerity and Political Instability - In light of the recent riots in the UK (not to mention Greece, Spain, etc) this paper by Ponticelli and Voth is very timely.  The paper takes a sample of European countries from 1919 to 2009 and looks at the incidence of various forms of political instability as a function of government austerity.  The graph above provides the take-away for most people.  The y-axis is number of incidents of instability per year per country while the various shaded bars represent increasing amounts of austerity (measured as the cut in government budget divided by the country's GDP).  The "Chaos" group is simply the sum of all the other kinds of problems.  Clearly, the larger the cutback, the higher the chance of resulting social problems. You might wonder if the cause was just the poor economic performance that occasioned the cuts rather than the cuts themselves - they tested that idea and it doesn't seem to be so.  You might wonder if tax increases have the same effect as expenditure cuts - they didn't.  (Though one wonders whether this generalizes from Europe to the US).

The real grand bargain Washington should seek -That aborted deal reportedly would have cut about $4 trillion from projected deficits over 10 years, trading cuts in Medicare, Medicaid and Social Security (raising the eligibility age of Medicare by two years and cutting Social Security through slower inflation adjustment) in exchange for more revenue. The latter would be achieved by lowering tax rates on individuals and corporations while closing loopholes and deductions. This “grand bargain” looks unconscionable. In a time of Gilded Age inequality, with the wealthiest 10 percent capturing all of the rewards of growth over the past decade, this would trade cuts in basic security for working families (Social Security, Medicare and Medicaid) in exchange for tax hikes hitting middle- and upper-middle-class families and workers with health-care benefits. Instead, the committee should consider a real grand bargain, one that takes real courage. First, act to boost the economy and put people to work. Extend the payroll-tax cuts and unemployment benefits. Do what any sane corporate executive would do with interest rates extraordinarily low — borrow a lot of money and, if you’re the U.S. government, launch a major drive to rebuild America’s decrepit infrastructure. Add direct public employment for veterans returning from battlefields abroad, and for young people — the one in five high school graduates who are unemployed and not in college — ensuring that they don’t begin their adult lives with despair, depression and drugs.

Balance the Budget -- but Tie it to the Business Cycle - Despite claims that Keynesian economics leads to a bloated government, there is no automatic relationship between the size of government and Keynesian stabilization policies. Depending upon the mix of taxes and spending used to stimulate the economy during recessions and pay for the policies when times improve, the size of government can get larger, smaller, or stay the same. For example, if every recession is attacked with an increase in government spending financed by increasing taxes when times get better, government spending will ratchet up in each recession and the government will grow over time. This is the spend-and-tax strategy that Democrats are often accused of pursuing. Conversely, if tax cuts are used to stimulate the economy in recessions, and then spending is cut during booms to bring the budget back into balance, the successive spending cuts will reduce the size of government over time. This is, in essence, is the “starve the beast” strategy Republicans pursue: Use recessions as an excuse to cut taxes and then use the resulting deficits to insist on cutbacks in spending. But there is no need for the size of government to trend in either direction. In the examples above one of the two fiscal policy tools – taxes or spending – was used to stimulate the economy during recessions and the other to bring the budget into balance when times are better. But if the policy is simply reversed, if spending and tax cuts used alone or in combination to stimulate the economy are fully reversed when things improve, then the average size of government stays the same over time.

Why Obama should propose a Balanced Budget Amendment - It's the one simplest thing President Obama could do to seize control of the economic agenda. It's counterintuitive - but done right, it could be the tonic both for the economy and for a divided political scene. Don't click on your back button yet - I haven't gone crazy.Obama should propose a Balanced Budget Amendment with the following key features:

  • The balance must be achieved over ten years, not one
  • It should include automatic (not discretionary) investment programmes when unemployment is high, which are scaled down when the economy is doing well
  • It should commit to share the proceeds of future growth between deficit reduction/debt repayment, tax cuts and investment

This policy would provide countercyclical intervention - exactly as a responsible government should. Right now, the US economy could use five to ten million more jobs (that's about $500 billion a year, by the way). Five years ago it didn't need anything like that - there was plenty of private investment going on, so the government wasn't needed so much. We hope that in five years time the same will be true again

The wrong solutions to fixing our economy -In early January 2009 two White House-bound economists — Christina Romer and Jared Bernstein — predicted that if the stimulus bill were passed, unemployment would peak at 8% by midyear and then start coming down. If there were no stimulus, they said, joblessness might hit 9% and not peak until 2010. Romer and Bernstein had the risky job of hyping policy, but they weren't alone in their optimistic views. Forecasters at the Congressional Budget Office, the Federal Reserve and most private banks all thought that the economy had a natural tendency to right itself, sooner or later. What it needed, the activists urged, was a push. Well it's now obvious that the push didn't do the job. Even with it, unemployment is higher than the Romer-Bernstein worst case. The optimistic forecasts now look embarrassing, ranking right up there alongside Irving Fisher's 1929 comment that stocks had reached "a permanently high plateau." About the time Romer and Bernstein issued their assessments, I wrote a cover essay for Washington Monthly attacking predictions of early recovery. The "return to normal" would not happen, I wrote, because the effects of a financial collapse could not be reversed. But though this fact was obvious and in plain sight, somehow many economists missed it. Let's examine that epic failure.

It's the Aggregate Demand, Stupid - With the debt limit debate temporarily set aside, the Obama administration is talking about finding some way to create jobs and stimulate growth. But the truth is that there really isn’t much it can do and it knows it. There may be some small-bore things it can do without Congressional action that may help a little, but the operative word is “little.” The only policy that will really help is an increase in aggregate demand. Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented. The federal government could increase aggregate spending by directly employing workers or undertaking public works projects. But there is no possibility of that given the political gridlock in Congress and President’s Obama’s desire to appear moderate and fiscally responsible going into next year’s election. That really leaves just consumers as a potential avenue for increasing spending.

Capital depreciation as stimulus? - Let’s say the U.S. becomes another Japan or for that matter let’s say Japan has become Japan.  Still, we all know that capital depreciates.  That raises the return on replenishing and rebuilding the capital stock.  Even though wealth is falling, it raises the marginal rate of return on investment.  Which in turn should spur aggregate demand and also credit creation.  At some point you have to get the roof fixed.  If alien invasion can work, what about a slower rotting away of the same output? That’s a slow, ugly and painful way to end a downturn, but the deeper question is whether it will work at all.  It doesn’t seem to have worked in Japan and they’ve had enough time for a lot of capital to rot away. This paper measures depreciation rates (for America) and estimates that physical capital, without repair, has an average survival time of thirteen to sixteen years. Why has it not worked in Japan?

Oh! What A Lovely War! - Krugman - World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy. Christy Romer is very much on the same wavelength. It’s especially relevant because in the 1930s, as today, many wise heads insisted that unemployment was structural, that many of the unemployed could not be gainfully employed no matter how much demand increased. Then demand actually did increase, and as Christy says, Because nearly 10 million men of prime working age were drafted into the military, there was a huge skills gap between the jobs that needed to be done on the home front and the remaining work force. Yet businesses and workers found a way to get the job done. Factories simplified production methods and housewives learned to rivet. Here the lesson is that demand is crucial — and that jobs don’t go unfilled for long. If jobs were widely available today, unemployed workers would quickly find a way to acquire needed skills or move to where the jobs were located.

Paul Krugman’s Cure For Economic Woe: An Alien Invasion - Paul Krugman: Think about WWII, right? That was not, that was actually negative social product spending, and yet it brought us out [of the Depression]. I mean partly because you want to put these things together, you say, ‘Look, we could use some inflation,’ Ken and I are both saying that, which is of course anathema to a lot of people in Washington, but it’s in fact what the basic logic says. It’s very hard to get inflation in a depressed economy, but if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So that if you think about using all of these things together, you could accomplish a great deal. If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.And then if we discovered, ‘Whoops! We made a mistake. There aren’t actually any space aliens,’ we’d be in better shape—

Summer rerun: Misunderstanding Modern Monetary Theory - Last week Paul Krugman again attempted to take on MMT in another piece called "Franc Thoughts on Long Run Issues." in that post, Krugman makes the same bogus claims about MMT’s saying deficits don’t matter in a fiat currency regime.  Even non-MMT fiat currency sceptics like me have figured it out. Personally, I see something cynical about these repeated bogus claims. For example, in March, Dr. Krugman wrote: As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. Clearly he understands the MMT position. Yet last week he wrote: MMT (modern monetary theory) types… insist that deficits are never a problem as long as you have your own currency. See the difference?  Statement #1 is correct. Statement #2 is incorrect – and a repeat of what he said last summer. Since Krugman made statement #1 prior to statement #2, I am left guessing why he has returned to the mischaracterization which is the subject of this post.

Krugman Taken to the Modern Money Cleaners - Last week Paul Krugman again attempted to take-on Modern Money Theory (MMT), in his piece "Franc Thoughts on Long Run Issues." He complained that he is being "harassed" by those who adopt the approach to money that has been labeled MMT. He conceded that on many issues he agrees with MMT conclusions -- particularly in rejecting the hysteria about current US federal government budget deficits. I want to be clear that MMTers recognize and appreciate the role that Krugman has played in fighting against the deficit hyperventilators in Washington. However, he claimed he diverges from MMT's insistence that "deficits are never a problem" and in particular that deficits will not become a problem when the current "liquidity trap" ends.  Now this is at least the third time that Krugman has claimed that MMTers say "deficits are never a problem." He never cites anyone when he makes the false claim. And every MMTer I know has directly refuted his accusation; indeed Stephanie Kelton, Jamie Galbraith and I have all published responses on Krugman's own blog denying that we believe any such thing. All of us have also published elsewhere detailed refutations, including my post at New Deal 2.0. . His refusal to change his tune says more about him than about the MMT position.

MMT, Again - Krugman -First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do get the premise that modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t. Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds. The second case poses no problem, say the MMTers, or at least no worse problem than the first: the US government can simply issue money, crediting it to banks, to pay its bills. I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.

Large government per se should not be the political or economic goal - Paul Krugman lays out a hypothetical scenario, mainly to refute the MMT position that money-financed deficits are not much different from bond-financed deficits. He tries to point out that money-financed deficits will eventually lead to inflation.Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds. Let's question the assumptions here one by one. In this hypothetical scenario where private demand has already revived, why does the government still feel the need to commit to spend equal to 27 percent of GDP?

For whatever reason - Paul Krugman has another piece up on MMT. I like this piece a lot more than the last one he wrote. I suggest you read it. Here’s the one passage I do find troubling, however:Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds. It’s actually just three words that bother me: “for whatever reason”. i think the whole discussion hangs on those three words actually. Interest rates largely reflect the expected path of future policy rates. It does not follow logically for me that investors would refuse to buy US bonds ‘for whatever reason’. Sure, currency revulsion can cause the exchange rate to collapse and inflation to go through the roof. As Dr. Krugman points out, you could even get hyperinflation under certain circumstances.

The Effect of Individual Income Tax Rates on the Economy, Part 1: 1901 - 1928  -Over the next few posts, I will take a systematic look at the relationship between individual tax rates and the economy going as far back as the data allows in the United States.  In most of these posts, I will measure the effect of the economy using growth in real GDP per capita. However, that series only dates back to 1929. So in today's post, which will focus on the period up to December 1928, I will look at the recessions (using official dates from the NBER and compare that to top individual marginal tax rates as published in the IRS' statistics of income historical table 23.  The graph below shows the top marginal tax rate (black line) and periods in which the economy was in recession (gray bars) going back to January 1901. (Note - the economy was in a recession from June of 1899 to December 1900, so January 1901 is a nice "clean slate" date at which to start.)  I think the graph above lends itself to be division into three more or less discrete periods. The first is the pre-tax period from 1901 until 1912. The second is the "rising tax" period from 1913 through 1918, and the third is the "falling tax" period from 1919 to 1928.

Tax Buyouts: Raising Government Revenues without Increasing Labor Tax Distortions - NY Fed - At a time of increasing fiscal pressures both here and abroad, it seems important to consider ways of raising government revenues without discouraging people from working. This post describes a revenue raising plan—a tax “buyout”—that does just that. The buyout would give you, the taxpayer, the option each year of paying a lump sum to the government in exchange for a given reduction in your marginal tax rate that year. In effect, you would use the lump sum payment to buy yourself a lower marginal tax rate, which would in turn give you more incentive to work. The buyout would be risk free: you wouldn’t have to decide whether to take the buyout until after you know your labor income. Why would this be good for you? If you choose to take it, you end up paying less taxes. If you don’t take it, you are just as well off as before. Why is this good for society? The lower marginal tax rate induces you to work more, so that some of the distortionary effects of taxation would disappear. Furthermore, your participation would be voluntary, so the buyout should be politically palatable.

Stop Coddling the Super-Rich - Warren Buffett - OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.  These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.  Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

Warren Buffett: Tax Me More! - Warren Buffett has long been on a crusade to raise the taxes paid by people like himself. Usually, Buffett points out the he pays a lower rate than his secretary, on account of she pays Social Security taxes on all of her income and he only on a fraction of his. But that’s always struck me as silly: so long as we pretend that Social Security and Medicare are self-funding, it makes sense to cap taxation; after all, we cap payouts. In an op-ed in yesterday’s NYT (“Stop Coddling the Super-Rich“) he makes a stronger case. Along with emotional nonsense like “While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks” — it’s just a non-sequitur–Buffett points to actual problems in the tax code:Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors. These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Taxing the Rich for the Benefit of All (Even the Rich)  Warren Buffett performed a very civic duty when he wrote his op-ed in the New York Times pleading for the U.S. government to raise his taxes.  He makes two basic points:  (1) the rich can surely afford to pay higher taxes, and (2) their paying higher taxes would not prevent them from investing and hiring.Bill Gale, speaking as a smart economist rather than famous rich person, goes further, explaining the historical evidence that low taxes grow the deficit more than the economy, aren’t effective at constraining the growth in government spending,  and have contributed to the dramatic rise in income inequality.  But instead of just endorsing Buffett’s idea that we could just raise marginal tax rates on the rich, Bill suggests (in his op-ed on there are better ways to raise taxes, even if only on the rich, by broadening the tax base and rethinking our ill fated love affair with the Bush tax cuts:One good place to start? High-income households: Limit the rate at which itemized deductions can occur to 28%. This would affect only households in the highest income ranges, it would not raise their official marginal tax rate, and it would raise $293 billion over the next decade, relative to how much money would be raised according to current law, according to the Congressional Budget Office. This would be a small move in the right direction.

The dual-taxation meme  -- Warren Buffett’s op-ed on Monday calling for higher taxes for the very rich clearly touched a national nerve. Which is one reason there’s been a steady stream of arguments from the right explaining that in fact he’s wrong when he says that he pays much lower taxes than anybody who actually earns money from a job. And there’s one argument in particular which seems to be very popular. Here’s Daniel Indiviglio: The income that a corporation makes is first taxed at 35%. Then, a dividend is paid out — after taxes. If you obtain that dividend, should it be taxed? Well, it already was — at 35%. For this reason, it makes sense to tax it at 0%. If you tax it more, then you are taxing the income it produced twice. And here’s Tim Worstall:In the U.S. system from our $100 first we take $35 at the corporate level. Then we take another $15, or the dividend tax rate of 15%, from the recipient. Giving us a tax rate of 50% on dividends. We’ve taken $50 from the total amount that was to be used to pay dividends. And here’s the WSJ:Much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.

Warren Buffet’s Proposed Tax Hikes Would Provide Insignificant Revenue - Warren Buffett's recent call to increase taxes on the super- and mega-rich has garnered much media attention.  But how much money could such increases actually raise?  What effect could they have on reducing the nation's deficit or debt?  As it turns out, not much.  Below is a quick look at the latest IRS data on earners making more than $100,000: Source:  IRS data,,,id=96981,00.html, table 1.2. Mr. Buffett specifically called to raise tax rates on Americans making more than $1 million and proposed an additional increase on taxpayers whose income exceeds $10 million.  Suppose Mr. Buffett got his wish and loopholes and deductions were eliminated, making it possible to tax the "super-rich" (those earning $1M - $10M per year) at an effective rate of 50%.  The following table shows the effect that such a historic hike on effective rates would have on the deficit and debt:

Yes, There’s Real Money at the Top - When billionaire investor Warren Buffet recently called on policymakers to “get serious about shared sacrifice” by raising taxes on the nation’s wealthiest people, some critics claimed that this wouldn’t make a serious dent in our budget problems.  Nonsense. IRS data show that the top 1 percent of taxpayers had a combined income of $1.7 trillion in 2008, the most recent year available.  This is fully 20 percent of the nation’s total adjusted gross income — and much more than the bottom half of the population had (around 13 percent). Moreover, the tax burden at the top of the income scale has fallen dramatically in recent decades.  IRS data show that the top 1 percent of taxpayers paid an average of about 23 percent of their income in federal income taxes in 2008.  That’s far below what they paid prior to the Bush tax cuts, and about a third less than they paid back in 1980 (see graph). Returning the average tax rate on the top 1 percent of taxpayers to its 1996 level of 29 percent could raise about $100 billion a year, or $1 trillion over the next decade.

The REAL Reason Now's The Time To Raise Taxes On The Rich: The buzzy, "must-read" of the day is Warren Buffett's op-ed in the NYT called Stop Coddling The Super-Rich. It's well-traveled ground for Buffett, who has long been an advocate of higher taxes on the rich. Nothing new on that front. The fact that we're fighting so much about deficits these days, and the fact that the party most aggressive about deficit-fighting is also the most aggressive about keeping taxes low perhaps adds a little urgency to it, but basically there's not much new to report. Buffett's argument is basically: We have a big deficit, and higher taxes on the rich is what's fair. But fairness aside, is raising taxes on the rich now good policy? Two points on this. First a small one, and second a big one. First you have the conventional wisdom is that it's a horrible idea to raise taxes during a recession. The economy is weak, so why take more money out of the economy? But the biggest problem facing the economy is a lack of consumption, and a tax on high earners (who are also high savers) isn't likely to have a huge impact on this measure. The other side is that, well, rich people do the hiring and the real investment in the economy, so taxing them will hurt job creation. But again, given the lack of demand, it's hard to fathom that income tax rates are a major impediment to investment. If strong demand, and the ability to get more income, were there, then it would be worth investing for even if it meant higher taxes. If anything, it stands to reason that when there's not a good case for the rich to make domestic investments, then a tax hike doesn't cause much harm. There's a bigger argument however, and that's the long-term health of the US Dollar!

US debate intensifies over taxes on the rich - Henry Bloch knows a lot about taxes and a lot about wealth. He is the retired honorary chairman of H&R Block, a Kansas City-based tax services company, which he founded with his brother in 1955.  Having amassed a fortune by helping Americans process their tax returns, the philanthropist – and registered Republican – believes the time has come for higher taxes on his richest fellow countrymen.  “It’s not going to hurt the wealthy to part with a little money,” “This is a wonderful country and that’s the least they could do.” Mr Bloch’s words highlight the intensity of the debate over the taxation of the highest-income Americans as the US struggles to find ways to reduce its long-term budget deficits. On Monday, Warren Buffett, the billionaire investor, proclaimed that he too was in favour of raising more revenue from his cohorts.  The call for higher taxes on the wealthy – which is shared by President Barack Obama and many congressional Democrats – appears to chime with the desire of most Americans. A CNN poll this month found 63 per cent of Americans favoured higher taxes on businesses and rich citizens to curb the soaring debt.

The Most Specious Tax Argument Ever - Conservatives are in a tizzy because Warren Buffett had the temerity to once again suggest that he should pay a higher percentage of his income in taxes than his secretary does. The gall! The GOP response has been as predictable as it is unpersuasive: Buffett is a hypocrite for not promoting a wealth tax instead, and just wants to keep the merely rich from reaching his status; the armies of lawyers and accountants the super-rich employ will insulate them from any tax hikes; and, if Buffett wants to pay higher taxes, why not just do it himself? But Investors Business Daily wins the award for chutzpah with their Orwellian argument that the tax burden for top earners has actually increased in the last decade: Nor is it true, as Buffett claims, that the rich have been "coddled." Indeed, the top 0.1% of income earners — the millionaires and billionaires Buffett says have made out like bandits — paid a third more in federal income taxes in 2008 than they did in 2001. There's a lot of dishonesty to unpack here. First, comparing absolute tax returns -- the metric they cite -- is essentially meaningless.

The real grand bargain, coming undone - Despite all the recent talk of “grand bargains,” little attention has been paid to the unraveling of a truly grand bargain that has been at the center of public policy in the United States for more than a century.That bargain — which emerged in stages between the 1890s and 1930s — established an institutional framework to balance the needs of the American people with the vast inequalities of wealth and power wrought by the triumph of industrial capitalism. It originated in the widespread apprehension that the rapidly growing power of robber barons, national corporations and banks (like J.P. Morgan’s) was undermining fundamental American values and threatening democracy.

Tax the super-rich or riots will rage in 2012 - More rage is dead ahead. Across our planet a new generation is filled with rage. High unemployment. Raging inflation. Dreams lost. Hope gone. While the super -rich get richer and richer.  Listen to that hissing: The fuse is rapidly burning, warning us. Wake up before the rage explodes in your face. This firestorm is endangering America’s future. From forces outside, yes. But far more deadly, from deep within our collective psyche. We have lost our moral compass. We are self-destructing.  Crackpot warning? No. This warning comes from the elite International Monetary Fund. A recent IMF report looked at “the causes of the two major U.S. economic crises over the past 100 years, the Great Depression of 1929 and the Great Recession of 2007,” “There are two remarkable similarities in the eras that preceded these crises. Both saw a sharp increase in income inequality and household-debt-to-income ratios.” And in each case, “as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living.”

What HFT Hedge Funds Tell Us About Carried Interest - Warren Buffett's recent New York Times op-ed calling for higher taxes on the super-rich has brought the issue of carried interest back into relief.  For the uninitiated, carried interest is the tax loophole that lets private partnerships -- venture capitalists along with private equity, hedge fund and real estate managers -- get taxed at the long-term capital gains rate rather than at the ordinary income rate. That is why a billionaire fund manager like Buffett recently had a tax bill that amounted to only 17.4% of his income.Carried interest is actually a bit more complicated. Members of private partnerships are typically compensated along a 2/20 model: they earn a management fee equal to 2% of the size of their fund, and receive a performance fee of 20% of any profits. The 2% management fee is taxed at the ordinary income rate -- i.e., 35% -- but the 20% of profits are taxed at the capital gains rate of 15%, despite the fact that fund managers ordinarily do not risk much of their own capital. There's a final wrinkle. Managers must hold on to a position for a year to qualify for the long-term capitals gain rate of 15%; if they do not, profits are taxed as ordinary income.

Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013 - Wealthy individuals in the U.S. will find it easier to cut their estate-tax bill as a result of a provision for using their deceased spouses’ exemption credit.  Everybody has a gift and estate-tax exemption of up to $5 million this year and next. For people who died after Dec. 31, 2010, any unused portion of that can now be passed by the estate to the surviving spouse, according to tax legislation enacted by Congress in December. Before that law, couples set up specialized trusts and had to be sure their assets were divided up in a certain way. “It’s something that can help someone caught dying before they did any planning, but certainly shouldn’t be something you count on,” according to John Olivieri, a partner in the private clients group in the New York office of White & Case LLP.  The $5 million exemption covers gifts made while alive as well as after death. For example, if a married man died this year and left his $2 million estate to his children and had made a $1 million lifetime gift, he would have a $2 million exemption that was unused. The portability provision would allow his widow to take advantage of that $2 million exemption and add that to her $5 million exemption, and give away up to $7 million free of federal gift and estate taxes if she dies before 2013.

The Coming Payroll Tax Role Reversal - In a couple of weeks, President Obama will ask Congress to extend this year’s payroll tax cut. It will surely become a classic Washington double-reverse rhetorical moment. I can’t wait to hear Obama lift some of House Speaker John Boehner’s (R-OH) best lines about the folly of raising taxes in the midst of an economic slump. And, of course, we’ll also get to hear Boehner do an Obama and warn against the dangers of recklessly extending temporary tax cuts. If the stakes weren’t so high, it would all be great fun.   Confused? Don’t be. Just take what each side said last winter as Obama and Congress battled over what to do about the expiring 2001 and 2003 tax cuts and give the Democrats the Republican talking points and give the Rs the D’s script.

Ordinary People to Politicians on Taxes: Grow Up, Already! -- Here’s an encouraging article in this morning’s (Friday’s) Washington Post, about the conversations politicians are having with their constituents back at home this summer.  Seems that Republicans are getting scolded, and Democrats are feeling a little less wimpy these days, on the topic of tax policy’s role in deficit reduction: Hultgren’s own constituents had picked up the message, repeatedly hectoring the freshman congressman at a town hall meeting to raise taxes on the wealthy and corporations. “We have clear information that … tax cuts, especially to the super rich, has not increased any more jobs,” one man told him. “I want to know under what conditions you would be willing to consider increasing taxes, especially on those who can afford it? ” “I just have one question for you tonight,” said another. “Did you sign Grover Norquist’s pledge to never raise taxes?” — referring to the promise that has been signed by most congressional Republicans, including Hultgren. “Don’t you have the confidence in your own ability in Congress to make up your own mind? You need Grover Norquist to tell you?” the man continued.

Federal Gasoline Tax to Expire in September Unless Extended - The average price of a gallon of gasoline is about $3.59 nowadays, including a federal 18.4 cent per gallon tax plus state excise taxes on gasoline. At least until September 30. Unless Congress acts on what is normally a routine vote to extend the federal gasoline tax, the tax rate will drop to 4.3 cents per gallon, a 14.1 cent per gallon drop. The tax current generates about $30 billion per year, which is used to pay for part of approximately $42 billion in annual federal highway spending and $14 billion in annual federal transit spending. The desire to have the gasoline tax cover all of these expenses is what led to the Bowles-Simpsons deficit reduction commission's recommendation of a 15 cent per gallon gasoline tax increase. The AFL-CIO and Chamber of Commerce have jointly called for an even larger increase. Politically, a vote to renew the gasoline tax will come at a tough time. Gas prices have risen steadily in the past few months, and sentiment against taxes is at a high level.

Tax Expenditures - One possible explanation for the difficulty in controlling the budget is that a major component of spending—tax expenditures—receives privileged status. It is treated as tax cuts rather than spending. This paper explores the implications of that misclassification and illustrates how it can lead to higher taxes, larger government, and an inefficient mix of spending (too many tax expenditures). The paper then suggests options for reform to the budget process that would explicitly incorporate and properly measure tax expenditures. It concludes by considering ways to control tax expenditures (and other spending) and the special challenges presented by tax expenditures. Tax expenditures are large relative to other spending. (Table 1). Income tax expenditures will amount to about $1.2 trillion in fiscal year 2011 based on US Treasury estimates. That is significantly larger than nondefense or defense discretionary spending. Tax expenditures would roughly equal total discretionary spending were it not for the extra outlays authorized in an effort to boost the economy out of recession.

Designing a national consumption tax - The US government, when it taxes individuals, taxes only what they earn, and not what they spend; this is one big reason why we have a gaping budget deficit. Every other developed country in the world has some kind of consumption tax, as indeed do many US cities and states. If the US is serious about getting its fiscal house in order, a consumption tax of some description is likely to be necessary.Bloomberg has come out in favor of a value-added tax of the kind familiar to those of us from Europe. It’s a tried-and-tested solution, and it’s superior in just about every way imaginable to the flat sales taxes that Americans are used to right now. It’s spread along the supply chain instead of being back-loaded at retailers; it is much more adaptable to an economy based on services rather than goods; and it easily captures online activity from places like which current sales tax regimes find hard to deal with.There would also be a reduction of tax-collecting bureaucracy: rather than having to operate their own sales-tax regimes, states and cities could simply use the national one instead.

Even in principle, figuring out a fair tax system is hard - How does one set up a system such that everyone pays their fair share of taxes? Let us suppose that a "fair" tax is one where everyone gives up the same share of utility to pay for public goods. One could formulate this such that U(X(L)-L-t)/U(X(L)-L) = K The idea is that the fraction of utility one keeps after taxes is the same for everyone. X is consumption; the amount one gets to consume is a function of effort, L. To make things easy, we will assume people consumer their incomes, so that income and consumption are the same. Assume that utility function has the shape U' > 0 and U" < 0. K is dependent on how much society wishes to spend on public goods. Just this simple formulation presents three problems. First, the fair rate of progressivity will be a function of the magnitude of U". For instance, if we assume log utility, U' = 1/(X-L) = U" = -1/(X-L)^2. This means U" gets very small very rapidly, which also means that the need to increase marginal tax rates in income to maintain the above definition of fairness gets quite small. Second, the correspondence between consumption and effort is not one-to-one.  The lower the correlation, the worse the approximation.

Majority of corporations avoid federal income taxes - -- Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday. The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes - despite having a combined $2.5 trillion in revenue. The study showed that 28% of foreign companies and 25% of U.S. corporations with more than $250 million in assets or $50 million in sales paid no federal income taxes in 2005. Those companies totaled a combined $372 billion in sales for the largest foreign companies and $1.1 trillion in revenue for the biggest U.S. companies. The GAO report, which did not name any specific companies, said that some corporations reported zero income before deducting expenses while others said they had zero net income after deducting expenses. Either way, those companies reported no tax liability, the GAO said.

The Credit Rating War - The continuing brouhaha over Standard & Poor’s downgrade of the United States government’s credit rating offers a powerful lesson in institutional economics. Markets work best in an institutional environment that creates strong incentives for everyone to tell the truth.Whether you call this institutional environment law and order or, more specifically, regulation, it’s not easy to design because it is so easily corrupted. Some observers, as well as some representatives of the Obama administration, view the Standard & Poor’s downgrade as a strategic effort to retaliate against regulatory changes that would adversely affect the company as well as a political intervention in the deficit-reduction debate. Their fury was intensified when John Bellows, acting assistant Treasury secretary for economic policy, discovered a significant informational error (a miscalculation amounting to $2 trillion) in Standard & Poor’s initial explanation of the rating change. The rating agency declined to change its assessment after the error was pointed out.

Rob Johnson and Tom Ferguson on the Real Meaning of the S&P Downgrade and the Market Reaction - Yves Smith (two videos) Readers have responded well in the past to Tom Ferguson’s cut-to-the-chase, curmudgeonly style, but I also wanted to call your attention to Rob Johnson’s observations. Rob, by contrast, is a very measured speaker, so on his scale of discourse, his remarks about Obama are remarkably blunt.

Dean Baker: The S&P Downgrade Market Plunge Myth - The Wall Street crew that wants to cut your Social Security and Medicare benefits are sensing that victory is in sight. They have managed to knock jobs completely off the agenda and have made deficit reduction the near exclusive focus of economic policy in Washington. They are now setting the stage to have the Congressional "super-committee" produce a deal that will mean large cuts in both programs. The backdrop for these cuts is that the country is in crisis and that we have no choice. A central part of this story is that the stock market crashed last week in response to the Standard and Poor's downgrade of U.S. government debt. The Wall Street crew and their allies in the media and Congress will tell the country that if we don't have the cuts in Social Security and Medicare demanded by S&P then we run the risk of further downgrades. This raises the prospect of further market panics and the complete wreckage of the economy. This story has as much credibility as John Edwards' tales of marital bliss during his presidential campaign.

Downgrade for U.S., but no downgrade for France - You probably heard that on Aug. 5 Standard & Poor's downgraded the United States one notch, from AAA to AA. You may not have heard that on Aug. 10 S&P said France's current AA A rating was "warranted" and "stable." S&P was saying that the United States is a bigger credit risk than France. The market is behaving as though S&P had said the exact opposite. Treasuries rose in price, and the United States.was able to auction $72 billion of notes and bonds at 2.13 percent, the lowest average yield for a re-funding on record. Meanwhile, the difference between French and German yields on 10-year bonds rose to almost a full percentage point. That's the largest spread for France since the euro was established. The annual cost of insuring French debt against default for five years soared from about $75,000 in the earlier part of the summer to $175,000, compared with about $55,000 to insure the United States. (The cost of insuring French debt has since fallen back to about $150,000.) The market is saying that AAA France is a much bigger credit risk than the AA United States.

Moody’s view of sovereign ratings - I’m very late to Adam Ozimek’s interview with David Levey,  the former Director of Sovereign Ratings for Moody’s. Levey makes a couple excellent points about sovereign ratings, starting with this one: On methodology, things changed in the mid-2000s. Under pressure from regulators and issuers, the agencies were forced to “open the black box” and become much more explicit about their criteria, scorings, weights attached to various factors, etc. There was a tendency to move to a “scientistic”, quantitative, formulaic approach. I tended to resist that (being a great admirer of Hayek). I saw risk assessment as a multidisciplinary, highly qualitative, judgment process involving a varied weighting of factors.I fear that this is exactly the reason why S&P started coming out with weirdly precise deficit-cutting targets — the “chop $4 trillion over ten years, or we’ll downgrade” phenomenon. Sovereign ratings are always more of an art than a science, and the pressure to become quantitative and formulaic has been deleterious at both major ratings agencies.

Fitch reaffirms AAA rating for US, outlook stable -- Fitch Ratings reaffirmed Tuesday its AAA rating on the US but cautioned Congress that failure to reach a deal to cut the federal budget deficit could start the ball rolling toward a downgrade. Washington and the financial markets have been eager to hear more from the other major ratings firms after Standard & Poor's downgraded the US debt rating to AA-plus from the coveted AAA on Aug. 5. S&P's move angered the White House and the Treasury Department, which called the downgrade a mistake based on faulty analysis. In a statement, Fitch affirmed its AAA sovereign rating on the US, with a long-term outlook of stable and a short-term currency rating of F1-plus.The affirmation "reflects the fact that the key pillars of the US's exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base," Fitch said.

Fitch maintains US’s triple A rating - The US still deserves a triple A credit rating with a stable outlook, Fitch Ratings said on Tuesday, highlighting the different tacks that leading agencies have taken on US creditworthiness. Fitch’s decision to reaffirm the pristine credit of the US came after Standard & Poor’s shocked markets with a downgrade to double A plus and Moody’s took the middle road, keeping a top notch rating but cutting its outlook to negative. he Fitch decision shows that while there is not a vast disagreement between the agencies on the trajectory of US debt, they take different views on the recent debt ceiling deal, and on the potential for the US political system to produce more savings. “We do think the Budget Control Act was a pretty substantive commitment,” said David Riley of Fitch Ratings in London. He said that Fitch wants to see whether the congressional “supercommittee” set up to find further savings by this autumn can deliver.“We think that’s worth waiting for. If they do reach agreement, then you’ll have specific measures, passed into legislation before the end of this year, on very substantive additional deficit reduction,” said Mr Riley. “That would signal that common ground can actually be found.”

MOODY'S ANALYST BREAKS SILENCE: Says Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed  - A former senior analyst at Moody's has gone public with his story of how one of the country's most important rating agencies is corrupted to the core.  The analyst, William J. Harrington, worked for Moody's for 11 years, from 1999 until his resignation last year.  From 2006 to 2010, Harrington was a Senior Vice President in the derivative products group, which was responsible for producing many of the disastrous ratings Moody's issued during the housing bubble.  Harrington has made his story public in the form of a 78-page "comment" to the SEC's proposed rules about rating agency reform, which he submitted to the agency on August 8th. The comment is a scathing indictment of Moody's processes, conflicts of interests, and management, and it will likely make Harrington a star witness at any future litigation or hearings on this topic.

The Case Against the Credit Ratings Agencies - In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises. These crises in turn force debtor governments to sell off their assets under distress conditions. In pursuing this guard-dog service to the world’s bankers, the ratings agencies are escalating a political strategy they have long been refined over a generation in the corrupt arena of local U.S. politics. Moody’s, Standard and Poor’s and Fitch focus mainly on stocks and on corporate, state and local bond issues. They make money twice off the same transaction when cities and states balance their budgets by spinning off public enterprises into new corporate entities issuing new bonds and stocks. This business incentive gives the ratings agencies an antipathy to governments that finance themselves on a pay-as-you-go basis by raising taxes on real estate and other property, income or sales taxes instead of borrowing to cover their spending. The effect of this inherent bias is not to give an opinion about what is economically best for a locality, but rather what makes the most profit for themselves.

Blame for financial mess starts with the corporate lobby - Another great week for Corporate America!The economy is flatlining. Global financial markets are in turmoil. Your stock price is down about 15 percent in three weeks. Your customers have lost all confidence in the economy. Your employees, at least the American ones, are cynical and demoralized. Your government is paralyzed. Want to know who is to blame, Mr. Big Shot Chief Executive? Just look in the mirror because the culprit is staring you in the face. J’accuse, dude. J’accuse.You helped create the monsters that are rampaging through the political and economic countryside, wreaking havoc and sucking the lifeblood out of the global economy.  Did you see this week’s cartoon cover of the New Yorker? That’s you in top hat and tails sipping champagne in the lifeboat as the Titanic is sinking. Problem is, nobody thinks it’s a joke anymore.

To Save The Economy, You Sometimes Need To Ignore Business - Many on the right and center indicate that in order to restore the economy, President Obama needs to do more to cater to the whims of rich businessmen. Many on the left feel that this is exactly wrong and that in order to restore the economy, President Obama needs to do more to stick it to the rich and dispossess them. History suggests that both are wrong. Economic recovery would be good for business, but businessmen who may be good at running businesses are extremely bad judges of macroeconomic policy. Consider, for example, the Great Depression, and the monetary stimulus that economists from Milton Friedman on the right to Christina Romer on the left now agree ended it.The Depression was not good for big business. Nor was it good for banks and large financial institutions. Ending the Depression required stepping on some toes, but fundamentally the Depression was a negative-sum experience and everyone was better off when growth returned. But here’s a couple New York Times articles from June of 1933 — “Plea” from June 2, “Return to Gold” from June 4 — showing the business community’s intense hostility to the expansionary monetary policy that eventually saved all their skins:

Shadow banking – from Giffen goods to Triffin troubles - Here’s a chart for anyone interested in the origins of the so-called deposit crisis: It comes from the widely cited recent IMF working paper by Zoltan Pozsar and suggests there are too few banks to meet the demand for safe places to put burgeoning institutional cash pools. It’s the flip side to the increasing amount of cash held by US corporations, rich people and asset managers throughout the last two decades. Chart from the paper’s appendix (click to expand, please note the nominal scale): Pozsar’s paper is a crisp introduction to the demand side of the “shadow banking” system. As he explains, the typical explanation for its rise is a supply argument: that the search for yield and abritrage opportunities encouraged the growth of money market funds and use of repurchase agreements, or repos. Tyler Cowen notes that this builds on arguments by the excellent Gary Gorton.

The Systemic Risk Industry - There seems to be a cottage industry now in proposals to solve and/or mitigate systemic risk. I'm myself somewhat of a guilty party. The producers here are law profs and economists. These proposals fall into three buckets. One focuses on executive compensation as the key area for reform, a second on activity and/or size limitations, and the third on changing banks' capital structures. Strangely there seems to be little integration of these three approaches, although they would seem to be complements, rather than alternatives. But we scholars tend to see every problem as a nail for our particular hammer.  It'll be interesting to see if this industry has a half-life longer than a couple of years; I suspect not, as many of the producers in the industry are not particularly interested in financial institutions per se and are likely to migrate to the next hot application of their tool box. Among existing proposals, the most intellectual activity has focused on capital structures as key. We've seen myraid co-co bond proposals, living wills, holding company structures, alternative capital risk-weighting, leverage limits, liquidity requirements, expanded shareholder liability, and all sorts of other variations on contingent capital.

Court Ruling Offers Path to Challenge Dodd-Frank - A new front has opened in the behind-the-scenes battle over financial regulation. Industry groups have been examining legal challenges to the Securities and Exchange Commission’s new corporate whistle-blower program and a provision surrounding the extraction of oil and natural gas from foreign countries, people briefed on the talks said. The Commodity Futures Trading Commission’s plan to curb speculative trading is also under fire. The catalyst has been a federal appeals court decision in July striking down an S.E.C. rule that would have made it easier for shareholders to nominate company directors. The so-called proxy access rule stemmed from the Dodd-Frank act, the sweeping regulatory overhaul enacted in the wake of the financial crisis. In recent weeks, lawyers and Wall Street trade groups have gathered in Washington to ponder the next big case. Lawyers branded one meeting, held by the United States Chamber of Commerce, as “Dodd-Frank Excesses,” according to two people who were notified of the meeting. Until now, Wall Street relied largely on an army of lobbyists to chisel away at 300 new rules flowing from the S.E.C. and the Commodity Futures Trading Commission, among other agencies. But while lobbying might yield the occasional loophole, judicial rulings can halt new rules altogether.

U.S. Regulators Lack Key Tool to Unwind ‘Too-Big-to-Fail' Banks…U.S. regulators given new powers to dismantle “too-big-to-fail” financial firms are still working to draw up so-called living wills -- a central component of the toolkit needed to prevent future bailouts.  While the Federal Deposit Insurance Corp. gained the authority in the Dodd-Frank Act to seize and unwind systemically important firms, the agency is still pushing to finalize the living wills that outline how to dismantle the firms if they fail.  In the interim, the agency has been developing contingency plans in coordination with the Federal Reserve that would allow them to take over a systemically important firm even if a living will was not in place, according to an agency official who was not authorized to speak publicly about the activities. Implementing the agency’s new powers “in a credible way is really the major new challenge for the agency,”

Global Bank Capital Regime at Risk as Regulators Spar Over Rules - Capital standards designed to fortify the global financial system are eroding as European officials, beset by a debt crisis, rewrite the regulations and U.S. rulemaking stalls.  The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.  “The game on the ground has changed in Europe and the U.S.,”  “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.”

Is Basel III dead? - The European Commission estimates that the region’s banks will have to raise about $600 billion to comply with the new capital rules…Both the Bloomberg Europe 500 Banks and Financial Services Index and the KBW Bank Index of U.S. bank stocks have fallen about 30 percent this year. That wiped out more than $700 billion of market value on the two continents. Here is much more.

Credit Card Securitization and Skin-in-the-Game - I have a new paper on credit card securitization and what it teaches us about the likely effectiveness of the Dodd-Frank Act's skin-in-the-game risk retention requirements. Credit card securitization has long required 4%-7% credit risk retention (cf. 5% under Dodd-Frank).  I argue that when combined with other features of credit card securitization it was actually counterproductive at aligning issuer/securitizer and investor incentives and likely contributed to rate-jacking. Instead, credit card securitization didn't go off the rails like mortgage securitization because of the existence of implied recourse, effectively 100% skin-in-the-game. This suggests that skin-in-the-game cannot be relied upon as a one-size-fits-all cure. Its effectiveness will instead depend on the other securitization features with which it is combined.   If you're interested in going into the sausauge factory of credit card securitization, there's plenty of gore and detail here for you. If you're interested in the connections between credit card securitization and rate-jacking, there's something here for you. And if you're interested in whether Dodd-Frank's risk retention requirements will be effective, there's something here for you too.  The abstract is below:

Why “Business Needs Certainty” is Destructive - Yves Smith - If you read the business and even the political press, you’ve doubtless encountered the claim that the economy is a mess because the threat to reregulate in the wake of a global-economy-wrecking financial crisis is creating “uncertainty.” That is touted as the reason why corporations are sitting on their hands and not doing much in the way of hiring and investing.This is propaganda that needs to be laughed out of the room. I approach this issue as as a business practitioner. I have spent decades advising major financial institutions, private equity and hedge funds, and very wealthy individuals (Forbes 400 level) on enterprises they own. I’ve run a profit center in a major financial firm and have have also operated a consulting business for over 20 years. So I’ve had extensive exposure to the dysfunction I am about to describe.Commerce is all about making decisions and committing resources with the hope of earning profit when the managers cannot know the future. “Uncertainty” is used casually by the media, but when trying to confront the vagaries of what might happen, analysts distinguish risk from “uncertainty”, which for them has a very specific meaning.

We Speak on RT America About Business’s False Quest for Certainty - Yves Smith - I haven’t done this show before and quite enjoyed the chat, although I did muff words in a couple of places. I’m finding that I seemed to be banned from US TV channels, but the flip side is this was a much more substantive conversation than you’d find on the usual suspects here.

Profits in a Capitalist Economy – Where Do They Come From, Where Do They Go? - Profits are without doubt the key driving force in a capitalist economy. No respectable entrepreneur would try to sell goods or services were they not to make some sort of profit out of it. And yet profits are spoken of surprisingly little in mainstream neoclassical economics. For the neoclassicals there is, in fact, a deafening silence surrounding the role that profits play in the functioning of our economies; economies that are, of course, founded on the profit motive. For example, if we turn to a fairly standard mainstream textbook – in this case Samuelson and Nordhaus’ ‘Economics: Fifteenth Edition’ – we find just how little neoclassical economics concerns itself with profits This 800-odd page book devotes all of three pages to the topic. And even in this short space the authors are vague and fuzzy. We are told that profits come from ‘a hodgepodge of different elements’; that they are earned as a ‘reward for bearing risk’ and that occasionally they take the shape of ‘monopoly returns’.  This must appear to anyone with even a cursory interest in how our economies work as a rather unusual evasion. And it should. Usually when people are evasive on such important issues it is because – whether they know it or not – they are hiding something.

Home Of The Brave - We associate complexity with progress for some ungodly reason. The following problems, however, have become inherent in our economy. What does that mean? It means they will be around for a while: Needless poverty, unemployment, inflation, the threat of depression, taxes, crimes related to profit (sale of illicit drugs, stolen IDs, muggings, bribery, con artists, etc.), conflict of interest, endless red tape, a staggering national debt plus a widening budget deficit, 48 out of 50 states in debt, cities in debt, counties in debt, skyrocketing personal debts, 50% of Americans unhappy at their work, saving for retirement and our children's education, health being a matter of wealth, competing in the "rat race", the need for insurance, being a nation of litigation, being subject to the tremors on Wall Street, fear of downsizing and automation, fear of more Enrons, outsourcing, bankruptcies, crippling strikes, materialism, corruption, welfare, social security, sacrificing quality and safety in our products for the sake of profit, the social problem of the "haves" vs. the "havenots" and the inevitable family quarrels over money.  We Americans love our freedom; yet, we have allowed the use of money to completely dominate our way of life. Indeed, we are no longer a free people. We are 7.4 trillion dollars in debt. We live in fear of depression, inflation, inadequate medical coverage and losing our jobs. Our freedom is at stake if not our very survival. Yet, we put our collective heads in the sand.

Mainstream Economist: Marx Was Right. Capitalism May Be Destroying Itself - Roubini:  Businesses are not doing anything.  They're not actually helping.  All this risk made them more nervous.  There's a value in waiting.  They claim they're doing cutbacks because there's excess capacity and not adding workers because there's not enough final demand, but there's a paradox, a Catch-22.  If you're not hiring workers, there's not enough labor income, enough consumer confidence, enough consumption, not enough final demand.  In the last two or three years, we've actually had a worsening because we've had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households.  So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.Karl Marx had it right.  At some point, Capitalism can destroy itself.  You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand.  That's what has happened.  We thought that markets worked.  They're not working.  The individual can be rational.  The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else's income and consumption.  That's why it's a self-destructive process. The full interview is here.

Roubini: Is Capitalism Doomed? - Nouriel Roubini says that if things don't change, capitalism is in trouble:...Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). ... Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities. To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

Negative rates: the price of safety for investors (Reuters) - If all you care about is getting your money back in this current period of intense uncertainty on global capital markets, then you may need to pay for the privilege -- or put another way, to accept negative interest rates. The shrinking universe of safe-haven assets is forcing investors to pay negative rates to park cash in guaranteed custody accounts or hold assets in certain markets that are considered ultra-secure. Negative nominal interest rates occur when investors pay banks to hold their cash in an environment of low central bank interest rates, widening differences in credit health between counterparties, and extreme risk aversion. Doubts about the quality of sovereign credit ratings, with the United States the latest country to lose its top-grade status, and concerns about the European banking system have pushed capital into secure deposit accounts and away from money markets -- traditionally a haven for wary investors. Bank of New York became the first custodian bank this month to charge a fee to big clients for large deposits, effectively imposing negative rates on them. Short-term deposit and money rates in Switzerland and Singapore have also turned negative over the past week as capital has flowed in seeking safety.

The Mutual Fund Merry-Go-Round - AS stock prices have gyrated wildly, many investors have behaved in a perverse fashion, selling low after having bought high. Individual investors bear some responsibility for ill-advised responses to the ups and downs in the market, but they are not the only ones to blame. For decades, the mutual fund1 industry, which manages more than $13 trillion for 90 million Americans, has employed market volatility to produce profits for itself far more reliably than it has produced returns for its investors.  Too often, investors believe that mutual funds provide a safe haven, placing a misguided trust in brokers, advisers and fund managers. In fact, the industry has a history of delivering inferior results to investors, and its regulators do not provide effective oversight.  The companies that manage for-profit mutual funds face a fundamental conflict between producing profits for their owners and generating superior returns for their investors. In general, these companies spend lavishly on marketing campaigns, gather copious amounts of assets — and invest poorly. For decades, investors suffered below-market returns even as mutual fund management company owners enjoyed market-beating results. Profits trumped the duty to serve investors.

What the Latest Fed Policy Means for Your Money - The Federal Reserve's latest policy meeting offered at least one surprise: a rare timeline for its current low interest-rate policy. After lowering short-term interest rates to virtually zero during the depths of the financial crisis in late 2008, the Fed announced Tuesday that it plans to keep them there for at least another two years. The reasoning behind the decision is that lower rates should encourage consumers to spend and businesses to increase lending, thus boosting the anemic economic growth rate. But there are clear winners and losers. "There's a divide that makes this low interest-rate commitment by the Fed really positive or really negative, depending on which side you come down on," "Savers have largely been victimized by this environment, while borrowers have been the beneficiaries." If you're primarily a saver—in or nearing retirement, for example—you'll continue to see paltry yields on investments like money market funds or certificates of deposit. Today, the average six-month CD yields just 0.41 percent, according to (In comparison, in 2007, a six-month CD yielded more than 5 percent.)

Wells Fargo’s $3 Debit Card Charge: A Sign of More Bank Fees to Come? - A new report emerged Tuesday that Wells Fargo (WFC1) will begin charging some customers $3 every month to use their debit card -- further indication that banks are putting on the squeeze as new swipe-card regulations are set to take effect. Wells Fargo already sent letters to customers in Georgia, New Mexico, Nevada, Oregon and Washington that the fees will begin Oct. 14, according to MyBankTracker.com2. That's just two weeks after Federal Reserve-mandated rules slash the amount banks can charge retailers for every debit card purchase. Regulators reduced the maximum bank take on each transaction from 44 cents to 24 cents. A chain reaction was already in effect before Wells Fargo acted. In March, JPMorgan Chase (JPM3) began assessing a $3 service fee for debit card use and $15 for checking accounts in certain regions, according to reports4. Chase has also pondered the idea of capping the amount per debit-card purchase at $50 to $100, along with other major institutions such as Citigroup and Bank of America, the New York Post5 reported.

Is the SEC Covering Up Wall Street Crimes? - Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record. That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman - Mish - Senator Chuck Grassley, Republican of Iowa, says SEC may have destroyed documents  “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” said Sen. Chuck Grassley, Republican of Iowa, in a letter to the agency’s chairman, Mary Schapiro.  “It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”  Agency staff “destroyed over 9,000 files” related to preliminary agency investigations, according to a letter sent in July to Grassley, the top Republican on the Senate Judiciary Committee, and obtained by MarketWatch.  The allegations were made by SEC enforcement attorney, Darcy Flynn, in a letter to Grassley. Flynn is a current employee, and according to the letter, received a bonus for his past year’s work.  Flynn alleges the SEC destroyed files related to matters being examined in important cases such as Bernard Madoff and a $50 billion Ponzi scheme he operated as well as an investigation involving Goldman Sachs Group Inc. trading in American International Group credit-default swaps in 2009.

Taibbi on SEC’s Records Destruction Reveals How Deeply Entrenched Official Corrpution Is - Yves Smith - Matt Taibbi has published yet another serious expose, and this one is appalling in that it shows how long standing and deeply institutionalized the “nothing to see here” practices are engrained at the SEC. This is the guts of the article: For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history…. It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases.  Don’t underestimate the seriousness of these charges. The SEC’s own staff has admitted that this behavior may well be criminal, and the agency has responded to inquired with remarkably obfuscatory replies, which is usually a official sign that the facts are ugly.  Not only is this conduct appalling, but the timeline is revealing. It apparently dates to at least 1993, when Clinton appointee Arthur Levitt became chairman. This is well before most people would date Wall Street having much impact on undermining regulation.

Matt Taibbi vs the SEC -- Matt Taibbi’s 5,000-word exposé of the SEC’s document-shredding is a magnificent piece of journalism, and is the first and last place that you should look to understand what’s going on here. After the piece came out, Senator Chuck Grassley — who’s quoted in the article — made growling noises in the general direction of the SEC, which is now very much on the back foot. But all the news and background that you need can and should be found in Taibbi’s article, rather than Grassley’s 325-word press release. So how well is the mainstream media reporting this news? Everybody’s reporting Grassley’s statement, of course, as they should be. But the WSJ, Bloomberg, FT newspaper, and even Reuters make no mention of Taibbi or his article at all. The NYT is better, providing a link to the article and saying that the document disposal was “first reported by Rolling Stone magazine on Wednesday”,  Only FT Alphaville draws a direct connection between Taibbi’s article and Grassley’s statement and really encourages you to read the piece. Blogs and Twitter, of course, are much better. Zero Hedge, Dealbreaker, Naked Capitalism, Daily Intelligencer, Clusterstock, Atlantic Wire, and many others took Taibbi’s article seriously, linked to it prominently, devoted entire posts to it, and mentioned him by name rather than just referencing the name of his publication. The Huffington Post gave the article its standard aggregation treatment, and Arianna tweeted it personally.

The Real Reason the SEC Has Been Shredding Documents For Decades - What should we make of the new revelations by Securities and Exchange Commission attorney Darcy Flynn (background here, here and here) that the SEC has been shredding documents for decades? As many commentators have noted, the SEC did this to cover up fraud on Wall Street. The Entire Government Strategy Is To Cover Up Fraud. William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are: The entire strategy is to keep people from getting the facts. Top Government Officials Created the Conditions In Which Fraud Would Flourish. I noted last year: It is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud. Here are just a few of many potential examples:

Video: The Bankers as the Enemy of Humanity -- Yves Smith - This video is stunning, in that it is an articulate and well done rant that will resonate with many readers. The fact that it appeared on Karl Denninger’s site is an indication that the level of frustration with the major banks’ refusal to take responsibility for wrecking the global economy and their efforts to preserve their ability to loot is moving to a new level. I’m sure there are readers who are employed by banks who perform modest and blameless jobs. Those of you might consider how the abusive policies of the major players are creating anger at everyone in the sector (save obvious small fry like community banks and credit unions).

Banking: Again on the edge - They were never going to attract outpourings of sympathy from the general public. But the job cuts that have hit whole echelons of the world’s biggest banks in recent weeks have not only attracted little compassion, they have barely been noticed at all amid the seesawing global markets and predictions of economic gloom. Yet the 60,000 redundancies un­veiled in a matter of weeks by eight big banks, six of them European – an average of about 5 per cent of the headcount of each institution – are likely to be just the start of a brutal reshaping of the industry that could result in the axing of hundreds of thousands of jobs worldwide. “If you have to cut costs, you have to cut jobs,” says one European bank chief executive. “If economies aren’t going to grow, there will have to be a lot more job cuts than we have seen so far.” More importantly, the cuts this time are set to differ from those of previous cyclical downturns. Bankers and regulators agree they may mark a profound change in employment patterns across the world’s banking industry.

Unofficial Problem Bank list at 988 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Aug 13, 2011. Changes and comments from surferdude808: The total number of institutions on the Unofficial Problem Bank Lists remains unchanged from last week at 988. However, there were two removals and two additions. Aggregate assets declined slightly by $391 million to $411.3 billion.

President Obama Still Likes Big Government: When it Helps the Banks - That's what the Washington Post told readers in a front page story. According to the Post, the Obama administration is leaning toward a system that would provide a direct subsidy to securitization by offering a government guarantee to mortgage backed securities. It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction. This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).There is no obvious reason to have an additional subsidy through the system of mortgage finance. Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices. This would leave monthly mortgage payments virtually unaffected. The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

U.S. Inquiry Eyes S.&P. Ratings of Mortgages -The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews. The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations. In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

Quelle Surprise! Standard & Poor’s Execs Diddled in Mortgage Bond Ratings (Updated) -- Yves Smith - Louise Story at the New York Times reports that the SEC is looking into whether it has grounds to file suit against the ratings agency Standard & Poor’s for publishing higher ratings on bonds than the analysts had recommended. The article reports that the agency has found instances where executives overrode analyst judgement to award higher ratings on mortgage bonds that were later downgraded and produced investor losses. The piece indicates that the SEC has found instances of this sort of misconduct; the question seems to be whether it took place often enough to make a case. From the Obama administration’s standpoint, it must seems rather unfortunate that the SEC has decided to go after S&P just as Matt Taibbi has called attention to the fact that the agency has organized its affairs so as to help it avoid seeing all but the most egregious misconduct. Readers will point out that any case would be politically motivated, but those who live by the sword should be prepared to die by the sword. S&P’s downgrade of the US bears all the hallmarks of reflecting the agenda of McGraw Hill chairman and CEO Terry McGraw. Among other things, he is head of the Business Roundtable, which has having Social Security privatized as one of its policy aims. S&P was completely silent when the deficit widening Bush tax cut extensions were approved at the end of last year. Jane Hamsher has chronicled in detail how S&P swung into action on the deficit attack front when efforts to increase regulation of its activities ratcheted up.

Lawsuits reveal the doublespeak of mortgage bond sales - It's hard to tell how many residential mortgage-backed securities lawsuits will see the light of day in court. If they do, the resultant court transcripts will reveal just how creative MBS creators can get, for starters, by describing their own RMBS deals as "goat poo," "lemons" and "pigs." No doubt the plaintiffs will be less-than-amused over the way sell side spoke of its own deals — internally — while no doubt speaking about the same deals in glowing terms externally. By making the true nature of the deals seem less unpleasant, it is alleged investors bought the confidence of those selling structured finance products they themselves would never buy.Those real intentions, being used as "proof" today, reveal the doublespeak of pre-bust mortgage bond sales.And, lucky for us (maybe not for some of the parties), a few insiders wrote those vivid RMBS descriptions down in e-mail form for everyone, including the lawyers, to enjoy. Wall Street, note to self, don't put your thoughts in e-mail. I know it's easier than picking up the phone, but come on. We've had computers, e-mail and e-discovery for quite some time, so when you're about to "dog" your own product so to speak, think twice before writing it down.

Moody’s, S&P Mortgage Ratings Face Probe - The U.S. Justice Department is probing Moody’s Investors Service and Standard & Poor’s over ratings of mortgage-backed securities, according to three former employees who said they were interviewed by investigators.  Washington-based lawyers from the Justice Department spoke to former employees as recently as last month about whether the companies raised their grades for the complex investments in order to win business, said the former employees, who asked for anonymity because the investigation is ongoing. The inquiry is a civil matter, two of them said.  The probe is the latest of dozens of government investigations and investor lawsuits targeting Moody’s and S&P, a unit of McGraw-Hill Cos., all based in New York, over the top grades they assigned to bonds backed by subprime mortgages. Even as the Financial Crisis Inquiry Commission called them “key enablers of the financial meltdown,” the raters avoided legal liability.

Moody’s lowers rating on Lender Processing - Moody's Investors Service on Friday lowered its rating the liquidity of Lender Processing Services Inc., citing a change in its capital structure and the recent decline in mortgage originations, and said its outlook for the mortgage services company is negative.Analyst Steve Sohn lowered his speculative-grade liquidity rating to "SGL-2" from "SGL-1" for the company, which provides mortgage settlement and default services. The "Ba1" corporate family and probability of default ratings and "Baa3" senior secured ratings were affirmed. Sohn said the company's recently completed refinancing leaves it with less of its expanded revolving credit available than Moody's had expected. Sohn said Lender Processing's ratings could be lowered if foreclosure revenues continue to decline into 2012 or if the company's liquidity weakens. Sohn said the ratings could also be downgraded If it becomes apparent that Lender Processing will have to pay a "meaningful settlement or regulatory fine."

Is Bank of America Headed Toward Collapse? - Bank of America is no stranger to controversy. The largest bank in the United States has seen, in just the last six months, nationwide protests of its branches by groups like US Uncut, National People's Action1 and other progressive activists angered by the company's tax dodging, foreclosures2, massive bonuses (paid after taxpayer bailouts)3 and other practices. But could the too-big-to-fail behemoth actually be headed for failure? On August 5, Yves Smith of the blog Naked Capitalism started a Bank of America Death Watch4, writing: “It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken writedowns on balance sheet items (for instance, roughly $125 billion of home equity loans5 and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral.” Back in 2008, Bank of America snapped up Countrywide, one of the subprime lenders that preyed on low-income home buyers, often with adjustable-rate mortgages that ballooned after a couple of years, leaving homeowners unable to make payments. Though it doesn't seem hard to figure out that many people would be driven into foreclosure by such loans, Countrywide was able to repackage these loans into mortgage-backed securities that were then resold as prime products to investors—investors that often were state pension funds, like CalPERS, the funds responsible for paying the benefits owed to public employees. These are the same public employees who are now being targeted around the country as greedy and unwilling to take cuts to their pensions. The unethical actions of big banks and mortgage lenders are at fault, yet working people are expected to take the hit.

Bank of America’s Moynihan Begs Geithner to Give Him a Positive Mortgage Talking Point - Yves Smith - Matt Stoller pointed out this Bank of America story on Bloomberg, “BofA’s Moynihan Said to Press Geithner on Foreclosure Agreement,” which has the perverse effect of revealing how desperate the beleaguered Charlotte bank is:Bank of America Corp. Chief Executive Officer Brian T. Moynihan met Treasury Secretary Timothy F. Geithner to press for a settlement of probes tied to the industry’s shoddy foreclosure practices….A settlement among banks, state attorneys general and the Department of Justice would enable lenders to resolve delinquent loans and in turn allow the U.S. housing market to recover, Moynihan told the officials.“In the states where foreclosure can take place you’re seeing the system unclog and move through,” Moynihan said during in an Aug. 10 conference call hosted by mutual fund manager Bruce Berkowitz. “That’s different than states where foreclosure is going through very slowly.” Let’s parse what is really going on.

Quelle Surprise! New York Fed Director Shills for Bank of New York, Argues Against Rule of Law - - Yves Smith - By way of quick summary, Bank of America entered into what is widely referred to as an $8.5 billion settlement. That would give it a broad waiver from suits by investors in the trusts that are covered by this pact, which represent virtually all of the Countrywide securitizations. Where this all gets squirrely is that BofA didn’t ink this deal with investors. The trustee on these deals, Bank of New York, is the one that agreed to the settlement. It conferred with only 22 investors, but some (like the New York Fed, Goldman Sachs, Pimco, and Blackrock) might prefer making the mortgage mess go away to maximizing their return on investment.  The settlement is subject to court approval, and a number of objections have already been filed. The biggest bombshell, as we discussed, came from New York attorney general Eric Schneiderman.  Schneiderman alleged that BoNY had engaged in fraud. First, it failed to preform its duty to investors by getting a very valuable indemnification, which we had characterized from the very outset as a bribe from BofA . Second, BoNY failed to perform required duties and tell investors that loans were defaulting. Third, BoNY made false certifications to investors regarding whether it held the collateral as stipulated in the pooling and servicing agreements, which is a violation of New York securities laws. Abigail Field in Fortune Magazine found a complete fail in Countrywide securitizations it examined in two New York counties. A probe by the New York Post published Sunday today found a 92% chain of title failure rate in Chapter 13 filings it examined in two Federal court districts in New York state. Not surprisingly, this issue was the centerpiece of the Delaware filing objecting to the settlement.  So what in the way of wounded noises do we get from the Bank of New York camp? Get a load of this, from Alison Frankel at Reuters: A BNY Mellon spokesman told me the bank didn’t want to comment on the broader implications of the AG’s filing, but directed me to Kathryn Wylde, CEO of the Partnership for New York City, a business development non-profit. She said that the AG’s “careless action” hurts New York’s standing as a financial center.

Bank of America Death Watch: Unloading “Non-Core” Assets Aggressively - Yves Smith - Bank of America’s actions continue to betray its words. CEO Brian Moynihan bravely maintained in an investor conference call last week that the beleaguered bank would be around for the next 230 years and did not need more new capital. He nixed selling equity at its current price levels, because it would be highly dilutive.  Yet we and others have raised the issue that the bank is in a corner in dealing with its not so hot balance sheet. Not only are equity sales an alternative the bank desperately wants to avoid, but the other route back to health, earning its way out, looks constrained. Bank expert Chris Whalen forecasts reduced profits for major banks. And the industry seems to see that coming too. A Financial Times story yesterday reported that top global banks were making serious headcount cuts based on their expectation of earnings pressure. So what’s a struggling bank to do? If you are in a leaky boat, you throw anything disposable overboard and bail like crazy. But BofA is in the weird position of having potential a long term solvency problem without immediate liquidity pressures. So while selling dispensable operations is a good strategy right now, it needs to sell ones where it can show a profit over book vale or otherwise have a favorable impact on its capital levels.

BofA Said to Consider Foreclosure Deal That Leaves Securities Probes OpenBank of America Corp. (BAC) may settle a state and federal probe of foreclosure practices in a deal that lets New York proceed with an inquiry into securitizations, according to two people with direct knowledge of the talks.  The firm may pursue an accord with most of the 50 state attorneys general, even if it omits New York’s Eric Schneiderman and at least two other states who are opposed because a deal would impede related inquiries, said one of the people. Negotiations on a broad settlement stalled after Schneiderman indicated he wouldn’t let it block his probe into the bundling and sale of mortgages, said the people, who declined to be identified because talks are private.  Chief Executive Officer Brian T. Moynihan, seeking to reverse a 44 percent stock slide this year, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since the start of 2010. One of the largest legal matters still pending is the multi- state probe into whether firms servicing mortgages used bogus documents to justify foreclosures.

Bank of America Plans Big Layoffs to Cut Costs - Bank of America is set to eliminate at least 3,500 jobs in the coming months, as the beleaguered financial giant seeks to cut costs and restructure amid deepening shareholder dissatisfaction. With its stock down more than 50 percent since January, the job cuts by Bank of America may be only the start of a broader restructuring at the company, which is the nation’s largest bank. Brian T. Moynihan, the chief executive of the bank, has said that he hopes to trim quarterly expenses by $1.5 billion. Thousands more job cuts are likely in the months ahead. “I know it is tough to have to manage through reductions,” Mr. Moynihan wrote in a memo to the company’s senior leadership late Thursday that outlined the cuts. “But we owe it to our customers and our shareholders to remain competitive, efficient and manage our expenses carefully.” In the memo, obtained by The New York Times, Mr. Moynihan said the company’s broader revamping effort was nearing completion of its first phase, which examines the consumer business and support functions. A third and final review is set for early September.

Struggling Bank Of America Slashes Thousands Of Jobs -  Facing mounting pressure  to boost profits the nation’s largest bank is said to be cutting 3,500 jobs by October. Bank of America is eliminating the jobs as part of a greater restucturing effort to cut costs and bump up the bank’s bottom line, the Wall Street Journal reported. The broader effort is known as “Project New BAC” and could end up pushing the number of total job cuts to 10,000, WSJ said. To be sure, BofA is not the first and surely won’t be the last big bank to announce job cuts amid difficult economic conditions. Banks are finding it harder to make the kind of money they generated before financial crisis. During the second quarter several banks including UBS, Credit Suisse, Morgan Stanley, HSBC and Lloyds announced that they will cut jobs as a way to cut operational costs. Gobal banks have announced close to 50,000 job cuts, Reuters reports.

Memo to Reporters – How to Cover the 50 State Attorney General Foreclosure Settlement Talks - Doesn’t it seems like we’ve been on the verge of a 50 state Attorney General settlement with the banks over robo-signing and mortgage securitization liability for nine months? It does, doesn’t it? Why is that? Maybe it’s because… that’s what journalists keep writing. Here’s what I mean. (list of articles)  And so, the moral of the story is, the robo-signing/chain of title/overall mortgage securitization liability issue is a bear of a problem. It isn’t going away. So here’s a tip to journalists writing about the housing market. Don’t trust what Bank of America, Iowa Attorney General Tom Miller, various Federal regulators, Obama officials, and probably other bank-associated parties tell you.  Don’t trust the bank-friendly conventional wisdom, because it will end up making otherwise good stories inaccurate (this goes for headline writers as well). The banks don’t know their legal liability and the regulators don’t know how to fix this problem. And everyone’s suing everyone.  Maybe the AGs will come out with a settlement tomorrow. But for the last nine months, that’s pretty much what the reporting has been saying. And it’s been wrong.

Nevada Joins States Balking at Bank Releases in Foreclosure Deal-- Nevada's attorney general joined three other states in questioning whether a possible settlement of a 50-state probe of foreclosure practices should protect banks from continuing mortgage investigations. Nevada Attorney General Catherine Cortez Masto, whose office has sued Bank of America Corp. and is conducting civil and criminal foreclosure probes, said she will be “very cautious” about agreeing to a settlement that hinders them. “If it's impacting my ongoing litigation and any other future litigation or current investigation, I'm going to be cautious about whether to sign on or not,” Masto said yesterday in a phone interview. State and federal officials are negotiating a settlement with the five largest mortgage servicers, including Charlotte, North Carolina-based Bank of America and New York-based JPMorgan Chase & Co., over their servicing and foreclosure practices. A person familiar with the matter said last month that banks want liability releases that cover other areas of their mortgage operations besides servicing, including the bundling of loans into securities.

Not Settling for a Settlement - Let’s review.  Banks and mortgage lenders like the infamous Countrywide originated millions of housing loans which they then bundled into securities (MBS) and sold to investors.  Investors paid servicers, sometimes the originating banks themselves, to manage the loans.

  • Problem 1: when you sell a loan, you tend not to take your underwriting or your paperwork too seriously. 
  • Problem 2: the housing bubble burst and loans started to default.
  • Problem 3: because of the shoddy work done by originators, not to mention the attempt to cover up that shoddy work with forgeries (robo-signers), establishing ownership of the loans became problematic to say the least.  And you can’t foreclose if you can’t document ownership of the loan.

So what’s the best way out of this mess? Well, the fastest way is for the banks to get off the hook with a big, national settlement.  They pay a fine and they’re held harmless— indemnified— against further legal action for all their screwups. But is that the best way?  Eric Schneiderman and Beau Biden think not, and I think they’re right.

Knights of Columbus Add New Claims To BNY Mellon Mortgage Suit - The Knights of Columbus, an organization tied to the Catholic Church, on Tuesday raised the stakes in its fight against Bank of New York Mellon Corp. (BK) for failures to carry out duties as a bond trustee and to detect violations by the servicer. The Knights of Columbus, which hold $17 billion in assets, claim that Bank of New York violated terms of agreements on 18 residential mortgage-backed securities issued by Bank of America Corp.'s (BAC) Countrywide unit, including maintaining files on underlying loans and ensuring master servicer Countrywide was pursuing foreclosures without undue costs to investors.  The investors' amended lawsuit was filed in New York Supreme Court. Because loan files weren't cared for, the Knights of Columbus "did not acquire residential mortgage-backed securities, but instead acquired securities backed by nothing at all," the lawsuit stated.

N.J. judge allows 4 major banks to resume uncontested foreclosure proceedings - Four of the country’s biggest banks can now resume their uncontested residential mortgage foreclosures in state court, a Superior Court judge ruled today. The decisions come nearly nine months to the day after New Jersey Supreme Court Chief Justice Stuart Rabner cracked down on more than 30 residential mortgage lenders and servicers over fears judges had inadvertently "rubber-stamped" files with inadequate or inaccurate paperwork and people were unnecessarily put out of their homes. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo were among six financial institutions that filed more than 40 percent of foreclosures in state court last year. They were also selected for a document review because testimony nationwide indicated that the companies had previously encountered "robo-signing," when employees of mortgage lenders sign foreclosure claims without any personal knowledge of the application’s contents.

MERS Case Filed With Supreme Court -- Yves Smith - Before readers get worried by virtue of the headline that the Supreme Court will use its magic legal wand to make the dubious MERS mortgage registry system viable, consider the following:

    • 1. The Supreme Court hears only a very small portion of the cases filed with it, and is less likely to take one with these demographics (filed by a private party, and an appeal out of a state court system, as opposed to Federal court). This case, Gomes v. Countywide, was decided against the plaintiff in lower and appellate court and the California state supreme court declined to hear it
    • 2. If MERS or the various servicers who have had foreclosures overturned based on challenges to MERS thought they’d get a sympathetic hearing at the Supreme Court, they probably would have filed some time ago. 3. The case in question, from what the experts I consulted with and I can tell, is not the sort the Supreme Court would intervene in based on the issue raised, which is due process (14th Amendment). But none of us have seen the underlying lower and appellate court cases, and the summaries we’ve seen are unusually unclear as to what the legal argument is

So this filing looks like a probable non-starter. Housing Wire provided an overview of Gomes v. Countrywide:A controversial case challenging the ability of Mortgage Electronic Registration Systems to foreclose on a California man was filed with the Supreme Court Monday, making it the first major MERS case to reach the nation’s highest court. Get that: no foreclosure has taken place. The plaintiff is disputing the use of MERS in a foreclosure.

The people’s Ponzi scheme - The story the country awaited from Barack Obama, according to Professor Drew Westen, went like this: "This was a disaster, but it was not a natural disaster. It was made by Wall Street gamblers who speculated with your lives and futures. It was made by conservative extremists who told us that if we just eliminated regulations and rewarded greed and recklessness, it would all work out."  The trouble is that "Wall Street gamblers" didn't do the speculating. The American public did. This was a Ponzi scheme by the people, of the people and for the people, the most democratic crony-capitalist scam in the history of humankind. Households made more money than the bankers during every year of the bubble, and ended up better off than they were before the bubble, while the bankers got wiped.

Will the Mortgage Mess Meet Too Big To Fail? - The Congressional Oversight Panel of the TARP, which I chaired until it ceased operations earlier this year, held a number of hearings and issued numerous reports on problems within the federal government's Home Affordable Modification Program. I came to suspect that the entire system in place to bundle and sell mortgages through securitization might be fatally flawed. When you bought a new home before the 1960s, you negotiated with a lender for a mortgage that was then filed at the county property office. In most places, by law, any time ownership of that mortgage changed hands, the change had to be filed at the county property office. Beginning in the 60s but becoming the norm in the 90s, banks developed a system that combined many individual mortgages into a security that was then sold to investors. This securitization led to a dramatic increase in the rate at which ownership of mortgages changed hands. In order to avoid having to record repeated changes in ownership of millions of mortgages at thousands of county property offices, major banks devised a workaround: the Mortgage Electronic Registration System. MERS, which was incorporated in Delaware in 1995, was supposed to fix the problems inherent in the securitization process. It didn't.

A Government-Lite Fix For Underwater Mortgages - The dead weight of debt based on fanciful home prices is a major reason why the economic recovery has never accelerated out of first gear and now looks in danger of stalling. That dead weight amounts to more than $700 billion, according to an analysis by Core Logic, which finds 11 million households with an average of $65,000 in negative equity in their homes. Now, as the recovery sputters, policy mavens have once again turned their attention to this drag on growth and with good reason. The idea of judicially imposed cram-downs — shedding negative equity in bankruptcy court — would seem less likely to win approval than it did when Democrats had big majorities in both branches of Congress.Another more promising idea that’s been kicked around for a few years and was recently touted by the impressive John Hussman of Hussman Funds would give lenders a share of future home price appreciation in return for erasing negative equity.Such warrants would have a uniform structure and a degree of price predictability based on the future path of U.S. home prices, allowing them to be a liquid, tradable instrument.But upon closer inspection, Hussman’s approach falls flat.

The US Government and the Foreclosure Crisis: Out of Ideas or Out of Will? - It’s old news that federal housing agencies need better ideas about what to do about the foreclosure crisis.  The new development is that they realize it and have issued a blunderbuss “RFI” (request for information) seeking ideas from anyone willing to write in by September 15 describing business structures for the government to off-load foreclosed properties it is holding, particularly in “large scale transactions” to deal with the scale of the problem of lingering “inventory.”  See here.   An RFI is something short of an RFP (request for proposals).  Indeed, this new RFI is careful to note the distinction and also that there may never be a call for actual proposals.   So let’s not get too excited.  Furthermore, the problem of the continuing foreclosure crisis seems to be less about ideas than about will to act.  Most disturbing, the RFI does not even allude to the possibility of beefing up foreclosure prevention as an important way to stem growth in the volume of unsold and vacant foreclosed homes.So first, what is the government looking for?  Specifically, the Federal Housing Finance Agency (FHFA), in consultation with Treasury and HUD, seeks new options for selling foreclosed one-to-four unit properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).   Bulk sales might be for resale, rental or demolition.

On mortgages, Obama wants proposal for how government can keep big role - President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter. The decision follows the advice of his senior economic and housing advisers, who favor maintaining the government’s role as an insurer of mortgages for most borrowers. The approach could even preserve Fannie Mae and Freddie Mac, the mortgage finance giants owned by the government, although under different names and with significant new constraints, said people knowledgeable about the discussions.A decision to preserve a major government role would mark a big milestone in the effort to craft a new housing policy from the wreckage of the mortgage meltdown and could mean a larger part for Fannie and Freddie than administration officials had signaled. In a statement, the White House said it is premature to say that senior officials have agreed on any of the three main options outlined earlier this year in an administration white paper on reforming the housing finance system.

Fannie Mae promises to keep families in homes, but instead pressures banks to foreclose - In early December, a senior executive at Fannie Mae assured members of the Senate Banking Committee in Washington that the mortgage giant was doing everything possible to address the foreclosure crisis. "Preventing foreclosures is a top priority for Fannie Mae," Terence Edwards, an executive vice president, told the panel. "Foreclosures hurt families and destabilize communities." But confidential documents obtained by the Free Press show that Fannie Mae has pushed an agenda at odds with those public assurances. The records cover Fannie Mae's foreclosure decisions on more than 2,300 properties, a snapshot from among the millions of mortgages Fannie handles nationally. The documents show Fannie Mae has told banks to foreclose on some delinquent homeowners -- those more than a year behind -- even as the banks were trying to help borrowers save their houses, a violation of Fannie's own policy.

Principal Pay Down in Chapter 13 as a Means of Foreclosure Prevention - As we have discussed recently, here and here, the Federal Housing Finance Agency has asked for ideas about how to dispose of foreclosed properties in bulk.  But there is no reason we shouldn’t take this request as also encompassing reducing foreclosed inventory by preventing foreclosures to begin with.  FHFA has the power to implement either type of program for loans or properties controlled by Fannie or Freddie, the government-sponsored entities under FHFA conservatorship. So let’s talk about the idea of Principal Pay Down (PPD) in chapter 13 bankruptcy as a foreclosure prevention strategy.  FHFA could direct the GSEs to go along with chapter 13 plans that propose to pay down principal over five years, thus affecting a broad swath of home mortgages.

AIA: Architecture Billings Index Drops for Fifth Straight Month - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Drops for Fifth Straight MonthThe American Institute of Architects (AIA) reported the July ABI score was 45.1 – the steepest decline in billings since February 2010 – after a reading of 46.3 the previous month. This score reflects a continued decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 53.7, a considerable slowdown from a reading of 58.1in June. This graph shows the Architecture Billings Index since 1996. The index decreased in in July to 45.1 from 46.3 in June. Anything below 50 indicates a contraction in demand for architects' services. Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. Note that the government sector is the weakest. The American Recovery and Reinvestment Act of 2009 is winding down, and state and local governments are still cutting back.

MBA: Mortgage Refinance Activity Increases, Purchase Activity Declines "Sharply" - The MBA reports: Refinance Applications Increase in Latest MBA Weekly Survey:The Refinance Index increased 8.0 percent from the previous week, but was 16.3 percent lower than the same week last year. The seasonally adjusted Purchase Index decreased 9.1 percent from one week earlier. ..."Unprecedented volatility in the stock market last week amid additional signs that the economy has slowed led to further drops in mortgage rates, with the 15-year rate reaching a new low for the MBA survey," said Mike Fratantoni, MBA's Vice President of Research and Economics. "Purchase application activity fell sharply over the previous week, likely the result of potential homebuyers hesitant to purchase in this highly volatile and uncertain environment."The following graph shows the MBA Purchase Index and four week moving average since 1990.  The four week average of the purchase index has been moving down recently and is at about 1997 levels. Of course this doesn't include the large number of cash buyers ... but purchase application activity was especially weak last week

Mortgage Rates Fall to Record Low Levels: Monthly Payments on A Median Price Home Only $677 -- Based on data released today by Freddie Mac:
1. Rates for the 30-year fixed mortgage fell to a new all-time historic low this week of 4.15%, which is slightly below previous record low for the 30-year rate in mid-November of last year of 4.17% (see top chart above).
2.  The average fixed rate for 15-year mortgages fell to 3.36%, the lowest rate in the history of this series, which started in 1991 (see middle chart).  
3. The rate for one-year adjustable mortgages fell to 2.86% from 2.89% last week, setting a new all-time record low going back to April 1986, when weekly data for ARMs started being collected (see bottom chart). 
It's a great time to buy a house or refinance your mortgage.  For the current median price home of $174,000, with a 20% down payment, monthly payments for principal and interest would be:

Fixed mortgage rates hit 50-year lows: Freddie Mac -The 30-year, fixed-rate mortgage hit lows not seen in five decades this week as the Federal Reserve committed to keeping the federal funds rate low through 2013, according to the Freddie Mac Primary Mortgage Market Survey. European debt concerns also riled the market, staving off a hike in mortgage rates, according to Frank Nothaft, vice president and chief economist for Freddie Mac. The 30-year, fixed-rate mortgage dropped to 4.15% from 4.32% a week earlier and 4.42% last year. Nothaft said 30-year, fixed mortgage rates are at their lowest levels in five decades. Meanwhile, the 15-year, FRM hit 3.36%, down from 3.50% a week earlier and 3.90% last year. In addition, the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.08% this week, down from 3.13% a week earlier and 3.56% a year ago, while the one-year Treasury-indexed ARM averaged 2.86%, down from 2.89% last week and 3.53% last year. The low rates kept refinancing activity high. In the first half of 2011, refinancing applications represented nearly 70% of all mortgage activity. 

Low rates, no interest - ANN CARRNS writes: Mortgage rates reached record lows this week, according to the weekly market survey from Freddie Mac. The average rate on a 30-year fixed-rate loan fell to 4.15 percent, with borrowers paying an average point of 0.7 percent. That rate is down from 4.32 percent last week. It is “the lowest in over 50 years,” Frank Nothaft, vice president and chief economist at Freddie Mac, said in a news release. The survey’s previous low was 4.17 percent in November 2010. Average fixed rates for 15-year mortgages were already in three-point territory and this week they dropped even lower, to 3.36 percent, with an average of 0.6 points. Rates on adjustable-rate loans fell too. That should be great for housing markets, right? Only would-be buyers are backing out on deals and lowering offers.  A major problem, of course, is that current low interest rates are a result of falling confidence in the economic outlook. It's cheaper than ever to borrow, but that's because no one wants to borrow.

Mortgage Refinance Activity Graph - This morning the MBA reported that there was a sharp increase in mortgage refinance activity. “Refinance application volume increased substantially for the week, although there was substantial variation across the market. In September MBA’s Weekly Applications Survey will transition to an expanded sample that covers 75% of the retail market rather than the current sample that covers roughly 50% of the retail market. That expanded sample showed a significantly larger increase in refinance applications than the current sample, with some lenders reporting increases in refinance applications in excess of 50 percent for the week. The big differences in refinance volumes were likely driven by the decisions of some lenders not to drop rates last week, largely due to the need to manage their pipelines.” Here is a graph of the MBA refinance index compared to the ten year treasury yield. Although refinance activity has picked up, it is still well below the level of the huge refinance boom of 2002/2003, and below the smaller refinance peaks in 2008, 2009 and last year.  It takes lower and lower rates to get people to refi (at least lower than recent purchase rates). However if interest rates fall much further there will probably be another large increase in refinance activity.

New Resource for Tracking Home Sales - DataQuick has developed a new resource for tracking home sales that is updated weekly. It can be accessed by going to the DataQuick news site and clicking on the National Home Sales at the top (or directly here: National Home Sales Snapshot). This graph shows the NSA data for DataQuick and the NAR. The dashed line is scaling up the DataQuick numbers by .6625 (their estimate of sales coverage).  The NAR recognizes that their estimate are too high - and they are planning revising down their estimates this fall. However this suggests that the NAR might be overestimating by even more than the 10% to 15% that many analysts think. This also suggests sales in 2011 are very weak.The second graph compares the DataQuick new home sales numbers with the Census Bureau. The Census Bureau reports when contracts are signed and DataQuick reports when the purchase is closed. So there are some timing issues. The dashed line is using the same scaling factor as for existing homes. The new home data from the Census Bureau appears to be fairly close to the DataQuick numbers - although it is hard to tell because of the large spikes due to the homebuyer tax credit and because of the lag between contract signings and closings.

Sales of existing homes fall 3.5% in July - Sales of existing homes fell 3.5% in July to an eight-month low, with a high cancellation rate again taking its toll on an already troubled housing market, according to data released Thursday. The National Association of Realtors said sales fell to a seasonally adjusted annual rate of 4.67 million. June's data was upwardly revised to 4.84 million from an initially reported 4.77 million. Economists polled by MarketWatch had expected a 4.99 million annual rate for July. The numbers for the second straight month went against the increase in pending home sales, again showing the difference between agreed and closed transactions. Sales in July were 21% above the same month of 2010, which represented the cyclical low following the expiration of the home buyer tax credit. The median price was $174,000, a decline of 4.4% from July 2010. June prices were sharply downwardly revised to $176,100 from an initially reported $184,300, which NAR blamed mostly on late-reporting data from the troubled Phoenix area.

Existing Home Sales in July: 4.67 million SAAR, 9.4 months of supply - The NAR reports: Existing-Home Sales Down in July but Up Strongly From a Year Ago -Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 3.5 percent to a seasonally adjusted annual rate of 4.67 million in July from 4.84 million in June, but are 21.0 percent above the 3.86 million unit pace in July 2010, which was a cyclical low immediately following the expiration of the home buyer tax credit. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in July 2011 (4.67 million SAAR) were 3.5% lower than last month, and were 21% above the July 2010 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.65 million in July from 3.72 million in June. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, so it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory. Inventory decreased 8.9% year-over-year in July from July 2010. This is the sixth consecutive month with a YoY decrease in inventory. Months of supply increased to 9.4 months in July, up from 9.2 months in June. This is much higher than normal.

Existing Home Sales: Comments and NSA Graph - A few comments and a graph (of course): First, from Freddie Mac: Mortgage Rates Lowest in Over 50 Years

  • • The NAR reported that inventory decreased in July from June, and that inventory is off 8.9% from July 2010. Other data sources suggest that the NAR is overstating inventory (inventory will be part of the coming revisions). Inventory is probably down more year-over-year (YoY) than the NAR reported.
  • • The NAR provided an update on the timing of the "benchmark revisions": Update on Benchmark Revisions: ... Preliminary data based on the new benchmark is expected to be available for review by professional economists in coming weeks. This process is expected to take some time before finalized revisions can be published to address any issues that may surface in the review process and to update monthly seasonal adjustment factors. This revision is expected to show significantly fewer homes sold over the last few years (perhaps 10% to 15% fewer homes in 2010 than originally reported), and also fewer homes for sale.
  • • The following graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2011. Sales NSA are above last July - of course sales declined sharply last year following the expiration of the tax credit in June 2010. The level of sales is still elevated due to investor buying.

RE/MAX: Home sales drop 12.7% in one month - July home sales dropped 12.7% from the previous month, according to a RE/MAX survey of 53 cities released Thursday. The real estate company blamed tightened lending standards, concern about the overall economy and bad appraisals that reportedly killed many transactions – a notion many in the appraisal business balked at. The National Association of Realtors pointed to similar predicaments when it reported existing home sales dropped 3.5% in July. RE/MAX also said many lenders are already using the lower loan limits for government guaranteed or insured mortgages set to take effect in October. Still, sales remained 13.1% above levels measured one year ago, and the median price dropped 4.6%, the smallest yearly decline in six months.

NYC home sales down 40% from last year - New York City second-quarter home sales were nearly cut in half from one year ago, but prices and even new building permits went up, according to a study from New York University Furman Center for real estate and urban policy. Home and condominium sales totaled 4,200 in the second quarter, down 40% from the same period last year and a 20% drop from the previous three months. The National Association of Realtors said the overall U.S. housing market started the third quarter with a steep drop in existing home sales, which could mean the New York City market could slow even further. Other indicators in the market pointed up. Home prices citywide increased 6% from the first quarter but remains 21% down from the peak. Prices increased 8% in the Bronx and Brooklyn from the previous quarter but remain more than 20% down from their peaks, according to the study. The average price for a single-family unit in New York City went for $415,000 in the second quarter and more than $5.3 million in Manhattan.

Home sales rise 9.6% in greater Detroit area - The Detroit area experienced a 9.6% surge in home sales in July with 4,563 properties sold compared to 4,164 a year earlier, according to Realcomp. The data includes condo and residential homes sales across four Michigan counties in and around Detroit. Home prices in the four-county metropolitan area climbed 8.8% to $78,000 from $71,665 a year earlier. On average, homes in the area stayed on the market 88 days, down from 99 days a year earlier. Pending home sales that had yet to close across the entire MLS, which includes listings outside Michigan, were up 4.1% to 7,180 in July from 6,898 a year ago. Inventory system-wide hit 32,007 units. Of those, 3,847 are foreclosures and 28,160 are non-foreclosures, Realcomp said. Of the 5,701 homes closed last month, 689 were classified as short sales.

DataQuick on SoCal: Lowest July Home Sales in Four Years - From DataQuick: Southland Housing Market's Vital Signs Remain Weak Southern California home sales fell last month to the lowest level for a July in four years ... A total of 18,090 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in July. That was down 11.9 percent from 20,532 in June and down 4.5 percent from 18,946 in July 2010, according to San Diego-based DataQuick...."The latest sales figures look a bit worse than they really are, given this July was a fairly short month, but they still suggest some potential homebuyers got spooked. Reports on the economy became increasingly downbeat and, no doubt, some people fretted over the possibility the country would default on its obligations," said John Walsh, DataQuick president.

Housing Starts decline slightly in July - From the Census Bureau: Permits, Starts and Completions  Privately-owned housing starts in July were at a seasonally adjusted annual rate of 604 000 This is 1.5 percent (±10 7%)* below the revised June estimate of 613,000, but is 9.8 percent (±10.8%)* above the July 2010 rate of 550,000. Single-family housing starts in July were at a rate of 425,000; this is 4.9 percent (±8.9%)* below the revised June figure of 447,000. The July rate for units in buildings with five units or more was 170,000. Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 597,000. This is 3.2 percent (±1.2%) below the revised June rate of 617,000, but is 3.8 percent (±2.2%) above the July 2010 estimate of 575,000. Single-family starts declined 4.9% to 425 thousand in July. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for over two years - with slight ups and downs due to the home buyer tax credit. This was slightly above expectations of 600 thousand starts in July. Multi-family starts are increasing in 2011 - although from a very low level.

Another Record Low for Homes Under Construction - Today’s housing data showed that the number of single-family homes under construction hit another record low in July: Ten years ago, America’s home builders were in the midst of constructing 689,000 single-family homes. Five years ago, they were building 913,000 homes. Last year, they were building 278,000. And now that figure is down to a mere 243,000.

Mutli-family Starts and Completions, and Quarterly Starts by Intent - Since it takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - it makes sense that there will be a record low, or near record low, number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010. Click on graph for larger image in graph gallery. The rolling 12 month total for starts (blue line) is now above the rolling 12 month for completions (red line), and they are heading in opposite directions. Starts are picking up and completions are declining. It is important to note that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). Still this is bright spot for construction.

On Track for Record Low Housing Completions in 2011 - The U.S. is on pace for a record low number of total housing completions this year, and the fewest net housing units added to the housing stock since the Census Bureau started tracking completions in the '60s. Below is a table of net housing units added to the housing stock since 1990. Note: Tom Lawler thinks scrappage is closer to 250,000 units per year. This means there will be a record low number of housing units added to the housing stock this year (good news with all the excess inventory), and that the overhang of excess inventory should decline significantly in 2011 depending on the rate of household formation (and that depends on jobs).

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

NAHB Builder Confidence index unchanged in August, Still Depressed - The National Association of Home Builders (NAHB) reports the housing market index (HMI) was unchanged in August at 15, the same level as in July. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Unchanged in August "Builders continue to confront the same major challenges they have seen over the past year, including competition from the large inventory of distressed homes on the market, inaccurate appraisal values, and issues with their buyers not being able to sell an existing home or qualify for favorable mortgage rates because of overly tight underwriting requirements," said Bob Nielsen, chairman of the National Association of Home Builders. He noted that 41 percent of respondents to a special questions section of the HMI indicated they had lost sales contracts due to buyers' inability to sell their current homes.

Residential Remodeling Index at new high in June - The BuildFax Residential Remodeling Index was at 129.5 in June, up from 124.3 in May. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFaxThe Residential BuildFax Remodeling Index rose 23% year-over-year--and for the twentieth straight month--in June to 129.5, the highest number in the index to date. Residential remodels in June were up month-over-month 5.2 points (4%) from the May value of 124.3, and up year-over-year 24.5 points from the June 2010 value of 105.0. This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 23% from June 2010. Even though new home construction is still moving sideways, it appears that two other components of residential investment will increase in 2011: multi-family construction and home improvement.

Misunderstanding the Rent vs. Buy Dynamic - There seems to be an underlying misunderstanding about the US Real Estate market — how it functions, the psychology of buyers, and its current problems. Today, I want to take a long term look at these fundamental issues, and put them into some context. The cause of these thoughts are a pair of studies: The first from Zillow that looks at home values by community, and finds that “Home prices in some of the nation’s hardest-hit metro areas have fallen far below pre-bubble levels, stirring concerns that properties in those markets are undervalued.” The second is a similar study from Trulia looking at the rent vs buy question. The original WSJ web article had a rather surprising headline: Something like “Are Homes Undervalued?” — thats gone now, replaced with the circumspect Linkage in Income, Home Prices Shifts.  But the editor who penned the descriptor may be misguided: “Home prices have fallen below “fair value” in one-third of nearly 130 housing markets examined in a study by real-estate firm Zillow, raising concerns that some housing markets have over-corrected.”

The Stimulus Package of Refinancing, the Link between Underwater and Unemployed Places and the Failures of HARP - Here’s a headline for today: Mortgage Rates Hit 50-Year Low. “The average rate on a 30-year fixed-rate loan fell to 4.15 percent, with borrowers paying an average point of 0.7 percent.” (h/t Barry.) The refinancing that could come with these low rates would help consumers rebuild their balance sheets by reducing their monthly payments .  It would put more money into the economy.  But it’s hard to refinance to take advantages of those rates if you are underwater on your mortgage. This in turn blunts the efficiency of QE and monetary policy. As QE advocate Joe Gagnon pointed out in a Roosevelt Institute presentation: one of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse.

Do Mortgage Modifications Increase Unemployment? - The painfully slow rate of job growth can be blamed at least in part on home mortgage modifications that reduce house payments for struggling homeowners, because such policies incentivize people to stay where they are instead of moving to better job markets, according to a new paper by researchers at UCLA. The paper is one among a growing number papers that explore why mobility has decreased so drastically through the recession, and what the effects have been. Most economists would agree that reduced mobility increases unemployment: When people don’t move, they deny themselves the chance to find work in a city or state where jobs are more plentiful. However, there have been different conclusions regarding why people are staying put. For instance, while job recruiters have said many people are staying put because they owe more on their home than it’s worth and would thus lose money if they sold it, this paper from the Federal Reserve Bank of Minneapolis shows “underwater” mortgages have had minimal effect on mobility.

NY Fed Q2 Report on Household Debt and Credit - This report shows some minor household credit improvement, but that the pace of deleveraging has slowed. From the NY Fed: New York Fed’s Quarterly Report on Household Debt and Credit Shows Continued Signs of Healing in Consumer Credit Markets "Outstanding consumer debt remained essentially flat, down just $50 billion, in what was basically a repeat of the previous quarter. This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed," . "During the next few quarters we will gain a better understanding of whether this is a permanent or temporary break in the decline of total outstanding consumer debt."Here is the Q2 report: Quarterly Report on Household Debt and Credit. Here are two graphs: The first graph shows aggregate consumer debt decreased slightly in Q2. The second graph shows the percent of debt in delinquency. The percent of delinquent debt is declining, but what really stands out is the percent of debt 90+ days delinquent (Yellow, orange and red).

Is household debt still holding back the economy? - Higher consumer demand is critical to jump-starting the economy. But Americans won’t be inclined to spend and borrow more until they’ve pulled themselves out of the quagmire of debt left in the wake of the 2008 meltdown. Household debt has to come down before the economy can recover. The latest data from the Federal Reserve Bank of New York show modest signs of healing from U.S. households, which are still unwinding their debt but may be slightly more inclined to spend again. The N.Y. Fed’s report also makes it clear, however, that parts of the country are still underwater, and the mortgage crisis is still a drag.  Nationwide, household debt excluding real estate fell 0.4 percent in the last quarter, and mortgage and home-equity balances both fell. The pace of consumer debt reduction has slowed as compared to the previous nine quarters, but some are interpreting this as a sign that consumers have managed to unwind many of their most toxic assets. “This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed,”  There were also small improvements on the demand side: Open credit card accounts rose by 10 million, and credit card limits rose by 2.1 percent, showing banks may be more willing to lend.

US Deleveraging Continues Steadily in Q2 - Each quarter the New York Fed publishes estimates of total outstanding household debt and each quarter I use it to update the above graph of household debt divided by disposable personal income.  The most recent quarter shows a pretty similar pace of deleveraging to the trend of the last few years (though Q1 was a partial hiatus). The conclusions haven't really changed:

  • US household deleveraging is a slow, painful, but orderly process.
  • It's likely to continue for a number of years more.
  • It's a drag on growth but is not going to cause the end of the world as we know it

How Far Should Consumers Unwind Debt? - In an article today, Tara Siegel Bernard and I examined whether the Fed’s announcement that it would keep credit cheap for two more years would inspire more people to borrow and spend. Aside from consumer confidence, which is decidedly shaky, a crucial underlying factor holding back borrowing is that families are still paying off debt accumulated during the boom, when credit was easy and people treated their homes like big A.T.M.’s. According to an analysis from Moody’s Analytics, total household debt peaked in August 2008 at $12.41 trillion and has come down by about $1.2 trillion. As a proportion of gross domestic product, household debt peaked at 99.5 percent in the first quarter of 2009, and has come down to just under 90 percent. Economists, who talk about the “deleveraging” process, say that debt still has a way to come down before the economy will return to full health. Just how far it needs to come down, though, is difficult to say.

Late Credit Card Payments At Lowest Rate Since Mid '90s - We mentioned a few weeks ago that more Americans have begun paying down their credit card debt during the last two years rather than maxing out their accounts with stuff they can't afford. Now comes another sign of more responsible behavior... the rate of late credit card payments is the lowest it's been in 17 years — .That's an entire Bieber! According to credit bureau TransUnion, the national credit card delinquency rate (i.e., the rate of payments at least 90 days past due) in the second quarter of 2011 was only 0.60%, down from 0.92% during the same period in 2010.  But before you assume that the number dropped because folks are not using their credit cards, both TransUnion and the credit card companies report that there was actually a small increase in the amount of credit card use during this time period. "Not only do we have consumers that are using their debt more responsible and taking out less debt, they've also cut back on the number of the cards they carry,"  He also points to an increase in debit card use as a sign that more people are not spending beyond their means.

U.S. buckling down for a long, tough economic slog - We've worked down credit card debt and tended to our savings (mostly). America's businesses have trimmed the fat — and then some — from their expenses. The federal government has found a way to cut spending (barely), cover its debts (for now) and avoid tax increases (again, for now). All this has kept our still-remarkable standard of living at least temporarily intact and protected the economy from an apocalyptic meltdown. Now comes the harder part: There are few things left to cut and only spotty evidence of better prospects ahead. The stock market pogo-stick act last week that followed a rating agency's downgrade of U.S. Treasury bonds and the nobody's-happy deal that raised the federal debt ceiling only worsened our economic confidence. Whether the economy is taking a double dip in the stagnant pool of recession or is in the middle of a years-long trek of slow growth, virtually no one sees boom times starting soon. So how will families and businesses cope, when they've already made so many painful adjustments? With more of the same belt-tightening, most likely, and that may only make things worse.

Event Driven Declines in Consumer Sentiment - I looked at some of the previous spikes down in sentiment due to fairly short term events: 1) the 1987 market crash, 2) the Gulf War, 3) 9/11, 4) the Iraq Invasion, and 5) Hurricane Katrina. These events are apparent on the following graph: There are other reasons for declines in sentiment, but I was looking for event driven declines. Note: It is more unusual to see sentiment spike up due to an event - perhaps the capture of Saddam Hussein in Dec 2003 led to an increase in sentiment in the January 2004 report.Looking at these five events (table below), some of the declines were related to other factors (like an increase in oil prices) - and some lasted longer and had a direct impact on consumption.My feeling is the debt ceiling decline - assuming the decline was due to the insanity in D.C. - is most similar to the 1987 stock market crash (that scared everyone, but had little impact on the economy) and to Hurricane Katrina. If I'm correct, then sentiment should bounce back fairly quickly - but only to an already low level. And the impact on consumption should be minimal. Of course sentiment could have declined because of other factors (weak labor market, European financial crisis, etc), and then sentiment will probably not bounce back quickly

Sentiment Leads Consumption; Sentiment Four Ways: Chris Puplava, Calculated Risk, Consumer Metrics; Gallup - Chris Puplava at Financial Sense put together an excellent series of charts last week in Economic Indicators Show Recession As Early As Next Month.  Puplava's prognosis that the "Global Economic Train Is Coming Off the Tracks".  My commentary below pertains to one topic of Puplava's post, namely consumer sentiment. I will add to his commentary with additional charts and commentary of my own and from others. Puplava's call for a consumer spending pullback peaked my interest because Consumer Metrics Institute's Contraction Watch online spending chart suggests something different.  The chart is confusing in that there is no blue-red crossover. The red line represents days since the 2008 contraction and the blue line is days since a 2010 contraction. The word "contraction" is in reference to Consumer Metrics' proprietary indicator of online sales.  Note that the first time in approximately 560 days, consumer spending as tracked by Consumer Metrics crossed the zero line. Also, Calculated Risk discusses Event Driven Declines in Consumer Sentiment

Consumer Prices in U.S. Increased More Than Forecast in July - The cost of living in the U.S. climbed in July by the most in four months, led by higher energy and food prices.  The consumer-price index increased 0.5 percent from June, more than twice the 0.2 percent median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The so-called core gauge, which excludes volatile food and fuel costs, rose 0.2 percent.  Some businesses are trying to preserve profits by recouping higher commodity costs from earlier this year, an effort that may wane as a stagnant labor market and wage growth threaten sales. While bigger grocery and fuel bills also strain household budgets, the Federal Reserve last week said longer term inflation is projected to settle “at or below” its goal.  The CPI report is “showing some continued firmness in prices,”  “There’s not a lot of improvement in the labor market, and given what’s going on with economic growth, pricing power should weaken further. Ultimately, inflation will moderate, but in the meantime, it remains frustratingly high.”

Retailers Raise Prices to Offset U.S. Labor Costs - Retailers and restaurants are raising consumer prices to help compensate for higher labor costs, which increased the most in almost three years during the second quarter. Fifty-three percent of these companies with annual sales of $10 million to $500 million have lifted prices during the last 12 months, up from 32 percent a year ago, according to a quarterly survey by Barlow Research Associates. This comes as U.S. inflation excluding food and energy costs accelerated at an annual pace of 1.8 percent in July, the biggest such gain in more than a year, according to Labor Department data released yesterday. Unit labor costs for nonfarm businesses rose 1.3 percent in the quarter ended June 30 compared with a year ago, as hourly compensation rose while productivity fell, Bureau of Labor Statistics data show. “This is an early sign that even with high unemployment, labor costs are starting to pick up, giving companies an incentive to raise prices,”

Slower Wage Growth Collides with Faster Price Growth - When unemployment is as high as its been (and likely to stay up there for a while), nominal wages tend to grow more slowly.  Back in early 2009, the annual growth rate of hourly wages was about 3.5%; now it’s down to around 2%. At the same time, inflation has picked up—we learned today that consumer prices grew 3.6% over the past 12 months (energy prices spiked and food prices grew more quickly as well—take those out and the price index grew less than 2%). Combine slower nominal wage growth with faster inflation and you get the picture below.  It plots both the real (inflation-adjusted) growth in hourly and weekly wages over the past few years.  Inflation was running close to 1% around a year ago, and that led to growing real wages.  But the collision of faster price growth and slower wage growth since then has meant a decline in the buying power of the average workers’ paycheck.

Walmart warns on US weakness - Walmart, the biggest US retailer by revenues, warned on Tuesday that persistent weakness in the US economy was putting pressure on its low income consumers who are increasingly worried about unemployment and becoming more reliant on government assistance. The struggling US economy is continuing to take its toll on Walmart’s domestic sales as it reported its ninth consecutive quarter of falling sales at US stores open at least a year. Comparable store sales at Walmart in the US, excluding fuel sales and purchases at Sam’s Club stores, were down by 0.9 per cent from a year ago.  “We remain concerned about the economic pressure on our customers and the uncertain impact it can have on their shopping behaviour,” Bill Simon, chief executive of Walmart’s US business, said. “With this volatility, it is as important as ever to deliver on Walmart’s one-stop shopping promise for broad assortment and every day low prices.” Walmart, regarded as a bellwether for the US economy, has been trying to improve its domestic performance after more than two years of stagnant same-store sales. Once revered for its “everyday low prices”, dollar stores and have been eating into Walmart’s market share and convincing consumers that they offer better bargains.

Walmart suffers 9th straight drop in U.S. store sales - -- Wal-Mart Stores Inc. suffered a ninth straight drop in its U.S. store sales last quarter, even as it reported earnings and sales in the period that were higher from a year earlier. Bentonville, Ark-Wal-Mart, the world's largest retailer, said Tuesday that sales at its domestic namesake stores open at least a year dipped 0.9% in the second quarter.  This decline marks a protracted slump in the discounter's same-store sales, which is a key gauge of a retailer's performance. Wal-Mart blamed the continued shortfall in store sales on fewer shoppers flocking to its stores. The retailer said overall customer traffic at Wal-Mart stores was down last quarter compared to the previous year.  The period also included the critical back-to-school shopping3 season, the second-most important sales event for merchants after Christmas.

Number of the Week: 4.6% - 4.6%: E-Commerce Sales as a Share of Total U.S. Sales. Online sales haven’t suffered much of a soft patch. E-commerce sales — almost entirely Internet sales — rose 3% in the second quarter from the first, unadjusted for inflation, according to the Commerce Department. Offline sales rose just 1.1%. Rising gasoline costs may have been a factor, making shopping online that much more inviting than a drive to the mall. Traffic volume data from the Federal Highway Administration show that people began cutting back on driving this spring.Americans’ desire to save money in a tough economy is another. Prices online are lower since Internet retailers don’t have the overhead costs of many of their brick-and-mortar counterparts. And, in most state, they don’t collect sales tax. But with the share of sales made online continuing to rise, and with state and local governments struggling to come up with ways to plug budget gaps, calls for taxing Internet sales are becoming more strident.

Import Prices in U.S. Rise 0.3%, Led by Gains in Costs of Fuel, Clothing - Prices of goods imported into the U.S. rose in July, led by gains in costs of fuel, industrial supplies and clothing. The 0.3 percent gain in the import-price index followed a revised 0.6 percent drop in June, Labor Department figures showed today in Washington. Economists projected a 0.1 percent decrease for July, according to the median estimate in a Bloomberg News survey. Prices excluding petroleum rose 0.2 percent. Slowing growth in emerging economies such as China and Brazil, coupled with weakening demand in the U.S. amid political gridlock and stock declines, means import prices are likely to taper off this month. Federal Reserve policy makers last week said they expected inflation to “settle” lower as commodity price gains “dissipate further.” “While we’re still importing a good amount of price pressures from the faster-growing emerging economies, that trend has tempered in recent months,”Compared with a year earlier, import prices rose 14 percent, today’s report showed. That was the largest 12-month increase since the 18.1 percent gain in the period from August 2007 to August 2008.

LA Port Traffic in July - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for July. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down 0.2% from June, and outbound traffic is up 0.6%. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of July, loaded inbound traffic was down 2% compared to July 2010, and loaded outbound traffic was up 7% compared to July 2010.   Exports have been increasing, although bouncing around month-to-month. Exports are up from last year, but still below the peak in 2008.  Imports were down from last year, and are below the levels of July in 2006 and 2007 too.

'Made in China' ranks only 2.7% of U.S. spending - Convinced that everything you buy these days has a Made-in-China label?  Then you aren't paying attention. Things made in the U.S.A. still dominate the American marketplace, according to a new study by economists at the San Francisco Federal Reserve.  Goods and services from China accounted for only 2.7% of U.S. personal consumption spending in 2010, according to the report titled "The U.S. Content of 'Made in China.' " About 88.5% of U.S. spending last year was on American-made products and services. "On average, of every dollar spent on an item labeled 'Made in China,' 55 cents goes for services produced in the United States," the report said.

Does America suffer from consumption? - MICHAEL MANDEL diagnoses America's economic ills: It's true that consumer spending creates economic activity. But it's not true that all that economic activity is in the United States. Many of the consumer goods we buy are imported. If you buy a shirt or television, you are stimulating manufacturing jobs in China, or perhaps Mexico. You aren't doing as much to stimulate jobs at home. This is true across the economy, but a helpful example is the clothing, or apparel, industry. Since the fourth quarter of 2007, clothing purchases by consumers have increased by about 5% in real terms, according to the latest figures from the Bureau of Economic Analysis. Over roughly the same period, shipments from U.S. apparel factories fell by 31% in real terms, while apparel jobs fell by 26%. The winner: Factories in China and elsewhere making clothes for the U.S. market...If we want Americans to prosper, we need consumer spending to become less important to the economy, not more. In the end, we need a production economy, not a consumption economy.

Industrial Production increased 0.9% in July, Capacity Utilization increases - From the Fed: Industrial production and Capacity Utilization - Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent. The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972--2010) average. This graph shows Capacity Utilization. This series is up 10.2 percentage points from the record low set in June 2009 (the series starts in 1967).  The second graph shows industrial production since 1967. Industrial production increased in July to 94.2. Both industrial production and capacity utilization had been moving sideways for a few months. This was a fairly strong increase, although partially related to the extreme heat (and an increase in utilities).

Double Dip Watch: Industrial Production Surge - Industrial Production surged last month as I expected, growing at over a 10% annual rate. The upward revisions in the manufacturing component from pervious months, I did not expect. Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent. This is good news but it was already backed into the cake, as it were. A failure of industrial production to surge after the Japanese supply disruption was fixed would have been very bad news. So this is good news, but not super good news. Again we will be looking closely at the manufacturing surveys as they roll out.

U.S. Industrial Production Resumes Growth - The Federal Reserve released its monthly report on industrial production this morning, with the following highlights:
1. At an index level of 94.2, industrial production in July was at the highest monthly level since August of 2008, almost three years ago (see chart above).
2.  Over the last year, industrial production has increased by 3.7%, and over the last three months industrial production has increased by 6% at an annual rate.

    • 3. On a monthly basis, industrial production increased by almost 1% from June to July, the highest monthly growth since December of last year. 
    • 4. Manufacturing production increased in July by 3.8% on an annual basis. 
    • 5. Sectoral growth over the last year was especially strong for business equipment (8.5%) and mining (6.6%).  On a monthly basis, motor vehicles and parts increased by a healthy 5.5% in July.

Industrial Output in U.S. Climbs, Easing Concern on Manufacturing Recovery -  Manufacturers in the U.S. churned out more cars, computers and furniture in July, easing concern that one of the mainstays of the recovery was giving way. The 0.9 percent increase in production at factories, mines and utilities was almost twice the median forecast of economists surveyed by Bloomberg News and the biggest gain of the year, according to data today from the Federal Reserve in Washington. Another report showed homebuilders cut back last month. Part of the jump in manufacturing reflects a rebound from the supply shock caused by the earthquake in Japan, indicating it will be difficult for factories to maintain this pace of output as consumer spending and exports cool. At the same time, companies have kept inventories lean, limiting the need for large-scale cuts that could trigger an economic slump. “Given some of the other negatives in the economy, I think you still have to point to manufacturing as a bit of a bright spot,”

Manufacturing in New York Fed Regions Shrinks for Third Month - Manufacturing in the New York region unexpectedly contracted in August for a third straight month as orders dropped and managers became less optimistic about the future, signaling the industry that has led the economic recovery is at risk of stumbling. The Federal Reserve Bank of New York’s so-called Empire State Index fell to minus 7.7 from minus 3.8 in July, a report showed today. The median forecast in a Bloomberg News survey called for an index of zero, the dividing line between expansion and contraction. The bank’s six-month outlook gauge dropped to the third-weakest level on record. Weaker demand from consumers and businesses, coupled with slowing growth in emerging economies and Europe, means factories are ratcheting down production. The Fed, in its policy meeting last week, said growth this year had been “considerably slower” than forecast and announced it would keep its benchmark lending rate near zero at least though mid-2013 to spur growth. “There are downside risks ahead for manufacturing particularly given that U.S. consumer spending is going to be weaker than a lot of people have been thinking, including the Fed,”

Empire State Survey indicates contraction - From the NY Fed: Empire State Manufacturing SurveyThe August Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to worsen. The general business conditions index fell four points to -7.7, its third consecutive negative reading. The new orders index also remained below zero, at -7.8, while the shipments index was positive at 3.0. Price indexes continued to retreat, with the prices paid index falling fifteen points to 28.3 and the prices received index falling three points to 2.2. The index for number of employees was slightly positive, while the average workweek index was slightly negative. The index decreased from -3.8 in July, and is well below expectations of a reading of 1.0. This is the first regional survey released for August and shows that manufacturing in the NY region is still contracting.

Philly Fed Survey: "Regional manufacturing activity has dipped significantly" - Earlier from the Philly Fed: August 2011 Business Outlook Survey:The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 [any reading below zero is contraction]. The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month. Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through August. The ISM and total Fed surveys are through July. The averaged Empire State and Philly Fed surveys are well below zero suggesting a further decline in the ISM index.

Regional factory activity hits 2-1/2 year low (Reuters) - Factory activity in the U.S. Mid-Atlantic region slumped to a nearly 2-1/2 year low in August and home resales unexpectedly dropped in July, dashing hopes for a quick revival in economic growth. Other data on Thursday also pointed to a darker outlook for the economy, with consumer inflation rising at its fastest pace in four months in July and more Americans than expected claiming new jobless benefits last week. Stock markets worldwide tumbled on the weak economic data, which stoked concerns that recovery is on the rocks. Still, economists did not believe that the sharp drop in manufacturing activity signaled that the U.S. economy was sliding back into recession. "Without a strong rebound in the coming months this will be taken as a very worrying development for policymakers charting the outlook for the second half of the year," said Peter Newland, a senior economist at Barclays Capital in New York.

Well, Shit - Ok so, the Philly Fed manufacturing report came in really, really badly. Unfortunately I don’t have time to completely dissect but here is the chart...A quick quote The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month. Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. About 18 percent of the firms reported an increase in employment, but 23 percent reported a decrease. The percentage of firms reporting a shorter workweek (28 percent) was greater than the percentage reporting a longer one (14 percent). The workweek index fell 9 points. There is just no good way to look at this. Maybe more later if I get a chance, but double dip odds are strongly rising.

Pollyanna-in-Chief? - The Economy Drowns Out Obama's Cheery Speeches - "There is nothing wrong with our country" except for the "broken" political system, President Obama declared at many stops on his Midwest bus tour this week. "We've still got the best workers in the world. We've got the best entrepreneurs in the world. We've got the best scientists, the best universities." Well, fine. Presidents have to profess confidence about the country and its long-term prospects, even when the news is bleak. But in repeatedly insisting that there is "nothing wrong," Obama put himself at odds with current reality and with what most people think is true.

What Is Business Waiting For? - When the German economy turned south after the 2008 financial crisis, the pain was mitigated by a program known as “Kurzarbeit1.”  The word means short work. Instead of laying off workers, German companies cut back their hours. The government then used money set aside during good times to pay the workers around 60 percent of their lost wages. The labor unions went along because they believed it was better to keep people employed even at reduced pay. This is the German social compact.  As we suffer through our own economic hard times, the German approach is something we can only envy. Here, companies quickly lay off workers, many of whom never find their way back into the full-time labor force. What are the latest unemployment figures? Some 25 million people2 — more than 16 percent of the work force — are looking for full-time work. Companies are hoarding cash while reporting record profits.  With all their cash, companies shouldn’t be waiting for Congress to give them tax incentives to hire people. They should be trying to jump-start the economy — and fend off another recession — by making investments, and hiring workers, that will lead to renewed prosperity.

The Shrinking Frontiers of the Possible - Joe Nocera’s musings about Kurzarbeit aside, it is not the case that what we need right now are more and newer ideas for increasing growth and jobs.  We do not have a scarcity of such policy ideas.  What we are lacking are the political institutions that would allow us to carry any of them out.  Our policy problem is a political problem.It is remarkable how much of our lingering economic malaise can be attributed, not to the inherent thorniness of the problems we face, but to the misaligned incentives of our political system.  As Greg Hannsgen pointed out in a recent post, there is no reason to believe that the United States government has suddenly been rendered unable to pay its debts as they come due.  Rather, the danger appears to be that the political system (or at least an empowered minority of it) will simply refuse to do so.This is a recurring pattern.  Take the case of growth and employment.  The real resources necessary for a higher level of economic activity and employment are there, sitting idle.  Unfortunately, most of the textbook policy solutions lay equally idle; discarded and now beyond the realm of political possibility.  We have the productive capacity, but through political choice or obstruction we are simply refusing to use it.

Prudence is the new greed - THE new economic villains are not greedy bankers or inept politicians, but businesses choosing to hoard cash rather than hire new workers. I’ve heard it suggested that this is greedy or even unpatriotic. But businesses have good reason to hold cash right now. Investment is risky and demand is still weak. An ongoing tepid recovery, or even a double-dip recession, may mean firms won’t need to grow for a long time. Or things might get worse; in that case a business owner may worry he won’t generate enough cash flow to meet his payroll. Then he’ll need that cash to avoid more layoffs. It might just be a sensible idea to hold off on expansion and keep assets as liquid as possible until there is some end to trouble in sight. Joe Nocera is not having it. He confuses risk aversion under uncertainty with a focus on short-term profits. The only way that’s going to happen, however, is if our society implicitly makes the kind of compact that German society makes explicitly: We have to be willing to allow companies to sacrifice short-term profits for the long-term good of the country.

Weekly Initial Unemployment Claims increased to 408,000 - The DOL reports: In the week ending August 13, the advance figure for seasonally adjusted initial claims was 408,000, an increase of 9,000 from the previous week's revised figure of 399,000. The 4-week moving average was 402,500, a decrease of 3,500 from the previous week's revised average of 406,000. The following graph shows the 4-week moving average of weekly claims since January 2000 (longer term graph in graph gallery). The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 402,500. This is the lowest level for the 4-week average since early April. The 4-week average is still elevated, but has been moving down since mid-May.

The President's Bold Jobs Bill (Maybe) - The President is sounding like a fighter these days. He even says he’ll be proposing a jobs bill in September – and if Republicans don’t go along he’ll fight for it through Election Day (or beyond). That’s a start. But read the small print and all he’s talked about so far is extending the payroll tax cut and unemployment benefits (good, but small potatoes), ratifying the Columbia and South Korea free trade agreements (not necessarily a job-creating move), and creating an infrastructure bank. An infrastructure bank might be helpful, depending on its size. Which is the real question hovering over the entire putative jobs bill – its size. Some of the President’s political advisors have been pushing for small-bore initiatives that they believe might have a chance of getting through the Republican just-say-no House. They also figure policy miniatures won’t give aspiring GOP candidates more ammunition to tar Obama as a big-government liberal. But the President is sounding as if he’s rejected their advice

U.S. Postal Service: Will it survive? - It is hard to think of a better deal than mailing a letter. In exchange for nothing more than a first-class stamp, the U.S. Postal Service will come to your house, pick up your envelope, and deliver it anywhere in the country. It will bring it from Hawaii to Miami. It will carry it from Bangor, Maine, to Dededo, Guam, a distance of 8,000 miles. If you got the address wrong, it will bring the letter back. These services are completed with extraordinary accuracy and speed.  America's postal service is elegant, efficient, even amazing, given the enormous size of the country and the low cost of stamps. But the U.S. Postal Service is a hulking, foundering, money-hemorrhaging bureaucracy. A government watchdog has deemed the whole business unsustainable. Next month, it might actually run out of cash. It raises the question: How is the postal service going to be viable as mailed letters become increasingly obsolete? One thing is for sure: The fiscal situation at the USPS is bad—really bad. According to its most recent quarterly report, the USPS lost $3.1 billion between April 1 and June 30. Add that to billions of dollars in losses racked up since the recession hit—the USPS has been in the red for 18 of the last 20 fiscal quarters. It has also amassed tens of billions in unfunded liabilities, mostly in pension and retiree health-benefit obligations.

The new firm employment puzzle - Atlanta Fed's macroblog - Last week, John Bussey of the Wall Street Journal identified some discouraging statistics from the U.S. Bureau of Labor Statistics "Business Employment Dynamics" (BED) program concerning the number of new establishments (a specific physical location like a store) and the number of jobs from new establishments. These data are replicated in the following chart, which shows both a steep decline in the number of establishments over the last few of years but also a decade-long trend of a declining number of jobs coming from new establishments.  Not only has the number of new establishments declined, but the average size of new establishments has also tended to decline over time.  If small businesses, or more specifically new small businesses, are an engine of job growth in the United States, that particular engine has been getting less powerful. Between March 2009 and March 2010, new establishments generated 1 million fewer jobs than over the period from 2005 to 2007. About 85 percent of that decline was related to a reduction in the number of new establishments

Unemployment rate remains extremely high - The unemployment crisis is not improving, yet much can be done to stimulate the economy and create jobs. President Obama and Congress can implement policies that will rejuvenate the labor market, including: enacting a program to repair and upgrade the nation’s 100,000 public school buildings; implementing direct job creation programs in hard-hit communities; approving additional spending on transportation infrastructure; providing fiscal relief to states; and expanding the safety net (because doing so gets money into the hands of people who will immediately spend it).* And there is more that can be done. Additional job-creating policies include: supporting work-sharing to avoid layoffs; boosting manufacturing by ending currency manipulation by foreign governments; encouraging the Federal Reserve both to resume asset purchases in order to lower long-term interest rates and to target a higher inflation rate (e.g., 3-4%) to reduce real interest rates and erode debt; and reducing household debt through mortgage forgiveness and refinancing.

Chart of the Day: Is the Real Unemployment Rate 12.5%? - Some people criticize the way the unemployment rate is measured, since it doesn't include Americans who have left the workforce temporarily, but ultimately will want or need to get a job. If you include these people in the calculation, the labor market picture has worsened since last November, as I explained on Saturday. So Federal Reserve economists can't pretend that the unemployment picture has improved since their last intervention. But what if we went all the way back to January 2007? At that time, the labor participation rate was 66.4%. In July 2011, it hit a new recessionary low of 63.9%. That 2.5% might not seem like a lot, but it would have meant nearly 6 million more people in July's labor force. If you add those people into the workforce, then the unemployment rate last month would have hit a new high of 12.5%, which is much higher than the official 9.1% reported. Here's how this alternative measure for unemployment would have evolved over the past couple of years:

With Unemployment Sky-High, Employers Having Significant Trouble Finding Workers Who Are "Punctual" - We just reported on the ugly Empire Manufacturing Survey, which saw a big collapse in general business conditions, and the outlook for future business. But there's something in there that's even more worrisome. See, in addition to the normal questions about business conditions, the NY Fed also asked some other questions about the state of business, including what areas companies were having trouble hiring in. Not surprisingly, there's still a big shortage of high tech talent out there. Everybody knows that. But then right after that, a huge number of employers are still saying that they have problems hiring workers who are proficient in "Punctuality/reliability." In fact, this measure is one where things have actually gotten worse since the last time they did this survey in March 2007. Unemployment is over 9%, and yet punctuality is still a problem.

Unemployment, Unemployment Benefits and Severance Packages: A Modest Thought Experiment - Most economists believe that unemployment benefits increase the unemployment rate. The idea is that even having a relatively small income coming in (from unemployment) can encourage people to stay jobless just a little while longer. And no doubt there are people who play the unemployment compensation game fairly well.  Now, consider severance packages. These days they aren't uncommon. There are differences in how different states treat severance packages, but as I understand it, in general, if a jobless worker received a severance package equivalent to X weeks of pay in lump sum form, that makes the worker ineligible to receive unemployment benefits for what would otherwise be the first X weeks worth of claims. Which, would imply that for an unemployed worker, there is zero incentive to be jobless during the first X weeks of unemployment, but a jump in the incentive to be jobless beginning in week X + 1. One presumes, therefore, a greater probability of people turning down proffered job offers in weeks X-1 or X (when unemployment benefits are imminent) than in week 1 or 2 (when there is a much longer wait to get unemployment benefits).

Employment Dynamics - In recent years the BLS has developed a new database where they can track the jobs created by an establishment over time. It is called Business Dynamics and you can read about it at:  Research using the new database has altered the basic view of where jobs are created. The old view that jobs are created by small businesses has been pretty much discredited by this approach.  As this chart shows over recent years large firms have accounted for a greater share of employment than small firms. Since the 2000 recession their share has been relatively constant,  implying that small and large firms have created about the same number of jobs

Employed vs unemployed wage rigidity - Nick Rowe - Suppose you believe that (nominal) wage rigidity in the face of a decline in the (nominal) demand curve for labour is what causes unemployment in a recession. Is it wage rigidity of the employed workers or of the unemployed workers that's the problem? Scott Sumner and Alex Tabarrok say it's (mostly) the wage rigidity of the employed that's the problem. I'm going to disagree. If (note I said "if") you believe that wage rigidity is the problem, then: as employment falls on the way down, it's wage rigidity of the employed that's the problem; but what prevents employment coming straight back up again is wage rigidity of the unemployed..

Shorter Workweeks, Longer Vacations - The financial crisis is largely irrelevant to the economy’s current weakness. The problem is that the demand that was created by $8 trillion in housing bubble wealth cannot be easily replaced. The bubbles generated more than $600 billion in annual demand in construction that has now been lost. The imaginary equity created by bubble-inflated house prices led to a consumption boom that pushed the saving rate to zero. Now that this wealth has vanished, so has the consumption that it fueled. This leaves a gap of more than $1.2 trillion in annual demand. In the short term, this can be filled only by government deficits. In the longer term, the demand gap will have to be filled by a reduction in the U.S. trade deficit, but this requires a large fall in the value of the dollar.  With neither the prospect of much larger deficits nor a sharp decline in the value of the dollar very likely in the near future, the only remaining option is to share the work. This could be accomplished by changing employers’ incentives so that it is more profitable to reduce work hours than to lay people off.

We need not just jobs, but jobs that pay - Everyone to the left of Michele Bachman seems to agree that America's most immediate problem isn't the budget deficit, but the jobs deficit.  Fourteen million Americans are unemployed, and the number ranges up to almost 16 million if you include those who want full-time jobs but can only find part-time ones. Put all those people to work, and they will cheerfully run out to the malls and spend, thus reigniting the engine of consumer capitalism. Or so the conventional wisdom goes. But just how many jobs will the economy have to generate to cure the jobs deficit -- 14 million? Sixteen million? Or a whole lot more? The answer depends not just on the number of people out of work but on the quality of jobs being offered. According to a January report from the National Employment Law Project, 76% of the new jobs generated in 2010 were of the low-paying variety, offering between $9 to $15 an hour. Suppose you're a parking lot attendant, a dishwasher or an office cleaner, and you earn only the federal minimum wage of $7.25 an hour. If you have two children to support, your annual earnings will be $3,000 below the official poverty level for a family of three, so you'll need at least a part-time second job. Not to mention the fact that you'll need to designate one of your children as a full-time baby sitter for the other.

Nice Guys Earn Less Money in Workplace - "Nice guys finish last" the old adage goes, and a new study suggests there just might be some truth to this dictum — at least when it comes to workplace earnings.  The study, published in the Journal of Personality and Social Behavior, found that men who described themselves as nice -- agreeable, cooperative and kind -- earned 18 percent less than men who characterized themselves as disagreeable and aggressive. Women earned the least amount of money, but women who called themselves disagreeable made about 5 percent more than their more friendly female counterparts.  Timothy A. Judge, a professor of management at the University of Notre Dame and lead author of the study, said the most significant finding showed that what works for men -- disagreeableness -- didn't work as well for women.

Study finds mean people earn more money - The phrase "Nice guys finish last" appears to be the case in who gets paid the most. According to a study by several researches, "agreeable" workers make significantly lower than their less agreeable counterparts, with the gap being wider among men.The study, titled "Do Nice Guys—and Gals—Really Finish Last?", used survey data to examine "agreeableness" and found that men who disagreed far greater make 18%- or $9,772 annually- more in salary than those who agree. The salary disparity is far less among women, with disagreeable females making 5% or $1,828 than those who agree more. Cornell professor Beth A. Livingston, who co-authored the study told the Wall Street Journal, "Nice guys are getting the shaft." "The problem is, many managers often don't realize they reward disagreeableness," Livingston added. "You can say this is what you value as a company, but your compensation system may not really reflect that, especially if you leave compensation decisions to individual managers."

Construction Workers: Why a sharp drop in unemployment is not good news. Since the beginning of the year, something extraordinary has happened in one of the sectors hardest hit by the recession: Unemployment has dropped by more than a third among construction workers. In January, the unemployment rate in construction was a whopping 22.5 percent. By July, it had fallen to 13.6 percent. Few other major employment sectors have seen such a dramatic change, let alone a positive one, in the same time period. Those statistics might seem astonishing given the stubbornly high unemployment rate and anemic pace of jobs growth in the last year or two.  Alas, the statistics are somewhat misleading. There has been no real recovery in construction. The falling unemployment rate is a sign of a still-ailing industry, not a newly thriving one.  Indeed, investment in and spending on new houses, office towers, bridges, and roads remain at almost generational lows. So why has the unemployment rate dropped so much—from a high of 27.1 percent in February 2010 to 13.6 percent last month—if the industry is ailing so badly? The answer is that since the beginning of the year, construction workers have fled the industry..

Number of Green Jobs Fails to Live Up to Promises - In the Bay Area as in much of the country, the green economy is not proving to be the job-creation engine that many politicians envisioned. President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream. A study released in July by the non-partisan Brookings Institution2 found clean-technology jobs accounted for just 2 percent of employment nationwide and only slightly more — 2.2 percent — in Silicon Valley. Rather than adding jobs, the study found, the sector actually lost 492 positions from 2003 to 2010 in the South Bay, where the unemployment rate in June was 10.5 percent. Federal and state efforts to stimulate creation of green jobs have largely failed, government records show. Two years after it was awarded $186 million in federal stimulus money to weatherize drafty homes, California has spent only a little over half that sum and has so far created the equivalent of just 538 full-time jobs in the last quarter.

1,100 Hanford layoffs planned - The Department of Energy has authorized its environmental cleanup contractors at Hanford to lay off up to 1,100 more workers in the fiscal year that starts Oct. 1. That's in addition to up to 1,985 layoffs already announced this year, the majority of which will be Sept. 29. Hanford started the year with about 12,000 employees, meaning the potential layoffs announced this year would cut jobs by about a quarter. That does not include the jobs at Pacific Northwest National Laboratory, where about 50 jobs are expected to be trimmed from its staff of about 4,470 in Richland. The most recent projected layoffs are to prepare for the new fiscal year federal budget, which is expected to reduce Hanford's annual budget. The number of layoffs required will not be known until Congress passes a Hanford budget. The projected 1,100 new layoffs will start with up to 475 jobs at the Hanford tank farms, where 56 million gallons of radioactive waste awaiting treatment are stored in underground tanks. The last day of work for those employees will be no later than Oct. 13. The layoffs announced earlier this year are mostly linked to the end of federal economic stimulus money. 

The General Theory of Anti-Mulliganism - Krugman - One of the odder sideshows of the Lesser Depression has been the ongoing crusade of Chicago’s Casey Mulligan, who has repeatedly tried to convince everyone via his blog that contrary to all appearances, we are not suffering from an overall lack of demand. One of his arguments was that since employment of teenagers continues to expand in the summer, when those teenagers are in fact able to work, supply must be the constraining factor. Another was that the growth in Texas employment similarly shows that demand can’t be the factor limiting national employment. The latter argument, of course, has new relevance now that Rick Perry is going to run on his alleged economic miracle.So this seems like a good time to lay out something I’ve been thinking about for a while: the general theory of anti-Mulliganism. Here’s the question: why do patterns of employment over time that are, in fact, normally supply-driven continue to be visible even during a demand-side slump? And here’s the answer: businesses make long-term decisions that influence hiring patterns over time, and those decisions continue to shape their behavior even when there is a surplus of labor.

Lake Wobegon Economics - Krugman - Dean Baker has a very good, succinct summary of what’s wrong with pretty much everything Casey Mulligan has written about employment. What I’d say, however, is that it’s much broader than Mulligan. As Dean says, Mulligan and others keep emphasizing examples of individual groups that have managed to gain jobs by cutting wages or offering other attractions to would-be employers. They then assert that these examples tell us what would be needed to expand overall employment. The point, of course, is that all such arguments amount to committing the fallacy of composition. Or, if you prefer, they’re saying that we can solve the jobs problem through Lake Wobegon economics, creating an environment in which every state, every age group, and every occupation offers wages that are below average. The essence of macroeconomics is understanding why such things are a fallacy, why what happens if one group does something is not at all what happens when everyone does it. And it’s a sad commentary on the state of economics when tenured professors at famous schools don’t get that distinction.

Returning to the scene of the class war —Aggravated today by a New York Times story in which striking Verizon workers were forced to argue that their wages weren’t, in fact, “too high”–seeing them make the very valid point that living in the New York area and raising a family on $40,000-$70,000 a year doesn’t actually make them rich–I tweeted angrily:  “How the hell did we get into a world where workers making $60,000 are overpaid but CEOs making millions are overtaxed?” I don’t tend to have that many Republican or libertarian Twitter followers, but when Kirsten Powers, a Fox News contributor, retweeted me, I was deluged with replies, some of which I’m reposting here:

  •          “becuase they are paying all those 60k wages. Without them, the people making 60k are unemployed.”
    • “Who assumes the most risk?”
    • “Pay is dependent upon what you accomplish for the company. If you make 60K and are not being productive..”
    • “If you have to threaten people with violence to earn $60K, you are overpaid.”
    • “because you can’t punish success. It’s anti-capitalist.”
    • “The workers making $60K accepted it while CEO’s demanded more, but how does the CEO’s wage negatively affect the $60K guy?”

What Should the Verizon Strikers Do? - They’ve been out now for two long weeks. Hard weeks. Their savings are running out. Mortgages are a concern. Verizon threatens to cut off health care benefits for strikers’ families on August 31. Billionaire Warren Buffett said, “There is a class war in this country, and my class is winning.” These 45,000 Verizon employees, members of the CWA and IBEW, are on the front lines of the class war. They are fighting for us all. Verizon’s demands for concessions from its workers are part of the relentless attack that corporations and the government have waged on working people for the last forty years. Verizon is trying to set the clock back before the 1960s and early ‘70s, when workers won new benefits on a rising tide of militancy. Millions of ordinary people in those years challenged the powerful and demanded racial and social equality, an end to savage wars, and real democracy.

The Great Recession and the Middle Class - The American middle class has been slowly thinning for years, but the Great Recession is accelerating that process. Median incomes are declining and the housing market has collapsed. The consumer recovery, such as it is, appears to be driven by the affluent, not the masses. While the rich and well-educated are putting the recession behind them, the rest of America is stuck in neutral or reverse.  To assess the widening divide between the super-rich and everyone else, we invited cover story writer Don Peck and three other experts – James Fallows, Maria Kefalas, Tyler Cowen – to discuss the state of the economy and the problems facing the middle class.

Long-term unemployment wreaks mental toll on jobless - Ever since Lisa Banks was laid off from her job as an administrator for a federal contractor in May 2009, she's sent out hundreds of resumes, but only had four interviews. She says she's depressed enough to try to seek out psychological help. But no luck there either: She doesn't have insurance to pay for it. "I've worked all my life. I've been a decent person," she said. "(But now) I feel as if I'm invisible. Like I'm not worth anything to society anymore." The one consolation she can take is that she's not alone. Statistics show that 14 million unemployed Americans still suffer the effects of the recession. Of the jobless, more than 44 percent have been out of work for 27 weeks or more, a time frame the Bureau of Labor Statistics considers long-term. The average unemployed American has been out of a job for a record 40.4 weeks, a figure that's grown steadily in the past three and a half years — from 17.5 weeks in January 2008. As Americans such as Banks struggle to find jobs, long-term unemployment is wreaking a psychological toll across the United States, with experts and a number of studies saying the jobless are especially at risk of depression, increased anxiety and physical ailments.The National Alliance on Mental Illness, an advocacy group, said in a March report that a cumulative $1.8 billion from mental health services was cut in 32 states and the District of Columbia from 2008 to 2010.

Examining the Limitations of a Neoliberal Safety Net: Romney’s Unemployment Insurance Savings Accounts - Mitt Romney argued for replacing our current unemployment insurance with a system of unemployment savings accounts.  Romney (transcript): “But I would far rather see a reform of our unemployment system, to allow people to have a personal account which they’re able to draw from as opposed to having endless unemployment benefits….if I were president right now, I would go to Congress with a new system for unemployment, which would have specific accounts from which people could withdraw their own funds.” Suzy Khimm has more, while Crooks and Liars has video and notes that this proposal looks a lot like a policy paper from the Mercatus Center.  A proposal where, instead of contributing to a public trust fund for UI, employees create a savings account while working that has money automatically channeled into it tax-free to be drawn down during periods of unemployment. We’ve tried to generalize a contrast between a liberal and neoliberal ideological policy agenda at this page before.  I often think if we created the social safety net for the first time right now we’d see something very different.  In particular, if we had to create unemployment insurance in this neoliberal era I think we’d see something like these unemployment insurance savings accounts instead of the unemployment insurance system that came into being with the 1935 Social Security Act

Child Labor Rules Stalled At White House As Farm Accidents Continue -- Last week, two 17 year olds were critically injured in Oklahoma when they were pulled into a grain augur while on the job. Yet the White House continues to sit on new child labor rules proposed last year by the Department of Labor that some safety advocates say could have prevented that accident. Although the rules proposed by the Labor Department have not yet been made public, sources familiar with them say they would deem certain work activities on farms too dangerous for minors to perform, potentially strengthening laws that haven’t been updated in 40 years. The rules have been awaiting review from the White House's Office of Management and Budget for the past nine months -- an unusually long time, even in the world of federal rule making. Such rules are supposed to be reviewed within 90 days, then go on to a public-comment period. Observers are confused in part because the changes would have minimal economic impact. "We've been trying to figure out who's opposed to these rules,"

US streets full of formerly middle class (RT news Video)

Land of the Free, Home of the Poor - PBS Newshour video

How should we measure the poverty rate? - Perhaps we shouldn’t.The idea behind a poverty rate is that we set an income line below which people’s resources are deemed insufficient for a minimally decent standard of living. The poverty rate is the share of people in households with income below that line. Because it’s a binary measure, it’s a crude one. Suppose a lot of the poor at time 1 have incomes just below the poverty line. The economy then improves, or the benefit amount for a government transfer program is increased, so at time 2 a number of those people have moved above the line. It will appear that poverty has been sharply reduced, even though the amount of genuine progress is small. Similarly, suppose a number of people who formerly had very low incomes move into the work force and experience an income rise, but that rise doesn’t quite get them above the poverty line. This is a significant improvement, but it won’t show up at all in the poverty rate.

The libertarian solution to inequality - The libertarian movement often has a very odd notion of "liberty." Here is yet another case in point. Reviewing a book about happiness, George Mason University professor and Cato Institute blogger Bryan Caplan writes:...[but even if he] is right about the unhappy effects of income comparison, you shouldn't conclude that redistribution is the solution. Yes, you could fight inequality of income. But you could just as easily fight comparison of income. Instead of praising those who "raise awareness" about inequality, perhaps we should shame them, like the office gossip, for spreading envy and discontent. So, the libertarian solution to the problem of inequality is to socially persecute anyone who talks about inequality? Maybe I'm in the crazy minority here, but it seems to me that this kind of social persecution would make people feel less free, not more. Who wants to live in a society in which certain topics are verboten? Would we really be happier if the words "Gini coefficient" were NSFW? And, more fundamentally, when did restricting the free flow of information - by any means, governmental or social - increase our liberty?

Anti-baby boom: Why U.S. birth rate keeps falling - Right before the recession hit, the U.S. was undergoing a mini baby boom. Now, birth rates are declining fast. The number of children born in the U.S. peaked with a record 4.3 million births in 2007, but has since fallen, dropping to 4 million births last year, according to estimates by the National Center for Health Statistics. The birth rate -- a measure of births per 1,000 people -- has dropped 10% so far. Historically, declines in birth rates have gone hand in hand with economic downturns. During the financial slumps of the early 1990's and 1970's, the birth rates fell 15% and 18%, respectively. In the midst of the Great Depression, the birth rate was down by 17%. Meanwhile, the cost of raising a child has risen steadily since the U.S. Department of Agriculture began tracking the data in 1960. From buying car seats and strollers to paying for childcare and schooling, a middle-income family could spend an average of $226,920 to raise a child born in 2010 to age 18 (and that doesn't include overwhelming cost of college1), according to the USDA.

Understanding this should be a SNAP - Secretary of Agriculture Tom Vilsack talked to MSNBC yesterday and made a point about the Supplemental Nutrition Assistance Program (SNAP) program the right really didn’t like. “I should point out that when you talk about the SNAP program, or the food stamp program, you have to recognize that it’s also an economic stimulus,” Vilsack noted. “Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little bit more in the grocery store, then someone has got to stock it, shelve it, package it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get into the economy during tough times.” The cast of “Fox & Friends” was incensed by the very idea, telling viewers as part of their coverage this morning: More and more people are, unfortunately, using this program. But the spin of this program now is that actually people who are on food stamps stimulate the economy because every dollar generates $1.84 into the economy. You buy more groceries if you’re on food stamps. Do you buy that? Do you buy that as a stimulating part of the economy? […]

Children in Poverty: How Are Kids in Your State Faring? - The latest numbers on poverty among U.S. children are so striking that they make you do a double take. In 2009, 31 million kids were living in families with incomes below twice the federal poverty threshold. That's 42 percent of the kids in the United States who are just a few of mom's or dad's paychecks away from economic catastrophe, says Patrick McCarthy, CEO of the Annie E. Casey Foundation, which released the statistics this week as part of its latest Kids Count study. Nearly 8 million children in 2010 were living with at least one parent who was unemployed. You can explore more of the findings focused on children and families here. And there's plenty of other data to pore over -- about disturbing trends at the national level and what's happening in your state. We took our own look at the data to explore how the childhood poverty figures have changed from 2000 to 2009:

Poverty’s Not Just for Cities: America’s 10 Poorest Suburbs - The trend toward suburban poverty has been under way for nearly a decade. And in some metropolitan areas, the poverty rates in the suburbs are higher than in the cities they surround. "Between 2000 and 2008, suburbs in the country's largest metro areas had their poor populations grow by 25% -- almost five times faster than the cities themselves...", the Brookings Institute recently reported. Additionally, "large suburbs saw the fastest growing low-income populations across community types and the greatest uptick in the share of the population living under 200% of poverty." The poverty threshold in 2008, the last year used in Brookings' study, was $21,384 for a family of four. That means they earn less than twice the poverty level, or less than $44,700 annually for a family of four, according to the 2011 guidelines.  With this in mind, 24/7 Wall St. looked at the 10 metropolitan areas with the largest rates of poverty in their suburbs, ranked by the Brookings Institute. We then compared the suburban poverty rate with that of the metropolitan areas' primary cities and analyzed the situations that created this poverty.

Jobless Rates Increased in Most States in July - Jobless rates increased in most states last month as the labor market struggled to gain traction amid a slowing economy. Twenty-eight states and the District of Columbia logged increases in their unemployment rates in July, the Labor Department said Friday. Nine states recorded drops, while 13 saw no change in unemployment. States hardest hit by the recession and housing downturn again posted the highest unemployment rates. Nevada led the pack at 12.9% (up half a percentage point from June), followed by California at 12%. Nine others had unemployment rates at or above 10% during the month: Michigan and South Carolina at 10.9%, the District of Columbia and Rhode Island at 10.8%, Florida at 10.7%, Mississippi at 10.4%, Georgia and North Carolina at 10.1%, and Alabama at 10%. Half of all states posted unemployment rates that were significantly lower than the U.S. rate of 9.1% in July. North Dakota remained the lowest by far at 3.3%, followed by Nebraska at 4.1% and South Dakota at 4.7%. Those states and others with significant energy or farm sectors have been faring well with higher commodity prices over the past year.

State Unemployment Rates "little changed" in July - From the BLS: Regional and State Employment and Unemployment Summary:Regional and state unemployment rates were generally little changed in July. Twenty-eight states and the District of Columbia registered unemployment rate increases, nine states recorded rate decreases, and thirteen states had no rate change, the U.S. Bureau of Labor Statistics reported today.  The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate.  Three states are at new 2007 recession highs: Arkansas (8.2%), Texas (8.4%) and Montana (7.7%).  The fact that 39 states and the District of Columbia have seen little or no improvement over the last year is a reminder that the unemployment crisis is ongoing.

The United States of Unemployment - There are 13.9 million unemployed people in the U.S. – and that just counts those looking for work.  That works out to 9.1% of the labor force, the widely publicized unemployed rate. But here are a few more ways to look at it. There are more unemployed people in the U.S. than there are people in the state of Illinois, the fifth largest state. In fact there, there are more unemployed people in the U.S. than there are people in 46 of the 50 states, all but Florida, New York, Texas and California. There are more unemployed than the combined populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, Maine, New Hampshire, Idaho and the District of Columbia. If they were a country, the 13.9 million unemployed Americans would be the 68th largest country in the world, bigger than the population of Greece or Portugal (each of which has 10.8 million people) and more than twice the population of Norway (4.7 million.)

John Kasich looking to compromise on ballot referendum - Liberal and labor groups disappointed by the outcome in the Wisconsin recall elections are pointing to new developments in Ohio as proof that their effort is paying off. Just a day after the final state Senate recall elections finished with Democrats winning two seats but coming up short of retaking the majority, Ohio Gov. John Kasich (R) on Wednesday moved to avert a similar showdown in his own state. The labor-aligned group We Are Ohio has successfully collected 1.3 million signatures to force a November ballot referendum that would repeal Kasich’s bill reining in the collective bargaining rights of public employee unions. With the idea of repeal polling well – 56 percent favored a repeal and 32 percent opposed it in a recent Quinnipiac poll – Kasich on Wednesday sent the group a letter and held a press conference urging compromise. The move is a tacit acknowledgment that Kasich and the state GOP could very well lose the battle ahead – or at least that it will be a very expensive distraction with possibly disastrous consequences for Kasich’s budget.

Job creation: Interrogating the Texas Miracle - OVER the weekend, I predicted that Rick Perry will be a formidable candidate. Although many progressives are discounting him—see Kevin Drum's post on "Why Rick Perry Won't Win"—we can tell that many do take him seriously. The giveaway is that his announcement has inspired a rush of critical commentary about his record, particularly the vaunted "Texas Miracle" of job creation that will be central to Mr Perry's campaign in the primary and in the general election, should it come to that.One of the major entries comes from Paul Krugman, in a column about the "Texas Unmiracle", which my colleague M.S. discussed yesterday. Mr Krugman writes:...What you need to know is that the Texas miracle is a myth, and more broadly that Texan experience offers no useful lessons on how to restore national full employment.It’s true that Texas entered recession a bit later than the rest of America, mainly because the state’s still energy-heavy economy was buoyed by high oil prices through the first half of 2008. Also, Texas was spared the worst of the housing crisis, partly because it turns out to have surprisingly strict regulation of mortgage lending. Despite all that, however, from mid-2008 onward unemployment soared in Texas, just as it did almost everywhere else.

Texan-Sized Bullshit - Rick Perry may be a nice guy, just as Michelle Bachmann may make for an entertaining and illuminating dinner-party guest. In this regard, I make no judgment of Mr Perry. He may also be very competent and highly intelligent. He may be a good administrator, and may make a great president. Here, I will readily admit that I am not sufficiently informed to have an opinion.What I take exception to, and find exceptionally dishonest (and believe the American People should take note as well) is for Mr Perry to associate his policies or administration of the affairs of Texas with the avoidance of the more general financial malaise engulfing the nation as a whole, though in particular, the coasts and rust belt. I say this because Mr Perry, as Governor of Texas has had absolutely nothing to do with rising agricultural land values, more-than robust oil prices, vaulting agricultural commodity prices, a steadily growing oil-services industry, and population growth trends (whether due to fertility or net internal and external migration) in excess of national averages which diminishes supply-demand imbalances in the real estate market.

The Texas “Miracle”  The notion of a Texas Miracle — that employment in Texas somehow defied the grips of the Great Recession — has been debunked thoroughly here, here, here and here, just to cite four examples.So, putting employment aside, I thought I’d examine some other metrics by which states are measured.  Using the excellent database at the Council of State Governments (which I’ve written about previously), I took a look at a dozen “quality of life” metrics to see how Texas ranks relative to its peers. In each case, I ranked the 50 states in a manner where “1″ is the best score achievable and “50″ the worst (e.g., the highest high school graduation rate would garner a “1,” the lowest incidence of STD’s would also garner a “1.”  In other words, if you’re a governor — a state’s CEO, as it were — you always want to be #1 and, conversely, nowhere near #50.). That said, let’s have a look at how Governor Perry’s Texas ranks in a dirty dozen metrics (and keep in mind that Perry has held the governorship for 11 years):

Perry’s employment record in Texas - Paul Krugman has an important column today about Rick Perry’s record of job creation in Texas: So where does the notion of a Texas miracle come from? Mainly from widespread misunderstanding of the economic effects of population growth… Texas tends, in good years and bad, to have higher job growth than the rest of America. But it needs lots of new jobs just to keep up with its rising population — and as those unemployment comparisons show, recent employment growth has fallen well short of what’s needed.The unemployment numbers are interesting, but I thought it would be interesting to look at the employment numbers instead — and to see how employment in Texas compares to employment in the rest of the country. So Nick Rizzo collated the data for this chart, taking employment figures from Google’s Public Data Explorer, and filling it out with population data from the Census Bureau and — for the 2011 population of Texas — the Texas Department of State Health Services. Here’s the result:

Governor’s claims of ’miracle’ irk Texans - Randy Ford, who holds three teaching certifications and a bachelor’s degree, began work this week as a teacher’s helper for Texas public schools. He earns $17 above the poverty level, before taxes.  Mr Ford was one of 50,000 teachers sacked when Texas moved to plug a $25bn budget deficit by cutting spending, rather than raising taxes or tapping all $9bn in the state’s “rainy day funds’”. Mr Ford, 38, moved his wife and their 13-month-old daughter into his father’s guest house: “If it weren’t for that, we might have been homeless.’’  And yet that Mr Ford has a job at all means he is part of the “Texas miracle” being trumpeted by Rick Perry as the state governor runs for president.  Texas has added 40 per cent of new US jobs since June 2009, which Mr Perry considers a key credential for the nation’s highest office.

A Growing Gloom for States and Cities - In the space of just a few weeks, the Republican-led standoff on spending and taxes brought them a triple dose of bad news: a budget deal that will probably lead to a significant reduction in federal aid; a bond downgrade that could eventually trickle down to the local and state level, making borrowing more expensive; and a stock market plunge that is bleeding state employee pension funds.  States have been cutting frantically for the last four years because of declining tax revenues, but the 2012 budget year will have the deepest cuts to education, health care and other services since the recession began. A recent report1 from the Center on Budget and Policy Priorities showed that nearly all states will spend less on vital services in 2012 than they did in 2008, after inflation, even though there are more children in public schools and more poor people on the Medicaid rolls. That means that 100,000 low-income people will be kept out of Medicaid in Arizona, which has frozen enrollment. New Jersey plans to cancel Medicaid coverage for 23,000 parents. Texas eliminated prekindergarten money for 100,000 children. Ohio and Pennsylvania are each cutting school aid by more than 7 percent this year, which in Ohio is equivalent to more than 14,000 teachers’ salaries.

State Revenue Forecasting Best Practices: A Dangerous Concept - Using another state's successful methods of estimating revenues to accurately forecast those of your own is prohibitively risky.  Yet state legislators ask how to do just that.  Facing fiscal woes, many states' representatives want to know which states have been successful and how they have accomplished their goals. However, by its very nature, forecasting is an imperfect science.  It is the practice of predicting outcomes which have yet to be observed.  Yet it is a necessary evil when state legislators budget for the upcoming year.  They must forecast revenues in order to determine how much the state can prudently spend. According to a recently released paper by The Pew Center on the States and The Nelson A. Rockefeller Institute of Government, "States Revenue Estimating: Cracks in the Crystal Ball," a disturbing trend has taken shape:  Revenue estimate errors have grown over the last 23 years and are even worse during times of fiscal crisis.  The last three economic downturns have been no exception.  In addition, the number of states making errors is growing.  So too are most states' budget gaps.

Texas raids fund for poor to keep taxes low - Texas utility customers pay a little extra on their bills that is supposed to go into a fund to help the poor cover their own utility payments. But in a year of record heat, less than half the fund is being paid out, forcing people to do without air conditioning in triple-digit temperatures. CBS reports that the Texas legislature has repeatedly approved raiding the fund in order to balance its budget without raising taxes. By 2013, there will be $900 million sitting unspent, with no plans to ever pay it out. And not only are the poor being shortchanged, but members of the middle class who pay utility bills are being charged that extra fee which does nothing but subsidize keeping taxes low on the wealthy. This video is from CBS News, posted August 12

Did Rick Perry Sink the Texas Economy? - That's what reporters should be asking now that he has entered the race for the Republican presidential nomination. Texas had been growing more rapidly than the overall economy for decades. There were three main factors. First, like other southern states it is a destination for retirees who want to escape the cold winters in the Northeast and Midwest. Second, as a border state it is the first destination for millions of immigrants. Third, it is a major oil and gas producer. The rising price of these fossil fuels means that Texas receives more money for its output. It also gives more incentive for exploration for new wells.Over the years from 1987 to 2001, annual job growth in Texas averaged 2.8 percent. This is 0.8 percentage points higher than the growth rate for the economy as a whole. In the ten and a half years since Governor Perry took office job growth has averaged 0.2 percent annually, just 0.3 percentage points above the rate for the nation as a whole. So, the question that reporters should be asking is which of Governor Perry's policies caused the Texas economy to slow so much relative to the rest of the country.

Rick Perry for President? My Experience with "The Texas Unmiracle" (Krugman) - Paul Krugman wrote yesterday in the New York Times about "The Texas Unmiracle".  It's worth reading, because the facts about Texas are not nearly so rosy as Perry would paint them.  As Krugman notes, even with the oil and gas prosperity to put a surface gloss on the Texas economy, facts for little folk on the ground are not so nice--one in four lacks health insurance;  more Texans that do work have work that pays only minimum wage compared to other states; and unemployment has lately soared to 8.2 percent.  Perry's approach to government can't be applied at a national level to achieve any good results. As a former Texan, I must say I feel particularly queasy thinking about Texas Governor Rick Perry's presidential aspirations.  I believe George W Bush will be viewed historically as one of our worst presidents--he oversaw a pullback on regulation and oversight that ensured that bank speculation would move us into the Great Recession, and he capped that with a Treasury Secretary from Wall Street--Paulson--who engineered a huge (and ultimately necessary because of the Bush deregulatory policies) bailout of the Big Banks (and indirectly of their Big Investors) but one with no strings attached! Rick Perry would be even worse.

It's A Miracle? - Scott Lemieux linked to an article that in turn referenced a BEA report on state GDP gains with this map: or, if you just want to see the numbers,  "Growth only slightly lower than Michigan's" should be a great campaign slogan.*  *And that's ignoring that the second-largest contributor to that gain is Finance and Insurance. Rick Perry probably gives Jamie Dimon a big, wet kiss every time they meet.

Socialism, Texas-Style - Something I’ve spent a fair amount of time complaining about is the extent to which state and local government layoffs have been a drag on employment. This is problem they’ve avoided in Texas, where everything — including the government payroll — is not only bigger, but increasingly so: If only all states could provide such labor market stability.

Fed’s Fisher Takes On The Texas Question -Richard W. Fisher, president of the Federal Reserve Bank of Dallas, has taken on what can be called the Texas question: the nature and quality of the state’s job creation.“For obvious reasons” the subject of jobs in Texas has become of such interest that Fisher said “my staff and I are being hounded by the national press corps for data and commentary.”The obvious reason is that a record of superior job creation is a central economic plank of Texas Gov. Rick Perry, who recently announced his candidacy for the Republican nomination for president.On the Texas jobs miracle, Fisher provided data of various sorts, all agreeing that in Fisher’s words, “Texas has accounted for a significant amount of the nation’s employment growth both over the past 20 years and since the recession officially ended.” Including both time frames shows the trend preceded Perry’s governorship. And Fisher does point out blemishes on that impressive record.

Investigating the Link between Debt, Deleveraging and the “Texas Miracle”  - A lot of people are interested in the “Texas Miracle” – or the performance of the Texas economy during the Great Recession.  Matthew Shapiro has an epic post about the data, Jared Bernstein has two very important Keynes Goes to Texas posts (I, II) Kevin Drum and Jonathan Chait summarize. There’s two debates – one is whether or not there is something there, and the other is what is causing it.  What is causing any job growth has important implications for our country.  President and CEO of the Federal Reserve Bank of Dallas Richard Fisher is now explaining that he is dissenting from the Federal Reserve because he is awe-inspired by the raw beauty of job creators in full motion in Texas. One important part of the crisis has to do with a debt overhang from the bubble and the subsequent process of deleveraging.  Suzy Khimm looked at this yesterday.  The Federal Reserve Bank of New York releases quarterly data (excel here) on of a handful of states and the country as a whole, getting specific in terms of debt and credit conditions.  I looked at this data source two quarters ago when we were discussing mobility and deleveraging, and now is a great time to check it again.

California Plans $5.4 Billion Short-Term Note Sale to Repay a Bridge Loan - Wells Fargo & Co. (WFC) and Barclays Plc (BARC) will be senior managers of California’s $5.4 billion short-term notes sale the week of Sept. 12, a spokesman for state Treasurer Bill Lockyer said. The first such issue since November will have De La Rosa & Co. as co-senior manager and Wells Fargo as book runner, Tom Dresslar, a Lockyer spokesman, said in an e-mail yesterday. Proceeds from the sale of the revenue anticipation notes, or RANs, will repay a bridge loan from a syndicate of eight banks and investors led by Goldman Sachs Group Inc. (GS) and Wells Fargo, Dresslar said in an interview earlier this month. Lockyer arranged the loan last month in the event of credit-market disruption should the U.S. have defaulted on its debt. RANs, which are typically issued by states when cash on hand is low, are repaid from later tax collections.

Debt Limit Deal Will Hit States and Localities, Too -  As Americans return from vacation to find shrunken state and local services — from fewer teachers in their children’s classrooms to less help for elderly and disabled residents to tuition hikes at public universities — we hope they’ll connect the dots as well as yesterday’s New York Times editorial did: Washington should have been trying to find a way to help states avoid the layoffs and cutbacks that have contributed heavily to the high unemployment rate.  Instead, it seems to be doing everything possible to make the situation worse in state capitals around the country. That’s because the large federal spending cuts in the recent debt-limit deal will inevitably force large cuts in funding for services that states and localities provide, like transportation, education, and environmental protection. For four years, states and localities have closed their recession-induced budget shortfalls by cutting services, eliminating more than half a million public-sector jobs (see graph), and — to a much lesser degree — raising revenues.  They’ll likely have to take more painful steps like these in response to cuts in federal aid.

States mull taxing drivers by the mile - Shift away from gas power drives proposals for GPS-based fees -  A number of regulators and planners think the idea of charging by the mile is a great idea — something that could gain even more traction if electric propulsion grows in popularity. Since hybrids use less fuel than comparable conventionally powered vehicles and battery-electric vehicles use no fuel at all, there’s the potential for government coffers to lose billions of dollars a year in annual revenues used for road maintenance and other projects.  To replace those revenues, several states — along with a number of European countries — are exploring the idea of establishing per-mile fees that would use GPS navigation systems to track how much a vehicle is driven. There could be a fixed-rate charge or the fee might be adjusted to reflect the fuel-efficiency of a vehicle, perhaps even when and where it was driven.  A proposal introduced in the Oregon legislature, for example, proposed a charge of about 0.85 cent per mile through 2015, with the figure jumping to 1.85 cents per mile by 2018.

Monday Map: State Credit Ratings - Today's Monday Map shows S&P credit ratings of the 50 states. 13 states have the top AAA rating, and the worst state, California, has a rating of A-.

Investors in U.S. `Keep Their Heads’ After S&P Downgrades Municipal Bonds - Individual municipal-bond investors aren’t fleeing the market after Standard & Poor’s lowered the credit rating of thousands of bonds.  The ratio of buy orders to sell orders, a measure of investor demand, was 2.5 for municipal-bond trades on the BondDesk Group LLC platform yesterday, meaning there were more buyers than sellers, said Chris Shayne, senior market strategist for the group, a bond marketplace that works with dealers, advisers and discount brokers. That ratio showed demand was about normal and up from earlier in the week when demand was “substantially” weaker than normal. Investors may not be dumping their bonds in part because they’re more focused on the underlying ability of issuers to repay principal and coupons, “They’re taking a longer-term view,” Spalding said. “The overwhelming evidence is that municipal credit is still a relative safe haven for investors.”

Another Reason You Can Have Him - Fitch won't downgrade the U.S., but they have downgraded Chirstiedom, officially because he didn't pillage the state's severely-underfunded Pension Funds enough.  Of course, those Pension Funds wouldn't be so underfunded if they had been funded instead of f*ck*d by the Whitman Administration's Coke-Induced Budgeting Practices. (The "miracle of compound interest" includes that it doesn't compound so much when there's no principal.)  [UPDATE: Blue Jersey highlights the line I missedFitch believes that meeting the requisite increases in pension contributions will be challenging and is likely to conflict with other long term challenges, such as property tax relief, school funding, and infrastructure needs. Gosh, you mean you have to pay for services? As for the other highlight:  The state's recent economic performance has been weak and the state is expected to lag the nation in recovering from the recent recession. we could always use The Texas Solution: Hire More and More Government Workers.]  So, if you want him, as I said at Skippy, you can have him. He's got experience with ratings downgrades.

Downgrades Felt at Local Level -To city officials in Manassas Park, Va., Standard & Poor's one-notch downgrade of the U.S. government's credit rating was relatively mild compared with what the firm sprung on them last month. The tiny city's credit rating was reduced to triple-B from double-A minus—a five-notch tumble. ."For us to have been downgraded with the problems of the economy, we were expecting that," says Gary Fields, Manassas Park's finance director. "But maybe a notch. Maybe two notches. We were quite surprised at the size of the downgrade. I don't really understand." Similar confusion and frustration is spreading through other cities, counties and municipalities bruised by steep downgrades. Since June 2010, S&P, Moody's Investors Service and Fitch Ratings have made 196 so-called super-downgrades on municipal bonds, according to research firm Municipal Market Advisors. Super-downgrades are defined as cuts of at least three notches on the letter-grade scales used by the firms. The ratings firms say the multinotch downgrades are extremely rare and when they do happen they are often tied to bonds where investors already expect volatility, such as bonds that depend on property-tax revenue at a time when the real estate market is depressed.

Muni Bonds May Face Downgrades After Final U.S. Budget, S&P Says -- Standard & Poor's, the credit rating company that cut the U.S. to AA+, said the federal budget deal may lead to downgrades on municipal credits. The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on "differing levels of reliance on federal funding, and varying management capabilities," and, after the Budget Control Act of 2011, will be felt "unevenly across the sector," S&P said. "Experience tells me I would expect there to be some downgrades," said S&P credit analyst Gabriel Petek. "These cuts are coming in addition to the losses of revenue that already came during the recession." The initial budget cuts would be smaller than the revenue losses during the recession that ended June 2009, he said. States lost $67 billion in aggregate during the 18-month contraction, the report said. The federal government has planned $7 billion in cuts, most of which won't be implemented until 2013, giving states some time to prepare, Petek said.

Forgiving debt may be the answer to this mess  - In America’s unenlightened past, men who couldn’t pay their debts were imprisoned. Languishing behind bars deprived them of any chance to repay their creditors, so the practice was stupid as well as cruel. During college, I came upon a trove of heartrending petitions to the Connecticut General Assembly from women seeking to have their debtor husbands released from jail. The petitions were, by and large, rejected.  Society has come a long way since, but not far enough. There is still a presumption that blood can be squeezed from a stone. That’s true in the U.S. housing market, where banks continue to insist that they will be able to collect full repayment of wacky mortgage loans that they never should have made in the first place. And it’s true in Europe, where creditor nations and banks are dragging their heels on writing down the sovereign debt of Greece, Ireland, and Portugal.  Why does this matter? Because debt — public and private, foreign and domestic — is the No. 1 issue of 2011.

Charles Hugh Smith: Why Local Enterprise Is The Solution - A growing number of individuals believe our economic and societal status quo is defined by unsustainable addiction to cheap oil and ever increasing debt. With that viewpoint, it's hard not to see a hard takedown of our national standard of living in the future. Even harder to answer is: what do you do about it?Charles Hugh Smith, proprietor of the esteemed weblog, sees the path to future prosperity in removing capital from the Wall Street machine and investing it into local enterprise within the community in which you live. "Enterprise is completely possible in an era of declining resource consumption. In other words, just because we have to use less, doesn’t mean that there is no opportunity for investing in enterprise. I think enterprise and investing in fact, are the solution. And if we withdraw our money from Wall Street and put it to use in our own communities, to the benefit of our own income streams, then I think that things happen."

Local courts face steep budget cuts -This year, California’s courts are being asked to trim expenses by $350 million as part of the system's share of hits in the newly passed budget. It’s the highest single-year reduction since the state began paying trial court costs 14 years ago, equating to around a 6.7 percent reduction for all county superior courts. For many, it’s just another push to tighten their belts as they’ve been doing consistently for the last several years. For the past three years, Fresno County Superior Court has lost up to $11 million annually from a combination of direct cuts from the state and other decreases. Court Executive Officer Tamara Beard said the sacrifice this fiscal year looks to be in the neighborhood of $13 to $14 million, most of that related to efficiency measures. On top of that, more than $14 million was recently shifted from the court to the Fresno County Sheriff’s Department in response to a statewide cost-saving plan that transferred certain inmates in California prisons to local jails.

Long Beach police chief proposes cutting patrols to shore up budget - Budget issues dominated a special meeting of the Long Beach City Council on Wednesday because the city expects a $20 million deficit next fiscal year. Earlier this month, Long Beach officials proposed more cuts to the city’s police and fire departments. Almost 70 percent of the city’s general fund goes to those two agencies. Long Beach Police Chief Jim McDonnell reluctantly offered further cuts to the city council. Council members said McDonnell’s recommendation to cut patrol officers worried them because it might reverse the department’s progress toward reducing violent crime. He responded that police management is already too lean to withstand further cuts.

Miami Declares "Financial Urgency", Seeks Cuts From Unions - Miami city manager Johnny Martinez declared a “financial urgency” Monday, forcing the city’s four major unions to enter into negotiations for new contracts with city officials. The collective bargaining agreements for the city's four unions -- fire, police, general workers and sanitation -- are about to expire. There’s a $61 million budget shortfall for the next fiscal year and if by 14-day period of negotiations, there is no deal, commissioners can make changes to balance the budget. In 2010 the city faced a $105 million deficit and city officials used the same state statute. Meanwhile, Miami’s Police union has voted to spearhead a campaign to recall Mayor Tomas Regalado.

Miami Declares ‘Financial Urgency’ as It Moves to Cut Worker Pay, Benefits - Miami, facing a $61 million fiscal 2012 deficit, declared a state of “financial urgency” for a second straight year, moving toward wage and benefit cuts.  The declaration gives unions for municipal workers two weeks to agree to contracts for the year that starts in October or be subject to actions imposed by the City Commission. Workers including police and firefighters absorbed about $80 million in reduced pay, health insurance and pensions in fiscal 2011. “In order to balance the budget, sacrifices have to be made by everyone,” Miami joins at least two Florida cities that also have invoked the fiscal statute, including one that may force reductions on union workers. Hollywood, which made a declaration in May, is set to cut salaries, including for police and firefighters, as much as 12.5 percent. State law gives cities special powers when they declare financial urgency.  Standard & Poor’s cut Miami’s general-obligation bond rating two steps to BBB, the second-lowest investment grade, on June 28 and gave it a negative outlook, partly because of lawsuits from city unions stemming from cuts imposed in August 2010. The legal actions “expose the city to significant liabilities at a time when its available reserves and liquidity are low,”

Plastics Industry Edited California Textbooks - Under pressure from the American Chemistry Council, a lobbying group for the plastics industry, schools officials in California edited a new environmental curriculum to include positive messages about plastic shopping bags, interviews and documents show. The rewritten textbooks and teachers' guides coincided with a public relations and lobbying effort by the chemistry council to fight proposed plastic bag bans throughout the country. But despite the positive message, activists say there is no debate: Plastic bags kill marine animals, leech toxic chemicals and take an estimated 1,000 years to decompose in landfills. In 2009, a private consultant hired by California school officials added a new section to the 11th-grade teachers' edition textbook called "The Advantages of Plastic Shopping Bags." The title and some of the textbook language were inserted almost verbatim from letters written by the chemistry council.

Rick Perry’s Innovative Educational Model: Students Get to Decide the Right Answer - A lot of people are talking about the Secessionist’s response to a question about evolution. “Here your mom was asking about evolution, and you know it’s a theory that’s out there, and it’s got some gaps in it,” Perry said. “In Texas, we teach both creationism and evolution in our public schools — because I figure you’re smart enough to figure out which one is right.” Let’s put aside the fact that evolution isn’t just a “theory that’s out there,” that there aren’t “gaps” in it — and that Texas doesn’t teach creationism. . But the rest of what the Secessionist is saying here is very out of character. Conservatives, who view the world as a series of blacks and whites and rights and wrongs, usually hate this kind of squishy relativism — especially when it comes to education.  But even the most progressive schools don’t adopt the Secessionist’s “let the students figure out which answer is right” theory in most subjects, let alone science. Students aren’t taught that pi could be 6.28 or 3.14, or that the capital of Texas could be Austin or Dallas, or that the Alamo was attacked by Hitler or Santa Anna.

The GOP’S New War on Schools - Michele Bachmann's victory in the Iowa straw poll Saturday represents many obvious things. But her growing popularity among the Republican base also signals something that's been less widely acknowledged: a sea change in the party's education agenda. It's safe to say that the political era of George W. Bush's No Child Left Behind is now officially over, even as the law's testing mandates continue to reverberate in classrooms across the country. Against a backdrop of Tea Party calls to abolish the Department of Education and drastically cut the federal government's role in local public schools, Rep. John Kline, the moderate chairman of the House education and workforce committee, has refused to engage in productive negotiations with the Obama administration on how to update and reauthorize the troubled No Child Left Behind law. If it is not rewritten to emphasize academic growth instead of raw test score goals, up to 80 percent of American schools could be labeled "failing" this school year, because less than 100 percent of their native-born American students have reached "proficiency" on reading and math tests. But with no Republican partners emerging from the partisan morass to work on the legislation, Secretary of Education Arne Duncan announced last week that his department would sidestep Congress, allowing states to ignore NCLB's test-score targets if they pursue school reform in other ways, such as tying teacher evaluation and pay to student achievement data.

Can the US Compete if Only 32 Percent of Its Students Are Proficient in Math? - Among the top-scoring places in the world that participated in a recent exam, math proficiency of 15-year-olds was well above 50 percent. One US state, Massachusetts, cleared that mark, barely. What do Massachusetts, Switzerland, and Singapore have in common? Their students are among the top performers in the world when it comes to mathematical proficiency. As for the rest of the United States, the comparison is more bleak, according to a new report: The US ranked 32nd out of 65 countries (or cities such as Shanghai and Hong Kong) that participated in the latest international PISA, an exam administered to representative samples of 15-year-old students by the Organization for Economic Cooperation and Development. To researchers who authored Wednesday’s report – “Globally Challenged: Are U.S. Students Ready to Compete?” – it’s yet another cause for alarm about the ability of the United States to compete on the global economic scene.

With Post-Its and Checklists, Schools Cut Their Energy Bills - Energy consumption in New York City’s 1,245 school buildings is down roughly 11 percent since 2008, as motion detectors have been installed on classroom lights and unused refrigerators and freezers have been unplugged for the summer.  In Yonkers, energy savings have financed $18 million in new boilers, windows and other capital improvements that the Westchester County district could not otherwise afford.  Schools, once known as energy wasters, are embracing conservation in increasing numbers. A desire to practice the environmentally friendly principles discussed in classrooms has been heightened by soaring energy costs and tighter budgets. With the help of a growing industry of energy consultants, school officials are evaluating every detail of their daily operations, like the temperature of the swimming pool and the amount of electricity the cafeteria ovens use, and are replacing energy-guzzling equipment with more efficient models. 

Detroit Public School Teachers Protest School Cuts - About 400 teachers and employees from Detroit Public Schools gathered outside of the Detroit Federation of Teachers Tuesday to protest recent school cuts. The group is upset over a 10 percent pay cut and requirement that they pay twice as much for their health insurance. These changes are set to go into effect on Aug. 23 and teachers are supposed to report to work six days later. This rally follows a lawsuit filed last week to block these type of pay cuts. The cuts were deemed necessary by DPS to make up the district's $327 million deficit. Detroit's emergency financial manager Roy Roberts has the power to override the district's contracts with teachers and force the cuts on them.

Student Loan Debt Climbs - Americans have cut back on credit of all kinds, with one notable exception. According to the Federal Reserve Bank of New York’s quarterly report on debt and credit, U.S. households had $11.42 trillion in debt outstanding in the second quarter. That was down from a peak of $12.5 trillion in the third quarter of 2008, when the financial crisis took hold, and the lowest since the first quarter of 2007. Mortgage debt, home equity loans, credit card debt and auto loans are all down sharply — partly because people are being more careful, but also because many have defaulted. But student loans are up sharply. There was $550 billion in student debt outstanding in the second quarter, up 25% from $440 billion in the third quarter of 2008.

More Student Loans Are Past Due - Student loans are on the rise, but so is the delinquency rate on them. On Monday Real Time Economics noted that since the depths of the recession the only type of credit to notch growth was student loans. Credit to students also stands out when looking at delinquency rates. In the second quarter, 11.2% of student loans were more than 90 days past due and the rate was steadily rising, according to data from the Federal Reserve Bank of New York. Only credit cards had a higher rate of delinquency — 12.2% — but those numbers have been on a steady decline for the past four quarters. Younger workers have continued to face the most difficult conditions in the labor market. Workers between 20 and 24 years old have a 14.6% unemployment rate, compared to the national average of 9.1% recorded in July. That comes even as the share of 20- to 24-year-olds that are working or looking for a job is at the lowest level since the 1970s, before women entered the labor force en masse.

Moody’s: Private Student-Loan Defaults Tick Up - Defaults on securitized private student loans rose to 5.4% in the second quarter as high unemployment among college graduates continued to weigh down credit performance, according to the latest data from Moody’s Corp.’s Moody’s Investors Service unit.The annualized default rate widened from 5% in the first quarter and 4.5% a year ago, the credit-rating company said. Much of the increase stemmed from a seasonal rise in defaults on loans securitized in 2010, which also contained more delinquencies. (Read more about past due student loans.) As with securities tied to home mortgages, student-loan asset-backed securities can offer a snapshot of borrowers’ financial health.Young college graduates faced a 9% unemployment rate in the first half of 2011, and the jobless rate has yet to show signs of improvement. Student loans securitized between 2008 and 2010 hold more young college graduates than older vintages, leading to a higher default rate, Moody’s said.The latest default rate is still below the record 7.6% peak in the third quarter of 2009 but remains about 2.5 times higher than the average rate seen before the recession.

Suicides and Student Loan Debt - Barbara Ehrenreich wrote a piece entitled, "Suicide Spreads as One Solution to the Debt Crisis." The article touched upon the housing crash, and  Ehrenreich highlighted several cases in which people took their lives when they knew they were losing their homes. Ehrenreich discusses shoot-outs in the past, but these incidents often entailed groups of men barricading themselves in their homes and fighting it out with the cops. In recent history, however, people have been turning the barrel of the gun towards themselves. "Suicide," Ehrenreich explains, "is becoming an increasingly popular response to debt." We need to have a national discussion about student loan debtors who have taken their lives. I already know of three individuals who, in part, committed suicide in response to owing student loans; they felt there was no way out. A few weeks ago, and on the same day, I learned about two individuals who committed suicide. One told a connection of mine that her niece recently took her life after she had received a bank statement that detailed the amount of student loan debt she owed.On the same day that I learned of these two suicides, I spoke to a woman in L.A. who told me, "I am at the end of my rope." She too was suicidal. We talked for nearly two hours, and I brought up Ehrenreich's work.

Pension Costs Soaring For New York Schools - School districts are being socked with a 29 percent increase in their pension costs this school year. The increase means schools will pay 11.11 percent of their payroll toward retirement costs in 2012, up from 8.62 percent in the prior school year, which ended June 30, the teachers' retirement system announced this week. It's the first double-digit rate in 22 years. Schools and governments have been grappling with soaring pension costs because more workers are retiring and because of poor returns on Wall Street. Pension funds have had stronger rates of return in recent years, but are still trying to recoup past losses during the recession. School officials said growing pension costs were equal to the total increase in school spending this year, up about 1.3 percent. The spending increase caused homeowners' tax levy to grow on average about 3.4 percent this year. The pension expense comes as schools next July will have to abide by a property-tax cap. The cap will limit tax increases to 2 percent a year or the rate of inflation, whichever is lower.

CalSTRS 'broke within 30 years' - report - The California State Teachers' Retirement System (CalSTRS) has been labelled as "high risk” and is expected to run out of money in the next 30 years, a new state auditor report claims. The report by State Auditor Elaine Howle into high-risk issues facing California, concluded CalSTRS does not have enough funds to continue paying teacher retirement benefits beyond the next 30 years. The warning echoes similar claims made by the pension fund itself.Howle said unless legislature takes action, the state could find itself responsible for providing the necessary funding using taxpayer money. The report added: "The laws governing the contribution rates for CalSTRS members and their employers have not changed in decades. As a result, the defined benefit programme is currently funded at 71%, well below the 80% considered necessary to fund a sound pension programme."Additionally, CalSTRS reports that the programme's assets will be depleted in 30 years. Considering that pension obligations can extend beyond 50 years, unless the State takes steps, such as raising the contribution rates for members and their employers, it may be responsible for providing the necessary funding to ensure that CalSTRS' defined benefit programme meets its obligations."

CalSTRS lobbies for gradual increase to underfunded pension - A plan by the giant state teachers' pension fund to ask the Legislature and governor this year to boost their financial support has been sidetracked by California's continuing budget shortfall. As the current legislative session winds down, leaders of the $154-billion California State Teachers' Retirement System have opted to begin a lower-key, multiyear lobbying campaign to convince Gov. Jerry Brown and lawmakers to approve a gradual increase in state, community college and school district contributions for the retirement of 852,000 public school educators. Without a contributions boost, the pension known as CalSTRS faces a projected $56-billion funding gap and could run out of money in 32 or 33 years, said Chief Executive Ehnes in a meeting Tuesday with the Los Angeles Times editorial board. The fund now has only 71% of the money estimated to meet pension obligations. That contrasts with 110% it had at the beginning of the decade, more than enough to pay all future pensions. Experts consider 80% to be the minimum secure level.

I’m cashing out my 401k and putting all my money into lotteries - Here is a data point you may want to keep in the back of your mind when discussing financial literacy: In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006). Some may be tempted to interpret this as the Death of the American Dream, and evidence that people are hopeless about their economic futures. But winning the lottery as the best retirement strategy for all Americans? I chalk this up to the phenomenon that no matter how stupid a belief is, if you know one person that ascribes to it then a survey will show that 1/4 to 1/3 of the population probably does as well

Social Security as a Ponzi Scheme -- Jonathan Bernstein is annoyed at the “Social Security is a Ponzi scheme” meme.After all, a Ponzi scheme is a deliberate fraud. Saying that Social Security is financed like a Ponzi scheme is factually wrong, but saying that Social Security is a Ponzi scheme or is like a Ponzi scheme is basically a false accusation of fraud against the US government and the politicians who have supported Social Security over the years.The Ponzi scheme meme is overwrought but, as I understand it, just means that both promise big payouts on the theory that there will always be more investors to fund it and collapse if there aren’t. Social Security is a Ponzi scheme in the limited sense that, if there aren’t enough young folks to pay for the burgeoning population of retirees then the system collapses unless we continue to ratchet up taxes on the working population or pay out less to retirees than we promised. But, no, it’s not a Ponzi scheme in the broader sense. The intent of a Ponzi scheme is to enrich the initiator and early investors by bilking later investors; they fully know the pyramid will collapse on others will be left holding the bag.

Nudging us into giving up on our Social Security - Well, well, well. I was looking over my money situation and realized I hadn't seen my annual estimate of Social Security benefits that's been coming every July for years. Hmm, I wondered, did I throw it in the wrong pile? Or did the feds cunningly decide to terminate this service as one more step in the path leading the American people to believe that Social Security will not be there for us and there's nothing we can do about it? You guessed it! Googling for "social security annual statement" got me to this helpful page, where the gummint explains that In light of the current budget situation, we have suspended issuing Social Security Statements. You may be able to estimate your retirement benefit using our online Retirement Estimator. Ahahahahahahahahahahahahahaha! I'd really like to know how much money it saved them to do this. As much as they would save by suspending drone attacks in Pakistan for a year? You can bet not.

Social Security Is Not the Problem - This is one of these facts that you may have heard before but it bears repeating: When people say, “the entitlements will bankrupt America,” they’re a) wrong, and b) not talking about Social Security, or at least the shouldn’t be. The figure below, from CBO, show that as a share of GDP, neither Social Security nor other spending (which includes the discretionary spending that everyone’s all gung ho to slash away at) are driving government spending as a share of the economy.  It’s health care.  And as I’ve stressed every time this comes up, that’s not a gov’t problem—that’s just a problem.  In fact, health costs grow faster in the private than in the public sector. Which is why I said “a” above is also wrong.  It’s not entitlements, it’s Medicare, Mcaid, etc.   And it’s not even those that will “bankrupt America.”  It’s health care spending system wide that must be brought under control. Social Security has a funding shortfall too—about 0.8% of GDP over the 75-year horizon.  That’s just about equal to the revenue from the expiration of the high-end Bush tax cuts, and less than half from all the Bush cuts.  So please don’t tell me we can’t afford this guaranteed pension that provides more than half of their income to more than half of the elderly.

Early Read: 2012 Social Security Cost-Of-Living Adjustment on track for 3%+ increase - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.1 percent over the last 12 months to an index level of 222.686 (1982-84=100)." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.
• In 2008, the Q3 average of CPI-W was 215.495. In the previous year, 2007, the average in Q3 of CPI-W was 203.596. That gave an increase of 5.8% for COLA for 2009.
• In 2009, the Q3 average of CPI-W was 211.013. That was a decline of 2.1% from 2008, however, by law, the adjustment is never negative so the benefits remained the same in 2010.
• In 2010, the Q3 average of CPI-W was 214.136. That was an increase of 1.5% from 2009, however the average was still below the Q3 average in 2008, so the adjustment was zero.
• CPI-W in July 2011 was 222.686. This is above the Q3 2008 average, although we still have to wait for the August and September CPI-W. CPI-W could be very volatile over the next couple of months, but if the current level holds, COLA would be around 3.3% for next year (the current 222.686 divided by the Q3 2008 level of 215.495).

Rick Perry Is Less 'Fed Up' Over Social Security - Texas Gov. Rick Perry used to be pretty frank when it came to the country’s Social Security system. In his fiery anti-Washington book, “Fed Up!”, published last fall when he had no plans to run for president, Mr. Perry called the program, which turned 76 on Monday, “a crumbling monument to the failure of the New Deal.”He suggested the program’s creation violated the Constitution. The program was put in place, “at the expense of respect for the Constitution and limited government,” he wrote, comparing the program to a “bad disease” that has continued to spread. Instead of “a retirement system that is no longer set up like an illegal Ponzi scheme,” he wrote, he would prefer a system that “will allow individuals to own and control their own retirement.”But since jumping into the 2012 GOP nomination race on Saturday, Mr. Perry has tempered his Social Security views. His communications director, Ray Sullivan, said Thursday that he had “never heard” the governor suggest the program was unconstitutional. Not only that, Mr. Sullivan said, but “Fed Up!” is not meant to reflect the governor’s current views on how to fix the program.

Department of Mental Health lays off 582 statewide -  The Department of Mental Health is laying off 582 employees statewide -- a quarter of their workforce -- including employees at Greil Memorial Psychiatric Hospital in Montgomery. In a statement, commissioner Zelia Baugh said the loss of feder­al stimulus money had created a $14 million deficit that the depart­ment could only address through job cuts. "Regretfully, a reduction in workforce will be required," she said. "However, our first priority is to the individuals this depart­ment serves; therefore, we will continue to look for ways to save money to the best of our ability without jeopardizing services." Layoffs began earlier this month at Partlow Development Center in Tuscaloosa, according to John Ziegler, a spokesman for the Alabama Department of Mental Health. Some 400 workers there will lose their jobs at Partlow, scheduled to close later this year.

The Medicare Sky is Falling.. Accepting Medicare - Part of the Medicare Sky Falling story is a claim that doctors are refusing to accept new Medicare patients because of low payments. It is common for politicians and pundits to pontificate declaring Medicare is broken. A doctor himself, Wyoming Senator Barrasso made the claim to CNN’s Candy Crowley recently. Sen. John Barrasso mistakenly claimed that "57 percent of doctors don’t want new Medicare patients," which isn’t true. His own spokeswoman admits he got it wrong.  National surveys have put the number who don’t take new Medicare patients as low as 14 percent,Senator’s Barrasso’s Medicare Mistake See also Part 1, Part 2, and Medicare Breaks medical inflation curve. Another claim by pundits and politicians is Medicare has been outstripping inflation. This has been true for a number of years; but, a more recent trend shows quite the opposite. Here again pundits and politicians have been claiming the reduction in doctors accepting Medicare patients has been the cause of such a decrease in Medicare cost. I believe we have debunked that claim earlier.

Healthcare Reform Should Have Been Based on Medicare - Robert Reich - Two appellate judges in Atlanta — one appointed by President Bill Clinton and one by George H.W. Bush – have just decided the Constitution doesn’t allow the federal government to require individuals to buy health insurance.  The decision is a major defeat for the White House. The so-called “individual mandate” is a cornerstone of the Affordable Care Act, President Obama’s 2010 health care reform law, scheduled to go into effect in 2014.  The whole idea of the law is to pool heath risks. Only if everyone buys insurance can insurers afford to cover people with preexisting conditions, or pay the costs of catastrophic diseases.  The issue is now headed for the Supreme Court (another appellate court has upheld the law’s constitutionality) where the prognosis isn’t good. The Court’s Republican-appointed majority has not exactly distinguished itself by its progressive views. Chalk up another one for the GOP, outwitting and outflanking the President and the Democrats.

Medical Debt Cited More Often in Bankruptcies - Medical debt is increasingly a factor in personal bankruptcy filings, an analysis of data at a large credit-counseling agency finds. Roughly 20 percent of those seeking financial counseling this year and last cited medical debt as the primary cause of their decision to seek bankruptcy protection, according to CredAbility, an Atlanta-based nonprofit credit counseling agency that serves clients nationally. That’s up from about 12 to 13 percent in the prior two years. The analysis included more than 47,000 clients for the first half of this year, and more than 100,000 in each of the prior years. With unemployment persistently high, more people have lost health coverage along with their jobs. Health costs are escalating for employed people, as well, in the form of higher premiums and deductibles. More health plans are offering lower monthly premiums in exchange for higher deductibles, but that means people find themselves on the hook for more out-of-pocket costs, if they get sick.

Are faith and health care substitutes? -"Every single 1st world nation that is irreligious shares a set of distinctive attributes. These include handgun control, anti-corporal punishment and anti-bullying policies, rehabilitative rather than punitive incarceration, intensive sex education that emphasizes condom use, reduced socio-economic disparity via tax and welfare systems combined with comprehensive health care..." Gregory Paul and Phil Zuckerman. People in countries with more public health care spending are, on average, less religious. The plot below shows the inverse relationship between public health care spending (as a proportion of the total) and the proportion of the population attending a religious service once a month or more -- the relationship is strong and statistically significant. 

Ecstasy could treat cancer: researchers - Scientists at the University of Birmingham in central England said modified forms of the drug boosted its ability to destroy cancerous cells by 100 times. Six years ago, researchers found that cancers affecting white blood cells appeared to respond to certain "psychotropic" drugs. These included weight loss pills, Prozac-type antidepressants, and amphetamine derivatives such as MDMA -- commonly known as ecstasy. The Birmingham scientists said their discoveries since then could lead to MDMA derivatives being used in patient trials.The derivatives could be effective in treating blood cancers such as leukaemia, lymphoma and myeloma. "This is an exciting next step towards using a modified form of MDMA to help people suffering from blood cancer,"

There Are 5 Fast Food Places for Every Grocery Store in America…According to the U.S. Department of Agriculture, 23 million Americans live in "food deserts," low-income areas without "ready access" to grocery stores. This, however, is not why Americans are so fat, according to a University of North Carolina study of long-term eating habits and summarized in The Week: The real problem, the study found, is the existence of "food swamps," filled with convenience stores selling calorie-loaded packaged foods, gallon cups of soda, and other sugar-loaded beverages, and fast-food chains peddling burgers, fries, and fried chicken on almost every street corner. That's no exaggeration: There are now five fast-food restaurants for every supermarket in the U.S. Pathetic. Anyway, here's the USDA's interactive "Food Desert Locator," in case you want to check out how poor and/or fat your neighbors are.

Does GMO Regulation Enhance Monsanto's Market Power? - I've been wondering for a little while about Monsanto's growing market power in the seed business.  Monsanto's growing dominance has coincided with expansion of genetically modified seed.  That doesn't mean one caused the other.  But there may be a causal link that comes from strong regulation of GMOs relative to traditionally bred crops.  This regulation makes it too costly for small or public entities--like universities--to develop GMO seeds and take them to market.  The only way to do it is to be really big and have deep pockets like Monsanto does.  The key thing here that worries me is that commodity demand is very inelastic.  Prices are super sensitive to quantities.  Thus, if Monsanto comes up with a higher-yielding seed and sells it on the same scale it currently sells its various Roundup-Ready (herbicide resistant) varieties, then commodity prices would fall.  Possibly by a lot.  That would be a good thing for consumers around the world and particularly good for the world's poorest.  But as with golden rice, I worry that Monsanto recognizes that it's not in their interest to develop and navigate a high-yielding GMO crop through the bureaucratic regulatory maze.  Because if they did, they would cannibalize their own profits by driving down commodity prices and thus the amount they could charge farmers for seed.

Where the Wild Bees Are: The Search for More Pollinators - Bumble bees, like their well-known honey bee cousins, are important pollinators of agricultural crops and native plants. But bumble bees are mainly used to pollinate greenhouse plants like peppers and tomatoes rather than field crops. Just 20 years ago, B. occidentalis was one of the most common bees found in western North America. Its native range includes Alaska and the Aleutian Archipelago, south to the mountains in Arizona and New Mexico. The bee could also be found from the Pacific coastline of the United States and Canada east to the plains of central Canada and central Colorado. Anecdotal evidence over the past 10-15 years has suggested that several bumble bee species are disappearing and that their range is constricting. Coupled with the current declines in honey bee populations, the decline in some bumble bee species sparked urgent action for finding suitable pollinators so that we can continue to enjoy the various fruits, vegetables, and flora that play important roles—nutritionally and aesthetically—in our daily lives.

Chinese Hunger for Corn Stretches Farm Belt - China's struggle to meet the growing demands of its middle class is fueling a sudden surge in demand for corn, sending vast ripples across the U.S. farm belt and potentially upending the grain's trade flows around the world. China's need for corn—which forms the basis of sweeteners, starch and alcohol as well as feed for livestock—was on stark display in July when the nation ordered 21 million bushels of U.S. corn in one hit, more than the U.S. government thought the country would buy in a year. The purchase surprised the market and came as an intense July heat wave was shrinking the potential size of the Midwest crop. China bought another 2.2 million bushels of U.S. corn early this month.  Corn prices, which have nearly doubled over the past year, climbed another 1% Tuesday. The corn futures contract for December delivery at the Chicago Board of Trade rose 7.5 cents to settle at $7.275 a bushel.China's influence on corn demand underlines how its fast-growing economy is reshaping global commerce. The nation, with its growing population of 1.3 billion people, has been a major player in commodities markets in recent years.

Chicago Fed: Midwest Farmland Values Soar - From the Chicago Fed: Second Quarter Midwest Farmland Values Soar Farmland values for the second quarter of 2011 climbed 17 percent from the level of a year ago in the Seventh Federal Reserve District. The value of “good” agricultural land increased 4 percent in the second quarter compared with the first quarter of 2011, according to a survey of 226 agricultural bankers in the District. ..At 17 percent, the year-over-year increase in the value of District farmland for the second quarter of 2011 was the largest recorded since the 1970s. Apparently there is quite a bit of investor buying (Gold, guns and farmland?). The Chicago Fed will hold a conference on farmland values in November: Rising Farmland Values: Causes and Cautions. Back in the 1980s, when farmland values collapsed, many farmers lost their land - and many banks went under. I just hope the lenders and farmers remember the '80s and keep the loan-to-value for farmland down.

Why is George Soros selling gold and buying farmland? - Food prices are skyrocketing all across the globe, and there’s no end in sight. The United Nations says food inflation is currently at 30% a year, and the fast-eroding value of the dollar is causing food prices to appear even higher (in contrast to a weakening currency). As the dollar drops in value due to runaway money printing at the Federal Reserve, the cost to import foods from other nations looks to double in just the next two years — and possibly every two years thereafter. That’s probably why investors around the globe are flocking to farmland as the new growth industry. “Investors are pouring into farmland in the U.S. and parts of Europe, Latin America and Africa as global food prices soar,” reports Bloomberg. “A fund controlled by George Soros, the billionaire hedge-fund manager, owns 23.4 percent of South American farmland venture Adecoagro SA.” Jim Rogers is also quoted in the same story, saying, “I have frequently told people that one of the best investments in the world will be farmland.” That’s because demand for food is accelerating even as radical climate changes, a loss of fossil water supplies, and the failure of genetically engineered crops is actually reducing food yields around the globe.

Drought recalls long, punishing dry spell of 1950s -— After enduring nearly a year of drought, Texans have grown accustomed to seeing acres of withered crops, scores of dried-up ponds and mile after mile of cracked earth. But the drought that began last fall has yet to eclipse the infamous dry spell of the 1950s, a bleak period when the skies stubbornly withheld moisture. It was the state's worst drought ever. Nearly everyone who lived through that time remembers constant hardship: Water supplies ran so low some communities had to import it from Oklahoma. Farms and ranches failed. And the lack of rain actually changed the state's demographics because so many families fled rural agricultural areas for cities. Now, with the possible return of another La Nina weather phenomenon, Texans who remember that desperate decade from childhood or adolescence are facing another intense drought that could drag on for at least another year. "I hope this is not going to be like the drought of the '50s,"

Texas heat wave smashes more records - Texas' Texas-sized drought and heat wave is setting new records, as August temperatures regularly topping 100° continue to impact most of the state. The high temperature hit 102° at the Houston Intercontinental Airport yesterday, a record for the date, and the 16th consecutive day of 100°+ heat. The 16-day streak is a new record. The previous record was 14 straight days, ending on July 19, 1980. The low temperature yesterday morning at Dallas/Fort Worth International was 86°--the all-time highest minimum temperature recorded there. This is the 4th time this summer Dallas has had an 86° minimum temperature, with the other dates being July 26, August 3, and August 4. Prior to this year, the hottest minimum temperature ever recorded in Dallas was 85° on September 1, 1939 (which they also matched this summer on July 25, August 7, and again this morning.) Thus Dallas has matched or exceeded their all-time hottest minimum temperature from previous years seven times this year. It's extremely rare for a station with a long observation history spanning more than fifty years to break an all-time record seven times in one year.

Texas Drought Now Equals Worst in History - Back in the spring I wrote a couple of posts arguing that some of the rhetoric at the time about the Texas drought seemed overwrought relative to what the data showed. This morning a reader emails me a link to the latest data for July PDSI: NOAA's graph software is a bit buggy as the July 2011 bar doesn't show full width, but if you look closely you can see that there's a trace of color all the way down to -7.25 which is the worst July in the historical record.  It's not yet the worst month ever - that honor seems to belong to September 1956 when the PDSI reached -7.8.  However, as the map up top makes clear, the drought is not over yet and it could well be the worst Texas drought ever before it's done. I don't think we have license to attribute it to climate change yet, however, since there's no overall trend in the Texas PDSI data (in contrast to California) and the drought is not yet bad enough to argue that we've crossed some kind of threshold into an a historical climate state.

Drought leads to livestock sales - Drought and the resulting lack of feed are forcing cattle growers in southeastern New Mexico to sell off their herds at alarming rates. In just the past two months, weekly livestock sales have almost tripled, increasing on average from about 1,500 head to 4,200 head, Clovis Livestock Auction sales representative Rustin Rowley told the Clovis News Journal in a story Monday ( ). Rowley said ranchers don't normally have to spend much money this time of year to feed their cattle because the animals are eating grass."But there's no grass right now so they're selling them," he said. "Some of them are quitting, and some keep feeding them. It's just a management decision on what they do." He said most local ranchers have sold at least some of their cattle, but some have had to sell all.

'Every Farmer in the World Will Be Affected by Climate Change' - The driest 10-month period on record for Texas has devastated the state and its crops.  The National Weather Service warned Monday: THERE IS LITTLE TO SUGGEST ANY END TO THE DROUGHT. Every state — along with much of Asia — has been hit by record temperatures this summer.  And thanks in large part to extreme weather around the globe, food prices are stuck at record levels, causing hardship for tens of millions: Dr. Andrew Dessler, a professor of atmospheric sciences at Texas A&M University, emailed TP Green, that while Gov. Perry may deny climate science: There are dozens of credible atmospheric scientists in Texas at institutions like Rice, UT, and Texas A&M, and I can confidently say that none agree with Gov. Perry’s views on the science of climate change. This is a particularly unfortunate situation given the hellish drought that Texas is now experiencing, and which climate change is almost certainly making worse.

Record for billion-dollar weather disasters tied - With four months still to go in 2011, the United States has already tied its yearly record for the number of weather disasters with an economic loss of $1 billion or more, the U.S. government reported Wednesday.  With the bulk of the hurricane season ahead and winter storms after that, National Weather Service Director Jack Hayes said 2011 could surpass the record, first set in 2008. "I don't think it takes a wizard to predict 2011 is likely to go down as one of the more extreme years for weather in history," he told journalists on a conference call. The "new reality" is that both the frequency and the cost of extreme weather are rising, making the nation more economically vulnerable and putting more lives and livelihoods at risk, Hayes said.The number of U.S. natural disasters has tripled in the last 20 years and 2010 was a record breaker with about 250, the NWS said, citing data from Munich Re, a company that insures insurance giants.

Huge Fish Spurs Call To 'Re-Reverse' Chicago River - The waterway had grown so putrid that it raised fears of a disease outbreak and concerns about hurting development. So in a first-of-its-kind feat, engineers reversed the river by digging a series of canals that not only carried the stinking mess away from the lake, but also created the only shipping route between the Great Lakes and the Mississippi River. Now a modern threat - a voracious fish that biologists are desperate to keep out of Lake Michigan - has spurred serious talk of undertaking another engineering feat almost as bold as the original: reversing the river again to restore its flow into the lake. The Army Corps of Engineers is studying ways to stop invasive species from moving between two of the nation's largest watersheds, including a proposal to block the canals and undo the engineering marvel that helped define Chicago.

Water risk database backed by big U.S. companies - A consortium of large U.S. companies including General Electric, Goldman Sachs, Coca-Cola and Dow Chemical is backing a new initiative to help manage water supplies in regions threatened by shortages, reflecting growing concern about the importance of water to businesses.  The Aqueduct Alliance, backed by seven large U.S. companies and the World Resources Institute, an environmental campaign group, is launching a new database showing water availability at a local level.  The database, which will be available to everyone, is intended to inform investment and planning decisions by businesses and governments, for example, by warning them that a plant might not be able to source the water it needs.  It will also enable investors to assess companies’ exposure to water risk.  Coca-Cola, the soft drinks group, has handed to the new alliance its own proprietary data on water availability, collected over years of research, making it open for general use. “Water is the lifeblood of our business,” said Joe Rozza, the group’s manager of water resources sustainability.

Second Harvest Food Bank Runs Out of Food - If the Piedmont's largest food bank can't get any donations by Thursday, they will have no more food to distribute. The Second Harvest Food Bank of Northwest North Carolina announced Monday the only food left in their warehouse is a shipment from the federal government. That will be distributed on Thursday. The bank provides food to 300,000 people in 18 counties. The bank also provides help to other food pantries across the region. Tomi Melson, director of development and community relations for Second Harvest, said food drives and grocery store salvages have not brought in enough food. Second Harvest has set up food drop-off boxes at Goodwill stores, BB&T bank branches, and Lowes Food stores across the Piedmont. There will also be boxes at the Winston-Salem Dash game on Tuesday and the Winston-Salem Open starting this Saturday. Melson said this is the worst emergency situation they've encountered since 2009, when they had the first shortage in their 28-year history.

Food prices worsening crisis in Africa's Horn, World Bank says - Soaring food prices is worsening the already dire situation in the Horn of Africa, according to World Bank. The Bank’s Food Price Watch report released Monday said a combination of drought, conflict and soaring food prices was turning deadly for the region’s most vulnerable children and families. While the emergency in the Horn of Africa was triggered by prolonged droughts, especially in areas struggling with conflict and internal displacement such as Somalia, food prices that are near the record high levels seen in 2008 also contributed to the situation, the report said. Over the last three months, reportedly 29,000 children under five have died in Somalia and 600,000 children in the region remain at risk in the ongoing crisis that is threatening the lives and livelihoods of more than 12 million people.

Somalia Suffers from Worst Drought in Century (18 captioned slides)

Food prices stay high: World Bank - There's no relief in sight for the world's poor, with the price of staple foods remaining high. The latest World Bank food price report says that overall food is 33 per cent more expensive than this time last year. Current prices aren't as high as the spike in 2008, but the World Bank says poor people are living on the edge. Food is one of the most basic human necessities and the president of the World Bank, Robert Zoellick, says near record prices means the poorest people in the world are living on the edge, struggling to cope.  Nowhere are high food prices, poverty and instability combining to produce tragic suffering more than in the Horn of Africa. Domestic food prices have been soaring in the region, white maize or corn is now 150 per cent more expensive than it was a year ago.

Food prices could hit tipping point for global unrest - When food shortages and rising prices drive people to desperation, social unrest soon follows. It's as true today as it was in 18th-century France. According to a new analysis of food prices and unrest, the 2008 global food riots and ongoing Arab Spring may be a preview of what's coming. "When you have food prices peak, you have all these riots. But look under the peaks, at the background trend. That's increasing quite rapidly, too," said Yaneer Bar-Yam, president of the New England Complex Systems Institute. "In one to two years, the background trend runs into the place where all hell breaks loose." Bar-Yam and his colleagues are hunters of mathematical signals in social data: market trends andeconomic patterns, ethnic violence, Hollywood movies. In their latest expedition, described 11 Aug in the prepublication online arXiv, they focus on the 2008 food riots and the Arab Spring, both of which followed year-long surges in basic food prices.

Russia Offers Agricultural Land for Southeast Asian Farmers to Grow Crops - Russia is offering agricultural land to Southeast Asian nations to grow crops and help secure reliable food supplies, part of wider efforts to foster trade and investment ties in new markets.  “We suggested today to companies in the region to enter the Russian market given its large scale and to establish themselves to produce food for your own supply,” Deputy Economy Minister Andrei Slepnyov said yesterday in an interview in Manado, Indonesia, where he is attending a meeting of the Association of Southeast Asian Nations trade ministers.  Russian President Dmitry Medvedev is turning to Asia to boost exports as his country’s economy struggles to grow at the pace it did before a 2009 recession. Russia is targeting grain buyers in Southeast Asia to regain its share of the world market after lifting an export ban in July, the Moscow-based Institute for Agricultural Market Studies said Aug. 1.  “Many Asian governments are exploring alternatives to secure food supplies over the long term given that the demographic and environmental pressures in Asia could lead to structural food shortages in the years to come,”

New ethanol blend raises ire of car buffs - Car buffs argue ethanol, the alcohol additive made from corn, hurts vehicles, while ethanol trade groups and corn producers say it is safe. "Most likely, you're getting ethanol everywhere you drive in the country," generally with 10 percent added ethanol, said Kirk McCauley, a spokesman for the Service Station Dealers Association of America. Federal regulators leave it to the states to decide whether pumps must be labeled disclosing that they dispense fuel blended with E10 . About a dozen states don't require ethanol labeling on gas pumps. Classic car buffs say 10 percent ethanol already in widespread use hurts their vehicles. But the U.S. Environmental Protection Agency says it's safe . Periodically, when an old car breaks down or a chain saw or boat motor self-destructs, the owner blames ethanol-blended gasoline. Trade groups for the ethanol industry and corn producers vigorously dispute such complaints, saying ethanol is safe for any new car and that, for older cars, parts can be adapted and fuel additives used during storage as safeguards.

Corn Ethanol Scam: A Profligate Biofuel Policy - Today, about 40 percent of all U.S. corn -- that's 15 percent of global corn production or 5 percent of all global grain -- is diverted into the corn ethanol scam in order to produce the energy equivalent of about 0.6 percent of global oil needs. Corn prices, now close to $7 per bushel, have more than doubled over the past two years (see chart above). And recent harsh weather, including floods in the Midwest and drought in the South, will likely mean a subpar U.S. corn harvest. That, in turn, will mean yet higher prices for corn, which will translate into higher prices for meat, milk, eggs, cheese and other commodities. "Livestock producers, restaurants, food manufacturers and consumers at the grocery store are all being penalized by this profligate biofuel policy," said Bill Lapp, president of Advanced Economic Solutions, an Omaha, Neb., commodity consulting firm.

GM Corn Being Developed For Fuel Instead Of Food -  US farmers are growing the first corn plants genetically modified for the specific purpose of putting more ethanol in gas tanks rather than producing more food. Aid organisations warn the new GM corn could worsen a global food crisis exposed by the famine in Somalia by diverting more corn into energy production. The food industry also opposes the new GM product because, although not inedible, it is unsuitable for use in the manufacture of food products that commonly use corn. Farmers growing corn for human consumption are also concerned about cross-contamination. The corn, developed by a branch of the Swiss pesticide firm Syngenta, contains an added gene for an enzyme (amylase) that speeds the breakdown of starches into ethanol. Ethanol plants normally have to add the enzyme to corn when making ethanol. The Enogen-branded corn is being grown for the first time commercially on about 5,000 acres on the edge of America's corn belt in Kansas, following its approval by the US Department of Agriculture last February. In its promotional material Syngenta says it will allow farmers to produce more ethanol from the corn while using less energy and water.

Never Mind a Tiger in Your Tank: How About An Alligator? - Researchers at the Lafayette campus of the University of Louisiana are looking for green substitutes for diesel fuel. The prime one now in use is soybeans, which are used to make biodiesel oil. But soybeans are also needed for human consumption and animal feed. The United States uses 45 billion gallons of diesel a year; making just one billion gallons from soybeans would use up 21 percent of the American crop, the scientists point out. Now the researchers think they have identified a potential source for biodiesel that currently goes straight to landfills: alligator fat, about 15 million pounds of it every year. Alligators are grown and harvested for their meat and for their skins before the fat heads to landfills, noted Rakesh Bajpai, a professor of chemical engineering at the university. They are not endangered or threatened. (Crocodiles are, but those are not part of the researchers’ equation.) And alligators are plentiful in the wild, Dr. Bajpai said. “If you start seeing alligator roadkill, you’ve arrived in Louisiana,’’ he said. The fat has very limited uses. “When I talk to local people, they say, ‘Grandma used to use it for every purpose,’” he said. Often, Dr. Bajpai said, it was used as a cure-all like cod liver oil. But even that use has died out, he said. That is in contrast to alligators’ skins, which are fashioned into wallets, belts and shoes, or their meat, which is commercially available and which shows up on restaurant menus, often as a deep-fried appetizer. “They say it’s very good,’’ Dr. Bajpai said. “I don’t know. I am a vegetarian.’’

Can Jeremy Grantham Profit From Ecological Mayhem? - Energy “will give us serious and sustained problems” over the next 50 years as we make the transition from hydrocarbons — oil, coal, gas — to solar, wind, nuclear and other sources, but we’ll muddle through to a solution to Peak Oil and related challenges. Peak Everything Else will prove more intractable for humanity. Metals, for instance, “are entropy at work . . . from wonderful metal ores to scattered waste,” and scarcity and higher prices “will slowly increase forever,” but if we scrimp and recycle, we can make do for another century before tight constraint kicks in.  Agriculture is more worrisome. Local water shortages will cause “persistent irritation” — wars, famines. Of the three essential macro nutrient fertilizers, nitrogen is relatively plentiful and recoverable, but we’re running out of potassium and phosphorus, finite mined resources that are “necessary for all life.” Canada has large reserves of potash (the source of potassium), which is good news for Americans, but 50 to 75 percent of the known reserves of phosphate (the source of phosphorus) are located in Morocco and the western Sahara. Assuming a 2 percent annual increase in phosphorus consumption, Grantham believes the rest of the world’s reserves won’t last more than 50 years, so he expects “gamesmanship” from the phosphate-rich.

What a marine massacre looks like- Yesterday I led a team of eight scientists and students from UNC, USFQ and the Galapagos Science Center that documented the catch aboard a vessel caught illegally long lining in the Galapagos Marine Reserve. We worked alongside a great team from the Galapagos National Park and were also assisted by the Ecuadorian Coast Guard.  We identified, sexed, and measured every individual (there turned out to be 379 sharks, not 357 as reported earlier). We also took samples for genetic and demographic analysis (very little is known about the biology of some of these species). It took 10 hours and was grueling and very dangerous work. (There were lots of knives, hooks, and other sharp objects around, the sharks are very heavy and the deck of the ship was extremely slippery.) Beyond that, it was one of the most depressing and intense days of my life. It felt like we were unearthing a mass grave in a war zone. The bodies of the sharks were literally coming out of a dark hold beneath the deck as if they were being unearthed. We are all physically and emotionally toast today, so I thought I should start describing it all with a slide show (note, this is graphic and disturbing).

Pesticides fear for Barrier Reef - Agricultural pesticides are causing significant damage to the Great Barrier Reef, according to a new Australian government report on water quality at the site. The report says some farmers must be more careful with their chemicals. It found that nearly one-quarter of horticulture producers and 12% of pastoral farmers were using practices deemed unacceptable by the industry. The Great Barrier Reef is a World Heritage-listed natural wonder.  In recent years, it has been coral bleaching caused by climate change that has damaged the Great Barrier Reef, but the first Australian government report on water quality there has found that agricultural pesticides are posing significant risks. Pesticides have been found up to 60km (38 miles) inside the reef at toxic concentrations known to harm coral.

Critters Moving Away from Global Warming Faster - Animals across the world are fleeing global warming by heading north much faster than they were less than a decade ago, a new study says. About 2,000 species examined are moving away from the equator at an average rate of more than 15 feet per day, about a mile per year, according to new research published Thursday in the journal Science which analyzed previous studies. Species are also moving up mountains to escape the heat, but more slowly, averaging about 4 feet a year. The species - mostly from the Northern Hemisphere and including plants - moved in fits and starts, but over several decades it averages to about 8 inches an hour away from the equator. "The speed is an important issue," "It is faster than we thought." Included in the analysis was a 2003 study that found species moving north at a rate of just more than a third of a mile per year. Camille Parmesan of the University of Texas, who conducted that study, said the new research makes sense because her data ended around the late 1990s and the 2000s were far hotter.

Perry Keeps Treating ‘Em Ugly -  At a “Politics and Eggs” event in Bedford, New Hampshire, Perry was asked by an audience member about the National Academy of Sciences’ affirmation that climate change is now primarily driven by the burning of fossil fuels. Perry responded that the evidence pointing to mankind’s role in climate alteration has been knowingly falsified. I do believe that the issue of global warming has been politicized. I think there are a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects. And I think we are seeing almost weekly or even daily scientists are coming forward and questioning the original idea that man-made global warming is what is causing the climate to change. Yes our climate’s changed, they’ve been changing ever since the earth was formed. But I do not buy into a group of scientists who have in some cases found to be manipulating this information.

Why Rick Perry's Position on Climate Change Makes Him a True Conservative - Rick Perry is a climate-change skeptic. Sure, he says, the world is getting warmer, but the climate has often changed. He doesn't buy in to the idea that human activity has an effect on the current warming trend. Friedrich Hayek would say that makes him a true conservative. Hayek liked to view the political spectrum not as a left-to-right line with socialist and conservative poles, but as a triangle. Conservatives were at one corner, socialists at another, and liberals at the third. In a famous essay "Why I Am Not  Conservative," Hayek identified a number of characteristic tenets of conservatism, including:

  • Habitual resistance to change, hence the term “conservative."
  • A claim to self-arrogated superior wisdom in place of rational argument.
  • A propensity to reject scientific knowledge because of the consequences that seem to follow from it.
  • Use of state authority to protect established privileges against the forces of economic and social change.
All of these tenets feed into Perry's views on climate change. He resists any change to an American path of economic development based on cheap, carbon-intensive energy; a path economists sometimes call extensive as opposed to intensive growth. He proudly claims superiority of faith-based wisdom over rational argument. And, especially in the case of climate change, he is quick to reject scientific knowledge.

If We Ignore Warnings the Ocean is Trying to Send, We Risk Losing More Than Just Our Vacation Spots -  When we go down to the shore and look out at the waves, do a bit of bodysurfing, maybe watch a blazing orange and pink sunset, then swing by the fish market and pick up a fresh, local, sustainable filet of something white and flaky to bring home and fry up in the pan, we don’t see what’s really taking place beneath the surface. We don’t notice the decades of habitat degradation from coastal development and polluted runoff. We don’t see the microscopic organisms struggling to build their shells and skeletons in acidified water that dissolves them almost as quickly as they grow. We can’t comprehend that the populations of fish and marine life we experience today are such a far cry from the teeming ecosystems considered normal by even our parents and grandparents.All the scientific analyses and drumbeats of overfishing and climate change notwithstanding, it’s hard to ask people to develop a different perception than what they see with their own eyes.

The Idiot Assumptions Of Humankind - I've been reading Curt Stager's book Deep Future: The Next 100,000 Years of Life on Earth. Stager sets the stage by introducing two concepts his readers are probably unfamiliar with, deep time and the Anthropocene. The former is just another way of saying geological time. Stager needs his readers to understand the geological epochs of the Cenozoic (65 million years ago to the present, i.e. the Paleocene, the Eocene and on through to the current Holocene) in order to introduce the Anthropocene, the as yet undefined epoch recognizing the predominance of human influence on the Earth's natural systems (the climate, the oceans, the carbon cycle, etc.).Drawing on the work of M. F. Loutre and A. Berger (below), and climatologist David Archer, Stager comes to the startling conclusion that carbon pollution will postpone the next Ice Age, which is due about 50,000 years from now. Once resident in the atmosphere, about 25% of the extra CO2 stays there a long, long time, and this residual amount only very slowly dissipates over time (measured in parts-per-million, ppm). We are at 387 ppm of CO2 in the atmosphere now, which is about 140% of pre-industrial levels.

Big Storms Slipping Toward Earth’s Poles - Mid-latitude storm tracks are major weather patterns that account for the majority of precipitation in the globe’s middle latitudes, which includes most of the heavily populated areas of North America, Eurasia, and Australia. Due to atmospheric circulation and the dynamics of weather systems, these bands of low pressure form repeatedly in the same locations. Apart from being meteorologically important, they’re also major players on the climate scene—clouds in these regions are responsible for reflecting much of the incoming solar radiation that is bounced back to space before penetrating Earth’s atmosphere. Many climate models have predicted that the positions of these storm tracks would slowly migrate toward the poles, but so far this trend had not been detected. However, analysis of 25 years worth of data from the International Satellite Cloud Climatology Project now indicates that this shift is probably already taking place.

Thinning Arctic Sea Ice Poised to Undergo Record Decline in Mid-August, Volume Minimum Likely - It looks increasingly likely that we’ll match or beat the 2007 record for Arctic sea ice area.  That means we should easily set the record for volume, since the ice is considerably thinner than 4 years ago.  The death spiral continues. Whether we will set the record for sea ice extent, which tends to get most of the media coverage, is a tougher call.  Extent and area are diverging more than usual, as I’ll discuss below.  But either way, the next few weeks should be pretty fascinating to watch. As meteorologist Dr. Jeff Masters explained yesterday, “Arctic sea ice poised to undergo record decline in mid-August“: A strong high pressure system with a central pressure of 1035 mb has developed over the Arctic north of Alaska, and will bring clear skies and warm southerly winds to northeast Siberia and the Arctic during the coming week, accelerating Arctic sea ice loss. Widespread areas of northeastern Siberia are expected to see air temperatures 4 – 12°C (7 – 22°F) above average during the coming week, and the clockwise flow of air around the high pressure system centered north of Alaska will pump this warm air into the Arctic. Arctic sea ice extent, currently slightly higher than the record low values set in 2007, should fall to to its lowest extent for the date by the third week of August as the clear skies and warm southerly winds melt ice and push it away from the coast of Siberia.

Arctic warming unlocks fabled Northwest Passage - The Arctic may be the world's next geopolitical battleground. Temperatures there are rising faster than anywhere else in the world, and the melting ice will have profound consequences on the roof of the world, opening strategic waterways to shipping, reducing the ice cap on Greenland, and spurring a rush to claim rights to the wealth of natural resources that lie beneath. NPR examines what's at stake, who stands to win and lose, and how this could alter the global dynamic. First in a six-part series

New study blames human beings for half of Arctic ice melt — About half the recent record loss of Arctic sea ice can be blamed on global warming caused by human activity, according to a new study by scientists from the nation's leading climate research center.  The peer-reviewed study, funded by the National Science Foundation is the first to attribute a specific proportion of the ice melt to greenhouse gases and particulates from pollution. The study used supercomputers and one of the world's most sophisticated climate models to reach its conclusions, said lead author Jennifer Kay, a staff scientist at the National Center for Atmospheric Research in Boulder, Colo. The paper was published last week in the scientific journal Geophysical Research Letters.

World's forests absorb almost 40 per cent of man made CO2 - The world's forests are much more important than previously thought in absorbing CO2, according to a paper published in Science. The University of Leeds research found forests absorb nearly 40 per cent of man made fossil fuel emissions every year. The first study to look at all the world’s forests together found that established forests, from boreal forests in the north to tropical rainforests in the south, absorb 8.8 billion tonnes of carbon dioxide every year. Scientists work out how much carbon is being absorbed by measuring the density of wood, height and width of different tree species over time. A further 6 billion tonnes is “mopped up” by newly planted forests around the world. However 10.8 billion tonnes is released as a consequence of deforestation as trees are chopped down and a further 28 billon tonnes is generated by cars, factories and other sources of fossil fuels. The study showed that forests are absorbing almost 40 per cent of the 38 billion tonnes of carbon dioxide created by mankind every year.

Deforestation in Brazil’s Amazon up 15% - Deforestation in Brazil’s Amazon increased by 15 percent during the past 12 months, the National Institute for Space Research (INPE) said Wednesday. From July 2010 to July 2011 the vast South American rainforest lost 2,654 square kilometers (1,649 square miles) of vegetation in the states of Mato Grosso and Para, according to a preliminary analysis of satellite photos. The year before, 2,295 square kilometers (1,426 square miles) were destroyed over that time period.  Wednesday’s figures were calculated from a satellite system known as DETER, which detects in real time when an area larger than 61 acres is destroyed, though its results are not always exact due to cloud cover.  Brazil, the world’s fifth largest country by area, has 5.3 million square kilometers of jungle and forests — mostly in the Amazon river basin — of which only 1.7 million are under state protection.

Getting ready for a wave of coal-plant shutdowns - Over the next 18 months, the Environmental Protection Agency will finalize a flurry of new rules to curb pollution from coal-fired power plants. Mercury, smog, ozone, greenhouse gases, water intake, coal ash—it’s all getting regulated. And, not surprisingly, some lawmakers are grumbling. Industry groups such the Edison Electric Institute, which represents investor-owned utilities, and the American Legislative Exchange Council have dubbed the coming rules “EPA’s Regulatory Train Wreck.” The regulations, they say, will cost utilities up to $129 billion and force them to retire one-fifth of coal capacity. Given that coal provides 45 percent of the country’s power, that means higher electric bills, more blackouts and fewer jobs. The doomsday scenario has alarmed Republicans in the House, who have been scrambling to block the measures. Environmental groups retort that the rules will bring sizeable public health benefits, and that industry groups have been exaggerating the costs of environmental regulations since they were first created.

Saudi Arabia’s Nuclear Energy Ambitions - The Kingdom of Saudi Arabia (KSA) plans to build 16 nuclear reactors over the next 20 years spending an estimated $7 billion on each plant. The $112 billion investment, which includes capacity to become a regional exporter of electricity, will provide one-fifth of the Kingdom’s electricity for industrial and residential use and, critically, for desalinization of sea water. This past April, the Saudi government announced the development of a nuclear city to train and house the technical workforce that will be needed to achieve these ambitions. It is clear that KSA’s plans for spending its sovereign wealth fund will be mostly focused on the home front. At the same time, a former Saudi ambassador to the United States , Prince Turki al-Faisal (served 2005-2006), has warned that a regional nuclear arms race could start if Iran does not curb its nuclear efforts. He told the Wall Street Journal on July 20, “It is in our interest that Iran does not develop a nuclear weapon, for their doing so would compel Saudi Arabia … to pursue policies that could lead to untold and possibly dramatic consequences.”

Podcast Aug 13th with Arnold Gundersen on SolarIMG

  • 1) The Japanese are allowing contaminated material (farm waste) to be burned.
  • 2) Eventually this ends up in the Pacific Northwest...these "rain-outs" will be depositing hot particles onto the soil along the West Coast for another year.
  • 3) Confirmation that a "strategic decision was made at the highest level of the U.S. government to downplay Fukushima...we are not sampling the food supply that is comming into the U.S. from Japan...he is not sure if this is because they want to support the Japanese Government or the nuclear industry.
  • 4) He wants you to send him samples of contaminated rainwater for testing...tells you how to go about doing so.

Cracked Fukushima: Radioactive steam escapes danger zone - (RT Video) Workers at Japan’s Fukushima plant say the ground under the facility is cracking and radioactive steam is escaping through the cracks. The cooling system at the plant failed after the devastating tsunami hit Japan in March, sparking a nuclear crisis. But new evidence suggests that Fukushima reactors were doomed to cripple even before the massive wave reached them. RT’s Anissa Naouai talks to Dr. Robert Jacobs, a Professor at the Hiroshima Peace Institute.

Excessive levels of radioactive cesium found 100 km from plant -- Excessive levels of radioactive cesium were found in sludge in a ditch at a district court branch in Fukushima Prefecture, about 100 kilometers west of the crippled Fukushima No. 1 nuclear power plant, the court said Tuesday. The isotope in the sludge, sampled from a ditch at the Fukushima District Court's Aizuwakamatsu branch, measured about 186,000 becquerels per kilogram, the court said, adding it plans to remove the sludge after consulting with local governments. Under government standards, sludge can be used in a landfill as long as the radioactive cesium contained in it measures 8,000 becquerels per kilogram or lower.The court has barred entry within 1 meter of the area where the sludge was sampled and another where radiation levels were higher than other locations on the premises, but that has not disrupted court business, it said.

The explosive truth behind Fukushima’s meltdown - It is one of the mysteries of Japan's ongoing nuclear crisis: How much damage did the 11 March earthquake inflict on the Fukushima Daiichi reactors before the tsunami hit?  The stakes are high: if the earthquake structurally compromised the plant and the safety of its nuclear fuel, then every similar reactor in Japan may have to be shut down. With almost all of Japan's 54 reactors either offline (in the case of 35) or scheduled for shutdown by next April, the issue of structural safety looms over any discussion about restarting them.  Throughout the months of lies and misinformation, one story has stuck: it was the earthquake that knocked out the plant's electric power, halting cooling to its six reactors. The tsunami then washed out the plant's back-up generators 40 minutes later, shutting down all cooling and starting the chain of events that would cause the world's first triple meltdown.  But what if recirculation pipes and cooling pipes burst after the earthquake – before the tidal wave reached the facilities; before the electricity went out? This would surprise few people familiar with the 40-year-old reactor one, the grandfather of the nuclear reactors still operating in Japan.

Two new nuclear leaks in Vermont - The governor of Vermont is saying he is disturbed over the recent detection of radioactive materials in a major state waterway, signaling the second appearance of radioactive elements in the area within weeks. Commissioner Harry Chen of the State Department of Health has confirmed that water samples taken from the shore of the Connecticut River have tested positive for traces of tritium. In large amounts, that radioactive isotope of hydrogen has been linked to causing cancer. Though the samples collected in the river appear to be of relatively low levels, concern is amassing since another dangerous element was discovered earlier this month. On August 2, health officials in Vermont said that fish swimming nine miles upstream from the Vermont Yankee nuclear plant tested positive for strontium-90, another radioactive isotope that has ties to both cancer and leukemia. Vermont Governor Peter Shumlin is now pointing the finger at a nearby nuclear plant, but officials at the facility are saying they aren’t to blame. Despite operating a nuclear power plant mere yards from the banks of the river, Entergy, the owners of Vermont Yankee, are denying they are responsible for the leak.

Energy Dept. says copper thefts on rise - Energy Department says copper thieves hitting federal sites - With copper prices at a near record, thieves across the country have been stealing copper wiring from power lines, construction sites and warehouses. Now federal officials say thieves are targeting power substations and even a locked recycling yard at a nuclear lab. The Energy Department's inspector general reports a "troubling increase" in copper thefts from federal sites, including national research labs, generating stations and a plant where nuclear weapons are dismantled and stored. An estimated total of $500,000 to $750,000 worth of copper has been stolen from DOE sites in the past three years, Inspector General Gregory Friedman said. Thefts have ranged from small amounts to about 30,000 pounds of copper stolen from the Los Alamos National Laboratory in New Mexico. In Texas, hundreds of pounds of copper were stolen from the Pantex plant near Amarillo, where nuclear weapons are stored and dismantled. Friedman said DOE officials need to improve security, especially at recycling facilities and remote substations

Natural gas pipeline leaks into Missouri River - A natural gas pipeline that runs under the Missouri River has developed a leak. Enterprise Products of Houston reported a drop in pressure Saturday, the Iowa Department of Natural Resources said. The affected section runs from Decatur, Neb., to just west of Onawa.The company shut down the pipeline and an estimated 140,000 gallons of natural gas was being pumped out. As of Sunday afternoon, the source had not been found but was suspected to be on the Iowa side.

Hundreds of miles of new pipelines to carry Pennsylvania gas - How big is natural gas in Pennsylvania? This big, according to the Associated Press: More than half of the interstate natural-gas pipeline projects proposed to federal energy regulators since the beginning of 2010 involve Pennsylvania — at a cost estimated at more than $2 billion. That's hundreds of miles of pipelines that can move more than 4 billion cubic feet of natural gas each day. The new pipeline projects also bring the risk of explosions, which have been a particular problem for natural gas systems lately. Congress is supposed to take a new look at pipeline safety rules, last updated in 2006, but that hasn't happened yet. But Pennsylvania’s already sporting one eternally burning township thanks to coal -- it can pick up one or two more from natural gas, right?

Rick Perry wants to frack Iowa - At a campaign stop in Iowa Monday night, Gov. Rick Perry (R-Texas) claimed that the Obama administration is "trying to scare people" about natural gas fracking. He told the attendees of a house party in Cedar Rapids that natural gas drilling with hydraulic fracturing has never damaged groundwater, and expressed concern that Iowans would miss out on the natural gas boom: You have this administration talking about stopping hydraulic fracking, trying to scare people, saying that hydraulic fracking somehow or other is going to damage the groundwater, and so we've got to stop this. Not one time that I'm aware of has hydraulic fracking impacted groundwater. And if we don't have the ability to frack, then all of the Pennsylvania Marcellus shale -- you know, we don't know what's under the surface here in Iowa. There may be copious amounts of natural gas down there. Because the Eagle Ford in Texas, no one knew it was there until four or five years ago. New technologies finding new ways to bring this energy source. And we need to be, we need to be talking about ways to make America as independent energy-wise as we can. Watch video

New York Subpoenas Energy Companies Over Plans for Gas Wells - New York State’s attorney general has sent subpoenas to three large energy companies as part of a broad investigation into whether they have accurately described to investors the prospects for their natural gas wells, according to several sources familiar with the inquiry.  The subpoenas focus on how the companies took advantage of federal rules, adopted in late 2008, that govern the way they report their oil and gas reserves to investors. Investigators have requested documents relating to the formulas that companies use to predict how much gas their wells are likely to produce in the coming decades. The subpoenas, which were sent on Aug. 8, also request documents related to the assumptions that companies have made about drilling costs in their estimates of the wells’ long-term profitability.  The investigation will be watched closely in the industry because the attorney general, Eric T. Schneiderman, is using a New York law called the Martin Act that gives him broad powers over businesses and allows him to obtain and publicly disclose an unusual amount of information.

Hydraulic fracturing rules considered by U.S. - The federal government is weighing whether to impose new rules on hydraulic fracturing to extract natural gas on public lands. Companies such as Anadarko Petroleum Corp. and Treasure Resources Inc. may be required to disclose chemicals used in the drilling and adopt well-integrity standards as part of the permit process, Robert Abbey, director of the Bureau of Land Management, said in an interview Thursday. "We have the authority to move forward with our own rule making to require such a disclosure and other best-management practices that we deem are feasible and appropriate," Abbey said. Such regulations are being "seriously entertained," he said. In fracturing, or fracking, companies inject water, sand and chemicals under high pressure thousands of feet underground to break up shale-rock formations and release the gas trapped there. The technique is used for more than 90 percent of wells drilled on public lands, Abbey said.

North Sea oil spill 'substantial' - More than 200 tonnes of oil could have entered the North Sea following a leak at an offshore platform, according to estimates from operator Shell.The spill - the worst in the region for more than a decade - began at the Gannet Alpha platform 112 miles east of Aberdeen on Wednesday.Estimates have only now been released by the firm, prompting complaints from environmental groups that there has been a lack of transparency.Shell said about 216 tonnes of oil, equal to 1,300 barrels, may have spilled into the sea so far. The estimate outstrips annual spill totals for the past decade, according to figures from the UK Government Department of Energy and Climate Change (DECC).

Shell North Sea oil spill 'more than 200 tonnes' -More than 200 tonnes of oil could have entered the North Sea after Shell's recent spill, it has been estimated. A leak in a flow line leading to the Gannet Alpha oil platform 113 miles (180 km) off Aberdeen was found last week. Shell said it was under control, and estimated 216 tonnes - 1,300 barrels - had spilled. The Department of Energy and Climate Change said it was a "substantial" spill, but should disperse naturally. Glen Cayley, technical director of Shell's exploration and production activities in Europe, said: "It is not easy to quantify the total volume spilled but we estimate so far that it is around 216 tonnes. "However, in terms of the volume on the surface, which changes from day to day, it is estimated today at about one tonne. "This is a significant spill in the context of annual amounts of oil spilled in the North Sea."

North Sea Spill: U.K. Says Hundreds Of Tons Of Oil May Have Leaked - The British government warned Monday that several hundred tons of oil may have leaked into the North Sea from a Royal Dutch Shell rig. The Department for Energy and Climate Change said it estimates that the leak from a flow line at the Gannet Alpha platform off the Scottish coast that began last week could have spilled several hundred tons of oil into the sea. It said the leak was small compared to the BP spill in the Gulf of Mexico last year, but said it was still substantial for the U.K.'s continental shelf. The government said the oil would disperse naturally and was not expected to reach the shore. It said Britain's offshore oil industry had a strong safety record, 'which is why it is disappointing that this spill has happened. We take any spill very seriously and we will be investigating the causes of the spill and learning any lessons from the response to it.' The government said the Maritime and Coastguard Agency, which monitors the waters around Britain, was making twice-daily flights over the area to monitor the situation. Shell has declined to comment on the volume off the spill. It said in a statement released over the weekend that the spill covered a surface area of 19 miles by 2.7 miles (31 kilometers by 4.3 kilometers) and that the leak was under control."

Shell finds second oil leak in North Sea - A second oil leak has been discovered from an offshore platform in the North Sea. An estimated 216 tonnes (1,300 barrels) has already spilled into the sea after the initial spill, which began at the Gannet Alpha platform 112 miles east of Aberdeen last Wednesday. Glen Cayley, technical director of platform operator Shell's exploration and production activities in Europe, said the main leak was "pretty much dead" but a small secondary leak was proving a challenge. Around two barrels a day are leaking into the sea, compared with hundreds of barrels a day at the start of the incident, Shell said. Cayley said: "The leak that we've stemmed was in the flow line so job number one was to close in the wells and isolate the reservoir, which of course is the large volume from the leak.

Shells admits risk of further North Sea oil spill - Hundreds of tonnes of oil estimated to still be inside an offshore pipeline that has been leaking for a week.  The final amount leaked could be four times the volume that has spewed into the sea in the past week.  The Shell oil spill in the North Sea is already the worst in UK waters in the last decade – but the final amount leaked could be four times the volume that has spewed into the sea in the past week, the company admitted on Wednesday, if measures to dam the flow are not successful. So far 218 tonnes of oil have already poured into the sea, with unknown effects on marine life, but Shell estimated on Wednesday that there could be up to 660 tonnes still remaining in the affected pipeline. Shell said there could be as much as 40% water in the pipeline however, which would mean much less oil remaining to leak out.

Shell's second oil leak in North Sea pipeline caused by relief valve - A relief valve close to the faulty pipeline at Shell's Gannet Alpha oil platform in the North Sea appears to be the source of a secondary leak that is adding to the worst oil spill in UK waters in a decade. Green campaigners and members of the Scottish parliament have rounded on the oil company for being slow to release full information on the leak, which was first detected last Wednesday but only disclosed to the public on Friday evening. Shell said on Tuesday that while the leaking well was "under control", and the main spill had been shut off successfully, a small quantity of oil was still finding its way to the sea by another pathway. After lengthy searching, the valve was pinpointed as the likely source. Work will continue to dam the small quantities of oil – at up to five barrels a day, a trickle compared with the 1,300 barrels thought to have gushed out in the first days of the leak, but Shell could not say how soon it would be completed. The company has also been so far unable to explain how the leak occurred in the first place.

North Sea Oil Leak: Shell Under Fire Over Silent Tactics - Oil giant Shell is struggling to contain the worst North Sea spill in a decade amid criticism over how honest the company is being with the public. The spill, which has continued through a second leak after the company had initially said the incident was "under control," was reportedly discovered last Wednesday but was only made public over the weekend. Shell has chosen to update people on the spill with a brief message each day on its British website. "Shell is providing information only reluctantly; that must change," said Jörg Feddern of the German chapter of the environmental organization Greenpeace. Richard Dixon, the director of WWF Scotland, has called for a public inquiry into the incident: "Any inquiry will need to look at what Shell knew when, what they did about it and what they told their regulators and the public. It is already obvious that Shell will be strongly criticized for giving out so little public information so grudgingly.

After North Sea Oil Spill, Shell Prepares to Drill in Arctic Where There is ‘No Infrastructure’ for Clean-Up  - Meanwhile, the Interior Department recognizes that the “Arctic is experiencing variations that are accelerating faster than previously realized” due to climate change, but supports drilling for more fossil fuels in the region anyway. Last week, Shell reported a ruptured oil pipeline in the North Sea, where it spilled around 750 barrels of oil. The leak was fixed over the weekend, but Shell has been quiet about exactly what happened, only saying it “responded promptly to the incident.” Compared to last year’s five-million barrel gusher in the Gulf, this latest leak is very small and was contained quickly. Shell says it was able to contain and monitor the problem with the proper equipment in place. But what happens when there’s no infrastructure in place to address a spill? This latest incident comes as Shell prepares to drill in the icy waters of the Arctic – an area where a leak or blown-out well would be much more difficult to fix. Experts tasked with clean-up efforts continue to warn of the consequences of a spill in the region.

Federal judge throws out Obama drilling rules  -  A judge on Friday threw out Obama administration rules that sought to slow down expedited environmental review of oil and gas drilling on federal land.  U.S. District Judge Nancy Freudenthal ruled in favor of a petroleum industry group, the Western Energy Alliance, in its lawsuit against the federal government, including Interior Secretary Ken Salazar. The ruling reinstates Bush-era expedited oil and gas drilling under provisions called categorical exclusions on federal lands nationwide, Freudenthal said. The government argued that oil and gas companies had no case because they didn't show how the new rules, implemented by the U.S. Bureau of Land Management and U.S. Forest Service last year, had created delays and added to the cost of drilling.

HuffPost: BP Investigates New Oil Sheen Near Green Canyon Block In Gulf Of Mexico  - A new oil sheen was spotted in the Gulf of Mexico, although energy company BP said Thursday the discovery had nothing to do with its operations and was far from the site of its disaster-hit Macondo well. A spokesman for another company involved in investigating the sheen said he believed it had already dissipated since being first spotted last week. BP spokesman Daren Beaudo said his company had sent several remotely controlled mini-submersibles into the water over the weekend to investigate the source of the sheen - a shiny coating that floats on the surface of the water and generally comes from leaked or spilled oil - but had concluded "that it couldn't have been from anything of ours." A statement from BP PLC placed the site of the sheen near two abandoned exploration well sites in the Green Canyon Block in the Gulf of Mexico, although its size wasn't disclosed.  The sheen was 172 miles (277 kilometers) from BP's Macondo well and about 100 miles off the Louisiana coast.

BP’s Gulf Oil Well May Be Leaking AGAIN: “The Oil May Be Coming From Cracks And Fissures In The Seafloor Caused By The Work BP Did During Its Failed Attempts To Cap The Runaway Macondo Well – And That Type Of Leakage Can’t Be Stopped, Ever” - As I noted last year, the seafloor under BP's leaking Gulf oil well cracked, and could leak for years.  Successful New Orleans attorney Stuart Smith - lead counsel in a lawsuit that resulted in a $1.056 billion dollar verdict against ExxonMobil for contaminating land and attempting to cover it up - says that it is leaking again. Smith wrote yesterday: No, this isn’t a post from last year. Oil from the Macondo Well site is fouling the Gulf anew – and BP is scrambling to contain both the crude and the PR nightmare that waits in the wings. Reliable sources tell us that BP has hired 40 boats from Venice to Grand Isle to lay boom around the Deepwater Horizon site – located just 50 miles off the Louisiana coast. The fleet rushed to the scene late last week and worked through the weekend to contain what was becoming a massive slick at the site of the Macondo wellhead, which was officially “killed” back in September 2010. The truly frightening part of this development, as reported in a previous post (see below), is the oil may be coming from cracks and fissures in the seafloor caused by the work BP did during its failed attempts to cap the runaway Macondo Well – and that type of leakage can’t be stopped, ever.

There are a number of ways to fulfill your campaign promise of $2-a-gallon gas - I can think of three ways to get gas prices down to $2/gallon: a price ceiling, reducing demand and increasing supply. Not all of these are unambiguously good. A price ceiling would achieve the goal well but a nasty side effect is the shortages it would create. Demand can be reduced in a number of ways: reducing global income, reducing the price of substitutes and changing tastes and preferences. Income can be reduced through worldwide recessions or high tax rates. Substitutes for gasoline include alternative fuels. Subsidies for ethanol and others might help, but the unintended consequences boggle the mind (e.g, corn prices). Changing tastes and preferences would involve changing attitudes about driving (i.e., Drive Less!) and encouraging public transportation and bicycles. These are good ideas, but the existing location of U.S. housing stock makes it unlikely to have much effect. Unfortunately, increasing current U.S. supply won't affect prices much. New supply can be increased in a couple of ways: exploration and discovery of new sources (i.e., drilling deeper and farther out) and new technology. However, high prices and government funded research are the best ways to encourage these activities. Encouraging high prices in the short run to lead to low prices in the long run would be odd policy.

U.S. oil speculative data released by Senator - Senator Bernie Sanders, a staunch critic of oil speculators, leaked the information to a major newspaper in a move that has unsettled both regulators and Wall Street alike.  In a June 16 e-mail reviewed by Reuters, a senior policy adviser to Sanders discusses how his office received private data with the names and positions of traders and forwarded it exclusively to a Wall Street Journal reporter. The e-mail, which also attaches two files with the data, was sent to Public Citizen's Tyson Slocum asking him to review it and speak with the newspaper about his observations. The leaked information has sparked concern at the Commodity Futures Trading Commission, which is legally prohibited from releasing confidential information that identifies trader positions and identities.  breach of data could make Wall Street less reluctant to hand over sensitive information if they fear it is not appropriately safeguarded. 

The U.S. Economy’s Albatross - Oil, the world's most vital commodity, continues to create problems for the United States. Oil, which traded up Monday $1.64 to $87.01 per barrel,1 is responsible for a considerable portion of the world's wealth since crude was first commercially drilled in 1853 in Poland2. It's a commodity that's created family/corporate dynasties and national empires. But oil -- and in specific oil's price -- has also led to massive economic upheavals, including oil shock-induced recessions in the second half of the 20th century. The 1973-743 and 1979-804 oil shocks led to recessions in the United States, and the 1990 oil shock played a role in third. And it looks like oil is set to wreak havoc on the U.S. and global economies again in 2011 heading into 2012 -- and this after one of the most volatile periods in oil's history -- the leveraging bubble/housing bubble period of 2003-2007.

Obama administration to launch Brazil energy partnership next week - A top Energy Department official will travel to Brazil next week to launch a high-level partnership aimed at developing the South American country’s oil-and-gas resources. The administration could be wading into politically thorny territory with the partnership. Republicans have pounced on President Obama’s plans to work with Brazil on energy issues, arguing that the administration should be spending more time developing U.S. oil resources. Obama announced his intentions to launch the partnership in May while visiting Brazil. He said at the time that he hopes to invest in Brazil’s oil-and-gas resources because the country is more stable than the Middle East and has vast fossil fuel reserves. “We want to work with you. We want to help with technology and support to develop these oil reserves safely, and when you’re ready to start selling, we want to be one of your best customers,”

Administration launches energy partnership with Brazil - The Obama administration said this week it will work closely with Brazil to develop the country’s energy resources. Energy Department Deputy Secretary Daniel Poneman launched a partnership with the South American country aimed at improving cooperation on energy issues like offshore drilling, nuclear power and renewables. “The Strategic Energy Dialogue builds on the long-history of energy cooperation between the U.S. and Brazil to advance our shared energy goals,” . “Working together, we can help grow our economies, enhance regional and global energy security, and build a clean energy future for both of our nations.”

The Americas Are The Next OPEC - Foreign Policy magazine is out with one of its "big trends" issues and ordinarily we avoid these things like the plague.   However.  Amy Myers Jaffe has a piece about the coming shift of energy power from the Middle East to the Americas.  The next capital of the energy world, she writes, will not be Riyadh.  It will be Houston.Here are the two key paragraphs: By the 2020s, the capital of energy will likely have shifted back to the Western Hemisphere, where it was prior to the ascendancy of Middle Eastern megasuppliers such as Saudi Arabia and Kuwait in the 1960s. The reasons for this shift are partly technological and partly political. Geologists have long known that the Americas are home to plentiful hydrocarbons trapped in hard-to-reach offshore deposits, on-land shale rock, oil sands, and heavy oil formations. The U.S. endowment of unconventional oil is more than 2 trillion barrels, with another 2.4 trillion in Canada and 2 trillion-plus in South America -- compared with conventional Middle Eastern and North African oil resources of 1.2 trillion. The problem was always how to unlock them economically.

Analysis: Recession could tip U.S. oil use into permanent decline (Reuters) - As a U.S. economic rebound stalls and threatens to spiral into recession, oil demand in the world's top consumer may be slipping into an irreversible decline. Last year's fledgling recovery in U.S. oil usage -- when demand rose 400,000 barrels per day (bpd) -- made up for only a part of the 1 million bpd demand drop during a year of economic turmoil that began in August 2008. Until recently, most analysts believed a healthier economy would push U.S. oil use higher this year and next, before tighter environmental regulations, increased use of biofuels, and tougher fuel-efficiency standards kick in later this decade to lower demand permanently. Instead, a sour economy may turn last year's demand growth into a one-off. Last week, the U.S. Department of Energy lowered its forecast for U.S. oil demand from growth to decline in 2011. It also cut its forecasts for growth in global oil demand, as did the Organization of the Petroleum Exporting Countries and the International Energy Agency.

Personal energy cubes - In this post, we’ll put a physical, comprehendible scale on the amount of energy typical Americans have used in their lifetimes. No judgment: just the numbers. The task is to estimate our personal energy volume, so that we can mentally picture cubic tanks or bins corresponding to all the oil, coal, natural gas, etc. we have used in our lives—perhaps plunked down in our backyards to bring the idea home. Go ahead and try to guess/picture how big each cube is. The resulting analysis is more mathy/quantitative than most of my posts, which might not make for the smoothest reading. Don’t let the math bog you down: the details are there if you want them—but if you just want the answers, they are not too hard to find. The U.S. share, 3 TW, divided by 300 million people, turns into 10,000 W per person. Let’s be clear about the meaning this number. It’s not 10,000 Watts per day, per year, or per any time. A Watt is already a rate of energy use, like a speedometer—easily confused with a kWh of energy. The average American is responsible for 10 kW of continuous 24/7 energy consumption.

Nigeria’s oil: Oil spoils | The Economist - BY BOOTING out Royal Dutch Shell in 1993, the 500,000 inhabitants of Nigeria’s Ogoniland hoped to take the first step towards cleaning up their homeland, a small region within the creeks and swamps of the vast Niger Delta, Africa’s biggest oil-producing region. Almost 20 years later, a new report from the UN says it could take 30 years and at least $1 billion to rid the poisoned mangroves of a thick, black carpet of crude. The report, the most extensive, scientific research carried out in the Niger Delta, found that some families were drinking water contaminated with 900 times as much benzene, a carcinogen, as is deemed safe by the World Health Organisation. It said areas that Shell had said were clean were in fact still polluted. It also exposed serious failures on the part of Shell and Nigeria’s national oil company NNPC, which it says failed to follow their own best operating practices. Some infrastructure, the report said, was unsafe and could cause further spills. Shell said the “report makes a valuable contribution”, and that it was reviewing its practices.

Bills paid, Iran's oil ships again to India - India, which imports almost two-thirds of the oil it consumes, has resolved a payments problem that put at risk purchases from sanctions-bound Iran, one of its top two suppliers, according to Indian Finance Minister Pranab Mukherjee. Iran this week confirmed that payments were being received. Payments to Iran via the Reserve Bank of India through a regional clearing-house mechanism were halted at the end of 2010 in response to United States pressure. The US maintains sanctions on Iran through the Iran Sanctions Act (formerly the "Iran and Libya Sanctions Act", or ILSA), beyond the several sets of sanctions that the United Nations Security Council has imposed since 2006 in connection with Tehran's failure to cooperate adequately with the International Atomic Energy Agency over its nuclear program. "We had some problem with regard to making payment for the oil bill to Iran, but [the] problem has been sorted out. Regular payment is taking place now," Finance Minister Pranab Mukherjee said in the Lok Sabha (lower house) this month, the Press Trust of India reported.

Outlook grim for Libyan oil production - It's unlikely that Libyan oil production will return to pre-war levels until at least three years after the fighting ends, a Scottish energy consultant said. International forces moved to enforce a no-fly zone over Libya in March and the military engagement has dragged on with few signs of progress for most of the summer. Energy group Wood Mackenzie in a research note said it's unlikely oil production from Libya will increase from 100,000 barrels per day to pre-war levels of 1.6 million bpd any time soon, the Platts news service reports. It would take at least three years for production to return to normal though that scenario depends on the level of war damage to the country's energy infrastructure.

Beyond 20/20 WDS - Table view - Oil Production top 30 countries (last 15 months)

Chinese Coal Imports Climb 36% on Power Demand, Sxcoal Says - Bloomberg: China’s July coal imports climbed 36 percent to 17.53 million metric tons from a year earlier,, a Shanxi-based industry portal, said on its website, citing Chinese customs data. That exceeded the customs bureau’s record of 17.34 million tons in December and 13.73 million tons in June. The official customs data is due to be released Aug. 22. The world’s largest coal consumer and producer increased imports of the fuel amid the worst summer power shortages in at least seven years. A shrinking gap between domestic prices and global costs are also spurring purchases. The premium of Chinese coal to Newcastle prices narrowed to $8.74 a ton on June 10, according to Mirae Assets Ltd. Coking-coal imports gained 29 percent to 4.05 million tons last month and coal for power plants rose 15 percent to 4.99 million tons, according to sxcoal. Imports declined 5.3 percent to 87.87 million tons in the first seven months, it said.

Copper standard - FT Alphaville and Michael Pettis had the story in the spring: Chinese companies would obtain trade finance to purchase copper abroad, warehouse it, and use the inventory as collateral to obtain letters of credit on Chinese banks, which could be used to fund investments totally unrelated to copper. Goldman says the authorities have cracked down on this scheme, as does Pettis. On its surface the scheme seems to be just another way to access credit in a constrained financial system, a spigot that has now been sealed off. The urgency of the situation thus removed, it is worth giving this a deeper read. The fact that the scheme made use of copper, a fungible, storable coinage metal, is suggestive. The suggestion is amplified by what appeared to be round-trip importing and re-exporting of copper to and from Shanghai. Pettis speculated in his May 1 newsletter:Even when London [copper] prices are above Shanghai prices, companies eager for loans are importing copper in order to get back-door financing, whereas local traders, noticing that domestic demand isn't strong enough to justify those import quantities, and perhaps eager to arbitrage the prices, are selling copper abroad.

China says will shut plant as thousands protest - Authorities in northeastern China on Sunday ordered a petrochemical plant to be shut down immediately after thousands of people demonstrated, demanding the relocation of the factory at the centre of a toxic spill scare, state media said. Demonstrators in the port city of Dalian, in Liaoning province, faced down a wall of police in riot gear in front of the municipal government office. Minor scuffles broke out, although there was no report of injuries among the 12,000 protesters, state news agency Xinhua said. The authorities also pledged to relocate the Fujia Chemical Plant, Xinhua said, citing a statement from the municipal committee of the Communist Party and the government. The report did not say where the plant is likely to move to. State media said last Monday that residents in Dalian were forced to flee when a storm battering the northeast Chinese coast whipped up waves that burst through a dyke protecting the Fujia plant, which makes paraxylene (PX), a toxic petrochemical used in polyester.

Whack-a-Mole: IMF Not Impressed With China Bubble Management - Is the International Monetary Fund becoming less sanguine on China’s housing market? Writing in a post on the IMF’s blog, China mission chief Nigel Chalk appears unimpressed with Beijing’s year-long fight to control housing prices. In a turn of phrase likely to be lost on China’s policy makers, Chalk compares the efforts of the authorities to tame the housing bubble to an amusement arcade game of whack-a-mole. What’s the problem? Chalk argues that China faces a potent cocktail of ingredients pushing house prices up:

  • –High domestic savings, and limited opportunities to take cash offshore
  • –Limited domestic savings options and bank deposit rates below the rate of inflation
  • –No property tax or capital gains tax, which makes it cheap to buy and hold property
  • –Rapid growth, high wages and urbanization, which mean real demand continues to grow

In A World With Over Nearly A Billion People In Extreme Poverty How Is Too Much Capital A Problem - Most of the analysis on China from insiders makes perfect sense to me:

  1. That China’s rapid growth is ultimately a function of household repression
  2. That massive accumulation of US Treasuries or some foreign asset is necessary to make this scheme work
  3. That easy lending is necessary to make this scheme work.
  4. That the transition towards a more balanced economy will be “tricky” to say the least.

What I don’t quite get is the common presumption that China’s investment must be overinvestment or even “malinvestment”. For the most part the Chinese are building the types of things that we strongly suspect human being will want to use: houses, roadways, office buildings, airports, trains, etc. There are also lots of people in the world. Many of those people currently don’t have those things. If they did they would be far more productive than they are today. It seems the key is getting the people to the things.

US, China Trade Decelerates Faster - What can international trade data tell us about the current state of the U.S. economy?  Quite a lot, actually! Previously, we found that we can use the change in the growth rate of U.S. imports from and U.S. exports to China to diagnose the economic health of each nation. We found that when an economy is growing, it will draw in a goods and services from outside its borders at a growing rate, while the opposite appears to be true for an economy that is contracting.  The chart below shows what we see for the U.S. and China through June 2011:  What we observe is that the economies of both the U.S. and China continue to realize slowing rates of trade growth, indicating that both economies are continuing to decelerate. The rate at which China's more strongly growing economy is pulling in goods and services from the United States is falling from the levels recorded in 2010, however the big story is found in the more severely falling level of China's exports to the United States.

Yuan Strength Doesn’t Necessarily Extend Beyond Dollar - The Chinese government’s policy of slow, steady strengthening of the yuan against the dollar makes for consistent downward movement in the dollar-yuan exchange rate. Many traders consider this proof that the yuan is broadly gaining strength.But this thinking has a caveat that sometimes gets glossed over: The upward yuan movement against the dollar doesn’t automatically mean appreciation against other currencies. The greenback is down 2.4% against the yuan since March, for instance, but the euro is only down 0.4%, the British pound is down 0.2% and the Japanese yen is up 5.8%.This is because even though China is consistently fixing the dollar-yuan exchange rate lower, the fact remains that the currency is still pegged to the greenback — it’s therefore vulnerable to the dollar’s movement against other currencies in a sort of two-step exchange rate. So, when the yuan gains steadily against the dollar, it doesn’t always move in the same direction against other major currencies.

China Slowing ‘Significantly’: Conference Board - China will achieve a “soft landing” even as growth moderates after the government tightened monetary policy, the Conference Board said as its main indicator for the economy rose. The New York-based researcher’s leading economic index for China increased 1 percent in June, it said in a release today. The index climbed 0.6 percent in May and 0.3 percent in April. The gain may ease concern that Europe’s debt crisis and a weakening U.S. recovery will weigh on growth in the world’s second-largest economy. China’s benchmark stock index has retreated 14 percent from its April high as the government stepped up efforts to cool the fastest inflation in three years. “The economy is significantly moderating right now and also over the next couple of months,”

The Predictions of Michael Pettis - In his weekly e-mail, he decided to highlight twelve questions where he would offer predictions.  Here they are:

  1. BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
  2. Over the next two years Chinese household consumption will continue declining as a share of GDP.
  3. Chinese debt levels will continue to rise quickly over the rest of this year and next.
  4. Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
  5. Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
  6. If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
  7. Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
  8. Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
  9. European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
  10. Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
  11. Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
  12. Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.

Innovate or Die - I have been reliably informed by Houses & Holes that we are “all going to die”, and rather sooner than we all imagined. Something to do with the economic meltdown in Europe and America, I believe.  Australia is caught in the middle. It provides the raw materials to rapidly industrialising nations, but is itself entering a post-industrial era. So the nation both is, and is not, in a mess, buffeted by contrary forces. Over the last 15-20 years we have witnessed many symptoms of this death in developed nations. There was the death of Japanese mercantilism, which began on the dot of the 1990s and has worsened ever since. The boom, which was largely about monetising existing forms of commerce or creating transactions from what had previously been non-economic behaviour (social networking, for instance) rose and fell. Then we have had the mother of all death throes in the bizarre financialisation of Western economies, a debt driven exercise in making money out of air or algorithms. The latest iteration is high frequency trading, and, like derivatives such as CDOs and CDSs it, too, shall fail. The same applies to Europe’s stagnation and hopelessly high unemployment. It is a society that has run out of ideas. Meanwhile, America seems to have only one idea: reward the fabulously wealthy at the expense of the middle class.

G7 expansion? Not even close. Canada's in a league of its own- Rebecca Wilder - The Q2 real GDP data across the G7 are now in, except for Canada who is always the last to release their statistics. We now know that the G7 expansion has been nothing short of pathetic. Why? Because among the G7, ONLY Canada - the G7 consists of the US, UK, Germany, France, Canada, Italy, and Japan - has fully regained its GDP lost during the recession (it had by Q3 2010 no less). Canada's in an expansion league of its own. Hence, the G7 ex Canada remain in "recovery" mode through Q2 2011 and roughly 3.5 years since the previous cyclical peak (see table in reference of post). The chart above illustrates real GDP (just "GDP" from here on out) across the G7 around the peak of each country's GDP during the last cyle, point 0. Only Canada has fully recovered its real GDP lost, having expanded to a level that is near 2% over its previous peak through Q1 2011. A full business cycle can be measured as the bottom of a recession to the bottom of the next recession, or the trough to trough measure.  In the US, the latest cycle lasted 91 months from the trough of the 2001 recession to the trough of the 2007-2009 recession. And here we are, 14 quarters since the peak in Q4 2007, of which GDP is 0,42% below. Even Germany, the wunderkind of euro area growth had not regained its GDP lost as of Q2 2011. And don't even get me started on Japan.

Can China save us a second time? - In Sunday’s weekly Economic Note, Australian Treasurer, Wayne Swan, reaffirmed his belief in the underlying strength of the Chinese economy and expressed his confidence that China can continue growing solidly even in the face of sluggish growth in the US and Europe [my emphasis].I’ve been asked a number of times in the past week whether China’s economy will likely be dragged down if its export markets in Europe and North America dry up. Of course like Australia, China is not immune from global developments. But I think there are good reasons to be optimistic about the continued growth of the world’s most populous nation. The image of China as the world’s factory churning out goods for the rest of the world overlooks many of the changing dynamics inside the economy.

Japan exports fall for 5th straight month in July - Japan's exports fell for the fifth straight month in July as the country contends with a strong yen and the ongoing impact of the March earthquake and tsunami. Exports fell 3.3 percent from a year earlier to 5.78 trillion yen ($75.6 billion), the government said Thursday. Exports are a key driver of the world's No. 3 economy, and the country is hoping that overseas demand will help it bounce back from the March 11 disaster. Data earlier this week showed that Japan's economy is still mired in recession, shrinking for the third straight quarter in the April-June period. The earthquake and tsunami damaged or destroyed factories in northeast Japan, which led to serious parts shortages for manufacturers in the auto and electronics industries. While the country has made progress in restoring production, it now faces new threats. A surging yen, which has recently tested record highs against the dollar, is painful for Japan's exporters. It reduces the value of their foreign earnings and makes Japanese goods more expensive in overseas markets.

Japan's Economy Shrinks but Beats Expectations - The Japanese economy contracted during the second quarter, but at a much slower than expected pace, as consumer spending held up remarkably well in the wake of the March 11 disaster. Real gross domestic product shrank 1.3% in annualized, seasonally adjusted terms in the April-June period, declining for the third straight quarter, the Cabinet Office said Monday. The result was much better than the 2.7% drop expected by 12 economists surveyed by Dow Jones.

Japan's Fiscal Picture - An Update on the World's Second Most Indebted Nation - In it's most recent data release in early August, Japan's Ministry of Finance reports that they have a total of ¥9,438,096,000 million in government bonds and outstanding borrowing on June 30th, 2011 which they term "Central Government Debt".  For those of you that aren't familiar with those really big yen numbers, that works out to $12.2573 trillion using a conversion of ¥77 to the United States dollar.  That's up ¥194,500,000 million or $252.597 million from the previous quarter.  Japan's debt was last downgraded by the esteemed Standard & Poor's in January 2011 from AA to AA-minus and Moody's warned of a possible downgrade by putting Japan's Aa2 rating on review.  Interestingly enough, according to a report in the Financial Times, after the downgrade in January, foreigners snapped up Japanese bonds at a rate that was higher than in the previous three months!  This is very similar to what happened just after S&P downgraded the United States' debt; Treasury prices rose and yields declined as investors fled to "safety".  Apparently, investors seem not to care what the ratings agencies have to say. Here is a bar graph showing the rise in Japan's sovereign debt since the mid-1960s:

Venezuela tells Bank of England to ship the gold back - Venezuela plans to transfer billions of dollars in cash reserves from abroad to banks in Russia, China, and Brazil and tons of gold from European banks to its central bank vaults, according to documents reviewed Tuesday by The Wall Street Journal. The planned moves would include transferring $6.3 billion in cash reserves, most of which Venezuela now keeps in banks such as the Bank for International Settlements in Basel, Switzerland, and Barclays Bank in London to unnamed Russian, Chinese, and Brazilian banks, one document said. Venezuela also plans to move 211 tons of gold it keeps abroad and values at $11 billion to the vaults of the Venezuelan Central Bank in Caracas, where the government keeps its remaining 154 tons of bullion, the document says.

Mikhail Gorbachev: 'They Were Truly Idiots' - Spiegel - In a SPIEGEL interview, Mikhail Gorbachev, 80, discusses the last days of the Soviet Union, his failure to resolve problems with the Communist Party and the ensuing bloodshed he says still troubles him today. He also accuses Vladimir Putin of pulling the country "back into the past."

Spanish towns face funding crisis, rack up debts -In this hillside town, topped by a medieval castle and surrounded by olive groves, the 120 municipal workers haven't been paid since May. Police have new orders not to use their patrol cars unless they get word of a traffic accident or a crime in progress.  The town pool is closed for the summer despite temperatures over 104 (40 Celsius) in the shade. Fees for the public day-care center have doubled. Water bills will soon go up 33 percent and local business owners are seething over €9 million ($12.7 million) in unpaid bills owed by the town hall, much of it to them.  Spain's 8,115 municipalities are being hit by a crushing revenue hangover from a nearly two-decade building boom that went bust in 2008. Officials in Moratalla believe they are the first in Spain to publicly declare their town is on the verge of going broke — and that the only way out is an unprecedented program of drastically reducing services while boosting local taxes and fees in an austerity drive that could last eight years.

Border Attacks: Spanish Farmers Threaten to Block Border with France; Global Trade Wars Yet Another Sign of Deflation - In an "eye for eye, tooth for tooth" retaliation to French farmers throwing Spanish produce in the streets, Spanish farmers have threatened to "look for French interests and cause the most damage possible."  Courtesy of Google Translate and my friend "Bran" who emails nearly every day from Spain, please consider Spanish farmers threaten to block border with France Agrarian Association of Young Farmers in Catalonia announced Friday that blocked the return of French tourists to their country by cutting the road to La Jonquera response to the boycott of Gallic producers and recent attacks on trucks from transporting fruit Peninsula and vegetables.  It has also warned that if they attack at the border now and the end of the month "automatically go looking French interests and cause the most damage possible." He called on the Catalan police to be "gatekeepers" and to defend the interests of Catalan and Spanish when these attacks occur, as has ensured that the security forces do Gauls.

Spain’s Economic Growth Slows in Second Quarter Amid Austerity Measures - Spain’s economic growth slowed in the second quarter as austerity measures to tackle the sovereign debt crisis undermined the recovery from a three-year slump. Gross domestic product grew 0.2 percent, less than the 0.3 percent pace in the first three months of the year. The economy expanded 0.7 percent from a year earlier, the National Statistics Institute said in Madrid today. The quarterly figure matched the estimate given by the Bank of Spain on Aug. 5, and the average forecast of four economists surveyed by Bloomberg. Home to almost a third of the euro region’s unemployed, Spain is relying on exports to offset declines in consumer and public spending. Economic growth in Germany, Europe’s largest economy, slowed to 0.1 percent in the second quarter, data showed today, and France’s economy stagnated in the three months through June.

On the ECB and the sovereign debt crisis - Last month I wrote an article called “The ECB is the difference” which claimed the ECB was the pivotal institution in the European sovereign debt crisis. I presented two options that the European Central Bank had in relieving pressure on European sovereign debt markets. Option A was monetisation i.e. buying up sovereign debt or guaranteeing a specific yield or spread. Option B was Eurobonds i.e. where “the ECB buys an agreed-upon portion of the existing debt from the sovereigns and then uses these funds to back the [Eurobond] supranational debt.” My thinking at the time was that Spain and Italy were not insolvent and yet their bonds were selling off as if they were. To me, this had the hallmarks of a classic liquidity crisis which necessitated a lender of last resort to fund the solvent but illiquid sovereigns and prevent dead weight economic loss. It has been clear to me that this was the endgame. As I said in November of last year, there are three options for the euro zone: monetisation, default, or break-up. In my view, the political costs of break-up are still too high, so monetisation and default is what we have seen and will continue to see for some time still. Elga Bartsch of Morgan Stanley said fiscal austerity would be the pre-condition – and she appears to have been right as Spain and Italy have accelerated plans for fiscal consolidation. As to Option B, euro bonds, we are now seeing movement on that front. Reuters reports that the German government no longer rules out euro bonds based on a Welt am Sonntag article.

Will the ECB Change Course? - Krugman - Just a quick note on the euro situation. The rescue operation to head off a self-fulfilling panic in Italy and Spain has succeeded, for now. But meanwhile the real economies continue to suffer; the latest is France, where growth has stalled. What this means is that of the four big eurozone economies — Germany, France, Italy, Spain — three are now stalled with high unemployment. So why, exactly, did the ECB raise rates? This isn’t even one-size-fits-all, it’s one-size-fits-one. Yes, inflation. But eurozone inflation looks just like US inflation: a bulge due to higher commodity prices that it already passing through the system, with clear indications that inflation will be back to low levels soon. And anyway, Europe really needs a somewhat higher inflation target than the United States to deal with its lack of labor market integration. So will the ECB back down on its monetary tightening? There’s a lot at stake here: a very fragile euro can’t handle a trigger-happy central bank.

ECB spent $32 billion last week on bond purchases - The European Central Bank spent euro22 billion ($31.7 billion) last week buying up government bonds in an effort to keep Italy and Spain from financial disaster.The purchases have driven down the high interest yields that were threatening those countries' finances.The ECB reactivated the bond-buying program after leaving it idle for four months when the financial crisis worsened earlier this month. Following a week of the program's reactivation, the yield, or interest rate, for both countries' ten-year bonds has fallen over a percentage point to below 5 percent. That's considered manageable for now. The bank stepped in because the eurozone's bailout fund has not yet received permission from national governments to carry out such purchases. The purchases disclosed Monday exceeded those the bank made in May, 2010 when it first launched emergency purchases of Greek bonds. Then, it bought euro16.5 billion.

Setbacks May Push Europe Into a New Downturn - Data released Friday leave little doubt that the European economy is losing momentum before most countries have even recovered to the level of output they had in 2008, when the recession started.  But the larger question is whether an increasingly toxic brew of flagging output plus sovereign debt crisis — along with the downturn in stock markets — will create something more sinister than a mere slowdown, and lead more businesses to cut jobs and investment as Mr. Knott has. In France, the second-largest economy in the European Union2 after that of Germany, economic growth came to a standstill in the three months through June, according to official figures. Meanwhile, industrial production in the 17-nation euro area fell 0.7 percent in June compared with May, a greater decline than analysts had forecast.  Economists said they expected a report Tuesday on euro area economic activity to show that gross domestic product growth had slowed to 0.3 percent in the second quarter from 0.8 percent in the first three months of the year.

Satyajit Das: The Real Debt Crisis is in Europe – Part 1 – “Solvency But Not In Our Time” -Despite the media hyperventilation and pundit hyperbole about the downgrade of US’s credit rating, the real issue remains Europe. There is no imminent danger that the US cannot finance its requirements. The US’s cost of debt will not increase significantly as a result of the marginal downgrade, by one of the three major rating agencies. Despite the shrill rhetoric, the Chinese and other foreign investors will continue to buy US dollars and government bonds to protect their existing. For many European countries, the inability to access markets is a clear and present danger, which threatens financial markets and the global economy.Echoing Neville Chamberlain’s infamous “peace in our time” announcement, the European Union (“EU”) on Thursday 21 July 2011 announced their plan to end the European debt crisis. Unfortunately, the deal is a cease fire not a conclusive peace treaty.

EU Money Supply Slowdown - Since the start of 2010, the growth of M1 has fallen significantly for the Euro area. These figures show the whole Eurozone area, however, in the South, M1 figures are even worse. This fall in the Money Supply is a real cause for concern; it shows an economy heading towards economic slowdown and recession. It raises the possibility of deflation (once commodity prices stop rising). Money Supply figures always needed to be treated with some caution. However, the trend clearly shows a slowdown in economic activity. A fall in the growth of M1 (narrow money supply) and M3 (broad money supply) broadly mean that economic activity is slowing down. Inflation is likely to be falling in the future. (see: link between money supply and inflation) This fall in the money supply growth (and continued output gap and high unemployment) is something the ECB should be worried about. Yet, their primary concern seems to be only budget deficits and fighting inflation.

Competitiveness in Europe - Harmonised competitive indicators in the EU (2011 Q1), source: ECB Stats based on unit labour costs indices for the total economy: The purpose of harmonised competitive indicators is to show changes in relative competitiveness of countries. They are are also consistent with the real effective exchange rates (EERs) of the euro.This shows the divergence in competitiveness between a country like Germany De (improved competitiveness) and other countries like Greece and Ireland which have seen higher unit labour costs. The ECB also show harmonised competitive indicators based on consumer price indexes. (CPI competitiveness) The issue of competitiveness and relative prices becomes much more important in a single currency. This is because uncompetitive countries can’t rely on devaluing the exchange rate. The result of competitiveness can be seen in statistics such as the current account. Countries which have become uncompetitive usually experience a large current account deficit. The below graphs shows how Greece has a current account deficit of 10%. This is unusually high and a signal of how uncompetitive Greece has become. Germany by contrast has a large current account surplus.

Italy calls for euro bonds as UK backs fiscal union  - Italian Economy Minister Giulio Tremonti stepped up calls for a more coordinated response to the euro zone debt crisis on Saturday ahead of a potentially vital summit between the leaders of France and Germany next week. Tremonti returned to proposals -- rejected in the past by Berlin and Paris -- for the creation of common euro zone bonds that would effectively make individual governments debt a common burden.  His British counterpart George Osborne, long a supporter from outside the euro zone of more fiscal integration within the currency bloc, went as far as to say that some form of outright fiscal union was now needed.  The austerity package unveiled on Friday, which contained a painful mix of spending cuts and tax increases, was demanded by the ECB in exchange for a commitment to protect Italian bonds but Tremonti said the problem risked spreading unless Europe ended its piecemeal approach to the crisis. "We would not have arrived where we are if we had had the euro bond," he said.

George Soros: 'You Need This Dirty Word, Euro Bonds' - In a SPIEGEL interview, billionaire investor George Soros criticizes Germany's lack of leadership in the euro zone, arguing that Berlin must dictate to Europe the solution to the currency crisis. He also argues in favor of the creation of euro bonds as a way out of the turbulence.

German government no longer rules out euro bonds(Reuters) - The German government no longer rules out agreeing to the issuance of euro zone bonds as a measure of last resort to save the single currency, conservative newspaper Welt am Sonntag reported on Sunday. Even though Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler again spoke out against euro zone bonds and debt collectivization, Welt am Sonntag reported the German government is nevertheless considering that and other measures."Preserving the euro zone with all its members has absolute top priority for us," according to a government source quoted in the newspaper under the headline: "Government no longer excludes European transfer union and joint euro bonds as last resort." The newspaper, traditionally close to Chancellor Angela Merkel's Christian Democrats (CDU), indirectly quoted the source adding: "In case of emergency, one would thus even be prepared to accept the introduction of a 'transfer union' and at the end of the day even joint euro zone bonds.

Germany and France rule out eurobonds - Germany and France are ruling out common eurozone bonds to solve the bloc’s current debt crisis, in spite of renewed pressure ahead of a meeting of chancellor Angela Merkel and president Nicholas Sarkozy on Tuesday.Wolfgang Schäuble, German finance minister, made clear in an interview with Der Spiegel, that Berlin remains opposed to such a policy. “I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity,” he said.  Senior French officials also played down speculation that any firm announcement on jointly issued bonds would be issued after meetings when Ms Merkel comes to Paris on Tuesday. “Eurobonds would require a much more determined integration of budgetary policy,” one said. “We do not have that today. It could be a long-term project, but you cannot have eurobonds and at the same time national economic and budgetary policies.”

Germany haunted by eurozone bonds - Over the last two weeks the crisis and the political debate have moved on significantly. After the spike in Italian and Spanish spreads, all eyes are now focused on tomorrow’s bilateral meeting between Angela Merkel and Nicolas Sarkozy.  Today’s big story, a theme likely to remain with us for some time, is about eurozone bonds. The weekend newspaper headlines could not be more conflicting. Die Welt am Sonntag wrote: “Transfer union as last exit from crisis”, and says the German government was no longer categorically opposed to the introduction of Eurobonds. In its coverage this morning, Die Welt writes that “influential members of the government” were reconsidering their position, but were reluctant to start a debate now (which is, of course, what they just did). A big obstacle is the unrelenting opposition of the FDP to such a scheme. However, the other parties in the Bundestag are in favour.  The Financial Times, meanwhile, writes this morning that “France and Germany rule out Eurobonds”. DPA, the German press agency (hat tip Der Spiegel), meanwhile, writes that France favours Eurobonds, while Germany does not, and that Nicolas Sarkozy would put pressure on Angela Merkel on this issue at their bilateral meeting tomorrow. In other words: Everybody has said everything.

Govts debt crossed $41 trillion globally in 2010 - The total amount of debt incurred by governments across the world jumped to a staggering $41.10 trillion last year, accounting for 69 per cent of the global GDP, because of stimulus packages and anaemic economic growth, says a report. Many governments, especially in the developed world, have resorted to massive stimulus measures to bolster their economies since the 2008 global financial meltdown. “Public debt outstanding (measured as marketable government debt securities) stood at $41.10 trillion at the end of 2010, an increase of nearly $25 trillion since 2000. “This was the equivalent of 69 per cent of global GDP, 23 percentage points higher than in 2000. In just the past two years, public debt has grown by $9.4 trillion — or 13 percentage points of GDP,”

The National Debt Death Spiral - A Credit Default Swap (CDS) is a special kind of insurance policy that can be purchased by individuals or institutions that invest in debt securities to protect themselves from losses if the issuer of the debt chooses to default on their obligations. The annual cost of this special kind of insurance policy is called the "spread". As with any kind of insurance, the cost of a CDS spread for a debt issuer who has a high probability of defaulting on their debt payments is higher than it is for a debt issuer who has a low probability of not making good in paying off their debts.  The chart below shows the relationship between CDS spreads and the cumulative probability that the debt issuer will default on their debt payments during the next five years for a number of sovereign governments: As it happens, there's a very direct relationship between the interest rate a debt issuer pays and the value of a CDS spread on the debt they issue. Here is a chart showing the yields of government-issued 10-Year debt securities against the CDS spreads on those debt securities for a number of sovereign governments:

Debt in Europe Fuels a Bond Debate - The Germans want to bury it. The French say it is a nonstarter. But the idea that the only way to contain the sovereign debt crisis1 is for Europe to issue bonds backed by all the nations of the euro2 zone will not go away.  President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany are scheduled to meet in Paris on Tuesday but have vowed to avoid the issue of euro bonds altogether. Nonetheless, a number of analysts say that eventually they may have no choice if they want to keep Europe’s currency union from falling apart.  The euro bond concept is gaining traction among economists and other outside experts like George Soros, the billionaire investor, as a way of preventing borrowing costs for Italy and Spain from rising so much that the countries become insolvent, an event that could destroy the common currency.  Debt issued and backed by all 17 members of the euro zone, euro bond proponents say, would be regarded as ultrasafe by investors and could rival the market for United States Treasury securities. The weaker euro members would benefit from the good standing of countries like Germany or Finland and pay lower interest rates to borrow than if left to face investors on their own.

“When the time is right” - The debate on Eurobonds has reached fever pitch in Germany. Sueddeutsche Zeitung writes that the German government was now actively discussing Eurobonds internally. While Angela Merkel was still officially opposed, senior government officials and ministers have been debating the issue for some time, and believe that Eurobonds would indeed end the crisis.  In order to bridge the gap between what is happening internally and externally, the German government seems to have borrowed a line from Margaret Thatcher in the 1980s, which her government deployed ahead of the entry into the European exchange-rate mechanism. One would join “when the time is right” (or ripe). FT Deutschland writes in an article that Merkel has decided in favour of a strategy first to calm down the market and to prepare the political grounds, and then, in a second step, to soften her opposition against the Eurobonds. The article says Merkel will demand a much stricter fiscal regime as a quid pro quo.  The issue will almost certainly be discussed at today’s bilateral summit between Merkel and Sarkozy in Paris, but it will not be a top agenda item, according to Frankfurter Allgemeine. Sarkozy does not want to put pressure on Merkel at this given time, given the delicacy of the political debate in Germany.

Swiss Ponder Battle Over Runaway Franc -  Switzerland, the nation that hasn’t gone to war with a foreign power since Napoleon, is reluctantly debating a generational taboo: ceding monetary independence to win a battle over its runaway currency. Swiss National Bank Vice President Thomas Jordan said the central bank is assessing “a whole range of options” to prevent the franc, which reached a record against the euro this month, from making Swiss goods prohibitively expensive. Even a cup of coffee at Café St. Gotthard in Zurich costs $8.30, with one Swiss franc buying $1.2816 at today’s exchange rate. Billionaire entrepreneur Christoph Blocher, one of the politicians who called on SNB President Philipp Hildebrand to resign after the bank lost $21 billion last year in a vain attempt to restrain the currency, now supports a franc target. “The franc is catastrophically overvalued,” said Blocher, a former justice minister for the People’s Party, Switzerland’s largest. “It’s almost like economic warfare -- to wage a war, you must use all measures at your disposal, and you must win.” Switzerland’s currency is 39 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development."

Satyajit Das: The Real Debt Crisis is in Europe- Part 2 – “Europe’s Long, Long Goodbye” - - The European Union’s attempts to resolve the continent’s sovereign debt problems do not deal with issues of growth, intra-European financial imbalances and competitiveness. The only “initiative” was the vague plan for a massive public investment program, although no details of how it is to be financed were provided.The call for greater public investment was accompanied by a familiar but contradictory insistence that all Euro-zone states adhere to agreed fiscal targets. Euro-zone countries except Greece, Ireland and Portugal must bring their budget deficit down to less than 3% of GDP by 2013. The need for many European countries to improve public finances is clear. But how greater belt-tightening and austerity would restore growth is not. As EU targets are honoured in the breach rather than observance, they probably don’t matter anyway. Jens Weidmann. Bundesbank President and ECB council member, also identified the lack of incentive to correct public finances: “By transferring sizeable additional risks to aid-granting countries and their taxpayers, the euro area made a large step toward a collectivization of risks in case of unsolid public finances and economic mistakes. That’s weakening the foundations of a monetary union founded on fiscal self-responsibility. In the future, it will be even more difficult to maintain incentives for solid fiscal policies.”

The Sucking Sound of Liquidity Draining From the Eurobank Market - 08/16/2011 - Yves Smith - As much as the dot com era conditioned US individual investors to focus on stock market movements, credit markets are where the real action lies. Deterioration in the bond markets almost without exception precedes stock market declines (although debt instruments can also send out false positives). In the stone ages of my youth, the rule of thumb was a four-month lag. In 2007, that guide was not at all bad.  Now given the extraordinary degree of government interventions, turns are not as obvious, market upheavals have repeatedly been beaten back, and relationships between stock and bond market price movements are likely to be less reliable than in the past. But one thing that is a clear danger signal is liquidity leaving the banking system. It’s like the preternatural calm when the water leaves the beach, revealing much more shore than usual, before the tsunami rolls in.A very good overview at the end of last week by the International Financing Review highlighted one clear danger sign: many mid tier banks in Europe are unable to get funding in interbank markets and are increasingly dependent on the ECB. The whole piece is very much worth reading. Key extracts:

For Now, Germany Flies Above Economic Storm - There is no one whose thoughts European officials would rather read than Chancellor Angela Merkel1, who meets Tuesday at the Élysée Palace with France2’s president, Nicolas Sarkozy3, as they struggle to find a lasting solution to the European debt crisis4.  The most common critique of Mrs. Merkel is that she lacks the necessary sense of urgency to restore confidence in the euro5 and calm the crisis. But a stroll through summertime Berlin makes clear why she remains so cool-headed. While the latest official figures on Tuesday showed German economic growth almost stalling in the second quarter, the streets are quiet and the cafes are full. Deeply tanned residents are returning to their jobs after vacations in fiscally compromised nations, like Greece6 and Portugal.  Germany7 may be the only European nation that is large enough and rich enough to cover the debts of its struggling neighbors, but its citizens are reluctant to be the source of the bailout. Germany is in many ways in the eye of the storm, with barely a hint of the winds swirling nearby. There is no tear gas, as in Athens; no tires burning, as in London; no chanting crowds packing public squares, as in Spain. While much of the rest of Europe is struggling to pass harsh austerity packages, Germany is in the midst of a debate over cutting taxes by as much as $14.2 billion.

German Economy Almost Stalled in Q2  - The German economy, Europe’s largest, almost stalled in the second quarter as the region’s sovereign-debt crisis weighed on confidence.  Gross domestic product, adjusted for seasonal effects, rose 0.1 percent from the first quarter, when it jumped a revised 1.3 percent [down from 1.5%], the Federal Statistics Office in Wiesbaden said today. Economists had forecast growth of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey.  France said last week its economy stagnated in the three months through June, while reports on Aug. 5 showed Italy’s GDP rose 0.3 percent and Spain’s increased 0.2 percent. Austria’s economy grew 1 percent. The German statistics office revised first-quarter growth down from an initially reported 1.5 percent.  Europe’s malaise is further confirmation of a cooling global economy. Japan cut its annual growth forecast last week on weaker export prospects, Hong Kong’s economy unexpectedly shrank in the second quarter and China’s expansion slowed. In the U.S., Federal Reserve Chairman Ben S. Bernanke signaled he may expand record monetary stimulus to revive a faltering recovery and reduce unemployment stuck around 9 percent.

German Second-Quarter Growth Almost Stalls as GDP Rises 0.1% (Bloomberg) -- The German economy, Europe's largest, almost stalled in the second quarter as the region's sovereign-debt crisis weighed on confidence. Gross domestic product, adjusted for seasonal effects, rose 0.1 percent from the first quarter, when it jumped a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast growth of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey. From a year earlier, GDP increased 2.8 percent. The worse-than-expected GDP data from Germany, which had been powering euro-area growth, add to signs Europe is flirting with a renewed economic slump as the debt crisis curbs spending across the region. France's recovery unexpectedly ground to a halt in the second quarter, Italian and Spanish expansion remained sluggish and Greece's economy contracted. "The German data are certainly disappointing," "Everything is pointing toward stagnation in the euro area in the second quarter."

European Economy Slows More Than Forecast as Debt Crisis Saps German Might - European economic growth slowed more than economists forecast in the second quarter as Germany’s recovery almost ground to a halt amid the worsening sovereign- debt crisis. Gross domestic product in the 17-nation euro area rose 0.2 percent from the first quarter, when it increased 0.8 percent, the European Union’s statistics office in Luxembourg said in a statement today. That’s the worst performance since the euro region emerged from a recession in late 2009. Economists had forecast the economy to expand 0.3 percent, according to the median of 34 estimates in a Bloomberg News survey. Europe’s economy may struggle to gather strength as governments from Italy to Spain step up budget cuts to fight the debt crisis. In Germany, Europe’s largest economy, growth almost stalled in the second quarter. German Chancellor Angela Merkel will meet French President Nicolas Sarkozy today in Paris under pressure to do more to combat the fiscal crisis.

Euro Zone Second Quarter GDP Growth Slows to 0.2 Percent  - The euro zone economy grew less than forecast in the second quarter, held back by a sluggish performance in Germany and stagnation in France, data from the European statistics agency showed on Tuesday. The Eurostat agency estimated gross domestic product (GDP) for the 17-country euro zone increased 0.2 percent in the three months to end-June from the previous quarter, compared with economists' forecasts of growth of 0.3 percent. That was sharply off the rate of 0.8 percent in the first three months of the year. Compared to the same quarter a year ago, Eurostat estimated GDP growth at 1.7 percent, compared to a year-on-year comparison of 2.5 percent in the first quarter of 2011. Economists had forecast a figure of 1.8 percent for the second quarter. A major contributor to the slowing growth was a German performance which suffered from a negative trade balance, flagging consumption and weak construction investment. German growth dropped to 0.1 percent in seasonally adjusted terms, from a revised 1.3 percent in the first three months of the year.

Eurostall - Krugman - First we worried about one-size-fits-all policy; then it seemed that the ECB was actually engaged in one-size-fits-one, oriented entirely toward Germany; now growth in Germany and the eurozone as a whole has stalled (pdf). So now it’s one-size-fits-none. It really is a race between America and Europe: who can make the worst of a bad situation. And both competitors are giving it their all.

Trouble at the core - THIS is not what Europe needs right now: More sluggish than expected German growth figures sent European stocks tumbling again on August 16th, continuing the roller-coaster ride they have been experiencing for several weeks. Unsettled markets were likely to make the job of Germany’s chancellor, Angela Merkel, even tougher as she prepared to meet France's president, Nicolas Sarkozy, in Paris for talks over the future of the euro. Germany’s GDP grew at a mere 0.1% in the second quarter of 2011, compared with 1.3% in the first (revised down from an earlier estimate of 1.5%). The national statistics office said that whereas exports continued to be strong, consumer spending and construction activity were notably weak. The slowdown in Germany, the euro zone's largest economy, brought the growth figure for the whole euro area down to 0.2% in the second quarter, compared with 0.8% in the first quarter. The disappointing news on Germany came a few days after new figures showed France's economy flatlining in the second quarter. A timely piece at Vox explains why a German slowdown is particularly bad news for the rest of Europe:

Finland and Greece agree on loan guarantees - Finance Minister Jutta Urpilainen said in a Tuesday press conference that Finland and Greece have reached common ground on loan guarantees demanded by Finland for its participation in the Greek bailout package. The agreement still requires approval from other eurozone states.  The Finnish and Greek Finance Ministries have agreed that the Greek state will transfer a sum to the Finnish state, which, together with interest on that sum, will serve to guarantee Finland's share in the bailout loan to the troubled southern state.  The guarantee sum would, however, be only a fraction of the money that Finland is contributing to the rescue package. Urpilainen has not divulged a concrete sum, because that is still being negotiated.

Going Dutch – One Possible Solution To the Euro Debt Crisis… Unfortunately all the coming and going, procrastination, denial and half measures we have seen since the Greek crisis first broke out have not come without a cost, and this cost can be seen in the growing lack of confidence in the markets that a lasting solution to the underlying problems of the common currency will finally be found. Only adding to the problems, even the Americans seem to be having difficulty finding the right thing to do this time round, or at least doing it at the right moment, as the market turbulence following the S&P downgrade has served to underline. It’s probably too soon to say whether what Europe’s leaders are about to agree on what will ultimately be the “right thing”, but at least there now does seem to be a general recognition that a defining moment is fast approaching, and fundamental changes to the continent’s institutional structure are now on the table. Among the options now being openly advocated and debated is to be found a measure thought unthinkable a year ago — ending Europe’s 13 year experiment with a single currency. But even if this ultimate possibility – the so called nuclear option – were to come to pass, as always there would be a right way and a wrong way of going about it.

Germany's Angela Merkel faces eurobond mutiny - German Chancellor Angela Merkel's coalition partners are threatening a withdrawal from government if she agrees to eurobonds or any form of fiscal union to prop up southern Europe. The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP). Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future."

Key Highlights From The Merkel Sarkozy Meeting - Here are the key highlights for now:

  • And fade: Sarkozy says "Maybe" Eurobonds imaginable one day
  • Merkel says Eurobonds wont help resolve crisis
  • Sarkozy says not enough integration for eurobonds now
  • Eurobonds have no democratic legitimacy now, Sarkozy says
  • French president Sarkozy says proposal would elect a Eurozone president for two and a half years
  • Van Rompuy Proposed as Head of Euro Council
  • Merkel says debt brake to be anchored in German, French law. And so the take over of europe by the new axis countries: France and Germany, is complete.

Nicolas Sarkozy Just Announced Plans For A New Tax On Financial Transactions - Some big news from the Merkozy press conference happening right now. French President Nicolas Sarkozy has expressed plans to introduce a "Tobin tax" in Europe: This means taxes on financial transactions, which is something the banks will hate.Obviously we need details, but this is not minor news if it's carried forth. On the surface, we'd expect banks to scream bloody murder, but given that the whole point of this ongoing bailout exercise is to protect banks, it's hard to imagine this being too damaging ultimately. Nobel Laureate economist James Tobin was the first to propose this idea, originally envisioning this as a tax on currency transactions.

Pledge for Euro Unity May Not Be Enough to Satisfy Markets - The leaders of France and Germany on Tuesday promised to take concrete steps toward a closer political and economic union of the 17 countries that use the euro1, but it was unclear whether their proposals would be sufficient, or come quickly enough, to satisfy markets anxious over Europe’s debts and listless economies.  Reflecting the uncertainty, European stock markets opened lower on Wednesday after Asian traders offered a mixed reaction, with indices in Britain, France and Germany following the same downward trend as those in Japan, mainland China and Taiwan. The response seemed to show that the two leaders’ announcement had not initially restored confidence sufficiently to ease market jitters. President Nicolas Sarkozy2 of France and Chancellor Angela Merkel3 of Germany called for each nation in the euro zone to enshrine a “golden rule” into their national constitutions to work toward balanced budgets and debt reduction, a level of discipline well beyond the current, oft-broken commitment.  They also pledged to push for a new tax on financial transactions, and for regular summit meetings of the zone’s members under the leadership of Herman Van Rompuy, who heads the council of all 27 European nations.

When the sovereign falls: Is this the endgame for world markets? - Back in May in response to a question during an interview I suggested that when the sovereign debt of a major nation is finally questioned, it will signal the endgame for the worldwide bull market in just about everything. That moment has arrived, and my thesis will now be tested.  And, I'm not talking about the United States. I'm talking about France. The downgrade of U.S. government debt by one ratings agency was more political theater than careful, cold calculation. U.S. Treasury bonds rallied on the news. But in France it is a different matter. French banks are known to be heavily exposed to the sovereign debt of what are now infamously called the PIIGS, that is, Portugal, Ireland, Italy, Greece and Spain. What changed this week was that market participants began to think that this matters. They think the problem is so big that it could impair the credit of the French government which will ultimately be saddled with cleaning up the mess. And, who wants to stick around for that?  Nicole Foss once explained to me that liquidity and confidence are the same thing. Liquidity means I'm willing to part with my cash to lend it to you or to buy something from you. When my confidence in you is shattered, I won't lend to you. When my confidence in my own future prospects is shattered, I won't buy from you because I think I may need the cash later. That, it seems, is where much of the world finds itself today.

How to Resolve the Euro Crisis - George Soros - A comprehensive solution of the euro crisis must have three major components: reform and recapitalization of the banking system, a eurobond regime, and an exit mechanism. First, the banking system. The European Union’s Maastricht Treaty was designed to deal only with imbalances in the public sector; but, as it happened, the excesses in the banking sector were far worse. They remain badly in need of protection from the threat of insolvency. Second, Europe needs eurobonds. The introduction of the euro was supposed to reinforce convergence; in fact, it created divergences, with widely different levels of indebtedness and competitiveness separating the member countries. If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable. And that is now happening. This leads directly to the third unsolved problem: What happens if a country is unwilling or unable to keep within agreed conditions? Inability to issue eurobonds could result in a disorderly default or devaluation. This is the most difficult of the three problem areas, and I do not claim to have a ready solution.

Dangerous Merkel-Sarkozy Spin - Interesting read by some traders on the Merkel/Sarkozy nonevent. Their take away is both leaders sent a message to the PIIGS to either get on board with fiscal adjustment or leave the Euro. Hmmmm. Now what would that do to each country’s stock of debt denominated in Euros? Would their bank and bond creditors take Greek drachmas and Irish punts as payment? If some of these countries left the Euro and went back to home currencies their debt to GDP ratios would freaking skyrocket! Dangerous stuff being kicked around at a dangerous time. Our sense is both leaders were relieved by the success of ECB intervention to bring down Spanish and Italian bond spreads and they will continue to rely on Trichet’s monetary bazooka to fend off the wolves. Bonne Chance!

Tobin Tax, Merkel & Sarkozy's Euro "Saviour"? - At various times in the aftermath of the US-engineered global financial crisis, Angela Merkel and Nicolas Sarkozy have both called for a Tobin Tax to be applied to financial transactions. By imposing a small tax on financial transactions such as foreign exchange trading, seriously large revenues can be raised in theory (Sarkozy bandied about the figure of $100B at the G20 earlier this year). While left-leaning activists want to apply a Tobin Tax to help address global poverty and slow the velocity of finance, these European leaders are more interested in generating revenues that help keep troubled Eurozone economies afloat. Little noticed in all the hullabaloo about these two attempting to fashion a definitive (if shopworn) solution to the EU's financial woes were new proposals for an EU-wide Tobin Tax. Although I am in principle supportive of such a tax, applying it only in the EU is difficult. For, banks trade with each other in various global financial centres--many of which are obviously outside the EU. If applied only in the EU, the likely effect of the Tobin Tax would be to merely shift speculative activity to non-EU locations and financial institutions to avoid paying up.

Merkel and Sarkozy are right about a Tobin tax - According to reports, French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose a financial transactions tax in September. Is this a good idea? It would certainly provide needed revenue to cash strapped governments, but at what cost? Governments must raise revenue somehow, but is this the best way to get the cash they need? Some taxes have a large distortionary effect on economic activity — with a financial transactions tax, the worry is that investment activity will be curtailed– and others have a much smaller effect. Some taxes can even make markets work better, e.g. taxes that force firms to internalize pollution costs and other externalities improves the decisions firms make. From society’s point of view, they are more, not less efficient. Thus, in designing a tax system, we should look for taxes that provide the most revenue at the least cost. So is a financial transactions tax a highly distortionary, costly tax? The answer is no. The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms.

Merkel, Sarkozy Shun Euro Bonds as Integration Touted to Resolve Crisis - German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an expansion of the 440 billion-euro ($633 billion) rescue fund and rebuffed calls for joint euro borrowing to end the debt crisis, saying greater economic integration was needed first.   The leaders of Europe’s two biggest economies agreed to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates. A plan to resubmit a financial-transaction tax, which the European Union rejected in 2010, sent European stocks lower.  Sarkozy and Merkel spoke after a two-hour meeting in Paris yesterday as investors clamored for indications that they would do more to end the euro-area debt crisis amid a slowdown in their economies. Unprecedented bailouts by governments and the European Central Bank have so far failed to stamp out concerns that rattled markets in AAA-rated France last week.

Merkel, Sarkozy want tighter EU budget controls - The French and German leaders called Tuesday for all countries using the euro to have mandatory balanced budgets and better co-ordination of economic policy. French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries' corporate taxes after meeting in Paris. Sarkozy said he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations. The new body would meet twice a year and be led by EU President Herman Van Rompuy. The moves appeared aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro, and are more focused on long-term political solutions instead of immediate financial measures like a single European bond. "We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told a news conference.

France, Germany set out next stage of EU integration (Reuters) - The leaders of France and Germany, under pressure to resolve the euro zone's debt crisis once and for all, have laid the ground for the next stage of European integration. The joint initiative by French President Nicolas Sarkozy and German Chancellor Angela Merkel reflects a realization that disparate fiscal policies within the euro zone are sowing the seeds of its destruction.But the insistence of the bloc's two dominant members on Tuesday that measures such as a larger euro zone rescue fund or common bond issuance can wait leaves the currency area at the mercy of further destabilizing attacks from the markets. "This meeting is all stick -- fiscal rule enforcement -- and no carrot -- a pooling of fiscal resources via a common bond," . Despite fierce opposition from Germany, many experts believe the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro bonds.

Even as Angela Merkel and Nicolas Sarkozy talk, Europe's economy slides towards disaster - The EU leaders’ rhetoric in Paris makes it clear that they are not facing up to the existential crisis. Beneath the grandiose rhetoric of this week’s mini-summit in Paris between Angela Merkel and Nicolas Sarkozy, a rather more important story was breaking. This was the news that the German economic recovery has comprehensively stalled, causing growth across Europe as a whole to come to a virtual standstill. Amid the storm clouds of the single currency crisis, the apparent buoyancy of the German economy had been one of the few remaining rays of sunshine. Now that, too, has flickered out.  All the warning signs of another economic catastrophe have been there for a long time now, but with policy-makers fretting over how to save the euro, they have been ignored. Rather than attempting to stave off a double-dip recession by loosening monetary policy – and fiscal policy, too, among those member states that can still afford it – Europe has gone careening off in the opposite direction. Interest rates have been raised, and member states have been forced into self-defeating austerity programmes which, by destroying growth, have made underlying debt dynamics even worse. It is hard to imagine a more perversely inappropriate set of policies.

Merkel and Sarkozy offer no miracle cure for euro - (Reuters) - Plans from France and Germany to move toward fiscal union in 2012 got a chilly response from other euro-zone countries and failed to reassure investors worried about the region's debt crisis and weakened economies. Austria, Finland and Ireland all questioned bold proposals from French President Nicolas Sarkozy and German Chancellor Angela Merkel to give up sovereignty over budgetary policies as a means to shore up their 17-nation currency union. Market analysts warned that political dissent coupled with failure to deliver any concrete pledges to increase the size of Europe's euro rescue fund, or launch of euro bonds, risks a renewed attack on heavily indebted countries. "There is little in the way of concrete measures in these decisions," "This is exactly what the markets don't want." In a sign of investor jitters, flight from the euro currency resumed on Wednesday as money sought the relative safety of the Swiss franc and the U.S. dollar. German debt, another safe haven, was also well bid compared with other euro-zone government debt.

In Defence of PIGS - Ambrose Evans-Pritchard - There was no deal. It was a vacuous restatement of clauses that already exist in the Lisbon Treaty, or an attempt to pass off retreads such as the Tobin Tax and harmonization of the corporate tax base as if they were new.No eurobonds, no fiscal union, no boost to the EFSF rescue fund, no change of policy on the ECB’s mandate. Zilch. More fiscal austerity for laggards, without even the Marshall Plan we had on July 21. It is all a step backwards into the black hole.As for appointing EU president Herman van Rompuy head of a eurozone panel, I find it remarkable that anybody should take this seriously (much as I like the poet Van Rompuy, among the best of the lot). There is already a Eurogroup, headed by Jean-Claude Juncker.The emptiness of the summit – coupled with Sarkozy’s deliciously absurd theatrics – tells us all we need to know. Neither Merkel nor Sarkozy seem capable of rising to the occasion. Europe is drifting towards its existential crisis. The ECB can hold the line for now by purchasing €20bn of Spanish and Italian bonds each week. But once the ECB nears €150bn or so, the markets will brace for the next crisis.

Germany and Michigan - Krugman - This post by Jon Cohn made me think of something I wrote, to fairly general derision, last year. What I wrote then was that the relatively good news coming out of Germany should be viewed as a regional development within a larger economy, and that Germany — as Europe’s center of durable goods manufacturing — bore some resemblance to the industrial midwest, which was also experiencing a bounceback as manufacturing revived. A year later that parallel is a lot easier to see — or would be if you were paying attention. As Cohn notes the precipitous drop in unemployment in this part of the country has been one of the better, if under-appreciated, economic stories of the last year — testimony to a rebound in the manufacturing sector bolstered, in part, by the government’s rescue of General Motors and Chrysler. Now there are signs that this expansion is faltering — but so it expansion in Germany. Truly, when talking about European economies, you want to adopt a regional economics/economic geography perspective. And when you do, some of the alleged success stories become a lot less striking.

Germany's Fiscal Picture - Are Cracks Starting to Show? - Now that the German economy appears to have sideswiped by the "Euro Debt Plague" with the announcement of near zero growth, I thought that it was time for an update of Germany's fiscal picture to the end of June 2011.  This covers the first half of Germany's fiscal year which runs from January to June. Germany's Finance Ministry provides a Monthly Report on its budget and fiscal picture.  In July's data release, the government notes that overall expenditures were down by 3.2 percent for the first 6 months of the year to €150.3 billion compared to the previous year.  Lower interest expenditures, which consume 12 percent of the national budget, were responsible for just over 50 percent of the €5 billion drop in spending.  Fortunately for Germany, total government receipts were up 4.6 percent to €128 billion with tax revenue up 10.8 percent on a year-over-year basis with much of the increase coming from value added taxes.  When the revenue and spending sides of the ledger are combined, the deficit for the first six months of 2011 came to €22.288 billion, down from €32.877 billion in the first six months of fiscal 2010.  Here is a graph showing the estimated deficit for the full year, the first six months of 2011 and the first six months of 2010:

Will Germany's Slowdown Doom Global Growth? - As if Europe doesn't already have it bad enough, here comes some more foul news: Germany's growth, widely considered to be the saving grace of the flailing eurozone, is grinding to a halt. The question is what that means for struggling Europe and the global recovery.Only a year ago, the region's biggest economy seemed to be powering full-steam ahead. This buoyed the spirits of global investors, even though troublesome Greece was crumbling. That's because back then, most of us assumed that even if Greece imploded, at least healthier economies like Germany and France would keep greater Europe plugging along. Granted, a lot of European countries, including France, complained about Germany's growth, since its industries benefited from lower-wage labor than elsewhere in Europe and a weak euro that make German exports cheaper. But then, at least something on the continent was going right and keeping the euro intact. Now the eurozone crisis is much, much bigger, and the challenges ahead – the potential collapse of Italy and Spain – will take even more ammo from richer Germany to fully address.

ECB moves to back Italy and Spain— The European Central Bank1 made record purchases of government bonds last week, it reported Monday, going further than many analysts had expected to hold down the borrowing costs of Italy and Spain, two of the largest countries caught up in the continent’s debt crisis. The $30 billion in government debt purchased by the central bank last week eclipsed the previous $20 billion bought in the days after it agreed last year to use its financial power to help restrain interest rates paid by weakened European governments. Increasing the demand for a government’s bonds lowers the interest rate it pays. The aggressive intervention offered evidence of the ECB’s effectiveness — Spanish and Italian borrowing costs dropped by a full percentage point after a spike — but it also underscored the extent of the challenge facing Europe’s policymakers. European leaders approved what they regarded as a dramatic set of steps2 in late July to convince global investors that the 17 nations that share the euro currency are solvent and will pay their bills.

The Printing Press Mystery - Krugman - John Plender at the FT seems mystified by something that has become obvious lately: bond vigilantes are only going after countries that no longer have their own currencies. He writes: The underlying logic is that no country defaults on its domestic bonds if it retains the right to set the printing presses in motion. Yet it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency. Oddly, he seems unaware of the pretty good explanation offered by Paul DeGrauwe, which I’ve sketched out a bit further. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.

Especially crummy bank - IN JANUARY of 2011, euro-zone prices fell from the previous month. Commodity prices were rising however, oil especially, and so in February monthly inflation rose 0.4%, and in March they were up 1.4%. By April, commodities were plateauing, and an uncertain outlook for the euro-zone economy made a sustained rise in inflation seem unlikely. The acceleration in monthly inflation came to an end; April prices were up just 0.6% from the prior month. No matter; the European Central Bank raised interest rates 25 basis points. Commodities sank dramatically in May, and the European debt crisis took a nasty turn for the worse. Monthly inflation fell to 0% in May, and prices didn't rise in June, either. By July, markets were in an all-out panic over European debt worries, and industrial production figures were signalling a return to recession across much of the euro-zone. No matter; the European Central bank raised interest rates 25 basis points. Now, it's August. New figures reveal that growth in the euro zone slowed dramatically in the second quarter, and very nearly came to a halt in the large core economies. Monthly inflation in July was negative; prices fell 0.6% from the prior month. What do you suppose the European Central Bank will do now?

No Turning Back: The ECB Brings Its Balance Sheet to Bear on Italy and Spain...The European Central Bank has crossed the Rubicon. By buying Italian and Spanish government bonds, it has brought a much-needed and credible external balance sheet to bear. There is thus the potential for an end to damaging games of chicken between the eurozone’s monetary and fiscal authorities and, therefore, stabilizing the eurozone’s systemically important government bond markets. But there remains huge uncertainty, together with large technical and political execution risk.  Clearly the ECB cannot solve all of the eurozone’s problems. But by preventing a downward spiral of contagion it can hope to restore stability and provide the environment for an orderly handover to eurozone governments that must ultimately do their part to promote ongoing eurozone stability. This is likely to take the form of controlled fiscal adjustment, common eurozone bond issuance or cross-border guarantees – via the EFSF or a successor to the EFSF – deeper fiscal integration, and structural reforms to promote growth. Again, the question is of the willingness of eurozone governments to take this approach to build greater stability. The ECB can be a bridge, but a fiscal solution is required for stability. In aggregate, the eurozone’s public and private debt burdens are no worse and in some respects more manageable than those of the U.S. There are significant political and coordination challenges to be overcome, however, for the comparison to be truly relevant.

Is the ECB starting to massively print money again? - Yesterday, Robert Wenzel at EPJ warned that the Eurozone economy is on the edge of a major downturn. A tight money policy by the European Central Bank is causing the eurozone to go into an "unexpected" recession. In Germany, the second-quarter gross domestic product growth number of a mere 0.1%, was significantly lower than the 0.5% Keynesian economists had been predicting. German GDP expanded 1.3% in the first quarter. And the Markit/BME purchasing managers’ index for the German manufacturing sector fell 2.6 points in July to 52 points, its lowest level since October 2009. There was zero growth registered by France in the second quarter and the euro area’s overall GDP rose only 0.2% in the second quarter from the preceding three months, after growing 0.8% in the first quarter, Eurostat said Tuesday. Growth in Spain and Italy was 0.2% and 0.3%, respectively. A non-money growth policy is the best policy, however, this policy, following a period of money printing results in the downturn of the boom-bust cycle as the economy adjusts to a non-money manipulated economy. Central banks rarely allow this correction to play out and return to money printing. Keep an eye on the ECB if it returns to money printing, we may very well be near the first near-global price inflation, as the U.S. money supply is already in near super-growth mode.

Greece threatened by another year of recession - ANALYSTS warned that Greece is at risk for a fourth year of recession in 2012, defying official forecasts of a recovery and dealing a further setback to the government's deficit-cutting plans. Amid plunging consumer demand, weakening global growth prospects and the possibility of fresh austerity measures, analysts said Greece's economy could shrink 2 per cent or more next year, following a 4.5 per cent contraction in 2010 and an expected 3.9 per cent downturn this year. That would raise questions about the €110 billion ($151bn) bailout the country received last year from its fellow euro-zone members and the International Monetary Fund. Those bailout loans are predicated on the moribund economy returning to growth in 2012 after painful fiscal and economic changes. The deteriorating forecast could refocus market attention on the country where the euro-zone debt crisis began, after weeks of hand-wringing over the economic woes in Italy and Spain.

Greek unemployment rate hits all-time high - Unemployment in Greece grew at a stunning rate of 1,200 people per day in May, climbing to 16.6 percent of the Greek work force that month, according to data released on Thursday by the Hellenic Statistical Authority (ELSTAT).  The total number of jobless Greeks soared above the 800,000 level for the first time in the last few years, reaching 822,719. Twelve months earlier, in May 2010, the figure stood at 602,185, or 220,534 fewer jobless people. In percentage terms it was at 12 percent, having been at just 6.6 percent in May 2008.  The steep rise in unemployment is obviously due to the recession of the Greek economy in the last couple of years and the austerity measures imposed, forcing a considerable number of enterprises to close down and thousands of jobs to be lost without being replaced in the market. The situation is worsening by the month, as in April 2011 the unemployment rate had stood at 15.8 percent, which means an additional 36,260 people lost their jobs within May alone, or about 1,200 per day.

Bad checks, unpaid bills of exchange stifling the market - Rubber checks soared by over 43 percent year-on-year in the first seven months of 2011, asphyxiating the market further as credit lines continue to dry up. Data released yesterday by the Tiresias bank information system showed that bounced checks in the year to July amounted to 1.38 billion euros, up by 43.3 percent from the same period in 2010, while unpaid bills of exchange rose to 86,257 units, totaling 134,476,048 euros and representing a 6.47 percent increase compared to last year.  Given the growth in bad checks and the deepening recession in the real economy, it is almost certain that their total amount will exceed 2 billion euros by the end of the year.  This phenomenon, which is set to grow, is causing a chain reaction in the market as it is also threatening the existence of healthy enterprises.

Greek bailout: 5 nations demand cash as collateral - A $157 billion international bailout for Greece ran into trouble Thursday after at least five countries demanded that the Greek government give them cash as collateral in exchange for their contributions to the rescue fund. The Netherlands, Slovenia, Austria and Slovakia said Thursday they wanted hundreds of millions of euros in collateral just like Finland, which struck a deal with the Greek government Tuesday to receive cash as security for the Finnish part of the bailout. Even with five nations demanding extra security for their loans in response to the Finnish deal, the amount of cash would probably not be large enough to scuttle the bailout entirely. But it could drive up the overall cost of the bailout, as Greece would need extra funds to put up collateral on top of servicing its debts, paying workers' salaries and meeting other financial obligation.

Private consumption in Portugal is suffering the biggest drop in 30 years - The indicator of private consumption in Portugal in July recorded a fall of 3.4% compared to the homologous months of 2010, the lowest since data collection began in 1978.  According to the Bank of Portugal (BOP), this was the eighth consecutive month in which the pointer just in negative territory, which has been deteriorating gradually since December 2010.  The entry into force of some austerity measures that Portugal should apply to return for the loan of 78,000 million euros was granted the EU and the International Monetary Fund (IMF) have affected the contraction in household consumption Lusas.

Greece, Ireland, Portugal Should Default on Debt, Pimco Says -- European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won't, according to Pacific Investment Management Co.'s Neel Kashkari. "They are delaying and denying as long as possible because the medicine to actually put out this crisis tastes so bad," Kashkari, head of new investment initiatives at Pimco, said. "They are always behind, always trying to play catch-up, and the crisis is always getting worse." Germany, France, the International Monetary Fund and the ECB should unveil a "massive" bailout package and announce it's available to the entire euro zone, except for Greece, Ireland and Portugal, effectively letting them default, according to Kashkari. That would create a firewall protecting Italy and Spain, said Kashkari, who joined Pimco in December 2009 after serving as head of the U.S. Treasury Department's bank-rescue program. .

The big cannoli - While Europeans were off basking on the shores of the sunny Mediterranean, the crisis was not on holiday.   If you’re back, reading this, you will know that while you were away events entered a new, more ominous stage.  Volatility returned with a vengeance.  The creditworthiness of major French banks was called into question.  Germany’s credit default spreads began to rise, approaching levels previously scaled only at the beginning of 2009.  Lots to grasp, to be sure.  But at this point the crisis boils down to just one word: Italy.   Italy’s debt is too big to restructure and too big for the European Financial Stability Facility to finance.  While crises are complicated beasts, there’s no reason to complicate this one.  Sure, Greece may have to restructure again.  France may have to take budgetary measures.  But those are sideshows.  The euro area will not live or die on their basis.  The euro area’s crisis is all about one thing:  that Italy’s debt might be unsustainable.   The ECB has ramped up its secondary market purchases, buying some €22 billion of mainly, one assumes, Italian bonds last week.  What it really bought was time.  Time for the members of the euro zone and Italian leaders to finally make the hard choices.

Funding worries hammer Europe’s banks - As if Europe’s banks didn’t have enough to worry about with the sovereign debt crisis and stagnant economic growth, the sector has taken a further pounding over fears that funding could seize up again. Shares in Barclays PLC have slumped nearly 19% since Tuesday’s close and Societe Generale has fallen 17% over the same period as investors fixated on several indications that banks are finding it harder to borrow. The Wall Street Journal reported Thursday that U.S. regulators are stepping up their scrutiny of European banks’ liquidity and a Swedish regulator reportedly warned banks they should do more to prepare for a funding crisis. Data from the European Central Bank on Wednesday also showed an unnamed institution had borrowed $500 million from a dollar facility that hadn’t been tapped for months. “A dollar drawdown at the ECB by one bank cannot be taken as a definitive sign of stress, but it sends a clear warning signal that merits close attention,” said analysts at Royal Bank of Scotland in a note to clients Friday.

We Speak on BNN About the Europe and Banks -- Yves Smith - I quite enjoy the host on this segment. We had a good talk about the usual topics, the state of the markets, with a focus on Europe and the banks. One matter that I didn’t make sufficiently clear (my bad): when I was speaking about ECB spending, I was referring to its new stabilization program, not its balance sheet in toto.

Marshall Auerback: Are We Approaching the Endgame for the Euro? - Forget about the S&P downgrade, which has had ZERO impact on the global equity markets.  So if it wasn’t the S&P downgrade which caused this downward cascade in the global equity markets, then what was it? By far, the most important factor currently driving the market’s bear trends is Europe or, more specifically, the future of the euro and the European Monetary Union. Systemic risk has migrated across the Atlantic to the euro zone. And after the recent joke of a summit between German Chancellor Merkel and French President Nicolas Sarkozy, it appears yet again that Europe’s policy makers have comprehensively blown it. Their persistent reluctance to get ahead of the looming systemic ticking bomb at the heart of the euro project has reached the point where it is likely to doom the euro’s existence. Their repeated “rescue plans” (and equally fatuous statements about new committees and “euro solidarity”) can no longer mask the central problem, which is that countries with very different economies are yoked to the same currency in the absence of a fiscal transfer union which would otherwise facilitate growth, not ongoing economic depression and political turmoil.

40% Chance of a Euro Zone Breakup: Economist  - An unexpected jump in weekly U.S. jobless claims and a surprise fall in existing home sales sparked more fears of a recession and sent U.S. stocks to their worst levels since the S&P downgrade. However, one economist is more worried about what is happening in Europe than the U.S., and he sees a growing risk of an eventual breakup of the single currency group. "The really worrying thing is a 40 percent chance the eurozone might break up altogether...over the next couple of years or so," Robin Bew, Editorial Director & Chief Economist at the Economist Intelligence Unit told CNBC on Friday. Bew believes investors are right to be worried, given the scale of the challenges facing the global economy. "They are looking at U.S. and Europe, and they're thinking "My god, is this Japan?" And the trouble is it might be, and that's the real worry," he said. According to him, the euro zone won't be able to cobble together a solution within the next few months even as credit market stresses increase. "If you look at what markets are doing at the moment, it's not clear to us they've got that much time," he said. "We're becoming increasingly worried not just about this kind of balance sheet recession, but also what is going on in the euro zone specifically, and the danger something goes very badly wrong there quite soon."

Euro Collapse Could Spark Global Depression, Soros Tells L'Hebdo: Billionaire investor George Soros said a collapse of the euro may spark a global financial crisis in a “new Great Depression,” L’Hebdo magazine reported, citing an interview. “It seems to me that one still doesn’t understand what would happen if the euro collapsed,” Soros told the Swiss magazine in an e-mailed pre-release of tomorrow’s edition. “It would lead to a banking crisis that would be totally out of control.” He also said Europe’s future hinges on Germany, which should “dictate its solution” to the region.

'Most Germans' doubt Merkel can stop financial crisis - Two out of three Germans doubt Chancellor Angela Merkel can prevent the eurozone debt crisis turning into an outright economic and financial crisis, according to an opinion poll released Friday. Fifty-five percent have little confidence and another 20 percent no confidence whatsoever that Merkel's conservative-led government will be able to contain the eurozone debt crisis, the poll released by ARD public television said. Just 22 percent of respondents said they were confident the chancellor, who is in charge of Europe's most successful economy, can deal with the current situation, according to the poll carried out by the Infratest dimap on Tuesday and Wednesday amongst 1,001 respondents. Merkel held a summit meeting with French President Nicolas Sarkozy on Tuesday evening to discuss how to respond to the spreading concerns that the 17 nations that share the euro will be able manage their heavy debt loads. Sarkozy also came out badly in the poll with 75 percent of Germans saying they had little or no confidence he can help solve the eurozone debt crisis.

Eastern Europe’s Economic Expansion Falters as Interest-Rate Bets Reverse - Eastern European economic growth slowed in the second quarter, supporting expectations that central banks may have to start reducing borrowing costs. The Czech and Hungarian economies slowed for the first time since they emerged from recession in the first quarter of 2010, Slovak gross domestic product grew at the slowest pace since that same period and Romania’s decelerated after ending a two- year slump in the January-March period. Poland on Aug. 30 may say growth slowed, according to a Bloomberg survey. Eastern Europe’s export-led recovery from its worst slump since the end of communism two decades ago is in peril as a deepening debt crisis in the euro area and a cut in the U.S. credit-rating intensify threats to the global economy. That means regional central banks may consider rate cuts to bolster their economies as long they don’t weaken local currencies and threaten financial stability, according to Citigroup Inc. “From the central bank point of view, there is a case for some rate cuts,”

Ryan Avent and the Ghost of the 1930s - Ryan Avent’s spooky comparison of the euro crisis with the implosion of the Western world in the 1930s has struck a nerve also with me, no different from my host Kantoos. As far-fetched as Avent’s parallel seems at first, the more one thinks about it the more unpleasant sense it makes – it seems as if a movie remake would be made from an 80 year old script:The susbsequent scenes from the 1930s (assumed to be known) do not need to repeat themselves, or course. Ryan Avent is arguably right that macroeconomic imbalances are less dramatic now than they were then, and Europe’s democratic foundations are (hopefully) more robust. Moreover, the parallel bewteen the gold standard and the euro is far from perfect: as Kantoos notes, the ECB can print euros and thus assure, in case of doubt, its member states’ ability to pay, while in the 1930s no one could print gold. But all this takes nothing away from Ryan Avent’s depressing observation:A Europe hoping never to repeat its historical tragedies has gone and blundered into institutions that make those same tragedies more likely. The European project, as it looks now, has failed.

Eurozone crisis: Are we losing the patient? - Is the euro a dying patient? This column argues that policymakers need to put up a credible defence, lest they risk the Eurozone altogether. The ECB must be empowered to purchase distressed sovereign debt as the need arises, the EFSF must be able to issue Union-bonds to the scale required to relieve the ECB when required, and the link must be broken between single loans and national public debt.

The great failure of globalization, by Jeffrey Sachs -  I’ve watched dozens of financial crises up close... Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalization. Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition.  The path to recovery now lies in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. The simple fact is that globalization has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile..., they have been able to convince their home governments to cut tax rates. in the name of global tax competition In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.

Bank of England unanimous on keeping rates down - The Bank of England's nine-member rate-setting panel voted unanimously to keep its main interest rate at the record low of 0.5 percent in August because of slowing growth and heightened tensions in financial markets. Minutes to the Aug 4. meeting, released Wednesday, show that the two members who had previously voted to increase rates changed their minds. This was the first unanimous vote for unchanged rates since May last year.One member, Adam Posen, continued to vote for a 50 billion pound ($80 billion) increase in the central bank's asset purchase program. The minutes show the rate-setters fretting over global demand and the volatility in financial markets. Overall, they thought the risks to inflation had "clearly shifted to the downside."

Bearded American Economists to the Rescue - Krugman - Bloomberg: Bank of England policy maker Adam Posen’s 11-month push for more stimulus is now shaping the debate among officials as they consider whether the U.K. needs more quantitative easing to fight the danger of Europe’s crisis. With no policy maker seeking an interest-rate increase after Spencer Dale and Martin Weale switched votes, the discussion on the Monetary Policy Committee has shifted toward Posen’s agenda. Go Adam! Adam Posen studied Japan during the 1990s, and was a member of the club (also including yours truly) that worried that Japan was an omen for other advanced countries. And I have to say that the Bank of England is showing a lot of intestinal fortitude right now, holding to expansionary policies despite an inflation bulge it knows is temporary, but which nonetheless puts it under pressure. Then again, BoE monetary policy committee members don’t fear being charged with treason, or lynched in Texas.

Quantitative easing 'is good for the rich, bad for the poor' - Quantitative easing (QE) – the Bank of England's recession-busting policy of buying up billions of pounds of bonds – may have contributed to social unrest by exacerbating inequality, according to one City economist. As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages."The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it," Joshi says in a new report. He points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been a key tool for boosting growth. In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.

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