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

Saturday, August 6, 2011

week ending Aug 6

U.S. Fed balance sheet expands in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the week ended Aug. 3, Federal Reserve data released on Thursday showed. The Fed's balance sheet  expanded to $2.851 trillion in the week ended Aug. 3 from $2.848 trillion in the week ended July 27. For balance sheet graphic: The Fed's holdings of Treasuries totaled $1.641 trillion on Aug. 3, up from $1.638 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $897.3 billion, unchanged from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system were also unchanged from a week earlier, at $112.4 billion. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $10 million a day in the week ended Wednesday, compared with an average daily rate of $2 million last week.

Fed Balance Sheet Broadly Steady In Latest Week At $2.871 Trillion -  The size of the U.S. Federal Reserve's balance sheet remained broadly steady in the latest week, a little over a month after the central bank completed a bond-buying program aimed at shoring up the economy. The Fed's asset holdings in the week ended Aug. 3 edged up to $2.871 trillion, from $2.867 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities also moved little, to $ 1.641 trillion on Wednesday, from $1.638 trillion a week earlier. Thursday's report showed total borrowing from the Fed's discount lending window was unchanged at $11.97 billion on Wednesday. Borrowing by commercial banks rose to $52 million, from $5 million a week earlier.U.S. government securities held in custody on behalf of foreign official accounts rose to $3.472 trillion, from $3.451 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.736 trillion from $2.719 trillion in the previous week. Holdings of agency securities also moved higher, to $736.13 billion, from the prior week's $731.96 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 4, 2011

Fed's Bullard: Large balance sheet a concern (Reuters) - The Federal Reserve's much expanded balance sheet could pose an inflation risk if policymakers fail to shrink it at the right time, a senior Fed official said on Friday. St. Louis Fed President James Bullard said that because inflation has climbed recently, the Fed's easy money policies have been even looser. "Given the near-zero policy rate, this means real short-term rates have declined," Bullard said in remarks prepared for delivery to a conference in Jackson, Wyoming. The Fed's balance sheet has ballooned to near $2.85 trillion from a pre-crisis level of around $900 billion as the central bank has bought securities to stimulate economic growth. Bullard said monetary policy is appropriate at current levels. However, if the economy strengthens as he expects in the second half of the year, the Fed will need to be ready to time policy tightening correctly.

Fed and Treasury review reserves mechanism - Officials at the US Federal Reserve and Treasury are reviewing the future of a programme to manage excess bank reserves now that a deal to raise the debt ceiling has been reached. The need to reconsider the SFP shows how the debt limit remains a constraint on economic policymaking even after the deal to increase it.  Under the SFP, the Treasury sells extra short-term bills and deposits the proceeds in an account at the Fed. The result is to transform overnight bank reserves into slightly longer-term assets. But the short-term bills count towards the debt ceiling and in February and March the Treasury ran the SFP down from $200bn to $5bn in order to free more capacity to borrow. In an ideal world, both institutions would like to use the SFP but their decision is complicated because this week’s deal only increases the debt limit in stages. The limit rises by $400bn immediately, $500bn in the autumn and a further $1,200bn-$1,500bn after Congress agrees a package of additional cuts. As soon as the Treasury starts to issue debt again, it will have to make good on about $230bn that it has borrowed from government pension plans since May as part of an accounting manoeuvre to buy time before hitting the debt ceiling. If it brings back the SFP straight away as well, it will quickly hit the $400bn limit and have to wind the programme back down again. A stop-and-start SFP may do more harm than good to markets.

A Renewed Focus on the Fed’s Role - Even as Congress escapes from its brush with default, political divisions have all but immobilized the levers of fiscal policy, raising pressure on the Federal Reserve1 to address the nation’s economic lethargy.  Failing to raise the debt ceiling2 could lead to an economic catastrophe. But even if the Senate on Tuesday joins the House in agreeing to let the government borrow more money, there is mounting evidence that the political turmoil has made a bad economic situation worse. Manufacturing activity declined in July, a trade group reported Monday. Unemployment is climbing. So is inflation.  And the high pitch of partisan rancor in Congress makes it difficult for either party to advance their incompatible economic agendas. The deal to raise the debt ceiling would reduce federal spending this year by billions of dollars, exacerbating a broader downturn in federal aid as the stimulus peters out. A payroll tax cut and extended benefits for the unemployed are scheduled to expire at the end of the year.

Global PMIs and Fed Policy: they're linked - Rebecca Wilder - Today a host of global purchasing managers indices (PMIs) reiterated that the global economy is slowing....quickly. Within 24 hours, China, the US, and the euro area all reported July PMIs falling toward the feared 50 (below which the manufacturing industry is contracting) - 50.7, 50.9, and 50.4, respectively. The UK PMI fell below 50 to 49.1 in July. I would posit (and I believe that others have, too, like Edward Hugh) that this is directly related to Fed policy, specifically that of quantitative easing (QE). The chart above illustrates the stated PMIs alongside the dates of a shift in the Federal Reserve's QE policy. The shorter bars indicate those dates when the Fed ended QE and announced that it would reinvest maturing proceeds. On the other hand, the full bars illustrate the outset of QE. Falling PMIs correlate with the end of QE. New QE correlates with a rebound in global PMIs. Given this correlation and the latest GDP release, I expect that talk of QE anew to surface.

Fed May Weigh More Stimulus on Flagging Recovery - Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts. “At a minimum, the FOMC will have a serious debate about the policy options -- what they should do, and what they expect to get from it,” said Roberto Perli, a former associate director in the Fed’s Division of Monetary Affairs, referring to the Federal Open Market Committee. “Growth in the first half was dangerously close to zero,” said Perli, director of policy research at International Strategy & Investment Group. The FOMC will meet Aug. 9 in Washington after the government marked down its measure of economic growth to annual rates of 0.4 percent in the first quarter and 1.3 percent in the second, casting doubt on the Fed’s June outlook of 2.7 percent to 2.9 percent growth for this year. A gauge of U.S. manufacturing, a main engine for the expansion, slumped last month to the lowest level in two years.

Fiscal Austerity Requires Monetary Liberality - Over at Cafe Hayek, Russ Roberts takes on Paul Krugman's claim that most studies show fiscal policy tightening will stall a recovery rather than help it:  Unfortunately, Krugman doesn’t provide a link to those “many studies” of the historical record. Maybe he was busy or simply didn’t have room to provide them. But I will just mention that in 1946, federal spending fell about 55% when the war ended. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived. Like Roberts, I am skeptical about the ability of discretionary fiscal policy to stabilize the business cycle.  His critique, however, is too quick to embrace the popular view that fiscal policy consolidation actually improves the economy.  On this point, Krugman is correct that most of the empirical evidence (e.g. here, here, and here) does not support this view.  What the evidence does show is that in most cases where fiscal consolidation was accompanied by a robust recovery it happened because monetary policy was accommodative.  In other words, a loosening of monetary policy made it appear that fiscal policy tightening was the cause of the economic recovery when in fact it was not.

The Fed Can Raise Nominal Incomes Too! - Ken Rogoff is one smart guy and his writings are typically fun to read.  His latest piece, however, left me feeling a little disappointed.  It concedes too much to the "balance sheet" view of recessions which for reasons spelled out here and here is an inadequate view of the crisis.  Moreover, his analysis ignores what monetary policy is really capable of doing for the U.S. economy: increasing nominal spending and nominal incomes.  Ramesh Ponnuru, the resident quasi-monetarist and Senior Editor at the National Review, makes this point: Kenneth Rogoff writes that “the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years.” It certainly would be a way to reduce the real burden of debt, but is it the only or the best way? What we need is not more inflation. We need for the Fed to stop holding the money supply below the demand for money balances. That might increase inflation, which would be a price worth paying to get nominal spending back to trend. But inflation shouldn’t be the goal.

The monetary policy of last resort—currency reform - The monetary policy of last resort is to get rid of the old money and start a new one. "Currency reform". I can just remember this policy being mooted in the 1970's. What happens if tightening monetary policy fails to break entrenched inflationary expectations and an ever-increasing inflationary spiral? It was the ace in the back pocket. Not to be played unless all else had failed. Today's problems are the exact opposite of the inflationary 1970's. But the solution -- the monetary policy of last resort -- might be the same. If you can't loosen monetary policy to break entrenched disinflationary expectations, then maybe it's time to think about currency reform. The 1970's problem was that people had too little belief in the value of the currency. Real goods looked good in comparison. Today's problem is that they have too much belief in the value of the currency. Real goods look bad in comparison.

Three Things the Fed Could Do Right Now - What is the Fed chairman to do? One thing he doesn’t want to do is sacrifice the Fed’s inflation-fighting credibility while trying to boost a perplexing economic recovery that the Fed is still trying to figure out. That, and divisions inside the Fed, make it unlikely that Mr. Bernanke would want to unleash a new torrent of securities purchases – known as quantitative easing – just yet. To the dismay of some critics, the central bank has already purchased $2.3 trillion worth of Treasury and mortgage bonds in an attempt to hold down long-term interest rates. As Donald Kohn, Mr. Bernanke’s former top lieutenant, said in an interview with The Wall Street Journal earlier this week, the Fed would probably want to wait before moving in the direction. Inflation would need to come down, Mr. Kohn said, in order to ensure it is not on an upward path and to prove that more quantitative easing wouldn’t damage the Fed’s reputation for keeping inflation low.  As the WSJ reported earlier this week, however, there are smaller steps the Fed is sure to discuss at the coming meeting which could be a little stimulative to the economy and also provide more coherence to Fed policies.Here are three that stand out. None could be expected to be a big jolt to growth, but they are getting active consideration:

What QE2.5 Might Look Like - In a note out tonight, BTIG's Dan Greenhaus looks ahead to next Tuesday's big Fed meeting. Ultimately, he expects little change in either policy or statement, other than the obvious acknowledgment that things aren't necessarily going as planned. Greenhaus still isn't on the QE3 bandwagon, like so many are, but he does lay out some possibilities of what you might call QE2.5. The Fed has three intermediate options:

  • -The first stop for the Fed is almost assuredly its communication strategy.  Simply, the Fed could commit to making its extended period even more extended. 
  • -The Fed could lower the Interest on Excess Reserves (IOER).  During the crisis, the Fed obtained the ability to pay interest on newly created excess reserves in the banking sector, the argument being that doing so would help the Fed control inflation. 
  • -The Fed could play with its balance sheet.  On the one hand, the Fed is in the process of reinvesting maturity MBS into treasuries.  They could push these reinvestments – currently running about $10-$14 billion per month – further out the curve to lower medium to longer term interest rates

End Game For The Fed - The era of quasi-religious belief in “Don’t fight the Fed” is drawing to a close; the Fed has been revealed as significantly less omnipotent and powerful than previously imagined. Many observers expect the Federal Reserve to bail out the stock market next Tuesday with an announcement of QE3, another round of “monetary easing” to reinstall the trade in risk assets. If they do, it will fail. The basic reason it will fail is that the Fed’s credibility has fallen below a critical threshold. Put another way, the quasi-religious trust in the Fed’s infallibility and power to single-handedly reverse global markets has been eroded by reality: QE2 was a monumental failure. Here’s a couple of things to understand about the Fed before you “buy the bounce when they announce QE3.”

What’s With All the Bernanke Bashing? - Mankiw - He left a comfortable professorship at Princeton to run the Federal Reserve — and this is what he gets. Mr. Bernanke has worked tirelessly to shepherd the economy through the worst financial crisis since the Great Depression2, and yet, for all his efforts, seems vastly underappreciated. CNBC recently asked people, “Do you have confidence in the way Ben Bernanke is handling the economy?” Ninety-five percent of the respondents said no. Yes, the CNBC survey was hardly scientific. Nonetheless, it reflected the deep unease that many Americans feel about our central bank and its policies. Critics on both the left and right see much to dislike in how Mr. Bernanke and his Fed colleagues have been doing their jobs. Let’s review the complaints.

Fed’s Kocherlakota: Core Inflation To Drive U.S. Monetary Policy - The underlying rate of inflation in the U.S. is the best gauge to drive monetary policy, according to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota. Writing in his bank’s annual report, the central banker said: “I will be paying close attention to the behavior of core inflation” as he thinks about the ideal setting for monetary policy. Changes in inflation stripped of food and energy factors appear “to provide critical information” about the state of labor markets and other factors, “and therefore about the appropriate stance of monetary policy.” “Monetary policy will need to evolve in response to ongoing shocks and new information,” “But I suspect that information about aggregate labor market quantities like unemployment will remain–at best–a noisy indicator about the appropriate stance of policy.” Core inflation is an increasingly controversial way to view price pressures because taking out food and energy factors means price gauges are being stripped of some of the most important prices people confront on a daily basis. Federal Reserve Bank of St. Louis President James Bullard has argued that the Fed needs to pay more attention to overall inflation, as it is the true measure of inflation in the U.S. economy.

Non-inflation Watch - Krugman - Today’s personal income report was predictably dreary, as the march to a lost decade (or more) continues apace. But let me highlight one piece of the report: the inflation, or lack thereof. The personal consumption expenditures deflator fell, thanks to falling commodity prices. More interesting is the sharp decline in inflation as measured by the PCE deflator minus food and energy, which has traditionally been the Fed’s favorite measure of “core” inflation. Many of the people who keep seeing runaway inflation just around the corner made a big deal of last month’s PCE core, which rose at an annual rate of 3.1 percent. Aha! they said: inflation is here. But some of us argued that this was a temporary blip, driven by the indirect effect of commodity prices even on core prices. And all consumer price index-based measures of core inflation turned down last month. Now the same thing is happening with the PCE core, which rose at an annual rate of only 1.3 percent in June. Later today we’ll get the Dallas Fed trimmed mean measure, which was already down in May and will almost surely show further decline in June.

Is Deflation Back? - Deflation has returned. For the first time in a year, consumer prices fell in June, according to a new report from the Commerce Department released Tuesday. The price decline was driven by energy declines, and is just one month’s data point, but even so, the figure is worrisome. The Federal Reserve pays close attention to this price index (more so, reportedly, than to the Consumer Price Index released by the Labor Department); and you may recall that part of the reason the Federal Reserve engaged in quantitative easing was the threat of a deflationary spiral. The Commerce Department’s report delivered other bad news, too. Nominal personal income increased by just 0.1 percent in June — and the increase was due to higher government transfer payments (like unemployment benefits) and capital gains income, not wages and salaries. In fact, private wage and salary income fell in June. None of these facts bode well for growth in the third quarter of this year, given that the economy is so dependent on consumer spending. And the austerity measures created by the recent debt ceiling deal look unlikely to make things better.

That Was The Inflation Scare That Was - Krugman - A little while back many people made a big deal over the fact that measures of core inflation, if you took monthly data at an annual rate, were running above 3 percent. Some of us tried to make the case that this wasn’t really reflecting a big rise in underlying inflation, that it was mainly “contamination” of the core by transitory effects of commodity prices; but this brought much jeering. Anyway, you should know that just about all measures of core inflation have now subsided rather dramatically. Here’s the Dallas Fed’s data, based on personal consumption expenditures: And here’s the Cleveland Fed’s version, expressed as monthly rates, based on the consumer price index: The Atlanta Fed’s sticky price CPI has also subsided, to an annual rate of 1 percent. Guess what: inflation is not taking off, it’s slumping back to around a 1 percent annual rate.

Does Headline Inflation Converge to Core? - FRBSF - Recent surges in food and energy prices have pushed up headline inflation to levels well above its underlying trend. In contrast, core inflation, which excludes food and energy prices, has remained low and stable. Historical data suggest that, since the early 1990s, headline inflation has tended to converge toward core inflation. Thus, high inflation is unlikely to persist as long as inflation expectations remain anchored.

Currency Intervention Revived as Odds Escalate Fed to Ease - Just eight months ago, Brazilian Finance Minister Guido Mantega declared a “truce” in competitive currency devaluations. Now, Japanese and Swiss moves to weaken the yen and the franc show reviving tension in foreign-exchange markets as the deteriorating U.S. economy weighs on the dollar. Japan sold yen today, causing the currency to weaken as much as 4 percent against the dollar after rising 5 percent last month. Currency gains may mean that central banks in nations including New Zealand, Canada and Australia tighten monetary policy at a slower pace than they otherwise would. “You’re seeing that already. The Bank of Canada has been pushing out its tightening campaign, the Reserve Bank of Australia is taking on a protracted pause in its tightening cycle and there are question marks on how aggressively the Reserve Bank of New Zealand is able to hike as well.” South Korea’s government is reviewing “all possibilities” on curbing capital inflows, Finance Minister Bahk Jae Wan told reporters in Seoul today, adding that he’s “closely monitoring” the situation, while declining to comment on the impact of Japan’s intervention. The Philippines is prepared to impose controls to cap volatility in the peso after its currency rose to a three-year high this week, central bank Governor Amando Tetangco said in an e-mail late yesterday. Turkey’s central bank said today it will sell dollars to banks when it sees it’s necessary to support foreign exchange liquidity in the domestic market.

Focus On Unemployment To Measure Output Gap - Sveriges Riksbank deputy governor Lars E.O. Svensson, my favorite central banker, delivered a speech a few months ago that had bearing on the question of what’s a policymaker to do in a world where government statisticians can’t accurately measure recessions fast enough to do stabilization policy. He argues that we should forget about the GDP output gap and just pay attention to unemployment: I believe instead that the unemployment gap is the most appropriate measure of resource utilisation. There are several reasons for this. Unemployment is measured often and is not revised. GDP on the other hand is measured less often and is highly uncertain, and major revisions are made. Unemployment is also directly related to welfare – one of the worst things that can happen to a household is that one of the members of the household loses his or her job. Unemployment is also the indicator of resource utilisation that is best known and easiest for the public to understand. The preparatory works for the Sveriges Riksbank Act state that the Riksbank should support the objectives of general economic policy. One of the main objectives of economy policy in Sweden is to limit unemployment, for example by improving the functioning of the labour market and increasing the incentives to look for work.

Fed Watch: On Pins and Needles - Here we are, one month into the second half. Expectations, or, perhaps more accurately, blind hope, is that the back half of 2011 is better than the first half. We can only hope this is true. The revised GDP data reveal the US economy flirted with recession in the first six months of the year, raising the real concern that we are at stall speed. We need those confidence fairies sooner than later – because it looks like fiscal and monetary policymakers are still on the sidelines. Worse, in the case of the former, near, medium, and long-term policy are all looking contractionary at the moment. Will the economy tumble into recession, or simply continue to limp along? Bets are all over the place at this point. Optimists are looking for a stronger second half as the temporary factors (Japan, oil price shock, etc) fade, giving a boost to at least one sector, autos. Karl Smith sees room for optimism in the manufacturing survey data – we will see the ISM number this morning for further insight. Rebecca Wilder, however, sees weakness in the high frequency data, although the most recent initial claims numbers fell below 400k. That said, Brad DeLong noted unusual seasonal effects in past Julys, and 2011 could be the same. Bloomberg sees trouble signs in container shipping rates:

Fed Watch: On The Edge. Again. -Market participants turned their attention away from Washington politics to the actual economy, and didn’t like what they saw. Incoming data has too many hints of recession to leave anyone optimistic about the second half. And while corporate profits have held up despite weak growth, it is difficult to see how they could retain recent gains in an outright recession. Moreover, the reality of the budget deal is starting to set in. What the economy needed was near-term stimulus and long-term consolidation. What Washington delivered was just consolidation, both near and long-term. Now market participants are scratching their heads around three basic questions: Is recession imminent? How deep would it be? When will Washington come to the rescue? The US economy quickly lost any momentum developed in the back half of 2010 as the impact of higher commodity prices rippled through the economy. . The commodity shock left a deeper mark on the economy. Not only did it directly impact households via higher energy prices, but I sense that firms where eager to try to push through higher prices. I also think one can argue that firms where goaded into higher prices by certain Fed officials who fanned the flames of inflation fears. The combination was that real consumption spending hit a wall:

The Big Squeeze - The new austerity is underway, but it’s not clear that the bond market is optimistic about the implications for growth. The benchmark 10-year Treasury yield dropped to 2.66% yesterday, the lowest since last November. The sight of the crowd rushing into bonds at this stage isn’t encouraging. Meanwhile, the stock market cast its own vote yesterday via a hefty 2.6% tumble.  What can be done? The Federal Reserve seems to be the only lever left to pull. It’s no silver bullet, but policy could be more accommodative, as a number of economists advise. Here’s David Beckworth, who criticizes the Fed’s “passive tightening” policy: What is frustrating is that the Fed could meaningfully undo this three-year passive tightening cycle by adopting something like a nominal GDP level target. For many reasons--its political capital is spent, internal Fed divisions, the popularity of hard-money views, etc--it won't and so the U.S. economy remains mired in an anemic recovery. And Scott Sumner observes: One need to look no further than the market for 5 year T-notes to see the increasing tightness of monetary policy. NGDP growth expectations are now falling rapidly.

Fed Watch: That. Was. Unpleasant. The rapidity with which confidence can shift is nothing short of a wonder of nature. I am not sure there was any terribly new news today. The evidence the US economy is weakening has been mounting for weeks. That equities had not sold off yet was something of a testament to the underlying profit situation. But now fear grips financial market participants as the rush to cash or cash equivalents accelerated. A rush to judgment on the US economy? Felix Salmon tries to paint a positive picture: Firstly, this is not necessarily a Bad Thing. If you’re saving for retirement, stocks are cheaper now, and your 401(k) contribution goes further than it did a few weeks or months ago. That’s good. Secondly, if there ever were serious doubts about the USA’s creditworthiness, they’re gone now. The 10-year bond is yielding less than 2.5%: there are no worries in evidence there. This seems to me to be a point in the recovery where you do not want the 10-year Treasury plunging to 2.41 percent. Felix offers a bit more pessimism: This is a global sell-off, with European markets down just as much as those in the US; Asia’s sure to follow suit when it opens. Now that the Fed has stopped dropping dollar bills on the US economy, it’s hard to see where confidence and optimism are going to come from in the coming months. Yes, will the Fed come to the rescue? Ryan Avent: The good news is this: the Fed can't help but act.

Fed Watch: Jobs Report and the Fed - The jobs report was somewhat better than expectations. Admittedly, this isn't saying much. But it was "good" enough to give the Fed pause before rushing into a fresh round of easing. From the perspective of policymakers the numbers will suggest that recession fears are overblown. And the 10 cent gain in hourly wages will suggest to some FOMC members that a renewal of deflation fears are also equally overblown. It is true that, as Calculated Risk notes, the survey period was before agents turned cautious as the debt farce deepened. But, then again, the Fed would simply argue they need to see how much of that caution is quickly reversed. Now, they could turn their attention the the household survey, and note that both labor force participation rates and the employment to population ratio continue to decline. But they could attribute these effects to largely structural causes, and as such beyond their purview. This too would also argue against any significant change in policy. The implied inflation expectations from the TIPS market is 193bp and 225bp at the 5 and 10 year horizons, respectively. Still well above last summer's lows. This too argues against significantly policy shifts.

How accommodating is the Fed? - TO FOLLOW up on this post responding to my colleague, there's one other thing I'd like to briefly discuss. My fellow blogger writes: Moreover, as Tyler Cowen regularly reminds us, the monetary authority moves last. If, for some reason, an all-but-undetectable cut relative to the pre-deal 2012 spending baseline nudges the economy into contraction, the Fed will likely respond to offset destimulative effects. For all I know, the Fed has been ready to go with QE3, or some other plan for additional monetary stimulus, but has been waiting for some legislative commitment to future deficit reduction before opening the spigot. In principle, I agree. Certainly this is how it ought to work; the Fed should stand ready, as the Bank of England has, to support the economy amid a fiscal tightening. Statements from Fed officials have been leaving me less confident, however, that this is the way it will actually work.

QE3 Might Help the Markets, but It Won’t Save the Economy - Stocks endured a free-fall Thursday, and the major indexes in the U.S. plummeted. Market psychology has deteriorated thanks to the debt ceiling debate. Plus, fundamentals are also looking ugly. Last week's shocking GDP data and this week's soft manufacturing data and worse-than-expected consumer spending numbers being the most glaring examples. All the negativity has led to renewed talk of another round of quantitative easing -- the Federal Reserve's stimulus program to spur growth by buying up government bonds. "The trend of the data is all negative, so barring any quantitative easing program from the Fed, we will probably be in a recession by the end of the year." Roberts is of the mind that the Fed will step in to help stave off another recession, but the potential for it to work after QE1 and QE2 is not great due to the law of diminishing returns.To top that off, he says markets, not consumers, will feel all the benefits if QE3 should come to pass. Consumers will actually take a beating because commodity prices -- oil and food prices -- will jump as the Fed pumps more dollars into the economy.

News From the Real Economy - Friday’s news on the real crisis was the government’s report on gross domestic product growth for the second quarter of this year, which, at an anemic 1.3 percent, was about half a percent under what most economists had been predicting and clearly not enough to create very many jobs. But the real shockers in Friday’s report from the Commerce Department’s Bureau of Economic Analysis were the downward revisions in GDP from previous quarters. The previous estimation of GDP growth in the first quarter, 1.9 percent, was revised downward—actually, almost zeroed out—to just 0.4 percent. The growth rate for the first half of 2011, then, is clearly under 1 percent. But the government’s downward revisions in GDP don’t stop there. The new report revises the numbers all the way back to 2005 and show that the decline of the economy in the wake of the Lehman bankruptcy in the fall of 2008 was far steeper than the numbers showed at the time. In the fourth quarter of 2008 and the first quarter of 2009, the GDP actually shrank by 7.8 percent, not by the 5.9 percent that was previously reported. But the revised data also show that in the second quarter of 2009, the decline in GDP shrank by just 0.7 and that the economy grew by 1.7 percent in the third quarter.  In other words, the stimulus worked.

“Great Recession” Far Worse Than We Had Been Previously Told - Included in the BEA's first ("Advance") estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they "finalized" just 35 days ago -- from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the "final" in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the "Real Final Sales of Domestic Product" for the first quarter of 2011 was even lower, at a microscopic 0.04%.  And the revisions to the worst quarters of the "Great Recession" were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized "growth" rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% "growth" rate. And the cumulative decline from 4Q-2007 "peak" to 2Q-2009 "trough" in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.

Meanwhile, Back in the Economy - The economy is in trouble, and Washington — fixated on budget slashing at a time when the economy needs more spending — seems determined to make matters worse.  On Friday, in the midst of the debt limit battle, the government reported that economic growth nearly ground to a halt in the first quarter of 2011, a far worse performance than previously estimated. The second-quarter growth number, a feeble 1.3 percent annual rate, is not nearly enough to stop unemployment from rising even higher.  Nor are there persuasive signs that absent more government support, conditions will turn around anytime soon. Indeed, they are bound to worsen if Congress approves deep near-term spending cuts as part of a debt-limit deal while letting relief and recovery measures expire.  We will leave it to the historians to figure out how both political parties, and many Americans, became convinced that austerity is the road to recovery. History provides evidence that it is not, including the premature budget tightening of 1937 that reignited the Depression.

No more jobs mystery. Period. End of story. - If I hear one more discussion of the mysterious lack of jobs I’ll explode.  The new GDP numbers are the final nail in the coffin.  For years I’ve been saying there is no jobs mystery.  That any deviation from Okun’s Law was minor compared to the scale of the output collapse.  With the new RGDP figures we now know I was right, there isn’t and never was any mystery as to why there are so few jobs.  RGDP is very low.  Period.  End of story. I also argued that there was no mystery as to the low level of RGDP.  The new GDP reports shows the NGDP collapse, already the worst since 1938, was even worse than we thought.  Show 100 economists in mid-2007 the NGDP path over the next 4 years, and all but the kookiest RBC-types will tell you a severe recession is ahead.  At least 97 out of 100 will make that prediction.  Check out the graph in this Stephen Gordon post. And then we have none other than Ben Bernanke telling is that the Fed can do more stimulus, he just doesn’t feel it’s necessary.  How do our elite economists react to the following facts?

  • 1.  Unemployment is unambiguously caused by RGDP collapse.
  • 2.  RGDP collapse is almost certainly caused or greatly worsened by the NGDP collapse.
  • 3.  Bernanke says the Fed drives NGDP.

The BEA Underestimates Recessions - Here’s an interesting point from Mark Doms, chief economist at the Commerce Department. The Commerce Department’s economists seem to consistently underrate the severity of recessions: I wonder why that is? But there seems to be a lesson here for macroeconomic stabilization policy, namely that when your data is indicative of a recession the risks ought to be seen as weighted to the downside. You need to err on the side of “going big” with your interest rate cuts and whatever else.

Tales from GDP revisions - Or things got a lot worse in 2008Q4 than we thought The 2011Q2 advance release and revised estimates [0] contained many unpleasant surprises (see Jim’s assessment; also [CR1] and [CR2] [Izzo/WSJ RTE]). The below consensus growth rate, and downward revision in Q1 growth, have been discussed elsewhere. I want to focus on the implications of the revisions to the data going back to 2003 (with particular emphasis on data back to 2007).Here are the points I take away from this new information:

  • The output decline starting from 2008Q2 was much worse than originally estimated.
  • The increase in GDP relative to 2009Q1 (when the ARRA was passed) is the same as before.
  • The output gap is more negative than originally estimated (based on January 2011 CBO estimate of potential), and is now getting more negative.
  • Consumption and fixed nonresidential investment account for the largest components of the downward revisions in final sales of domestic product.
  • GDP per capita fell even more precipitously from 2008Q2 through 2009Q1 than originally estimated.
  • The consumption decline is also more pronounced with new data.
  • The recent employment-GDP relationship seems a little less mysterious.
  • The exports story remains unrevised.

Revised GDP Numbers Look A Lot More Like Retail Sales - Here are the new numbers plotted together. Before, it had looked as if GDP had recovered faster than overall sales in the economy. Now it looks like real GDP, just like real retail sales, are a bit below peak. The good news is that we expect retail sales to be sharply higher through August as auto sales pick up.

Q2 GDP - The Numbers Don't Add Up - Q1 2011 GDP was revised one final time from 1.9% to 0.4% and Q2 2011 GDP the first estimate was 1.3%. Before analyzing the data I have one very simple question. Economic growth slowed during Q2 as acknowledged by the Fed and indicated by regional Fed surveys, ISM, durable goods, etc so how could Q2 GDP be higher than Q1 GDP? That would imply the economy accelerated and clearly that has not happened. In other words just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions.The table below shows how each of the four components contributed to GDP while the two red highlighted areas indicate the most vulnerable and their negative trend.

What does the new gdp report imply for structural explanations of our current troubles? - How should we revise structural interpretations of unemployment in light of the new gdp revisions?  (For summaries, here are a few economists’ reactions to the report.)  Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes.  I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel. A key result of the new numbers is that we had been overestimating productivity growth during a period when it actually was feeble.  That is not only consistent with this structural view but it plays right into it:  the high productivity growth of 2007-2009 now turns out to be an illusion and indeed the structural story all along was suggesting we all had illusions about the ongoing rate of productivity growth.  As of even a mere few days ago, some of those illusions were still up and running.

Q2 2011 Details: Investment in Office, Mall, and Lodging, Residential Components - The BEA released the underlying detail data today for the Q2 Advance GDP report. Here is a look at office, mall and lodging investment: This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP. Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 66%. Mall investment increased slightly in Q2 (probably remodels). Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by 80%. Notice that investment for all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly (flat as a percent of GDP for 2 or 3 years). The second graph is for Residential investment (RI) components.  This graph shows the various components of RI as a percent of GDP for the last 50 years. Investment in single family structures was just above the record low set in Q2 2009. Investment in home improvement was at a $153.1 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (about 1.0% of GDP), significantly above the level of investment in single family structures of $105.8 billion (SAAR) (or 0.7% of GDP). And investment in multifamily structures has been bouncing along at a series low for the last few quarters, although this is expected to increase this year as starts increase.

Forecast Update, by Tim Duy: I updated my very simple GDP model with revised data. This is a simple, data-driven approach - use with caution (I use it to form a baseline and track the impact of evolving data on the medium-term outlook). That said, the model definitely did not like the new take on the US economy: For1 was the forecast with data through 1Q2011 (pre-revision); For 2 extends the data through 2Q2011. While the general consensus is that weak growth in the first half of the year means a stronger second half, the model is telling a different story – the “stronger” second quarter was a bounce from the “weak” first quarter. Think about that a little, and you will get depressed. I very much doubt near term consensus forecasts will be this low (0.6 and 0.7 percent, respectively, for the final two quarters of the year). The tendency instead will be to add back sectors that dragged on the headline – turn the negative drag from auto production into a positive boost, for instance. There is logic to such an approach, and I wouldn’t dismiss it entirely. At the same time, at least the first major report of the month – the ISM manufacturing survey – is a red flag that the underlying weakness is more pervasive and less temporary than the general consensus believes.

Is the economy hitting stall speed? - Atlanta Fed's macroblog - The news that the U.S. economy is not only growing slowly but has grown more slowly than anyone even knew has justifiably rattled some nerves. The sentiment is captured well enough by this article from Bloomberg: "The world's largest economy has yet to regain the ground it lost during the recession and may be vulnerable to a relapse. "Gross domestic product [GDP] expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Economists said the slowdown leaves the recovery susceptible to being knocked off course by shocks at home or abroad." At Reuters, James Pethokoukis makes those concerns quantitative: "...we're in the danger zone for another recession. Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.") The research being referred to is work done by the Federal Reserve Board's Jeremy Nalewaik, a careful researcher who is clear that the results should be read with, well, care.

Staring into the eye of recession - Considering the proposed budget deal to lift the debt ceiling, I think Brad DeLong has the medium-run implications right:  “A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline. A hideous waste of opportunity. There is nothing in there to boost employment and capacity utilization. Absolutely nothing.” Note that the President is on record saying that these cuts are not so abrupt so as to weaken an already sluggish economy. This blurb from Andy Lees this morning is relevant from a global context: US consumer confidence as measured by the Conference Board is now 59.5. Chart 1 puts that in the context of its long term levels. Going back to 1970, every time the index has been below the present level, with the exception of the rebound from Q3 2009 until present (ie when the Fed was expanding its balance sheet), the economy has been in recession.

Personal Income less Transfer Payments Revised Down Sharply - On Friday, the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated. This morning the BEA released revisions for Personal Income and Outlays. One of the key measures of the economy is personal income less transfer payments, in real terms. This is also one of the measures the National Bureau of Economic Research (NBER) uses in business cycle dating: The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. The following graph shows personal income less transfer payments as a percent of the previous peak. Prior to the revisions, the BEA reported this measure was off close to 7% from the previous peak at the trough of the recession. With the revisions, this measure was off almost 11% at the trough - a significant downward revision and shows the recession was much worse than originally thought.

Recession Measures - By request, here are four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. Note: The following graphs are all constructed as a percent of the peak in each indicator. This graph is for real GDP through Q2 2011 and shows real GDP is still 0.4% below the previous pre-recession peak. At the worst point, real GDP was off 5.1% from the 2007 peak. And real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak. With the revisions, this measure was off almost 11% at the trough - a significant downward revision and shows the recession was much worse than originally thought. Real personal income less transfer payments is still 5.1% below the previous peak. It will be some time before this indicator returns to pre-recession levels. This graph is for industrial production through June. Industrial production had been one of the stronger performing sectors because of inventory restocking and some growth in exports. However industrial production is still 7.6% below the pre-recession peak, and it will probably be some time before industrial production returns to pre-recession levels. The final graph is for employment.

Still Playing Catch-Up, Across the Economy - Given that the downturn began nearly four years ago, and that the population has grown significantly since then, the economy should instead be bigger than it was before the financial crisis. But Calculated Risk, a finance blog, makes a good observation: On most major measures of economic health, the economy is still worse today than it was before the recession began. Here’s a chart I’ve put together showing the percentage changes in several important economic indicators since the start of the recession in December 2007. The categories are: overall economic growth (gross domestic product), jobs (nonfarm payrolls), personal income (without transfer payments from the government, like unemployment benefits), the length of the workweek, personal spending, and industrial production. As you can see, all of these categories but one are still below where they were when the recession began. Industrial production is by far the worst off, since an index of this activity is nearly 8 percent below its level in December 2007. Second-worst is employment; today there are 5 percent — or about seven million — fewer payroll jobs than there were when the recession began.

Could it Be That Our Enemies Were Right?: Two years ago, Commerce estimated the decline of the US economy at -0.5% in the third quarter of 2008 and -3.8% in the fourth quarter. It now puts the damage at -3.7% and -8.9%: Great Depression territory. Those estimates make intuitive sense as we assess the real-world effect of the crisis: the jobs lost, the homes foreclosed, the retirements shattered. When people tell me that I’ve changed my mind too much about too many things over the past four years, I can only point to the devastation wrought by this crisis and wonder: How closed must your thinking be if it isn’t affected by a disaster of such magnitude?… The ground they and I used to occupy stands increasingly empty. Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?

The U.S. Enters Into Microrecession - Last Friday, the U.S. Bureau of Economic Analysis revised its real GDP data going back to the start of the 2007 recession. Our animated chart below, created with the Make a GIF online app, shows what changed:  We added the horizontal line indicating the peak of the previous period of economic expansion, which helps highlight the biggest change: instead of having reached and passed that previous peak in the fourth quarter of 2010, the new data indicates that inflation-adjusted GDP in the U.S. is stalling out well below that level.  So, instead of the U.S. economy generating $13,444.3 billion (in 2005 U.S. dollars) of economic activity in the first quarter of 2011, it is actually 1.6% smaller than previously thought, having generated $13,227.9 billion (in 2005 U.S. dollars).  This revision for the first quarter of 2011 marks the largest deviation from previously reported GDP data, coming in some $216.4 billion below the earlier recorded levels.

Will the Microrecession Grow Into a Full Blown Recession? - With the United States having entered into microrecession in the first half of 2011, the next logical question to ask is whether that economic condition will turn into a full blown recession?  To find out, we applied our forward-looking GDP forecasting tool to project where GDP will likely be in the third quarter of 2011. The chart below illustrates our results: Using the advance estimate of inflation-adjusted GDP for the second quarter of 2011 ($13,270.1 billion in chained 2005 U.S. dollars), our "Modified Limo" forecasting method anticipates that real GDP will rise to be within 2% of $13.3 trillion in the third quarter of 2011. We estimate there is a 68% likelihood that real GDP in 2011Q3 will be recorded as being somewhere between $13,157.6 billion and $13,436.9 billion, with growth from the current advance estimate value of $13,270.1 billion being slightly favored. As such, we don't expect that the current microrecession will grow to become a full blown recession at this time.

The Crash Course: An Interview With Dr. Chris Martenson - A Look At This Weeks Show:

-Exponential growth is different from linear growth. We naturally think linear yet the current situation is exponential.
-Growth and prosperity are also different. You can have growth or prosperity, but not both perpetually.
-Problems and predicaments are different as well. A problem can be solved to avoid a certain outcome. A predicament has no solution, only an outcome. We currently have a predicament that we must adjust to.

Did The 2008-09 Downturn Ever End? - Msnbc notes: Many Americans believe that the 2008-2009 downturn never ended. The U.S. has entered a second recession. [Note: That this would happen has been obvious to anyone paying attention. See this and this.] It may not be as bad as the first. Economists say that the Great Recession began in December 2007 and lasted until July 2009. That may be the way that the economy was seen through the eyes of experts, but many Americans do not believe that the 2008-2009 downturn ever ended. A Gallup poll released in April found that 29 percent of those queried thought the economy was in a “depression” and 26 percent said that the original recession had persisted into 2011.(Indeed, more Americans believe the U.S. is in a depression than believe that the economy is growing). In fact, the Americans who believe that the 2008-2009 downturn never ended and that we are in a Depression are right.

Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011" - Charts of petroleum usage show signs of an economic downturn starting in April or May of 2011 says my friend Tim Wallace who writes ... Attached are two charts from my Petroleum Distillates Distribution Demand file. The first chart shows year-over-year demand from peak levels. As we have discussed before, the peak for USA usage was 2007, so everything looks back to that year to see how we are "recovering". As can be easily seen on the chart "Historic Growth Levels Off Peak Data" distillates usage plunged in 2008 then went into the abyss in 2009. There was moderate growth in both 2010 and 2011. "Shovel ready" stimulus, accounts for some of that growth and it is fading. There is no long term growth effect, just unsustainable spending. The second "month-by-month" chart shows a definite economic downturn starting full bore in the April/May time period. Usage is now falling and is well below 2010 levels and approaching 2009. I attribute a significant amount of the initial strength in 2011 to cold weather

Sputter to stall: U.S. economy dips into danger zone for recession - More evidence, as if we needed it, that the U.S. economy is in sad shape. America’s gross domestic product grew just 1.3 percent in the second quarter, according to the Commerce Department. And first-quarter growth was revised down to just 0.4 percent. This is now the weakest two-year recovery since World War II. More importantly, it means we’re in the danger zone for another recession. Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time. Check out this depressing analysis from IHS Global Insight, one of the economics firms the White House regulatory likes to cite (but maybe not today): There is little doubt that, since the summer of 2010, U.S. growth has faltered—the only question now is how much weaker could things get...

Goldman: Rising Unemployment Rate Raises Recession Risk - With last week’s dismal GDP report, and Monday’s disappointing manufacturing purchasing-managers report, the odds of the U.S. reentering recession are rising. The dividing line between a double-dip and a renewed recovery will be drawn by the job market. Goldman Sachs economists have come up with a rule of thumb to determine if the economy has entered recession: If the three month average of the unemployment rate increases by more than 0.35 percentage points, the economy will enter recession within the next six months. Stripping out months when the economy is already in recession, or has recently exited one, the measure has proved accurate about two-thirds of the time. “The important take away from this historical pattern is simple: the labor market is pivotal to sustained growth,” writes Goldman’s Andrew Tilton. “When economic activity slows enough to push the unemployment rate higher for more than a short period, household income growth is interrupted. This typically leads to a pullback in consumer spending, and companies respond with further cuts in labor demand.”

Pimco, BlackRock Say U.S. Economy Is Running at ‘Stall Speed,’ Fed May Act - Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling. Bill Gross, who runs the world’s biggest bond fund at Pimco, and Peter Fisher, head of fixed income at BlackRock, say the Federal Reserve is preparing measures to counter the slowdown. “We’re not looking at a recession yet, but we’re at a tipping point,” Gross said yesterday in an interview on Bloomberg Television. “We’re at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created,” said Gross. The U.S. recovery that began two years ago has been losing momentum and there are even odds the nation will slip into a recession, according to Harvard University economics professor Martin Feldstein. Investors who are seeking safety from a slowing economy and betting the central bank will keep interest rates on hold are snapping up Treasuries, sending two-year yields to a record low 0.3081 percent today.

Feldstein Sees 50% Chance of U.S. Sliding Back Into a Recession - Harvard University economics professor Martin Feldstein said the U.S. recovery that began two years ago has been losing steam and there are even odds the economy will slip into a recession. “This economy is really balanced on the edge,” Feldstein said in an interview on Bloomberg Television “Surveillance Midday” with Tom Keene. “I think there’s now a 50 percent chance that we could slide into a new recession.”  Feldstein cited continued weakness in housing and employment. U.S. consumer spending unexpectedly dropped in June for the first time in almost two years, Commerce Department figures showed today in Washington.  “Nothing has given us much growth,” Feldstein said. “The economy has been flat to down since the beginning of the year.”  The Federal Reserve “has done everything it can,” Feldstein said, though Congress and the administration have failed to address the central problem of weak housing. “Housing is a major drag on the economy,” he said. “The plan to deal with it has been a failure” and house prices have continued to fall.

Odds of Renewed U.S. Recession Seen Rising by Majority of Economic Panel - The two-year-old U.S. recovery’s staying power may be diminishing as consumers and the government pare spending, say five of the nine economists on the academic panel that dates recessions.  “This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”  A greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy, said economist Robert Hall of Stanford University, the panel’s chairman. Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29.  “The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Hall said in an interview.

Insight: Debt relief replaced with recession fear - Former Treasury Secretary Lawrence Summers said in a Reuters column there is a one in three chance of a U.S. recession. According to number crunching by Goldman Sachs, history suggests the economy is perilously close to tipping over the edge. Signs are little better elsewhere. Italy and Spain are edging closer to the euro area debt danger zone, China's economy is slowing and Japan is mired in recession after the March earthquake. The gloom is hitting the corporate world as analysts cut earnings forecasts globally, especially in export-led economies, and big banks have announced tens of thousands of job cuts.

The U.S. Economy Feels the Pull of Gravity - Economics isn’t rocket science, but the U.S. economy is a little like a rocket. If it has enough thrust, it can escape the tug of economic gravity. Not enough, and it just might go into a tailspin. Economists at the Federal Reserve and elsewhere are studying whether today’s slow growth is a precursor to an outright recession—and if so, why. It’s widely accepted that a slowly growing economy is more likely to tip into recession, for the obvious reason that it’s already too close to the line; any shock can knock it into negative territory. And today’s slow growth is at least in part a symptom of underlying problems such as consumer indebtedness, high energy prices, and the jitters induced by debt ceiling brinkmanship. What’s harder to prove is the hypothesis that slowness is not just a symptom of trouble but a cause of it. In other words, some economists say, if the economy grows too weakly, that slowness itself could create conditions that lead to a recession. Why? Maybe the sluggishness undermines consumer and business confidence. Maybe investors lose faith in the recovery so stock prices, already down 9 percent from their April high, plummet. Or maybe lenders get nervous about borrowers’ ability to repay loans and start withdrawing credit. Any such reaction could cause the very downturn that’s feared.

Double-dip recession: Why our current economic malaise is going to be hard to shake. - Whether or not an economy is in a recession is something of a technical question. Some economists insist that the country needs negative GDP growth for two consecutive quarters; otherwise, it is just a soft spot. Some economists use complicated formulas including business investment, unemployment, and other factors to determine whether the recession is real. For the average person on the street, a recession is like pornography; you just know it when you see it. Judging by the third metric, the U.S. economy has probably stalled out and returned to a recessionary state in the last two to four months. Industrial production, consumer spending, business confidence, hiring, overall demand—look at any of those metrics from the spring and summer, and find a sick economy getting sicker.  In the last two days, we have gotten two new, big numbers to confirm that old recessionary feeling. This morning, the Department of Labor announced the July unemployment and jobs-growth figures. Whether you think they are terrible depends on whether you are looking at levels or trends. The unemployment rate fell—good news! But it fell from 9.2 percent to 9.1 percent—bad news. The economy added 117,000 jobs—a decent number! But that is not enough to keep up with population growth, alas.  At the current pace of jobs growth, we will never return to a normal rate.

Supply-side vs. demand-side recessions - Tyler Cowen links to an interesting post about the deflationary impact of the internet. This is interesting not just because it illustrates how technological change impacts the economy, but because it tells us something about recessions. Namely, it tells us that our current recession - like all of the other ones in recent memory - was caused by deficiencies in demand, not in supply.  Does output falter because people don't want to buy as much stuff, or because we become unable to make as much stuff as we used to? This is a debate that has gripped the macroeconomics profession for many decades. Which is kind of surprising to me, because it is so obvious that demand shocks are the culprit. The reason is prices. If recessions are caused by negative supply shocks, then we should see falling output accompanied by rising prices (inflation). If recessions are caused by negative demand shocks, we should see falling output accompanied by falling prices (disinflation or deflation).

Odds of double-dip recession grow - In a report titled "Markets tumble, recession alarm bells ring," consulting firm IHS Global Insight Thursday put the odds of a new recession at 40 percent. Vanguard economists are estimating the odds of a double-dip recession at around 35 percent to 40 percent, up from 30 percent last year, [Roger] Aliaga-Diaz [Vanguard Fund senior economist] said. Economists still consider the most likely scenario to be a very slow-growing economy that feels like a recession, but isn't one officially.

Debt dooms US to low-growth economy, say academics - HIGH US debt is likely to mire the world's largest economy in persistent low economic growth, according to influential US academics who have dubbed the latest leg of the financial crisis ''a decade of debt''. Despite yesterday's move to lift the US debt ceiling, fund managers, academics and commentators are forecasting the US government's record high debt will continue to exact a heavy toll. To avoid a humiliating default or debt restructuring, the US is also predicted to continue unorthodox measures that suppress interest rates it pays on US bonds and therefore reduce its debt more quickly. Predicted impacts of US debt, which is running above 90 per cent of gross domestic product, include cutting economic growth by at least 1 percentage point compared with less debt-burdened economies.

Are we heading for a second global financial crisis? - How far are we from #gfc2? For those not aware, #gfc2 is the Twitter hashtag used for "global financial crisis 2". And the question I ask is a real one. A couple of weeks ago I wrote a blog wondering whether July 2011 felt like July 1914. And then along came a Greek deal, and now a US debt deal, and you might presume I had been prematurely melodramatic. I wish that were true; I very much doubt it is.  And the effective interest rates Italy and Spain are paying have gone over 6% when Germany is paying 2.4%, while the US is being marked for credit downgrade by all major ratings agencies. Gold has hit a record price. Perversely, the cost of UK debt has fallen to new lows: we're now a safe haven. Anyone who thinks we are out of the crisis has to be seriously misguided. And as for those agreements, to shift world war metaphors, think of them as being something equivalent to Chamberlain's Munich deal with Hitler – simple exercises in staving off the inevitable. But does that mean a new global financial crisis is likely? My answer is a very simple "yes". And the reasons are not hard to find.

Bernanke to the rescue? - All financial-market signs now point to a return to economic contraction. The S&P 500 has dropped 9% in two weeks. American government borrowing costs are plummeting, which could conceivably be construed as a result of increased confidence in America's finances in the wake of the debt-ceiling deal, except for three things: 1) the deal didn't fundamentally improve America's finances, 2) equities are tanking, and 3) so are inflation expectations. Yesterday afternoon, yields on inflation-protected Treasuries signaled a 5-year expected inflation rate of about 2.08%. That has since fallen to about 1.86%. The yield on 3-month debt is back to 0.0%, the yield on the 30-year Treasury is 3.79%, and 10-year yields are back to levels observed last August, which prompted the Fed to engage in QE2. Commodities are dropping like rocks—oil is back below $90 a barrel—except for gold, which continues to hit nominal highs. The dollar is also strengthening. American growth dropped to stall speed in the first half of the year, and the government is content to saddle the recovery with substantial fiscal tightening over the next year. Europe is on the brink, and its leaders are on vacation. Falling markets will add to reduced confidence. At this point, the self-fulfilling spiral back into recession is underway. The good news is this: the Fed can't help but act.

From Big Spending to Big Cuts, as Economy Stalls - The nation’s political leaders agreed on Sunday to spend and invest less money in the American economy, a step that economists said risks the reversal of a faltering recovery, in the hope of improving the nation’s long-term prosperity.  The emerging outlines of a deal to cut spending by at least $2.4 trillion over 10 years, with a multibillion-dollar down payment later this year, would complete an about-face in the federal government’s role from outsize spending in the immediate aftermath of the recession1 to outsize cuts going forward.  Last week brought the disconcerting news that the economy grew no faster than the population during the first six months of the year, in part because of spending cuts by state and local governments. Now the federal government is cutting, too.  “Unemployment will be higher than it would have been otherwise. Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise,” Mohamed El-Erian2, chief executive of the bond investment firm Pimco, said Sunday on ABC. “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”

Debt Ceiling Deal: Little Fiscal Drag in '12, Big Risk in '13 - Macroadvisers - Fiscal drag from the debt ceiling deal reached in Washington over the weekend would be modest and likely spread fairly evenly over the coming decade unless automatic spending cuts described in the legislation are triggered.

  • If the deal is enacted as planned — $917 billion of initial cuts followed by $1.5 trillion of additional cuts to be recommended by a Joint Select Committee (JSC) of Congress — the average impact on annual GDP growth over the next decade would be roughly 0.1 percentage point before multiplier effects, with the peak effect probably never more than 1⁄4 percentage point. 
  • However, if the JSC recommendations are not enacted, automatic spending cuts could subtract as much as 0.7 percentage point of GDP growth from FY 2013, again before multiplier effects. 
  • This would be bitter medicine for an economy likely still to be mired in a sub-par recovery at a time when the Federal Open Market Committee (FOMC) is badly positioned to offset any fiscal drag.

There would be somewhat less fiscal drag next year under the terms of this deal than we assumed in recent forecast, but a lot of risk surrounding any fiscal assumptions for 2013.

A few quick macro thoughts on the debt deal -  J.P. Morgan - As you are no doubt aware, a deal appears imminent to resolve the debt ceiling impasse. We see four main economic implications of this deal

  • 1) No default. This had always been a low probability (<1%) very high cost outcome, which now seems off the table.
  • 2) An eventual S&P downgrade is still more likely than not, though we think this would occur after the fiscal commission completes its task later this year. We see no major implications for borrowing costs due to the actions of one or more rating agencies.
  • 3) No stabilization in longer-run fiscal outlook. A stable debt-to-GDP ratio, commonly associated with sustainable fiscal policy, is not achieved within the ten -year horizon. Thus, this agreement should be seen more of a first step toward sustainability.
  • 4) Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012.

Debt Agreement Puts U.S. on Path to End Stimulus Just as Economy Falters - The federal government looks to be getting out of the business of trying to spur the economy just as the U.S. expansion shows increasing signs of faltering. A deal struck over the weekend to cut $2.4 trillion or more off budget deficits over a decade marks the beginning of a prolonged effort to put the government’s finances into better shape. While the immediate economic impact from the agreement is likely to be small, it will add to a reduction in growth next year of 1.5 percentage points coming from the expiration of past stimulus programs, according to economists at JPMorgan Chase & Co. and Deutsche Bank Securities. “Over the next 10 years, there will be further spending cuts and higher taxes, and that’s not good for economic growth,”  “It is the start of a meaningful move toward fiscal consolidation.” The shift from stimulus to austerity coincides with a slowdown in the two-year recovery. A report last week showed that gross domestic product grew at an annual rate of 1.3 percent in the second quarter of the year following 0.4 percent in the first three months, prompting economists to warn of possible relapse into recession.

The Economic Drag - It looks like the spending cuts in the deal through the end of 2012 will be $22 billion, although there could be more after the special committee fails makes their recommendations later this year.  These spending cuts will only have a small negative impact on the economy, but we have to remember that the original stimulus is almost over - and that the payroll tax cut expires at the end of the year - as do the emergency unemployment benefits. Plus state and local governments are continuing to cut spending. Brad Delong estimatesA first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline. That seems high based on the above spending cuts, but that is only part of the drag. I'll try to find some other estimate of the economic drag. It is not just this deal, but the winding down of all the programs that will be a drag on the economy.

    Now, Back to the Economy - Kuttner - While Congress completes action on the deal to raise the debt ceiling in exchange for deep spending cuts, the economy is on the brink of a deeper recession. And by the time phase two of the deal approaches, between Thanksgiving and Christmas (whose great idea was that?), members of both parties could be singing a different song. In phase two, Congress must agree to even deeper cuts recommended by a super-committee, or automatic ten-year cuts will kick in.  But as growth keeps slowing, the premise that a ten-year deficit-reduction deal will somehow restore economic confidence and produce recovery, always dubious, will be revealed as ludicrous.  Instead of the advertised fight about the mix of tax increases versus deeper spending cuts, we could well have a very different debate about how to stimulate a faltering economy. Democrats will call for more public spending, and Republicans will demand deeper tax cuts—but at least that debate has the virtue of acknowledging economic reality.

    Time to Say It - Double Dip May Be Happening - It has been three decades since the United States suffered a recession that followed on the heels of the previous one. But it could be happening again. The unrelenting negative economic news of the past two weeks has painted a picture of a United States economy that fell further and recovered less than we had thought.  When what may eventually be known as Great Recession I hit the country, there was general political agreement that it was incumbent on the government to fight back by stimulating the economy. It did, and the recession ended.  But Great Recession II, if that is what we are entering, has provoked a completely different response. Now the politicians are squabbling over how much to cut spending. After months of wrangling, they passed a bill aimed at forcing more reductions in spending over the next decade.  If this is the beginning of a new double dip, it will have two significant things in common with the dual recessions of 1980 and 1981-82.  Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.

    The Republican's Double-Dip, and What Must Be Done - Robert Reich - Wall Street investors aren’t ideologues. They don’t obsess about budget deficits ten years from now, or the size of the government. One day doesn’t make a trend, but a giant sell-off like this is motivated by hard, cold realities. Here are the two hard, cold realities investors are most worried about: First, the economy looks like it’s dead in the water. The Commerce Department reports almost no growth in the first half of the year. And job growth is just about at a standstill. Far fewer jobs were generated in May and June than necessary just to keep up with the growth in the potential labor force – meaning the employment picture is actually worsening. Investors fear tomorrow’s (Friday’s) jobs report for July will show more of the same. Secondly, investors now know the federal government’s hands are tied. The original stimulus is over; the Fed’s “quantitative easing” is over. This week’s deal over the debt ceiling cinches it. The market is now on its own — without enough rocket power get out of the continuing gravitational pull of the Great Recession.

    Double-dip recession and the debt-ceiling compromise: How the new bill won't help the faltering real economy at all. - What does the last-minute deal to raise the debt ceiling do to aid the flagging, faltering economy? Nothing. The economy is in appalling shape. Last week, the Commerce Department's latest estimate of economic growth left many economists agog. In the second quarter, the economy grew at an annual rate of 1.3 percent. In the first, it grew at an annual rate of just 0.4 percent, a figure revised down sharply from previous estimates. Based on the first six months of 2011, the economy is growing less than 1 percent per year, about one-third of the speed we would expect during a normal expansion. In short, the recovery has completely stalled and the economy is perilously close to double dipping back into recession.  Those horrid growth figures are magnified by horrible jobs figures. Currently, 14.1 million Americans are out of work. Millions more are underemployed, discouraged from hunting for jobs, or "missing" workers who have elected not to enter the labor market. Even if the economy suddenly starts growing at the pace of the 2002-07 expansion, the unemployment rate would not drop to its prerecession level of 5 percent until 2018.

    Assessing the damage - We finally get our debt-ceiling deal, only to watch the S&P500 fall 3.7% from Thursday's close. What gives? Let me begin by suggesting that the debt debate lumped together three issues that I regard as separate problems. There was first the immediate challenge of how the U.S. government was going to pay its bills for the rest of August. Second is the near-term need to bring unemployment down-- we need to see more robust economic growth in order to get Americans back to work as quickly as possible. And third is the daunting challenge of putting U.S. fiscal policy on a sustainable long-run course-- debt cannot continue to grow as a multiple of GDP, and something needed to change to ensure that it did not. The first problem-- finding a way to meet the government's immediate spending commitments-- was entirely a monster of Congress's own creation.So perhaps we should be thankful that at least one thing we got out of the last-minute deal was a lifting of the debt ceiling, allowing August federal payments to be made on schedule. But I think there was some damage done by carrying the drama as far as we did. People were getting nervous about how this would all play out. Concerns about how this would all end up could have been one factor contributing to the July plunge in consumer sentiment, and that loss in confidence could also be relevant for recent weakness in consumer spending.

    Washington’s appetite for self-destruction - We can now say with some confidence that Washington will be doing nothing more to help the ailing economy. President Barack Obama is trying to push an employment agenda. But for the federal government to spur growth or create jobs, it has to spend additional money. The antediluvian Republicans who control Congress do not think that demand can be expanded in this way. They believe that the 2009 stimulus bill, which prevented an even worse economy over the past two years, is responsible for the current weakness. Their approach of depression economics – embedded in the debt ceiling compromise – demands that we address the risk of a double-dip recession by cutting public expenditure immediately.  So instead of trying to pull out of the stall, the US economy will simply have to absorb whatever blow is coming. Some congressional Republicans are just backward, rejecting modern economics on the same basis that they reject Darwin and climate science. Others are cynical, desiring the worst possible economy as an aid to recapturing the White House and Senate in 2012. Still others simply do not believe that government action can ever be a force for good. Whatever their motivations, there is something sad about desperate Americans looking to a party that lacks any inclination to alleviate their misery.  A second lesson is that Washington will not be doing anything to address the fiscal imbalance that threatens America’s long-term economic vitality.  Instead we got this week’s sad bargain – a much smaller, deferred and contingent reduction in spending projections. This sends quite a different signal: our political system cannot cope with the difference between what comes in and what goes out. The quandary is now doubly insoluble because closing that gap, by all sensible accounts, requires both higher revenues and reductions in entitlement spending. Faced with Republican intransigence on taxes, Democrats are less likely than ever to give ground on social security or Medicare.

    Cutting Our Way to a Smaller Future — Spending is good. Borrowing is better. Washington is doing neither. It’s liquidating.  I’ve been covering Wall Street and corporate America for going on two decades, and if there’s anything I’ve learned it’s that there are really only two kinds of companies: those growing and those shrinking.  The U.S. government today has officially become the latter.  The difference between a growing business like Apple Inc. and a shrinking one such as Eastman Kodak has less to do with spending and revenue and than with psychology. Growing companies go through tough times. They adapt, and they’re poised to strike when conditions are right. They don’t stop innovating.  Defeated companies may be producing steady profits. But they lose their entrepreneurial spirit. They stop looking at the future. They get intimidated. They quit fighting. They look for a sale. They try to buy growth. They play not to lose — and end up losing anyway.  Which of those does Washington sound like?

    The Second Great Contraction - Why is everyone still referring to the recent financial crisis as the “great recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy. The phrase “great recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That’s why, throughout this downturn, forecasters and analysts who have tried to make analogies to past postwar U.S. recessions have got it so wrong. Moreover, too many policy-makers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.  But the real problem is that the global economy is badly overleveraged, and there’s no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression or inflation. A more accurate, if less reassuring, term for the ongoing crisis is the “second great contraction.”

    Reinhart And Rogoff: The Most Dangerous Economists In The World Right Now - Of course, Republican politicians in Washington don't see cutting spending and stimulating the economy as an either/or decision. One justification for cutting spending is that it's "pro-jobs" because it instills confidence in the private sector. And though nobody takes the "confidence fairy" argument very seriously, pro-cutting politicians are armed with some intellectual heft: Frequently during the debate we heard politicians cite the work of economists Carmen Reinhart (University of Maryland) and Ken Rogoff (Harvard), who have argued over the last couple of years that higher public debts contribute to lower GDP growth. And, conveniently, they've made a big deal over this idea that a 90% debt-to-GDP ratio represents some kind of tipping point, over which growth slows fast. Their ideas are outlined in the book This Time It's Different, which has been a huge hit.  There's something kind of reasonable sounding about this. More debt seems bad. Reducing debt seems good. So yeah, let's reduce our debt load, unburden the economy, and voila, growth!

    A Contagion of Bad Ideas, by Joseph E. Stiglitz - Optimists argue that the short run macroeconomic impact of the deal to raise America’s debt ceiling and prevent sovereign default will be limited – roughly $25 billion in expenditure cuts in the coming year. But the payroll-tax cut was not renewed, and surely business, anticipating the contractionary effects down the line, will be even more reluctant to lend. The end of the stimulus itself is contractionary. And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction. There has been much concern about financial contagion between Europe and America. But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other. The same will be true of the stagnation that those policies bring.

    The Journal and the Recovery - In an editorial in its weekend edition, The Wall Street Journal, picking up where editorial writer Stephen Moore left off five weeks earlier in his piece touting a report by the Republican staff of the Joint Economic Committee, compares the powerful 1983-84 recovery from the 1981-82 recession with the anemic recovery since 2009 from the 2007-09 downturn.  And guess what?  The Journal finds the present recovery wanting. No surprise there.  Everyone knows that this recovery is feeble and that, in a very real sense, the Little Depression is ongoing.  But the Journal, of course, wants to teach us a deeper lesson by comparing these two recoveries.  The 1983-84 recovery was presided over by none other than the Journal’s hero, Ronald Reagan, in the full bloom of supply-side economics while the current recovery is the product of the detested doctrines of Keynesian economics embraced by the misguided Barack Obama. The Journal tells a good story, but the actual data tell a different one.

    The Wrong Worries, by Paul Krugman - In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things.  For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors — It’s the Greeks! It’s the tsunami! — that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.  Where was growth supposed to come from? Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend. Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy, has been pulling back. To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away.

    BEA Numbers Show the Fumbled Handoff of Obama’s Recovery Plans - So the weekend where the administration is finalizing a debt ceiling deal that features immediate spending cuts, the expectation of medium-term spending cuts and no new stimulus in any form is also the weekend where new BEA data is showing their idea for how the recovery would happen has major problems. We talked a bit about the new BEA data from Friday showing that we’ve had a recovery-less recovery.  This data has shown 2011 has been a bad year and the past several years were revised downward, showing a deeper 2008 than we had previously thought.  But what does that mean for the recovery going forward? In a October 2010 speech, Ben Bernanke said that sustained “expansion must ultimately be driven by growth in private final demand, including consumer spending, business and residential investment, and net exports. That handoff is currently under way.”  In order for the recovery to take off, consumer spending would need to recover.  This is difficult with household balance sheets deeply damaged and weak job numbers. 

    Hope Is Not A Plan - Krugman - Nor is it good politics. So what the heck are they thinking? President Barack Obama’s spokesman is discounting talk that the economy may be headed back into recession, despite recent concerns of economists. Spokesman Jay Carney says there is no question that economic growth and job creation have slowed over the past half year. But, Carney told a White House briefing, “We do not believe that there is a threat of a double-dip recession.” Of course there’s a threat. Larry Summers puts the odds at one in three; I might be slightly more optimistic, but the risk is very real. Who, exactly, is at the White House who knows better?

    Notes on the Un-recovery - Krugman - First, anyone who called this a good jobs report is suffering from the soft bigotry of low expectations. The reality is that we have made little or negative progress on job creation relative to population since the recession officially ended, and this trend continues: Why is this happening, and why do policy makers keep being surprised? My main answer is that 2007-2009 was a postmodern recession brought on by private-sector overreach, very different from pre-1990 recessions that were brought on by tight money. This has two consequences. First, it’s much harder to engineer recovery from a recession that wasn’t created by the Fed; in 1982 all the Fed had to do was loosen the reins, now somebody has to persuade someone to spend more than normal. Second, forecasting models tend to be based on all postwar recessions, not just the 1990 and later postmodern recessions, so they tend to predict a much faster recovery than was ever likely. We should also note that fiscal policy is now very much acting in reverse, as the stimulus fades out and state and local governments keep on laying more people off.The bottom line is that we are not on the ascent, and policy makers should stop deluding themselves otherwise.

    Economic History Holds the Answers: It took the United States 10 years to recover from the Crash that ended the stock speculation of the late 1920s. It may take longer to emerge from the aftermath of the housing crash of 2007 because today's politics makes it impossible to imagine a massive spending program like the one that finally ended the Depression. Yes, World War II in its economic dimension was a stimulus program plain and simple. The great economic surge in the U.S. between 1940 and 1945 came from producing 300,000 military aircraft, 2,700 Liberty ships, aircraft carriers, battleships, 88,000 tanks and self-propelled guns, 2.4 million trucks, millions of bombs and billions of bullets, and more billions of dollars worth of food and clothing to supply 13 million American soldiers. It was largely financed by purchases of government bonds by the Federal Reserve, America's way of printing money. What the Nation got for this was victory, full employment, and a boost to the economy that lasted well into the 1960s."

    Putin says U.S. is "parasite" on global economy -- Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets. "They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi. "They are living like parasites off the global economy and their monopoly of the dollar," Putin said US President Barack Obama earlier announced a last-ditch deal to cut about $2.4 trillion from the U.S. deficit over a decade, avoid a crushing debt default and stave off the risk that the nation's AAA credit rating would be downgraded. The deal initially soothed anxieties and led Russian stocks to jump to three-month highs, but jitters remained over the possibility of a credit downgrade. "Thank god," Putin said, "that they had enough common sense and responsibility to make a balanced decision."

    Word War Two: After Calling Bernanke A "Hooligan", Putin Now Says America Is "A Parasite" Living Off The Global Economy - Three weeks ago Putin called Bernanke a hooligan. Since that remark came from the (allegedly) largest oil producing country in the world, it provoked nary a peep from America's foreign department. Today, he decided to ratchet up the rhetoric, and in a speech to a Kremlin youth group told his listeners what the bulk of the rest of the world thinks of America: ""They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told a Kremlin youth group. "They are living like parasites off the global economy and their monopoly of the dollar."" Russia has not made its distrust of America clear in the past, and while others (ahem China) have been jawboning about selling Treasurys even as they continue buying US one-ply paper, Russia has been actively dumping its Treasury paper to the lowest in years. The reason for the unprovoked outburst? The insanity in Congress. "Thank god," Putin said, "that they had enough common sense and responsibility to make a balanced decision."

    China Joins Russia in Blasting U.S. Borrowing After Debt Ceiling Agreement - China, the largest foreign investor in U.S. government securities, joined Russia in criticizing American policy makers for failing to ensure borrowing is reined in after a stopgap deal to raise the nation’s debt limit. People’s Bank of China Governor Zhou Xiaochuan said China’s central bank will monitor U.S. efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the “madcap” brinksmanship of American lawmakers. Russian Prime Minister Vladimir Putin said two days ago that the U.S. is in a way “leeching on the world economy.” The comments reflect concern that the U.S. may lose its AAA sovereign rating after President Barack Obama and Congress put off decisions on spending cuts and tax increases to assure enactment of a boost in borrowing authority. China and Russia, holding a total $1.28 trillion of Treasuries, have lost nothing so far in the wake of a rally in the securities this year. “It’s probably frustration more than anything else for China,”

    China's Zhou to Monitor U.S. as Xinhua Sees Debt 'Bomb' (Bloomberg) -- Governor Zhou Xiaochuan said China's central bank will monitor U.S. efforts to tackle its debt as the official Chinese news agency criticized what it called the "madcap" brinksmanship of American lawmakers. The People's Bank of China welcomes legislation that raised the U.S. debt limit and prevented a default and will "closely observe" the implementation, Zhou said in a statement on the central bank's website today. Xinhua News Agency said the move "failed to defuse Washington's debt bomb for good," in a commentary dated yesterday. Moody's Investors Service and Fitch Ratings say their AAA credit ratings for the U.S. may be downgraded if lawmakers fail to enact debt reduction measures and the economy weakens. China's Dagong Global Credit Rating Co. said today it cut to A from A+ with a negative outlook .

    China PBOC Calls On US To Protect Safety Of Treasuries – People’s Bank of China Governor Zhou Xiaochuan welcomed the end of the deadlock in Washington in recent days over the raising of the debt ceiling but continued to urge the U.S government to ensure the safety of Treasury investments and warned that China will continue to diversify its foreign exchange holdings. “We have noticed that the U.S House and Senate have passed bills to control spending, making progress on raising the debt ceiling and cutting the deficit in long term. We welcome this,” Zhou said in a statement on the website. Zhou said the U.S. Treasury bond is the major investment and trading product in the global bond markets and sharp volatility and uncertainty within U.S. bond markets would hurt the stability of the world financial system and the global economic recovery. “We hope the U.S. government and Congress take concrete and responsible policy measures to properly handle the debt problem, ensure the safety of U.S. Treasury investments… and boost global investor confidence,” Zhou said.

    China blasts US debt deal, saying it obscures risks - State media in China, the largest holder of US debt, chided the US yesterday over a deal to raise its borrowing limit, saying it was hiding “risks and troubles” for the world economy.“Although the United States has basically avoided default, its sovereign debt problems remain unresolved,” a comment piece said in the People’s Daily, a mouthpiece of the Chinese Communist Party. “They are just deferred and there is a tendency for them to grow. This is casting a shadow over the recovery of the US economy and hiding even bigger risks and troubles for the global economy.” China, sitting on the world’s biggest foreign exchange reserves of about US$3.2 trillion at the end of June, is the largest holder of US Treasuries. The debate over the debt ceiling, which the newspaper labeled a “political fight,” would hurt the credibility of US Treasuries, though a default was “essentially unlikely,” it said.

    Chinese agency warns of U.S. debt downgrade -- As the deadline looms for the United States to raise its debt ceiling or risk default, China's leading credit rating agency on Tuesday told CNN it is prepared to downgrade U.S. sovereign debt after putting it on negative watch last month. The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening it s monetary policy, said it plans a further downgrade to A, indicating heightened doubts over Washington's ability to repay its debts. It said the gloomy assessment -- much lower than the AAA ratings given by the so-called "big three" Western agencies Moody's, Fitch, and Standard and Poor's -- was inevitable given the level of market concern generated by a long-running stalemate between Democrats and Republicans over the debt ceiling. "The squabbling between the two political parties on raising the U.S. debt ceiling and the failure of Congress to pass a resolution so far reflect an irreversible trend on the United States' declining ability to repay its debt,". "The two parities acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,"

    China Rating Agency Downgrades U.S. Debt - China's Dagong Global has cut the credit rating on U.S. sovereign debt to A from A+, Chen Jialin, general manager of the international department at the firm told CNBC on Wednesday. The agency has also put the U.S. on negative outlook. The decision came despite the U.S. raising the debt ceiling and averting a default, and even as both Fitch and Moody's re-affirmed the U.S.'s Triple-A rating. An A rating puts the U.S. five notches below Triple-A and at the same level as Russia. Explaining its decision Dagong said the debt deal had not changed the general trend in which the increase in debt outpaced the increase in GDP and tax revenue. Dagong said that while the increase in the debt ceiling matched the cuts, "there is an eight-year difference between the two objectives." According to the firm, the U.S. needs to cut its fiscal deficit by at least $4 trillion within the next 5 years to maintain its current debt size.

    Concerns For U.S. Financial Outlook - Chinese officials and economists expressed concern about further uncertainty in the US economy despite the debt ceiling being lifted. A bipartisan bill to raise the debt ceiling by $2.4 trillion to $16.7 trillion and cut the deficit by $2.1 trillion over a decade was signed by US President Barack Obama at the White House on Tuesday just hours before the deadline. However, Chinese rating agency Dagong Global Credit Rating Co responded with a rating downgrade of US sovereign credit from A+ to A. The raising of the ceiling does not reverse the trend of debt growing faster than the US economy and actually marks a decline in the ability of Washington to pay its debts, Beijing-based Dagong said in a report. Zhou Xiaochuan, governor of the People's Bank of China, the central bank, said on Wednesday in a statement on the bank's website that the progress made in raising the debt ceiling and cutting the deficit was "welcome", but also urged the US to handle its debts responsibly. He added that any uncertainty or fluctuation in the securities market would undermine financial stability and hinder global economic recovery.

    US borrowing tops 100% of GDP: Treasury - US gross debt shot up $238 billion to reach 100 percent of gross domestic product after the government's debt ceiling was lifted, Treasury figures showed. On Tuesday, the Treasury had to add more than $200 billion of commitments immediately after President Barack Obama signed into law an increase in the debt ceiling. The liabilities had been temporarily taken off the federal government's balance sheet since May 16, when the Treasury reached the $14.29 trillion official cap. It then used extraordinary measures to remain under the legal limit while deeply polarized Republicans and Democrats battled over raising the debt ceiling and reining in the country's massive deficit. The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, putting the United States in a league with highly indebted countries like Italy and Belgium.

    U.S. Debt Reaches 100 Percent of Country's GDP - The U.S. debt surpassed 100 percent of gross domestic product after the government's debt ceiling was lifted, Treasury figures showed Wednesday, according to AFP. The debt, which had been in somewhat of a holding pattern over the past several weeks, rose $238 billion after President Obama signed the debt-ceiling deal into law Tuesday to avoid the country's first-ever default. The package is designed to carve $2.4 trillion from the deficit over the next decade. But in the near term, it granted Washington an increase in its borrowing authority worth the same amount. With that authority, the public debt has climbed to $14.58 trillion, putting it just over the $14.53 trillion size of the country's economy in 2010.

    Dollar’s Reserve Status Waning, U.S. Treasury Borrowing Committee Says - The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government. The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pacific Investment Management Co., said the outperformance of haven currencies and those from emerging nations has aided in the debasement of the dollar’s reserve status, according to comments included in discussion charts presented ahead of the quarterly refunding. The Treasury published the documents today. “The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” page 35 of the presentation made by one committee member said. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.” Members of the TBAC, as the committee is known, which met yesterday in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,”

    Wall Street Warns Tim Geithner That The Dollar Is Starting To Lose Its Reserve Status - The Treasury's Borrowing Advisory Committee, chaired by such luminaries as JPMorgan and Goldman Sachs, which according to some (and by some we mean anyone who cares about such things) is the brains behind the decision-making process of US debt issuance has released its quarterly minutes, in which it has issued one of the most stark warnings about the fate of the US Dollar to date. While it is now a daily occurrence for China and Russia to bash the dollar, for the most part still powerless to provide an alternative (but rapidly gaining), the same warning coming from Jamie and Lloyd has to be taken far, far more seriously. Which is precisely what happened today. As Bloomberg reports, "The Treasury Borrowing Advisory Committee... said the outperformance of haven currencies and those from emerging nations has aided in the debasement of the dollar’s reserve status, according to comments included in discussion charts presented ahead of the quarterly refunding. The Treasury published the documents today. “The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” . “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”"

    Why a Weaker Dollar Could Help the U.S. - Washington's debt deal raised hope that the U.S. economic recovery might not be so doomed after all. But the threat of a looming debt downgrade remains, which could still increase borrowing rates and put a damper on U.S. growth, if it causes investors to ditch U.S. Treasuries in search of safer havens. And yet, the prospect of a weaker U.S. dollar -- the other potential fallout of a downgrade -- might actually do the economy some good. In fact, the value of the dollar internationally has already been falling for some time, which has helped the recovery keep its legs. The dollar's value fell 11% against a basket of 12 major currencies through May 2011, and it's fallen by nearly a third over the past decade, according to a new paper out by Harvard economist Martin Feldstein for the National Bureau of Economic Research. That may seem odd, since inflation has been kept in check and U.S. officials are constantly touting their commitment to boosting the almighty U.S. dollar. But the real goal of American policymakers, says Feldstein, isn't a strong dollar overall. It's a strong dollar at home and a weak one abroad.

    When People Pay You To Take Their Money - Krugman - Look at the rates on inflation-protected US bonds: Negative rates at 5 and 7 years; all of 0.38 percent on 10 years. Borrowing to spend on useful infrastructure, or even just to put people to work in ways that enhance revenue down the road, would almost surely improve the long-run fiscal picture. Conversely, austerity now almost surely hurts the budget as well as the economy. So you know what all the serious people insist that we be doing … Update: The data are here.

    What In The World Is The Bond Market Saying? - Few things have been more confusing to traders in the last few weeks than the action in the bond market. With the USA on the verge of a near default and QE2 now over, there are few investors who would have thought that bonds would be an outperforming asset class.  I’ve pointed out most of these misconceptions about US government debt in real-time and why QE2 was never a “funding” source for government spending, debt monetization, etc. The debt ceiling debate is no exception. It’s been another charade with all the usual players spreading fallacies about the American monetary system. The bond market was never worried about US default or the end of QE2 because that’s not what the bond market takes its cues from. The bond takes its cues from the Fed. And the Fed takes its cues from the economy. The simple message coming from the debt ceiling debacle has not been one of insolvency. Only the media and the fearmongerers were focused on an actual insolvency. The real story here was always the impact of the debt ceiling outcome on the real economy. And the bond market’s message has been loud and clear. Bond traders think this deal stinks for the economy and what they see is an anemic economy.  It’s that simple.

    Rates of Wrath - Krugman - Not good news in stock markets — but you really have to look at the bond markets to get the full awfulness of the situation. The US 10-year bond rate is now down to 2.5%. So much for those bond vigilantes. What this rate is saying is that markets are pricing in terrible economic performance, quite possibly a double dip. And it also says that Washington’s deficit obsession has been utterly, totally wrong-headed. Meanwhile, Italy’s spread against German bonds is soaring even further. What are markets pricing in here? Default as a real possibility; maybe even euro breakup. The latter certainly sounds a lot more plausible now than it did a few months ago. Oh, by the way, how do I know that falling rates in America and rising rates in Italy are both bad news? Part of the answer is that you have to look at the context.  But if that doesn’t satisfy you, you can always make sure to look at more than one market. Italian stocks are plunging, which tells you that the rate rise isn’t about economic optimism; so are US stocks, which tells you that our rate fall isn’t about optimism regarding US solvency.

    Is that all there is? - TODAY was an ugly, ugly day for markets. Yields on safe haven debt—American, German, and British sovereign debt, for instance—dropped like stones. The yield on 30-year American debt is back below 4%. Two factors appear to be driving the mad dash to safety: deteriorating conditions for peripheral euro-zone debt and euro-zone banks, and concerns about the durability of advanced-economy recoveries. In America, the latter factor is probably the dominant one. Bad results on consumer spending and industrial production have come on top of last week's miserable GDP report. There is a growing realisation that the Federal government will represent a small drag on output in 2011, a bigger drag in 2012, and potentially a very big drag in 2013. Hopes for a meaningful fiscal stimulus have been all but dashed. The American economy isn't entirely without hope, however. The odds of a double-dip recession are higher now than they were last week, but there are still some underlying trends that could be supportive of a stronger second half. It looks as though the outlook for car sales might well be brighter in August. And housing markets have been firming for months, setting the stage for a rebound in prices and residential investment.

    Cash is king - IF YESTERDAY'S market rout is anything to go by, investors seem finally to be taking the full measure of the panoply of risks and the exceptional uncertainty they face. What are their options in the current context? Gold, perhaps the oldest refuge of nervous money, has attracted enormous interest from investors who have been rattled by the financial crisis.  The yellow metal is even overpriced against our second candidate, the Swiss franc—despite the fact that the franc itself also looks overheated, as Buttonwood remarked last month. The franc has appreciated by close to 40% against the euro since January 2010. Finally, Treasuries are a reflexive choice in a crisis. Sure enough, the 10-year yield fell by roughly 20 basis points yesterday, but locking in a 2.40% nominal yield is more akin to surrender than a genuine defensive strategy.  In the flight to safety, however, investors are overlooking one asset class: cash. Not all investors, mind you. The Quantum Endowment Fund—George Soros’s vehicle—is reportedly 75% in cash. And in an interview published on July 23rd, the head of PIMCO, Mohamed El-Erian told Barron’s: And don't underestimate the value of cash; in a volatile world both good and bad assets are impacted, and the higher the probability of being able to buy good assets at really cheap levels. You don't want to be fully invested today.

    The Debt Ceiling and Reducing International Exposure to Democracy - Like Ezra Klein, I am concerned about the possibility of continued manufactured crises. The most honest man in Washington did some more truth-telling on CNBC last night. Speaking to Larry Kudlow, Mitch McConnell made perfectly clear that the hostage situation we just went through wasn’t a one-shot deal. It’s the new normal . . .  This is the type of thing that should encourage banks and governments around the world to intensify the search for an alternative to the dollar and US Treasuries. Right now there is no practical way to do this, there is no viable alternative reserve currency and there is no issuing authority that can provide a bond market deep enough and liquid enough to replace Treasuries. However, I would be looking at this point to see what could be done with some sort International Currency basket and bonds issued by the People’s Republic of China. China does not have to be  a net debtor to do make this happen. It simply has to be willing to facilitate the issuance of a larger amount of state backed debt, presumably offset by holding a large amount of state owned assets. They have proven willing and adept at holding a large sovereign wealth fund.

    S&P Strips U.S. of Top Credit Rating - A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor's said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world. S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy outlook for America's finances. It downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen governments', including Liechtenstein's, and on par with Belgium's and New Zealand's. S&P also put the new grade on "negative outlook," meaning the U.S. has little chance of regaining the top rating in the near term. The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P's math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.

    S&P downgrades U.S. credit rating - -- Credit rating agency Standard & Poor's on Friday downgraded the credit rating of the United States, stripping the world's largest economy of its prized AAA status.  In July, S&P placed the United States' rating on "CreditWatch with negative implications" as the debt ceiling debate devolved into partisan bickeringTo avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a "credible" plan to tackle the nation's long-term debt.  In its report Friday, S&P ruled that the U.S. fell short: "The downgrade reflects our opinion that the ... plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."  S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed."

    S.&P. Downgrades U.S. Long-Term Debt - Standard & Poor’s removed the United States government from its list of risk-free borrowers for the first time on Friday night, a downgrade that is freighted with symbolic significance but carries few clear financial implications. The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA+, one notch below the top grade of AAA. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances.  “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement. The Obama administration reacted with indignation, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday afternoon, overstating the federal debt by about $2 trillion.  The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers.

    S&P downgrades U.S. credit rating – - The Standard & Poor's rating agency announced Friday evening that it has downgraded the U.S. credit rating to AA+ from its top rank of AAA. On Friday afternoon, hours before S&P publicly announced the downgrade, the agency revealed its plans to the Obama administration and sent an analysis to the Treasury Department. The senior administration official said the analysis inflated U.S. deficits by $2 trillion. Treasury analysts contacted S&P and challenged the analysis, and S&P acknowledged the mistake, the official said. But S&P said it still would stick with its decision to downgrade the United States' credit rating, according to the official."This is a facts-be-damned decision," the senior official said. "Their analysis was way off, but they wouldn't budge." The official the administration can do nothing now but hope that S&P's decision and analysis faces outside scrutiny. "These guys make Congress look good," the official said of S&P.

    Why the S&P downgrade was delayed - There are three points worth making here, even in ignorance of the details of what went on behind the scenes today. Firstly, talk of debt-to-GDP ratios and the like is a distraction. You can gussy up your downgrade rationale with as many numbers as you like, but at heart it’s a political decision, not an econometric one. Secondly, the US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point. Finally, it’s impossible to view any S&P downgrade without at the same time considering the highly fraught and complex relationship between the US government and the ratings agencies. The ratings agencies are reliant on the US government in many ways, and would be ill-advised to needlessly annoy the powers that be.

    Fed Press Release--Agencies Issue Guidance on Federal Debt--August 5, 2011: Earlier today, Standard & Poor's rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations). For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board's Regulation W, will also be unaffected."

    The Downgrade - I want to let S&P speak for themselves at some length, since their report lays out pretty clearly what it is they are worried about: The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability. Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.

    What the S&P U.S. Credit Rating Downgrade Means - Despite the mistakes S&P has made in the recent past, it's ratings still matter. As I pointed out earlier this week, on average countries with lower ratings have higher interest rates. So borrowing costs of not only the U.S. government but also American consumers is likely to go up, even if not significantly at first. What's more, Treasury bonds, long one of the most stable securities in the market, are likely to get more volatile. That being said, one should not view the current downgrade of the U.S. debt as a new economic event. It is the latest blow that the U.S. economy has taken from the huge ramp up in housing and other debt that lead to the financial crisis. Economists have long predicted that the credit crisis would cause the U.S. economy to grow at a slower pace for years to come. How exactly that slower growth would play out was not clear. Now we have one more piece of the puzzle - relatively higher interest rates that will make it harder for the government, Americans and corporations to borrow money and expand. And after all the borrowing we have done in the past few decades, it's an outcome we deserve.

    America's Crisis Of Confidence Begins - After the close of markets last night, Standard & Poors (S&P) announced that U.S. debt would no longer carry a AAA rating. From Bloomberg's U.S. Loses AAA Credit Rating as S&P Slams Debt, PoliticsStandard & Poors downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits. S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday... The downgrade was the final straw in a week which I believe the world will long remember. It would behoove those who can not accept the obvious facts of America's decline to think about what happened last week. Our political "leaders" proved beyond any doubt that they are just as short-sighted, self-serving, dysfunctional and corrupt as I have repeatedly said they are. It's a wonder the U.S. credit rating is not BBB+, or worse.

    No More “Grade Inflation” for the U.S.? - As reported tonight on CNN-Money (emphasis added):— In its report Friday, S&P ruled that the U.S. fell short: “The downgrade reflects our opinion that the … plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”  S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”…[O]ne of S&P’s explicit criticisms of the compromise was that it didn’t address the biggest drivers of the nation’s debt — Social Security and Medicare — and didn’t allow for additional tax revenue. Apparently the Treasury Department quibbled with S&P’s math, but even after S&P acknowledged an error, they still concluded the U.S.’s creditworthiness still fell below the AAA mark.  It’s down only to AA+, which is sort of like losing the solid “A” to an A- (still pretty good).  One might wonder why the U.S. is still the teacher’s pet.

    Downgrading our politics - Not surprisingly, Republicans seized on this as evidence that their strategy and views have been vindicated. The office of John Boehner, speaker of the House of Representatives, called it the “latest consequence of the out-of-control spending that has taken place in Washington for decades.” But this interpretation is incomplete and misleading. As S&P’s announcement makes clear, the inadequacy of the deal was only one motivation. As important (to me, even more important) was the the reckless and divisive battle that preceded it:  The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy … [This] weakens the government’s ability to manage public finances …  This is crucial. Sovereigns aren’t like companies. They can’t go bankrupt, and creditors can’t seize their assets. Their creditworthiness depends as much on their willingness as their ability to pay.

    On the S&P Downgrade - So S&P downgraded the US.  Big deal.  It should have happened long ago, and many other sovereigns deserve to be downgraded as well.  My point is that the initial downgrades of a AAA entity come hard, but once they come, they come with vigor and speed.  S&P has cleared the way for Moody’s and Fitch to downgrade as well.  The cost for them to downgrade is a lot lower now, and they can go lower than Aa1/AA+ if they choose.  Without significant change, the ratings of the US go lower from here. Now, some will say that there are no limits to what amount of debt a nation that controls its own currency could issue.  Typically, these are radical Keynesian economists, that like Keynes, have a simplistic model, but no sense of human nature or politics.  What could happen:

    • A blocking coalition against inflation elects a congress against additional borrowing, forcing a crisis versus demanded spending.
    • A constitutional convention removes the Fed, and/or repudiates external debts.
    • We could have another situation like the last one, and this time it doesn’t resolve, and we have a technical default.

    S&P and the USA - Paul Krugman - OK, so Standard and Poors has gone ahead with the threatened downgrade. It’s a strange situation. On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really? Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade. More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment. In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right. So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

    Downgrading Standard & Poors - Standard & Poor’s judges that the American political system is a mess and that there should be long-term concern about its public debt. It’s hard to argue with that. But would investors really be better off buying Liechtenstein’s bonds than America’s? On what basis? S&P says the downgrade “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”  Yet, John Chambers, chairman of S&P’s sovereign ratings committee, admits the downgrade “was pretty much motivated by all of the debate about the raising of the debt ceiling,” saying “It involved a level of brinksmanship greater than what we had expected earlier in the year.” But that’s an evaluation of process, not outcomes. And, again, the outcome was to actually start addressing the long-term debt problem. Additionally, S&P apparently issued its judgment based on a $2 trillion error in its baseline assumptions. Considering that this more than accounts for the medium-term impact of keeping the “Bush tax cuts” that they so disdain in place, that would seem significant. But, having their embarrassing error pointed out to them, they decided to stick with the downgrade anyway.

    U.S. Debt Downgrade Charade - No doubt you’ve already read elsewhere that Standard & Poor’s has elected to downgrade the debt rating of the United States. That’s relatively clear-cut; no charade there. The charade I refer to is the rumored hand-wringing, back-and-forth drama between S&P and the White House, as reported throughout the afternoon by CNN, the Wall Street Journal, etc. CNN does a good job of capturing and summarizing the hoopla here. I quote: “On Friday afternoon, hours before S&P publicly announced the downgrade, the agency revealed its plans to the Obama administration and sent an analysis to the Treasury Department. The senior administration official said the analysis inflated U.S. deficits by $2 trillion. “Treasury analysts contacted S&P and challenged the analysis, and S&P acknowledged the mistake, the official said. But S&P said it still would stick with its decision to downgrade the United States’ credit rating, according to the official. “This is a facts-be-damned decision,” the senior official said. “Their analysis was way off, but they wouldn’t budge.”

    Downgrade, Shmowngrade - So Standard and Poor’s went ahead and downgraded US debt from the highest rating of AAA down a notch to AA+. I was on Rachel Maddow’s show tonight, as one of a series of guests denouncing the downgrade. When it comes to anger regarding the self-inflicted damage this debt ceiling debacle has caused, I yield to no one.  Still, I believe we’ll be able to reliably service our public debt as we always have, and that is what the rating should reflect (as I stressed weeks ago when I first heard about this). Then there’s the point that S&P, who gave top grades to toxic mortgages in the bubble days, is not a credible source to decide the question anyway, even before their apparent $2 trillion mistake in arithmetic. All that said, if you read the press release, their critique of our dysfunctional politics and inability to get revenues in deficit reduction deal makes a lot of sense.  Especially with prominent R’s arguing that the debt ceiling debate should be a template for every increase in the ceiling.

    Why S&P Has No Business Downgrading the U.S. - Standard & Poor’s downgrade of America’s debt couldn’t come at a worse time. The result is likely to be higher borrowing costs for the government at all levels, and higher interest on your variable-rate mortgage, your auto loan, your credit card loans, and every other penny you borrow.  Why did S&P do it? Not because America failed to pay its creditors on time. As you may have noticed, we avoided a default. S&P has downgraded the U.S. because it doesn’t think we’re on track to reduce the nation’s debt enough to satisfy S&P — and we’re not doing it in a way S&P prefers. Here’s what S&P said: “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” S&P also blames what it considers to be weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions. Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?

    Will S&P Downgrade Be Another Y2K Scare? - Yves Smith - Remember Y2K? The world was gonna end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. I know people in who went into survivalist mode, stocking up months of supplies, and others who took less extreme precautions, like having lots of cash on hand in case ATMs were disrupted.  As we now know, January 1, 2000 came in without major incident, since the widespread publication of this software threat to End the World as We Know It led to lots of preventive action. Perversely, the big effect of the Y2K scare was that it accelerated tech spending, since many firms bought new systems and upgraded hardware as part of their overhaul. That increased the severity of the post-bubble economic downturn.  It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much, and may perversely hit wobbly stock markets more than Treasury yields. But there is a much bigger issue, namely S&P’s highly questionable conduct, the lack of any analytical process behind this ratings action, and the political implications.

    China tells U.S. good old days of borrowing are over -- China bluntly criticized the United States on Saturday one day after the superpower's credit rating was downgraded, saying the 'good old days' of borrowing were over. Standard & Poor's cut the U.S. long-term credit rating from top-tier AAA by a notch to AA-plus on Friday over concerns about the nation's budget deficits and climbing debt burden. China -- the United States' biggest creditor -- said Washington only had itself to blame for its plight and called for a new stable global reserve currency. 'The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,' China's official Xinhua news agency said in a commentary. After a week which saw $2.5 trillion wiped off global markets, the move deepened investors' concerns of an impending recession in the United States and over the euro zone crisis. Finance ministers and central bankers of the Group of Seven major industrialized nations will confer by telephone later on Saturday or on Sunday, a senior European diplomatic source said. The source said the credit rating downgrade had added a global dimension on top of the euro zone debt issue, raising the need for international coordination.

    Its Time to Abandon the United States - Over the last few years in general my tendency has been to waive away as absurd any notion that the United States would default or that Treasuries are anything less than the most secure asset on the planet. My thoughts and feeling have been shifting as of late. Indeed, for me the spectacle that was the debt showdown was a turning point. There was a palpable sense that GOP freshman simply would not do as they were told. Now, at the end of the day I was overwhelmingly certain a deal would come through. However, the level of brinkmanship shown was to great for me to feel comfortable with. If things could go this badly when there is so little at stake, over a set of issues that is nearly meaningless in the long run, then that has to make one nervous about the future. In my own mind the US government was downgraded last week. The S&P downgrade only confirms what I was feeling. Now, we still have the problem that a downgraded US is a downgraded humanity. There is no substitute for Treasuries. What we have to face is that for the time being we are living in a significantly less safe world.

    The Arithmetic of Near-term Deficits and Debt - Krugman - Amid all the debt hysteria, it’s worth taking a look at the actual arithmetic here — because what this arithmetic says is that the size of the deficit in the next year or two hardly matters for the US fiscal position — and in fact the size over the next decade is barely significant. Start with interest rates. What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments. Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars. Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

    Will the World Still Buy US Debt? - Is the PBoC going to stop buying US treasuries? The debt ceiling debate and a potential default have brought this question back into the spotlight. The theoretical and the real world answer to concerns about China and US debt is the same: China will not dump Treasuries. China's purchase of US treasuries is simply a function of its trade policy. And as we see today, with Treasury yields even lower, at 2.74% on the 10-year, it’s really all about interest rate expectations. John Brynjolfsson is right. “ A shutdown would signal greater weakness in the economy and cause Treasury yields to fall even more” – since we all know bond holders will eventually get their money. The right question to ask is “How fast will the Chinese revalue to dump dollars?” “if China wants to dump dollars, it should stop the chatter and put its money where its mouth is: Revalue faster or float; everything else is just hot air.”

    There is no federal public debt problem in the US - How would we know if the US government was spending too much overall in net terms (that is, relative to its tax revenue)? Answer: if there was full employment, full capacity utilisation and inflation was being driven by nominal aggregate demand growth outstripping the real capacity of the economy to respond by increasing output. A deficit per se – large or small – has no independent scale – by which I mean that one cannot say that it is excessive or deficient without reference to balance between nominal aggregate growth and the growth and utilisation of real productive capacity. Using descriptors such as “vast” just reflect one’s ignorance of what a deficit is. It is quite clear that the US federal budget deficit is way too small at the moment and the “deficit-cutting” agreement the leaders in Congress signed off to today (Monday Australian time) proves they are intent on damaging the economic prospects of their nation. The irony is that the “agreement” once enacted (if) might not even deliver lower deficits. If the damage to the private sector of the public spending withdrawal is such that tax revenue slumps even further we could see a rising budget deficit on the back of the automatic stabilisers.

    Endogenous business cycle spending + tax receipts at record lows = deficit hysteria for the wrong reasons - Rebecca Wilder - I wanted to illustrate the truth about the budget deficit. The truth is, that deficit hysteria has been set in motion by A surge in government spending on items like unemployment compensation, food stamps, and other types of 'support payments to persons for whom no current service is rendered' AND low tax receipts. Yes, long-term reform is needed; but my general conclusion is that the timing of the deficit hysteria is sorely misplaced. First things first, the fiscal deficit - receipts minus net outlays as a % of GDP - is big. In June 2011, the 12-month rolling sum of net receipts (the budget deficit) was roughly 8.5% of a rolling average of GDP. This is down from its 10.6% peak in February 2010, but the level of deficit spending clearly makes some nervous. Why should they be nervous about the 'level' of the deficit? I don't know, since recent 'excess' deficits are cyclically endogenous. The chart below illustrates the spending and tax receipt components of the US Treasury's net borrowing (see Table 9 of the Monthly Treasury Statement). Weak tax receipts and big spending are driving the federal deficits (spending, as we will see below, has surged on items directly related to the business cycle).

    US debt limit really doesn't limit debt  - The federal debt limit is a triumph of false advertising. It doesn't really limit the national debt. Whenever the false ceiling has been reached, it has been raised - forcing unpopular votes in Congress, but not the really hard ones it would take to cut spending, raise revenues and balance budgets. Ranting about the debt is easier than taming it. So the same political theatrics are played over and over again. The debt limit has been raised 78 times since 1960. The current hassle over No. 79 is more contentious and divisive than the previous rounds because of hardened lines in Congress, not only between Democrats and Republicans but within their rosters, especially on the GOP side where about 80 freshmen sent by tea party voters consider compromise a crime.  Blame it on the president. No matter that presidents don't appropriate the spending that creates deficits. Congresses do. But it is the presidents who must seek the increased ceilings necessary to avoid defaulting on the debt.

    Doing Away With the Debt Ceiling - Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position. What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of. The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion. Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

    War and Debt - To begin with the most obvious question: If governments run up their debt in the process of carrying out programs that Congress already approved, why would Congress have yet another option to stop the government from following through on these authorized expenditures, by refusing to raise the debt ceiling? The answer is obvious when one looks at why this fail-safe check was introduced in almost every country of the world. Throughout modern history, war has been the major cause of a rising national debt. Most governments operate in fiscal balance during peacetime, financing their spending and investment by levying taxes and charging user fees. War emergencies push this balance into deficit – sometimes for defensive wars, sometimes for aggression. In Europe, parliamentary checks on government spending were designed to prevent ambitious rulers from waging war.  This obviously was not the Tea Party position, nor that of the Republicans. What is so remarkable about the August 2 debt ceiling crisis in the United States is its seeming dissociation with war spending. To be sure, over a third ($350 billion) of the $917 billion cutback in current spending is assigned to the Pentagon. But that simply slows the remarkable escalation rate that has taken place from Iraq to Afghanistan to Libya.

    A Mobilization in Washington by Wall Street - Wall Street is no longer watching from the sidelines as the most polarizing political fight in years plays out on Capitol Hill. In the last few days, top executives have been in close contact with Washington in a last-ditch attempt to prod lawmakers toward a compromise by Tuesday, the administration’s deadline to reach a deal. On Friday, Jamie Dimon, JPMorgan Chase’s chief executive, raised concerns with Treasury Secretary Timothy F. Geithner about the standoff over the debt ceiling and its potential to disrupt the system through which JP Morgan and other big banks disburse federal payments. Mr. Geithner assured him that the Treasury and Federal Reserve had taken steps to keep the payment system functioning smoothly, according to individuals briefed on the call. In addition, more than a dozen chief executives from the nation’s biggest financial services firms wrote a joint letter2 to President Obama and members of Congress on Thursday warning of “very grave” consequences for the economy and the job market if an agreement wasn’t reached.

    High Stakes Histrionics - With the August 2 deadline fast approaching, the tone and intensity of the political debate grew ever more shrill. Obama faced bitter opposition from his own party regarding planned cuts in the budget, while Speaker of the House John Boehner found himself dealing with a de-facto mutiny from within his own ranks, as Tea Party leaders openly rebelled against Boehner’s leadership.Critical of the Tea Party merriment, Henry Blodget observed, “Sarah Palin is apparently enjoying the Washington debt-ceiling clusterf*** from her perch in Alaska. She just weighed in on Facebook with a veiled threat against tea-party candidates who vote to raise the debt ceiling. (Translation: C'mon, y’all, let's make America default.) And right now, those Tea Party candidates are making life miserable for House Speaker John Boehner, who is about to see his spending plan shot down by folks in his own party. And Mrs. Palin isn't helping.  “In her remarks, the possible 2012 presidential candidate invoked her patented ‘we the little people’ shtick and tossed in a threat about ‘contested primaries.’ The latter is presumably a reminder to the Tea Partiers that if they sell out on the debt-ceiling, their careers in DC will be short.

    Obama's 5 Options If Congress Fails To Raise Debt Ceiling On Time

    The #trilliondollarcoin meme - The coin seignorage idea has really caught on - not just in the blogosphere, but in the mainstream media as well. You have Brad DeLong, Matt Yglesias, Tyler Cowen and a lot of others talking up ‘The Coin’. In the mainstream media, the Economist, CNN, The New Republic and many others. Just so you know what I am talking about, the idea is an end-run around the debt ceiling and it works like this:

    1. The Treasury mints a $1 trillion coin, or whatever amount is desired.
    2. The Treasury deposits the coin into the Treasury’s account at the Fed.
    3. The Treasury buys back bonds
    4. The retirement of bonds is an asset swap, no different from QE2
    5. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
    6. These operations by the Treasury create no new net financial assets for the non-government sector
    7. The debt ceiling crisis is averted

    Legal Scholars Support Ignoring the Debt Limit If Congress Fails Its Constitutional Responsibility - Some time in the next week or so, President Obama will be forced to break the law. Either he must break the law by refusing to pay bondholders the interest or principal they are legally entitled to, or he must refuse to pay government contractors, government employees, Social Security recipients and millions upon millions of other people and businesses that are also legally entitled to payments from the Treasury. Indeed, there is a law, the Congressional Budget and Impoundment Control Act of 1974, which says that it is illegal for the president to fail to spend money that Congress has appropriated. For several months, a number of legal scholars have argued that section 4 of the 14th Amendment to the Constitution empowers the president to disregard the debt limit in the event that the Treasury runs out of cash and the president is forced to break the law. I have pulled together a considerable amount of material in support of the idea that the debt limit is constitutionally invalid. .

    Former Fed General Counsel Supports Constitutional Option on Debt Limit - On Thursday, the Financial Times reported that Michael Bradfield, former General Counsel to the Federal Reserve Board and the FDIC, had sent a memorandum to Congress supporting the constitutional option to the debt limit, in which the president would invoke section 4 of the 14th Amendment to override the debt limit and raise the cash necessary to avoid default and the violation of laws requiring spending for various purposes. I have managed to obtain a copy of this memo through a congressional source. Because of its importance to the debate taking place right this moment, I am pasting the memo below.

    Hopes emerge of deal to avoid U.S. default -(Reuters) - Hopes emerged that lawmakers were close to a last-minute deal on Sunday that could raise the debt ceiling by up to $2.8 trillion and assure financial markets that the United States will avoid default. Prospects that a significant package was within grasp brightened after Republican and Democratic leaders reopened stalled talks with the White House, and Senate Minority Leader Mitch McConnell said he was confident and optimistic. "I think we've got a chance of getting there," McConnell, a Republican, said. ABC News reported that U.S. debt negotiators had reached a tentative agreement on a package, but a White House official cautioned that a deal was "not there yet." Senate Majority Leader Harry Reid, a Democrat, pushed back a key procedural vote on a debt limit plan by 12 hours to 1 p.m. EDT on Sunday, buying additional time for both sides to hammer out details before Asia markets open.

    Factbox: Key elements of possible debt deal (Reuters) - Lawmakers were working furiously on Sunday to hammer out details of a deal to raise the debt limit and put in place a deficit-reduction plan. Following are some details of what could become part of a deal. However, Senate Majority Leader Harry Reid warned that a lot of work still had to be done before an agreement can be announced. A White House official cautioned that no deal had been reached and that details floating out there were "inaccurate".

    • * $2.8 trillion deal. It would raise the debt ceiling by that amount through 2012 and make equal spending cuts.
    • * $1 trillion in cuts would be agreed now.
    • * Special committee appointed by Congress would recommend a second installment of savings of about $1.8 trillion. Congressional leaders have been aiming for finishing that work by the end of this year.
    • * If Congress cannot agree on how to implement the cuts recommended by the committee, automatic cuts would be triggered, including reductions in military spending and cost savings to the Medicare healthcare program for the elderly.

    Obama, Congress Reach Debt Deal - After weeks of partisan wrangling, President Barack Obama and congressional leaders reached a deal Sunday night to raise the government's debt ceiling while cutting spending by about $2.4 trillion, avoiding a government default but setting the stage for months more of stormy debates over how Washington taxes and spends.  The Senate and House are expected to vote on the deal Monday, so the agreement still needs the support of many House Republicans, who have proven a restless, independent group in recent days. But if it passes both chambers, it culminates an extraordinary display of political and economic brinksmanship, coming just days before the government could have been unable to fully pay its bills.  The deal would raise the debt ceiling by $2.4 trillion in two stages, and provide initially for $917 billion in spending cuts over 10 years. A special committee of lawmakers would be charged with finding another $1.5 trillion in deficit reduction, which could come through a tax overhaul and changes to safety-net programs.

    It's a deal: Obama, Congress will avert default - — Ending a perilous stalemate, President Barack Obama and congressional leaders announced a historic agreement Sunday night on emergency legislation to avert the nation's first-ever financial default. The dramatic resolution lifted a cloud that had threatened the still-fragile economic recovery at home — and it instantly powered a rise in financial markets overseas. The agreement would slice at least $2.2 trillion from federal spending over a decade, a steep price for many Democrats, too little for many Republicans. The Treasury's authority to borrow would be extended beyond the 2012 elections, a key objective for Obama, though the president had to give up his insistence on raising taxes on wealthy Americans to reduce deficits.

    White House, congressional leaders reach debt-limit deal - President Obama and congressional leaders Sunday night sealed a deal to raise the federal debt limit1 that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a government default. The agreement2 brings to an end a self-created crisis that has consumed Washington, rattled Wall Street, and shaken confidence in the American political system at home and abroad. The deal could clear Congress as soon as Monday night — barely 24 hours before Treasury officials have said they could begin running short of cash to pay the nation’s bills.  Passage of the agreement, however, remained far from certain in the House, where skeptical Republicans were just beginning to digest the details.

    White House Issues Fact Sheet on Debt Deal - The debt deal announced today is a victory for bipartisan compromise, for the economy and for the American people. The agreement:

    • · Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
    • · Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
    • · Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
    • · Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;

    A Few More Comments on the Pending Deal - Again, quickly running down the deficit-reduction framework as it stands:

    • –$1 trillion in cuts in discretionary spending over 10 years. What does that mean?  It refers to the non-entitlements in the budget: defense and non-defense programs where dollar amounts are appropriated every year.  On the non-defense side, it’s transportation, education and training, child care, housing assistance, health research, energy. From a jobs perspective, a lot of infrastructure and investment in stuff like clean energy comes out of this part of the budget.
    • –A bipartisan committee (6 R’s, 6 D’s) must identify another $1.5 trillion in cuts; entitlements and tax increases can be on the table, though Speaker Boehner claims his R’s will not countenance any new revenues, and I’m prone to believe him.  Assuming the committee agrees on the cuts, it reports out by Thanksgiving and their proposal gets a fast-track procedure—up or down vote by the end of the year.
    • –But if the committee fails to report out or Congress won’t enact their cuts, a spending-cut-only trigger kicks in, with cuts split 50/50 between domestic and defense spending. I don’t see how you get $1.2 trillion (that’s the savings required if this part triggers) after you’ve already taken $1 trillion out of discretionary and still maintain those exemptions.   I predict they’ll be a lot of pressure to violate this part of the deal.

    Another Debt Ceiling Update - The details are still murky. The WSJ reports: House Republican leaders have agreed to a “tentative deal” ... House leaders have scheduled a briefing for their caucus at 8:30, aides say. From the WSJ:

    * $900 billion in the first stage of deficit reduction.
    * $1.5 trillion in second stage of deficit reduction to be defined by a bipartisan special committee of lawmakers appointed by leaders of the House and Senate.
    * If the special committee fails to deliver a deficit-cutting package that would trigger $1.2 trillion in cuts, half would be Defense cuts and the other half would be non-Defense cuts, exempting low-income programs Social Security and Medicaid, and only impacting providers in Medicare.
    * The debt ceiling increase would be done in three phases: $400 billion initially; another $500 billion later this year would be subject to a vote of disapproval; a third increase of $1.5 to get the rest through 2012 and would also be subject to vote of disapproval.
    * There is also a provision to have Congress vote on balanced budget amendment.

    Deal May Avert Default, but Some Ask, ‘Is That Good?’ - The resounding view on Wall Street and among many financial regulators and veteran lawmakers is that there will be a catastrophe if the United States does not raise its debt limit1 in the next few days.  But will the sky really fall?  It is a question more people were asking as the nation’s cash dwindled and lawmakers remained stuck in gridlock before the framework of a settlement emerged late Saturday.  Most people would rather not risk finding out and are hoping lawmakers can turn the framework into a bill that would raise the debt ceiling. But in recent days there has been growing attention on a few economists and financiers who have been arguing that it would be all right to miss the deadline — and even, a few of them say, default on payments to the nation’s bondholders.  These economists and traders argue that lawmakers need to focus on the nation’s long-term financial health rather than its current bind. They point to historical examples involving local and national governments that defaulted on some obligations, and said the short-term pain that befell those places when they tried to borrow again eased over time.

    The Budget Deal: A First, Wobbly Step - The new budget deal comes in two main parts. The first imposes cuts in discretionary spending of almost $1 trillion over the next decade. The second creates a Congressional commission that, by the end of the year, would offer a plan to cut entitlements and “reform” (as opposed to “raise”) taxes and reduce future deficits by $1.5 trillion. Congress would vote up or down on the plan and if the plan failed, a cut in federal spending would be enacted to save that amount. The cut would be split 50-50 between defense and everything else, except Social Security, Medicaid, and Veterans’ benefits. Medicare would be limited to a 2 percent programmatic cut, which would be placed directly on providers, not beneficiaries.  After years of cutting taxes and raising spending, reducing the medium-term debt is clearly a step in the right direction. But it is only the first step of a long journey and it is a problematic one at that.

    Debt Ceiling Update - The final vote will probably be on Tuesday to maximize camera time ...  From the WSJ:  The White House and negotiators for congressional leaders of both parties are pushing for a deal that would raise the nation’s borrowing limit in tandem with deficit reduction in a two-stage process that could result in as much as $3 trillion in spending cuts over the next decade, lawmakers said Sunday. The terms of the second phase – which would link further borrowing leeway to a potentially far-reaching overhaul of the tax code, defense spending and the major old-age safety net programs – are still not decided, On a personal note, I think most Americans (and most politicians) do not understand the U.S. budget.   As an example, the "Balanced Budget Amendment" is obviously bad policy, yet politicians aren't ridiculed for supporting it. Immediate cuts with a 9.2% unemployment rate are bad policy, but that appears to be what is going to happen. I get really frustrated with politicians comparing the Federal budget to a family budget.  If a family buys a car with 5 year financing, they usually just budget the monthly payments. If they budgeted like the government, they'd have to include the entire purchase of the car the year it was bought.

    High Noon: The Outcome to the Debt Ceiling Standoff - After a month of high drama the Senate at high noon today voted to pass a bill to raise the debt ceiling.    How to evaluate this outcome?    If I must give a one-word verdict, it would be “good.”   If I can expand to two words, it would be “not good.”   In what sense was the outcome to the debt ceiling standoff good?   It was much better than a number of alternatives that could have easily happened.  Washington managed to put the pin back into the hand grenade.   Specifically, it is good that:

    • 1. Those who favored a US default — in some cases deliberately, not just as a bargaining tactic — did not prevail.
    • 2. Those who sought to force the Congress and White House to go through the madness of voting on the debt ceiling every few months between now and the next presidential election did not prevail.
    • 3. The bill’s 10 years of spending cuts are not front-loaded. Frontloading would have substantially raised the chances of going back into a new recession. (So would have default or an uncertainty-maximizing short-term fix.)
    • 4. The bill has a mechanism that just might in November demonstrate to the arithmetically innumerate that it is literally impossible to eliminate the budget deficit if the cuts are to come primarily by cutting discretionary non-security spending. 

    When is a Non-Default a Default? - 'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less. The US Government, according to most press reports, has, by virtue of a last minute- a self-designated limit, it seems worth noting- deal, avoided default.  Amazingly, both the process and situation are even more confusingly convoluted than my opening sentence.   Imagine a world in which the debtor determines whether or not he is in default.  In that world defaults would be rare events indeed.  Alas for the debtors, but fortunately for the solvent, our world doesn't work that way, no matter how things might appear.   In our world, debtors don't determine default, creditors do.  With combined holdings on some $1.28T of US Treasuries, China and Russia are, unlike the US, in a position to declare the US in default, which brings us back to the big egg.  Humpty Dumpty's great fall might prove prophetic (and hopefully, beneficially cathartic) but it's his words that haunt me. The question is, which is to be the master- that's all

    Compared to What? - John Taylor writes, So it is clear that the budget has come a long way from the Administration's first spending proposal--about half way to the House proposal--and it was accomplished without any tax increases. Some are disappointed that Washington did not do more, but there is no question that this represents a very big shift, even though the heavy lifting will go on with a good debate in the upcoming elections.  Taylor compares the 10-year path of spending relative to GDP with the path implied by the budget submitted by President Obama. However, that budget was voted down, so I am not sure why it is a relevant comparison.  Another comparison would be with the Bowles-Simpson plan. That plan held spending to about 21 percent of GDP, and this plan never gets spending that low. That plan took on entitlements (admittedly without getting into specifics) and this plan does not.Relative to the Bowles-Simpson baseline, which is where centrists on both sides thought that the budget should head, it was not the crazies on the right who were able to move the needle. It was the crazies on the left.

    Details of 'super committee' are crucial in debt deal‎ - A divided Congress and the Obama White House continued negotiating Sunday to come up with a plan that could include a "super committee" of 12 members of Congress - six Republicans and six Democrats - tasked with recommending at least $1.8 trillion more in future reductions in the U.S. debt. A vote on its recommendations could be put to Congress by around Thanksgiving, Senate Minority Leader Mitch McConnell, R-Ky., said Sunday. As behind-the-scenes negotiations continued Sunday night, politically loaded questions about that super committee were already emerging - questions that could still leave in doubt the deal's passage before the nation's $14.3 trillion debt ceiling is reached on Tuesday. Starting with who would serve on it. That's hugely important because, depending upon the committee's power and responsibilities, a single members of such a committee could hold huge sway over its final recommendation. Some Republicans are already balking at the possibility of a GOP appointee agreeing to raising revenue, either through tax increases or closing loopholes, as any part of a comprehensive budget deal..Meanwhile, Democrats are worried that a committee with highly partisan players on both sides could end up deadlocked, invoking a "trigger" of automatic spending cuts that they fear could hit programs like Social Security and Medicare.

    CBO’s Analysis of the Debt Ceiling Agreement - CBO Director's Blog - Last night President Obama and Congressional leaders reached an agreement on a measure that would reduce future budget deficits and raise the limit on the public debt in a series of steps. CBO has estimated the impact on deficits of the bill—the Budget Control Act of 2011—as posted on the Web site of the House Committee on Rules on August 1, 2011.The legislation would:

    • Establish caps on discretionary spending through 2021;
    • Allow for certain amounts of additional spending for “program integrity” initiatives aimed at reducing the amount of improper benefit Payments;
    • Make changes to the Pell Grant and student loan programs; 
    • Require that the House and the Senate vote on a joint resolution proposing a balanced budget amendment to the Constitution;
    • Establish a procedure to increase the debt limit by $400 billion initially and procedures that would allow the limit to be raised further in two additional steps, for a cumulative increase of between $2.1 trillion and $2.4 trillion; 
    • Reinstate and modify certain budget process rules;  
    • Create a Congressional Joint Select Committee on Deficit Reduction to propose further deficit reductions, with a stated goal of achieving at least $1.5 trillion in budgetary savings over 10 years; and
    • Establish automatic procedures for reducing spending by as much as $1.2 trillion if legislation originating with the new joint select committee does not achieve such savings.

    Debt ceiling deal accomplishes little- High-stakes negotiations force people to reveal what they really care about, and in the 11th-hour deal to stave off a federal financial default, President Obama and congressional Democrats and Republicans each made clear their top priorities. For Republicans, it was preventing any tax increase to upper-income families. For Democrats, it was ensuring no cuts to Social Security, Medicaid and a handful of other programs that aid the elderly and the poor. And for Obama, it was getting a deal that would end the threat of an economy-shaking default until after the 2012 presidential election. None of the key players was willing to go all out to actually solve the nation's long-term financial problems. As a result, the deal doesn't. "In reaching this agreement, each political party yielded to the other party's highest-priority political and ideological interest," and fails to resolve the country's long-term budget problems, Sen. Joe Lieberman (I-Conn.) said Monday.

    When a Cut is Not a Cut - Ron Paul - One might think that the recent drama over the debt ceiling involves one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth. In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase. No plan under serious consideration cuts spending in the way you and I think about it. Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda. But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.   If we simply kept spending at current levels, by their definition of "cuts" that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to "cut". It would only take us 5 years to "cut" $1 trillion, in Washington math, just by holding the line on spending. That is hardly austere or catastrophic.

    Debt Ceiling Deal May Be In Serious Trouble In The House - Don't make nonrefundable plans just yet for a vacation under the assumption that the debt ceiling agreement that has been hinted at the past 24 hours is, in fact, a done deal.   I'm hearing that there is significant opposition from the tea partiers in the House who (1) don't like some (taxes and military spending) of what's in the current deal and (2) think that they can hold out for more concessions from the White House by waiting until Tuesday or Wednesday.  As of now, there's no indication at all that House Speaker John Boehner (R-OH) has the political gravitas with his caucus to simply demand that it vote for any deal.  The same dynamic that forced Boehner to change his plan earlier this week to please the tea partiers is still in place. House Democrats aren't that happy about the deal either so House Republicans may not be able to count on them to make up for for the tea party missing votes as Boehner seems to have been assuming.

    House Passes Debt Limit Deal - The House passed a bill on Monday evening to cut spending by $2.1 trillion and raise the debt ceiling until 2013, just one day before the Aug. 2 deadline by which the government was set to begin defaulting on its loans.  The deal passed mostly on the backs of House Republicans, with 269 votes for the deal and 161 against it. Among the 240 Republicans, 174 supported the bill.  House Democrats were furious, with some members calling the bill a "Satan sandwich" and most of the Congressional Progressive Caucus vowing to vote against it. In the end, however, 95 Democrats voted to support the bill, including Rep. Gabrielle Giffords (D-Ariz.), who is recovering from a gunshot wound. By approving the bill, which should easily pass the Senate on Tuesday, the House allowed the government to avoid a historic default on the nation's loans. But first, it had to anger plenty of progressives on the left and Tea Partiers on the right, both of whom opposed the deal.

    Congress now firmly on the path of austerity - For the US economy, the debt ceiling deal between Republicans and Democrats is as notable for what it excludes as for what it contains.  The new spending cuts come into effect slowly and are unlikely to hold the economy back too much in 2011 and 2012. More important is that Congress has locked in a path of fiscal austerity, even as the Institute of Supply Management’s manufacturing index – an accurate and timely measure of the economy’s health – suggested that the economy was stagnating.  Capital Economics described the ISM report as a “shocker” and said “it suggests that the easing in [gross domestic product] growth in the first half of the year is looking more and more like a sustained slowdown than a short-lived soft patch”.  The headline reduction in discretionary spending is a total of $917bn over the next decade but, according to the Congressional Budget Office, the fall in outlays during the fiscal year that starts this autumn is only $25bn. The consultancy Macroeconomic Advisers looked at an earlier version of the cuts and found that they would lower growth by an average of 0.1 per cent a year over the next five years.

    US debt deal: how Washington lost the plot - While many in the media and around the country had been panicking over the possibility that no deal would be reached and the government would actually default on its debt, those who understand American politics knew that this is not a concern. The reason is that Wall Street is on the frontline in this battle. If there were a default on US debt so that it could no longer be held on bank books as being a riskless asset, most of the major banks would likely be insolvent. It would not be just US debt that must written down, but also debt implicitly guaranteed by the government, such as mortgage-backed securities issued by Fannie Mae and Freddie Mac, as well as a wide range of other assets held by the banks. The loss of value of on a wide range of assets could easily wipe out the capital of the Wall Street banks, putting them on the road to Lehman land. Since JP Morgan, Citigroup and the rest have enormous power in Congress, it was a safe bet that they would force their allies to find a way to keep them in business. Therefore, there was never any reason to worry about the default story.

    Quick summary of the Budget Control Act - Everything below assumes the new Budget Control Act of 2011 bill passes the House and Senate and is signed into law by the President. I’m going to try to be neutral in this description and put my analysis in a separate post Debt limit:

    • The debt limit will be increased by $2.1 T no matter what Congress does.
    • The debt limit can be increased up to an additional $300 B depending on what Congress does on deficit reduction and a Balanced Budget Amendment (BBA).
    • The debt limit increase will happen in three steps: $400 B immediately, then +$500 B, then the remainder after Congress tries to enact further deficit reduction and pass a BBA.
    • Assuming the economy doesn’t go into the tank, this should eliminate the risk of another cash flow crisis for about 18 months, into early 2013. (No, it was never a “default” crisis.)

    Spending cuts, tax increases, and deficit reduction:

    • Whether or not Congress successfully enacts another deficit reduction law in the fall, the total deficit reduction will exceed the debt limit increase available to the President. If Congress fails this fall, some of that deficit reduction will happen through automatically triggered spending cuts.
    • As soon as the Budget Control Act becomes law, discretionary spending (aka annual appropriations) will be cut and capped, with projected savings of $917 B over 10 years, more than the initial $900 B of debt limit increase allowed the President. This is measured relative to a traditional inflation baseline for discretionary spending, without using the “Iraq/Afghanistan war baseline gimmick.”
    • In addition to these immediately enacted spending cuts from the cut and spending caps, a complex process will lead to additional deficit reduction of $1.2 – $1.5 T (or in theory more) over the next 10 years. That additional deficit reduction will result either from a new law enacted by the end of 2011, or from automatically triggered spending cuts written into the Budget Control Act (or from a combination of the two). The last leg of the President’s debt limit increase is tied to this additional deficit reduction.
    • How that additional deficit reduction is achieved is uncertain:

    Understanding the Budget Control Act - If you have not read my Quick summary of the Budget Control Act post, please do so before reading this one. I cover three topics in this post:  how taxes are treated in the Joint Committee, how the spending cut trigger works, and the intentional imbalance of triggered spending cuts.  All three are critical to the strategic analysis. This bill does not raise taxes. The $917 B of spending cuts that immediately take effect are just that, spending cuts. No tax increases there. The Balanced Budget Amendment might or might not have a 2/3 voting requirement to raise taxes. That’s up to the House and Senate to decide when they vote on a BBA. It gets complex when you look at the new Joint Committee.

    Strategic analysis of the Budget Control Act - The President knows he will get debt limit increases through early 2013 no matter what House conservatives/Tea Party members do. Those Members can no longer “hold a debt limit increase hostage” before the 2012 election. We could also describe this as eliminating liquidity risk through 2012. Assuming someone doesn’t find a way out of the enforcement mechanisms in the bill (1 in 3 chance), there will be at least $2.1 T in deficit reduction over the next 10 years as a result. While I think that’s a big policy benefit, I’m not sure how important that is substantively to the President. (Is he for stimulus? Austerity? Who knows at this point.) But given his recent public conversion to deficit hawk, the President will undoubtedly stress it publicly over the next 18 months and began doing so last night. At a minimum, the President will benefit politically with deficit hawk centrists, both for the policy result and the achievement of a bipartisan agreement. Prepare to watch the President seize political credit for spending cuts he fought.

    Relief at an agreement will give way to alarm – Larry Summers - At last Washington has reached a deal that raises the debt limit and averts a default that would have been a national embarrassment and an economic and geopolitical catastrophe. The forces shaping the deal and the deal itself are multifaceted and so also is the right reaction to it. The first is relief. There will be no first default in US history; no economy-damaging short-run austerity; no attack on the nation’s core social protection programmes or universal healthcare; and no repeat of the past month’s shabby spectacle for at least 15 months. But next comes cynicism. An objective observer would now predict larger US budget deficits than a few months ago. The economic forecast has deteriorated, and it is reasonable to estimate even a half a per cent reduction in growth, averaged over 10 years, adds more than a trillion dollars to the national debt by 2021. Despite claims of spending reductions of about $1,000bn, the agreement will also have little impact on spending during the next decade. The deal confirms the low spending levels already negotiated for 2011 and 2012, and caps 2013 spending where most would have expected this Congress to end up.  Beyond that, the outcomes are anyone’s guess. The reality is that Congress approves discretionary spending annually, and the current Congress cannot effectively constrain future actions. 

    CNN/ORC Poll: Most Americans dislike debt deal, think lawmakers acted like ‘spoiled children‘ (CNN) - A majority of Americans disapprove of the deal struck Sunday by President Barack Obama and congressional leaders that will raise the country's legal borrowing limit, and three out of four believe elected officials have acted like "spoiled children." According to a CNN/ORC International poll conducted Monday during a House of Representatives vote on the legislation, 52 percent of Americans say they are opposed to the debt ceiling deal while 44 percent are in favor of it. The Senate passed the legislation Tuesday in a 74-26 vote. Full results (pdf)

    Gross Says Debt Deal Fails to Make Significant Dent in Deficit -- Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., said the debt ceiling compromise reached by Congress won’t make a “significant dent” in U.S. deficits.  “In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost,” Gross wrote in a monthly investment outlook. Trillions of dollars in future spending cuts and tax increases are still necessary to stabilize the U.S. debt ratio as a percentage of gross domestic product to maintain a AAA credit rating, Gross wrote. The Senate is scheduled to vote today to ratify a debt-limit compromise that will defer decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits while slowing economic growth.

    Is a Balanced Budget Amendment a Good Idea? - Simon Johnson - Some House and Senate Republicans have pushed hard to include a “balanced budget” constitutional amendment as part of any agreement on a debt ceiling, and the final accord — passed Monday by the House of Representatives and awaiting action by the Senate — identified such an amendment as one path to the bill’s deficit-cutting provisions.Its supporters say such an amendment is a way to keep spending and deficits under control by requiring that federal spending not exceed revenues. But there are three main problems with this potential approach as it is currently articulated. The first issue, which has been forcefully identified by my fellow Economix blogger Bruce Bartlett, is that there is no way to make this amendment work. The language proposed would, as part of the “balance,” limit federal government spending to 18 percent of gross domestic product, and only a two-thirds majority in both houses of Congress could waive that limit. On the table, in effect, is a balanced budget amendment with a spending cap. G.D.P. is not a legal concept but an economic measure, the details of which change all the time, subject to the prevailing view of best practice among statisticians.

    On a balanced-budget amendment - WHEN was the last time you remember thinking, "Wow, the legislation Congress just passed is so perfectly constructed I can't imagine it ever needing to change"? It is difficult for Congress to tie its own hands. Any law that can pass Congress can later be undone or changed. In the rare cases that Congress puts together a near-perfect piece of legislation, that's a bad thing. In the vastly more common occurrence that Congress passes highly imperfect legislation in need of significant future tweaks, that's a very good thing. Support for an amendment to the constitution is a spectacular vote of confidence in the ability of a legislature to design near-perfect legislation, because the only thing rarer than an amendment to the constitution is a subsequent amendment undoing or clarifying a previous amendment. I see the argument for a well-designed, over-the-business-cycle balanced-budget amendment. But the idea of enshrining this Congress' pathologies into the constitution is terrifying.

    Why Would a Fiscal Commission Work This Time? - Here on Capitol Hill, legislators are fuming about being stripped of their power by a new bipartisan fiscal “super-committee.” But history shows that such commissions have been generally powerless. In the last six decades, Washington has assembled more than a dozen blue-ribbon panels to grapple with fiscal problems. These include the 1947-49 Hoover Commission, the 1982-84 Grace Commission and of course most recently, the Simpson-Bowles Commission, a bipartisan panel President Obama created by executive order just last year that included 12 sitting members of Congress. The panels were often devised as a way to give political cover to policy makers so they could make unpopular changes to things like entitlements and tax rates. In most cases, though, Congress ignored the proposals or deferred action. Even the panel usually held up as the exception that proved the rule, the 1981-83 Greenspan Commission set up to revamp Social Security, was also largely a failure.

    Ten Things You Should Know About the Debt Limit Deal - Now that we’ve had a few days to absorb the debt limit agreement signed by President Obama on Aug. 2, it might be useful to review what it did– and did not–do. Here’s my Top Ten list

    5 Things You Don't Know About The Debt Deal (video) Congress just passed an 11th hour debt deal to keep the U.S. government from defaulting on its loans. Reuters Op-Ed Editor, Jim Ledbetter, walks us through his five main concerns with the new law.

    Will the defense cuts stick? - “The deal puts us on track to cut $350 billion from the defense budget over 10 years,” says the White House. That’s been one of the catchy headlines from the debt-ceiling deal: Expect sweeping cuts to the Pentagon’s budget. But defense observers are discovering all sorts of caveats embedded in the fine print. So is there any way to figure out how much the Pentagon’s budget will actually shrink in the coming decade? And how likely is it that those cuts will stick? The way the bill treats defense is fairly confusing. The White House told Foreign Policy’s Josh Rogin that in the first round, there are roughly $420 billion in cuts over 10 years to “security” spending (which includes the Pentagon, Homeland Security, State Department, Veterans Affairs and USAID), compared with the baseline. Of that, $350 billion is supposed to come out of the Pentagon’s pockets. It’s up to Congress, not written into the bill. In fact, if — as many hawks in Congress would prefer — the Pentagon’s budget grows next year, then agencies such as the State Department and Homeland Security will have to absorb even more in cuts.

    Deficit reduction: On the debt-ceiling deal - TO DEMOCRATS I would like to say relax, guys. The debt-ceiling got raised. Yay! And the debt-ceiling deal is not going to destroy the recovery, if there has been a recovery. While the deal does rule out further fiscal stimulus, the bulk of the putative cuts in the deal are so far in the future that their contractionary effects are likely to be small to nil. Josh Barro is today's cool-headed voice of reason:[L]iberals who are upset that this deal is destimulative, or who expect it to tank the economy, are off base. Suzy Khimm cites a study finding that a 1 percent of GDP fiscal consolidation implies a 0.5 percent reduction in GDP after two years—or a reduction in the growth rate of 0.25 percent each year. That points to a hit to annual GDP growth of roughly 0.04 percentage points from the FY 12 changes in this plan—an effect that will be impossible to pick up amidst the noise. The consolidations get larger in later years. But an eventual fiscal consolidation is inevitable—we can’t run deficits over 5 percent of GDP forever. If the economy remains terrible in 2014, it is likely the cuts will be delayed. Moreover, as Tyler Cowen regularly reminds us, the monetary authority moves last. If, for some reason, an all-but-undetectable cut relative to the pre-deal 2012 spending baseline nudges the economy into contraction, the Fed will likely respond to offset destimulative effects.

    The Depressing Impact of a Spending Only Trigger - As I and others have written from the beginning of this debacle, absent new revenues, we’ll end up with spending cuts carrying too much of the load.  And that looks to be where we’re headed. As I understand it, the first tranche of cuts—about $1 trillion in discretionary spending—occurs soon after passage. Then, by the end of this year, a committee of 6 R’s and 6 D’s comes up with a proposal for about $2 trillion in round two cuts.  If the committee fails to do so, or Congress fails to enact, then an across-the-board spending-cut-only trigger takes over. If it’s true that the trigger in the deal is spending-only, no revenues, then the American people are about to end up with a very tough deal indeed.

    Spending cuts: Here comes the hard part (CNNMoney) -- After months of political wrangling, lawmakers have managed to pass a bill that raises the debt ceiling and cuts spending. Congress cut spending, but still has to decide which programs and agencies will receive less money. Really, that's where the rubber always meets the road. And the deadline for making those tough choices is just around the corner. The next fiscal year starts on Oct. 1, and legislators are still light years from putting together a spending plan for next year. And this new bill -- which cuts spending -- is being dropped into the appropriations process at what amounts to the last minute. "It's now August," said Craig Jennings, federal fiscal policy director at OMB Watch, which monitors federal spending. "They have to get this done by the end of September, and the Senate hasn't done anything."

    Spending Cuts Seen as Step, Not as Cure - There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.  By the end of the 10-year deal, the federal debt would be much larger than it is today.  Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.  That is the reason that the ratings agency Standard & Poor’s and its rivals still are threatening to remove the United States from their lists of risk-free borrowers, although the other agencies, Moody’s and Fitch, both said Tuesday that they would watch and wait for now.  It is also the reason that many conservative Republicans refused to vote for the agreement, calling it a grossly inadequate answer to a pressing problem.

    Could This Deal Raise Budget Deficits? - It is virtually impossible to think of the impact of the debt deal as doing anything to help the economy. But give Mr. Kroszner credit for trying, in today’s front-page article by Binyamin Appelbaum and Catherine Rampell. To come up with a rosy scenario, he suggests that uncertainty may somehow be reduced, leading to more consumption and investment. I cannot imagine anyone actually thinking this deal — with its clear potential for another bruising fight and deadlock that will do more to hurt the economy — decreases uncertainty. In fact, this deal could manage to do the exact opposite of what it promises — raise the deficit. If that happens, it will be because a major determinant of tax revenue is the health of the economy. Profits and growth bring revenues. This could damage the economy enough to send tax receipts down again. Although you never would have guessed it from the rhetoric, tax receipts are at the lowest level in years, as a percentage of gross domestic product. Get a healthy economy and tax revenues rise while a lot of spending, on such things as unemployment benefits, goes away.

    A Few Thoughts on the Debt Ceiling Deal -

    • 1. Obama still has his hostage—if he wants it. As far as I can tell, the Bush tax cuts are nowhere in the debt ceiling agreement, which means that at current course and speed they expire at the end of 2012. Extending the tax cuts would reduce revenue by about $3.5 trillion over the next decade. According to news reports, Obama was willing to extend the Bush tax cuts in exchange for $800-1,200 billion of additional tax revenue.
    • 2. The next step of the deal is that a joint Congressional committee is supposed to come up with a plan to reduce deficits by $1.2-1.5 trillion over ten years. If they fail to come up with a plan, or their plan is rejected by Congress, then there will be major automatic cuts in discretionary spending, including defense. (There will also be cuts in Medicare reimbursement rates, but not in Social Security or Medicaid.) The idea on Obama’s side is that the prospect of major defense cuts will force Republicans to negotiate.
    • 3. Obama needs the joint committee to succeed more than the Republicans do. Without it, he only gets a total of $2.1 trillion in debt ceiling increases, which may not get us through the next election—especially with the economy seeming to only get weaker. Since he is starting out with the weaker hand, I don’t see how he gets anything unless he is willing to hold the Bush tax cuts hostage

    Joint Select Committee On deficit reduction Has Been Set Up To Fail - The Budget Control Act of 2011 overall, but especially the Joint Select Committee (for now and evermore to be called by me on CG&G as the JSC) is being viewed in precisely the opposite way from the Congressional Budget Act of 1974.  CBA was seen as an opportunity to change the debate and make some progress. By contrast, the Budget Control Act and the JSC are seen as things to be feared and, therefore, prevented from succeeding. This has become completely and incontrovertibly evident in the less-than-24 hours since the law was signed.  During that time, congressional Republicans have made it clear that they won't appoint anyone to the JSC who will support tax increases of any kind.  They've even gone so far as to say that JSC doesn't have the authority to consider tax increases, although no one else seems to be able to find that prohibition in the law. Democrats, meanwhile, have said that they won't appoint anyone to JSC who will consider cuts in Medicare, Medicaid, or Social Security.

    If the Joint Committee fails, some ObamaCare spending will be cut - If you have been following my posts you understand that the Budget Control Act creates a new 12-Member Congressional Joint Select Committee to negotiate and agree to at least $1.2 T in deficit reduction by November 23rd. If the Committee fails or if it makes recommendations but they don’t become law, then plan B is triggered. Plan B is an automatic sequester that cuts $1.2 T over the nine-year period 2013-2021 from all discretionary and some mandatory spending programs. Monday I wrote that the bulk of the mandatory spending covered was Medicare. I flagged farm subsidies and unspecified “other smaller entitlements” as also being on the triggered sequester’s chopping block.Many big entitlements are exempted from this sequester, including Social Security, Medicaid, most welfare programs, refundable tax credits, veterans benefits, and civilian and military retirement benefits. This is because the Budget Control Act did not write its own new set of exemptions from the mandatory sequester. It instead referenced an exemption list in an earlier law.  I missed the new Affordable Care Act (ObamaCare) mandatory spending. While the biggest spending components of this law would be exempt from the sequester, significant parts of it would be subject to cuts if the Joint Committee fails.

    Exchange Subsidies Threatened; Part of the Automatic Trigger in the Debt Limit Deal - The White House definitely wants the Catfood Commission II to negotiate their grand bargain that they can tout along the lines of “getting things done” with a “bipartisan compromise.” And they believe that the automatic cuts that would be triggered if the Catfood Commission II recommendations don’t come about are so distasteful to both sides, that it will force an agreement. Some Democrats took a look at the automatic cuts and thought they were tough, but probably better than a bad agreement that would slash the safety net and in all likelihood do little on revenues. After all, Medicaid, Social Security and programs for the poor were protected in the agreement, and Medicare would only see a provider haircut. And half of the automatic cuts would hit the Pentagon. What’s the forcing mechanism for the left? Turns out, that would be the exchange subsidies from the Affordable Care Act:

    PCCC: Debt Ceiling Deal 'A Bizarre Parallel Universe'  - Unsurprisingly, the Progressive Change Change Campaign Committee has joined with other left-leaning groups like MoveOn in condemning the debt ceiling deal currently in the final stages of negotiations on Capitol Hill. "Seeing a Democratic president take taxing the rich off the table and instead push a deal that will lead to Social Security, Medicare, and Medicaid benefit cuts is like entering a bizarre parallel universe," PCCC co-founder Stephanie Taylor said in a statement. "One with horrific consequences for middle-class families." "This deal is the exact opposite of what the majority of Americans support," Taylor added, "and all Democrats in Congress should oppose it."

    The Cost of the Deal in Washington: Party like it's 1937.: So they struck a deal in Washington last night, cutting back spending on just about everything. Goodbye rail network, investment in green tech and infrastructure, green jobs. Hello 1937, where similar cutbacks put America right back into the Depression. And while they are at it, the Republican House is packing 39 anti-environment riders into legislation.

    Where Do We Go From Here? - The debt-ceiling business is a hostage crisis. That much became unmistakably clear last week, with multiple commentators endorsing the view, James Fallows, Paul Krugman and law professor Geoffrey Stone among them (“Negotiating with Terrorists” was the original headline on Stone’s post). And while it’s yet to be determined how many casualties there will be from the Tea Party’s astonishing attempt to highjack the spending and taxing debate, it is not too soon to be thinking about what will happen next. These are bleak times, but here I aim to offer one hopeful possibility. There has been bad behavior in the US Congress before, though not on such a scale. That’s not to say it wasn’t scarily dangerous at the time. I am thinking of the movement in the early 1950s that came to be known as “McCarthyism.” In these trying times, it’s worth remembering how civility was restored in those circumstances; how a new consensus developed rapidly in the mid-1950s that placed limits on disruptive political behavior.

    Moving forward after the debt deal - Larry Summers - At last Washington has reached a deal1 that raises the debt limit and averts a default that would have been a national embarrassment and an economic and geopolitical catastrophe. The forces shaping the deal are multifaceted and so are reactions. Mine has a number of elements. Relief. There will be no default; no economy-damaging short-run austerity; no attack on the nation’s core social protection programs or universal health care; and no repeat, for at least 15 months, of the recent shabby spectacle. All of this was in doubt just a few days ago.  Cynicism. Objective observers would forecast larger U.S. budget deficits in the out-years than would have been predicted a few months ago. The economic forecast has deteriorated, and it is reasonable to estimate that even a half-a-percent reduction in growth averaged over 10 years adds more than a trillion dollars to the national debt in 2021. Economic anxiety. The issues pressing the United States today are much more about jobs and a growth deficit than an excessive budget deficit. Consider that a single bad economic statistic — the manufacturing purchasing managers survey — more than wiped out all the stock market gains from the avoidance of default and that bond yields reached new lows at the moment of maximum apparent danger on the debt limit.

    The President Surrenders, by Paul Krugman - A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong. For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status. Start with the economics. We currently have a deeply depressed economy. The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts. Make no mistake about it, what we’re witnessing here is a catastrophe on multiple levels.

    S&P, Moody's Await Debt Plan Details - The U.S. avoided a fiscal crisis with an eleventh hour debt ceiling deal, and the markets are recovering from its fainting spell that the U.S. might default for the first time in the nation’s history. But the credit-ratings agencies are waiting on the details of the deal, and may stick to their guns that the $2.4 trillion in promised cuts fall short of the $4 trillion they demanded in a "credible" plan to ward off a downgrade by one notch to double A from triple-A. S&P has been notably pointed in its criticisms. John Chambers, its head of sovereign ratings, said on a client conference call late last week that $4 trillion in cuts is just “a good start,” and it wants more to stabilize the U.S.’ annual budget deficit-to-GDP ratio, now at more than 9%. The International Monetary Fund has said that a healthy ratio here is 7.5%. Chambers also indicated that the “acrimonious” fights in Washington were the most “detrimental” to the U.S. credit rating outlook. The plan’s new three-step process under which the government would raise the debt ceiling may risk more uncertainty and infighting, which S&P has already frowned on.

    U.S. may still face debt downgrade: Buchholz - U.S. debt faces a likely ratings downgrade in the next couple months despite President Barack Obama confirming a deal to raise the country's debt ceiling was in place, economic commentator Todd Buchholz said Monday. Buccholz, a former White House director of economic policy until 1992, said it was difficult to see how the current rating could be maintained while a certain amount of uncertainty remained. He said the pullback in the price of gold in reaction to the debt ceiling deal was insignificant and unlikely a devastating blow for the price of the precious metal. Obama said leaders of both political parties reached a broad deal Sunday night to raise the government's debt ceiling while cutting spending. Earlier Sunday, congressional aides said the agreement would raise the debt ceiling by US$2.4 trillion in three stages and provide initially for roughly $900 billion in spending cuts over 10 years

    'Band Aid’ Deal May Pressure S&P to Slash US Rating - Sunday night's deal that will see the US debt ceiling raised if it passes a vote in the House is merely a "band aid" and certainly not a game changer, according to an assessment from Barclays Capital. The deal “is certainly not a game-changing breakthrough, and will keep the possibility of a near-term rating downgrade alive; it represents, in our view, just a band-aid approach on the way to more sustainable public finances,” said Julian Callow, the chief European economist at Barclays Capital in a research note on Monday. The big problem for Callow is the slowdown in the US economy, which could mean any savings are offset by significantly lower revenue. “All of the putative fiscal savings could effectively be wiped out if US GDP outturns continue to be significantly weaker than is assumed in government fiscal baseline projections,” Callow said. Unless the credit ratings agencies believe the new enforcement mechanism is credible, Callow predicts they will downgrade US debt even though the debt ceiling has been raised.

    Geithner unsure if U.S. debt to be downgraded -ABC - U.S. Treasury Secretary Timothy Geithner said he is not sure whether the bitterly fought debt agreement to be considered on Tuesday by the U.S. Senate will avoid a downgrade of the U.S. top-tier credit rating. Geithner, in an interview with ABC News aired on Tuesday, also said he thought the risk of the U.S. economy slipping into a double-dip recession was low, but added that the battle over the debt limit and the threat of default had damaged confidence in the economy.  Geithner said the ratings agencies were "going to take a careful look" at whether Washington politicians have the will to act to bring deficits under control."It's not my judgement to make" whether the deal is enough to avoid a downgrade, saying that was up to the ratings agencies.

    US rating maintained by Moody's, Fitch; S&P in focus  (Reuters) - The United States had its triple-A rating confirmed by two key ratings agencies on Tuesday after Washington struck a last-minute deal to avoid a debt default, but threats of future downgrades remain. Moody's Investors Service and Fitch Ratings maintained U.S. ratings for now, but said additional deficit-reduction measures are needed for the government to put its finances in order and retain the coveted rating. Underscoring that threat, Moody's assigned a negative outlook to the Aaa rating, which means a downgrade is possible in the next 12 to 18 months. For details, see . Fitch promised to conclude a more thorough review of the United States by the end of the month and did not rule out slapping a negative outlook on the rating. Now investors await Standard & Poor's. The agency has been tougher than its rivals, threatening to downgrade U.S. ratings by mid-October if lawmakers did not come up with a plan to meaningfully cut the budget deficit. 'If they stick to what they said, they would downgrade (the United States). But I suspect they are under tremendous pressure not to do so,' said Mohamed El-Erian, co-chief investment officer at PIMCO.

    Fitch keeps US AAA rating, review ongoing  - Fitch Ratings upheld its AAA rating on the United States on Tuesday after lawmakers approved spending cuts that will help avoid a U.S. default, but warned that the world's largest economy must reduce its debt burden or face a downgrade. Although the bill removes the threat of imminent default by raising the national debt limit enough to last until 2013, its cuts are only about half the $4 trillion in savings that ratings agencies Standard & Poor's and Moody's have said would be enough to confirm the country's triple-A rating with a stable outlook. Other ratings agencies have also warned of a potential downgrade of U.S. credit depending on the scope and size of the deficit cutting agreement. "The more important question here is whether the bill will be enough to appease S&P, which wanted $4 trillion in cuts, with many in the market believing that there is a realistic chance of a downgrade from S&P,"

    US Debt deal alone won't sustain AAA rating - The U.S. averted a debt default Tuesday when President Barack Obama signed a bill raising the country's debt ceiling into law. But that might not enough to maintain its coveted AAA debt rating, according to Fitch Ratings. U.S. debt has held a AAA rating since 1917. Currently, fewer than 20 countries have AAA ratings. On Tuesday, Fitch said the agreement was an important first step but "not the end of the process." The rating agency wants to see a credible plan to reduce the budget deficit. David Riley, managing director at Fitch, told The Associated Press: "There's more to be done in order to keep the rating in the medium-term." Fitch expects to conclude its review of the U.S. sovereign rating by the end of August. As the debt deal currently stands, it is possible the U.S. debt rating could be downgraded at that time, Fitch said.

    El-Erian Says S&P Will Downgrade U.S. If It Holds to Outlook - Standard & Poor’s will downgrade the U.S. after it enacted a law to reduce federal debt by $2.4 trillion over a decade if the credit-rating company sticks to what it outlined last month, said Pacific Investment Management Co.’s Mohamed El-Erian. “It’s not clear that this is enough to preclude a downgrade by S&P,” El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “We suspect they’re under tremendous pressure not to downgrade, but if they stick to what they told the world on July 14, they will downgrade the U.S.” S&P, which has given the U.S. a top AAA ranking since 1941, placed the rating on “CreditWatch” on July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement was reached by yesterday. The company said it needs to see “a credible solution to the rising U.S. government debt burden.” It indicated last week that anything less than $4 trillion in cuts would jeopardize the grade.

    Will the US ever get its triple-A back? - I went on All Things Considered last night, and told Guy Raz that “once you lose your AAA, it’s gone” — following that up for good measure with the statement that “I cannot remember the last time that anyone got upgraded to AAA.” But was I right? Reckoning that if I was going to opine about such things on national radio, it might be a good idea to have a vague idea of what the truth of the matter is, I put the wonderful Roy Strom on the case. And he found this list of all S&P sovereign ratings actions since 1975. The last time that a country became triple-A was February 16, 2004, when Sweden got upgraded from AA+. The triple-A-sovereign club currently has 16 members, including Sweden. The US has had the top rating since 1941; the next longest-serving member of the club is France, which got its triple-A in June 1975. The most recent entries on the list — Denmark, Finland, Canada, Australia, and Sweden — are all countries which got downgraded and then reinstated. And when you do lose your triple-A, you have to expect to remain in the wilderness for at least a decade.

    Why an American Downgrade Will Hit Your Wallet Harder Than You Think - According to a recent chart put together by the New York Times, average bond yield of a debt of a country with a AAA rating is about 3%. The average yield of the bonds of the countries in the next three categories, which is where the U.S. will land is 4.15%. How will a 1.15% higher interest rate hit your wallet? Here's how: A higher interest rate will mean that the U.S. Federal Government will have to pay more to borrow. The cost to the average American household, if it were passed along in higher taxes, would be about $1550 a year. Mortgage rates tend to follow 10-year Treasury rates. So a higher yield on 10-year Treasuries that would come with a ratings downgrade is also likely to force you to pay more to buy a house. A 1.15% higher rate on a $200,000 loan would raise your interest payments by $36,573 over the course of the mortgage Not always, but higher Treasury yields are generally associated with higher rates of inflation. If that is the case you will need to be putting away more money for retirement because you dollars will be worth that much less 30 years from now. If you are 35 and make a salary of $75,000, you will have to save nearly 8,000 more a year, or about $650 a month, to have enough for retirement.

    “Is Too Much Significance Given to U.S. Credit Rating?” - A useful discussion with Marshall Auerback on Fox News on the debt ceiling deal and the implications of a possible downgrade of US Treasuries.

    Is It Time to Downgrade the Rating Agencies? - Throughout the rancorous debate, just about every player managed to agree that the United States’ AAA rating should not be threatened, even if they disagreed about how to save it. In his weekly radio address last Saturday, Obama warned2 that “if we don’t [reach a deal], for the first time ever, we could lose our country’s Triple A credit rating.” House Speaker John Boehner called in to Rush Limbaugh’s radio program during the negotiations last month and said3, “I believe that we've got to act to prevent a default and to prevent a downgrade of our nation's credit rating.” Representative Jim Jordan, head of the powerful Republican Study Committee in the House, said4 Monday that “Our AAA credit rating remains at risk because President Obama and his fellow tax-and-spend liberals refused to support the Cut, Cap, and Balance plan.” Senate majority leader Harry Reid meanwhile claimed5 that “anything less” than a debt ceiling increase into 2013 would “[risk] an immediate downgrade of America’s credit rating.” So by almost all accounts inside the beltway, a downgrade in the federal government’s credit rating would be catastrophic. But a closer look at who issues these ratings, how they do it, and the real-world impact of these ratings tells a different story.

    S&P, Moody's, and Fitch: Why are they so hard to kill? - Everyone hates the big credit rating agencies—Standard & Poor's, Moody's, and Fitch. Europeans resent the clout that they wield. Democrats hate them for their complicity in expanding the subprime mortgage market that brought down the economy and left us with a 9 percent unemployment rate. Republicans, though they're generally opposed to the Dodd-Frank financial reform legislation, have no love for the credit rating agencies, either. The conservative Wall Street Journal columnist Holman Jenkins, in a July 27 column headlined "Who Elected The Rating Agencies?," called section 939A of Dodd-Frank, which requires federal regulations to be stripped of all references to credit ratings, a "rare useful provision." Citing section 939A, David Zervos, the head of global fixed-income strategy at Jefferies, calls the noise the credit raters are currently making about downgrading U.S. Treasuries a "last gasp of hot air."

    Debt ceiling: winners - Barring a Republican rebellion in the House of Representatives, the Budget Control Act of 2011 will be passed by both houses of Congress on Monday, and sent to the President for his signature. Despite the resurrection of real market-shifting news on Monday, it’s worth quickly reflecting on the deal. A few other sites have done some post-mortems from a political or policy point of view. But see below for FT Alphaville’s debt ceiling winners and losers. (It was a lot harder to find winners than losers.) First, for a bit more context here is a helpful flowchart drawn by staffers for Senate Republicans, via Ezra Klein:

    Govts welcome U.S. debt deal, still worry about ratings - Japan and Germany welcomed news of an 11th-hour deal to avoid a U.S. government default on Monday, but officials in both countries said Washington must do more to deal with its huge debt burden and the threat of a cut in its credit ratings. Japan, second to China as America's biggest creditor, joined other countries and investors in praising the deal but said it hoped the United States would take additional steps to stabilise its finances and head off the threat of a downgrade. "If you look at the currency market, we're not seeing a rapid decline in the yen as a result," Deputy Finance Minister Fumihiko Igarashi said of the deal, which buoyed the dollar and share markets but left many investors and economists relieved but unimpressed and also left Washington's political credibility under question. "Part of the reason why is that there is still concern about a U.S. sovereign downgrade. It is my hope and request that U.S. authorities continue to make efforts to stabilise their public finances," Igarashi added. Governments and policymakers had warned Washington of the risk of financial disaster if it failed to find a compromise that raised the $14.3 trillion U.S. debt ceiling before it ran out of cash to pay its dues. An official Chinese newspaper had called U.S. handling of the crisis irresponsible and immoral.

    In World's Eyes, Much Damage Is Already Done‎ - With the deal reached Sunday night, the United States has a good chance of escaping the debt limit1 showdown with its credit rating intact. The United States government may not be so lucky with its reputation. Even before negotiations went down to the wire on Sunday night, the bitterness, division and dysfunction that resounded around the world in recent weeks as the United States veered toward default did more than just fuel a perception that Washington is approaching Japan-like levels of political gridlock. Among foreign leaders and in global markets, the political histrionics have eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession2. It has chipped away at the global authority of President Obama3, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.

    The Impact of the Budget Deal for Those Who Don’t Carry Around the Budget in Their Pocket - Dean Baker - Many readers of the NYT and Post may not have a good sense of how much $2.4 trillion in cuts over the next decade is. Unfortunately, the major news outlets do not consider it their responsibility to tell us. The government is projected to spend $46 trillion over the next 10 years. This means that the proposed cuts are a bit more than 5 percent of projected spending. However, large categories of the budget are protected. More than $27 trillion of projected spending goes to Social Security, Medicare, Medicaid and interest. If these areas escape largely untouched, the projected cuts would be around 13 percent of the remaining portion of the budget. In fact, since some other areas of the budget, like unemployment insurance, are also likely to be largely protected, the cuts to the remaining portion of the budget will be even larger. The government is projected to spend $7.8 trillion on the military over the next decade. If this area is largely protected, then most of the cuts would likely come from the $6.7 trillion of spending on the domestic discretionary portion of the budget. This is the portion that includes spending on infrastructure, education, research, and other areas that are considered investment.

    Tom Ferguson on the Debt Deal: Debt Ceiling Deal All Cuts No Taxes - video - Yves Smith: Our favorite astute political observer (and curmudgeon) Tom Ferguson weighs in on the debt deal. The bottom line is that the deflationary impact starts relatively soon, what appears to be $300 billion starting in October

    Experts: Debt deal avoids tackling hard questions — The outline emerging Sunday night of a deal to raise the debt ceiling and execute deep cuts in federal spending disappointed budget experts, who feared that the agreement was politically expedient but appeared to fall far short of serious changes to the big cost drivers of government spending.  "If all you can say is this, after 12 weeks of intense wrangling, charges and counter charges, if all they can do is pass the basic debt limit, we're very disappointed," said Steve Bell, a senior director at the Bipartisan Policy Center, a research group comprised of former Democratic and Republican powerbrokers that late last year offered an exhaustive plan to tackle the nations fiscal problems.What irked Bell and other budget experts was the blueprint emerging from congressional and White House officials that appeared to take off the table serious attempts to address military spending or changes to Social Security, Medicare and Medicaid_ the so-called entitlement programs.  Most of the cuts agreed on during three-way negotiations between the White House and Senate leaders from each side of the aisle were in discretionary spending. They agreed to make steep cuts over 10 years to a segment of the budget that accounts for less than a fifth of federal spending.

    What the U.S. debt deal means for the global economy - When U.S. President Barack Obama announced Sunday night that he and Congressional leaders had finally reached an agreement to raise the government debt ceiling, the world breathed a collective sigh of relief. Stock markets in Asia jumped on the news. Yes, the pact still has to pass through the Senate and unruly House of Representatives (a vote will take place today) before becoming official. But in all likelihood the scary game of brinksmanship between the country's two political parties has come to an end (for now), and as a result, the U.S. will likely not default on Tuesday. If the world's most important economy had actually been unable to pay its bills, the consequences for the global economy could have been biblical. The fact that we (barely) averted such a disaster is a bit of good news, something investors haven't had much of recently. But just as a default by the U.S. would have had an outsized impact on the global economy, due to the unique position of America in the world, a deal struck to alter the direction of fiscal policy will also have a tremendous effect. The decisions made (or in this case, not made) by Washington in the debt agreement will reverberate through the world economy for years to come.

    Debt Deal: What the World Thinks of Us Now - The debt deal out of Washington may have averted a big sell-off of U.S. Treasury bonds. But even though big Treasury holders like China and Japan haven't run for the hills, the response of foreign countries to the deal has been pretty tepid. Russian Prime Minister Vladimir Putin, for one, said the deal was "not that great overall because it simply delayed the adoption of a more systemic solution." Indeed, the political turmoil leading up to the debt deal, along with the deal's remaining uncertainties, may have tainted foreign perceptions of our trusty currency for good. Take China. Following the debt deal, its central bank chief announced that China would continue moving its foreign exchange reserves out of U.S. dollars, and a small Chinese credit rating agency downgraded U.S. sovereign debt. Of course, it's no secret that China, the biggest foreign holder of U.S. debt, has been wanting to diversify its dollar holdings for years. But its desire to ditch the dollar can't be shrugged off. As I've said here and here, the only thing keeping it from shedding more dollars is a lack of better alternatives.

    US debt crisis: investors fear 'end of empire' - America looks poised to suffer a major blow to its economic dominance despite leaders in Washington trying to thrash out a last-ditch deal on Sunday night to avoid a default. The deal, which would see the country's debt ceiling raised and deficit reduced by about $3 trillion (£1.8 trillion) will not be enough for America to preserve the triple-A credit rating that it has enjoyed since the Second World War, according to Pimco, one of the world's biggest debt investors.  "I think this compromise will lead to an increase in the debt ceiling, and therefore avoid default," Mohamed El-Erian, Pimco's chief executive, said in America yesterday. "We have one rating agency out there that said it would downgrade unless certain things happen, and these things are not happening fast enough.  "If the US loses that AAA status it will be much more difficult for it to restore growth, so it is unambiguously bad."

    Washington’s appetite for self-destruction - It is difficult to remember a more dismal moment in American politics. The debt ceiling crisis and the agreement that ended it point to deep dysfunction in our system. In a variety of ways, the episode portends continued short-term economic misery and long-term national decline. It is as if the US chose at the last minute not to commit financial suicide – but only out of preference for a slower, more excruciating form of self-destruction.  The crisis has, however, been clarifying in several respects. We can now say with some confidence that Washington will be doing nothing more to help the ailing economy. President Barack Obama is trying to push an employment agenda. But for the federal government to spur growth or create jobs, it has to spend additional money. The antediluvian Republicans who control Congress do not think that demand can be expanded in this way. They believe that the 2009 stimulus bill, which prevented an even worse economy over the past two years, is responsible for the current weakness. Their approach of depression economics – embedded in the debt ceiling compromise – demands that we address the risk of a double-dip recession by cutting public expenditure immediately.  So instead of trying to pull out of the stall, the US economy will simply have to absorb whatever blow is coming. Some congressional Republicans are just backward, rejecting modern economics on the same basis that they reject Darwin and climate science. Others are cynical, desiring the worst possible economy as an aid to recapturing the White House and Senate in 2012. Still others simply do not believe that government action can ever be a force for good. Whatever their motivations, there is something sad about desperate Americans looking to a party that lacks any inclination to alleviate their misery.

    Once Upon a Time in the West - Der Spiegel - The word "West" used to have a meaning. It described common goals and values, the dignity of democracy and justice over tyranny and despotism. Now it seems to be a thing of the past. There is no longer a West, and those who would like to use the word -- along with Europe and the United States in the same sentence -- should just hold their breath. By any definition, America is no longer a Western nation. The US is a country where the system of government has fallen firmly into the hands of the elite. An unruly and aggressive militarism set in motion two costly wars in the past 10 years. Society is not only divided socially and politically -- in its ideological blindness the nation is moving even farther away from the core of democracy. It is losing its ability to compromise.  This week, the United States nearly allowed itself to succumb to economic disaster. Increasingly, the divided country has more in common with a failed state than a democracy. In the face of America's apparent political insanity, Europe must learn to take care of itself.

    Shock doctrine and the debt limit - Washington's recently staged drama of dysfunction over the federal debt limit sadly distracted attention from real crises occurring outside the beltway. These include unemployment, housing foreclosures, torched 401k plans that have stalled earned retirements, and college graduates struggling to begin their careers with paying jobs. But there’s a more profound problem with this farce: This fabricated debt “crisis” was really nothing more than a veiled attempt to destroy the last vestiges of FDR’s New Deal utilizing “shock doctrine” to pacify resistance. In her best-selling book Shock Doctrine: The Rise of Disaster Capitalism, social critic Naomi Klein argues that crises are intentionally created to push the free market agenda. In the midst of a crisis, social protections can be destroyed, paving the way for ever more virulent versions of free market capitalism. Jamie Galbraith’s The Predator State refines this by claiming that what’s pursued by leaders in a crisis isn’t so much a “free market” agenda, but rather using government to install an elite class that runs the economy to further enrich and entrench themselves as predators. We recall President Bush’s dinner speech before an elite audience in October 2000: "This is an impressive crowd -- the haves and the have-mores. Some people call you the elites; I call you my base." Their sole public purpose for government is to serve that predator base.

    The Beast Is Starved: Welcome to the Next Great Depression - Since Reagan, Republicans have been on a “starve the beast” campaign – by which they mean eviscerate the government by taking away as much revenue as they can. Starving the beast has been the biggest bait and switch con game that has ever been perpetrated on the American people. And the most tragic. As Paul Krugman pointed out, Republicans offered popular tax cuts so that they could later cut popular government programs “as a necessity.” Oh, we’d love to continue providing low cost, effective medical care under Medicare, but you see, the country just can’t afford it … Of course we can’t. Billionaire hedge fund managers and Wall Street traders pay less in taxes than their secretaries. And most corporations pay little or no taxes. Starve the Beast was coupled with a clever campaign to make government appear to be a collection of bumbling bureaucrats who wasted tax money for pure pleasure. It was – and is – quite acceptable to characterize government workers as shiftless, lazy and incompetent. As a result, once the Republicans succeeded in cutting government revenue to the bone and beyond, it became impossible to raise taxes – who wants to give any more of their hard earned money to a bunch of lazy bureaucrats?

    Federal Budget Deficit Totals About $1.1 Trillion for the First 10 Months of the Year - CBO Director's Blog - The federal budget deficit was about $1.1 trillion in the first 10 months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review—$66 billion less than the roughly $1.2 trillion deficit incurred through July 2010. Revenues were about 8 percent higher than they were at the same point last year, whereas outlays rose by less than 3 percent. Revenues through July increased by $141 billion to nearly $1.9 trillion. That growth in revenues reflects a significant increase in receipts from individual income taxes combined with small changes in other receipts. Withheld income and payroll taxes rose by $53 billion (or 4 percent). Nonwithheld income and payroll taxes also increased (by $47 billion, or 17 percent); the bulk of that gain came from higher final payments made with 2010 individual income tax returns that were filed earlier this year. Receipts from unemployment insurance taxes rose by $10 billion as states replenished their trust funds, which were substantially depleted because of high unemployment. Revenues also rose because refunds of individual income taxes were down by about $21 billion (or 8 percent) during the past 10 months.

    What the debt ceiling deal means for the unemployed - The debt-ceiling deal, as we know, contains no stimulus. Nothing on jobs. No relief for the out-of-work. And that’s a real worry because, at the end of this year, existing emergency unemployment benefits — the ones that were extended as part of the 2010 tax-cut deal — are set to expire. Yet there are still millions of Americans who can’t find work. So what happens to the unemployed at that point?  The macroeconomic effects of failing to extend could be significant. Chad Stone, an economist at CBPP, walked me through a back-of-the envelope calculation. Currently, about 3.8 million people receive those additional, federally funded benefits scheduled to expire. The average benefit is about $1,300 a month. That comes to roughly $60 billion a year in spending. Now, UI benefits are one of the most effective forms of stimulus out there — people without jobs tend to spend most or all of the money, rather than pocket it. Moody’s chief economist Mark Zandi estimates that every dollar spent on unemployment benefits boosts GDP by about $1.60.

    What’s missing from the debt ceiling debate? Jobs - The unemployment rate, currently above 9 percent, is projected to remain high for a long time. For example, the current Blue Chip Economic Indicators consensus forecast puts the average unemployment rate for 2012 at 8.3 percent. The agreement to raise the debt ceiling just announced by policymakers in Washington not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs.  The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy. The agreement would reduce spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase. While the bulk of the cuts are back-loaded – coming more in the future – the near-term cuts would still have an immediate impact. Applying conventional multipliers, the reduction of $30.5 billion in calendar year 2012 would reduce GDP by 0.3%, and result in roughly 323,000 fewer jobs (as depicted in the table below).

    The debt ceiling deal’s net impact on jobs - With unemployment at 9.1% and projections for high levels well into next year and beyond, the agreement to raise the debt ceiling stands to lose out on two key job creators unless Congress acts soon. The debt agreement reduces spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase. The loss of the payroll tax holiday, a tax cut that reduces Social Security payroll tax for all workers, would lead to a reduction in GDP of $128 billion and roughly 972,000 fewer jobs in 2012. Allowing extended unemployment insurance to expire would hurt those who have already taken the hardest hit, reducing GDP by $70 billion and further reducing employment by roughly 528,000 jobs in 2012. Finally, the near-term discretionary cuts ($30.5 billion in calendar year 2012), will have an immediate impact of reducing GDP by $43 billion and leading to roughly 323,000 fewer jobs in 2012. The total 1.8 million fewer jobs will only contribute to a slower, more painful recovery in the long run.

    Krugman: Proposed debt deal will cost jobs and revenue - Video - From the perspective of a rational person, we shouldn’t even be talking about spending cuts at all now,” Krugman told ABC’s Christiane Amanpour. “We have nine percent unemployment. These spending cuts are going to worsen unemployment… If you have a situation in which you are permanently going to raise the unemployment rate — which is what this is going to do — that’s actually going to reduce future revenues.” “These spending cuts are even going to hurt the long-run fiscal position, let alone cause lots of misery. Then on top of that, we’ve got these budget cuts, which are entirely — basically the Republicans [saying], ‘We’ll blow up the world economy unless you give us exactly what we want’ and the president said, ‘Okay.’ That’s what happened.” “We used to talk about the Japanese and their lost decade. We’re going to look to them as a role model. They did better than we’re doing,” he added. “There is no light at the end of this tunnel. We’re having a debate in Washington which is all about, ‘Gee, we’re going to make this economy worse, but are we going to make it worse on 90 percent the Republicans’ terms or 100 percent the Republicans’ terms?’ The answer is 100 percent.”

    Randy Wray: The Budget Compromise – Congress Creates a Rube Goldberg Doomsday Machine - Don’t you feel relieved? After weeks of threats, hostage-taking, and other forms of deficit terrorism, our two political parties have finally “compromised” on what was always a foregone conclusion. The bill contains $1 trillion in cuts, spread over coming years. It creates a bipartisan committee that is supposed to find another $1.5 trillion to cut by Thanksgiving; Congress must vote on the recommendations by Christmas. If all that fails, $1 trillion across the board cuts will take effect. In return the debt limit is raised by $400 billion now, and another $500 billion later. Congress can vote to stop the debt limit hikes, but the President can and will veto such a vote—letting Congressional weenies save face. Finally, by New Year’s day Congress must vote to send a balanced budget amendment to the states; if they vote to do so, Obama can ask for a $1.5 trillion increase to the debt limit; otherwise he can ask for only $1.2 trillion. Congress gets to vote on that increase, too, but Obama gets to override that, too!  All of this is designed to allow Congress to shirk its job, of course—to build a Rube Goldberg machine to accomplish what our elected weiners know would hurt them in the next election.

    Welcome to the United States of Austerity - - Polluted water, smoggy skies, crumbling bridges, less education funding, more unhealthy Americans: the impact of the debt deal's massive cuts. The debt ceiling deal hammered out by President Barack Obama and congressional leaders and passed in the House on Monday afternoon makes deep, painful, and lasting cuts throughout the federal government's budget. What's on the chopping block? The numbers tell the tale. The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what's called "nondefense discretionary spending." That's budget-speak for the pile of money the government invests in the nation's safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more.

    Obama’s Grand Deficit Bargain Lost Out to 2012 Politics - As late as last week, President Barack Obama was still calling for one, broad debt agreement that included cuts, entitlements and taxes. That’s not what will go before Congress this week, and Obama’s strategic positioning contributed to the missed opportunity for a potentially historic bipartisan deal, said Democrats, retired lawmakers and former White House advisers with experience in bipartisan negotiations.  Obama came months late to the negotiations, allowed 2012 election concerns to shape his timing and willingness to advocate Social Security and Medicare reductions, and undermined his position by shifting his priorities, they said.  Senator Carl Levin, a Michigan Democrat, said Obama was unwilling to press the argument that the wealthiest should pay more in taxes to increase government revenues, causing many Democrats to view the deal with “a lot of unease,”

    Obama is NOT “Caving” to Corporate Interests - In  a campaign almost as frenzied as the effort to get Barack Obama into the White House, liberal groups are now mobilizing against the White House and reported deals that would cut Social Security, Medicare and Medicaid benefits. They accuse President Obama of being weak and willing to “cave” to corporate and conservative forces bent on cutting the social safety net while protecting the wealthy. Those accusations are wrong. The accusations imply that Obama is on our side. Or was on our side. And that the right wing is pushing him around. But the evidence is clear that Obama is an often-willing servant of corporate interests -- not someone reluctantly doing their bidding, or serving their interests only because Republicans forced him to. Since coming to Washington, Obama has allied himself with Wall Street Democrats who put corporate deregulation and greed ahead of the needs of most Americans:

    Matt Stoller: What Presidency? -The narrow intense focus of TV can constrain us so powerfully that we are blinded by technicolor. To explain – there’s an endless stream of musings on our current political problems, with an attempt to apportion “blame” for what’s going on. One argument, fleshed out by Paul Krugman and Amanda Marcotte is that of truculent Republican extremists are at the root dysfunction. In Krugman’s words, “The problem with American politics right now is Republican extremism, and if you’re not willing to say that, you’re helping make that problem worse. ” In this formulation, the President, though he does not fight hard enough, is drawn to poor policy-making by the dynamic imposed by far right ideologues. Another argument suggests that Republicans are making clear arguments about what they want, and it is the lack of a clear alternative that leads to our current morass. In this formulation, it is a betrayal by Obama that is the primary issue at hand. It’s something I encountered often, when there was a desperate under-the-radar policy fight between an alliance of Republicans and Obama versus liberals in Congress that Democrats simply didn’t pay attention to, like war funding, or perhaps more currently, free trade pending agreements. The focus, almost entirely, is on what is on TV.

    Obama & the Fake Debt Ceiling Crisis: This President Is Really Just Smarter Than You Are - It's taken a long while, but I'm finally coming around. I'm about ready to admit the truth. Supporters of the president have long insisted that The Man simply knows things most of us don't. After all, he's the president. He's got access to the facts, the figures. He's looking further, they say, seeing deeper, playing sixth dimensional chess while most of us can barely get our minds around checkers. You know, they just might be right. If there's one thing this phony debt ceiling crisis proves, it's that Barack Obama really is smarter than most of us, especiall smarter than the tens of millions who voted him into office. Before we examine that any deeper, we'll need a working definition of “smartness.” Let's make it simple. We'll call it the ability to get things done your way in a complex world, a world where lots of other people would rather see them done some other way. By that yardstick, who is smarter? The voters and volunteers who made Obama's career possible? Or Barack Obama himself? Who's getting what he wants, and who's getting left out?

    A sugar-coated Satan sandwich, with a side of peas, please - With a debt deal reached after weeks of negotiations, the country might be breathing a sigh of relief that an end to the political posturing is near. But what posturing it was. We were going to cover the moon in yogurt. President Obama was a jilted lover left weeping at the alter. There were reports of hobbits and trolls infiltrating the Capitol. Oh, the merry-making wordplay wound its way straight into this journalist’s heart. Thanks to Rep. Emanuel Cleaver (D-Mo.), chairman of the Congressional Black Caucus, the festivities have yet to end, despite a deal being reached. Cleaver declared the deal “a sugar-coated satan sandwich.” What is a Satan sandwich exactly? According to a 2004 Urban Dictionary definition, it’s “The chiefest of hell’s dark delights, it is said that just one bite of it arouses an unspeakable lust of terrific potency.” I’m not sure that’s what Cleaver meant, or I’ve been following the debt debate all wrong. The Twitter peanut gallery is already gleefully embracing the new meal. It seems to be a bigger hit than Obama’s peas.

    Debt Ceiling Deal: The Democrats Take a Dive - Taibbi - The Democrats aren't failing to stand up to Republicans and failing to enact sensible reforms that benefit the middle class because they genuinely believe there's political hay to be made moving to the right. They're doing it because they do not represent any actual voters. I know I've said this before, but they are not a progressive political party, not even secretly, deep inside. They just play one on television. For evidence, all you have to do is look at this latest fiasco. The Republicans in this debt debate fought like wolves or alley thugs, biting and scratching and using blades and rocks and shards of glass and every weapon they could reach. The Democrats, despite sitting in the White House, the most awesome repository of political power on the planet, didn't fight at all. They made a show of a tussle for a good long time -- as fixed fights go, you don't see many that last into the 11th and 12th rounds, like this one did -- but at the final hour, they let out a whimper and took a dive.

    Sometimes compromise is the worst thing - I guess I had to write something about the “compromise” aka cave-in yesterday in the US capital. You can only conclude that the US President wanted this agenda and needed a smokescreen (mad Republicans) to put it in place. There is a lot of evidence that Obama wanted to attack pension and medical entitlements. Now he can. Not for long though – he is a one-term president in the making. When you put all the elements together sometimes compromise is the worst thing. This picture seems to have been used by various commentators and conservative advocates as representing the sentiment of the US people. They wanted their politicians to compromise and save America from bankruptcy. The problem is that such representations only reinforce the mis-information that is driving the entire “debt debate”.America is not Greece because it maintained sovereignty over its currency and thus can use fiscal policy at all times to advance public purpose. Second, compromise is usually a good strategy but that doesn’t hold in this case.

    Debt Ceiling Deal: All cuts, no taxes - Below is a video with UMass Professor Thomas Ferguson discussing the politics and economics of the debt ceiling deal that recently passed the House and the Senate. Tom’s view is that this is basically a ‘Republican’ deal i.e. all spending cuts and no tax increases. Tom says that the spending cuts would not include defense in the first round and so would be borne disproportionately by ordinary citizens via social programs like student loans.  My take has more to do with the politics than the economics of the matter. I was on the BBC earlier today to talk about the debt crisis after the Senate approved the legislation raising the debt ceiling. Just as I was saying that this was a manufactured crisis, we cut away to President Obama who made many of the points I had intended to make, even using my phraseology ‘manufactured crisis’.

    The myth of Obama’s “blunders” and “weakness” - With the details of the pending debt deal now emerging (and for a very good explanation of the key terms, see this post by former Biden economic adviser Jared Bernstein), a consensus is solidifying that (1) this is a virtually full-scale victory for the GOP and defeat for the President (who all along insisted on a "balanced" approach that included tax increases), but  (2) the President, as usual, was too weak in standing up to right-wing intransigence -- or simply had no options given their willingness to allow default -- and was thus forced into this deal against his will.  This depiction of Obama as occupying a largely powerless, toothless office incapable of standing up to Congress -- or, at best, that the bad outcome happened because he's just a weak negotiator who "blundered" -- is the one that is invariably trotted out to explain away most of the bad things he does. It appears to be true that the President wanted tax revenues to be part of this deal.  But it is absolutely false that he did not want these brutal budget cuts and was simply forced into accepting them.  The evidence is overwhelming that Obama has long wanted exactly what he got: these severe domestic budget cuts and even ones well beyond these, including Social Security and Medicare, which he is likely to get with the Super-Committee created by this bill (as Robert Reich described the bill:  "No tax increases on rich yet almost certain cuts in Med[icare] and Social Security . . . . Ds can no longer campaign on R's desire to Medicare and Soc Security, now that O has agreed it").

    White House Believed Republicans Would Agree to Tax Increases, and Also, in Magic Unicorns -  Buried in a post by Jonathan Chait is this shocker. The third mistake lay in assuming Republicans would agree to raise tax revenue. I spoke several times with administration officials who asserted with total confidence that Republicans would simply have to acknowledge the need for more revenue. They betrayed a complete misunderstanding of the party they’re dealing with. How can this even be possible? What would lead them to believe that? Have they been in some kind of cryogenic freeze for the past 10 years? Have they never heard of Grover Norquist? Did they really think all those rabid, frothing-at-the-mouth, newly-elected Teabaggers would actually agree to higher taxes? If this is true, the problem isn’t that the White House is filled with a bunch of crypto-Republicans. It’s filled with a bunch of idiots.

    Very Serious Suckers - Krugman - Jonathan Chait has an excellent piece documenting the way in which what he calls the establishment, and I call Very Serious People, misjudged the way the debt ceiling thing would play out: The failure to understand the crisis we were entering was widely shared among centrist types. When Republicans first proposed tying a debt ceiling hike to a measure to reduce the deficit, President Obama instead proposed a traditional, clean debt ceiling hike. He found this position politically untenable for many reasons, one of them being that deficit scolds insisted that using the debt ceiling to force a fiscal adjustment was a terrific idea, and that connecting the deficit debate to a potentially cataclysmic financial event was the mark of seriousness. He then goes on to show how the usual suspects — the WaPo editorial page, the Committee for a Responsible Federal Budget, the Concord Coalition, etc. welcomed a crisis over the debt ceiling in the belief that it would lead to fiscal goodness. This was terrible policy, even if it had worked: now is not the time for fiscal austerity, and the way the VSPs have shifted the whole conversation away from jobs and toward deficits is a major reason we’re stuck in the Lesser Depression.

    Spiegel: 'The Biggest Loser is the Average American' - In the United States and abroad, concerns shifted Wednesday from whether or not Congress would come to agreement on raising the country's debt ceiling, to the overall health of the world's largest economy and the possibility it is sliding into another recession.  The bill also sets up a commission made up of six Democrats and six Republicans, to further work on reducing the deficit. The commission is charged with coming up with a plan by the end of November before spending cuts are automatically made across the board, including to the defense spending and social welfare programs popular with Republicans and Democrats. Nervous global investors contemplated the chance that, despite the deal brokered between Republicans and Democrats, the top credit rating agencies would still downgrade the country's creditworthiness. President Barack Obama repeated his call for tax increases on the wealthiest Americans to help offset the deficit. "We can't balance the budget on the backs of people who have borne the biggest brunt of this recession,"

    Who gains from debt deal? The Pentagon, for one - The last-minute deal that Congress is considering to raise the federal debt limit probably will mean trillions of dollars in government spending reductions for most agencies. But one department stands to gain: the Pentagon. Rather than cutting $400 billion in defense spending through 2023, as President Barack Obama had proposed in April, the current debt proposal trims $350 billion through 2024, effectively giving the Pentagon $50 billion more than it had been expecting over the next decade. With the wars in Iraq and Afghanistan winding down, experts said, the overall change in defense spending practices could be minimal: Instead of cuts, the Pentagon merely could face slower growth.  "This is a good deal for defense when you probe under the numbers," . "It's better than what the Defense Department was expecting."

    Defense spending cut in debt deal unclear - Despite the White House's claim that the new debt deal would cut $350 billion from defense spending over the next ten years, there are no specifics in the bill on defense cuts  -- and no way to tell what the final cuts will be.  "The deal puts us on track to cut $350 billion from the defense budget over 10 years," the White House said in a fact sheet today. "These reductions will be implemented based on the outcome of a review of our missions, roles, and capabilities that will reflect the President's commitment to protecting our national security."  But if you look at the text of the bill, there is simply no language on how much the defense budget will actually be cut. What the bill does is set spending caps for "security" spending, which the administration defines as defense, homeland security, intelligence, nuclear weapons, diplomacy, and foreign aid. There's no breakdown that defines which of these agencies get what, so there's no way to be sure that all the cuts would come from "defense."  Moreover, the spending caps are split between "security" and "non-security" discretionary spending only for fiscal 2012 and fiscal 2013. After that, the spending caps don't make any distinctions between budget accounts.

    Defense Secretary Leon Panetta warns against more cuts in Pentagon budget -  Defense Secretary Leon Panetta warned Thursday of dire consequences if the Pentagon is forced to make cuts to its budget beyond the $400 billion in savings planned for the next decade. “We’re already taking our share of the discretionary cuts as part of this debt-ceiling agreement, and those are going to be tough enough,” Panetta told reporters in his first news conference as defense secretary. “I think anything beyond that would damage our national defense.”The initial round of Pentagon cuts is part of a debt-reduction package that would slice about $1 trillion from agency budgets over 10 years. A second round of cuts, totaling as much as $1.5 trillion, will be prepared by a bipartisan congressional panel later this year. Senior Pentagon officials have launched an offensive over the past two days to convince lawmakers that further reductions in Pentagon spending would imperil the country’s security. Instead of slashing defense, Panetta said, the bipartisan panel should rely on tax increases and cuts to nondiscretionary spending, such as Medicare and Social Security, to provide the necessary savings.

    Sen. Lieberman: Cut Social Security to prevent cuts to defense budget -  Sen. Joe Lieberman (I-CT) announced on the Senate floor Tuesday that he was working on a bipartisan proposal to reform Social Security. He said reforming entitlement programs like Social Security was necessary to prevent cuts to the defense budget. “Bottom line, we can’t protect these entitlements and also have the national defense we need to protect us in a dangerous world, while we’re at war with Islamist extremists who attacked us on 9/11 and will be for a long time to come,” he said. Lieberman and Sen. Tom Coburn (R-OK) previously introduced legislation that would have gradually moved the eligibility age for Social Security up by two years. Watch video, clipped by ThinkProgress, below:

    Cantor Suggests Entitlement Promises Will Be Broken —House Majority Leader Eric Cantor on Wednesday suggested that Republicans will continue a push to overhaul programs such as Medicare, saying in an interview that "promises have been made that frankly are not going to be kept for many" and that younger Americans will have to adjust. "What we have to be I think focused on is truth in budgeting here,"  He said "the better way" for Americans is to "get the fiscal house in order" and "come to grips with the fact that promises have been made that frankly are not going to be kept for many." His comments suggest that Republicans are committed to overhauling entitlement programs such as Medicare even after President Barack Obama signed into law a debt package under which Medicare recipients weren't hit with direct cuts. Congress left Medicare recipients untouched directly in order to win enough Democratic votes for the debt package to become law. But Republicans could make a new push to cut back on Medicare as the debt-reduction deal is implemented.

    Social Security’s Biggest Threat: The Debt Deal Super Committee - This week's deal to raise the debt ceiling should remove any doubt about the power corporate interests have over our government. The deal, hammered out by the president and Republican congressional leaders, places the burden of reducing our long-term budget problems squarely on average Americans, while the wealthiest individuals and corporations are given a free pass. But the deal poses a larger threat. A provision in the agreement creates an appointed "Super Committee" in Congress that could circumvent normal rules and slash cherished programs like Social Security, Medicare, and Medicaid. How could this happen? Prior to this week's debt agreement, it's been extremely difficult to cut Social Security benefits, because doing so required 60 votes to overcome an almost certain filibuster in the Senate. And rightly so - Social Security is the most successful and popular government program in the history of the United States.  Yet the so-called Super Committee, which will be appointed by congressional leaders in both parties to consider additional budget cuts, will enjoy authority that no other entity or special legislative process has ever had: it will have the power to propose Social Security reductions that are guaranteed an up-or-down vote in the Senate, and therefore can be adopted by a simple majority.

    Why are we in this debt fix? It’s the elderly, stupid - If leadership is the capacity to take people where they need to go — whether or not they realize it or want it — then we’ve had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There’s been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff. We’ve heard lots about “compromise” or its absence. We’ve had dueling budgets with differing mixes of spending cuts and tax increases. But we’ve heard almost nothing of the main problem that makes the budget so intractable. It’s the elderly, stupid. By now, it’s obvious that we need to rewrite the social contract that, over the past half-century, has transformed the federal government’s main task into transferring income from workers to retirees. In 1960, national defense was the government’s main job; it constituted 52 percent of federal outlays. In 2011 — even with two wars — it is 20 percent and falling. Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending.

    Robert Samuelson Redefines "Wealthy" - The Washington Post once ran a front page piece questioning whether people who earned $250,000 a year, President Obama's cutoff for his no tax hike pledge, were really rich. However, it also features Robert Samuelson on its opinion page telling readers that seniors with income of $30,000 a year are wealthy. I'm not kidding.In a piece titled "Why Are We In This Debt Fix? It's the elderly stupid," Samuelson tells readers: "some elderly live hand-to-mouth; many more are comfortable, and some are wealthy. The Kaiser Family Foundation reports the following for Medicare beneficiaries in 2010: 25 percent had savings and retirement accounts averaging $207,000 or more." Let's see, we have retirees who have their Social Security checks, plus a stash of $207,000. If someone at age 62 were to take that $207,000 and buy an annuity this money would get them about $15,000 a year. Add in $14,000 from Social Security and they are living the good life on $29,000 a year. And remember, 75 percent of the elderly have less than this.

    Sanctioning Blackmail - We are about to sanction blackmail as a legitimate Congressional negotiating strategy. Anyone think this is the last time we will see this happen? One side put a gun to the economy and said do it our way or else. The other side had many ways to disarm the strategy, the 14th amendment for example, that it didn't even bother to keep alive as an alternative. Why? Even if you don't plan to use the option, why not leave the other side wondering so that their leverage is reduced? The best hope at this point is that Democrats in the Senate will not stand for this, and that they will somehow manage to get a better deal. But I'm not expecting much. We don't have to take a terrible deal today, and if it were up to me I'd threaten to veto the current arrangement, and make good on that threat if needed.  I thought Obama promised to do just that -- to veto the deal unless it was fair -- where fair meant three dollars in expenditure cuts for each dollar in tax increases. To me, that was already an unacceptably right-tilted outcome, and now we aren't even guaranteed that will happen.

    Ransom Paid - Robert Reich - Anyone who characterizes the deal between the President, Democratic, and Republican leaders as a victory for the American people over partisanship understands neither economics nor politics. The deal does not raise taxes on America’s wealthy and most fortunate — who are now taking home a larger share of total income and wealth, and whose tax rates are already lower than they have been, in eighty years. Yet it puts the nation’s most important safety nets and public investments on the chopping block. It also hobbles the capacity of the government to respond to the jobs and growth crisis. Added to the cuts already underway by state and local governments, the deal’s spending cuts increase the odds of a double-dip recession. And the deal strengthens the political hand of the radical right. Yes, the deal is preferable to the unfolding economic catastrophe of a default on the debt of the U.S. government. The outrage and the shame is it has come to this choice.

    Have You Had Enough Yet? - Swindler politicians are dicking around with YOUR future. These hustlers are extorting you, and they are running for re-election as they do so.   They want absolution, and they want you to give it to them. But you are being bamboozled by con-men. And they've been conning you for decades now. Have you had enough yet? Our "political leaders" are motivated by nothing outside of self-interest, and their interest is to serve the interests of those who elected them. Most Americans labor under the illusion that they elected these scumbags by voting for them. Sorry, but you've got that all wrong. Did YOU pay for all those TV ads? The propaganda? The smear campaigns? You did not. Did YOU pay $10,000 a plate for dinner at a Democratic or Republican fundraiser? You did not. Follow the money. The people with the money are the people who elected them. All YOU did was go through the charade of voting for Tweedle-Dum or Tweedle-Dee. The monied interests invest in politicians. They expect to get a return on their investment. As George Carlin saysForget the politicians. The politicians are put there to give you the idea that you have freedom of choice. You don't. You have no choice. You have owners. They own you. They own everything...

    The Next Debt Ceiling Deal Will Likely Be Much Worse - There should be no doubt that one of the most dangerous aspects of this current debt ceiling deal, is that it set a precedent for Republicans turning every future debt ceiling increase in the future into another hostage situation to force spending cuts. As Republican Senate Minority leader Mitch McConnell put it: “What we have done, Larry, also is set a new template. In the future, any president, this one or another one, when they request us to raise the debt ceiling it will not be clean anymore. This is just the first step.  This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order.”Another debt ceiling vote will take place in late 2012 or early 2013. Assuming President Obama is re-elected and Republicans hold at least one chamber of Congress or even a large minority in the Senate, we are being told very clearly will we have this same basic fight again. Yet this next time it should end much worse for liberals

    From the debt debate to the coming hostage revolt - In the melodrama that is consuming Washington this hot summer, featuring the spectacle of how much Tea Party Republicans will be able to extort for agreeing not to blow up the economy, the values and priorities of most Americans were early casualties. That reality will drive — no matter what the resolution this week — new, independent citizen mobilizations challenging both Republican zealotry and Democratic cravenness. The debt-ceiling debate has lasted long enough for most Americans to start paying attention and to realize just how divorced both parties are from basic common sense. With the economy faltering and 25 million people in need of full-time work, most Americans want Washington focused on how to create jobs and get the economy going, not on slashing spending for the rising number of poor children while sheltering tax havens for millionaires.

    Contemplating the Futility -  I think many are in a contemplative mood this evening, seeing that after all the drama of the past month, it looks like the Democrats, with the full faith and leadership of President Obama, will cave almost completely to the Republicans. We could have done this weeks ago. Four thoughts come to mind:

    • The debt-ceiling has been proven to be a very effective weapon, simply because there exists a non-trivial contingent of Republicans willing to push the button, but not a single Democrat. With that dynamic, the Republican goal of dismantling the social safety net looks achievable. They only need to chip away at it one debt ceiling at a time.
    • Obama's attempt to stabilize the political system by moving to the center has failed utterly and completely. The problem for Democrats is that Obama's "center" keeps moving to the right.
    • Is it futile to vote Democratic? Seriously, it is obvious now that your vote will deliver the same policy outcomes should you choose Democratic or Republican
    • Finally, it is utterly unbelievable that we are about to pursue an obviously contractionary policy course when the White House is held by a Democrat and in the wake of a GDP report that vividly illustrates the weakness of the economic recovery. Yet here we are. 

    Our Unbalanced Democracy - OUR nation isn’t facing just a debt crisis; it’s facing a democracy crisis. For weeks, the federal government has been hurtling toward two unsavory options: a crippling default brought on by Congressional gridlock, or — as key Democrats have advocated — a unilateral increase in the debt ceiling by an unchecked president. Even if the last-minute deal announced on Sunday night holds together, it’s become clear that the balance at the heart of the Constitution is under threat.  The debate has threatened to play out as a destructive but all too familiar two-step, revealing how dysfunctional the relationship between Congress and the president has become.  The two-step begins with a Congress that is hamstrung and incapable of effective action. The president then decides he has little alternative but to strike out on his own, regardless of what the Constitution says.  Congress, unable or unwilling to defend its role, resorts instead to carping at “his” program, “his” war or “his” economy — while denying any responsibility for the mess it helped create.

    What Would I Have Done? - Krugman - That’s the question Obama’s kinda-sorta defenders keep asking; it’s supposed to be a conversation-stopper. But the answer is clear: I would have made a statement declaring that giving in to this kind of blackmail would constitute a violation of my oath of office, and that my lawyers, on careful reflection, have determined that there are several legal options that allow me to ignore this extortionate demand. Now, the Obama people say that this wasn’t actually an option. Well, I hate to say this, but I don’t believe them. Think about the history here; think about all the misjudgments, all the reasons this administration has come up with not to act — not to act against the bankers, not to act on taxes, and down the line. Think of the colossal misjudgment over Republican intentions on debt. Why, at this point, should anyone trust these people when they say that they did all they could?It’s much, much too late for Obama and co. to say “Trust us, we know what we’re doing.” My reservoir of trust is now completely drained. And I know I’m not alone.

    If I Were In The House - Krugman - I guess I have to be explicit at this point: yes, I would vote no. What about the catastrophe that would result? Several thoughts. First, what I keep hearing from people who should know is that Treasury won’t actually run out of cash tomorrow, that it still has a few more days. Second, the people who claim that terrible things would immediately happen in the markets also claimed that there would be a big relief rally once a deal was struck. Not so much: the Dow is down 121 right now. Third, the idea that a temporary disruption would permanently damage faith in US institutions now seems moot; if you haven’t already lost faith in US institutions, you’re not paying attention. Fourth, those legal options are still there. Obama can move now; and even if he eventually loses in the courts, that gives him time.

    And the Wrong Words Make You Listen in this Criminal World - Mark Thoma, who supported (and probably voted for) the man during the primaries, is much more gracious than I am: A vague promise from Democrats about the future is all but worthless right now, we've had too many promises broken already. Obama's promises in particular mean nothing. The nicest thing I can do is describe this as BarryO's "Only Nixon could go to China moment." But that's because that slimy cocksucker was willing to sell out two countries—Formosa and Tibet—so he could discuss panda sex with Margaret Trudeau. Obama's version is selling out Democrats and Middle-Class and Aspiring Middle-Class Americans. When the best hope is that Stan Collender is right that bending over and sucking off isn't going to be good enough for House Republicans, it's time for all you idiots who said no one should run against BarryO "from the left" to do the honorable thing and find your wakizashi and prepare four cups of sake. (I'm certain there will be plenty of kaishkunin volunteers to aid you in Doing the Right Thing.)

    To the intransigent go the spoils - The United States’ fiscal emergency will not be over until a bill to raise the debt ceiling has passed both House and Senate and President Barack Obama has signed it. This can still be done by Tuesday’s deadline. As this column went to press, a deal looked within reach.  What would be the consequences? For the economy, once relief at avoiding default subsides: not good.  Preventing default is good, but lifting a threat that should not have been made in the first place is little to boast about. It is worth stressing that the history of the past few months cannot be unlearned. Will this farce recur every time the debt ceiling needs raising? That question is a new risk factor in its own right. Fortunately, any short-term spending cuts will be mild – planned savings are backloaded – but even timid cuts are risky with the recovery stalling. Revised figures for growth in the first part of the year were alarming. Further temporary stimulus should have been in the mix. Many arguments about exactly how to cut long-term spending lie ahead. The debt-containment strategy should include far-reaching tax reform. The debt-ceiling battle resolves less than you might think.  The Republicans have taken an enormous gamble. If default happens and they are blamed, they will pay a terrible price. In any other scenario, they win.Mr Obama may be the biggest loser in all this. And the question arises, does the United States want a loser in the White House?

    Debt Deal Winners and Losers - Both McConnell and Boehner got their gimmicks–the ability for Republicans to vote against a debt increase but allow Obama to do it and take the political heat and a meaningless vote on a balanced budget amendment, respectively–and the agreed to restructuring is exclusively on the spending side. Presumably, though, the new joint committee could push through tax increases later if they could somehow find the votes. More than anything, though, it seems to set up more fights just in time for the 2012 elections.  At the end of the day, it will be the same Congress making these decisions. If Obama didn’t have the votes to kill the Bush tax cuts before the 2010 elections radically changed the balance in favor of the Republicans, where will he find it now? And, really, he’s going to veto the plan and force massive defense and entitlement cuts right before the election?

    GOP on verge of huge, unprecedented political victory - By all accounts, it looks like a deal is about to be announced in which the debt ceiling is hiked in exchange for the promise of major spending cuts, including to entitlements, totalling at least $2.4 trillion. Anything can happen, but it apppears the GOP is on the verge of pulling off a political victory that may be unprecedented in American history. Republicans may succeed in using the threat of a potential outcome that they themselves acknowledged would lead to national catastrophe as leverage to extract enormous concessions from Democrats, without giving up anything of any significance in return.  Not only that, but Republicans — in perhaps the most remarkable example of political up-is-downism in recent memory — cast their willingness to dangle the threat of national crisis as a brave and heroic effort they’d undertaken on behalf of the national interest. Only the threat of national crisis could force the immediate spending cuts supposedly necessary to prevent a far more epic crisis later. Under the emerging deal, President Obama can hike the debt limit in two stages — the first in exchange for equivalent cuts; the second after a Congressional committee comes up with second round of yet more cuts, including to entitlements

    A Tea Party Triumph - If a good political compromise is one that has something for everyone to hate, then last night's bipartisan debt-ceiling deal is a triumph. The bargain is nonetheless better than what seemed achievable in recent days, especially given the revolt of some GOP conservatives that gave the White House and Democrats more political leverage. The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996. Most bipartisan budget deals trade tax increases that are immediate for spending cuts that turn out to be fictional. This one includes no immediate tax increases, despite President Obama's demand as recently as last Monday. The immediate spending cuts are real, if smaller than we'd prefer, and the longer-term cuts could be real if Republicans hold Congress and continue to enforce the deal's spending caps.

    Tea party ready for letdown, prepares payback - Tea party activists are bracing for disappointment as negotiations on the debt ceiling move closer to a deal, but sending a clear signal to congressional Republicans that they are even less willing to tolerate compromise and more likely to seek retribution against anyone who has not fully supported their agenda. They are focused in particular on the fate of the concession they extracted from House Speaker John Boehner in order to get his debt ceiling bill through the House last week - a provision making a balanced budget amendment to the Constitution a prerequisite for raising the debt ceiling again that they regarded as a huge victory. “If the final bill is passed by establishment Republicans and House Democrats and does not include a balanced budget amendment as a requirement, it will be completely unacceptable and will be seen as a violation of the mandate that the tea party and likeminded people gave Republicans in 2010,” said Ryan Hecker, the leader of a crowd-sourced tea party effort called the Contract from America. “The tea party didn’t help elect Republicans because they liked Republicans. They elected Republicans to give them a second chance. And if they go moderate on this, then they have ruined their second chance, and there will be a real effort to replace them with those who will stand up for economic conservative values,”

    Interview with Tea Party Co-Founder Mark Meckler - Mark Meckler, 49, the co-founder of the Tea Party Patriots in the United States, talks to SPIEGEL about the US debt ceiling, the radical right's uncompromising fight against the national debt and the "complete economic disaster" he claims President Barack Obama has created.

    Wake up GOP: Smashing system doesn't fix it - I'm a Republican. Always have been. I believe in free markets, low taxes, reasonable regulation and limited government. But as I look back at the weeks of rancor leading up to Sunday night's last-minute budget deal, I see some things I don't believe in:Forcing the United States to the verge of default.Shrugging off the needs and concerns of millions of unemployed. Protecting every single loophole, giveaway and boondoggle in the tax code as a matter of fundamental conservative principle.Massive government budget cuts in the midst of the worst recession since World War II.I am not alone. Only about one-third of Republicans agree that cutting government spending should be the country's top priority. Only about one-quarter of Republicans insist the budget be balanced without any tax increases. Yet that one-third and that one-quarter have come to dominate my party. That one-third and that one-quarter forced a debt standoff that could have ended in default and a second Great Recession. That one-third and that one-quarter have effectively written the "no new taxes pledge" into national law.

    Bread, Circuses, Spending Cuts, Unicorns, And The Appearance Of Wealth - With the revolting display of political theater in the last few weeks, I couldn’t help but consider the parallels between the Roman Empire and the American Empire. The entire debt ceiling farce was a circus on an epic scale – The Greatest Show on Earth. The American public was treated to high wire acts of near debt experiences, Senators putting their heads into the mouths of lions, and hundreds of clowns riding tiny bikes with squeaking horns. In the end, American politicians did what they do best - pretended to solve a spending problem without cutting spending. Only in America could politicians put the country on course to increase its national debt from $14.5 trillion to $23 trillion by 2021 and declare they are cutting spending. For those that need to visualize the lies of politicians, take a gander at this chart and try to find the cuts in spending.

    Learning to Live With Debt - Debt can kill. But you can’t live without it.  Seldom have those twin realities been as stark as they are now. It was excessive debt brought on by too-easy credit that brought down the American economy and allowed some European countries to borrow money they will never be able to pay back. It is fear of debt that threatens to keep the United States from doing much to prevent a double dip recession1.  A considerable part of the current economic strain stems from the fact that the credit overhang continues to haunt borrowers around the world. The lenders may have been bailed out, but the borrowers were not — or at least not enough to return them to health. Millions of Americans remain underwater on mortgage loans. Countries that lack printing presses for their own currency find themselves unable to borrow from private lenders.  In the long run, inflation may be a significant part of the solution, enabling borrowers to pay back dollars and euros that are worth a lot less than the ones they borrowed. The soaring price of gold, now around $1,650 an ounce, makes sense only if you assume something like that is going to happen.

    Interest on the United States Debt - An Unsustainable Scenario - While everyone is gaga about the pending debt deal that is proposing to cut a couple of trillion dollars in spending over the next 10 years, I would not get too excited about the long-term impact of such a deal.  Sure it's a deal that prevented those in D.C. from having to actually haul out the rulers and unzip, but it is a poor one as far as American taxpayers should be concerned.  That pesky interest on the $14.343 trillion current debt is what makes the deal far less than a good one. Here's a look at the interest payments on the federal debt over the past 9 months and annually all the way back to 1988 from the Treasury Direct website: Notice how in the first 9 months of fiscal 2011 we've already exceeded the amount of interest owing for the entire 2009 fiscal year.  America is already at the fifth highest amount of annual interest on the debt and we're only nine months into the fiscal year.  Back in 2008, interest on the debt reached its record level of $451 billion, a record that is most likely going to fall in fiscal 2011.  What is even more frightening is that the interest record will be broken in a year where interest rates are at generational lows as you'll see in a moment. 

    Legislation to Phase Out Private Military Contractors is Filed in Senate and House - Sen. Bernie Sanders and Rep. Jan Schakowsky (D-Ill.) today introduced legislation that would phase out private security contractors in war zones. This legislation recognizes that the United States increasingly has relied on private contractors to wage our wars, wasting taxpayer money, damaging military morale and hurting our reputation around the world. "The American people have always prided themselves on the strength, conduct, and honor of our United States military. I therefore find it very disturbing that now, in the midst of two wars and a global struggle against terrorism, we are relying more and more on private security contractors - rather than our own military - to provide for our national defense," Sanders said. "Our continued reliance on private security contractors endangers our military, damages our relationships with foreign governments, and undermines our global priorities," said Schakowsky. There are 155,000 contractors in Iraq and Afghanistan today, but only 145,000 uniformed service members.

    What Will the Debt Deal Mean for Tax Reform? - What will the debt deal mean for the future of tax reform? Sadly, nothing good. The budget agreement is, for tax reformers, a huge disappointment.  It is based on the fantasy that the nation can return to a sound fiscal footing through spending cuts only.  It entirely ignores the revenue side of the budget. And while a special bipartisan congressional committee representing both the House and Senate (to be called the Gang of 12, I suppose) would have the authority to recommend tax reform later this year, there is no reason to believe it will do so. Indeed, because the debt deal will limit the ability of Congress to spend money directly, it is likely to encourage lawmakers to expand their use of tax subsidies. . The new bipartisan deficit committee is set up, in fact, to make it as difficult as possible to fundamentally rewrite the tax code. The panel would be required to find about $1.5 trillion in deficit reduction over 10 years. . But if Congress fails to adopt the panel’s recommendations (assuming it can even agree on a package), the consequence is $1.2 trillion in automatic spending cuts only.

    Can the Super Committee Raise Taxes or Not? - The celebrated Joint Select Committee on Deficit Reduction created by the debt-ceiling bill that pass this week hasn’t even been named yet. But it isn’t off to a very reassuring start. The White House says nothing in the law prevents the committee from raising taxes, and Republican leaders say the details of the law block Democrats from counting an expiration of the Bush tax cuts for upper-income  Americans towards the deficit-reduction goal. It’s a reminder that the bipartisan push to pass the legislation before the Treasury ran out of cash didn’t settle the big differences Republicans and Democrats, particularly on taxes. The Budget Control Act says: “The goal of the joint committee shall be to reduce the deficit by at least $1.5 trillion over the period of fiscal years 2012 to 2021.”  It also says that the Congressional Budget Office shall provide estimates of the impact of the committee’s proposal s that are based on current law, and, under current law, all the Bush tax cuts expire at the end of 2012.

    How to Keep Taxes in the Debt Limit Deal - Here’s one way it could work out:

    • 1. By the Thanksgiving deadline, the second-round super committee recommends legislation that would obligate Congress and the administration to strict pay-as-you-go rules on any future extension of expiring tax cuts. The pay-as-you-go rule means that any proposal includes a method to offset the cost, so the proposal does not add to the deficit. This would include a promise to pay for any extension of any part of the Bush tax cuts at their next expiration date, which is the end of 2012. Relative to current policy, this would save $2.5 trillion over 10 years, and relative to Obama policy, this would still save $1.8 trillion.
    • 2. At the same time, the super committee could identify and bring up for vote specific proposals to raise revenue by reducing certain tax expenditures in fair and economically efficient ways, providing a down payment on the offsets required for the future tax rate extensions. President Obama’s proposal — made in all three of his budgets thus far — to limit itemized deductions to 28% is a good example. This would give policymakers another year to develop and debate specific tax reform proposals that would fully comply with the pay-as-you-go rule on the Bush tax cuts.

    Can the Joint Committee get credit for raising tax rates? - Yesterday I explained my understanding of how the Joint Committee would treat tax increases. The President’s NEC Director, Gene Sperling, has a perplexing description that conflicts with mine. I’ll examine that in a separate post. Here I’ll try to respond to a question from Mickey Kaus. I’ll make his example even simpler. The top individual income tax rate this year is 35%. Under current law it will increase to 39.6% on January 1, 2013. Yes, the Joint Committee could start their $1.5 T deficit reduction effort by extending the 35% rate for two more years. That would score as a revenue lossand therefore a deficit increase relative to current law, let’s say of $150 B. Since they started by increasing the deficit relative to current law, the Committee would need to find $1.65 T of deficit reduction pain to hit its target, since it starts out $150 B in the hole. If the Committee produces a $1.65 T deficit reduction package, then dials it back under interest group pressure to $1.5 T, yes, they can get “scored” with $150 B of deficit reduction by “increasing” that top marginal rate back up to 39.6%.

    5 Reasons Why the “Supercommittee” Must Consider Tax Increases - The congressional “supercommittee” that the debt limit deal establishes to recommend more deficit-reduction measures not only can consider revenue increases, but must consider them if it’s going to produce a balanced plan.  Here are five reasons why:

    1. President Bush’s tax cuts are a significant contributor to projected deficits, as this well-known chart shows. Letting the tax cuts expire would save up to $3.8 trillion over the next decade, including the savings on interest payments on the national debt.
    2. Higher-income people can and should share in the sacrifices needed to reduce long-term deficits. Elderly Medicare recipients, soldiers, working-class college students, and many others may have to take a seat at the budget-cutting table.  Basic fairness dictates that the most affluent people in the country take a seat as well.
    3. Taxes are low both in historical terms and in comparison with other countries. While taxes have fallen disproportionately for high-income people, they also are at or near historically low levels for middle-class people, as we’ve explained.   Moreover, the United States collects less in taxes than nearly any other developed country when measured as a share of the economy
    4. A large chunk of federal spending takes place through the tax code. The federal government spends more than $1 trillion a year on “tax expenditures” — credits, deductions, and other targeted tax breaks.  That’s more than it spends on either Social Security or on Medicare and Medicaid combined
    5. Taking taxes off the table would force crippling cuts in entitlement programs.

    Pelosi says new tax is 'on the table' - A new value-added tax (VAT) is "on the table" to help the U.S. address its fiscal liabilities, House Speaker Nancy Pelosi (D-Calif.) said Monday night. Pelosi, appearing on PBS's "The Charlie Rose Show" asserted that "it's fair to look at" the VAT as part of an overhaul of the nation's tax code. "I would say, Put everything on the table and subject it to the scrutiny that it deserves," Pelosi told Rose when asked if the VAT has any appeal to her.  The VAT is a tax on manufacturers at each stage of production on the amount of value an additional producer adds to a product. Pelosi argued that the VAT would level the playing field between U.S. and foreign manufacturers, the latter of which do not have pension and healthcare costs included in the price of their goods because their governments provide those services, financed by similar taxes.

    Anti-stimulus Politics - Krugman - Cullen Roche likes what I said in today’s column except that it’s “too political”, and then asks why I don’t call for a temporary cut in payroll taxes, which Republicans, who love tax cuts, would support. There’s good reason on economic grounds to be skeptical about the effectiveness of temporary tax cuts as stimulus; Milton Friedman’s permanent income hypothesis tells us that much of such cuts will be saved, not spent. But leave that on one side, and consider a point Mr. Roche doesn’t seem aware of: Republicans have already rejected a payroll tax cut.Remember, the Obama administration extracted such a cut as the price for its surrender on the Bush tax cuts — and it has been trying to get that cut extended, as the only economic stimulus it considers politically possible. And the GOP has turned it down flat. How can that be, when Republicans love tax cuts? The answer is, they don’t. They love tax cuts for the rich. Tax cuts for ordinary workers, many of whom will be those hated lucky duckies whose incomes are too low to pay income tax, are if anything something Republicans dislike. Also, the GOP is against any idea that (a) comes from Obama (b) might help the economy before the 2012 election.

    When is a $3.5 Trillion Tax Hike Not a Tax Hike? - One of the least reported facts about the 11th hour debt limit deal between the White House and Congressional leaders is that it assumes that on January 1, 2013 virtually every working American will begin paying much higher taxes than they are today. Indeed, baked into the deal is a $3.5 trillion tax increase, yet plan supporters say it does not raise taxes.  How can that be? They can do so by assuming what is known as the "current law" baseline that assumes that all of the Bush-era tax laws expire as scheduled at the stroke of midnight on December 31st 2012. This means that all income tax rates will go up across the board, the child credit will fall from $1,000 to $500, the marriage penalty will return. Moreover, the current law baseline also assumes that the AMT will not be "patched" and will affect tens of millions of unsuspecting taxpayers. Under this baseline scenario the federal government is estimated to collect $39 trillion in tax revenues over the next ten years. So by assuming taxes have already gone up lawmakers can say that they have not "technically" increased taxes.

    How the Billionaires Broke the System: There are two ways of cutting a deficit: raising taxes or reducing spending. Raising taxes means taking money from the rich. Cutting spending means taking money from the poor. Not in all cases of course: some taxation is regressive; some state spending takes money from ordinary citizens and gives it to banks, arms companies, oil barons and farmers. But in most cases the state transfers wealth from rich to poor, while tax cuts shift it from poor to rich. So the rich, in a nominal democracy, have a struggle on their hands. Somehow they must persuade the other 99% to vote against their own interests: to shrink the state, supporting spending cuts rather than tax rises. In the US they appear to be succeeding. Partly as a result of the Bush tax cuts of 2001, 2003 and 2005 (shamefully extended by Barack Obama), taxation of the wealthy, in Obama’s words, “is at its lowest level in half a century”(1). The consequence of such regressive policies is a level of inequality unknown in other developed nations. As the Nobel laureate Joseph Stiglitz points out, in the past 10 years the income of the top 1% has risen by 18%, while that of blue collar male workers has fallen by 12%(2).

    Closing The Hedge Fund Manager Tax Loophole Would Raise $4 Billion Annually From The 25 Richest Managers - During the negotiations regarding raising the nation’s debt ceiling, congressional Republicans have gone to the mat to defend all manner of unwarranted tax breaks, including those for oil companies and corporate jet owners. Despite the drain on the Treasury caused by these tax breaks — and the negligible benefit they provide — Republicans have threatened to allow the nation to default on its obligations rather than abandon them. One of the tax breaks upon which President Obama has focused is a provision that allows hedge fund managers — who make billions annually — to receive a substantial tax break. This particular tax break, known as the carried-interest loophole, allows hedge fund managers to treat the money they receive from investors as capital gains, subject to a 15 percent tax rate. Though this money is a paycheck received for services, just like a movie star receiving a bonus if her movie does well, it’s treated as investment income. Since hedge fund managers are some of the richest people in the country, this tax break actually causes a significant loss of revenue. In fact, according to calculation by RJ Eskow, closing this loophole would raise more than $4 billion per year just from the 25 richest hedge fund managers:

    Income Share by Top Fractile - Or, why it was so important to keep top marginal income tax rates constant for millionaires. Figure 1 depicts the income shares accruing to the top 0.5 percent and top 0.1 percent of households (including realized capital gains). It is clear that their shares have declined going from 2007 to 2008; for the top 0.1%, their share has declined from 12.3% to 10.4% of total income. The income threshold for the top 0.5% is $558,726 in 2008 (the average income for households in the 0.5% to 0.1% range is $878,139). The income threshold for the top 0.1% is $1,695,136 in 2008. The framework currently under consideration in the Congress maintains the marginal tax rates applying to these income fractiles constant. Corresponding graphs for top 5% and 1% income fractiles, either including or excluding realized capital gains, are displayed in this post.

    Chance favors wealth concentration - U.S. researchers say chance contributes to wealth becoming concentrated in the hands of a few. First author Joseph Fargione, an adjunct professor of ecology, evolution and behavior in the University of Minnesota's College of Biological Sciences, and colleagues, built a simplified model that isolates the effects of chance and found that it consistently pushes wealth into the hands of a few, ever-richer people. The researchers simulated the performance of a large number of investors who started out with equal amounts of capital and who realized returns annually over a number of years. The study, published in the journal PLsS One, found wealth did not remain equal, because each year an entrepreneur's return was a random draw taken from a pool of possible return rates. In other words each person's rate of return differed. Therefore, a high return did not guarantee continuing high returns, nor did early low returns mean continuing bad luck, the study says. Even though all investors had an equal chance of success, the simulations consistently resulted in dramatic concentration of wealth over time. 

    IRS Sees Just A Few Thousand Multi-Millionaires - For all the recent ire directed toward millionaires and billionaires, there aren’t all that many of them, according to data from the Internal Revenue Service this week. Millionaires made up just over 0.1% of the more than 140 million tax returns filed in 2009. At the tippy top, there were just 8,274 returns filed by those with income of $10 million or more. In its data, the IRS does not distinguish between returns from individuals and those from households. More than 97% of tax returns filed in 2009 reported an income of $200,000 or less. And the biggest chunk of returns – about 13% – were from those making between $50,000 and $75,000. Their average tax bill was $4,740. The overall average income of in 2009 was $54,283. That was a drop of 7.7% from the previous year. Meanwhile, unemployment benefits increased more than 91% from 2008, as nearly 19% more taxpayers included it on their returns. In the same period, the amount of reported cancelled debt soared 117%.

    Chart of the day: America’s small tax revenues - This chart comes from Barrie McKenna’s great article on US tax rates, and pretty much speaks for itself. While the rest of the developed world has seen its tax rate rise as it got richer, the US stands out as the one country where tax rates have been going down. In the OECD, only Chile and Mexico have lower tax burdens, and neither of them have been decreasing: both have relied very much on state-owned commodity wealth to stand in for tax revenue.As McKenna reports, The total tax burden on Americans, as a percentage of gross domestic product, stood at 24 per cent in 2009 – lower than it was in 1965 and still falling. That compares to 31.1 per cent in Canada, 34.3 per cent in Britain, 42 per cent in France, 37 per cent in Germany and 43.5 per cent in Italy. The Japanese, Australians and South Koreans all pay significantly more. The United States is the only major country without a national value-added tax and its sales taxes are lowest in the OECD. Likewise, U.S. fuel and sin taxes are at the bottom among rich countries. And generous tax breaks mean many businesses and individuals pay few taxes, placing a heavy burden on a relatively narrow tax base…

    Tax Burdens Around the World - (graphics) Comparing tax burdens around the developed world, I am, as always, left to wonder how the opposite meme has taken hold in the U.S. consciousness.

    U.S.: In state of denial over taxes? - Tax has become a dirty word in the U.S. debt crisis debate. But almost unanimously, experts agree that raising taxes – perhaps significantly – is key to the country’s long-term salvation. Unlike Greece, which is broke, the United States is rich and has the fiscal capacity to tax its way out of its debt mess. Policy makers may be reluctant to do so while the economy is weak. But longer-term, there's room for tax rates to go up: Contrary to what most Americans believe, the United States is one of the least-taxed countries in the developed world. They pay much lower taxes than any other G7 country. Among wealthy OECD countries, only Chile and Mexico tax their people and companies less.  “Either Americans don’t realize their economy is taxed less than other major economies, or they just have a different standard of what an appropriate tax level is,”

    Debt-Ceiling Deal Sets Off Lobbying Frenzy - The so-called super committee that would be responsible for cutting $1.5 trillion from the federal deficit is poised to create a new class on K Street: The Superlobbyists. Within 14 days of the debt-ceiling compromise becoming law, Senate Majority Leader Harry Reid, Minority Leader Mitch McConnell, House Speaker John Boehner, and Minority Leader Nancy Pelosi must each appoint three members to a bipartisan panel of 12 lawmakers tasked with goring sacred cows. The scale of cuts is immense. When the Divine Dozen are named, it will lead “to the emergence of a pack of superlobbyists who will have access to those members” and who can try to protect clients from the carnage, said Democratic consultant David Di Martino. That’s because with only six members from each party on the committee, influencing the super committee will largely be an inside game with Democratic and Republican lobbyists working their respective lawmakers.

    Obama Still Wall Street’s Honey … Raises More (As Both Raw Amount And Percentage) From Wall Street Than In 2008 -  Money News notes: A just-released study by the Center for Responsive Politics shows that President Obama is relying more on Wall Street to fund his re-election this year than he did in 2008, according to CNBC, which obtained an advance copy of the report. ***Obama has even added new Wall Streeters who did not work for him in 2008, including former Goldman Sachs CEO Jon Corzine, Evercore Partners executive Charles Myers, Greenstreet Real Estate Partners CEO Steven Green, and Azita Raji, a former investment banker for JPMorgan.  Obama and the DNC combined are on pace to far exceed the amounts Obama raised from Wall Street donors in 2008, both in raw dollar amounts and as a percentage of what he raises overall. Mr. Obama is bought and paid for. He wasn’t “bullied” into accepting a bad debt deal … Republicans weren’t even calling for much of what he caved in on.  In truth and fact, Obama has fought to sell out the American people from day one.

     Wall Street Continues to Spend Big on Lobbying - As the Dodd-Frank Act reaches its one-year anniversary, Wall Street’s army of lobbyists continue its aggressive campaign to tame the financial regulatory law. The financial industry has spent more than $100 million so far this year to court regulators and lawmakers, who are finalizing new regulations for lending, trading and debit card fees. During the second quarter, Wall Street spent $50.3 million on lobbying, a small dip from the prior period, according to an analysis by the Center for Responsive Politics. “In 2010, the Dodd-Frank financial reform was one of the biggest shows in town, and that continues this year,” said Michael Beckel, a spokesman for the center. Big banks are among the most prolific spenders. JPMorgan Chase’s team of in-house lobbyists spent $3.3 million, a slight uptick over last year. The biggest war chest among organizations focused primarily on Dodd-Frank belongs to the American Bankers Association, which so far spent $4.6 million on lobbying. The organization wrestled the top spending spot from the Financial Services Roundtable, a fellow trade group that represents 100 of the nation’s largest financial firms.

    Galbraith: why economists won't discuss fraud - A startling quote from James K. Galbraith: "you cannot get – not at a meeting sponsored by the International Monetary Fund, not from the participants at the Institute for New Economic Thinking – is any serious discussion of contract law and fraud. I’ve tried, repeatedly. No one will deny, in response to the question, the role that fraud played in the financial debacle. How could they? But they won’t discuss it either." He explores why, looking at this in a Keynesian framework. It goes a long way towards explaining why economists have paid so little attention to tax havens. And he has some frightening things to say, along the way:"The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable."or "we are at the end of the illusion of a market place in the financial sphere."

    Low Bank Capital Is Next Fiscal Crisis: Simon Johnson - The summer debate that has dominated Washington seems straightforward. Under what conditions should the U.S. government be allowed to borrow more money? The numbers that have been bandied about focus on reducing the cumulative deficit projection over the next 10 years, as measured by the Congressional Budget Office. But there is a serious drawback to this measure because it ignores what will probably prove to be the U.S.’s single largest fiscal problem over the next decade: The lack of adequate capital buffers at banks.  In January 2008, before anyone thought the crisis would spin out of control, the CBO projected that total government debt in private hands -- the best measure of what the government really owes -- would reach only $5.1 trillion by 2018, which was then the end of its short-term forecast horizon. As of January 2010, once the depth of the recession became clear, the CBO projected that over the next eight years debt would rise to $13.7 trillion, or more than 65 percent of GDP --a difference of $8.6 trillion. In January 2011, CBO moved the forecast for 2018 to $15.8 trillion, or 75 percent of GDP, primarily because the damage to growth had proved even more prolonged than anticipated.

    Is Dodd-Frank Overdue or Overkill? 2 Dueling Views - Will the Dodd-Frank financial regulatory overhaul thwart a future crisis?That depends on who you ask. “While the Dodd-Frank bill improved matters, it went nowhere far enough: the problems continue, and as long as they continue, our economy is at risk,” Joseph E. Stiglitz1, the Nobel Prize2-winning economist, told the Senate Banking Committee on Wednesday. Conversely, a former top financial regulator testifying at the Senate hearing cautioned that the law bordered on overkill. Eugene A. Ludwig3, the former comptroller of the currency during the Clinton administration, praised portions of the Dodd-Frank Act while warning that it could put “a deleterious drag on capital formation and meaningful job opportunities for our people. The debate at the hearing reflected larger partisan wrangling over the law, enacted in response to the financial crisis.Democrats largely back Dodd-Frank, saying Wall Street was long overdue for a crackdown. Republicans counter that the law will crimp the banking industry’s profit-making engines at a fragile time for the American economy. Conservative lawmakers in the House of Representatives have introduced some two-dozen measures to kill or roll back the law.

    GOP moves to block consumer watchdog chief  - Congressional Republicans plan to block President Barack Obama from appointing a director for the new U.S. consumer agency over the August congressional recess. A spokesman for Senate Minority Leader Mitch McConnell confirmed on Tuesday that the Senate would not fully recess for the August break. Instead, it would hold several "pro forma" sessions that prevent so-called "recess appointments." Obama nominated former Ohio attorney general Richard Cordray in June to be the first person to run the Consumer Financial Protection Bureau, one of the most contentious parts of the 2010 Dodd-Frank financial oversight law. Democrats and Republicans are feuding over when or whether to confirm Cordray. Senate Republicans have promised to block a vote on his nomination unless the agency is led by a board instead of a director, its budget is approved by Congress, and other regulators have more say in its oversight of banks.

    Dem senator: If Geithner quits, he might not be replaced anytime soon - Sen. Mark Warner (D-Va.) warned Tuesday that if the Treasury secretary quits anytime soon, his position might remain unfilled. There have been reports that Treasury Secretary Timothy Geithner would leave after a deal was reached to raise the nation's debt ceiling. Warner said Geithner's post would be in danger of staying unfilled thanks to a trend of appointment confirmations stalled in Senate committees. "Since at this point all of the nominees ... are put on hold by some of my Republican colleagues, I'm not sure we'd get to a Treasury secretary confirmation," he said on MSNBC. "Which isn't the way a government should work ... [we should] vote a guy up or down; don't leave him hanging." Warner said he hoped that Geithner would remain in his position for the foreseeable future. "I think Secretary Geithner has navigated some very tough challenges."

    What Should Be Done About the Private Money Market? - What should be done about the private money market? It is widely recognized that this market was at the center of the recent financial crisis. Indeed, very nearly the entire emergency response to the financial crisis was aimed at stabilizing this market. Yet recent and proposed reform measures have done little to address this market squarely. It is important to be precise about terminology. The term “private money market” refers to the multi-trillion dollar market for short-term IOUs that are neither issued by nor guaranteed by the federal government. This market includes repurchase agreements (“repo”), asset-backed commercial paper (“ABCP”), uninsured deposit obligations, and so-called Eurodollar obligations of foreign banks. It also includes the “shares” of money market mutual funds. ... The recent crisis witnessed a massive run on the private money market (also called the “shadow banking system”). And the federal government responded with a massive intervention. But why intervene? What would have been so bad about widespread defaults by issuers of these instruments? In my recent article, Regulating Money Creation After the Crisis, published in the Harvard Business Law Review, I provide one possible answer. Specifically, I argue that the instruments of the private money market have important properties of money. Accordingly, widespread defaults on these instruments should be expected to generate adverse monetary consequences.

    Quelle Surprise! Greedy Rentiers Are the Same the World Over! -- Yves Smith - I thought US-based readers would find this extract from a recent post in the Australian blog MacroBusiness terribly familiar. While America’s extortionate class par none is the too big to fail financial firms, in Australia they have enough of a tradition of regulation that the banks are merely coddled as opposed to completely spoiled (they also never had the opportunity to engage in the wreck-the-economy-for-fun-and-profit exercise we had here that put them firmly in control). Down under, the cohort that is now at the top of the economic pecking order is the miners. Notice the similarities to behavior we’ve seen over and over again here. From MacroBusiness: If there’s one thing that bugs me about the Australian economy and business it is rent-seeking. It is that practice of big businesses wielding political power for shareholder and personal gain. It is a doubly toxic pursuit because it not only means that Australians often have to pay extortionate prices for goods but it retards productivity for the economy overall, meaning we all get richer more slowly (except for the protected few).

    Revolving Door at S.E.C. Is Hurdle to Crisis Cleanup - Mr. Glass’s recent deposition was for a separate S.E.C. case against Fabrice Tourre4, the young Goldman trader who had developed and marketed Abacus to investors. Mr. Tourre, 31, has denied the accusations. The revelation of Mr. Glass’s involvement in the Abacus deal could undermine the S.E.C.’s case — or at least prove to be a distracting embarrassment. Perhaps more important, his role once again raises questions about the revolving door between Washington and Wall Street at a time when public distrust about the agency and its lack of enforcement action against the culprits of the crisis is running high. “There are a lot of talented people out there you could hire who weren’t necessarily part of the problem,” said Mary Kreiner Ramirez, a professor at Washburn University School of Law. “If he was involved in Abacus, how is he supposed to police it?”

    “Time to Take Stock” - Exactly how did we get into this mess with the capital markets? A situation where the global stock of derivatives is over $US600 trillion, which is about twice the capital stock of the world. A situation where high frequency trading is over two thirds of the transactions on the NYSE and about the same in the stock markets of the UK and Europe. Likewise they are over half the action in foreign exchange markets and they are rapidly becoming dominant in the futures market. Andrew Haldane from the Bank of England is arguing against allowing high frequency trading — algorithms chasing algorithms chasing algorithms — from being allowed to proliferate pointing at volatility as the problem: Speed increases the risk of feasts and famines in market liquidity. HFT [high-frequency traders] contribute to the feast through lower bid-ask spreads. But they also contribute to the famine if their liquidity provision is fickle in situations of stress. Haldane noted that relative to gross domestic product, the equity market capitalisation of the US, Europe and Asia had not grown since 2000, suggesting that “the contribution of equity markets to economic growth … has been static”. Little wonder, when you consider that companies are putting themselves in the hands of algorithms.

    Bill Black: U.S. Subsidies to Systemically Dangerous Institutions Violate WTO Principles - This article makes the policy case that U.S. subsidies to its systemically dangerous institutions (SDIs) violate World Trade Organization (WTO) principles. The WTO describes its central mission as creating “a system of rules dedicated to open, fair and undistorted competition.” There is a broad consensus among economists that the systemically dangerous institutions (SDIs) receive large governmental subsidies that make “open, fair, and undistorted competition” impossible. To date, WTO is infamous for its hostility to efforts by nation states to regulate banks effectively. At best, the result is a classic example of the catastrophic damage cause by the “intended consequences” of the SDIs’ unholy war against regulation.  There is broad agreement among economists that the U.S. provides extremely valuable subsidies to the SDIs and that these subsidies have disastrous consequences. Neither major Party in the U.S., however, is willing to end the SDIs or even subject them to effective regulation. I propose that Latin America take the lead in demanding that the WTO live up to its stated mission and stop the massive governmental subsidies that the rent-seeking SDIs have extorted through their political power and their ability to hold the global economy hostage.

    Money Still Owed In Federal Bailout: $1.5 Trillion Still Owed to Treasury, Federal Reserve - A new study released today by the Center for Media and Democracy (CMD) shows that, despite rosy statements about the bailout's impending successful conclusion from federal government officials, $1.5 trillion of the $4.8 trillion in federal bailout funds are still outstanding. The analysis, presented in charts and an online table and program profiles, is based entirely on government records. This comprehensive assessment of the bailout goes beyond the relatively small Troubled Asset Relief Program (TARP) program to look at the rest of the Treasury and Federal Reserve’s multi-trillion dollar response to the financial crisis. It shows that while the TARP bailout of Wall Street (not including the bailout of the auto industry) amounted to $330 billion, the government also quietly spent $4.4 trillion more in efforts to stave off the collapse of the financial and mortgage lending sectors. The majority of these funds ($3.9 trillion) came from the Federal Reserve, which undertook the actions citing an obscure section of its charter.

    A "Run to the Bank" - Over the last couple of weeks, we saw extreme caution by businesses and consumers. CEOs were warning about a sharp slowdown. Lawyers were telling their clients to wait before signing contracts. Corporations were stockpiling cash ... and there was even a "run to the banks"! From the WSJ: Washington's Haggling Left Wall Street Dangling U.S. companies large and small also chose an extraordinary playbook, stashing cash in the corporate equivalent of mattresses—bank accounts that yield no interest ... Banks, for their part, looked at the influx of deposits with mixed feelings.  On one hand, the unexpected bounty provides them with cheap funding that can be put to work in the form of loans. At the same time, the new deposits swelled their liabilities ... One executive even suggested that if this "run to the bank" continues, lenders might consider introducing negative interest rates on deposits (savers would have to pay a fee to park the money in the bank) to keep money out. A key question is how quickly consumer and business confidence returns to the already low pre-debt ceiling debate levels.

    BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash  - Bank of New York Mellon Corp. is preparing to charge some large depositors to hold their cash, in the latest sign of the worries roiling global markets. The big U.S. custodial bank said this week in a note to clients that it will begin slapping a fee next week on customers that have vastly increased their deposit balances over the past month. The bank cited the heavy dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over U.S. government borrowing. BNY Mellon's decision sent money-market mutual funds and financial institutions scrambling to put their cash to work in short-term markets Thursday, sending rates falling across many investments. Treasury bill prices rose, pushing down their yields down sharply, and interest rates on overnight securities repurchase, or repo, agreements tumbled. The cost of borrowing overnight in this market tumbled below zero Thursday, after starting the day at around 0.08%.

    New Fee to Bank Cash - Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash. The unusual move means some U.S. depositors will have to pay to keep big chunks of money in a bank, marking a stark new phase of the long-running global financial crisis.  The shift is also emblematic of the strains plaguing the U.S. economy. Fearful corporations and investors have been socking away cash in their bank accounts rather than put it into even the safest investments.  The giant bank, which specializes in handling funds for financial institutions and corporations, will begin assessing a fee next week on customers that have been flooding the bank with dollars, Bank of New York told clients in a note reviewed by The Wall Street Journal.

    Bank of New York Charging to Hold Cash, Driving New Frenzy for T-Bills - They say that nothing comes for free, and now that includes cash. Bank of New York, the world’s biggest custodian bank, announced it is charging a fee of 13 basis points for unusually large cash deposits. That has pushed money funds to move even more of their cash into already in-demand T-bills, short-term agency notes and Treasury repos. “By forcing cash out into the marketplace, demand for money-fund investments is only going to grow, forcing investors into a pool with already incredibly shallow options,” says a money fund manager. “Most importantly, if other banks follow suit, then yield levels as a whole will have no where to go but lower as investors look to remain invested.” Three-month T-bills recently yielded 0.008%, and short-term bills have been darting in and out of negative territory this morning.

    Bank Of New York Mellon To Pay Negative Interest Rate for Very Large Cash Deposits: The Bank of New York Mellon will begin paying negative interest rates on very large cash savings deposits, over $50 million, this week. As an aside, we wonder why the Fed does not similarly reduce the interest they pay on bank reserve deposits with them to zero from the current .25 percent? It should be noted that Bank of New York Mellon has a current dividend yield of 2.06%. Are those dividends taxable? Will depositors be able to claim a lost on the negative interest they pay to BNY Mellon? Not a sign of deflation if you understand it, although I am sure some will tease that conclusion out of this. Negative real interest rates are the hallmark of quantitative easing, which are artificially low interest rates and the creation of non-organic money, printing paper if you will. It is just they are nominally positive on the longer end of the curve. When they go nominally negative on the short end for a sustained period, you know we are not in Kansas anymore, Toto. This is a clear sign of a topsy turvy financial system, of dysfunctional markets, of predatory banking, distorted risks and returns, and a broken economy with negative real interest rates that are likely to become...more negative. The US can get by with this because of who they are, and what the dollar represents to world trade.

    BNY Mellon Deposit Fee: Life in the Liquidity Trap - Bank of New York’s move to charge a fee on large deposits is emblematic of much broader strains that plague the U.S. economy and the global financial system. In response to the recession and anemic recovery, the Federal Reserve has pushed interest rates to zero and purchased $2.6 trillion worth of mortgage and Treasury securities. In the process, it has flooded the financial system with cash. But banks and investors are reluctant to put that cash to work because they are worried about the economic outlook. With no other place to put it, they’re parking it in banks. Economists call this a liquidity trap — liquid cash is trapped in the financial system and not finding its way into productive investments and spending in part because demand is so weak.

    Stock Market Plunge: Why Wall Street Hates the Debt Deal - Some have said the fact that the debt deal was struck has allowed investors to focus more clearly on the economy, and what they see, now that they're looking again, is bad news. But it's more than just that. In the Aug. 15 issue of TIME, columnist Rana Foroohar argues that the debt deal will increase the level of inequality in the U.S. You can read her very good article here. I agree with Foroohar that it is bad news — and perhaps even worse than she makes it out. Inequality not only caused the financial crisis; it could make the recovery much slower. Here's why:I have written a few pieces about how the debt deal could slow the economy. A cut in spending, be it from consumers or the government, during a recession is sure to cost the economy jobs. Still, the direct drag from the debt deal on the economy is unlikely to be that big, mostly because the $2.1 trillion in cuts over the next decade won't really kick in for a few years. Thomas Lam, chief economist at Singapore-based financial firm OSK/DMG, calculates that the drag on the economy will lower economic growth by only 0.3 percentage points in each of the next two years, which is something but not disastrous. So why is Wall Street reacting so badly in the wake of the deal? Because the big impact of the deal may not be the direct drag of a decrease in spending.

    The reason the markets are diving - Washington likes to talk about the economy in terms of things it can control. Spending and deficits. Stimulus. Policy uncertainty.  But the Dow Jones isn’t diving because spending has risen, deficits have grown or stimulus policy has changed. It’s diving because of forces Washington can’t control, and in many cases, doesn’t understand very well. How many members of Congress do you think could give a coherent account of what has happened to oil or steel prices over the last three years? Or what’s happening in the Eurozone? Or to the yuan? A dramatic gap has opened between the economy as Washington sees it -- and wants to intervene in it -- and the economy that actually exists. Whatever weak recovery we might have hoped for is being hindered by global commodity prices, consumer deleveraging, fears of flagging demand in emerging markets, earthquakes in Asia, and much more. Globally, it’s been an almost uninterrupted run of crises and bad luck. Meanwhile, Washington just spent two months arguing over whether it would pay its bills or spark an unnecessary financial crisis.. This week, the markets are tanking. Which suggests that Washington is asking itself the wrong question.

    Minus 512, 2.4 Percent - Paul Krugman - OK, OK, we always need to bear in mind Paul Samuelson’s line about how the stock market had predicted nine of the last five recessions. Still, the markets do seem to be telling us a couple of things: 1. The world looks a lot more like the way it’s viewed by the Krugman/Thoma/DeLong axis (hey, I like it) than as viewed by, say, the WSJ editorial page. 2. Policy makers have been worrying about the wrong things, obsessing over deficits when the real problem was lack of growth. There are intimations that this could turn out to be more than a mere market plunge; European stresses are starting to make some nasty financial ripples that suggest a possible mini-Lehman event, although I think — I hope — governments and central banks will head this off. But if you had any doubts that we were on the wrong track, this should resolve them.

    US corporate bond yields hit fresh lows - The yield on high-quality US corporate bonds has fallen to record lows as investors seek out debt from top-notch companies as a relatively safe destination for their cash. The average yield on the benchmark Barclays Capital index of US corporate bonds with investment-grade ratings on Wednesday reached an all-time low of 3.42 per cent, five basis points below the previous record of reached in November of 2010. “Growth is continuing to slow and that is a challenge for all risk assets,” “Investment-grade corporate credit is acting as a safe haven, because these companies have record amounts of cash on their balance sheets and low levels of short-term debt.” The rally in top-quality corporate debt comes as stocks and riskier bonds have continued to lose value. Stock markets around the world fell on Wednesday on fears of a US double-dip recession and continued uncertainty about the fate of eurozone sovereign debt. The uncertainty regarding the outlook for sovereign credits has made corporate bonds prized by investors.

    Unofficial Problem Bank list declines to 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 5, 2011.Changes and comments from surferdude808:  Busy week for removals with the two failures this Friday night and after the FDIC updated its structure database to reflect some recent unassisted mergers. The removals plus one addition leave the Unofficial Problem Bank List at 988 institutions with assets of $411.6 billion, down from 995 institutions with assets of $415.4 billion last week.

    Problem Banks: Comparing Official and Unofficial Counts -The following graph compares the weekly count of banks on the "unofficial problem bank list" with the number from the FDIC's Quarterly Banking Profile. We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808).  The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are also not made public. CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. The red dots are the number of banks on the official problem bank list as announced in the FDIC quarterly banking profile for Q1 2009 through Q1 2011. The dots are lagged one month because of the delay in announcing formal actions. Here is a graph from the FDIC back to Q1 2006.

    Bank of America Death Watch - - Yves Smith - 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 loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral. Its stock was down 7.44% yesterday, which puts its market cap at $89.5 billion, which is a mere 41.6% of common equity (total equity less book value of preferred) of $215 billion. That means if the bank is under pressure to raise its capital levels, it will be so dilutive as to be problematic, particularly if the stock market weakens further and banks continue to take it on the chin. And the entire mortgage industrial complex is coming under stress. Number three mortgage insured PMI posted yet another loss and fell short of regulatory standards. Although mortgage insurer woes are mainly a Fannie-Freddie issue, problems in tightly-coupled systems can ricochet in unexpected ways. The death spiral dynamic kicked in during the crisis as a result of funding stress: as interbank markets dried up and short term funding costs rose, CDS spreads also rose and banks faced risk in terms of both cost and availability of funding. Rating agencies downgrades exacerbated the spiral. Some of these conditions would appear not to be operative now, with banks having tons of reserves parked at the Fed. But BofA in particular has been suffering a slow bleed of deposits as angry consumers vote with their feet, making it more dependent on market funding than before.

    Some Bankers Never Learn - YOU’D think the mortgage bust would qualify as a teachable moment. But some people refuse to learn from mistakes — a list that apparently includes certain mortgage bankers. Their industry is fighting a new rule that might prevent a repeat of the lending binge that helped drive our economy off a cliff. In case you just arrived from another planet: America’s mortgage mania was fueled by home loans with poisonous features that made them virtually impossible to repay. It was fun while it lasted, at least for the financial types who profited by making dubious loans and selling them to investors. But the Dodd-Frank financial overhaul last year barred lenders from making home loans before determining that people could probably repay them. (It’s depressing that we have to legislate common sense, but, hey, that’s the world we live in.) Dodd-Frank also required regulators to define the characteristics of loans that would most likely be repaid. The idea was to ensure that banks had skin in the game when they bundled risky mortgages into securities.

    Gretchen Morgenson Is Right: Bankers Have No Shame - Following the collapse of the housing bubble and the resulting financial meltdown, there was widespread agreement that securitzers should be forced to keep "skin in the game," meaning a stake in the mortgages they issued. Dodd-Frank included a requirement to this effect.While many were arguing for a 10 or even 20 percent stake, the rules that came out from regulators is that they have to keep just 5 percent. Furthermore, the regulators exempted traditional 20-percent-down mortgages that have low risk of the fault. Banks need keep no skin in the game on those. Naturally the banks are acting like this 5 percent stake will be the end of the world. They are yelling that this will exclude large numbers of people from the market. If bankers could do arithmetic (the evidence suggests otherwise), then they would know that this claim is absurd on its face.  Let's assume that the return on this 5 percent stake is 40 basis points less than if they could sell it. That comes to 2 basis points or 0.02 percentage points for the mortgage as a whole. Is this going to result in large numbers of people being frozen out of the housing market? Give me a break, this is garbage and Gretchen Morgensen was right to call them on it.

    Beleaguered Bank of America Seeking Yet Another Get-Out-Liabilty-Almost-Free Card in AG Negotiations - Yves Smith - Bank of America is hemorrhaging liability. Although it will take years for this drama to play its way out in court, the Charlotte bank, thanks in large measure to the self-inflicted wound of its Countrywide acquisition, faces litigation-related losses that will make a joke of its second quarter “we put it all behind us” $20 billion writedown.   Alison Frankel of Reuters describes the continuing death-of-a-thousand-unkind-cuts reversals: First came news of a new securities fraud suit against BofA. Fifteen institutional investors have elected to opt out of the bank’s $624 million class action settlement of Countrywide-related claims, deciding they can do better in a joint suit outside of the class action. What’s particularly interesting about the case is the lineup of plaintiffs. Three of them–BlackRock, TIAA-CREF, and Thrivent Financial–are also part of the group of 22 institutional investors that negotiated an $8.5 billion settlement of mortgage-backed securities contract claims with Bank of America in July.  Now to the current “we need to bail out liability faster” effort. Shahien Nasiripour gives us the latest sighting in the so-called 50 state AG negotiations. They are starting to feel like the Jarndyce versus Jarndyce of negotiations, even though they haven’t been going on all that long, but since we’ve been told since at least March that it would be wrapped up within weeks, the continued overpromising and underdelivering is getting a bit old.

    New York Attorney General Moves to Block Mortgage Settlement…- The New York attorney general is moving to block a proposed $8.5 billion settlement struck in June by Bank of New York Mellon and Bank of America over troubled loan pools issued by Countrywide. A lawsuit filed late Thursday accuses Bank of New York of fraud in its role as trustee overseeing the pools for investors.  In papers filed in New York State Supreme Court, lawyers for Eric T. Schneiderman, the attorney general, contended that Bank of New York misled investors about its conduct as overseer of the securities. The bank also breached its duties to investors by agreeing to the deal with Bank of America, according to the complaint, because the trustee is conflicted and “stands to receive direct financial benefits” as a result of the agreement.  Questioning the fairness of the deal, the attorney general’s lawsuit said that it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses” that have been suffered by investors.

    NY AG Unsheathes Excalibur - NY AG Eric Schneiderman came out with guns blazing in the proposed Countrywide investor settlement litigation.  It his filing intervening in the action and suing Bank of New York Mellon for breach of fiduciary duty, persistent fraud, and violations of the Martin Act (the "Excalibur" of the NY AG), General Schneiderman didn't mince words.  He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese): One of BNYM’s primary obligations as trustee under these PSAs wasto ensure the proper transfer of loans from Countrywide to the Trusts.  The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages.  These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.  .  

    New York Attorney General Schneiderman Drops Bomb on Bank of America Settlement and Bank of New York - Yves Smith - New York state attorney general Eric Schneiderman filed a motion to intervene in the proposed $8.5 billion settlement between Bank of America and the Bank of New York acting as trustee of 530 Countrywide residential mortgage securitizations.  We said when the deal was announced that it was not a done deal and it stank to high heaven, so we are glad to see confirmation of our dim view. In keeping, the motion charges Bank of New York with “fraudulent and deceptive conduct”. As we will see, the allegations that Schneiderman has made against Bank of New York opens up a whole new front of mortgage securitization liability, that of the trustees failing to live up to their contractual duties and worse, making ongoing certifications that they had. This is an area we’ve discussed at some length before and have been surprised hasn’t been taken up until now.  By way of background, the proposed settlement purportedly had Bank of New York acting on behalf of investors, although it conferred with only 22 and did not even go through the motions of consultation with the rest. In addition, we indicated, many of that 22, such as the New York Fed, had reason to support Bank of America getting a sweetheart deal if it alleviated questions about the bank’s solvency. Moreover, as we pointed out, Bank of New York itself had substantial conflicts of interest in entering into this deal.  But the biggest problem with the deal were the broad releases that went well beyond the matter at hand, which were breaches of representations and warranties. One was effectively a payoff: that Bank of America gave Bank of New York indemnification that looked to be too good an offer to refuse

    Delaware to intervene in BoA $8.5 billion pact(Reuters) - A day after New York's attorney general called Bank of America Corp's (BAC.N) $8.5 billion mortgage-backed securities settlement "unfair" and "inadequate", another state attorney general hinted he may also oppose the deal. Delaware Attorney General Beau Biden plans on filing a motion to intervene next week, said an attorney from his office on Friday. The attorney, Ian McConnel, said after a court hearing in the BofA case that, like the New York attorney general, his office had a duty to protect the marketplace. He also said that Delaware pension funds may be holding notes that are subject to the deal. "We're also very interested in understanding our own exposure to the notes," said McConnel. In late June, BofA settled an eight-month dispute with outside investors who bought Countrywide Financial Corp mortgage bonds. The investors -- including Pacific Investment Management Co, or PIMCO, and BlackRock Inc (BLK.N) -- requested the bank repurchase toxic home loans that comprised a series of mortgage-backed securities.

    Bank of America’s ReconTrust Sued by Washington State Over Foreclosures…  - Bank of America Corp's ReconTrust unit failed to conduct foreclosures as a neutral third party as required by law, Washington state Attorney General Rob McKenna said in a lawsuit.  ReconTrust, which acted as a trustee handling foreclosures, had a duty to act in good faith to borrowers as well as lenders, McKenna said today at a press conference announcing the suit. ReconTrust also concealed or misrepresented the actual owner of the debt when handling foreclosures, according to the complaint filed in state court in Seattle. The lawsuit follows an investigation of Washington trustees’ foreclosure practices, including faulty documentation. McKenna said the lawsuit was filed because ReconTrust didn’t take corrective actions to change its ways. “They have left us with no choice,” McKenna said. “We will have the full attention of ReconTrust and its owner, Bank of America, and they will be more interested in sitting down and making things right.”

    Citigroup Said to Get California Subpoena Over Mortgage Deals -- Citigroup Inc., the third-biggest U.S. bank, was subpoenaed by the California Attorney General’s Office over mortgage securitization, a person familiar with the matter said. Attorney General Kamala Harris, who is investigating mortgage fraud, is seeking information from the New York-based bank on its practices, said the person, who wasn’t authorized to speak publicly about the matter and didn’t want to be identified. The subpoena comes after Harris’s May announcement that she had set up a mortgage-fraud task force to investigate “every step” of the mortgage process from lending to securitization. Shum Preston, a spokesman for Harris, and Mark Costiglio, a Citigroup spokesman, declined to comment yesterday on the subpoena. The subpoena was reported earlier yesterday by the Los Angeles Times. Harris is part of a group of state attorneys general and federal officials that is negotiating a nationwide settlement with U.S. banks over their foreclosure and mortgage-servicing practices. Citigroup is one of the five banks involved in those talks.

    SJC expands right to challenge bank seizures - The state’s highest court has ruled that people fighting eviction from homes they lost to foreclosure can challenge the validity of a property seizure in housing court after the fact, a decision that housing rights advocates are calling a major victory.The Massachusetts Supreme Judicial Court’s unanimous ruling, released yesterday, involved KC Bailey of Mattapan, whose home was taken back by his lender through foreclosure in 2007. Two years later, Bailey, 65, contested his impending eviction during a housing court proceeding, saying the foreclosure process was flawed. Bailey claimed he learned of the foreclosure only after finding an eviction notice taped to a fence surrounding his three-bedroom Colonial, which had been in his family since 1979. The Vietnam veteran said he refused to leave because he was not given proper notice of the sale and is still living there. Bank of New York, which set out to evict Bailey, argued that the housing court didn’t have the authority to consider a challenge to a foreclosure already finalized, and the judge agreed. Bailey appealed and the Supreme Judicial Court decided to take the case.

    Standing to Invoke PSAs as a Foreclosure Defense - A major issue arising in foreclosure defense cases is the homeowner's ability to challenge the foreclosing party's standing based on noncompliance with securitization documentation. Several courts have held that there is no standing to challenge standing on this basis, most recently the 1st Circuit BAP in Correia v. Deutsche Bank Nat'l Trust Company. (See Abigail Caplovitz Field's cogent critique of that ruling here.) The basis for these courts' rulings is that the homeowner isn't a party to the PSA, so the homeowner has no standing to raise noncompliance with the PSA.   I think that view is plain wrong.  It fails to understand what PSA-based foreclosure defenses are about and to recognize a pair of real and cognizable Article III interests of homeowners:  the right to be protected against duplicative claims and the right to litigate against the real party in interest because of settlement incentives and abilities. 

    Judge threatens to sanction CEO of HSBC for ‘robo-signing’ - A State Supreme Court justice in Brooklyn is threatening sanctions against the chief executive officer of HSBC Bank USA, blaming her personally as head of the bank for filing what he called false and misleading documents involving "robosigning" in a home foreclosure case. In a complex decision issued in early July, Justice Arthur M. Schack denounced what he called the "frivolous conduct" and the submission of fraudulent paperwork by HSBC (HBC) and the attorney representing it in the case, Frank M. Cassara. He said the documentation submitted to the court by Cassara and HSBC to support the foreclosure is full of defects and "material factual statements that are false." And he criticized their case as a "waste of judicial resources." Schack threw out the foreclosure case itself, declaring that HSBC lacked the legal right to foreclose on a woman's home because it did not own the loan. But in an unusual move that went further than other judges, Schack threatened to impose fines or other actions against Cassara, his law firm and HSBC Bank USA CEO Irene Dorner. He cited cases in which fines of up to $10,000 were found to be appropriate for making a "frivolous motion."

    "We're Still in the Middle of the Storm" - A widely touted strategy aimed at keeping Maryland residents from losing their homes by bringing banks and homeowners to the bargaining table has met with little success as the nation braces for another wave of foreclosures. Maryland passed a law a year ago that gave homeowners in foreclosure the right to mediation, if they ask for it. The Justice Department reported in a November study that there were 25 mediation programs in 14 states. As of May 31, just 56 homeowners in the state have gotten a modification of their loan through the mediation program. Borrowers complain that lenders are more interested in foreclosing than negotiating. One borrower was horrified to discover that the bank had sold her home during the mediation process.

    LPS: Foreclosure Starts Increased in June - LPS Applied Analytics released their June Mortgage Performance data. According to LPS, 8.15% of mortgages were delinquent in June, up from 7.96% in May, and down from 9.55% in June 2010.  LPS reports that 4.12% of mortgages were in the foreclosure process, up slightly from 4.11% in May, and up from 3.66% in June 2010. This gives a total of 12.27% delinquent or in foreclosure. It breaks down as:
    • 2.38 million loans less than 90 days delinquent.
    • 1.91 million loans 90+ days delinquent.
    • 2.17 million loans in foreclosure process.
    This graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquent rate has fallen to 8.15% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long long ways to go. However the in-foreclosure rate at 4.12% is barely below the peak rate of 4.21% in March 2011. There are still a large number of loans in this category (about 2.17 million) - and the average loan in foreclosure has been delinquent for a record 587 days!   This graph provided by LPS Applied Analytics shows the days delinquent for the loans in foreclosure. About 35% of those 2.17 million loans in the foreclosure process have not made a payment in over 2 years. Another 34% have not made a payment in over a year (but less than 2 years). That is around 1.5 million properties. The third graph shows foreclosure sales by the previous month's delinquency bucket. Foreclosure sales are down compared to last year, regardless of time in delinquency - although sales are slowly picking up. Also the servicers are foreclosing a lower percentage of long term in-foreclosure properties - these long term in-foreclosure properties are just hanging over the housing market (mostly in judicial states like Florida).

    Foreclosure Timeline Soars to 587 Days - The average loan in foreclosure today has not seen a payment for 587 days, a new record and the total of loans in foreclosure or seriously delinquent now is 12.8 percent higher than last year. Delays in processing foreclosures are continuing to drive up foreclosure processing timelines at the same time that new foreclosures jumped 10 percent in June, according to the June Mortgage Monitor report by Lender Processing Services, Inc., but are still down 16.4 percent from the start of the year Delinquencies were also up, but incrementally, showing a 2.4 percent increase over May. As of the end of June, 4.1 million loans were either 90+ days delinquent or in foreclosure, representing a 12.8 percent increase since June 2010. More than 40 percent of mortgages delinquent more than 90 days have not seen a payment in more than a year. For loans in foreclosure, 35 percent have been delinquent for more than two years. Looking at the differences between judicial and non-judicial foreclosure states, the LPS data shows that the foreclosure pipeline ratio - that is, the number of loans either 90+ days delinquent or in foreclosure divided by the six-month average of foreclosure sales - is more than three times as high for judicial foreclosure states. Additionally, the slowdown associated with foreclosure moratoria has been almost exclusively felt in judicial states.

    Bulldoze: The New Way To Foreclose - Banks have a new remedy to America's ailing housing market: Bulldozers. There are nearly 1.7 million homes in the U.S. in some state of foreclosure. Banks already own some of these homes and will soon have repossessed many more. Many housing economists worry that near constant stream of home sales from banks could keep housing prices down for years to come. But what if some of those homes never hit the market. Increasingly, it appears banks are turning to demolition teams instead of realtors to rid them of their least valuable repossessed homes. Last month, Bank of American announced plans to demolish 100 foreclosed homes in the Cleveland area.  BofA has already donated 100 homes in Detroit and 150 in Chicago, and may add as many as nine more cities by the end of the year. And BofA is not alone.  Fannie Mae has a program to sell houses to local municipalities for around a few hundred dollars. Wells Fargo has donated 800 homes to be demolished since 2009.. Since 2008, the JPMorgan has donated or sold at a discount 1,900 houses to city or county officials.

    FHA sells record number of REO in June - Earlier this year, Tom Lawler noted that the FHA was having REO inventory problems, and the FHA's REO inventory increased in Q1.  It now appears the FHA REO problem has been solved. The FHA sold a record number of REO in April, more in May, and another new record in June. According to HUD, the FHA acquired 7,667 REO in June and sold a record 13,609 properties (breaking the record of 12,671 properties sold in May). The FHA REO inventory has declined from 69,958 at the end of Q1 2011, to 54,645 at the end of Q2. Fannie and Freddie are expected to release results including REO aquisitions and inventory later this week. I expect Fannie and Freddie to report declines in REO inventory in Q2 too.

    CoreLogic: Home Price Index increased 0.7% in June - Case-Shiller is the most followed house price index, but CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of April, May and June (June weighted the most) and is not seasonally adjusted (NSA).  From CoreLogic: CoreLogic® Home Price Index Shows Third Consecutive Month-Over-Month Increase CoreLogic ... today released its June Home Price Index (HPI) which shows that home prices in the U.S. increased by 0.7 percent in June 2011 compared to May 2011, the third consecutive month-over-month increase. According to CoreLogic, national home prices, including distressed sales, declined by 6.8 percent in June 2011 compared to June 2010 after declining by 6.7 percent* in May 2011 compared to May 2010. Excluding distressed sales, year-over-year prices declined by 1.1 percent in June 2011 compared to June 2010 and by 2.1* percent in May 2011 compared to May 2010. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

    Homeownership Rate Drops to 13-Year Low - The nation’s housing crisis has forced unprecedented numbers of homeowners out of their homes, made for a difficult homebuying environment, and tainted many Americans’ ideal of owning a home. These factors are taking their toll on homeownership in this country. The Census Bureau says homeownership in the United States has fallen to its lowest level in more than 13 years. The nation’s homeownership rate dropped to 65.9 percent in the second quarter. That’s a full percentage point lower than the second quarter of 2010 and a half a percentage point below the rate recorded in the first quarter of 2011. Paul Dales, senior U.S. economist with the research firm Capital Economics says the poor economic climate, the double dip in house prices, the high number of foreclosures, and tight credit conditions are all reasons why the homeownership rate will continue to fall. “With another 3 million foreclosures in the pipeline and no sign of a major improvement in credit conditions or the labor market, demand for owner-occupied housing is likely to remain weak for some years yet,”

    Home ownership hits lowest level since 1965 -- As the foreclosure crisis continues to wreak havoc on the housing market, a source of national pride has taken a sour turn. Home ownership is on the decline and, according to a recent Morgan Stanley report, the United States is fast becoming a nation of renters.  Last Friday, the Census Bureau reported that the percentage of people who owned a home had dropped to 65.9% during the second quarter -- its lowest level since the first quarter of 1998 and a far cry from the high of 69.2% reached in late 2004.  Yet, in a research paper issued a week earlier, Morgan Stanley analysts argued that the home ownership rate is even lower than the Census Bureau statistics say.  In fact, once they factored in delinquent mortgage borrowers (the ones who are likely to lose their homes at some point), Morgan Stanley calculated that the home ownership rate is more like 59.2%. That's the lowest level since the Census Bureau started keeping quarterly records back in 1965 (before that, it recorded home ownership rates once a decade). The Census Bureau's statistics, however, do not factor in mortgage delinquencies.

    America’s 10 Sickest Housing Markets: 24/7 - Robert Shiller has been stating that home prices could fall another 10% in the next year. Inventories in some major metropolitan areas would take years of sales to get back to 2005 levels. Then, the normal inventory of homes for sale was replaced on average every six months and it was unusual for a house to be on the market for a year. Foreclosure rates remain high and only the robo-signing scandal has slowed the process.  Once this is resolved, economists fear the market will be flooded with even more vacant, unsold homes.24/7 Wall St. has taken a new look at the housing market to find the very weakest cities by identifying those with the highest homeowner vacancy rates and rental vacancy rates. These are markets where demand has clearly collapsed. These are cities where the requirement for living space has dropped well below the national average.  Further, vacancy rates of many cities were stable during the recession, but accelerated sharply higher in the last year. Similarly, housing prices in several of these markets have decreased at a faster rate in the last three quarters than during the recession. These cities, like Detroit, St. Louis, Dayton, and Atlanta, also tend to be larger and older among the top 75 metropolitan areas. Their economies were damaged long before the recession.

    Mobility in the U.S. is Down. What’s More of a Factor: the Housing Slump, or Air-Conditioning? - It’s always been one of the supposed strengths of the American economy: the relative ease with which we’re able to pick up and move. This is particularly useful when times are tough and you need to unhinge from a weak local economy. The conventional wisdom today is that mobility is being dragged down by the housing crisis, that people underwater on their mortgage or reluctant to sell their home into a soft market are choosing to stay put. But a new study throws some water on that theory by showing that states with high percentages of homeowners with negative equity are no more likely than other states to see a decline in long-distance migration of their residents. While being clear that much more research is needed, they offer a few interesting hypotheses: One such widespread factor might be a return to equilibrium after a massive population shift toward the South.

    Construction Spending increased in June - The Census Bureau reported that overall construction spending increased slightly in June:  [C]onstruction spending during June 2011 was estimated at a seasonally adjusted annual rate of $772.3 billion, 0.2 percent (±1.8%)* above the revised May estimate of $770.5 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 65% below the peak in early 2006, and non-residential spending is 38% below the peak in January 2008. Private construction spending is mostly moving sideways, and it is public construction spending that is now declining. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending will probably turn positive in August, but public spending is now falling sharply as the stimulus spending ends.

    Financial Armageddon: Not the Only Debt Mess - If you want to keep up-to-date tabs on how much cash the U.S. Treasury has (left), click here:Are We Broke Yet?  But if you want a (scary) picture of another big debt mess, look here: (graphic)

    U.S. Consumer Credit Jumps by Most in 4 Years - U.S. consumer borrowing jumped in June by the most in four years, led by a gain in non-revolving debt, including student loans.  Credit increased by $15.5 billion, three times as much as projected and the biggest gain since August 2007, after a $5.08 billion advance in May that was little changed from the previous estimate, the Federal Reserve said today in Washington. Economists forecast a $5 billion rise, according to the median estimate in a Bloomberg News survey.  Unemployment hovering around 9 percent may be spurring Americans to stay in school longer or seek more training in the hope of landing a job. At the same time, elevated gasoline and food costs may be straining household budgets, prompting consumers to turn to their credit cards to purchase necessities.  “While consumer credit has grown, it has does so more slowly than disposable income,”  “Households are still deleveraging but not nearly as aggressively as they were last year.”

    Consumer Spending Retreats In June - For the first time in a year, monthly consumer spending dropped, the U.S. Bureau of Economic Analysis reports. Personal consumption expenditures (PCE) fell 0.2% in June as disposable personal income rose by a slight 0.1%. Joe Sixpack’s inclination to spend, it seems, is drying up. Indeed, PCE’s monthly pace has been descending non-stop since March and the latest number reflects outright decline. (Some news outlets are reporting that consumer spending, as per today's revised numbers for PCE, fell in June for the first time in nearly two years. In fact, there was a slight 0.04% drop in June 2010, although rounding changes this to zero.)Suffice to say that the trend in PCE isn’t encouraging. There’s no shortage of incentives for consumers to save more and spend less these days, but that won’t diminish the macro pain for an economy that relies primarily on Joe Sixpack’s consumption habits.  On the other hand, there’s nothing particularly new in today’s numbers. We already knew that second-quarter GDP growth was weak. After reading today’s income and spending report for June, we have more detail on why it was weak.

    Personal Income increased 0.1% in June, PCE decreased 0.2% - The BEA released the Personal Income and Outlays report for June:  Personal income increased $18.7 billion, or 0.1 percent ... Personal consumption expenditures (PCE) decreased $21.9 billion, or 0.2 percent.  Real PCE decreased less than 0.1 percent. ... The price index for PCE decreased 0.2 percent in JuneThe following graph shows real Personal Consumption Expenditures (PCE) through June (2005 dollars). On a quarterly basis, PCE barely increased in Q2 from Q1 (this was in the GDP report Friday). Note: The PCE price index, excluding food and energy, increased 0.1 percent. The personal saving rate was at 5.4% in June.

    Americans choose to save, not spend, in June-- Americans earned a little bit more income in June, but they chose to stash it away rather than spend it. Personal spending fell 0.2% during the month, according to data released Tuesday by the Commerce Department.  It marked the biggest monthly decline in consumer spending since September 2009 and fell short of economists' forecasts for a slight increase of 0.1%. "It's consistent with this flat spot we're seeing in the economy,"   "Consumers retrenched underneath all the pressures between rising gas prices and continued housing challenges." Meanwhile, personal income rose 0.1% in June.  Consumers chose to hold on to the extra cash, pushing up the personal savings rate. Savings as a percentage of disposable income rose to 5.4% from 5.0% in May. Americans saved a total of $620.6 billion during June, compared with $581.7 billion the prior month.

    Americans cut spending for first time in 20 months- Americans cut their spending in June for the first time in nearly two years after seeing their incomes grow by the smallest amount in nine months. The latest data offered a troubling sign for an economy that is adding few jobs and barely growing. Consumer spending dropped 0.2 percent in June, the Commerce Department said Tuesday. It was the first decline since September 2009. Some of the decline was the result of food and energy prices moderating after sharp increases earlier this year. When excluding spending on those items, consumer spending was flat. Still, consumers also cut back on big-ticket items, such as cars and appliances, which help drive growth. Incomes rose 0.1 percent, the smallest gain since September. Many people are also pocketing more of their paychecks. The personal savings rate rose to 5.4 percent of after-tax incomes, the highest level since August 2010.

    Consumers face minor changes from debt deal - A downgrade would nudge interest rates higher on a variety of consumer loans. Not only would Uncle Sam have to pay higher borrowing rates, so would everyone else.   Restrictions on lending could get tighter. Some borrowers could find it even more difficult to be approved for a mortgage.  The upside for prospective homebuyers: Any increase in interest rates could be partially offset by a decrease in home prices.  The rates on home-equity lines of credit could also climb. If the U.S. credit rating is downgraded, interest rates would likely rise by 0.25 to 1 percent on existing private student loans and more on new private student loans, according to Mark Kantrowitz, publisher of the FastWeb and FinAid websites about college aid. Kantrowitz said that would push up monthly loan payments anywhere from 5 to 12 percent.

    Consumer Moods Sour More in August - U.S. consumers are gloomier this month, according to a survey released Thursday. The Royal Bank of Canada said its consumer outlook index dropped to 40.2 in August from 43.7 in July. The August reading is the lowest since November 2009. The RBC current conditions index fell to 28.9 from 33.4. The expectations index declined to 49.4 from 53.1. “There will no doubt exist a strong inclination to highlight recent debt ceiling wrangling as having weighed on confidence this month,” said Tom Porcelli, RBC’s chief economist. Although the survey showed 54% of respondents said the debt ceiling crisis made them feel less confident about the U.S. recovery, Porcelli cautioned against attributing all the August drop to the debt discussions. That’s because other worries are also evident. Within the RBC survey the employment index continue to slide and inflation concerns picked up after falling for two consecutive months. The RBC inflation index rose to 75.1 from 72.3 in July and 73.6 in June.

    Number of the Week: Washington to Blame for Gloomy Consumers? - 77%

    : Percentage of people who say the economy is getting worse. The mood of U.S. consumers badly soured over the past month. That might have had more to do with the recent debt ceiling fiasco than a weakening economy. For the three days ended Thursday, an average of 77% of respondents to a daily Gallup survey said they thought economic conditions were worsening. That was up from 65% at the end of June and near the highest level since early 2009, when the recession was raging. You might hang the worsening outlook on a worsening economy, but here’s the thing: Gallup also asks people if their employers are hiring or not, and this measure showed stable job growth through the month. Since the deterioration in confidence in July maps pretty closely with the intensity of the debate over the debt ceiling, there’s a good case to be made that Washington is to blame.

    How Retailers Fared - Many large retailers reported their July sales numbers this week, with most of them coming out the morning of Thursday, August 4. Results were mixed, but generally positive as retailers aimed to clear inventory ahead of the back-to-school season. Click here for a chart sortable by company name, category, change in total or same-store sales, and total sales. Click here for June’s chart.

    The rich are (almost) spending like it's 2006 - Nordstrom has a waiting list for a Chanel sequined tweed coat with a $9,010 price. Neiman Marcus has sold out in almost every size of Christian Louboutin “Bianca” platform pumps, at $775 a pair. Mercedes-Benz said it sold more cars last month in the United States than it had in any July in five years.  Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering — they are zooming. Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.  “If a designer shoe goes up from $800 to $860, who notices?”  The luxury category has posted 10 consecutive months of sales increases compared with the year earlier, even as overall consumer spending on categories like furniture and electronics has been tepid, according to the research service MasterCard Advisors SpendingPulse. In July, the luxury segment had an 11.6 percent increase, the biggest monthly gain in more than a year.

    Wal-Mart Visits Drop as Added Products Fail to Draw Buyers - Visits to Wal-Mart Stores Inc.’s U.S. locations open at least a year dropped 2.6 percent from February through June, according to an internal memo, while rivals are attracting customers. Those Wal-Mart stores had 82.8 million fewer visits through the first five months of the company’s fiscal year than a year earlier, says the memo, which was obtained by Bloomberg News. Wal-Mart doesn’t disclose those traffic numbers, and David Tovar, a spokesman, declined to comment on the memo. Wal-Mart’s plan to recapture customers by returning thousands of products to U.S. store shelves has failed to reverse a decline in foot traffic at the world’s largest retailer,  . That’s primarily because Wal-Mart’s core low-income customers are shopping less and going to other retailers more often, according to two recent shopper surveys. “The biggest issue remains weak store traffic,” “We believe sales have slowed in the second quarter and are running below plan primarily due to further traffic declines.” . Sales in U.S. Wal-Mart stores open at least 12 months have declined for eight straight quarters.

    A Wish of E-Shoppers Everywhere, Now in China - When China's online luxury shoppers click to spend more than $4,000 on a Maison Martin Margiela leather jacket or over $3,000 for an Alexander McQueen dress on fashion website, they will have an option the company doesn't make available to any other customers around the world. FedEx Corp. delivery men will wait on the doorsteps of Chinese consumers while they inspect their purchases, try them on for size, and decide if the products are worthy of keeping or sending back. Luxury Internet-retail company Yoox Group SpA and FedEx custom designed the service, which will start up in September

    Dollar stores and the recession: You know the economy is in bad shape when customers say dollar stores are too expensive. - When he was Fed chairman and had access to the best economic data and minds on the globe, Alan Greenspan famously liked to forecast the direction of the economy by studying sales of men's underwear. Even during the best of times, underwear purchases remain pretty flat, he noted. (What dude who has just gotten a raise thinks: "Ah yes! I'll upgrade my entire collection of briefs now!") Only during the worst of times—when people are really, really cutting back—do boxer and brief purchases drop off. The reverse logic usually holds for America's dollar stores. Customers flock to the chains, which sell thousands of products for a buck or $2 or $10, when times get tough. When the economy improves, they shop at nicer outlets, like Target. But there are some worrisome signs that the prolonged economic malaise has changed even this retail paradigm. Middle-class households remain reluctant to spend. And cash-strapped consumers are finding even dollar stores a bit too expensive.

    The Consumption House Of Cards Falls Apart - This post is a follow-up to Personal Consumption Is A House Of Cards, which I wrote in May. The main result of that post came from Jake at his blog Econompic Data — Darn Nice Economic Eye Candy. The "official" savings rate is calculated by subtracting personal consumption from income. However, transfer payments from the government to households count toward both numbers. If transfer payments were subtracted from income, it turned out that the savings rate in the United States is negative.As of April, transfer payments made up a record 18.3% of personal income. This gives you some idea of what would happen to consumption in the United States if transfer payments were curtailed. See my post America's Road To Perdition. What has happened since May? Personal Consumption Expenditures (PCE) have declined for 3 consecutive months.Another ominous development got very little attention. Yesterday—the day the world supposed to end—Calculated Risk reported that the Bureau Of Economic Analysis (BEA) had made some very significant downward revisions to personal income excluding transfer payments.

    That Which Is Too Fearful To Speak: The Demise of the Consumer Economy - The consumer-debt-based economy is toast, but everyone's too terrified by its demise to acknowledge this reality, never mind consider a new model. The entire creaking economy is based on a few ideas which no longer work:

    • 1) Create "aggregate demand" (i.e. consumer demand, which then creates business demand) and the economy "grows," people are hired and get paid, and that's good.
    • 2) When consumer demand slumps because people are over-indebted and can't afford to buy more of anything, then "stimulate" demand with massive Central State spending to replace the vanished private demand.
    • 3) Demand is endless. You can never have enough stuff, food, vacations, education, healthcare and toys. Give people free money, or the ability to borrow nearly-free money, and they will spend, spend, spend. This creates "growth" which is always good.

    Container-Ship Plunge Signals U.S. Slowdown  - Plunging rates for chartering container vessels that carry sneakers, furniture and flat-screen TVs may signal a U.S. consumer slowdown and losses for shipping lines in what is traditionally their busiest time of the year. Fees for hiring vessels have fallen 9.3 percent since the end of April, according to the Howe Robinson Container Index, which tracks charter rates for a range of vessels. Last year, the index surged 56 percent in the period, as lines added ships on demand from U.S. and European retailers restocking for the back-to-school and holiday shopping periods. “The troubling part is that charter rates are falling in the peak season,” . “Sentiment among consumers and retailers isn’t very strong.” Concerns about the sustainability of economic growth are also contributing to container lines renting ships for shorter periods. Average charter lengths have declined to seven months from 10 months at the beginning of the year,Shipping lines are also contending with fuel costs that have jumped 53 percent in a year in Singapore trading,

    AAR: Rail Traffic soft in July - The Association of American Railroads (AAR) reports carload traffic in July 2011 decreased 1.0 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 1.3 percent compared with July 2010. On a seasonally adjusted basis, carloads in July 2011 were up 0.7% from June 2011; intermodal in July 2011 was down 0.8% from June 2011. On a non-seasonally adjusted basis, U.S. freight railroads averaged 277,921 carloads per week in July 2011, down 1.0% from July 2010’s 280,680 carloads per week and up 3.1% over July 2009’s 269,479 carloads per week. July 2011 was the fourth straight month in which carload traffic closely tracked year-earlier levels. July saw the biggest year-over-year monthly decline (and the second decline of any kind) in U.S. rail carload traffic in 16 months. This graph shows U.S. average weekly rail carloads (NSA) excluding coal.  Rail carload traffic collapsed in November 2008, and now, 2 years into the recovery, carload traffic ex-coal is about half way back. The second graph is for intermodal traffic (using intermodal or shipping containers): U.S. railroads originated 895,649 intermodal trailers and containers in July 2011, an average of 223,912 units and up 1.3% (11,724 units) over July 2010. That’s the lowest year-over-year increase since January 2010.

    U.S. Light Vehicle Sales 12.23 million Annual Rate in July - Based on an estimate from Autodata Corp, light vehicle sales were at a 12.23 million SAAR in July. That is up 6.1% from July 2010, and up 6.2% from the sales rate last month (June 2011). Although still below the sales rate earlier this year - before the tragedy in Japan - this was above the consensus forecast of 11.9 million SAAR. It appears most of the supply issues will be resolved over the next 30 to 60 days, and sales will probably be stronger in August. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for July (red, light vehicle sales of 12.23 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967. Growth in auto sales should make a solid contribution to Q3 GDP as sales bounce back from Q2, however further sales growth will obviously depend on the overall economy and jobs and income growth.

    Auto sales higher, but consumer fears persist - Major automakers posted July U.S. sales that ticked higher from the slump of recent months, but failed to dispel doubts about the strength of the economy and the mood of American consumers.  "We're seeing that the consumer confidence is pretty fragile right now because of everything that's happened in the past few months," General Motors Co's U.S. sales chief, Don Johnson, told reporters on a conference call.  GM's U.S. sales in July rose about 8 percent, while those at Ford Motor Co and Fiat-controlled Chrysler increased 9 percent and 20 percent, respectively. Monthly car sales figures are among the first snapshots of consumer demand each month. Consumer spending habits are of particular interest after last week's tepid increase in U.S. second-quarter output and sharp downward revision for the first quarter. The auto industry also is coming off May and June sales that fell short of economists' predictions, raising concerns about the recovery. Analysts said higher pricing by many automakers backfired at a time of penny-pinching consumers.  Thirty-nine economists polled by Reuters were expecting an annual sales rate in July of 11.8 million vehicles .

    Prolonged drag in economy blamed as U.S. auto sales stall - U.S. auto sales have stalled, casting doubt on a rebound this year as persistent unemployment and tighter lending deter buyers. Light-vehicle deliveries in July, to be released today, may have run at an 11.9 million seasonally adjusted annual rate, the average estimate of 12 analysts surveyed by Bloomberg. That would trail the 12.5-million rate in the first half. The auto industry may lose 1.5 million in projected sales in 2011, according to consultant AlixPartners. The economy isn't picking up as fast as anticipated, and the drag may continue beyond this year, AlixPartners said. That may put a return to average annual sales of 16.8 million vehicles from 2000-07 out of reach. Unemployment reached the highest level this year in June. "This curve of unemployment looks like it's got a lot of legs," "This is one of the first recent cycles where demand is not going to go back above its prior peak, because there are just so many structural things that are different this time around."

    ISM Manufacturing index declines in July - From the Institute for Supply Management: July 2011 Manufacturing ISM Report On Business® PMI was at 50.9% in July, down from 55.3% in June. The employment index was at 53.5%, down from 59.9% and new orders decreased to 49.2%, down from 51.6%.  Here is a long term graph of the ISM manufacturing index. This was below expectations of 54.3%, but in line with the weak regional surveys.

    U.S. Manufacturing Index Falls to Two-Year Low - U.S. manufacturing expanded in July at the slowest pace in two years as new orders shrank and production eased.  The Institute for Supply Management’s factory index fell to 50.9 last month from 55.3 in June, the Tempe, Arizona-based group said today. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.  Manufacturers are facing stagnant consumer spending, raising the risk that production will be tempered further even as parts shortages from Japan’s earthquake dissipate and commodity costs ease. Slower job growth may further keep household spending restrained at the same time exports improve.  “In the near term manufacturing will get a little bit of boost from auto production, but for that to continue you’ve got to see demand and that demand has been pretty soft.”  Estimates for the manufacturing index from 80 economists ranged from 51 to 56.

    Manufacturing Slows In July, Stoking Slowdown Fears -- More evidence that the economy remains stubbornly stagnant, if not in danger of falling into a recession: The Institute for Supply Management said its index of national factory activity fell to 50.9 from 55.3 the month before. The reading was shy of expectations of 54.9, according to a Reuters poll of economists. A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion. New orders fell to 49.2 from 51.6. Prices paid was down at 59 from 68. The employment index fell to 53.5 from 59.9. U.S. construction spending unexpectedly rose in June to touch a six-month high as an increase in private outlays offset a drop to a four-year low in public spending, a government report showed on Monday. Construction spending advanced 0.2 percent to an annual rate of $772.32 billion, the Commerce Department said. May’s construction spending was revised to a 0.3 percent increase rather than the previously reported 0.6 percent decline. Economists polled by Reuters had expected construction spending to be flat in June.

    Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders - New orders for manufactured durable goods in June decreased $4.0 billion or 2.1 percent to $192.0 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 1.9 percent May increase. Excluding transportation, new orders increased 0.1 percent. Excluding defense, new orders decreased 1.8 percent. Transportation equipment, also down two of the last three months, had the largest decrease, $4.2 billion or 8.5 percent to $45.4 billion. This was due to nondefense aircraft and parts which decreased $2.8 billion. Inventories of manufactured durable goods in June, up eighteen consecutive months, increased $1.6 billion or 0.4 percent to $357.2 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 1.2 percent May increase. Transportation equipment, also up eighteen consecutive months, had the largest increase, $1.2 billion or 1.1 percent to $109.1 billion. This was also at the highest level since the series was first published on a NAICS basis and followed a 1.7 percent May increase.

    ISM Non-Manufacturing Index indicates slower expansion in July - The July ISM Non-manufacturing index was at 52.7%, down from 53.3% in June. The employment index decreased in July to 52.5%, down from 54.1% in June. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: July 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in July for the 20th consecutive month, say the nation's purchasing and supply executives in the latest in the latest Non-Manufacturing ISM Report On Business®. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 54.0%.

    REPORT: Debt Ceiling Deal Will Cost 1.8 Million Jobs In 2012 - The Economic Policy Institute, a top nonpartisan think tank, estimates that the deal struck this weekend to raise the nation’s debt limit will end up costing the economy 1.8 million jobs by 2012. Today the Senate is expected to approve the package passed yesterday by the House and send it to President Obama. But while the unemployment rate remains above 9 percent, the deal does nothing to address chronic joblessness.  The agreement would reduce spending by at least $1 trillion over 10 years, but even the near-term cuts could shrink already sluggish GDP growth by 0.3% in 2012. According to EPI, the plan “not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs.” In particular, the immediate spending cuts and the “failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012.”

    Austerity Top Priority As Economy Sputters, Americans Suffer - This week's big debt deal has left progressives despairing over a disconnect between Washington and the rest of the country that they say has possibly never been wider. Their concern arises from the fact that while the country suffers from a sputtering economy and a grinding jobs crisis, elected officials are celebrating the passage of a massive deficit-reduction bill almost guaranteed to even further slow the economy and cost jobs. For the weeks leading up to the agreement, Democratic and Republican leaders were essentially trying to out-austere each other. It's that bipartisan enthusiasm for reducing the government's budget -- and the speed with which both parties abandoned a job-creating agenda -- that left-leaning analysts say demonstrate how beholden elected officials from both parties have become to the rich, and how out of touch they are with the problems of the poor and the middle class. "If these people were rational policymakers, they would not focus on deficit reduction right now,"  "They would focus on stimulus right now." "What's crazy about Washington is that the only thing we talk about is deficit reduction; that nobody talks about jobs,"  "It's borderline insane."

    Obama calls for measures to create jobs - President Obama on Tuesday said cuts in federal spending won't do much to help the U.S. economy and he urged Congress to take swift measures to create jobs. Obama issued his plea shortly after the Senate passed a deal that raises the borrowing limit of the U.S. government by up $2.4 trillion, while cutting federal spending by a similar amount over the next decade. Obama indicated support for an extension of the temporary cut in worker payroll taxes and more money for unemployment benefits, among other things. He also reiterated his call for higher taxes on the rich and the elimination of corporate tax breaks to help balance the U.S. budget in the long run.

    The Hostage Crisis Continues: Why Obama Can't Pivot to Jobs and Growth - Robert Reich - Nine paragraphs into his remarks today announcing the nation has paid most of the ransom the radical right demanded as a condition for maintaining the full faith and credit of the United States, the President pivoted to the agenda he should have been talking about all along: “And in the coming months I’ll continue also to fight for what the American people care most about: new jobs, higher wages, and faster economic growth.” But what precisely will he fight for now that the debt deal has tied his hands? He says he wants to extend tax cuts for middle class families and make sure the jobless get unemployment benefits. Fine, but the new deal won’t let him. He’ll have to go back to Congress after the recess (five weeks from now) and round up enough votes to override the budget caps that now restrict spending. What are the odds? Maybe a little higher than zero. He says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart. Fine, but the new deal he just signed may not let him do this either.

    White House Has Several Unused Options When It Comes to Jobs - As Dick Polman writes today, the Obama Administration put themselves in a box on jobs that will be difficult to emerge from.  And you can see that with the kind of programs the Administration is floating today as boosts to the economy. White House officials are weighing a proposal to offer tax cuts to employers in return for hiring new workers. The administration considered this idea last year, but it gave way to a broader payroll tax deduction for workers in a bipartisan deal in December.In addition, administration officials are considering proposing new investments in domestic clean energy as well as renewing tax breaks for companies using renewable energy — particularly wind power — that are to expire this year.Also on the table is an initiative designed to help the ailing housing market without the need for more public spending. Under that proposal, the government-controlled mortgage giants Fannie Mae and Freddie Mac would rent out foreclosed properties that they own rather than try to sell them at depressed prices. That approach could relieve pressure on the housing market, one of the main drags on the economy.

    You Want to Create Jobs? Here's How Part II - If we want to foster enterprise and employment, we have to face the reality that the U.S. economy is horribly inefficient and loaded with deadweight costs. Many seek external reasons for America's sagging economy, and issues of globalization, "free" trade and tariffs are certainly real. But we should keep in mind that imports and exports combined are roughly $3.2 trillion, or about 22% of the GDP.  We should also keep in mind that roughly half of "imports" are actually "related party trade" which the U.S. Census Bureau defines thusly: "Related-party trade includes trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies."  In other words, half of the imports come from U.S. subsidiaries: they are not the result of "foreigners" but of U.S corporations shipping in goods within their global corporate structures to reap immense profits in America.  Globalization is all about reaping vast profits, which is why U.S. corporate profits are near all-time highs: almost 14% of the entire GDP.  So while we need to understand how trade and trade policies have impacted employment, we should start by recognizing the gross inefficiencies and high cost structure of the domestic U.S. economy.

    White House Proposes Export Control Changes - The Obama administration is proposing to shift tanks, trucks and other military vehicles currently controlled on the U.S. Munitions List (USML) to the less-restrictive U.S. Commerce Control List (CCL) by year’s end as part of a broader effort to reform the U.S. arms export licensing process. The licensing process governs foreign sales of sensitive U.S. technologies to other countries, including commercial communications satellites. Under a proposed federal rule issued July 15, the Commerce Department would implement a new regulatory framework for the transfer of defense articles that the president determines no longer warrant control under the Arms Export Control Act, which governs the State Department-administered USML. As a first step, a rewrite of an initial tranche of items — U.S. tanks, trucks and other military vehicles contained within Category VII of the USML — is to be complete by year’s end, according to a senior administration official.

    What's Up (And Down) With The Economy? - Is there a new recession looming? That’s the burning question (again) these days, and understandably so. The slowdown in job creation is reason enough to worry. As troubling as that is, there’s discouraging news on consumer spending and weak July reports for the manufacturing and services sectors. Adding to the anxiety is the fear that the push in Washington to cut spending at a time of weak economic growth will only exacerbate the problem, although the pro-austerity crowd argues otherwise. All of which sets us up for the latest update on initial jobless claims. Unfortunately, the number du jour doesn’t tell us much.  New filings for unemployment benefits slipped a scant 1,000 last week to a seasonally adjusted 400,000, the Labor Department reports. That’s the lowest in nearly four months, but it's also ambiguous at a time when the crowd’s desperate for strong signals about what comes next. But as the chart below suggests, it's unclear if we're set to resume the fall in new jobless claims or stuck at an elevated level.

    Small Business Owners Using Pawnshops to Make Payroll -- Yves Smith - One of the reasons the economy continues to be mired in high unemployment is the lack of hiring by small businesses, which have been the engine of job growth in the US for the last decade. In the last expansion, the largest companies shed jobs, and that trend has gotten only worse as a result of the crisis. Not only are giants like Cisco cutting headcounts, but the heretofore-insulated-from-bad-things-by-your-tax-dollars big banks are following suit. And not surprisingly, recent surveys of new businesses show they remain cautious about hiring. Needless to say, if companies can’t afford to hang on to the staff they have, that certainly isn’t a plus for the economy. The use of pawn shops by small enterprises to make ends meet is likely to be one step before the end of the rope. Small businesses took it on the chin early in the downturn as credit card companies slashed credit lines on credit cards in an indiscriminate manner (many cut everyone in zip codes that showed large housing price declines; Advanta, which was focuses solely on small business, failed; American Express dropped its two credit line products aimed at business owners). As the recession continues, a sign of continued distress is the use of pawn shops, the traditional banks to the least bank-worthy, to help these enterprises make payroll.

    FCC Promises 100,000 New Jobs... At Call Centers - Need a job? Come join the glamorous world of call centers! The FCC says that call centers are poised to add 100,000 new jobs to the economy. You'll get your very own cubicle! Or, at least, your very own partitions! The call centers jobs are coming about as some companies decide to stop outsourcing their customer service overseas and start "onshoring" it instead. A business group calling itself "Jobs4America" is announcing the project alongside the FCC.  Some of the jobs will be in call center facilities, others will be "home-sourced," which means the workers will work at computers and with headsets in their own homes.  The group has said their plan is to "target areas with high unemployment." This is a very good strategy because with the high turnover and burnout rates seen among call center workers, you need to have nice big pools of people who have few other choices to churn through.

    Help Wanted Ads Bode Ill for Jobs - If the debt deal passes on Monday in time to avert a federal default, all eyes will turn to the July jobs report coming Friday from the Labor Department. The last report, as you remember, was dismal: employers added just 18,000 net nonfarm payroll jobs in June. Signals are not looking good. A key survey of manufacturers showed that employment in July grew at a slower rate than in June. And the Conference Board, a business group, released a survey showing that vacancies advertised in Internet job listings fell by 217,000 in July, leaving 3.22 job seekers per opening. Another way of putting that: there are 9.7 million more people out of work than there are advertised openings.  In one state — North Dakota — vacancies actually exceeded the number of unemployed people. That’s not a surprise, though. Oil has kept that state booming while the rest of the country has suffered. But listings fell in California and New York. In another worrying sign, openings for health care providers and technicians, one of the few categories that has had consistent growth throughout the recession and technical recovery, slipped by 61,200. And ads for home health care aides fell by 11,900.

    Monster Employment Index: Sideways Job Market - The Monster Employment Index, an index of job postings from various Internet sites compiled by Monster Worldwide, points to weak job growth in July. The Monster Index was at 144 in July, down from 146 in June (a not surprising summer slowdown, since the index is not seasonally adjusted). But the July reading was up just 4% from last year – and the year-over-year gains have been generally decelerating. Economists surveyed by Dow Jones Newswires expect today’s Labor Department report will show total nonfarm payrolls rose by 75,000 in July, after factoring in expected layoffs at state and local governments. They forecast the unemployment rate will stay at 9.2%. The Monster Index, when measured year-over-year, has thus far been a leading indicator of the job market, decelerating sharply over the past several months. According to Monster, some hard hit industries have been government (down 16% year-over-year in July), as well as the restaurants and hotels sector (down 9%). Strong growth was seen in energy and commodity-related industries such as oil and gas extraction, as well as retail trade jobs.

    Planned Layoffs Surge In July: Challenger - This week has been a worrisome one for economists who monitor the health of the U.S. economy, with mounting signs all pointing in the same direction: For the average American worker, a rebound will not be soon forthcoming. In fact, things seem to be moving in the other direction. GDP growth is weak; new hiring is not keeping pace with population growth, according to fresh data; and growth in manufacturing — which once lead the recovery — has practically ground to a halt. But most worrisome of all the signs, perhaps, is the return of mass layoffs. For the past three months, American companies have been cutting their workforce in increasing numbers, according to a new report from Challenger, Gray & Christmas, an outplacement consultancy group in Chicago. In July, the number of planned job cuts surged to a 16-month high of 66,414 — a 60 percent increase from June. “We’re beginning to see patterns that are disconcerting, and the really troubling part is this: Nothing is happening in the economy which is going to boost job growth,” The pattern, if it continues, could spell serious trouble for the American labor market. “What may be most worrisome about the July surge is that the heaviest layoffs occurred in industries that until now have enjoyed relatively low job-cut levels, including pharmaceuticals, computer and retail,”

    Forecasting the Unemployment Rate -DeLong - Macro Advisors and other mainstream forecasters certainly expect the unemployment rate to decline: a typical glide path has “headwinds” keeping the unemployment rate at 9.2% until the end of this year, and thereafter has it declining from 9.2% to 8.6% in half a year and to 8.0% by the end of 2012. I really do not see where this forecast is coming from. It is certainly the case that over an average year in the entire 1948-2010 period the unemployment rate converges 23% of the way back to its sample average level of 6.1%. That regression coefficient starting with 9.2% late this year would get us to 8.7% by mid-2012 and to 8.1% by end 2012. But since 1990 mean reversion in the American unemployment rate has ebbed away. Since 1990 we have closed on average not 1/4 but rather 1/14 of the gap between the current unemployment rate and its long-run sample average over the course of a year.

    ADP: Private Employment increased 114,000 in July - Employment in the U.S. nonfarm private business sector rose 114,000 from June to July on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated advance in employment from May to June was revised down modestly to 145,000, from the initially reported 157,000. ... Employment in the service-providing sector rose by 121,000 in July, marking 19 consecutive months of employment gains. Employment in the goods-producing sector fell by 7,000 in July, the second decline in three months. Manufacturing employment decreased 1,000 in July, which has seen growth in seven of the past nine months. Note: ADP is private nonfarm employment only (no government jobs).

    ADP: Economy Adds 114,000 Private-Sector Jobs In July - Today’s ADP Employment Report for July isn't really encouraging but it does tell us that there's still job growth. It's modest at best, but the fact that the labor market is still expanding at this point suggests that the economy will sidestep a new recession. There's no assurance that the labor market won't suffer in the months ahead, but the latest numbers don't look like recession figures.  Private nonfarm payrolls added a net 114,000 positions last month, ADP advises. That's down slightly from June's 145,000 gain and so there's nothing much has changed in the labor market. Growth is still sluggish. But 100,000-plus new jobs implies that there's still enough forward momentum in the broad trend to keep the economy bubbling, if only slightly. The margin for error is thin, but it could be a lot worse

    U.S. Payrolls Rose in July; Jobless Rate at 9.1% - American employers added more jobs than forecast in July and wages climbed, easing concern the world’s largest economy is grinding to a halt.  Payrolls rose by 117,000 workers after a 46,000 increase in June that was larger than earlier estimated, the Labor Department said today in Washington. The median estimate in a Bloomberg News survey called for a gain of 85,000. The jobless rate dropped to 9.1 percent as discouraged workers left the labor force. Average hourly earnings climbed 0.4 percent.  Faster job gains are needed to bolster consumer spending, which makes up 70 percent of the economy and rose last quarter at the slowest pace in two years. At the same time, the report may relieve pressure on Federal Reserve policy makers meeting next week to take immediate steps to sustain the recovery.  “There is not a lot to celebrate even though it was better than most feared,”

    July Employment Report: 117,000 Jobs, 9.1% Unemployment Rate - From MarketWatch: U.S. economy gained 117,000 jobs in July The U.S. economy added 117,000 jobs in July and an even larger 154,000 in the private sector while the unemployment rate fell to 9.1% from 9.2%, partly because 193,000 people dropped out of the labor force, according to the latest government data. Job gains in May and June were also revised up by a combined 56,000, the Labor Department reported Friday. Average hourly wages rose 10 cents, or 0.4%, to $23.13. The workweek was unchanged at 34.3 hours. This graph shows the unemployment rate. The unemployment rate decreased to 9.1%.  I'll add the Participation rate and Employment to population ratio soon. This graph shows the job losses from the start of the employment recession, in percentage terms aligned at the start of the recession. The dotted line is ex-Census hiring. The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse). This was still weak, but better than expectations for payroll jobs, and the unemployment rate. The 154,000 private sector jobs - and 56,000 in upward revisions to May and June are improvements.

    Here Is Your July Jobs Report - The Bureau of Labor Statistics crashed this morning minutes after it released the jobs report. If you're looking for the report, it's here: BLS JOBS REPORT.pdf. Thanks to the Joint Economic Committee for their assist. Some quick numbers before we get to deeper analysis: BLS topline: "Total nonfarm payroll employment rose by 117,000 in July, and the unemployment rate was little changed at 9.1 percent." Good news: Private sector up 154K, which is around population growth.  Bad news: Public sector down 37K. Worse news: Employment/population rate falls to 58.1%, lowest since 1983 .... Labor force participation fell to 63.9% ... Silver lining: June revised from 18K to 46K

    Private-Sector Job Creation Accelerates In July - Today’s jobs report isn’t great, but it’s better. For the moment, that’s good news--great news, if you consider the alternative outcome implied by yesterday's steep market loss. Private-sector payrolls rose by 154,000 in July, nearly double June’s revised 80,000 gain. Although government jobs overall decreased 37,000 last month, the momentum in the private sector was enough to bring the unemployment rate down ever so slightly to 9.1%. In short, we dodged another bullet. There are still plenty of challenges ahead, as there have been all along, but today’s payrolls report for the private sector is strong enough to keep the recession risk at bay, if only on the margins and just long enough until the next data point arrives.  Last month’s net gain in private-sector jobs was the highest since April’s 241,000 rise. We’re still well below that figure, but it’s also obvious that we’re comfortably above the below-100k reports for May and June. Is the two-month slump over? Hard to say, and there are lots of reasons for staying skeptical.

    July payrolls rise may soothe recession fears - U.S. job growth accelerated more than expected in July as private employers stepped up hiring, a development that could ease fears the economy was sliding into a fresh recession. U.S. payrolls increased 117,000, the Labor Department said on Friday, above market expectations for an 85,000 gain. The unemployment rate dipped to 9.1 percent from 9.2 percent in June, but this was mostly the result of people leaving the labor force. The payrolls count for May and June was revised to show 56,000 more jobs added than previously reported. The report was the first encouraging piece of economic data in some time.

    A Bettter-Than-Expected-Though-Still-Pretty-Weak Jobs Report - The nation’s payrolls increased by 117,000 last month, with the private sector posting a stronger gain of 154,000, its best month since April.  Job gains for May and June were revised up by a combined 56,000, and hourly wages got a decent bump, up 0.4% over the month. The unemployment rate ticked down slightly, from 9.2% to 9.1% but that decline was due to fewer people looking for work, not more people finding jobs (note that the payroll data and the unemployment data come from different surveys. The job and wage gains were better than expected and such expectations matter a lot right now.  Fear feeds fear in this hyper-skittish market environment, and today’s better-than-expected jobs numbers should help calm some jittery nerves and reduce some destructive volatility.   The economy is growing, but much too slowly to provide working families the jobs, hours or work, and paychecks they need. To see this more clearly, it’s useful to average over the past three months, in order to smooth out some of the statistical noise in these monthly data.  If you do so, you get average monthly private sector gains of 111,000 over the past three months, compared to 240,000 over the prior three months, so no question that employment growth has sharply slowed

    July Jobs Report Better Than Expected, But Still Not Very Good - Going in to today’s release of the July jobs report from the Labor Department, the consensus forecast was for a gain of between 75,000 and 85,000 net new jobs, so people breathed a sigh of relief when the numbers turned out to be better than expected: Hiring picked up slightly in July and the unemployment rate dipped to 9.1 percent, an optimistic sign after the worst day on Wall Street in nearly three years. Employers added 117,000 jobs last month, the Labor Department said Friday. That’s better than the past two months, which were also revised higher. The mild improvement may ease investors’ concerns after the Dow Jones industrial average plummeted more than 500 points over concerns that the U.S. may be entering another recession. Businesses added 154,000 jobs across many industries. Governments cut 37,000 jobs last month. Still, 23,000 of those losses were almost entirely because of the shutdown of Minnesota’s state government.

    Another Gap-and-Crap on Payroll Report - Jobs +117,000, Unemployment Rate 9.1% - Actual number of Employed (by Household Survey) declines by 156,000 - Mish - What passes for "good" decreases with time. Here is an overview of today's numbers.

    • US Payrolls +117,000
    • US Unemployment Rate -.1 to 9.1%
    • Participation Rate -.2 to 63.9% accounting for drop in unemployment rate
    • Actual number of Employed (by Household Survey) fell by 38,000
    • Unemployment rose by 156,000
    • Those dropping out of the labor force rose by 374,000
    • Civilian population rose by 182,000, Labor Force declined by 193,000
    • Average Weekly Workweek was unchanged at 34.3 hours
    • Average Private Hourly Earnings Increased by 10 Cents
    • Government employment decreased by 37,000 - a genuine bright-spot

    Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data. Many of those millions who dropped out of the workforce would start looking if they thought jobs were available. Indeed, in a 2-year old recovery, the labor force should be rising sharply as those who stopped looking for jobs, once again started looking. Instead, the labor force is not expanding at all. Were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%.

    Sideways isn't good enough - WE WILL have a full analysis of the American jobs figures up shortly, but I wanted to offer a few quick thoughts. First, the main numbers—a net employment gain of 117,000 jobs, attributable to a 154,000 gain in private sector employment offset slightly by a 37,000 drop in government employment—aren't meaningfully different from the recent trend. May and June employment gains were revised up a little but remain well below 100,000, and the general picture is of an economy that's not creating jobs fast enough. The household survey reinforces this; the employment-population ratio continues to tick downward. There has been no recovery, at all, in the share of the labour force with a job. Second, forward-looking indicators aren't encouraging. The employment outlook for industry is darkening, fiscal drag is expected to increase, and markets have gone through a bloody two weeks. . This report is entirely consistent with expectations of a dip back into recession within the next year. Yet it might be just good enough—positive, and a smidge above expectations—to convince the Fed that it can wait until its September meeting to make a call on new easing. It might be just good enough to convince legislators that recent panic has been overstated, and a payroll-tax-cut extension isn't actually warranted.

    The Morning Jobs Report--Not as Terrible as it Might Seem - Though the unemployment rate dropped slightly, to 9.1% from 9.2%, so did the labor force participation rate, so at least some of that improvement seems to have been from discouraged workers leaving the labor force.  The number of marginally attached workers (people who want work, but have given up looking for it because they don't think they'll find a job) was essentially unchanged.  So was the number of people involuntarily working part time because they can't find a full time job. But there was a lot of worry from pundits that 117,000 jobs wasn't even enough to absorb population growth.  154,000 jobs were created in the private sector, but the government lost 37,000 jobs.  So on net, it seems, we lost a little bit of ground. However, it turns out that 23,000 of those lost government jobs were in state government, and according to the BLS almost all of those were due to Minnesota's shutdown.  I'm going to assume that eventually, Minnesota restores all of those jobs, which means that we made more progress than it seems.

    Employment Situation - (7 graphs) Private payrolls rose by 117,000 a level much better than the last two months data. Even though the previous months data was revised higher, on a smoothed basis the employment gains remain anemic. Except for the early 200's cycle this still remains the weakest cycle on record as far as job creation is concerned. The unemployment rate ticked back down. However, this was due largely to a 193,000 drop in the labor force as the household survey reported that employment actually fell 38,000. This was the third decline in the last four months. So the household survey reported a drop in the number of unemployed , but that was only because the labor force contracted. Typically the household survey tends to lead the payroll data and from that perspective the very weak job gains in the household survey is discouraging. The year over year gain for the household survey is only 0.2% as compared to 1.7% for the payroll data. Historically the payroll data has always had problems capturing jobs in small and start-up firms. So they use the birth-death model to adjust for this and one can not help but wonder how much of the reported gain in payroll jobs is due to this adjustment. The average work week was unchanged. So together with the significant gain in payroll jobs the index of aggregate hours worked increased 0.2% after being unchanged in June. The one item of good news in the report was a 0.4% jump in average hourly earnings. The year over year gain in hourly wages rose to 2.3% from the 2% gain in the previous month. But with the workweek unchanged the gain in weekly earnings remained at 2.6%.

    The Jobs Report -Not a strong report. Auto supply issues and higher gasoline prices have sent a bit of a jolt through the economy. But not on par with devastation. Note that private sector jobs came in at 154K. That’s actually a decent number. If the government sector were adding a normal 30K or so then we would have 185K. That’s a recovery level report. At this point job creation is slow because government is downsizing. Government downsizing will not continue forever. I know many economists and commentators are focused on the contractionary nature of the budget deal. Don’t be. As I have said, there are basically two types of government workers: teachers and not-teachers. What we’ve seen over the last year is a sharp drop in State and Local employment and a big chunk of that is teachers. This will not continue forever. Local political forces are different than national ones and the push-back against little Johnny having 45 students in his class will be strong and bipartisan.

    More Employment - A few more graphs based on the employment report. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Two key categories moved down in a little in July. The 27 weeks and more (the long term unemployed) declined slightly to 6.2 million workers, or 4.0% of the labor force. Also the less than 5 weeks category declined in July after increasing in June. This graph shows the unemployment rate by four levels of education. Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining). This is a little more technical. The BLS diffusion index for total private employment was at 58.6 in July, up from 56.6 in June, and for manufacturing, the diffusion index increased slightly to 53.1. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

    Good news, but is it good enough? - AMERICAN employment put in a respectable performance in July. Non-farm payrolls rose 117,000, or 0.1%, and the unemployment rate edged lower to 9.1% from 9.2%, both better, but not dramatically so, than Wall Street had expected. Any other time this would have been cause for mild satisfaction. In these grim times, it constitutes a massive relief bordering on joy. Economic data in recent months, including a stunningly weak job performance in June, had suggested the odds America could fall back into recession were rising, and were perhaps as high as 50%. The jobs report is consistent not with renewed recession but the orthodox view that the American economy hit a bump in the spring thanks to several unexpected blows, most importantly a rise in petrol prices and the Japanese earthquake and tsunami, which interrupted global manufacturing supply chains. As those restraints have lifted, activity has improved slightly. The guts of the report support this story. Manufacturing employment rose 24,000 in July, the best in three months, and retail employment gained 26,000. Private payrolls grew a decent 154,000. Government continued to be a drag with total payrolls down 37,000.

    The Employment Report: Moving Sideways Isn't Good Enough - The employment report shows that the economy added 117,000 jobs in July. The private sector added more jobs than that, 154,000, but a decline in government employment reduced the headline number. The unemployment rate fell from 9.2 percent to 9.1 percent, but as the report notes, this is “partly because 193,000 people dropped out of the labor force.” This is not as bad as many people expected, but it still nothing to cheer about. We need somewhere in the range of 100,000 - 150,000 jobs per month just to keep up with demographic changes (the true number is likely on the lower end of that range). Thus, with 117,000 jobs we are essentially moving sideways. If we were at full employment, then adding jobs at a rate equal to population growth would be desirable. But we aren’t at full employment, there are still close to 14 million people in need of employment, and moving sideways won’t make any inroads into this problem. And a key indicator of labor market health, the employment to population ratio, hasn’t been improving at all (an indication we are adding jobs at a rate slower than population growth). It was 58.5 percent in March, and has now fallen to 58.1 percent.

    Nothing Great About the Good Jobs Number - For the past few weeks, more and more forecasters have been saying that the economy may start to shrink and we will find ourselves back in recession. July's jobs market number suggests that a new recession, or a double-dip, isn't going to happen anytime soon. In July, the number of people employed in the United States rose by 117,000. Exclude the government, which eliminated workers last month, and the economy seems even stronger. Private companies increased their payrolls by 157,000 people in the month of July. That was far better than the 80,000 additional workers that were hired last month. And it was enough to cause the unemployment rate to fall for the first time in five months to 9.1%. Employment is the most important gauge of the economy, and you can't have a recession when 100,000 more people get jobs. But while there wasn't reason for panic, there wasn't a lot of reason to rejoice either. Jobs remain hard to find. There are nearly 14 million people out of work. Earlier this year, many economists were predicting that the U.S. economy would grow 3% in 2011. Even today's better than expected number puts us on a path of less than 2% growth. And that means all of our worries about the U.S. economy not being able to grow fast enough to support the amount of U.S. government debt will remain for a while.

    Labor Force Participation Hits New Low - Two years into the economic recovery labor force participation has hit a new low. The labor force participation rate, the share of Americans who are working or looking for jobs, declined to 63.9% in July from 64.1% a month earlier, the Labor Department said Friday. July’s numbers were a new low for the measure, which has dropped during the recession and slow recovery to its lowest percentage since the early 1980s.  The employment-population ratio, the share of the working-age population that is employed, showed a similar trend. It, ticked down to 58.1% from 58.2% in June, another new low for this downturn.  “July 1983–a time when American feminism was only halfway born–was the last time we saw an employment-to-population ratio this low,” Brad DeLong, a University of California, Berkeley, economist wrote Friday. Declining participation carries a toll – both for the sidelined workers and for the entire economy. When participation falls it’s an indication that Americans have grown discouraged about their chances of finding jobs and have given up looking.

    Length of Unemployment Continues to Break Records - The average worker who is unemployed has been searching for a job for 40.4 weeks, or more than nine months, according to new Labor Department figures. That is the longest average unemployment duration on record: This pattern is especially worrisome because unemployment begets unemployment — that is, for a whole host of reasons, people who are already out of work for a long period of time have very slim chances of finding new work in the near future. Just consider the catch-22 some employers are creating by stating that they’ll only hire workers who already have jobs. In other words, what started out as a cyclical problem could morph into a structural one — particularly if the country allows the nation’s 14 million jobless workers to become a sort of underclass like the one many European countries have struggled with.

    Employment Summary, Part Time Workers, and Unemployed over 26 Weeks - As I noted yesterday, the BLS survey reference week includes the 12th of the month (the 2nd full week of July), and that was before the economy froze up due to the D.C. debate, and also before the European crisis really flared up again. That might be why this report was a little better than expected.  There were more jobs added in July (117,000 total and 154,000 private sector). The unemployment rate decreased from 9.2% to 9.1%, and the participation rate declined to 63.9%. This is the lowest participation rate since the early ‘80s. Note: This is the percentage of the working age population in the labor force.  The employment population ratio fell to 58.1%, also a new cycle low. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, decreased to 16.1%; barely off the high for the year.The following graph shows the employment population ratio, the participation rate, and the unemployment rate.  The unemployment rate decreased to 9.1% (red line).  The Labor Force Participation Rate declined to 63.9% in July (blue line). This is the percentage of the working age population in the labor force. This is a new cycle low - and the lowest participation rate since the early '80s.  The Employment-Population ratio declined to 58.1% in July (black line). This is also at a new cycle low and the lowest since the early '80s. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  In the previous post, the graph showed the job losses aligned at the start of the employment recession. In terms of lost payroll jobs, the 2007 recession was by far the worst since WWII.  The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) decreased to 8.396 million in July from 8.552 million in June. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 16.1% in July from 16.2% in June.

    Private Sector Up, Government Down - As weak as the economy has been in recent months, the private sector has still been adding jobs at a faster rate than the adult population has been growing. Over the last 12 months, the private-sector employment has grown by 1.7 percent, while the adult population has grown about 1 percent, according to Haver, a research firm, and the Bureau of Labor Statistics: Annual private-sector job growth (blue) vs. population growth (red).Yet the percentage of adults with jobs has been falling: How could this be? Because the government — especially state and local government — is cutting jobs:

    Seasonal Joys in the Jobs Report? - The job numbers on Friday were better than expected, at least if you look at the seasonally adjusted figures. They still were not very good, but any good news is welcome. But some of this could be the seasonal factors I wrote about last month in an Off-the-Charts column. Before seasonal adjustments, the Labor Department said the number of jobs fell by 1,231,000. But July is always a weak month, so the department applies seasonal adjustments. If a characteristic of this economy is less turnover, as I think it may be, then the seasonal adjustments may be overstated. Similarly, June may have erred in the other direction. The July seasonal adjustment relates almost entirely to government jobs. Of course there are fewer of them in the summer. Implicitly, the Labor Department is assuming that all those teachers will be back in September. Let’s hope it is right.

    A Quick Note on the Long-Term Unemployed and Duration - It is probably very easy to sound like Chicken Little with how bad the economy is these days and how concerned everyone should be about new numbers coming out.  But it needs to be said again and again: Friday’s BEA numbers should have everyone worried. As Scott Sumner notes, No more jobs mystery.  Period.  End of story. “The new GDP numbers are the final nail in the coffin.” There also shouldn’t be any mystery of long-term unemployment either.  Every month the average and median duration of unemployment goes up, reflecting a large share of the unemployed being unemployed longer.  Commentators are surprised.  Right-wing economists come up with all kinds of convoluted theories about how the long-term unemployed are taking a year off to coach junior’s baseball team (instead of suffering high rates of mental illness and suicide from the shock that comes with being out of the workforce for an extended period of time).  But the simple answer is that there was a period in 2009 when the economy shoved 7 million people out of the workforce and then stopped creating jobs.

    ZMP workers and output quotas -Imagine, just imagine, that the government put a quota on the total output of, say, cars.  The result would be a drop in employment of auto workers. Some of those workers, who had skills useful in other sectors, would be able to find jobs elsewhere. Others, who had little or no alternative skills, would be unemployed. Would we describe those unemployed car workers as being Zero Marginal Product workers? Not really. They are still exactly as capable of producing extra cars as they were before. It's just that their potential employers are no longer able to sell any extra cars. Would we describe those unemployed workers as being Zero Value Marginal Product workers? Yes and no. Depends what you mean. The extra cars they could produce would have zero value to the firms trying to sell them, because they aren't allowed to sell any extra cars. But those extra cars would have exactly the same value as before to the people who wanted to drive them, but who now can't, because of the output quota on cars. Would wage cuts help employment of car workers? Not really. An individual car worker who was willing to work for lower wages might get the job that would otherwise have gone to another worker, but that doesn't help aggregate employment of car workers.

    The Jobless Recovery and the Education Gap -The charts above show the differences in: a) monthly employment levels and b) monthly unemployment rates between 1992 and 2011 for: a) college graduates and b) workers with less than a high school degree.  The differences are quite striking and interesting, and might help explain some of the labor market dynamics in the current "jobless recovery."   Note that the employment level for college graduates flattened during the 2008-2009 recession, but is now at a record high level.  In contrast, the employment level for workers without a high school degree is about 2.5 million below the pre-recession peak.  Likewise the jobless rate for college graduates has increased by a few percentage points because of the recession (and is now at 4.4%), but the jobless rate for workers with less than a high school degree has increased by more than six percentage points (now at 14.3%), and was recently almost ten percentage points above its pre-recession level.

    Bad Economics: Lack of Diversity Limits Clear View - I was then spending a lot of time on the road, chronicling the experiences of previously middle-class Americans who had slipped into poverty. They had lost jobs, houses, cars and retirement savings. Even those who were less affected were nursing considerable wounds. Many had lost hours at work or equity in their homes. Anxiety was widespread, making people inclined to hold on to their dollars -– an inclination that was itself reinforcing decline by depriving the economy of spending. Businesses were in no mood to hire, cognizant that their customers were hunkered down -– a major problem in an economy in which consumer spending makes up about 70 percent of all activity. "Where are ordinary people going to get the money to spend to sustain a vigorous recovery?" I asked.  He accused me of spending too much time listening to the stories of people who "got screwed," while erroneously assuming that their experiences represented the big picture. "Most Americans didn't get screwed," he said, adding that the vast majority had deferred spending during the worst of the downturn and were now eager for the accouterments of modern life: home furnishings, restaurant meals, cars. This spending from the "non-screwed" would be enough to power a muscular recovery, generating millions of jobs.

    Workers’ Wages Chasing Corporate Profits - THESE are the worst of times for workers, and the best of times for companies. At least that is one way to read the newly revised national economic statistics.  The Commerce Department last week reduced its estimates of economic growth in 2010 and early 2011. At the same time, it said corporate income was much better than it had thought. Using newly available data from 2009 corporate tax returns, the department raised its estimates of corporate profits by 8.3 percent for 2009 and 10.8 percent for 2010. The new figures indicate that corporate profits accounted for 14 percent of the total national income in 2010, the highest proportion ever recorded. The previous peak, of 13.6 percent, was set in 1942 when the need for war materials filled the order books of companies at the same time as the government imposed wage and price controls, holding down the costs companies had to pay.  In the first quarter of 2011, the latest figures available, the new estimates indicate corporate profits accounted for 14.2 percent of national income, well above the 13.1 percent that had previously been estimated.

    Labor’s Decline and Wage Inequality - The decline in organized labor’s power and membership has played a larger role in fostering increased wage inequality in the United States than is generally thought, according to a study published in the American Sociological Review this month. The study, “Unions, Norms and the Rise in U.S. Wage Inequality,” found that the decline in union power and density since 1973 explained a third of the increase in wage inequality among men since then, and a fifth of the increased inequality among women. The study noted that from 1973 to 2007, union membership in the private sector dropped to 8 percent from 34 percent among men and to 6 percent from 16 percent among women. During that time, wage inequality in the private sector increased by more than 40 percent, the study found. While many academics argue that increased inequality in educational attainment has played a major role in expanding wage inequality, the new study reaches a surprising conclusion, saying, “The decline of the U.S. labor movement has added as much to men’s wage inequality as has the relative increase in pay for college graduates.” The study adds that “union decline contributes just half as much as education to the overall rise in women’s wage inequality.”

    U.S. incomes fell sharply in 2009: IRS data (Reuters) - U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday. The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009. Average income in 2009 fell to $54,283, down $3,516, or 6.1 percent in real terms compared with 2008, the first Internal Revenue Service analysis of 2009 tax returns showed. Compared with 2007, average income was down $8,588 or 13.7 percent. Average income in 2009 was at its lowest level since 1997 when it was $54,265 in 2009 dollars, just $18 less than in 2009. The data come from annual Statistics of Income tables that were updated Wednesday. The average tax rate was 11.4 percent, up from 10.5 percent in 2007, the Internal Revenue Service data showed. No income tax was paid by 1,470 of the 235,413 taxpayers earning $1 million or more in 2009, compared with the 959 taxpayers with million-dollar-plus incomes who paid no income taxes in 2007.

    The Costs of War - Reports come fast and furiously from the Pew Research Center and the National Urban League. The news is bad. The Pew report shows that between 2005 and 2009 every "racial" group lost wealth, but the losses were largest amongst Hispanics and Blacks. Inflation-adjusted median wealth of white households fell by 16%, but Hispanic households lost 66% and Black households lost 53%. As of 2009, the typical white household had wealth (assets minus debts) worth $113,149, which Black households only had $5,677 and Hispanic households $6,325. The myth of the post-racial society should be buried under this data. The most dazzling fact is not this decline. It is what is to come. The National Urban League Policy Institute's latest study finds that unemployment for Blacks with four-year college degrees has tripled since 1992, and overall unemployment is near 1982 levels, namely 20%. Such numbers have not been seen since the Depression. Langston Hughes wrote that the 1930s "brought everybody down a peg or two," but that those on the darker side of the Color Curtain had not much to lose. That is no longer the case.

    National ‘poverty tour’ will highlight hardships in Obama’s backyard - Tavis Smiley, the syndicated talk show host who has been a vocal critic of President Barack Obama's policies on behalf of African-Americans, will bring his national "poverty tour" to Chicago this weekend, putting the spotlight on economic hardships in the president's hometown. The tour, organized by Smiley and Princeton professor Cornel West, is the latest effort by the two to highlight what they see as deficiencies in the Obama's administration and to force the president and Congress to pay more attention to poor people who have been hit hardest by the recession. The events, scheduled for Sunday in Joliet and Chicago, come on the heels of the deal approved Tuesday by Congress to raise the country's debt ceiling while allowing for at least $2.1 trillion in spending cuts over 10 years. Smiley called the legislation, signed by the president, "a declaration of war on the poor." "I don't understand how the president could agree to a deal that does not extend unemployment benefits, does not close a single corporate loophole and doesn't raise the taxes on the rich," said Smiley. "The poor are being rendered more and more invisible in this country. Nobody, not the president, not the Republicans in Congress, is speaking to the truth of the suffering of everyday people."

    Cantor Opposes Extending Unemployment Benefits: We Need To Stop ‘Pumping Up’ Jobless Americans - The unemployment rate inched downwards to 9.1 percent today, with private sector jobs increasing by 154,000. While a slight improvement, these better-than-expected figures provide little comfort to the 14 million Americans who are unemployed. 44.4 percent of the unemployed have been out of work for six months or more.  For these Americans who are struggling to make ends meet, the federal unemployment benefits program provides much needed financial support. Every dollar the federal government spends in federal unemployment generates two dollars of economic growth. These benefits, however, are set to expire at the end of the year. In response to today’s jobs report, House Majority Leader Eric Cantor (R-VA) declared that “unemployment is far too high” and that Congress “must push pro-growth policies to get back on track.” “for too long in Washington now we’ve been worried about pumping up the stimulus moneys and pumping up unemployment benefits”:

    Food stamp use rises to record 45.8 million - Nearly 15% of the U.S. population relied on food stamps in May, according to the United States Department of Agriculture. The number of Americans using the government's Supplemental Nutrition Assistance Program (SNAP) -- more commonly referred to as food stamps -- shot to an all-time high of 45.8 million in May, the USDA reported. That's up 12% from a year ago, and 34% higher than two years ago. The program provides monthly benefits to low-income individuals and families, which they can use at stores that accept SNAP benefits. To qualify for food stamps, an individual's income can't exceed $1,174 a month or $14,088 a year -- an amount that is 130% of the national poverty level. Extreme debtors The average food stamp benefit was $133.80 per person and $283.65 per household in May.

    Food Stamp Use Surges By Most In Years As Alabama Foodstamp Recipients Double In May - It appears that GDP data revisions are not the only thing that the administration enjoys fudging with in order to make the Chinese ministry of Truth seem like a real ministry of truth. After last month the data for April food stamp recipients indicated the we may, just may, be reaching an inflection point in the foodstamp participation following a mere 60 thousand jump in those receiving Supplemental Nutrition Assistance Program (SNAP), today's just released data confirmed that the BLS and BEA may have had a hand or two when determining this latest data series. Because the just announced jump in foodstamp usage of over 1.1 million is entirely out of the blue, and as the chart below shows, is the highest single monthly jump in Foodstamp participation since mid 2009, when eligibility requirements were adjusted. Yes, that's 45.8 million people (obviously an all time record) living on foodstamps which amount to the whopping $133.80 per person (an increase of $0.54 M/M) and $283.65 (an increase of $1.29) per household. Obviously, annualizing the latest monthly rate of 1.1 million people, it means that over 13 million Americans will live on about one third what the cheapest iPad costs in about a year.

    States cutting Unemployment Insurance benefits - Here is a depressing report from the National Employment Law Project: States Made Unprecedented Cuts to Unemployment Insurance in 2011 NELP’s new analysis shows that in 2011, six states cut the maximum number of weeks that jobless workers can receive unemployment insurance to less than 26 weeks—a threshold that had served as a standard for all 50 states for more than half a century, until this year. Michigan, Missouri, and South Carolina cut their available weeks down to 20; Arkansas and Illinois cut down to 25; and Florida cut to between 12 and 23 weeks, depending on the state’s unemployment rate. Double-digit unemployment in Michigan, South Carolina, and Florida did not discourage lawmakers there from making the cuts. ... Indiana changed the formula it uses to calculate weekly benefit amounts so that the average unemployment check will drop from $283 to $220 a week. Ouch.

    What the Debt Limit Deal Means for States - The debt limit deal inevitably will lead to large federal cuts in programs that directly benefit families and communities, adding to the deep and widespread cuts that states have made in their programs — everything from preschool to services for the elderly. The recession triggered the largest decline in state revenues on record, opening up more than $430 billion in budget shortfalls over the past four years (see graph).  States have balanced their budgets mostly by cutting services and shedding employees:  34 states have cut K-12 education, 43 have cut college funding, 29 have cut services for the elderly, and 31 have cut health care. To cite just a couple of examples, Texas is eliminating state funding this year for pre-K programs that serve around 100,000 mostly at-risk children, and Arizona is eliminating Medicaid coverage for 100,000 poor adults who otherwise would qualify.States and localities have also shrunk their workforces by 577,000 jobs since 2008 and continue to shed tens of thousands of jobs per month. Now, the federal government will pile on by making deep cuts.  We do not yet know exactly how Congress will meet the savings targets in the new debt limit deal, but we know that the required cuts in federal “non-security discretionary” funding will likely hit states hard.

    Fewer Cops, More Potholes: How Debt Deal Could Hit States Hardest - The debt-and-deficit bill signed into law on Tuesday forestalled a dangerous federal government default. But it will also slash aid to states already reeling from the recession, almost certainly forcing them to curtail services and raise revenues to pay for programs once bankrolled by Congress.  The bill, which the Senate approved and President Obama signed into law Tuesday, will eventually raise the government’s debt limit by more than $2 trillion in exchange for equivalent savings. Congress will achieve nearly $1 trillion of those savings by cutting domestic discretionary spending – including funds for education, health care, job training – to its lowest level in over half a century, as a share of the GDP. “State budgets are already devastated,” says Ethan Pollack, a senior policy analyst at the Economic Policy Institute. “This deal just makes it far worse and shifts a lot of the pain onto state and local governments. ”The recession pummeled states, diminishing tax revenues while increasing demand for public aid. Federal stimulus dollars that shored up many state budgets over the last few years are mostly spent, as are many states’ rainy day funds.

    Surf’s Down in California? - California was one of the first states into the Great Recession, so it’s a state worth watching amid fears of a double-dip.To that end, several economic indicators show California continues to languish under high unemployment and that business is now turning down.  Office Depot said its sales weakness in California has resurfaced. “Costco removed California (where it gets 20% plus of its annual sales) as a strong state for sales on its sales call, while underperformance at Zumiez also sparks concern given its exposure,” . (See a chart of how retailers fared in July)Meantime, California still has the nation’s largest collection of high-unemployment metropolitan areas — a reflection not only of the state’s large population but also the list of lingering economic problems due to the housing market and construction. In June, there were 12 metropolitan areas with at least 15% unemployment, according to the Labor Department’s metro-area unemployment report. The two highest were El Centro, Calif., and Yuma, Ariz., which had June unemployment rates of 28.5% 26.9% respectively.

    Stalemate in Senate Leaves 4,000 Out of Work at F.A.A— After dealing with the debt crisis, Senate negotiators tried and failed on Tuesday to end a stalemate over temporary financing for the Federal Aviation Administration, leaving 4,000 agency employees out of work and relying on airport safety inspectors to continue working without pay. The partial agency shutdown, which began on July 23 and is likely to continue at least through Labor Day, has also idled tens of thousands of construction workers on airport projects around the country. Dozens of airport inspectors have been asked by the F.A.A. to work without pay and to charge their government travel expenses to their personal credit cards to keep airports operating safely. Air traffic controllers and airplane inspectors, who are paid with separate accounts, have continued to work, but workers who oversee research on aviation systems, grants for airports and facilities and operations equipment have been furloughed.

    Senate fails to fund FAA, leaving 4,000 on unpaid furlough - Despite an appeal from President Obama, the Senate recessed without funding the Federal Aviation Administration, leaving nearly 4,000 "nonessential" workers on unpaid furlough and other "essential" employees on the job without pay at least through Labor Day. Airport safety inspectors, who enforce compliance with federal rules and are considered essential, have been asked to keep working and put expenses on personal credit cards. But the FAA insisted that safety is not affected because air traffic controllers, who are paid with separate funds, remain on the job. Obama called Congress' failure to resolve the situation "another Washington-inflicted wound on America." The standoff also is costing the government money. Without an FAA funding bill, airlines are not required to turn over ticket taxes, which add up to $250 million a week. A month without those taxes costs the U.S. $1 billion.

    Sen. Reid Calls It Right: FAA Shutdown Is About The GOP And Delta’s ‘Non-Union’ Stance - With Congress officially in its August recess, the Federal Aviation Administration will remain shut down for at least a month, furloughing 4,000 federal employees, stopping construction projects that employ tens of thousands of workers, and costing the government more than $1 billion in uncollected airline taxes. Airport inspectors are currently working without pay. Much of the media coverage of the shutdown has framed it as simply another example of “Capitol Hill gridlock,” or has focused on cuts to rural airports that the House GOP included in the bill. But the crux of the matter is that House Republicans refused to reauthorize the FAA without the inclusion of a union-busting provision that would make it harder for workers at airlines and railways to organize. The cuts to rural airports — as House Transportation Committee Chairman John Mica (R-FL) freely admitted — were simply meant to stick it to Democratic senators (as they’re concentrated in states those senators represent).

    None Dare Call It Privatization - It happened at a conference called “It’s Not Privatization: Implementing Partnerships in Illinois”, organized by The National Council for Public-Private Partnerships and the Chicagoland Chamber of Commerce with assistance from the Metropolitan Planning Council . The conference revealed the corporate sector’s designs on the commons in Illinois, and how they intended to duck the increasingly unpopular label of privatization. In recent years Chicago has become an epicenter of privatization. In 2005 Mayor Daley assigned the Skyway Bridge connecting the city to Indiana to a consortium owned by Spanish and Australian companies. That deal got the city $1.83 billion for a 99 year lease. One analysis of the deal shows that the new owners stand to reap between $5 to $15 billion, depending on the traffic volume and how high they jack up the tolls. In 2009 Mayor Daly gave our parking meters to a group of investors led by MorganStanley, which included the oil-rich sheikdom of Abu Dhabi. Chicago got $1.15 billion for a 75 year lease. The investors will earn in the vicinity of $11.6 billion over the life of the deal. Parking rates have skyrocketed, meters appeared in places that never been been metered before and the hours for paid parking were extended. 

    Monday Map: Sales Tax Holidays - Today's Monday Map shows states with sales tax holidays in 2011. The data comes from our latest special report, Sales Tax Holidays: Politically Expedient but Poor Tax Policy. Click on the map to enlarge it.

    Tax Flight is a Myth - Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue. The basic facts, as this report explains, are as follows:

    • Migration is not common. Most people have strong ties to their current state, such as job, home, family, friends, and community. On average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010, and only about 30 percent of those born in the United States change their state of residence over the course of their entire lifetime.
    • The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes.  The difference between housing costs in two different states is often many times greater than the difference in taxes. So what might look like migration in search of lower taxes is really often migration for cheaper housing.

    New York will face a $2.4 billion budget gap in 2012 - The state isn’t out of the woods yet. After closing a $10 billion budget gap in 2011, the next few years will also feature red ink that must be blotted off the page, to the tune of an immediate $2.4 billion in 2012, according to a quarterly report released Wednesday by the state Division of Budget. North country lawmakers agreed that the situation was expected, if unwelcome; where they diverged — along party lines — was how to address the problem. “We still have budget deficits projected,” “Unless something really miraculous happens with our economy and we have increased tax receipts, cuts will have to be made.” That’s after a 2011 budget that featured a $1.5 billion cut to school aid and hefty hacks out of the state’s public university system and its Medicaid program. Asking lawmakers four months before the next budget deliberations begin about what they’re willing to cut elicits politically safe responses about scaling back bureaucracies and adminsitrations. But such changes, even wholesale ones, are unlikely to wring out enough savings from the economy to reach $2.4 billion.

    State Parks Become Victim of Budget Slashing - Several states struggling to fight budget shortfalls are announcing plans to shutter parks, recreation areas and reserves in an effort to save a little money. California alone plans to close 70 parks, ranging from the obscure (Zmudowski State Beach) to the fairly popular (Tomales Bay State Park – pictured). Other states hanging out the “Closed for Business” sign include Arizona, Georgia, Oklahoma and Rhode Island. TreeHugger reports that Utah and Texas have also severely cut their parks’ budgets, though avoided closures, while Florida has taken far more drastic measures. Sunshine State legislators are looking into the possibility of privatizing more than 50 state parks, allowing corporations to run camping areas and add RV sites. Honeymoon Island, a beautiful castaway spot just off the coast, could become a major campsite. Meanwhile, even states that are keeping their parks open are putting off the sort of repairs that would have been a priority in the past. Niagara Falls State Park in New York is in notably bad shape, and it seems unlikely a contractor will be arriving any time soon.

    Budget cuts leave California with fewer hands to fight wildfires - For firefighters, it appeared to be a routine event. Six engine teams, including five from Cal Fire and one from Fresno County, attacked from two sides. Firefighters carrying heavy, 300-foot hose extensions ascended the rocky terrain. They doubled back for additional hose, stretching their water lines and attempted to circle the fire before it leaped a ridge. But, under state budget cuts, Cal Fire was battling the blaze with three firefighters per engine instead of the normal four-man crews used in the wildfire season. They couldn't get water around the fire in time. It jumped the ridge and devoured the next canyon.  The incident on what one fire captain called "a standard wildfire" stoked fear over whether staffing cuts are affecting first-strike capabilities of firefighters to stave off severe wildland events.

    How JP Morgan Took Over All Kentucky’s Financial Services, And Why You Should Be Scared - On July 1, JP Morgan Chase became the Commonwealth’s bank. As the state’s official depository, JP now receives all deposits, writes all checks and makes all wire transfers on the $12-15 billion that flow through Kentucky state government in the course of a fiscal year. It will cut payroll checks, receive federal and other funds earmarked for the state, and disburse educational or transportation or any other funds to their appropriate monetary endpoints. For its trouble, the bank will receive $1.3 million in state fees and the ability to re-lend idle state funds out to customers for private gain. Yes, you should be worried.

    Debt Crisis? Bankruptcy Fears? See Jefferson County, Alabama - This is the end of the road, where the can cannot be kicked any farther.  There are lessons for everyone here, and they are all painful: lessons for those who are not concerned about the prospect of mounting debt, for those who insist that steep cuts can be relatively painless, for those who think the bill for big spending can safely be put off into the future, for those who have blind faith in the market and for those who think the government can always be relied upon to protect the interests of the people.  All of these beliefs have led to a place where the government can no longer borrow and the little cash on hand is being demanded by creditors, where the Sheriff’s Department cannot afford to respond to traffic accidents and hundreds of county workers are sitting at home, temporarily or possibly permanently out of work. They have also led to a widely held conclusion among residents that no one is on their side.

    Rhode Island city declares bankruptcy - The tiny, crowded city of Central Falls, R.I., is declaring bankruptcy. “The current situation is dire,” said Governor Lincoln Chafee of Rhode Island. “Despite its proud past, the reality of the present is that Central Falls is no longer a boom town,” Chafee said. “The city has for years had liabilities outweighing its means.” It is the first city in Rhode Island history to declare bankruptcy. Flanders said officials have revoked the contracts of police, firefighters, and municipal workers, and they plan to talk to the unions about cutting labor costs. He also said city pensioners would see as much as a 50 percent cut in their next pension check. Officials said they are seeking savings through layoffs, sharing services with nearby communities, and cuts to workers’ health insurance plans.

    Central Falls Bankruptcy Driven by Pensions Casts Shadow Over Rhode Island - Central Falls, Rhode Island, whose motto is “a city with a bright future,” has cast a shadow across the rest of the state by entering bankruptcy.  Rhode Island’s poorest city sought court protection yesterday after retirees failed to accept cuts in pensions and benefits. That pushed the municipality into insolvency, according to Robert Flanders, a former state Supreme Court justice named to oversee Central Falls finances earlier this year. The city asked the court to let it impose “a prudent plan” to adjust what it pays retired workers.  The city’s plight echoes imbalances found in other municipalities across the U.S., including Vallejo, California, and Harrisburg, Pennsylvania, where local governments failed to curb spending to fit shrinking economies. In Rhode Island, the move into court is sounding an alarm because many local pension plans are “considerably underfunded,” the state’s auditor- general said in a report last year.  “Unless there’s pension reform, Central Falls may not be the last municipality in Rhode Island that faces bankruptcy,”

    The Ultimate Problem With A Higher Ed Bubble - There has been a lot of talk recently regarding a possible bubble in higher education. With increasing tuition costs for students and a dire job market after graduation, more are beginning to ask whether getting a college education is really worth it.  Given the prevalent use of student loans to fund higher education, US debt troubles, and increasing unemployment, the statistics strongly suggest that there is indeed a higher education bubble. To add insult to injury, with all the talk of the US debt ceiling, budget cuts could spell doom for federal student loans.  Most of the damage of any higher education fallout will land on the younger generations. If we include Social Security, this would be the second major nationwide pyramid scheme-esque institution that younger generations have been roped into in their lifetimes -- quite a track record for the older generations in American society. Even still, much of the shock wave of a higher education restructuring could be felt for generations to come.

    It's Not Just the Degree, but What You Study - Readers of Economix are familiar with the case for why a college education is worth it in the labor market. Quite simply, if you have a college degree, you will probably earn more than someone who doesn’t. A new report from the Center on Education and the Workforce at Georgetown University looks at average lifetime earnings and finds, not surprisingly, that those with a bachelor’s degree earn much more than high school graduates, and that the premium has widened since 1999 to 84 percent from 75 percent. But the blanket recommendation that students should go to college and get a bachelor’s degree isn’t enough. It turns out that what you study and the careers for which your major prepares you matter, too. In fact, there are cases where someone with a lower level of education can earn more than someone with a higher degree, because of the course of study pursued.

    Declaring bankruptcy doesn't ease student loans - Recent college graduates have entered one of the worst job markets in decades, with youth unemployment now standing at 14.5 percent. To make matters worse, many grads find themselves trapped by expensive student loans. CBS News correspondent John Blackstone reports that filing for bankruptcy with those expensive loans offers no solution. More than 500,000 students have defaulted on their student loans since 2008, but unlike in years past, bankruptcy is not an option for them. Valisha Cooks always believed that a college degree would mean a better future, but at 30, faced with $80,000 in student loan debt (and a limping economy,) the future is hard to think about. "I currently make now, almost exactly what I made before I had my degree. I really feel sometimes that going back to school ruined my life," Cooks says.

    New York’s Top Cop Jumps Into Fray - New York Attorney General Eric Schneiderman is poised to take the lead in inquiries by state officials into whether some banks properly charged state and local pension funds for thousands of currency transactions over the past decade.The move by Mr. Schneiderman, who has the option of wielding a powerful state law called the Martin Act that effectively lets him cross state lines, could lead a nationwide lawsuit on behalf of pension funds in New York and across the country, according to people familiar with the situation. Alternatively, he could seek a settlement on behalf of funds nationwide.

    More people borrowing from 401(k) accounts - As the economy struggles in recovery, more working Americans are making dicey moves to pluck cash from their 401(k) retirement accounts. A record one in five employees sitting on these popular nest eggs had borrowed from accounts at the end of 2009. Recent reports show that number has continued to climb. The money helps families cope with high-cost credit card debt and medical bills, fund educations and improve or buy homes. Borrowing it, however, also can set personal finance traps. The biggest risk for borrowers is getting laid off. That typically means the 401(k) loan has to be repaid promptly, even though the paychecks have stopped. And an unpaid loan damages the worker's contribution to his retirement security even as the nation debates cutting future Social Security and Medicare benefits. Workers have drawn millions of dollars out of their 401(k) accounts though loans, reports from their employers show.

    Average monthly Social Security benefit for a retired worker -  The average monthly Social Security benefit for a retired worker was about $1177 at the beginning of 2011. This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits. ...

    CBO’s Long-Term Social Security Projections - CBO Director's Blog - CBO projects that in fiscal year 2011, outlays for Social Security will total $733 billion, one-fifth of the federal budget. About 56 million people will receive Social Security benefits this year. Most are retired workers, their spouses, their children, or their survivors, who receive payments through Old-Age and Survivors Insurance (OASI). The remainder consist of disabled workers or their spouses and children, who receive Disability Insurance (DI) benefits. Tax revenues credited to the program will total $687 billion in fiscal year 2011, almost all from payroll taxes. A very small portion (about 3 percent) comes from income taxes on benefits. Revenues from taxes, along with intragovernmental interest payments, are credited to Social Security’s two trust funds—one for OASI and one for DI—and the program’s benefits and administrative costs are paid from those funds.Today CBO released additional information about the long-term projections of the Social Security program’s finances that were included in CBO’s 2011 Long-Term Budget Outlook (June 2011). Today’s publication, shown below, updates the projections included in CBO’s 2010 Long-Term Projections for Social Security: Additional Information. As we reported in June 2011, the shortfalls for Social Security that CBO is currently projecting are marginally smaller than those projected in our October 2010 publication.

    Think Medicaid is safe? Think again. - Medicaid advocates breathed a collective sigh of relief when the debt debate wrapped up early this week. The entitlement program, initially seen as vulnerable in negotiations, was protected from across-the-board cuts in the trigger deal. A federal exemption, however, is only half the story. States, who also foot a big chunk of the Medicaid bill, also shape the program. Looking at crunched budgets, states are weighing some big changes to their Medicaid programs that could vastly reshape the program’s financing. “Don’t think things can stand still just because Medicaid was exempted,” says Tevi Troy, an official with the Department of Health and Human Services under President George W. Bush and a senior fellow at the Hudson Institute. “It cannot stand still with states looking at the expected growth level. Standing still really isn’t an option.” Enhanced funding for Medicaid included in the stimulus ran out last month. States will spend an additional $16 billion of general fund revenues on Medicaid next year. That’s at the same time that states will likely slash funding for education, public assistance and transportation.

    Medicare cuts nursing home payments by 11 percent - Medicare says it will cut payments to nursing homes to correct for an unintended windfall this year, and the industry is warning that quality will be compromised. Officials announced the 11 percent cut Friday, along with other changes meant to tamp down on physical therapy costs. Medicare covers rehabilitation in nursing homes, not long-term stays. Officials insisted the cut is fair because it removes an unintended spike in payments this year due to a formula glitch. Medicare chief Don Berwick says the Obama administration remains committed to high-quality care.  But Lauren Shaham, a spokeswoman for nonprofit homes, says the cut is so large that it will make it "tremendously hard" to keep up quality service. The new lower payment rates take effect Oct

    Medicare, Medicaid tab keeps growing - The costs of the government's big health care programs are soaring again, expenses not tackled in the agreement President Obama signed into law Tuesday to raise the nation's debt limit and cut federal spending. Medicare and Medicaid spending rose 10% in the second quarter from a year earlier to a combined annual rate of almost $992 billion, according to new data from the Bureau of Economic Analysis (BEA). The two programs are on track to rise $90 billion in 2011 and crack the $1 trillion milestone for the first time. The jump in health care spending is the biggest since the Medicare prescription drug benefit was added five years ago and ends a brief lull in the spending increases that occurred during the economic downturn. The debt limit and spending package approved by Congress and Obama don't restrict costs of Medicare, Medicaid and other entitlement programs. The rapidly escalating costs of the health care programs will challenge lawmakers seeking to rein in federal spending in the future, especially in 2014, when coverage expands to people who are uninsured now.

    Budget fight on health care cuts just beginning -- When it comes to Medicare and Medicaid, the debt deal raises more questions than it answers. The giant health care programs serving some 100 million elderly, low-income and disabled Americans were spared from the first round of cuts in the agreement between President Barack Obama and congressional leaders. But everything's on the chopping block for a powerful new congressional committee that will be created under the deal to scour the budget for savings.  And if that hunt leads to a dead end, the agreement decrees an automatic 2 percent cut to Medicare providers such as hospitals. That's on top of a 6 percent cut already enacted to finance Obama's health care law, which is just being phased in. "The story isn't over,"  "The future of the programs really hangs in the balance. It could lead to deep cuts and irreversible changes to Medicare and Medicaid that shift costs to beneficiaries." The hospital industry, which agreed to cuts of $150 billion to help pay for Obama's expansion of coverage to the uninsured, said Monday it's just about had it.

     US physicians spend nearly 4 times more on health insurance  than their Canadian counterparts - U.S. physicians spend nearly $61,000 more than their Canadian counterparts each year on administrative expenses related to health insurance, according to a new study by researchers at Cornell University and the University of Toronto. The study, published in the August issue of the journal Health Affairs, found that per-physician costs in the U.S. averaged $82,975 annually, while Ontario-based physicians averaged $22,205 – primarily because Canada's single-payer health care system is simpler. Canadian physicians follow a single set of rules, but U.S. doctors grapple with different sets of regulations, procedures and forms mandated by each health insurance plan or payer. The bureaucratic burden falls heavily on U.S. nurses and medical practice staff, who spend 20.6 hours per physician per week on administrative duties; their Canadian counterparts spend only 2.5 hours. "The magnitude of that difference is what is interesting,"

    Federal court rules human genes can be patented - The United States Court of Appeals for the Federal Circuit ruled in a 2 to 1 decision Friday that human genes can be patented because the DNA extracted from cells is not a product of nature. The court held (PDF) that Myriad Genetics can patent two human genes used to predict the risk of breast and ovarian cancer in women, overturning a previous decision by a federal district court in March 2010. But the court ruled that the method used to determine a patient's risk of cancer was not patentable. The lawsuit, Association for Molecular Pathology, et al. v. U.S. Patent and Trademark Office, et al., was filed in May 2009 on behalf of researchers, women patients, cancer survivors and scientific associations against the U.S. Patent and Trademark Office, as well as Myriad Genetics and the University of Utah Research Foundation, which hold the patents on the genes, BRCA1 and BRCA2. "In this case, the claimed isolated DNA molecules do not exist as in nature within a physical mixture to be purified," Judge Alan D. Lourie wrote for the majority. "They have to be chemically cleaved from their chemical combination with other genetic materials. In other words, in nature, isolated DNAs are covalently bonded to such other materials. Thus, when cleaved, an isolated DNA molecule is not a purified form of a natural material, but a distinct chemical entity. In fact, some forms of isolated DNA require no purification at all, because DNAs can be chemically synthesized directly as isolated molecules."

    What the USDA Doesn't Want You to Know About Antibiotics and Factory Farms - Here is a document the USDA doesn't want you to see. It's what the agency calls a "technical review"—nothing more than a USDA-contracted researcher's simple, blunt summary of recent academic findings on the growing problem of antibiotic-resistant infections and their link with factory animal farms. The topic is a serious one. A single antibiotic-resistant pathogen, MRSA—just one of many now circulating among Americans—now claims more lives each year than AIDS. Back in June, the USDA put the review up on its National Agricultural Library website. Soon after, a Dow Jones story quoted a USDA official who declared it to be based on "reputed, scientific, peer-reviewed, and scholarly journals."  But around the same time, the agency added an odd disclaimer to the top of the document: "This review has not been peer reviewed. The views expressed in this publication do not necessarily reflect the views of the United States Department of Agriculture." And last Friday, the document (original link) vanished without comment from the agency's website.

    Monsanto-spawned superweeds growing three inches daily, destroying farm equipment - The proliferation of superweeds -- weeds that have mutated to develop resistance to popular herbicides like Monsanto's Roundup formula -- continues to rise. But the individual plants' overall size and strength is also increasing. According to a series of new studies published in the journal Weed Science, farmers are having more trouble than ever dealing with out-of-control superweeds in their fields, some of which grow up to three inches a day in size, and are so strong and thick that they are destroying farm equipment. The studies reveal that there are currently at least 21 different weed species known to be resistant to Roundup, also known generically as glyphosate. These species include ragweed, pigweed, horseweed, waterhemp, and ryegrass. Since 2007, the total acreage of farmland known to be infested with superweeds has also jumped more than 450 percent, from 2.4 million acres to 11 million acres, which means that the problem is only going to get exponentially worse.

    For those who still doubt the role of corporations in raising food prices through speculations - "Reports that a company owned by Cargill and ABF bought all the available UK feed wheat last month has renewed calls for tighter regulation of commodity markets. Traders reportedly told the Bureau of Investigative Journalism that Frontier Agriculture bought all available May Futures contracts on the London International Financial Futures and Options Exchange (Liffe) in the period running up to the tender date in the last week of April. It has been described as an “unprecedented move” and an attempt to manipulate the market, which Frontier denies. However, the BIJ says that Frontier is believed to have taken delivery of about 225,000 tonnes of feed wheat now worth about £40m."

    Famine and Hope in the Horn of Africa -The immediate cause of this disaster is clear: the rains have failed for two years running in the dry regions of East Africa. These are places where water is so scarce year after year that crop production is marginal at best. Millions of households, with tens of millions of nomadic or semi-nomadic people, tend camels, sheep, goats, and other livestock, which they move large distances to reach rain-fed pasturelands. When the rains fail, the grasses shrivel, the livestock die, and communities face starvation. Pastoralism has long been a harrowing existence in the Horn of Africa. The location of life-supporting pasturelands is determined by the unstable and largely unpredictable rains, rather than by political boundaries. Yet we live in an era when political boundaries, not the lives of nomadic pastoralists, are sacrosanct. These boundaries, together with growing populations of sedentary farmers, have hemmed in pastoralist communities. The political boundaries exist as a legacy of the colonial era, not as the result of cultural realities and economic needs. Somalia, for example, contains only a part of the Somali-speaking pastoralist population, with large numbers living across the border in Kenya and Ethiopia. As a result, the Ethiopian-Somalia border has been war-torn for decades. 

    Somalia famine has killed more than 29,000 children, U.S. says  - The drought and famine in Somalia have killed more than 29,000 children under the age of 5, according to U.S. estimates, the first time such a precise death toll has been released related to the Horn of Africa crisis.The United Nations has said previously that tens of thousands of people have died in the drought, the worst in Somalia in 60 years. The UN says 640,000 Somali children are acutely malnourished, a statistic that suggests the death toll of small children will rise. Nancy Lindborg, an official with the U.S. government aid arm, told a congressional committee in Washington on Wednesday that the U.S. estimates that more than 29,000 children under the age of 5 have died in the last 90 days in southern Somalia. That number is based on nutrition and mortality surveys verified by the U.S. Centers for Disease Control and Prevention. The UN on Wednesday declared three new regions in Somalia famine zones, bringing the total number to five. Out of a population of roughly 7.5 million, the UN says 3.2 million Somalis are in need of immediate lifesaving assistance.

    Forty-One Percent of U.S. Abnormally Dry - About 40 percent of the contiguous United States is currently parched by a rainfall shortage. July has seen the highest percentage of the United States in drought conditions ever recorded by the U.S. Drought Monitor, said Brian Fuchs of the National Drought Mitigation Center at the University of Nebraska-Lincoln in a press release. The Monitor ranks conditions from D0 (abnormal dryness) and moves up in severity to D1 (moderate drought), D2 (severe drought), D3 (extreme drought) and D4 (exceptional drought). Although several whole states are in a drought, certain areas areas are further behind in the amount of rain that has fallen. The ranking system helps people understand how fierce the drought is in one area relative to another. Texas is the hardest hit. Three-fourths of the state broils under "exceptional drought" conditions. But many other states are suffering as well.

    Record percentage of United States experiences 'exceptional drought' - Exceptional drought conditions spread across nearly 12% of the United States last month, a record number that shows the widespread impact of the dry weather conditions, according to a report released Monday. Officials at the National Drought Mitigation Center said the July percentage is the highest recorded level of drought since the monitor began documenting conditions 12 years ago. More than 40% of states faced abnormal dryness or drought, a report released by the center said. The report tracks and ranks weather conditions from "abnormal dryness" to "exceptional drought." A drought is considered "exceptional" when the situation extends beyond what "could be considered part of normal risk management," according to the center's website.

    Heat Wave, Drought Create 'Grim' Crop Yields for Farmers in Plains, South - Many areas in the Southern U.S. and southern Plains are suffering from parched pasturelands, wilting and dying crops, and a loss of livestock. Huge wildfires have swept across tinder-dry trees and forests in several states over the past few months. Now new research by the National Drought Mitigation Center shows 12 percent of U.S. land is in the midst of an exceptional drought, the largest contiguous area to suffer such difficult conditions in a dozen years. The hardest-hit states are Texas, Louisiana, Oklahoma and New Mexico, with 100 percent of each state experiencing drought. Arkansas, Georgia and South Carolina are also very dry, with 95 percent of each of those states showing drought as well.We take a closer look now at the impact this is having on farming with Frank Morris of KCUR Public Radio and Harvest Public Media, a local journalism center dedicated to agricultural reporting. He joins us now from Kansas City, Mo.

    Historic drought hammers Texas cattle ranchers - Texas cattle rancher Charles Kothman is down to six calves and their mothers after selling off 80 animals in recent months. The drought that has baked pastures and dried ponds has ranchers in Texas and Oklahoma - the nation's top two beef producers - culling their herds. Some have sold off all their cattle, but Kothman is hanging on and hoping for rain. "I may get to the point that I say `no' and take them over to the sale barn," said Kothman, whose ranch is about 70 miles south of San Angelo. Some ranchers say they may sell out and get back into the business down the road. Others may never get back in, Kothman said. "My reason for saying maybe is because I'm 74 years old." Cattle ranchers either have to sell cattle during droughts or buy feed because their barren pastures can't sustain the animals. If they opt to buy hay while watching for rain clouds, they risk running into bankruptcy. If they sell off cows of calf-bearing age instead, they do it knowing rebuilding the herd later will be a long, costly process. Most cows sold are being sent to slaughter. When the drought ends, demand for animals to rebuild herds is likely to peak just as the nation's cattle population is at its lowest since 1958.

    Economist: Strong cattle prices forecasted, tight supplies… Even if rebuilding of the nation’s cattle herds were to begin today, it would be several years before inventory would reach a significant number, according to an economist. “Even in best case scenario, we will not see additional beef on the table until 2015,” Brett Stuart, an economist with CattleFax, told 1,450 attendees Monday at the 57th Annual Texas A&M Beef Cattle Short Course, sponsored by the Texas AgriLife Extension Service. Drought through much of the southern U.S. continues to force deep herd reductions. And Stuart said steer and heifer slaughter numbers continue at a steady clip. The volume of heifers that continue to go into feedlots indicates the beef industry is still “in a contraction phase,” he said. If the beef cattle industry were to start the rebuilding phase today, Stuart said, the amount of time it takes to hold back heifers, have a calf, then make it to the feedlot before finally arriving at the retail meat case would be several years. However, there are some positive indications for Texas ranchers dealing with a historic drought statewide, he said. “Supplies are going to be very tight for the next five plus years,” Stuart said. “There are good days ahead; that’s the bottom line.”

    Drought in Texas reaches epic proportions - As temperatures reached 100 degrees for the 34th consecutive day in Dallas-Fort Worth, officials say that statewide, Texas is now experiencing the worst one-year drought on record.  July was the hottest month on record for Texas -- dating to 1895 -- according to John Nielsen-Gammon, the Texas State Climatologist and professor of atmospheric sciences at Texas A&M University.  The average temperature was 87.2 degrees, breaking the record of 86.5 degrees set in 1998, Nielsen-Gammon said.  Also, the official Dallas-Fort Worth temperature hit 107 Thursday afternoon, tying the record for the date set in 1951.  Thursday morning, the low dropped to only 86 degrees, which will be a record for the highest low temperature on an August 4th should it hold through midnight. The record is 83, set in 1980.  Other July statistics that show the severity of the drought:

    • ■ The monthly rainfall total of 0.72 inches ranks as the third-driest, surpassing the 0.69 inches in 1980 and 2000.
    • ■ The year-to-date rainfall total of 6.53 inches is the lowest ever, with the previous low being 9.36 inches set in 1917.
    • ■ It's the driest 12 months ever ending in July with 15.16 inches or rain, eclipsing the previoous record of 16.46 inches in 1925.

    End Times? Texas Lake Turns Blood-Red - A Texas lake that turned blood-red this summer may not be a sign of the End Times, but probably is the end of a popular fishing and recreation spot. A drought has left the OC Fisher Reservoir in San Angelo State Park in West Texas almost entirely dry. The water that is left is stagnant, full of dead fish — and a deep, opaque red.The color has some apocalypse believers suggesting that OC Fisher is an early sign of the end of the world, but Texas Parks and Wildlife Inland Fisheries officials say the bloody look is the result of Chromatiaceae bacteria, which thrive in oxygen-deprived water.

    July's blazing heat set records in all 50 states - No state in the union was safe from July's blistering heat wave, according to data from the U.S. National Climatic Data Center. The horrible July heat wave, lasting weeks in some cities, the entire month in others, affected nearly 200 million people in the United States at some point. Preliminary data show that 2,712 high-temperature records were either tied or broken in July, compared with 1,444 last year, according to the NCDC. At least one weather station in all 50 states set or tied a daily high temperature record at some point during July. Two weather stations tied for the hottest temperature recorded during July. The Blythe station in Riverside County, Calif., and the Gila Bend station in Maricopa County, Ariz., both hit 120 degrees Fahrenheit (48.9 degrees Celsius) in July. Even Alaska recorded unusually sweaty temperatures. The temperature at the Northway weather station in Southeast Fairbanks County hit a record 97 F (36.1 C) on July 11.

    April officially set U.S. record for most tornadoes in a month - The U.S. set a record for the most tornadoes in one month in April. The final report for the month shows 753 twisters across the country, including a super outbreak on April 25-28 that killed more than 300 people in the South and Midwest. The tornado total is down from the preliminary count of 875 that generated widespread publicity. But the federal Storm Prediction Center says it still tops the former monthly record of 543 tornadoes in May 2003.The number of tornadoes in Alabama in April shattered state records, according to the National Weather Service.  Preliminary counts showed that 98 tornadoes battered the state on April 15 and 27. The most that had ever occurred in an entire year was 94 in 2008.

    Legislative riders target environmental protections - Nearly 40 amendments would stop the enforcement of water quality standards, abolish rules that protect streams from surface mining, gut a budget to acquire and protect pristine forestland, and slice a portion of money used to operate national parks. Attaching restrictive provisions called riders to appropriations bills is nothing new. Democrats and Republicans do it to block presidential policies. But the array of riders attached to the current Interior appropriations House bill is the broadest attack on an administration’s environmental agenda since Republicans took control of the House in 1995.

    The GOP's Hidden Debt-Deal Agenda: Gut the EPA - It was lost in the endless drama of the debt-ceiling negotiations, but last week, the Republicans in charge of the House of Representatives launched an unprecedented attack on the U.S.'s environmental protections. GOP Representatives added rider after rider to the 2012 spending bill for the Environmental Protection Agency and the Interior Department, tacking on amendments that would essentially prevent those agencies — charged with protecting America's air, water and wildlife — from doing their jobs. Last week's riderfest wasn't unusual for the 112th U.S. Congress. Representatives Henry Waxman and Edward Markey — two senior Democrats with solid green credentials — recently charted all the votes taken so far this year and calculated that the Republican-led House has voted to "stop," "block" or "undermine" efforts to protect the environment 110 times since January. As Natural Resources Defense Council president Frances Beinecke wrote recently, this body of lawmakers stands an excellent chance of becoming "the most anti-environment House of Representatives" in U.S. history.

    The EPA: the Tea Party's next target - You'd think Congress would be too busy wrecking the economy to attack the environment. Yet, in the midst of a packed schedule snapping at President Obama's heels and lunging for each other's throats, Republicans have found time to try and rip the heart out of the Environmental Protection Agency, killing 40 years of protections for water, air, endangered species, wildlife habitat and national parks. Instead of taking direct shots at the environment – not even Tea Tendency zealots come out and say they're pro-pollution – Republicans are going after the EPA. It's a "job-killer". America's high unemployment rate is not the fault of the worldwide recession or the housing bubble or Wall Street hubris or two unfunded wars on top of George W Bush's silly tax cuts for the rich, it's those damned DC bunny-huggers. Representative Mike Simpson of Idaho insists, "overregulation from EPA is at the heart of our stalled economy"; his colleague, Rep Louie Gohmert of Texas, says, "Let EPA go the way of the dinosaurs that became fossil fuels."

    Global warming is a litmus test for US Republicans - Mitt Romney, arguably the leading Republican candidate for president of the United States in the 2012 election, recently significantly diminished his prospects for obtaining the support he needs from the right wing of his party. How did he do this? He simply declared that he believes the Earth is warming, and that human activities are responsible. To most scientists, such a statement would be considered fairly innocuous, and an accurate assessment of current understanding. But to a large fraction of the US Republican party, this is a completely unacceptable position - ranking alongside gay marriage, gun control and abortion rights. Anthropogenic climate change has become a litmus test for Republicans in the United States.If you want to appeal to the hard core of the party - those whom you need in order to obtain the party's nomination - you simply can not acknowledge what almost every national science academy and scientific organisation has accepted for many years.

    Gas tax may be next Tea Party target -- You may want to consider investing in some good shock absorbers for your car this fall.  Fresh from blocking any new tax increases during the debt ceiling debacle, some lawmakers in Congress may now oppose renewing the federal tax on gasoline and diesel fuel, which is used to maintain our nations highways. The federal gas tax of 18.4 cents a gallon expires at the end of September. In order to keep the gas tax, lawmakers would need to vote to extend the highway funding bill, which is what the gas tax is tied to.  There are no official efforts to scrap the tax yet but as first noted in the journal Politco, momentum appears to be moving in that direction. A bill was recently introduced by Senate Republicans that would allow states to opt out of the federal highway program. The highway program uses $32 billion each year collected by the gas tax, plus a handful of smaller fees and some borrowing to distribute some $50 billion a year to the states for road construction, maintenance and mass transit projects.

    Near-record Arctic melt opens cargo route - Arctic sea ice is melting at a near-record pace, opening shipping lanes for cargo traffic between Europe and Asia, Russia’s environmental agency said yesterday. Ice cover is close to a record low, opening “almost the entire northern sea route to icebreaker-free shipping” as of early August, the Federal Hydrometeorological and Environmental Monitoring Service said on its website. The ice extent is as much as 56 percent less than average in some areas, allowing “very easy” sailing that will persist through September, the Moscow-based service said. Melting ice is making it easier for Russian and other European shippers to service Asia via the northern sea route, which is about one-third shorter than the Rotterdam-Yokohama voyage through the Suez Canal, saving time and fuel. Iceland President Olafur Ragnar Grimsson said last year that the pace of global warming in the Arctic was three times faster than elsewhere, cutting journeys between Asia, Europe and North America by as much as half.

    Ice ‘tipping point’ may not occur - Scientists say current concerns over a tipping point in the disappearance of Arctic sea ice may be misplaced.  Danish researchers analysed ancient pieces of driftwood in north Greenland which they say is an accurate way to measure the extent of ancient ice loss.  Writing in the journal Science, the team found evidence that ice levels were about 50% lower 5,000 years ago.  They say changes to wind systems can slow down the rate of melting. They argue, therefore, that a tipping point under current scenarios is unlikely.

    Bombshell: Warming May Shrink Russian Permafrost 30% by 2050 — Russia’s vast permafrost areas may shrink by a third by the middle of the century due to global warming, endangering infrastructure in the Arctic zone, an emergencies ministry official said Friday. This AFP story snuck across my desk on little cat feet.  It didn’t get much attention,  in part because they buried the lede in the very last sentence: Scientists have said that permafrost thawing will set off another problem because the process will release massive amounts of greenhouse gas methane currently trapped in the frozen soil. Ya think? The permafrost permamelt contains a staggering “1.5 trillion tons of frozen carbon, about twice as much carbon as contained in the atmosphere, much of which would be released as methane.  Methane is 25 times as potent a heat-trapping gas as CO2 over a 100 year time horizon, but 72 (to 100) times as potent over 20 years!

    Sea Level Rise to Put the “Squeeze” on Coastal Georgia - “At high tide here, we would be ankle deep in water,” says Hurley, an estuarine ecologist at Georgia’s Sapelo Island National Estuarine Research Reserve. He snaps off the end of a dead cordgrass blossom and looks east long enough to notice that the tide has turned. In a few hours time, this tidal bank will again be inundated, but never for more than an hour or so each day. Once the tide rolls in, striped mullet feed on decaying cordgrass on the marsh’s soggy bottom.  Like the tides on which these estuaries depend, Georgia’s 100-mile coastline has waxed and waned for thousands of years, surviving by shifting miles in the process. And it's doing so once more; again driven by warming oceans and melting glaciers. Mention “global warming” in this part of the world and most people's eyes will glaze over. Sea level rise, however, has tangibility that residents here experience with every high tide. But that doesn’t mean they’ve thought about how global sea level rise will impact them personally. In a recession-weary economy heavily dependent on tourism, real estate and the fishing industry, sea level rise hasn’t exactly hit the top of the charts — yet.

    250-500 Million MW of Extra Energy Now Roiling the Earth’s Climate System - As extreme weather events multiply, scientists are still in the early stages of understanding how more energy is influencing complex weather phenomena Despite America's intense political polarization over climate change, the scientific measurement of global warming is not in dispute. Since 1900, the earth as a whole has warmed by 1.4 degrees Fahrenheit, an empirical fact that has become an official U.S. government statistic of the National Oceanic and Atmospheric Administration.  It is a seemingly minuscule and barely perceptible increase of average temperature, but spread over the entire surface of the earth that extra energy accumulates into an enormous force. Just what the impact is on the climate system is something that scientists are only now beginning to understand. "Seemingly very small changes can have very big implications," The 1.4 degree rise in average temperature means the entire surface of earth's 500 million square kilometers has become home to between 250 and 500 million megawatts of energy that used to escape the planet's atmospheric shell into space. That's an extra 0.5 to one watt, or roughly one Christmas light bulb's worth of heat, falling on every square meter of land and sea.

    NOAA study: Slowing climate change by targeting gases other than carbon dioxide  - Carbon dioxide remains the undisputed king of recent climate change, but other greenhouse gases measurably contribute to the problem. A new study, conducted by NOAA scientists and published online today in Nature, shows that cutting emissions of those other gases could slow changes in climate that are expected in the future. Discussions with colleagues around the time of the 2009 United Nations' climate conference in Copenhagen inspired NOAA scientists to review the sources of non-carbon dioxide (CO2) greenhouse gases and explore the potential climate benefits of cutting their emissions. Like CO2, other greenhouse gases trap heat in Earth's atmosphere. Some of these chemicals have shorter lifetimes than CO2 in the atmosphere. Therefore cutting emissions would quickly reduce their direct radiative forcing – a measure of warming influence. "We know that recent climate change is primarily driven by carbon dioxide emitted during fossil-fuel combustion, and we know that this problem is going to be with us a long-time because carbon dioxide is so persistent in the atmosphere," "But lowering emissions of greenhouse gases other than carbon dioxide could lead to some rapid changes for the better."

    UN: Global Population To Hit 10 Billion - The world’s population is likely to reach 10.1 billion people by the end of the century up from 7 billion this year. It will reach 9.3 billion along the way–probably in 2050. There is nothing astonishing about the number, at least not for those who have watched population growth in China, India, and other developing nations. Some of these counties have tried to throttle the number of children per family. That has not worked. It is hard to regulate the actions of billions of people. And child mortality rates in many countries are so high that it is understandable families would want to have more offspring. The UN data has caused the agency and other organizations and experts to make the predictable forecasts that there will be unimaginable famine. A great deal of the increase of people will be in nations which cannot feed their people now. There is no reason to think that terrible problem will change.

    History’s normal rate of species disappearance is accelerating, scientists say - Biologist E.O. Wilson once pondered whether many of our fellow living things were doomed once evolution gave rise to an intelligent, technological creature that also happened to be a rapacious carnivore, fiercely territorial and prone to short-term thinking. We humans can be so destructive that some scientists believe we’ve now triggered a mass extinction – one that in several hundred years will rival the asteroid impact that killed the dinosaurs. The geologic record shows the living world went through five previous spasms of extinction in the last 500 million years. There’s plenty of evidence that the sixth mass extinction has begun, said biologist Stuart Pimm, chair of conservation ecology at Duke University.

    Biodiversity On Earth Plummets, Despite Growth in Protected Habitats - Despite rapid and substantial growth in the amount of land and sea designated as protected habitat over the last four decades, the diversity of species the world over is plummeting, a new study has found.  Over 100,000 so-called "protected areas" representing some 7 million square miles of land and nearly 1 million square miles of ocean have been established since the 1960's, noted the analysis, published Thursday in the journal Marine Ecology Progress Series.  And yet, according to a widely cited index used to track planetary biodiversity, the wealth of terrestrial and marine species has seen steady decline over roughly the same period, suggesting that simply protecting swaths of land and sea -- a common conservation strategy worldwide -- is inadequate for preventing the steady disappearance of earth's creatures.  "The problem is bigger than one we can realistically solve with protected areas -- even if they work under the best conditions,"  "The protected area approach is expensive and requires a lot of political and human capital,"  "Our suggestion is that we should redirect some of those resources to deal with ultimate solutions."

    Brazil’s Deforestation Nightmare - A string of recent events indicates that Amazonian deforestation and violence against environmental activists are on the rise.  In the last few weeks, a series of major events has signaled the urgent need for constructive change to Brazil’s current policies regarding the Amazon rainforest. On May 19, 2011, Brazil’s National Institute for Space Research (INPE) released satellite images indicating that deforestation increased from 103 km2 in March and April 2010 to 593 km2 in the same period of 2011, a sixfold increase from a year ago.[1] Not long after, on July 1, 2011, the INPE announced that this increase was not just a temporary aberration: deforestation in May 2011 stood at 268 km2, twice the amount of clearing as in May 2010.[2] On May 25, 2011, leading forest conservationist José Cláudio Ribeiro da Silva and his wife Maria do Espírito Santo da Silva were killed in the Amazon state of Pará; this event was followed by the murders of environmental and land reform activists Adelino Ramos on May 28 and Obede Loyla Souza on June 15.[3] And on the same day as da Silva’s murder, Brazil’s Chamber of Deputies, the National Congress’s lower house, voted 410-63 in favor of a bill that would allow individual states to lower the legal reserve requirement, the percentage of land that a landholder in the Amazon is obligated to preserve as rainforest.

    Breaking: New Study Links Mountaintop Removal to 60,000 Additional Cancer Cases - Among the 1.2 million American citizens living in mountaintop removal mining counties in central Appalachia, an additional 60,000 cases of cancer are directly linked to the federally sanctioned strip-mining practice. That is the damning conclusion in a breakthrough study, released last night in the peer-reviewed Journal of Community Health: The Publication for Health Promotion and Disease Prevention.  “A door to door survey of 769 adults found that the cancer rate was twice as high in a community exposed to mountaintop removal mining compared to a non-mining control community,” said Hendryx, Associate Professor at the Department of Community Medicine and Director of West Virginia Rural Health Research Center at West Virginia University. “This significantly higher risk was found after control for age, sex, smoking, occupational exposure and family cancer history. The study adds to the growing evidence that mountaintop mining environments are harmful to human health.” Bottom line: Far from simply being an environmental issue, mountaintop removal is killing American residents.

    Orient Express : Will Montana become a coal colony? - With the heavy spring rains, the Otter Creek Valley, in southeastern Montana, glows green in early July, dotted with sage and bright patches of yellow clover and wild mustard. A month before and about 6,000 miles away, in Beijing, a city of 20 million, where enveloping smog obscures the surrounding mountains, Montana Gov. Brian Schweitzer spoke of this Montana valley—or, rather, what's beneath it. The governor of the state with the greatest coal reserves keynoted a coal conference sponsored by Peabody Energy, the largest private coal company in the world, with massive operations in northeast Wyoming, just south of Otter. Schweitzer and coal companies such as Peabody see economic opportunity in exporting coal to China and other energy-hungry Asian markets. More than a billion tons of coal beneath the Otter Creek Valley could be shipped and burned there.

    Coal and Ethanol Are Not Alternative Energy Policy -The domestic alternative energy policy in the US seems to rotate on semantics and adding words to other words to make it look like something is going on. However, the truth of the matter is, energy policy is as defunct as ever and on most fronts the US is lagging far behind. Mostly it is a disregard of what the economist Herman Daly has pointed out about the macro-view of the macro-economic system. His idea is that the ecological system is closed and finite, not infinite created by God for our own personal use, which needs to be included into economic models. As pointed out by this author in, The Need For a Real Domestic Alternative Energy Policy, the US will need this Energy policy to spur growth, create jobs, and remain competitive going forward. Yet, with words out there such as “clean coal” and “corn ethanol” as our savings for the future, it seems that the US gets further and further from the ability to save the economy and closer to suicide.

    Data Centers’ Power Use Less Than Was Expected - Data centers’ unquenchable thirst for electricity has been slaked by the global recession and by a combination of new power-saving technologies, according to an independent report on data center power use from 2005 to 2010. The report found that the actual number of computer servers declined significantly compared to 2010 forecasts because of this lowered demand for computing and because of the financial crisis of 2008 and the emergence of technologies like more efficient computer chips and computer server virtualization, which allows fewer servers to run more programs.  The slowing of growth in consumption contradicts a 2007 forecast by the Environmental Protection Agency that the explosive expansion of the Internet and the computerization of society would lead to a doubling of power consumed by data centers from 2005 to 2010.  In the new study, Mr. Koomey found that electricity used by data centers worldwide grew significantly, but it was an increase of only about 56 percent from 2005 to 2010. In the United States, power consumption increased by 36 percent.

    Federal Loan Guarantees for the Construction of Nuclear Power Plants - CBO Director's Blog - The Energy Policy Act of 2005 established incentives to encourage private investment in innovative technologies, including advanced nuclear energy facilities. Much of the government’s support for the construction of nuclear power plants is offered in the form of federal loan guarantees. Those guarantees, which are administered by the Department of Energy (DOE), promote investment in nuclear energy by lowering the cost of borrowing and possibly increasing the availability of credit for project sponsors. In exchange, DOE is authorized to charge sponsors a fee that is meant to recoup the guarantee’s estimated budgetary cost.  A CBO study, which was prepared at the request of the Ranking Member of the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, identifies the main factors that influence the cost of federal loan guarantees for nuclear construction projects. It provides illustrative estimates of the costs of such guarantees, using both the methodology specified in the Federal Credit Reform Act of 1990 (FCRA) and a more comprehensive fair-value approach.

    Nuclear plant will wait to reopen - When the Fort Calhoun nuclear power plant will be able to restart is still not clear because the utility that operates it won’t be able to inspect it for damage until floodwaters from the overflowing Missouri River recede, officials said yesterday. The Nuclear Regulatory Commission met with Omaha Public Power District officials to discuss what steps will be needed before the plant can reopen. Utility officials and regulators emphasized safety throughout the public meeting. “Regardless of the river level, we will not restart the plant until it is safe to do so,” said OPPD’s Chief Nuclear Officer Dave Bannister. Fort Calhoun has been shut down since April because it was being refueled before the flooding began. Utility officials say they have no set timeline for restarting it because they won’t know what work is needed until after the water level drops. The plant could reopen this fall, but it could even be delayed until next spring depending upon repairs, inspections and the weather.

    After tornadoes, TVA will replace emergency sirens - A Tennessee Valley Authority official said Wednesday the authority plans to correct a problem that left only 12 of Browns Ferry Nuclear Plant’s required 100 emergency sirens working after the April 27 tornadoes. The same power loss that left 88 sirens useless also caused problems at the nuclear plant. All three reactors shut down automatically April 27. Because of the distraction of reactor personnel, according to a report TVA filed this month with the Nuclear Regulatory Commission, water levels dropped in the Unit 1 reactor when the water boiled off faster than it was replaced. The cooling systems that control the temperature of the reactors and spent fuel rods stopped working for 47 minutes on April 28, 57 minutes on May 2 and 40 minutes on May 12.

    Nuclear plant workers developed cancer despite lower radiation exposure than legal limit - Of 10 nuclear power plant workers who have developed cancer and received workers' compensation in the past, nine had been exposed to less than 100 millisieverts of radiation, it has been learned. The revelation comes amid reports that a number of workers battling the crisis at the Fukushima No. 1 Nuclear Power Plant were found to have been exposed to more than the emergency limit of 250 millisieverts, which was raised from the previous limit of 100 millisieverts in March. According to Health, Labor and Welfare Ministry statistics, of the 10 nuclear power plant workers, six had leukemia, two multiple myeloma and another two lymphatic malignancy. Only one had been exposed to 129.8 millisieverts but the remaining nine were less than 100 millisieverts, including one who had been exposed to about 5 millisieverts.

    Japanese Find Radioactivity on Their Own Local officials kept telling her that their remote village was safe, even though it was less than 20 miles from the crippled Fukushima Daiichi nuclear power plant. But her daughter remained dubious, especially since no one from the government had taken radiation readings near their home. So starting in April, Mrs. Okoshi began using her dosimeter to check nearby forest roads and rice paddies. What she found was startling. Near one sewage ditch, the meter beeped wildly, and the screen read 67 microsieverts per hour, a potentially harmful level. Mrs. Okoshi and a cousin who lives nearby worked up the courage to confront elected officials, who did not respond, confirming their worry that the government was not doing its job.

    Contaminated Water Treatment System: 58% Operating Rate, Amount of Water Increased by 3000 Tonnes in a Week - TEPCO announced on July 27 that the operating rate of the water treatment system at Fukushima I Nuclear Power Plant that treats highly contaminated water remained at less than 60% for two weeks in a row. It's been a month since the "circulation injection cooling system" which uses the treated water to cool the fuel in the reactors, but a series of troubles has caused the operating rate to be far below the target rate of 90%. If the rate remains low, the plan to reduce the amount of contaminated water to zero by the year end will be in jeopardy. According to TEPCO, the operating rate for the week ended on July 26 was 58%, not much improvement from 53% of the previous week. The operating rate since the start of full operation is 63%, and the cumulative amount of treated water is about 30,000 tonnes. TEPCO had initially planned the operating rate in July to be 80%, but later lowered it to be 70%. The lowered target is not likely to be achieved.

    Gov’t says 1,500 tons of highly radioactive sludge may end up as “soil for gardening” - Nearly 50,000 tons of sludge at water treatment facilities has been found to contain radioactive cesium, A total of 1,557 tons in 5 prefectures, including Fukushima and Miyagi, was found to contain 8,000 or more becquerels per kilogram. This sludge is too radioactive to be buried for disposal. The most contaminated sludge, with 89,697 becquerels per kilogram, was discovered at a water treatment facility in Koriyama City, Fukushima. The ministry plans to study how to dispose of the radioactive sludge. [...] The health ministry will cooperate with the Ministry of Land, Infrastructure, Transport and Tourism and consider reprocessing the sludge as soil for gardening.

    Tepco Says Highest Radiation Yet Is Detected at Fukushima Dai-Ichi - Tokyo Electric Power Co., operator of Japan’s crippled Fukushima Dai-Ichi nuclear plant, said it detected the highest radiation to date at the site. Geiger counters, used to detect radioactivity, registered more than 10 sieverts an hour, the highest reading the devices are able to record, Junichi Matsumoto, a general manager at the utility, said today. The measurements were taken at the base of the main ventilation stack for reactors No. 1 and No. 2. “I suspect the high radiation quantity was an aftermath of venting done,” Matsumoto told reporters in Tokyo. “The plant is not running. I don’t think any gas with high radiation level is flowing in the stack.”

    Tepco Reports Second Deadly Radiation Reading at Fukushima Nuclear Plant - Tokyo Electric Power Co. reported its second deadly radiation reading in as many days at its wrecked Fukushima nuclear plant north of Tokyo. The utility known as Tepco said yesterday it detected 5 sieverts of radiation per hour in the No. 1 reactor building. On Aug. 1 in another area it recorded radiation of 10 sieverts per hour, enough to kill a person “within a few weeks” after a single exposure, according to the World Nuclear Association. Radiation has impeded attempts to replace cooling systems to bring three melted reactors and four damaged spent fuel ponds under control after a tsunami on March 11 crippled the plant. The latest reading was taken on the second floor of the No. 1 reactor building and will stop workers entering the area. “It’s probably the first of many more to come,” said Michael Friedlander, who spent 13 years operating nuclear power plants in the U.S. “Although I am not surprised, it concerns me greatly; the issue is the worker safety.”

    Fatal Radiation Level Found at Japanese Plant - The operator of the Fukushima Daiichi nuclear plant said Monday that it measured the highest radiation levels within the plant since it was crippled by a devastating earthquake. However, it said the discovery would not slow continuing efforts to bring the plant’s damaged reactors under control.  The operator, Tokyo Electric Power, said that workers on Monday afternoon had found an area near Reactors No. 1 and 2, where radiation levels exceeded their measuring device’s maximum reading of 10 sieverts per hour — a fatal dose for humans.  The company said the reading was taken near a ventilation tower, suggesting that the contamination happened in the days immediately after the March 11 earthquake and tsunami, when workers desperately tried to release flammable hydrogen gas that was then building up inside the reactor buildings. The release, known as venting, failed to prevent crippling explosions that destroyed the reactor buildings.  The plant has continued to spew radiation since the disaster, though levels have been dropping. The operator is working to install a new makeshift cooling system by early next year that will allow it to finally shut down the plant’s three damaged reactors.

    Guest Post: Fukushima Radiation Highest Ever, Exceeding Capacity of Measuring Device … Fuel Likely Leaking Out Of Containment Vessel -  Things are – literally – heating up again at Fukushima:

    SPECIAL REPORT-Fukushima long ranked Japan's most hazardous nuclear plant  - Japan's Fukushima Daiichi nuclear plant ranked as one of the most dangerous in the world for radiation exposure years before it was destroyed by the meltdowns and explosions that followed the March 11 earthquake. For five years to 2008, the Fukushima plant was rated the most hazardous nuclear facility in Japan for worker exposure to radiation and one of the five worst nuclear plants in the world on that basis. The next rankings, compiled as a three-year average, are due this year. Reuters uncovered these rankings, privately tracked by Fukushima's operator Tokyo Electric Power, in a review of documents and presentations made at nuclear safety conferences over the past seven years. In the United States -- Japan's early model in nuclear power -- Fukushima's lagging safety record would have prompted more intensive inspections by the Nuclear Regulatory Commission. It would have also invited scrutiny from the U.S. Institute of Nuclear Power Operations, an independent nuclear safety organization established by the U.S. power industry after the Three Mile Island accident in 1979, experts say. But that kind of stepped-up review never happened in Tokyo, where the Nuclear and Industrial Safety Agency remains an adjunct of the trade ministry charged with promoting nuclear power. As Japan debates its future energy policy after the worst nuclear accident since Chernobyl, a Reuters review of the long-troubled record at Fukushima shows how hard it has been to keep the country's oldest reactors running in the best of times. It also shows how Japan's nuclear establishment sold nuclear power to the public as a relatively cheap energy source in part by putting cost-containment ahead of radiation safety over the past several decades.

    Worries Over Water As Natural Gas Fracking Expands - Drive through northern Pennsylvania and you’ll see barns, cows, silos and drilling rigs perched on big, concrete pads. Pennsylvania is at the center of a natural gas boom. New technology is pushing gas out of huge shale deposits underground. That’s created jobs and wealth, but it may be damaging drinking water. That’s because when you “frack,” as hydraulic fracturing is called, you pump thousands of gallons of fluids underground. That cracks the shale a mile deep and drives natural gas up to the surface — gas that otherwise could never be tapped. But some people, like Mike Bastion, say fracking also ruins their water. “What gives the gas industry the right to take your clean water away?” a clearly angry Bastion says as he stands in the kitchen of his brother Steve’s house near Alba, in northern Pennsylvania. He says fracking ruined his water well.

    New York State’s Fracking Lawsuit Barred by Law, U.S. Says - The U.S. government said it will ask a judge to dismiss a New York lawsuit that seeks to force a fuller environmental review of how natural-gas extraction could affect 9 million water drinkers in the state. The U.S. plans to ask U.S. District Judge Nicholas Garaufis in Brooklyn, New York, to dismiss the case on the grounds that the state can’t prove injury and doesn’t have the right to sue federal agencies, according to a letter filed with the court yesterday. The New York state complaint is “barred by well-settled principles of sovereign immunity,” Assistant U.S. Attorney Sandra Levy wrote in the letter to the judge. Sovereign immunity protects the U.S. from lawsuits unless it waives the right. New York Attorney General Eric Schneiderman sued on May 31, saying a commission that oversees the Delaware River Basin has proposed regulations that will allow hydraulic fracturing, or fracking, at 15,000 to 18,000 gas wells without a full environmental review.

    EPA proposes new rules on fracking - Prohibited from regulating hydraulic fracturing under the Safe Drinking Water Act, the EPA took to the air, proposing federal regulations to reduce smog-forming pollutants released by the fast-spreading approach to gas drilling. If approved as currently written, the rules would amount to the first national standards for fracking of any kind, the EPA said. The agency sets guidelines when companies inject fluids underground for various purposes, but in 2005 Congress prohibited the EPA from doing so for fracking. Regulation has been left to the states, some of which compel companies to report what chemicals they use and have imposed tougher well-design standards. The new EPA proposal would limit emissions released during many stages of natural gas production and development, but explicitly targets the volatile organic compounds released in large quantities when wells are fracked. Drillers would have to use equipment that captures these gases, reducing emissions by nearly 95 percent, the EPA said.

    U.S. shale gas: Less abundance, higher cost - Shale gas has become an important and permanent feature of U.S. energy supply. Daily production has increased from less than 1 billion cubic feet of gas per day (bcfd) in 2003, when the first modern horizontal drilling and fracture stimulation was used, to almost 20 bcfd by mid-2011.There are, however, two major concerns at the center of the shale gas revolution:

    • • Despite impressive production growth, it is not yet clear that these plays are commercial at current prices because of the high capital costs of land and drilling and completion.
    • • Reserves and economics depend on estimated ultimate recoveries based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic.

    Shale gas investors get warning in possible SEC probe -  Recent reports of an investigation by the Securities and Exchange Commission into whether shale gas companies are overstating their gas reserves highlights the challenges investors face in navigating this emerging sector. Last week a research note from the investment management firm Robert W. Baird, citing industry lawyers, said the SEC is looking into whether shale gas companies may be overestimating the amount of natural gas they hold beneath the ground.The investigation is most likely politically motivated and not entirely unwelcome, the note said, sparked by congressional calls for SEC action following a scathing report in the New York Times questioning the reserves held by some shale gas firms. "We view it as appropriate and expected for the SEC to evaluate compliance with new regulations if compliance is publicly questioned," Christine Tezak, an energy and environmental policy analyst at Baird, wrote in the note. "A regulatory investigation may provide a clearer investment horizon than a 'trial' in the press."

    100 MPG on gasoline: Could we really? - Since I was a teenager, I frequently heard stories that some guy had invented a car that could get 100 miles per gallon (MPG), but that powerful interests (often GM, Chevron, etc.) had bought rights to the idea and sat on it. We suckers were left to shell out major bucks for gasoline, when a solution was in hand and under wraps. Leaving aside the notion that such a design would bring unbelievable prosperity to its holder (i.e., no real incentive to sit on it), let’s look at what physics says is possible. We will use the somewhat awkward (although appropriate) speed of 67 m.p.h. because it conveniently maps to 30 meters per second. At these speeds, aerodynamic resistance is the dominant energy drain, so we will start by evaluating only this to get a lower bound on fuel efficiency, and find that we do a pretty good job! As long as your car is bigger than a dust grain, air resistance increases as the square of velocity. The purpose of this post is to illustrate that fuel efficiency on the freeway is not mysterious. It’s the air, stupid. We have few knobs to turn, and are limited in how much more we can turn them. The biggest disappointment, perhaps, is the typical 20% performance of our engines. Naïvely, this suggests a factor of five potential gain. But as long as we’re making fireballs in our cylinders, we’re limited by harsh thermodynamic realities.

    Nate Hagens: We're Not Facing A Shortage of Energy, But A Longage of Expectations - This week's interview is one of the most important discussions we've had to-date on energy, its supply/demand dynamics, and the tremendous impact it has on our economic and social identity. It is clear now that we are staring at a future of declining output at a time the world is demanding an ever-increasing amount. Nate Hagens, former editor of the respected energy blog, The Oil Drum, gives a fact-packed update on where we are on the peak oil timeline. But interestingly, he explains how he sees the core issue as less about the actual amount of energy available to the world, and more about our assumptions about how much we really need: "We’re not really facing a shortage of energy, we’re facing a longage of expectations. And the sooner that we as individuals or a nation recognize that the future is going to see much lower consumption than today and prepare for that, psychological resilience is going to be really important; because if no one is psychologically prepared, people are going to freak out when some of these freedoms start to go away.

    Keystone Pipeline a Step Closer to Fruition - The controversial Keystone XL pipeline may be a step closer to reality after the passage of legislation requiring a decision on the project by November, has reported. The pipeline would stretch about 1700 miles from Alberta, Canada to Houston, Texas, transporting an additional 830,000 daily barrels of oil to US markets. The proposal was first lodged in 2008 but has been delayed while federal regulators weigh huge opposition to the project. Proponents say the pipeline would boost US oil supply and reduce the need to import oil from hostile foreign countries. Canada is already the biggest supplier of crude to US markets, as well as an ally. The pipeline would also generate 20,000 jobs during construction and countless other related jobs once it was built, reported

    Federal judge dismisses enviro oil sands lawsuit - A federal judge has dismissed a lawsuit brought by two environmental groups alleging that the Defense Department violated the law by procuring Canadian oil sands. The Sierra Club and the Southern Alliance for Clean Energy had alleged the Defense Department violated Section 526 of a 2007 energy law that prevents the military and other agencies from buying alternative fuels that have higher greenhouse gas emissions than conventional petroleum fuels. But United States District Judge Claude Hilton, out of the District Court for the Eastern District of Virginia, dismissed the case late last week because he said the plaintiffs lacked standing.

    CanadianDoomer: Oilsands are ... ethical? - Have you seen this site yet? There is a campaign to change the image of the Canadian Oilsands - Their point is that the Canadian Oilsands, which cover an area of 140,000 square kilometers and are about the same size as the American state of Florida, provide more ethical oil than places like Saudi Arabia. Their comparison is Ethical Oil vs Conflict Oil.  Why? Well, we tend not to stone women or kill gays. Our economy does not support terrorism. We elect women into politics. We have some environmental controls. One of their arguments is that coal-powered plants in China cause more pollution than the oilsands industry does. Fabulous. We're not using (much) coal and we have some environmental controls. A commenter remarked that global warming merely means that we're returning to shorter winters, with summers unchanged, and that that's a good thing.

    EPA Proposes New Air Pollution Standards for Oil and Gas Drilling - : The Environmental Protection Agency proposed new standards on air pollution from oil and gas drilling operations in response to a court order Thursday. The new standards are aimed to help reduce harmful emissions that are detrimental to air quality and impact public health. In order to meet these standards, the EPA is emphasizing the incorporating of cost-effective technology in gas and oil drilling operations to reduce air emissions. The technology would help drilling operators to capture and sell natural gas, which would ultimately improve the efficiency of operations. The EPA's proposal would aim to reduce major culprits of smog, including volatile organic compound emissions that come directly from the oil and gas industries. The other emissions released during operations also impact public health due to their toxicity and their ability to cause cancer.

    Gulf ‘Dead Zone’ Expanding to New Areas as Increased Flooding Makes the Problem Worse - This year’s survey of the dead zone in the Gulf of Mexico was just completed. And although it didn’t shatter record size as previously thought, the findings still show the problem worsening. The dead zone is caused by a phenomenon known has hypoxia. When nutrients from farming fertilizers run into rivers and pour into the ocean, massive amounts of phytoplankton grow. As the excess phytoplankton get consumed by bacteria, the decomposition process depletes oxygen and creates an uninhabitable area. According to a 2008 study, there are 400 dead zones around the world making up an area about half the size of California. At 6,765 square miles, this year’s dead zone in the Gulf of Mexico was above average. Researchers were expecting to find a record-breaking zone of between 8,500 and 9,400 square miles due to high water levels on the Mississippi River, but a tropical storm whipped up dissolved oxygen around the zone and decreased the area. According to an interview with one of the researchers in the New York Times, the problem is still getting worse:

    Republicans, Alaska Governor Push for Oil Drilling in Arctic Ocean and Wildlife Refuge - After months of forgotten offshore drilling ventures following the United States' worst oil spill disaster, Republicans are planning to push a bill that would allow drilling in the Arctic National Wildlife Refuge in northeastern Alaska. Consisting of more than 19 million acres, it is the largest wildlife refuge in the country. In addition to drilling in the Arctic National Wildlife Refuge, the bill would also require the Department of the Interior to begin selling offshore leases for drilling ventures. The same day Alaska Gov. Sean Parnell requested that federal regulators move forward in terms of allowing offshore oiling north of Alaska in the Arctic Ocean. Parnell expressed his concerns with the U.S.'s dependency on foreign oil, especially in light of rising gas prices. The efforts from Republicans in Congress, Gov. Parnell, and other Alaskan officials come in light of the Obama administration's release of the Blueprint for a Secure Energy Future. The blueprint outlines policies and steps that the U.S. needs to adopt and apply to secure the future of energy across the nation and reduce dependency on foreign oil. Of course, the blueprint has received criticism from Republicans and energy experts who claim that while the concepts are crucial, major roadblocks still stand in achieving them. Additionally, one of Obama's main goals is to reduce foreign oil imports by a third by the year 2025, which puts a mass amount of pressure on increasing domestic oil output.

    U.S. dependence on foreign oil has dropped - The United States was so dependent on foreign oil that by 2008 it imported two-thirds of what the country's refineries needed to produce enough gasoline, diesel and the other petroleum products to meet the country's needs. But recently the federal Energy Information Administration reported that in 2010 imports had fallen far more than many realized — to 49 percent of the country's needs. What happened? Part of the big drop resulted from the federal agency’s using a different measurement — net petroleum imports — widely viewed as a more accurate way to judge overall dependence on foreign petroleum. The figure counts imports of crude oil and of refined petroleum products such as gasoline and diesel, but it also subtracts exports of U.S. petroleum products, which have been growing. The country recently stopped being a net importer of petroleum products for the first time since at least 1973, as the country’s refiners sold more gasoline and other end products to other countries. A second factor is simply lower demand for petroleum products, in large part a result of the sour economy, but also helped by more efficient cars.

    Big Oil Companies Post Huge Profits On High Gas Prices - The Big Five oil companies this week announced they had made a whopping $36 billion in profits in the second quarter of 2011.  According to second-quarter earnings reports, ExxonMobil alone made $10.7 billion in the most recent three months. That's a 41 percent increase over the same period last year and a 161 percent increase over 2009. Shell nearly doubled its profits year over year, taking in $8.7 billion in the second quarter. Chevron's profits were $7.7 billion, up 43 percent. BP earned $5.6 billion, a far cry from its $17.2 billion loss a year ago. A good chunk of these profits is coming right out the pockets of the American public, thanks in part to astronomical gas prices and to $4 billion to $8 billion a year in deficit-increasing tax subsidies that oil companies continue to get, long after the incentives those subsidies were designed to create ceased to make economic sense.

    Oil Heads for Biggest Weekly Drop Since May - Oil fell in New York, heading for the biggest weekly decline in three months and wiping out its gain for the year, on speculation fuel demand will falter as the U.S. economy weakens and the European debt crisis worsens. Futures dropped as much as 1.1 percent after slumping 5.8 percent yesterday. U.S. consumer confidence slid to the lowest in more than two months, a report showed. Italian and Spanish bonds surged to records amid speculation Europe will fail to contain its sovereign-debt crisis. Crude for September delivery dropped as much as 95 cents to $85.68 a barrel in electronic trading on the New York Mercantile Exchange at 11:38 a.m. Sydney time. The contract yesterday tumbled $5.30 to $86.63, the lowest settlement since Feb. 18. Prices are down 10 percent for the week and 6 percent in 2011. “Economic worries in the U.S. led to fears that oil demand will soften dramatically,” Peter Beutel, president of Cameron Hanover Inc., an energy adviser in New Canaan, Connecticut, said in an e-mailed note today. “Traders were buffeted by fears that the global economy is slowing, nations are embracing austerity and the euro-zone debt crisis is spreading.”

    The Relationship Between Hunger And Petroleum Consumption - Part 5 - Here, I summarize parts 1-4 and put my results into the context of the broader ideas of peak oil, food production and population decline. A number of readers may think that it is obvious, or common knowledge, that food production and fossil fuel consumption are directly linked, and therefore, the higher the level of petroleum consumption in the world, in a region, or in a country, the greater the amount of food produced and the less hunger and starvation there will be. The implications of reaching peak oil and declining along the down side are equally clear—less oil means less food, more hunger, and eventually starvation. This was definitively my thinking, until a few months ago when I started to look at the relationship between petroleum consumption and population growth for different regions of the world, and some individual countries, during periods when petroleum consumption dramatically declined. To my surprise, the population often just kept increasing at the same rate or at most, the rate of increase slowed down a bit. That is, I saw nothing that one would call a “die off” (see Estimating the End of Global Petroleum Exports; Part 7 and on).

    Oil’s Well that Doesn’t End Well - Over the past few months, I’ve been writing about energy companies that I think own valuable land positions in emerging light oil resource plays in North America. My focus on oil has been driven by what I think is an obvious long-term supply and demand problem that we are facing in the global market. I believe we humans have reached the point where it is going to be very difficult to raise the amount of oil that we can produce on a daily basis. And much of the incremental production that we now bring on is at a much higher finding and development cost. We aren’t running out of oil, we just can’t find any additional super giant reservoirs that produce at prodigious rates at a low cost. What we now find is smaller and, often, under a few miles of water or in a remote location. As the old super giants produce less and less every year, we have more trouble making up for that lost production. It’s bigger than just supply issues, of course, as this oil challenge is a double-edged sword. The demand side is equally challenging. The numbers tell the entire story.

    When oil and gas are depleted - In this year, 2011, we are enjoying a lifestyle beyond the most optimistic dreams of past generations. We are benefitting from the whirlwind of achievements in science and technology during the last hundred years. There has never been a century like the one just passed, and there will never be another like it.  Lifestyles will be very different when oil and gas are depleted.  Most of us see the progress of civilization as it has been in our lifetime and assume that it will continue as it has in our experience. Our civilization is powered by fossil fuels. There is great concern about the damage to the environment caused by the use of fossil fuels and there are developments underway to replace fossil fuels with “renewable” sources of energy. It is generally believed that renewable sources and nuclear power can provide enough energy in quantity and form to sustain and grow our civilization.

    Peak Oil: When Saudi Spare Capacity Falls Short - I know exactly why I keep up my insomniac pacing. A single thought has been rushing to the forefront of my sleepless psyche: Let's hope it won't be us asking the Saudis for more oil. That's what we were left pondering after seeing firsthand how hungry China is for Canadian energy. Unfortunately, it's more likely a U.S. diplomat will be making that future phone call, apologizing to the Saudis for past grievances and promising we won't stray from their oil taps again... The real kicker is there's a good chance they'll say no. Their refusal won't come from some repressed anger, but rather the fact that all they can do is shrug their shoulders helplessly... Turns out the Saudis might not be able to feed our addiction any longer because they've fallen victim to their own racket.

    Shale Gas, Emission Cuts Urged To Reduce China's Oil Imports - China should accelerate the pace of its exploration of unconventional natural gas and introduce more stringent policies to cut emissions to cope with its heavier dependence on crude oil and natural gas imports, industry experts suggested.  The nation's dependency ratio of foreign crude imports hit a new high of 55.2 percent in the first five months of 2011, the Ministry of Industry and Information Technology (MIIT) said on Tuesday. That surpassed the 53.5 percent in the United States, it said.  Last year, China reported a dependency ratio of about 55 percent on crude imports.  MIIT data showed that the world's second-biggest oil consumer had 191 million tons of apparent crude consumption from January to May, up 8.5 percent from the same period last year. Apparent consumption includes domestic production and imports, but excludes exports.  China has been a net importer of oil since the 1990s, and its oil imports have risen sharply ever since to support its strong economic expansion.

    Foxconn to replace workers with 1 million robots in 3 years (Xinhua) -- Taiwanese technology giant Foxconn will replace some of its workers with 1 million robots in three years to cut rising labor expenses and improve efficiency, said Terry Gou, founder and chairman of the company, late Friday. The robots will be used to do simple and routine work such as spraying, welding and assembling which are now mainly conducted by workers, said Gou at a workers' dance party Friday night. The company currently has 10,000 robots and the number will be increased to 300,000 next year and 1 million in three years, according to Gou. Foxconn, the world's largest maker of computer components which assembles products for Apple, Sony and Nokia, is in the spotlight after a string of suicides of workers at its massive Chinese plants, which some blamed on tough working conditions. The company currently employs 1.2 million people, with about 1 million of them based on the Chinese mainland.

    More investors shorting Chinese yuan - Plenty of smart money is betting on the rise of the yuan, but some overseas foreign-exchange investors are looking the other way.  Contrarians range from hedge funds to wealth-management firms, and they generally agree that the possibility of yuan devaluation against the U.S. dollar is at least slightly greater than market consensus. Chinese policy makers, meanwhile, are not rushing to argue the point.  “We are indeed shorting the yuan,” investment manager Cullen Thompson told Caixin.  Thompson is joined by Mark Hart, investment chief at hedge fund Corriente Advisors, which launched its China Opportunity Master Fund to play against the Chinese currency and economy in general.  Hart said he expects to profit from an economic slowdown in China, telling investors last year that, in his opinion, the Chinese government’s artificial exchange rate controls and low interest rates have created asset bubbles in areas such as real estate and bank credit, and that a downturn will follow.

    No hard landing, but no solution - I have been arguing for a while that as long as the Chinese government retains its capacity to raise debt we are not going to see a sharp slowdown in economic growth – at least until 2013.  Any indication that the economy is slowing too quickly will be met with a relaxation of credit controls, and the concomitant rise in investment will spur growth. On July 13, under the heading “National Economy Maintained Steady and Fast Growth”, the National Bureau of Statistics released more data on China’s economy. According to the preliminary estimation, the gross domestic product (GDP) of China was 20,445.9 billion yuan for the first half of this year, a year-on-year increase of 9.6 percent at comparable prices. Specifically, the growth of the first quarter was 9.7 percent, and 9.5 percent for the second quarter…The gross domestic product of the second quarter of 2011 went up by 2.2 percent on a quarterly basis. Quarter-on-quarter growth of 2.2% means that on an annualized basis the Chinese economy grew 9.1% in the second quarter.   The market was expecting slightly lower growth, but I think few people expected the reported numbers to come in below 9%.  We are well on track to completing the year with GDP growth rates of around or above 9%.

    Revaluation of the Chinese Yuan Would Improve US Trade Balance - In a recent report, I showed that full revaluation of the yuan and other undervalued Asian currencies would improve the U.S. current account balance by up to $190.5 billion, increasing U.S. GDP by as much as $285.7 billion, adding up to 2.25 million U.S. jobs and reducing the federal budget deficit by up to $857 billion over 10 years. This change to the current account balance (the broadest measure of the U.S. trade balance) would also help workers in China and other Asian countries by reducing inflationary overheating and increasing workers' purchasing power. However, a recent blog post by two researchers from the Federal Reserve Bank of New York argues that revaluation "would not make a meaningful near-term difference in the U.S. bilateral deficit with China." Their work ignores the much more significant impact that Chinese revaluation would have on U.S. exports to the rest of the world; and the likely impact a higher yuan will have on other currency manipulators such as Hong Kong, Taiwan, Singapore and Malaysia. Recent research has estimated that the yuan is undervalued by 28.5 percent against the U.S. dollar. China's currency manipulation acts like a subsidy of 28.5 percent on all of its exports, and a tax on U.S. exports to China and the rest of the world (since it lowers the cost of Chinese products relative to those made by U.S. firms).

    Beefed-up burgernomics - Economist - THE Big Mac index celebrates its 25th birthday this year. Invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level, it was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. American politicians have even cited the index in their demands for a big appreciation of the Chinese yuan. With so many people taking the hamburger standard so seriously, it may be time to beef it up.

    Manufacturing Weakens From China to U.K - Manufacturing indexes from Asia to the U.S. to Europe fell in July as demand weakened and the global recovery from recession lost momentum. U.K., Russian and Australian manufacturing shrank last month, while the pace of factory growth slowed in Europe and China, according to surveys today. An index of U.S. manufacturing dropped more than economists forecast to a two- year low, even after the dollar’s 7 percent drop against the euro this year. Europe’s debt crisis, U.S. political haggling over the nation’s debt limit and monetary tightening in China have combined to restrain the global recovery. Consumer confidence is being undermined by job cuts and government austerity measures, while manufacturers may also struggle to recover as soaring commodity prices weigh on margins. “Manufacturing is slowing and some of these readings are in recessionary territory,” said David Owen, chief European economist at Jefferies International Ltd. in London. “Coming through a banking crisis, you can’t place much weight on the consumer so you depend on manufacturers doing well.”

    Europe, Asian factory growth stalls in July -Factories in Asia and Europe expanded in July at the weakest rate since major industrial powers were struggling through the 2009 recession, adding to concerns over world growth. While stock markets rose on signs of a last minute solution that would avoid a U.S. debt default, manufacturing purchasing managers indexes (PMIs) provided the latest evidence of a slowing global economy.The euro zone manufacturing PMI, which gauges the activities of thousands of businesses, fell to 50.4 in July from 52.0 in June -- its worst showing since September 2009 and barely above the 50 mark dividing growth and contraction.Perhaps more worryingly, China1's official government PMI dropped to 50.7 from 50.9 in June, its weakest in more than two years, while the HSBC2 PMI fell below the 50 mark for the first time in a year -- to 49.3 in July from 51.6.

    Manufacturing slump accelerates - Activity in Australia's manufacturing sector slumped in July, with the strong local currency and weak domestic demand continuing to restrict growth. The Performance of Manufacturing Index by the Australian Industry Group and PwC fell 9.5 points last month to 43.4. That is well below the key 50-point level which separates expansion from contraction. The survey also shows the prospect of a carbon tax has added to manufacturers' concerns and is clearly weighing on sentiment in the sector. The chief executive of the Ai Group Heather Ridout says concerns about the carbon tax come on top of ongoing worries about the strong Australian dollar and weak demand.

    Eighty-five building and construction firms go under in a month - The building and construction industry seems to be bearing the brunt of the brittle Australian economy, with more than 85 companies either entering administration, liquidation or being hit by a winding up notice over the past month in Victoria and New South Wales alone.The reasons, according to Sanderson, are the relatively recent downturn and increased aggression from the Australian Taxation Office. "An awful lot of tradies couldn't pay their bills during the GFC, and now the ATO is coming to get them," Sanderson says. "Whereas other industries might continue to limp on, small tradies might not have the ability." Master Builders Australia chief economist Peter Jones says uncertainty over where the economy is headed is not helping the sector, which has a higher number of SMEs than other sectors

    Canada’s Economy Shrank 0.3% in May Posting the Largest Drop in Two Years - Canada’s gross domestic product fell in May by the most in two years due to temporary disruptions in the mining and oil and gas sector, government data showed. Output fell 0.3 percent in May to C$1.26 trillion ($1.32 trillion) on a seasonally adjusted basis, after being little changed in April and gaining 0.3 percent in March, Statistics Canada said today in Ottawa. Economists in a Bloomberg survey forecast the economy would grow 0.1 percent, based on the median of 24 responses. The Bank of Canada said July 20 the economy’s growth probably slowed to 1.5 percent in the second quarter of this year, its slowest pace since the country emerged from recession in 2009, because of “supply disruptions” related to the earthquake and tsunami in Japan, slowing government spending and the impact of higher food and energy prices. Governor Mark Carney has kept the central bank’s benchmark policy rate at 1 percent since September.

    Spiegel: Outlook Dims for European Juggernaut: German Economy Starts to Cool Down - Germany staged an impressive recovery from the 2008/2009 global economic crisis, but there are increasing signs that the boom is now coming to an end.  After almost two years of strong growth, its economic outlook is starting to deteriorate, due to a slowdown in major emerging markets including China and fears of a possible United States recession caused by $2.4 trillion in spending cuts linked to the debt ceiling deal.  Various indicators released in recent weeks point to a deceleration of Europe's largest economy. The Ifo business climate index for July fell sharply to its lowest level in nine months, and analysts say it is likely to keep dropping. The ZEW investor sentiment index showed the weakest level since January 2009.

    Could There Really Be A Recession Risk In Germany?-  The Germany economy is the strongest in Europe, time and again we have been told it is powering and powering ahead. It has just demonstrated record growth performances. So where the hell could you possibly get the crazy idea that Germany might be in for a double-dip recession?  Perhaps the idea is not as absurd as it seems at first sight. Try taking a look at this chart (exhibit A), for starters. This is what just happened to German manufacturing industry. It is the monthly manufacturing PMI chart, and note the sharp smooth downward line, which stretches from February’s high point of 62.7, down to July’s 52. Yes, German manufacturing industry is still expanding, but only just, and it is the pace of the slowdown which is remarkable.And this months report made plain there is worse to come, since as Tim Moore, senior economist at Markit informed us: “New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth”. The report also highlighted a reduction in export sales, with the pace of contraction being the fastest since June 2009.

    Meanwhile, in the Global Economy - Krugman -  Bad news all over. In the US, Manufacturing growth hits lowest level in 2 years. In Europe, my favorite current indicator of the eurozone crisis, the Italy-Germany bond spread, has blown out again. And while part of this is due to falling German rates — which, like falling US rates, reflect growing pessimism about growth — the Italian bond rate is once again at 6 percent, a level that invites a self-fulfilling debt spiral. Oh, and in Britain, poster child for wonderful expansionary austerity, we have this: For the fifth consecutive month, the manufacturing sector has disappointed expectations. In the past six months, the headline composite index has crashed by 12.5 points, a record only exceeded post-Lehman in 2008. Output has been slightly better behaved over the past few months, but July’s 2 point decline to 50.6 leaves it slightly below May’s trough. Worryingly, the temporary supply-chain disruptions that depressed output in May appear to have eased, indicating that July’s weakness might be more structural.  I’m so glad we have a deal that will bring the confidence fairy to our rescue!

    Poor countries fight for reform of global tax systems - The OECD club of rich countries is battling poorer states over a controversial global tax deal that could affect multinational tax schemes. Visiting South Africa and Nigeria last week, David Cameron wrote in a South African newspaper about the benefits of "effective tax systems" – but failed to mention aggressive tax avoidance by multinational corporations, something that South Africa's finance minister has called "a serious cancer eating into the fiscal base of many countries". Meanwhile, the British government is locked in battle with South Africa and other developing countries over a controversial global tax deal, which is due to be finalised in Geneva on Wednesday; a deal that could potentially have a large impact on multinational tax schemes. On one side of this fight sit Britain, the US, the EU and other rich countries, which want to maintain the pre-eminence of the OECD. On the other side, along with South Africa, sit Argentina, Brazil, China, India, Mexico and other developing countries, which want developing countries to have a bigger voice.

    South America Plans Summit on Defending Currencies, Economies From Crisis - Finance officials from South America and Mexico will gather next month to discuss ways to protect their currencies and economies from the debt crisis in the U.S. and Europe.  The meeting of finance ministers from the Union of South American Nations, to take place Aug. 10-11 in Buenos Aires, was organized at the urging of Colombian President Juan Manuel Santos. The gathering will allow governments to coordinate action to deal with shared problems including “speculative” capital inflows that are fueling a rally in their currencies, Santos said at a July 28 summit of regional leaders. “Latin America is sitting on $700 billion in reserves that are losing their value because of the crisis we’re going through with the impasse in the U.S. Congress over the debt ceiling,”

    Japan primes markets for FX intervention-BOJ easing combo (Reuters) - Japan primed financial markets on Tuesday for currency intervention after the yen tested record highs, signalling it may try to tame the unit with a combination of yen-selling and monetary easing. A near 5 percent surge in the yen in the past month has raised concerns among exporters such as Toyota Motor that the currency's strength will harm the economy, already in recession following the March earthquake and tsunami. The yen traded as high as 76.29 per dollar on the EBS platform on Monday, near its March record high of 76.25. Even as it pulled back to 77.40 on Tuesday, Japanese officials adopted a new, more direct tone, suggesting they were increasingly convinced markets needed a nudge to keep the yen at levels the economy could live with. "The yen is being valued stronger than we think ... I'd like to watch currency market conditions especially carefully today," Finance Minister Yoshihiko Noda told parliament.

    Japan Follows Switzerland in Acting to Weaken Currency to Protect Exports - Japan followed Switzerland in seeking to stem appreciating exchange rates that threatened to damage export competitiveness, selling the yen and pledging to inject 10 trillion yen ($126 billion) in funds to the economy. Japan acted alone in the market, while officials were in touch with other nations, Finance Minister Yoshihiko Noda told reporters today. The Bank of Japan (8301) followed up with monetary stimulus that totaled double the amount pledged days after the March 11 earthquake. The yen weakened to 80 per dollar for the first time since July 12 at 10:58 a.m. in London. Today’s moves reflect deepening concern of a U.S. return to recession that might force the Federal Reserve into another round of asset purchases and a widening in Europe’s debt crisis, with a sell-off in Spanish and Italian debt. The concerns have prompted investors to seek havens in the currencies of Japan and Switzerland, which both enjoy current-account surpluses, and those of emerging markets with faster growth rates. “What you’re seeing now is policy makers responding because it’s beginning to hurt their overall economic prospects, particularly in the case of Japan, where the economy is pretty vulnerable after the March earthquake,”

    Japanese, Swiss Move to Push Currencies Lower - The collateral damage from the U.S. and European debt crises has shifted the front lines of the currency wars to Japan and Switzerland. The Japanese government intervened Thursday morning in currency markets to stem the rise of the yen against the dollar, hoping to preserve modest growth in an economy rebounding surprisingly well from the March earthquake and tsunami—but that now appears threatened by a soaring currency undermining exporters.  The Bank of Japan also announced that it would end later in the day a policy meeting originally scheduled to spill over to Friday and would make an announcement Thursday afternoon.

    More On The 2011 Edition Of US-Japan Open Currency Warfare: "This Is Just The Beginning" - According to Credit Suisse, this is just the beginning of Transpacific central banking warfare. Per Dow Jones: "The Japanese Ministry of Finance's JPY-selling operation Thursday may be the first in a series of interventions over the coming weeks to curb further rises in the unit, and may have come Thursday in part as the Swiss National Bank's move Wednesday to weaken its own currency made it easier for Japan also to step in, says Koji Fukaya, director of fixed income and global foreign exchange research at Credit Suisse. "This may be the start of a number of actions, depending on the yen moves in the weeks ahead," Fukaya says. The SNB's move Wednesday means Japan's own move "could be considered as a kind of coordinated action" in response to broad USD weakness, he says. As traders say the MOF has so far sold under Y500 billion, Fukaya says the total size ahead could rise as high as Y2 trillion, though the move Thursday should be enough to send USD/JPY above 79.00 later, where it should stabilize in coming sessions. The pair is now at 78.32, from 77.10 earlier." To anyone trading in these 100% correlated markets, which are now nothing but a battleground for those who yield the global electronic fiat printing presses, good luck.

    Sea Change in Map of Global Risk - The black-and-white borders of the bond market are graying. As the pristine credit rating of the U.S. remains under threat, and the debt crisis in Europe rolls on, investors, traders and policy makers are grappling with fundamental changes in the global bond markets. Many so-called emerging countries, which have typically been charged higher interest rates because of their perceived risk, are now paying as little to borrow as developed nations, if not less. Bond investors now appear to see Mexico and Brazil as less risky than the European countries that were once their colonial rulers, Spain and Portugal. The ongoing debt-ceiling debate has pushed the cost of credit-default swap insurance on U.S. Treasurys—long the ultimate "risk free" investment—above that of Brazil.  While this flipflop is in part due to the dual crises raging on both sides of the Atlantic, many say it is part of a much broader, more permanent shift in the way investors view the relative risk of government debt, and in the way they charge for it.

    "Indignant" Demonstrators Marching to Brussels to Protest Effects of Crisis -- Protesters from several European Union cities have begun to follow the example of hundreds of demonstrators from Spain who are marching from Madrid to Brussels, the bloc's de facto capital, in a growing protest against the effects of the economic crisis and the fiscal adjustment policies adopted to combat it.The march - literally, on foot - began Tuesday Jul. 26 with half a dozen people at the Puerta del Sol, in Madrid, the "kilometer zero" point from which all distances in the country are measured. The "'Indignant' People's March" aims to cover the 1,550 km to Brussels by Oct. 8, one week ahead of the global demonstration planned for Oct. 15 by Democracia Real YA (Real Democracy Now!) Marchers from other European cities will stop in Paris on the way to Brussels, to support the Occupy Wall Street initiative, aimed at occupying and disrupting what they call the "financial Gomorrah" of the United States.

    Fears of far-right rise in crisis-hit Greece -— They descended by the hundreds -- black-shirted, bat-wielding youths chasing down dark-skinned immigrants through the streets of Athens and beating them senseless in an unprecedented show of force by Greece's far-right extremists. In Greece, alarm is rising that the twin crises of financial meltdown and soaring illegal immigration are creating the conditions for a right-wing rise -- and the Norway massacre on Monday drove authorities to beef up security. The move comes amid spiraling social unrest that has unleashed waves of rioting and vigilante thuggery on the streets of Athens. The U.N.'s refugee agency warns that some Athens neighborhoods have become zones where "fascist groups have established an odd lawless regime." Greek police on Monday said they have increased security checks at Muslim prayer houses and other immigrant sites in response to the Norway shooting rampage that claimed 77 lives. Greece's fears are shared across Europe. Last week, EU counterterror officials held an emergency meeting in Brussels on ways to combat right-wing violence and rising Islamophobia, warning of a "major risk" of Norway copycats. The massacre by Anders Behring Breivik prompted continent-wide soul-searching about whether authorities have neglected the threat of right-wing extremists as they focus on jihadist terror.

    Blundering towards a ‘You Break it You Own it’ Europe - The latest instalment of the drama that is the eurozone periphery sovereign debt crisis and European Union-wide banking sector crisis demonstrates that fiscal federalism is not going to happen. Nor will its primitive sibling, an open-ended, uncapped transfer Europe with creditor or donor countries in control of public spending, taxation and privatisation in debtor or beneficiary countries. The core euro area donors would walk out and the periphery financial beneficiaries would refuse the required surrender of national sovereignty. This leaves two roads for the eurozone. The first is to disband. The second is to move to a ‘You Break it You Own it’ Europe where insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, without any permanent financial support from any other nation’s taxpayers. Likewise, threatening insolvency of systemically important banks (‘sibanks’) and other ‘sifis’ is first visited on these institutions’ unsecured junior and senior creditors. Their claims are written off or converted into equity before any taxpayer money goes in.

    “Europe plans its next crisis”  - With the economic world firmly focussed on the US debt debacle this week it is likely that Europe will slip off the radar a little. I suspect, as many people do, that for the US there will be an eleventh hour resolution followed by a short lived bounce in the world markets. Once that bounce heads back to earth again it is likely that the world’s eyes will turn back to Europe. There is much to see. It hasn’t taken very long for the world to wake up to the fact the that EFSF is only going to work if there is a sudden stabilisation of Europe’s weak economies. That obviously isn’t about to happen so the markets have already started pecking at the weak links. Ten-year Spanish yields climbed 31 basis points to 6.08 percent. They have added more than 60 basis points this month. The nation plans to sell 3.4 percent securities maturing in April 2014 and 4.4 percent bonds maturing in 2015 at an auction on August 4. Italian 10-year bond yields advanced 46 basis points to 5.87 percent. Two-year Italian note yields added 67 basis points to 4.32 percent. Apart from the fact that two contributors are already in strife there is also the small issue that the EFSF may not even be ready to help Greece in time for the next tranche.

    Spain in ‘Danger Zone’ on Europe Crisis: IMF Quote: The assessment - Spain is still in “the danger zone” and must keep up momentum in restructuring its economy to stave off contagion from Europe’s sovereign-debt crisis, the International Monetary Fund said.  “The outlook is difficult and the risks elevated,” the Washington-based IMF said in a report yesterday after a visit by staff to Spain. “The policy agenda remains challenging and urgent -- there can be no let up in the reform momentum.” The assessment coincided with Prime Minister Jose Luis Rodriguez Zapatero’s decision the same day to call early elections on Nov. 20 and Moody’s Investors Service’s warning that it may downgrade Spain. The euro-region’s fourth-biggest economy is trying to rein in surging borrowing costs that have pushed the yield on its 10-year bond above 6 percent, hindering efforts to stoke growth as unemployment stays above 20 percent.

    Italy, Spain Spreads Widen on Concern Crisis ‘Self-Fulfilling’ - Italian and Spanish 10-year bonds dropped, pushing yields up to euro-era records versus benchmark German bunds, on concern that slowing growth will hamper efforts to tame the nations’ debt loads. German 10-year yields touched an eight-month low amid speculation spending cuts included in a U.S. debt-limit compromise agreement will harm the global economy. Investors pared bets on higher euro-region borrowing costs as European producer-price inflation slowed for a second month.“This has all the features of a self-fulfilling crisis,” "The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.” The yield on 10-year Italian bonds rose 13 basis points to 6.14 percent at 4:31 p.m. in London. It earlier surged to 6.25 percent, the most since November 1997. The 4.75 percent security maturity in September 2021 fell 0.895, or 8.95 euros per 1,000- euro ($1,422) face amount, to 90.34. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999.

    What About Europe? -  Krugman - I defer to nobody in my dismay and disgust over the debt ceiling disaster. America really is a mess. But I still wonder, looking at news coverage, why our disaster is dominating the headlines to the apparent exclusion of European woes. It’s there if you look for it carefully, and especially if you’re keeping track of the market spreads, but a casual reader might not even realize that the whole eurozone thing is coming apart at the seams.  I really don’t know how this is going to play out; Italy and Spain are too big for extend and pretend, and they’re also too big to save. But this is huge, and just as worrying in its own way as the US crisis of governance.

    The euro area bond crisis in charts - Rebecca Wilder - Edward Harrison draws our attention to the euro area bond crisis: Spain, Italy, Belgium yields now under attack. I'd like to add to this thread by offering some illustrations of the polarizing of bond markets that's coincident with the euro area bond crisis. (Notice I do not say currency crisis because it's really the bond markets that are seething - the euro area, hence the currency, is thought to be relatively secure for now.) Spain, Italy, and Belgium are breaking away from the 'core', Germany, Austria, Netherlands, Finland, and France. But if you look really hard, France is showing a fair bit of stress too; it's underperforming the other core countries. This is ironic. By attempting to stem broader contagion by ring-fencing Greece, Ireland, and Italy, euro area policy makers focused market attention on those countries too big to quickly ring-fence, i.e., Italy and Spain. Let me cite Warren Buffet's interview with CNBC again when he said the following about euro area policy: “When you have 17 countries that all have the same currency, and the yields on their bonds are dramatically different, the situation is not solved.”

    Eurocontagion Spreads - Finally, the deal has passed the Senate and the House.  Which means we now return to our regularly scheduled programming: panicking about Europe.  Italian and Spanish bond yields are soaringThe flurry of activity came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 per cent and 6.25 per cent, respectively. The premiums Madrid and Rome pay to borrow over Germany also reached new euro-era highs of 404 and 384 basis points. Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs.  The premium France pays to borrow over Germany also hit a euro-era high of 75bp. Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading. "What can be announced to really break that? It is difficult to see". The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy. It has been heightened by worries about the possibility of recessions in the US and Europe, which has led to frenzied buying of perceived safe-haven debt including Germany, the US and the UK.

    Italy to hold financial stability meeting. - Finance Minister Giulio Tremonti will hold a meeting of Italy's financial stability committee on Tuesday, including representatives from the central bank and bourse regulator Consob, a source said. The committee will discuss "the sovereign debt market situation and the implications for the banks and the economy," the source told AFP. Italy's Financial Stability Safeguard Committee, as it is formally known, was set up in 2008 as the global economic crisis first hit and includes representatives from stock market and insurance regulators. Prime Minister Silvio Berlusconi is set to address parliament on the financial crisis on Wednesday and meet trade union leaders on Thursday.

    Spain PM Delays Vacation To Deal With Economic Woes - Spanish Prime Minister Jose Luis Rodriguez Zapatero Tuesday postponed a scheduled vacation and Finance Minister Elena Salgado was talking to several of her European counterparts as borrowing costs for Spain and Italy hit new euro-era highs. Zapatero cancelled his vacation in order "to more closely follow" the country's "economic indicators," according to a statement from his office. A spokesman added that Zapatero was in close contact with Salgado, while the finance minister has been talking with her Italian, French and German counterparts. The new spike in borrowing costs comes two days ahead of a Spanish bond auction Thursday, where the treasury plans to sell between EUR2.5 billion and EUR3.5 billion of three- and four-year bonds. It also heightens concerns about the abilities of Italy and Spain, the euro zone's third- and fourth-largest economies, respectively, to finance themselves. In a recent research note, analysts at Deutsche Bank said Greece, Ireland and Portugal started to get frozen out of financial markets when their 10-year bond yields reached levels of between 6% and 7%.

    EU not considering rescue plans for Italy, Spain - The European Union has no plans to provide rescue loans to Italy and Spain, despite the rising borrowing costs facing these countries, a European Commission spokeswoman said Tuesday. Italian and Spanish authorities are taking the necessary steps to improve their budget situations, spokeswoman Chantal Hughes said.  “We are absolutely confident that the Spanish authorities will take all steps which are necessary,” Hughes said. “The question of a rescue plan is not on the table.” “The situation is very similar for Italy,” she added. There is also no indication that either of those countries won’t participate in paying the next tranche of bilateral loans to Greece, Hughes said.

    America is merely wounded, Europe risks death - The US and EU debt crises are feeding on each other in a dangerous synergy, with fears of a fiscal “sudden stop” in Washington causing global risk aversion and aggravating tremors in the Spanish and Italian bond markets. It is a pre-taste of the “catastrophe” predicted by the Fed’s Ben Bernanke if politicians fail to control their passions.  And yet, data from the St Louis Fed show that America’s M2 money supply grew at a 6.4pc annual rate in the second quarter, accelerating to 12.2pc in June. The compound annual rate of change has exceeded 40pc over recent weeks.  There is no longer a 1930s liquidity trap. We can infer that the housing market may be nearing the end of its deep slump.  The economy is curing itself in time-honoured fashion. Whether this monetary cure will be allowed to run its course depends on politicians in Washington, Berlin, Rome and Madrid.  My recurring nightmare ever since the Western debt edifice began to crumble four years ago is that the denouement would track the events of mid-1931, when leaders failed to reform a destructive fixed exchange system (Gold Standard) and the fuse finally detonated on Europe’s banking system. It was when political blunders turned recession into the Great Depression, and ideology intruded with a vengeance.

    The Domino Effect: A short crisis update - This is not a full newsbriefing, just a short crisis update. In the last few days, the eurozone bond markets experienced extreme price movements on little trading volume. The rise in Italian and Spanish yields – and fall in German yields – continued this morning.  In terms of 10-year spreads, Italy and Spain are now in the position where Portugal and Ireland were just before they applied to the EFSF. Belgium is what Spain used to be a month ago, and France is where Belgium used to be. The dominos in the eurozone are falling. And the threat is reaching deep into the core.  If those levels of bond yields were to persist, Italy and Spain would be insolvent.  There are now five possibilities how the situation might resolve.

    • 1. The ECB resumes its programme of bond markets purchases, and sets a floor to all eurozone bonds. (We think this is not likely, at least not without option 2 in place.
    • 2. The EU increases the volume of the EFSF, but this cannot be done on individual country guarantees, as this would overextend France in particular, leaving too much weight on Germany.
    • 3. Italy and Spain remain in the eurozone, but default on part of their debts.
    • 4. Italy and Spain leave the eurozone.
    • 5. The situation reverses with only minimal policy action (another austerity or reform programme).

    German Exports - Italian bond yields are flashing red again. In thinking about the long term future of the Eurozone, much obviously depends on the willingness of Germany to accept changes in the structure of the Euro such that the situation will work better for other countries than it does at present. Accordingly, it's helpful to think about where Germany's actual interests lie. Clearly, as a major exporter, its interests are strongly bound up with who is buying its exports and what they are buying.  I found some statistics on this at the United Nations International Merchandise Trade Statistics website.  Firstly, here is what Germany is mainly exporting: You can see that Germany is exporting a mix of high-end and sophisticated manufactured goods (Mercedes and Porsches, pharmaceuticals, etc).   You can see that Italy is up there with about 6% of the export total, and other Eurozone countries are important too - France, Netherlands, Austria, etc.  So there's no question that worsening economic weakness on the eurozone periphery will have some short term impact on German exports.

    Euro Area Retail Trade Stats - The core concern about Italy and Spain is that they won't be able to grow while in a monetary union with stronger economies (especially Germany); in particular while facing tight monetary policy designed to prevent inflation in those economies.  If they can't grow, they are going to have trouble servicing their debts.  To assess this, it's helpful to look at other series, besides GDP, that are more timely.  One is retail trade, for which I found some data at Eurostat.  The series for the entire EU and the Eurozone are above.  That graph pretty clearly says "double-dip" - that a second recession has already begun, particularly in the Eurozone. Looking at the five largest European economies over the last 12 months we get this: Clearly Spain is going down the tubes at a fairly rapid clip following the collapse of its housing bubble.  This is presumably why government bond prices are now similar to Italy despite the latter's much larger debt.  Italy's retail trade is also shrinking but much more slowly.  Even Germany only just returned to the level of 2005 in June.  France and the UK look better (to the extent that shopping more is a good thing, anyway).  However, both are basically flat over the last 12 months.

    Euro Area Industrial Production - The graph above shows industrial production for the Eurozone as a whole and for Europe's five largest economies (including the UK which is not in the Eurozone).  Data are from Eurostat, go through May 2011, and are indexed to show 2005 as 100.  The general problem with the Eurozone post great-recession is abundantly clear - German production is soaring while everyone else languishes (with only France being slightly optimistic - but still not back to 2005 levels of production.

    Berlusconi to Address Italy on Crisis as Bonds, Stocks Slump -- Prime Minister Silvio Berlusconi, facing record bond yields and calls for his resignation, will seek to reassure the nation as Italy and Spain struggle to avoid becoming the next victims of Europe's debt crisis. Berlusconi will give a national televised address in the Chamber of Deputies in Rome at 5:30 p.m. today to lay out his plan to boost growth and tame the euro region's second-biggest debt. He'll address the Senate at 7:30 p.m. as he tries to shore up confidence in Italy after bond yields soared to euro-era records and the benchmark stock index slumped to a 27-month low. European leaders' agreement last month on a second bailout for Greece and Italy's subsequent austerity plan to balance the budget failed to convince investors that Berlusconi's government can avoid seeking outside aid. While Spain also faces surging bond yields, confidence in Italy has been shaken by political turmoil, with Berlusconi's grip on power weakened by corruption allegations against him and some of his main allies.

    Corporate Bond Risk Rises in Europe, Credit-Default Swaps Show - The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 13.5 basis points to 478, according to JPMorgan Chase & Co. at 7 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and an increase signals deteriorating perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2.75 basis points to 126.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers climbed 3 basis points to 196 basis points and the subordinated index was up 5 at 339.5. A basis point on a credit-default swap protecting 10 million euros ($14.2 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

    Europe’s Banks Struggle With Weak Bonds - Ever since the European debt crisis1 began, the risk of contagion — of problems spreading from smaller countries to bigger ones, like Italy2 and Spain3 — has worried government officials and investors. Now, another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain. The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short. The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear. Now there are signs that these concerns are, in turn, starting to making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

    Satyajit Das: Still Stressed After All These Tests! - For the second time in two years, the European Banking Authority (“EBA”) completed tests on European banks to demonstrate their “solvency” under conditions of “stress”.The results have been over shadowed by other momentous events – the announcement by the European Union (“EU”) of a range of measures to deal with the European debt crisis. The tests remain highly relevant as the EU measures are unlikely to “resolve” the debt problems and European banks remain heavily exposed to losses. The risk of a European banking crisis remains. Last year’s debut test was openly derided as the equivalent of conducting a crash test on a motor vehicle assuming that the car could never crash. Within months of the stress test, several Irish banks that had passed needed rescue by the EU and International Monetary Fund (“IMF”). Another major casualty was the credibility of European Banking regulators

    Euro-Zone Debt Woes Get Messier -As U.S. event planners clear the bunting from the Washington debt drama, the European debt theater is revving up once more. Mark noted earlier that yield spreads are widening sharply this morning in Europe. That includes the usual suspects (Greece, Ireland, Portugal), and some new, more worrisome folks, such as Italy, Spain and even Belgium. According to Markit, the cost to insure against debt default for Italy and Spain have reached record levels. Italy, the euro-zone’s third largest economy, has very high debt levels. Spain, the zone’s fourth-largest economy, has high deficits. According to a story in today’s Daily Telegraph, J.P. Morgan has told clients that Italy could run out of money in September and Spain in February if they lose access to capital markets. Currently, Italian and Spanish long-term debt is yielding more than 6%. By comparison, similar German bunds yield 2.4%. With Italy and Spain flashing yellow, banks have made heavier use of the European Central Bank’s emergency lending facilities. And leaders in Spain and Italy are busy meeting to try and cobble together plans that would maintain access to capital markets.

    Europe's money markets freeze as crisis escalates in Italy and Spain - The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008. The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. "Europe's money markets are undoubtedly starting to freeze up," "It's not as dramatic as pre-Lehman but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis."  The credit stress was triggered by fresh mayhem in the southern European bond markets and ominously in parts of the eurozone's soft core as well, including Belgium. Spanish yields pushed further into the danger zone to 6.42pc. Italian debt reached a post-EMU high of 6.22pc before falling back slightly on reports of Chinese buying.  "We have a revolt taking place by foreign investors in these bond markets,"

    Italy, Spain Stuck in No-Go Debt Zone for Merrill, DWS Funds: Merrill Lynch Global Wealth Management, unconvinced that the second Greek bailout has stemmed the debt crisis, won’t put any of its $1.5 trillion of assets into Italian or Spanish bonds.  The unit of Bank of America Corp. (BAC) has spurned bonds from Greece, Portugal, Ireland, Spain and Italy since deciding to avoid them in April of last year, according to Johannes Jooste, a senior Merrill portfolio strategist in London. Merrill isn’t alone: Frankfurt-based DWS Investment, which oversees $390 billion for clients, and Legal & General Investment Management say they are “underweight” Spanish debt.  The lack of enthusiasm from bond buyers threatens the latest rescue deal for Greece, which was struck two weeks ago to reassure investors as contagion from the debt crisis sent Italian and Spanish bond yields soaring. The bailout includes contributions from banks and other private bondholders through a series of exchanges and buybacks that will cut the debt load.  “We are not convinced that this is the finality of the haircuts,”

    EU says Euro area's systemic capacity in doubt - European Commission President Jose Manuel Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern and did not reflect the true state of the third and fourth largest economies in the currency area. "In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said in a statement. He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies. Italian Economy Minister Giulio Tremonti held two hours of emergency talks with the chairman of euro zone finance ministers, Jean-Claude Juncker, in Luxembourg but neither disclosed anything of substance after the meeting. The euro zone's rescue fund cannot use new powers granted at last month's summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

    This Morning's Grim Eurothought - Krugman - Ryan Avent has a further take on the mess in Yurp: The European Union, and its single-currency extension, were forged in the decades following the war in an effort to make sure that war never again divided and savaged the continent. But strangely enough, in the effort to tie itself together, Europe imposed some of the same fiscal and monetary constraints that precipitated the collapse of the 1930s. And here we are, watching history repeat itself. Within a Europe riven by imbalances, the fiscal and monetary screws are once again being applied to countries with no hope of escaping their financial burdens. Markets are attacking, and efforts to salvage the situation through massive aid packages are emerging too small and late to matter. The pressure within the squeezed economies is building, and that pressure will find a release, one way or another. 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. Indeed.  It’s therefore a bitter irony that in the attempt to prevent history from repeating itself, European leaders imposed what amounts to a new gold standard — and when things went wrong, demanded that afflicted nations impose Chancellor Bruening policies.

    Italy calls emergency meeting as eurozone crisis resurfaces - A fresh wave of eurozone panic prompted Italian authorities to call an emergency meeting on Tuesday and Spain's prime minister to delay his holiday as borrowing costs for the two nations hit fresh highs. Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece. Concerns that Spain and Italy will be the next victims of the eurozone crisis drove benchmark bond yields to all-time highs and unsettled stock markets. Yields on 10-year Spanish government bonds rose 25 basis points to 6.426pc, while Italy's 10-year bonds also hit highs of 6.219pc -edging closer to the 7pc levels that forced its smaller Greek and Portuguese neighbours to ask for a bail-out.

    Worsening euro crisis may force bigger rescue fund - A worsening euro zone debt crisis may ultimately force the bloc to expand its 440 billion euro ($625 billion) bailout fund, despite political opposition in key contributing countries, some officials and analysts say. An emergency summit of euro zone leaders last month agreed to let the fund, the European Financial Stability Facility, deploy its money in new ways to fight the crisis. But it did not take a major step for which investors were hoping: give the EFSF more firepower. Since then, the euro zone's debt problem has become even more worrying, threatening to move beyond small countries such as Greece to engulf large states such as Spain and Italy. The spread of the Italian 10-year government bond yield over German Bunds jumped to a euro-era high of 3.85 percentage points on Tuesday, a level which, if sustained over the long term, could prevent Italy from borrowing in the markets at affordable rates. To convince the markets that this will not happen, rich euro zone governments may have no choice but to override opposition among their taxpayers and pledge to contribute to a drastic expansion of the EFSF -- perhaps doubling or tripling it.

    ECB to Revive Bond-Buying to Protect Italian Auction This Week - Former Bank of England policy maker Willem Buiter said the European Central Bank will revive its bond-buying program to safeguard this week’s auction of Italian bonds.  “The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday,” Buiter, now chief economist at Citigroup Inc., told reporters in London today. “If the ECB doesn’t come in, the Italian bond auction is likely to fail.”  The ECB said yesterday it refrained from buying government debt for a 15th week after the purchase program issued 74 billion euros ($103 billion) of liquidity in the last 14 months. Italy sells a series of bonds on July 14 with maturities ranging from 2016 to 2026 at a time when investors are pushing up its bond yields amid concern Europe’s debt crisis is spreading.  “What we’re going to have is the ECB are going to be doing the heavy lifting,” said Buiter.

    ECB to protect Europe by buying bonds - The European Central Bank is expected to signal it is stepping into the eurozone debt crisis on Thursday by reopening its purchases of government debt, amid fears the turmoil will claim the economy of a nation that is "too big to bail". Officials on Wednesday night said the ECB's monthly meeting was expected to see a reversal on the buying of sovereign bonds after 18 weeks of staying out of the markets, because of an EU institutional vacuum that threatens to drag down Italy and Spain, the region's third and fourth-largest economies.  With EU officials scrabbling to fine-tune changes to allow the eurozone's €440bn (£384bn) bail-out fund to intervene in the markets, central bankers are expected to reluctantly accept the precedent of allowing ECB bond buy-backs in May 2010.  Measures allowing the European Financial Stability Facility (EFSF), the bail-out fund created last summer, new powers to buy the bonds of struggling countries were agreed at an emergency euro summit on July 21 in an attempt to protect Italy (whose public debt and bank exposure is shown in the interactive graphic above) and Spain.

    Italy,Spain bonds stabilise on ECB support speculation - Italian and Spanish bond yields came back off 14-year highs on Thursday due to a well-bid Spanish debt auction and speculation that Japan's intervention to weaken the yen will inspire the ECB to revive its dormant bond-buying programme. "There's been speculation the ECB's waiting in the wings to calm the market, which we think it is highly unlikely," Citi interest rate strategist Steve Mansell. "The ECB is going to be a very reluctant participant to any kind of market turbulence that's a direct result of sovereigns not stepping up and doing the required amount in terms of fiscal adjustment and negotiating more credible support packages."

    Another European Domino?  -In my last post, I wrote:   In theory, the EU could step in, either in the form of the European Central Bank or guarantees from the core. In practice, while I find this somewhat plausible in the case of Greece, I find it fairly unlikely in the case of Greece, Portugal, Spain, Italy, and Ireland . . . which is what we're looking at. (For that matter, why stop there? Have you taken a look at Belgium's debt-to-GDP ratio?) No sooner had I written those words, and "hit publish", than I turned to the Wall Street Journal, and found this: British regulators have asked U.K. banks to publicly disclose information about their exposures to Belgium's government and banks, in a sign of how concerns about the euro zone are spreading beyond southern Europe, according to bank executives. Lloyds Banking Group PLC, which reported its second-quarter results on Thursday, became the first U.K. bank to disclose how much debt it's holding tied to the Belgian government or local financial institutions. Executives said they made the disclosure at the request of the Financial Services Authority last month.

    The widening European sovereign debt crisis - Euroland is coming apart at the seams. Belgian/Bund spreads are now also over 200bps along with Italy and Spain. Belgium has just entered the periphery and France is not far behind. Right now there are four to five separate groups in Euroland’s sovereign debt crisis. First, there is Greece, assumed by everyone to be insolvent and the only country to default via its bailout package which reduces creditor repayments by 21%. Then there are Ireland and Portugal. These two countries have also received bailouts but have not defaulted. Next are Spain and Italy, what I have called “the new Ireland and Portugal”. These two countries are seeing their spread to German bunds widen considerably and yields explode above 6%. Fourth is a new and worrying development with Belgium and France becoming untethered from the core. Spreads are widening for these two countries in a way which is dangerous. Finally, there is the core of Germany, Finland, Austria, the Netherlands, Luxembourg, Malta, Slovakia and Slovenia. Estonia and Cyprus are special cases: one is new to the zone and the other has unique problems that I won’t discuss here. That’s 15 countries in six distinct categories (plus Estonia and Cyprus). Greek, Irish and Portuguese yields have calmed due to the latest bailout. Spain and Italy are now on the hot seat. But my main concern is not Italy and Spain; it is Belgium and France.

    EU urges changes to bailout fund — Mounting worries that Italy and Spain won't be able to repay their debts pummeled stocks and the euro Thursday and piled pressure on the 17-country eurozone to overhaul its crisis strategy. And despite indications that the European Central Bank has restarted its bond buying program after a four-month hiatus in an attempt to calm markets, the financial pressures on Italy and Spain remained acute. European Commission President Jose Manuel Barroso admitted as much, urging eurozone leaders to make further changes to their bailout fund — including boosting its size — to ensure it can effectively stem the debt crisis that has rocked the currency union for 21 months. Barroso's appeal and the ECB's apparent turnaround came just two weeks after eurozone leaders reached what they branded a "historic" deal on the currency union's crisis strategy, including a second massive bailout for Greece and far-reaching new powers for their rescue fund.

    Trichet Says ECB to Offer Banks More Cash - European Central Bank President Jean- Claude Trichet said the ECB will offer banks additional cash as the region’s debt crisis spreads, increasing pressure on policy makers to resume bond purchases. The ECB will lend euro-area banks as much money as they need for six months and extend its existing liquidity measures through the end of the year, Trichet said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1.5 percent. ECB rates are still “accommodative” and inflation risks “remain on the upside,” he said. European officials are trying to stop the region’s sovereign debt crisis spreading to Italy and Spain. While the comments suggest the ECB is reluctant to shelve further rate increases, traders are looking for signs that the central bank will take direct steps to shore up the bonds of crisis-hit nations. While acknowledging a “particularly high” level of uncertainty, Trichet said inflation expectations “must remain firmly anchored.”

    Eurozone crisis: Italy's debt pile comes under scrutiny - Just a few months ago, international investors were fairly relaxed when they considered Italy's debt mountain - the second highest in the eurozone. Now, Prime Minister Berlusconi has been forced to defend his economic strategy before parliament, and the more excitable City economists are sending me emails declaring that "Italy is bound to default". What gives? Forget, for a moment, the broader context of the eurozone crisis and consider only the arithmetic of Italy's debt. The scary numbers are that Italy has a debt stock of 120% of GDP, and accounts for 23% of all eurozone sovereign debt. Because that stock of debt needs to be rolled over, Italy has to raise an equally scary amount from the bond markets on a regular basis, even though its budget deficit, at less than 4% of GDP, is among the lowest in the eurozone. In 2012, the IMF reckons that Italy will need to raise an amount equivalent to 20% of GDP simply to refinance the debt that is coming due. That's even more than Greece, and higher than 2011, even though next year's deficit will be lower.

    Italy is 'bound to default', says CEBR - The Centre for Economics and Business Research (CEBR) said it had modelled good and bad scenarios for the two countries and Italy could not support its debt even if rates fall back unless the eurozone's third-largest economy sharply increases growth. "Realistically, Italy is bound to default, but Spain may just get away without having to do so," said the London-based consultancy. Even though Italy has managed to run tight budgets - and plans to eliminate its deficit by 2014 - with its massive debt it won't be able to escape if it can't boost its growth rate, it said. It calculated Italy's debt would rise from 128pc of annual output to 150pc by 2017 if bond yields stay above the current 6pc and growth remains stagnant. The country's economy grew by just 0.1pc in the first quarter of the year.

    ECB Resorts To Unlimited Six-Month Tender To Stem Crisis - The European Central Bank resorted to one of its tried and trusted anti-crisis measures Thursday, announcing that it would offer a six- month tender of unlimited size next week. Opening his monthly press conference, ECB President Jean-Claude Trichet also said the bank would keep its policy of lending unlimited amounts at its one- week, one-month and three-month operations until the end of the year. The ECB had not been due to decide its liquidity policy for the fourth quarter until next month. The provision of unlimited funds over longer periods comes against a background of increasing stress in European financial markets, particularly in the form of speculation against Spain and Italy. However, Trichet gave no indication that the ECB would hold off from further interest rate rises in the near future. He warned that risks to the medium-term price outlook "remain to the upside."

    Trichet Sounds Hawkish Note on Inflation - The euro zone’s inflation outlook has remained largely unchanged since the European Central Bank‘s July policy meeting, ECB President Jean Claude Trichet said Thursday, noting that he would not rule out further rate increases despite the ECB broadening its efforts to support fragile financial markets. Speaking in a television interview with Dow Jones Newswires, Trichet said “our judgment is very much the same as in the previous meeting a month ago. We consider that we’re still in a situation where the risks are more on the upside… and that we will have to monitor the situation very closely.”

    The ECB realises inflation may not be Europe's biggest worry just now - IT REALLY is difficult to overstate the extent of the European Central Bank's failure in recent months. Earlier this year, headline inflation rose in Europe behind rising commodity prices. The Bank of England and the Federal Reserve considered the increase in inflation, looked at emerging market efforts to tighten policy, tightening fiscal conditions in their economies, and general economic weakness and concluded that the bump would be short-lived. It's not going too far to say that it was obvious they would be short-lived. But the ECB apparently suffers from a severe case of central-bank myopia, and so it responded to higher headline inflation with an April interest rate increase, despite the vulnerability of the euro-zone economy, and despite an extremely serious ongoing euro-zone debt crisis. Since that time, commodity prices have dropped, just as everyone expected they would. Inflation has eased; in the euro zone, producer prices indicate that it's come to a screeching halt. Meanwhile, much of the euro zone is facing a return to recession. Industrial production is contracting across southern Europe. And the euro zone is on the precipice of an existential crisis.  Oh, and did I mention that the ECB raised rates again just last month? Having driven the euro zone to the brink of collapse, the ECB is seemingly happy to let someone else push the economy over the edge.

    This is a classic liquidity crisis - I was on CNBC tonight talking about the market meltdown and the crisis in Europe. When I get the video I will post it. But I made the point earlier today in my post “Euroscepticism” that this is a liquidity crisis and the way to deal with liquidity crises is by providing liquidity. The only player left on the ice that can credibly provide that liquidity is the ECB. Once the liquidity concerns are dealt with, the euro zone can move to deal with its structural deficits. But if the ECB doesn’t step in, the euro zone won’t have the opportunity. This is a classic liquidity crisis. Bond markets in Europe are selling off. Commercial paper markets in the US are seizing up. Retail investors in Asia are already running for safety in overnight trading. What we are experiencing is a market panic and that means liquidity is the first order of the day.  The sovereign debtor solvency issues in Europe are medium term issues. Even the obviously insolvent Greece has yet to give principal haircuts to creditors. The proposed restructuring is just another exercise in extend and pretend. And yet Greece is fine for now. So liquidity can tide the market over until the panic passes and then that’s when the solvency issues should be dealt with. Yes it is a solvency crisis. But the liquidity issues are the pressing ones right now.

    Searching for solutions to the European crisis - I am a eurosceptic and have always been. But we are here now. The euro exists. And that does change things.  It would easy for me to say something like, “see I told you so. The euro is an abomination and the peripherals should simply leave or be tossed out of the euro zone.” I even remember suggesting the Irish should threaten this to get the most leverage before their banking sector imploded: Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent. Ireland didn’t do that. In fact they did the opposite. So when I talk about the euro zone these days, despite my euroscepticism, I am not pushing an anti-Euro line. It is just the opposite; I am suggesting ways the euro zone can best remain intact despite the political and economic impediments. That’s why I have said the ECB is the difference. As I said yesterday: “The problem here is that as more and more countries keep getting plucked off and put into the penalty box, there are fewer and fewer players left to skate.” Spain and Italy are already in the penalty box and Belgium and France will be too in due course. That leaves Germany as the only enforcer left to skate. But the ECB is a player too. The ECB is acting as if it has retired from the game. But I think they will have to come back for one pivotal season.

    European Commission President: Crisis no longer contained to periphery - Admitting the obvious ... from the WSJ: Letter from the President of the European Commission José Manuel Barroso Developments in the sovereign bond markets of Italy, Spain and other euro area Member States are a cause of deep concern ... they reflect a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis.  The 21st of July bold decisions on the Greek package and the increased flexibility of the EFSF (precautionary use, recapitalisation of banks and intervention in secondary bond markets), are not having their intended effect on the markets. [I]t is clear that we are no longer managing a crisis just in the euro-area periphery. ... We need also to consider how to further improve the effectiveness of both the EFSF and the ESM in order to address the current contagion. I would like to call on you to accelerate the approval procedures for the implementation of these decisions so as to make the EFSF enhancements operational very soon.

    The ECB throws Italy and Spain to the wolves - Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control.  Bank shares crashed in Madrid and Milan, with Intesa Sanpaolo down 10pc and Italy's MIB index reduced to its knees with a one-day fall of 5.2pc. Share trading was suspended at a string of bourses across Europe.  Yields on 10-day US debt fell to zero in a replay of panic flight to safety seen during the onset of the Lehman-AIG crisis three years ago.  Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued.  Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

    Italy 'to default' but Spain may 'just' escape - Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research. With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both. It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth. However, it said, "there is a real chance that Spain may avoid default". Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth. But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish.

    Summarizing Italy's Catastrophic Predicament In 15 Simple Bullet Points - The irony about the blow up over the past month in "all things Italian" is that the facts about its sovereign debt and viability profile have always been available for anyone to not only see, but make the conclusion that the situation is unsustainable. The fact that so few dared to do so only confirms that affirmative confirmation bias that dominates within 99% of the investing population. Sites such as Zero Hedge and others had been warning for over a year that the Italian "contagion" (which is a misnomer: Italy's lack of viability is perfectly-self contained: it does not need Greece or Portugal to blow up, and can do so perfectly well on its own, but the punditry certainly needs a scapegoat, in this case the incremental layering of "revelations" about how insolvent Europe is) and we have long presented primary source data confirming just how precarious the house of cards is not only in Italy but everywhere else too. Regardless, no matter how conventional wisdom got to the big picture revelation of just how ugly Italy's reality is  the truth is that the cat is not only out of the bag, but is widely rampaging through the china store (no pun intended), high on speed and methadone. So for everyone who still wishes to know why the Italian jobs is very much hopeless absent the ECB stepping in an bailout out the country, below is a succinct list of 15 bullet points courtesy of The Telegraph, which explains all there is to know about the country's current predicament. In retrospect we certainly can not blame Tremonti for wanting to get the hell out of there.

    What's At Stake - Italian and Spanish bond yields hit an all-time high on Aug. 2, meaning that borrowing is getting more expensive, with confidence in those countries at an all-time low, close to non-existent.  Here’s what’s at stake should the economic crisis worsen: welfare states will cut deeper and inflict more austerity measures; there will be a weaker European voice on the world stage; and most importantly, Europe will drift further to the right, into the laps of Europe’s populist far-right parties, already enjoying success. Europe has never had so many conservative parties in power (this interactive map shows the continent’s rightward drift). The left should be able to take advantage, but instead of conservatives moving to prevent that from happening by becoming more centrist, they’re only moving further right. That’s unlikely to change any time soon, with the right and far-right able to score easy points the more European economies suffer, with immigrants and the E.U. a likely scapegoat.

    IMF weighs risk of bailout for Italy and Spain as debt crisis continues - AS EUROPE’S sovereign debt crisis threatens Italy and Spain, the International Monetary Fund, the euro zone authorities’ partner in its rescue missions so far, is wondering whether getting more involved will risk its cash and credibility. If the fund were to maintain the one-third share of financing it provided in the joint EU-IMF bailouts for Ireland and Portugal, Spain would be a stretch and Italy out of the question for its limited resources. However with the euro zone desperate for the credibility that some say the IMF can bring, the fund could take a leading role in enforcing conditions on the borrower countries while providing a shrinking share of the financing. Ironically, Spain – and to some extent Italy – are much closer to the traditional candidates for IMF funding than Greece. With a relatively low ratio of debt to gross domestic product, Spain can argue that it is illiquid but solvent. In theory, the fund could make a reasonable contribution to a financing package for Spain: rough estimates of a likely rescue loan for Spain are €200 billion- €300 billion and the IMF has about €280 billion of “forward commitment capacity” (FCL).

    Italy brings forward budget plans as crisis mounts - Prime Minister Silvio Berlusconi agreed on Friday to accelerate plans to restore Italy's public finances after a day of hectic telephoning with international partners alarmed at the escalating crisis over Italian debt. Speaking at a hastily called news conference after markets closed, Berlusconi promised to bring forward austerity measures passed last month and get the budget into balance by 2013, a year ahead of the original schedule. "We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early, by 2013 instead of 2014," he said. With Economy Minister Giulio Tremonti sitting alongside, he said the government would introduce a constitutional balanced budget amendment and accelerate unspecified tax measures to help cut the deficit. Tremonti said there would also be labour reforms. "There is a very particular attention from international speculation on us that we must try to counter," Berlusconi said.

    Italy pledges to balance budget by 2013, make balanced budget a constitutional requirement - Italy is pledging to work for a constitutional amendment requiring the government to balance its budget as Rome feverishly tries to assure domestic and foreign investors its finances are sound and calm nervous market. Finance Minister Giulio Tremonti also told a hastily convened news conference Friday night that Italy aims to balance its budget in 2013, a year before previously scheduled. Premier Silvio Berlusconi, saying he conferred with world leaders, announced that G-7 finance ministers will meet "within days" of the exploding financial crisis.Analysts at Rabobank International called the current fund "hugely inadequate" to cover Italy and Spain, not least because it would lose the pro-rated contributions those countries make if they needed to be bailed out with loans. They calculated the fund would need euro665 billion ($941 billion) to cover Italy's funding needs for three years

    ECB Agrees to Start Buying Italian Bonds on Monday: Italian Minister - The European Central Bank has agreed to start buying Italian bonds starting on Monday, an Italian minister said on Friday. "Everyone is afraid our bonds will turn into scrap paper but by returning to a budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds," Federalism Reforms Minister Umberto Bossi told a group of reporters, acccording to the AFP. The ECB is is open to purchasing bonds from Italy and Spain but has not yet made a commitment to do so, people familiar with the matter told the Wall Street Journal. On Thursday, traders said the ECB had started buying Portuguese and Irish bonds. after an unusual signal from ECB president Jean-Claude Trichet. The ECB kept interest rates at 1.5 percent, as expected, Thursday and Trichet announced a six-month operation to inject liquidity into markets. Trichet has made it clear that he's waiting for Italy and other countries to make serious economic reforms to get their debt under control.

    Good News That Is Really Not So Good - A mid-day rally appears to have been prompted by this: U.S. stocks rose, erasing an early tumble, amid speculation the European Central Bank was preparing to buy Italian and Spanish bonds to halt the region’s debt crisis. Stocks erased losses after Reuters said the European Central Bank is pressuring Italy to make further reforms in return for buying Italian and Spanish bonds. Italy’s government will announce plans to speed up state-asset sales, liberalize the labor market and introduce a balanced-budget amendment into the country’s constitution, Sky TG24 reported today, citing unidentified officials. Really?  Really?  Clearly one of those "beatings will continue until moral improves" sort of things.  The history of European-debt crisis is that one economy finds itself under pressure, "help" is offered in return for fiscal austerity, austerity worsens the underlying economic situation and thus the fiscal position, and funding pressures resume.  Apply, rinse, repeat. 

    Deficits are no longer the issue, but rather outstanding debt too - News that the ECB would resume its bond buying programme initially gave the markets some support, but later the comments from a European Monetary source that it would be limited to Ireland and Portugal and not include Spain or Italy met with disappointment. Speaking with my fixed income colleagues they tell me that the ECB already owns a lot of the paper in Greece, Ireland and Portugal, and most of the other paper is in long term hands and marked to market so there is only a small amount that the ECB could buy. The fact  that it is specifically not buying Italian or Greek paper suggests that it feels that this is not a disruptive market move and its actions clearly suggest it is not targeting lower yields.  Trichet also highlighted was that by the end of this year the combined European budget deficit would only be about 4.5% of GDP which puts Europe in a dramatically better position than either the US, Japan or Britain. Unfortunately as I have been saying for some time, the fact that the markets are now questioning Italy, which I has a primary budget surplus, highlights that deficits are no longer the issue but rather outstanding debt, indicating that stagnating economic growth and the resultant inability to service that residual debt in such an environment is the real issue.

    Explaining How The Just Announced ECB Market Rescue Pledged 133% Of German GDP To Cover All Of Europe's Bad Debt - Two weeks after Zero Hedge readers were informed about it, slowly the sell side is coming to the realization that not only will the EFSF have to be expanded (that much was known), but that Germany, and specifically the outright economy, will be on the hook by an unprecedented amount of money. And expanded it will have to be: not by two, not by three, but by a cool four times, to a unbelievable €3.5 trillion which according to Daiwa's Head of Economic Research, Grant Lewis, is an act which will be necessary to convince financial markets of euro area resolve to save Italy and Spain. Says Lewis: 'France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure. France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt may trigger downgrades to both countries.' Yes... and no. As we explained when we referred to a far more accurate and complete report by Bernstein, merely a €1.5 trillion expansion in the EFSF, would mean that Germany is on the hook to the tune of €790 billion or 32% of German GDP. If France is downgraded, Germany essentially becomes the sole backstopper of the entire Eurozone, to the tune of €1.4 trillion or 56% of its GDP. Now let's assume Daiwa is correct, and the full amount under the EFSF has to increase to €3.5 trillion. That means that Germany 'contin[g]ent liabilities', in the worst case scenario where France again gets downgraded, and it likely will eventually, would surge to about €3.3 trillion, or an insane 133% of German GDP!"

    Belgium Put on Watch List - British regulators are pushing U.K. banks to publicly reveal more information about their exposures to troubled European countries such as Belgium, a sign of how concerns about the euro zone are spreading beyond southern Europe. Lloyds Banking Group PLC on Thursday disclosed its holdings of debt tied to the Belgian government and local financial institutions as part of the bank's second-quarter results. Executives said they made the disclosure at the behest of the Financial Services Authority. "It was the FSA's suggestion that Belgium be added to the list," said Tim Tookey, Lloyds's chief financial officer.

    Greece close to missing annual deficit targets: data - Greece is close to missing this year's deficit reduction targets that were agreed with the EU and the IMF in return for huge bailouts, official data showed on Thursday. The finance ministry said the public deficit -- a key cause of the country's economic ills -- had risen to 14.69 billion euros ($20.9 billion) six months into the year, largely due to health and social fund debts. Greece has agreed with creditors on a targeted public deficit of 16.68 billion euros for all of 2011, or 7.4 percent of output. Greece is supposed to be reducing its public deficit under the terms of economic bailouts from the European Union and the International Monetary Fund. But the cost of government continued to rise despite sweeping cuts to civil servant salaries and ministry budgets last year. Total costs were nearly 65 billion euros in the first half of the year compared to 54.8 billion a month earlier, while state revenue increased from 42.2 billion to 50.3 billion.

    Greece In Panic As It Faces Change Of Homeric Proportions - In one of the biggest banks in the centre of Athens a clerk is explaining how his savers have been thronging to pull out their cash. Wary of giving his name, he glances around the marble-floored, wood-panelled foyer before pulling out a slim A4-sized folder. It is about the size of a small safety-deposit box – and those, ever since the financial crisis hit Greece 18 months ago, have become the most sought-after financial products in the country. Worried about whether the banks will stay in business, Greeks have been taking their life savings out of accounts and sticking them in metal slits in basement vaults. The boxes are so popular that the bank has doubled the rent on them in the past year – and still every day between five and 10 customers request one. This bank ran out of spares months ago. The clerk leans over: "I've been working in a bank for 31 years, and I've never seen a panic like this." Official figures back him up. In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a "silent bank run". This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can.

    Portugal’s New Austerity Fails to Bring Down Borrowing Costs - Two months into the job, Portugal’s Prime Minister Pedro Passos Coelho is deepening the budgetary pain without feeling any gain. Swept to office June 5 on the back of a 78 billion-euro ($110 billion) rescue sought by his predecessor, Passos Coelho has announced a tax charge and spending cuts together worth more than 1 percent of gross domestic product to ensure he meets the targets set out in the aid package. All he’s got in return are higher borrowing costs as contagion spreads to Italy and Spain. “There was and there will be a contagion effect,”"Our recovery depends on their recovery, and our yields won’t decline if they don’t recover.” The first review of Portugal’s aid program began this week as the sovereign debt crisis shifted to Italy and Spain, driving yields on 10-year bonds to euro-era records. With the third- and fourth-biggest economies in the common currency now shouldering yields closer to 7 percent than Germany’s 2.30 percent, Coelho’s bid to show he’s serious about taming Portugal’s deficit has yet to impress investors.

    Average Irish person 30 percent worse off due to recession - A report by economist consultants at Indecon found that close to 300,000 people had been “wiped out” financially since 2007. They also revealed that the average Irish person is 30% worse off than they were before the start of the financial crisis. Their reasoning for the steep decline is the changeover from full-time to part-time jobs, and how the private sector was hit a lot harder than the public sector was. Personal incomes, as a result, dropped by around 50%, mainly because private sector employees were well-paid before, but were forced out of their jobs due to the recession. The report claims that because private-sector managers couldn’t afford to keep as many employees, they were either forced to lay them off or reduce their hours to a part-time position. According to the Independent, employers cutting back on staff and hours has "pushed the number in part-time jobs up by about a fifth over the last four years."

    Boone and Johnson on the Eurozone Crisis - Peter Boone and Simon Johnson have what written what I believe is the best analysis of the Eurozone crisis.  I will tease you with some excerpts from Boone and Johnson, but you should read the whole thing. The euro crisis is not under control. Deep structural flaws have become apparent--particularly the extent to which moral hazard has underpinned credit flows within the euro area. Ending this moral hazard will not be easy, particularly as European decision-making structures are struggling to find a comprehensive approach....Market prices currently imply an 88 percent chance of default in Greece within five years More worrying is the rise of Italian CDS prices to near-record levels on July 11. These now imply a 25 percent chance Italy will default within the next five years....In France, Italy, and Germany, the largest two banks alone need to roll over 6 percent, 9 percent and 17 percent of national GDP in debt, respectively, within 24 months. This compares to just 1.6 percent of GDP for the largest two banks in the United States. ...Goldman Sachs reports that the exposure at default of the European Bank System to the GIIPS sovereigns (Greece, Ireland, Italy, Portugal, and Spain) equals 1.5 times their tangible equity.

    U.K. Producer-Price Inflation Accelerates to 5.9%, Fastest Pace Since 2008 - U.K. producer prices rose in July as food and clothes costs surged, pushing the annual rate to the fastest since October 2008.  The cost of goods at factory gates increased 0.2 percent on the month and 5.9 percent on the year, the Office for National Statistics said today in London. The monthly gain matched the median forecast of 18 economists in a Bloomberg News survey, while the annual change exceeded a 5.8 percent estimate. Input costs jumped the most since April on the month.  Higher prices for oil and other commodities have pushed up costs for companies. Along with a sales-tax increase and the pound’s drop, that has boosted consumer-price inflation to more than double the Bank of England’s target. Still, officials kept the key interest rate at a record low yesterday as the recovery falters. The economy barely grew in the second quarter and manufacturing shrank in July.  “Manufacturers are to some extent getting squeezed and that’s not going to change any time soon,”

    Osborne's Delusions - Krugman - Britain’s experiment in austerity is going really, really badly. But the Chancellor of the Exchequer is finding solace in well, fantasy. Interest rates on UK debt are falling, and: “This is proof that we are now seen as a safe haven, we’re not seeing the increase in yields seen in Europe and the US,” said Mr Osborne’s spokesman.Yields in the US have, of course, plunged rather than risen. And they’ve plunged for the same reason UK yields have plunged: a scarily weak economy suggests that it will be years before the central bank raises rates. For what it’s worth, credit default swaps suggest that perceived risk of a UK default has been low all along, except for a panicky few months after Lehman. It’s sad, actually: the wolf is at the door, and Osborne thinks it’s the confidence fairy.

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