global glass onion: December 2011

Fed's Balance Sheet Expands In Latest Week - The U.S. Federal Reserve's balance sheet expanded over the last week as the central bank continued with its plan to extend maturities and support economic growth. The Fed's asset holdings in the week ended Dec. 28 climbed to $2.928 trillion, from $2.919 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities fell to $1.672 trillion on Wednesday from $1.684 trillion. The report Thursday showed holdings of Treasury securities with a remaining maturity exceeding five years rose over the past week, while the amount of shorter-term securities fell. Meanwhile, the report showed total borrowing from the Fed's discount lending window was $9.08 billion Wednesday, down from $9.51 billion a week earlier. Borrowing by commercial banks fell to $42 million from $57 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts was $3.411 trillion, down from $3.434 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts declined to $2.679 trillion from $2.702 trillion in the previous week. Holdings of agency securities grew to $731.80 billion from the prior week's $ 731.63 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - December 29, 2011

Fed calls it quits on 'twist' for year‎ - The Federal Reserve isn't scheduled to buy Treasury securities Thursday for its latest stimulus plan that extends the average maturity of the U.S. government debt sitting on its balance sheet. The daily buying or selling of Treasurys for the so-called Operation Twist accommodation program is done for 2011. The central bank will announce January's set of operations Friday. In total, the program will have the Fed exchange $400 billion of its short-term Treasury securities for longer-dated ones. These purchases will keep the Fed's balance sheet size steady. By purchasing longer-term Treasurys, the Fed hopes to push long-term borrowing costs lower for consumers and businesses to facilitate the economic recovery. The Fed funds rate was last at 0.0750 percent, within the central bank's 0-0.25 percent target range.

Are western central banks having an existential crisis? - David Wessel over at the Wall Street Journal has followed up on a story FT Alphaville has been covering for a while. That the world economy is running out of super-safe financial assets, and that this is doing untold damage to central banks’ abilities to control interest rates (the last bit is our spin). He raises a point which we think is pretty important. The fact that all this asset encumbrance really started back in the mid 2000s — and was possibly the reason for Alan Greenspan’s famous yield conundrum, when the Fed chairman declared he couldn’t rationalise why longer dated yields would not budge higher despite Fed rate hikes. As Wessel explains: In the mid-2000s, this money flowed into U.S. Treasurys and other AAA-rated dollar securities, depressing long-term yields even when the Federal Reserve was trying to boost them. Then-Federal Reserve Chairman Alan Greenspan called this “a conundrum;” his successor, Ben Bernanke, “the global savings glut.” Demand was so strong that Wall Street manufactured billions of mortgage-linked securities for which it won the top AAA rating. In 2008, it became clear those bonds were “far riskier than had been believed,”

Fed’s Moves Shield Against Europe - AS the euro zone mess unfolds, another financial crisis may be coming our way. The conduit could be some spillover effect from across the Atlantic — whether in derivatives or money markets — or maybe some under-the-radar surprise. With such dangers at hand, it’s time for a spot-check on whether financial regulation in the United States has left us prepared. So far — with one notable exception — it’s not looking good. Less than two years ago, our government enacted the Dodd-Frank law, the most complex financial regulation bill of all time, based on the work of hundreds of economic and legal experts, all hyper-aware of the issues of risk. Neither this bill nor our government, however, foresaw that we were already living in the onset of the next potential financial crisis, namely the spillover from the euro zone. Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps -- First it was Zero Hedge. Then Ron Paul joined in. Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again. Incidentally, O'Driscoll says, "America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here." One thing we can say proudly - it has been noticed loud and clear here...

A Thinly Veiled Bail -The ECB is borrowing U.S. Dollars from the Fed to bailout European banks. And that is in addition to the Long Term Refinancing Operation (LTRO). However, the "borrowing" is not called "borrowing." It's called a "temporary U.S. dollar liquidity swap arrangement." Yet it is really borrowing because it's going massively in one direction for the purpose of giving the ECB Dollars to lend to European banks, so the ECB can avoid lending more Euros. The ECB doesn't want to tarnish its "inflation fighting" reputation and further devalue the Euro. Instead, the Fed is taking billions of Euros as collateral for the Dollar swap. As Gerald P. O'Driscoll Jr., former vice president and economic advisor at the Federal Reserve Bank of Dallas, and senior fellow at the Cato Institute, wrote in the WSJ (The Federal Reserve's Covert Bailout of Europe): "The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities."

US M1 Fell $1.4 Billion In Dec. 19 Week; M2 Fell $6.4 Billion - The Federal Reserve's latest weekly money supply report Thursday shows seasonally adjusted M1 fell by $1.4 billion, to $2.137 trillion, while M2 fell $6.4 billion, to $9.666 trillion. The figures are preliminary estimates for the week extending through December 19 and are subject to revisions. More details on the report, along with weekly information on the Fed's custody holdings, repurchase agreements, Treasury portfolio and free reserves, can be found on the Internet at http://www.federalreserve.gov/releases/.

What Is Money and How Do You Destroy It? - One thing Republican presidential candidates agree on is that Ben Bernanke’s Federal Reserve is wrecking America and its currency. In response to the financial crisis, the Fed has pushed short-term interest rates to near zero and created trillions of dollars to pump into the financial system by buying vast new holdings of U.S. Treasury bonds and mortgage-backed securities. One Republican front-runner, Newt Gingrich, has declared Mr. Bernanke’s Fed the most inflationary and dangerous in history. He has vowed to fire him. Mitt Romney says Mr. Bernanke’s policies have “over-inflated” the currency. Ron Paul’s pledge to replace the Fed with an 1800s-style gold-backed financial system once looked odd, if not quixotic. Now, Mr. Paul’s words resonate. His views have devotees on Wall Street, where gold-buying, at least until very recently, has been among the latest investment booms. Even at Occupy Wall Street camps around the U.S., the title of Mr. Paul’s book, “End the Fed,” shows up on placards. The fury surrounding the central bank is as old as the U.S. Before there was a Fed, there was a First Bank of the United States over which the founding fathers deeply disagreed.

Treasuries Are Not An Option - Remember Operation Twist? Last week, Freddie Mac reported record lows on rates, with the 30-year notes at 3.91%. This has not, of course, encouraged many people to go out and buy homes but it has DISCOURAGED people from putting their money into bonds and ENCOURAGED them to put their money into stocks. There is, however, a problem with this. When people put money into Treasuries, it is "locked up" for a period of time but stocks are more liquid so, as soon as rates begin going up (and they will when the panic in Europe subsides despite the Fed's efforts), then money can come out of stocks as quickly as it went in and move into 5% paper. See, I said 5% paper and you were thinking "Yeah, I'd like some of that." So are Trillions of Dollars worth of other investors and that means, sorry to tell you, that this little Federally-funded rally is full of holes you can drive a truck through. The Fed's stimulus plan is the central bank's third definitive attempt to aid the U.S.'s patchy economy since 2008. As expectations grew that the Fed would act in the weeks leading up to the bank's actual announcement, which came Sept. 21, 10-year yields dropped nearly 0.30 percentage point. Since the Fed's official statement, yields have already risen modestly, to 2.026% on Friday, from 1.95% on Sept. 20.

Is the Fed our savior in financial regulation? - It seems odd to put up an actual substantive post on Christmas day, nonetheless here is my New York Times column on financial regulation. The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale.Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets. It is estimated by Moody’s that America’s biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it’s the cushion we’ve been seeking. Furthermore, a lot of those reserves sit in the American subsidiaries of large foreign-owned banks, protecting the European system, too. This new safety comes not from regulatory micromanagement but rather from the creation of additional safe interest-bearing assets. Here is a relevant link from The Economist. Here are links to Brad DeLong, David Wessel, and others, on related points. Here is David Beckworth on safe assets. The scarcity of safe assets is a critical theme today, and still we lack a satisfactory theory of collateral.

Obama Noninates Jeremy Stein and Jerome Powell to Fed Board of Governors - During the biggest financial panic in many, many decades, Congress has refused to confirm nominees to the Federal Reserve Board leaving the Fed short-handed. David Wessel reports there's some chance that will change: President Barack Obama will announce Tuesday that he plans to nominate a Harvard University finance professor and a former private-equity executive to fill the two vacancies on the seven-member Federal Reserve Board, a White House official said. The nominees are Jeremy Stein, 51 yeas old, an economist who did a five-month stint in the Treasury and White House in the early months of the Obama administration, and Jerome Powell, 58, who was undersecretary of the Treasury for domestic finance in the early 1990s during the George W. Bush administration. If confirmed by the Senate... A Republican and a Democrat -- this looks like an attempt to get both through by allowing one from each side of the political fence. But as Justin Wolfers said, "An independent Fed is not one that is half from one team, and half from the other."

Obama Moves to Return Fed Board to Full Strength - President Obama finally moved to fill two long-standing vacancies on the Federal Reserve Board, announcing his intent to nominate Harvard University’s Jeremy Stein and former private-equity executive Jerome “Jay” Powell. At full strength, the Fed board has seven members. The last time all seven seats were occupied was in 2006 — for two months. All seven seats were filled from March 1, 2006, when Randall Kroszner was sworn in as a governor, until April 28, 2006, when then-Vice Chairman Roger Ferguson resigned. Of the seven members on the Fed board back in the spring 2006, only one remains on the board: Ben Bernanke.

Obama in fresh move to fill Fed seats - President Barack Obama has made a fresh attempt to fill vacant positions on the board of the US Federal Reserve, nominating candidates with Republican and Democratic affiliations in an apparent attempt to neutralise resistance in Congress. The White House said on Tuesday that it would propose Jay Powell, a former executive in a private equity firm who previously served in the Treasury in George H.W. Bush’s administration in the early 1990s, and Jeremy Stein, a Harvard professor who worked in Mr Obama’s administration in its early months. Mr Obama said: “Their distinguished backgrounds and experience coupled with their impressive knowledge of economic and monetary policy make them tremendously qualified to serve in these important roles.” A previous White House attempt to fill a vacant position on the seven-member Fed board with Peter Diamond, an economics professor from the Massachusetts Institute of Technology, was stymied by political opposition in the US Senate. But though Prof Diamond was awarded the Nobel Prize for economics during the nomination process, his confirmation was blocked by Richard Shelby, the senior Republican on the Senate banking committee, who said Prof Diamond was not qualified for the post. Prof Diamond finally withdrew his nomination in June.

Beckworth Smackdown - Arpit Gupta pushes back on my post about why safe assets matter. He invokes Jeffrey Friedman and Vladimar Kraus' argument that implies regulatory arbitrage created by the Basel reforms can explain the demand for safe assets. Here is Gupta: If a bank decided to hold a AAA-rated sovereign bond, for instance, they typically had to hold zero excess capital to meet regulatory standards. However, if they held an equivalent amount of an unsecured private loan, they were required to hold substantially more capital in response. The net effect of these capital regulatory standards is that safe assets came to be valued not just for their economic riskless value — but also for how alter bank capital requirements. Banks that face fewer capital requirements can be more levered, risky, and potentially profitable than banks whose assets force them to raise substantial amounts of additional capital. This motive, arguably, is why banks around the world are eager to purchase safe assets — not because they are useful in conducting repo. Gupta also makes some other points, but this is his main one. His point sounds reasonable, but I wonder how important this effect is explaining the overall trend. As I mentioned in my previous post, this shortage of safe assets can arguably be traced all the way back to the bursting of Japan's asset bubble.

The Market Monetarist, MMT, and Austrian Lovefest - The Economist magazine has a new article on the rising popularity of Market Monetarism, MMT, and Austrian economics. The article notes that all of these schools of thought have benefited immensely from the blogosphere and have each provided a critique of how macroeconomic policy has been conducted over the past few years. It was an interesting article, though as Scott Sumner notes the piece is wrong in its implication that nominal GDP targeting requires significant activism by the Fed. If implemented properly, nominal GDP targeting would require less activism since it focuses the Fed on a single, explicit mandate. In the case of Scott Sumner's nominal GDP futures targeting, this approach would actually put the Fed on automatic pilot. (It would also put many Fed economists out of work and make the Fed far less important, so do not bet on it happening!) One point I want to stress here is that contrary to claims of some MMT advocates, the success of nominal GDP targeting does not depend on increased bank lending or on a naive belief in a simple money multiplier story where increased bank reserves lead to increased bank lending. In fact, the MMT emphasis on bank lending being influenced by capital considerations, credit worthiness of borrowers, and the demand for credit is entirely consistent with the Fed using a nominal GDP target to manage expectations such that portfolios are rebalanced in a manner that sparks a recovery. Here, bank lending responds to the improvement in current and expected economic activity brought about by nominal GDP targeting.

Slowing Inflation Cheers Fed - U.S. inflation is slowing after a surge early in the year. This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth. The slowdown has been apparent for months in some commodities. The price of copper is down 21% from a year earlier. Cotton is down 45%. Natural-gas prices continue to fall, and crude oil has retreated from peaks hit in April, though not as sharply as other commodities. Now, more broadly, the Commerce Department's measure of consumer prices for November, released Friday, stood 2.5% above year-ago levels in November, down from year-over-year increases of 2.7% in October and 2.9% in September. A less volatile measure excluding food and energy, watched closely by the Fed, rose 1.7% from a year earlier. Another closely tracked measure, the Labor Department's consumer-price index, has risen at a 0.8% annual rate in the past three months.

The Core, Not Rotten - Krugman - There have been many news reports the past few days about declining inflation — very different from this time last year, when warnings of higher inflation (and higher interest rates) abounded. As I’ve written many times, events amount to another win for the IS-LM model and the concept of a liquidity trap. They also amount to a win for the concept of core inflation. It’s not perfect — it’s actually not sufficiently core-y — but it does do a much better job than headline inflation of getting at underlying inflation. Look at the last decade: Focusing on headline inflation, you would have experienced three inflation panic attacks (and one deflation panic attack), whereas excluding volatile prices would have kept you relatively calm.

BPP@MIT Data Show Inflation Trending Downward - The charts above shows monthly and annual inflation rates from the Billion Prices Project @ MIT over the 12 month period ending at the end of November. According to the BPP website, the index is "designed to provide real-time information on major inflation trends, not to forecast official inflation announcements. We are constantly adding new categories of goods, but we do not cover 100% of CPI goods and services. The price of services, in particular, are not easy to find online and therefore are not included in our statistics." Bottom Line: Monthly inflation, measured by the BPP @ MIT, has been trending downward since February, and at the end of November was showing slight deflationary pressures. Similarly, BBP annual inflation has been trending downward since last summer and reached an eight-month low at the end of November. According to this real-time measure of inflationary trends in the U.S. economy, inflationary pressures are gradually moderating, and there is even evidence now of short-term deflation for the month of November.

Zero Rate Confusion - Bill Gross wrote in the FT that zero interest rates could actually contract the economy. That’s wrong but I want to spell out in greater detail than I have seen, exactly why. Here is Gross: If a bank can borrow at near 0 per cent, then theoretically it should have no problem making a profit. What is important, however, is the flatness of the yield curve and its effect on lending across all credit markets. Capitalism would not work well if Fed funds and 30-year Treasuries coexisted at the same yield, It is not only excessive debt levels, insolvency and liquidity trap considerations that delever both financial and real economic growth; it is the zero-bound nominal yield, the assumption that it will stay there for an "extended period of time" and the resultant flatness of yield curves which are the culprits. Gross is concerned that flattening the yield curve destroys the traditional business of banking. Part of the confusion is not separating the difference between what I call financing and carrying. Financing in my terms is generating liquidity from a non-liquid asset. One does this by rolling over or otherwise juggling short-term liabilities in such away that you always have enough net borrowing to fund a long term investment. If you keep shifting your balance from one credit card to another so as to keep your interest payments low enough to make that deck renovation affordable then you are self-financing the deck. This will work so long as you can always find a new low introductory rate.

The Year In 4 Charts :- I wish I'd been the first, second or third person to think of getting a bunch of econ types to submit their entry for Chart of the Year. Alas, the BBC, the Atlantic and Wonkblog all beat me to it.
The originals are all worth clicking through. But if you're too busy even to look through a few dozen charts (really?), or if looking through a few dozen charts doesn't sound as fun to you as it sounds to me (plausible), I've picked four that really seem to nail it, for different reasons.

1. GDP came back. Jobs didn't.
2. "The 1 percent" became a household phrase.
3. Government spending was still high. Tax revenues were still low. The deficit was still big. ("High," "low," and "big" all relative to the norms of the last 50 years.)
4. Everybody stopped thinking that Italy was the same as Germany.

Private Investment and the Business Cycle - Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but one key is to watch private domestic investment. Even though private investment usually only accounts for about 15% of GDP, private investment experiences significantly larger swings than PCE during the business cycle and has an outsized impact on GDP. Note: currently private investment is just over 12% of GDP - much lower than normal. The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph). The second graph shows the contribution to GDP from the four categories of private investment: residential investment, equipment and software, nonresidential structures, and "Change in private inventories". Note: this is a 3 quarter centered average of the contribution to GDP. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, and blue. The dashed purple line is the "Change in private inventories". The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness is a key reason why the recovery has been sluggish so far. Equipment and software investment has made a significant positive contribution to GDP for nine straight quarters (it is coincident). The third graph shows residential investment as a percent of GDP.The last graph shows non-residential investment in structures and equipment and software. Equipment and software investment has increased sharply, but is still at a fairly normal level of GDP. And non-residential investment in structures increased in Q3, but this is still very low.

The Weak Recovery is a Policy Failure - In my last post I argued that nominal GDP targeting does not depend on bank lending to work. Instead, its success depends on the Fed using the nominal GDP target to manage expectations such that the portfolios of the non-bank sector rebalance in a manner that shores up aggregate demand. Bank lending may respond to this process, but is not essential to it. I mention this again because I just came across an interesting paper by Edward Nelson and David Lopez-Salido that lends support to this view. The authors show that, contrary to the claims of Reinhart and Rogoff (2009), recoveries following financial crises are not inherently weaker. Rather, they depend on policy. From their abstract [emphasis mine]:We find that the regularity that recoveries are systematically slower in the aftermath of financial crises does not hold for the postwar United States. The pace of the expansion after recessions seems to reflect deliberate aggregate demand policy. A weak lending outlook does not appear to pose an insurmountable obstacle to the functioning of stimulative aggregate demand policies. The implication of this paper and my previous post is that the weak economic recovery is a failure of policy to fully restore aggregate demand, nothing more. There was nothing inevitable about the Great Recession.

1.8% Growth Could Be Closer To Recession Than You Think - "... let me just provide you with a quick reminder that the first estimate of GDP released by the Bureau of Economic Analysis is tied closely to the consensus estimate of economists as there is incomplete information about the various subcomponents to make a more accurate estimate. The reason I point this out is that it is VERY rare that the consensus is EVER spot on to the first decimal point with the release. I find this very suspect." That is our quote from our review of the initial 3rd quarter GDP release on October 28th. I also got chastised quite a bit on our analysis that Personal Consumption Expenditures were highly suspect with most of the money spent on Medical Bills and Utilities due to the summer heat wave. However, with Thursday's release of the final revision of 3rd quarter GDP we find GDP not growing at 2.5% as per the original estimate, or even 2% from the second revision, but a meager 1.8% when the data finally all poured in. I suggest that you review our original post for context .There has been a large debate as of late about the economy going into 2012. Will it "muddle through" at a sub -2% rate, rebound sharply to more than 3% as currently estimated, or will we decline into a secondary recession? Cases can clearly be made for all three scenarios and only time will tell who is correct.

Wrong is still wrong and should be disregarded - I have been collecting some items from the past five or so years which I am weaving into the text book that Randy Wray and I hope to have out in the coming year. When academics or others comment on public affairs it is clear that our commentary is to a certain extent time-dependent. The language we use, the topics we focus on and the conclusions we draw. So some things that are written sound quaint when we go back to them after some years. I hoard information and occasionally I access my databases to see who said what in some year and compare it to what might have happened in the interim and then what the same person might be saying in retrospect. It is an interesting exercise and when applied to my own profession reveals some amazingly nonsensical predictions or assessments. The global crisis has provided a major event to test many of the assessments made prior to the crisis. The most surprising thing is that the same sort of assessments made prior to the crisis that were demonstrated to be entirely false are still being made and still influencing policy design. But the most robust assessments have withstood the crisis and remain relevant today. I include the developments in Modern Monetary Theory (MMT) in this latter category. Mainstream macroeconomics was largely wrong before the crisis and is wrong now (for the same reasons) and should be disregarded.

Prospects for the World Economy in 2012 - There is a palpable sense of gloom and impending doom in most discussions of the world economy today. Even before, several economists had argued that the excessive optimism about ”V shaped recovery” that was being used to describe the economic revival in 2010 was premature and misplaced, especially as none of the fundamental contradictions of global capitalism that led to the previous crisis had been adequately addressed. But they were once again written off as Cassandras by the financial media, which desperately sought sources of ”good news” and future engines of growth particularly among the emerging markets. Now even the most stalwart establishment voices are expressing growing concern and pessimism. Oliver Blanchard, Chief Economist at the IMF, has issued what must be an unprecedentedly sombre and even dismal statement at the close of the year, noting that recovery is at a standstill in the advanced economies and recognising that 2012 may face even worse economic conditions than 2008.

What Worries Us Most: Economic Collapse - Natural disasters, terrorist attacks, global disease – if you’re so inclined, there’s no shortage of major issues to fret about these days. Still, a new poll finds that the catastrophic event Americans are most likely to be worried about is economic collapse. The pollsters asked Americans to choose the top three catastrophic events that worry them the most. The top choice was “economic collapse,” with 63 percent choosing that option. Natural disaster was second, at 46 percent, and terrorist attack ranked third at 44 percent. Market research firm Leiflin Inc. asked the question on behalf of the EcoHealth Alliance, a conservation group that also works on global disease issues. One-third of the people surveyed said a global disease outbreak was one of their top three worries. The poll of about 1,000 Americans, conducted this fall, had a margin of error of 3 percent. The pollsters did not specify whether they were referring to global or national economic collapse. Still, after four years of very difficult economic times, it’s no surprise economic worries are top of mind for many Americans.

2012 doomsdays talk becomes mainstream chatter - The economic, political and social outlook for 2012 is profoundly negative. The almost universal consensus, even among mainstream orthodox economists is pessimistic regarding the world economy. Although, even here, their predictions understate the scope and depth of the crises, there are powerful reasons to believe that beginning in 2012, we are heading toward a steeper decline than what was experienced during the Great Recession of 2008 – 2009. With fewer resources, greater debt and increasing popular resistance to shouldering the burden of saving the capitalist system, the governments cannot bail out the system. Many of the major institutions and economic relations which were cause and consequence of world and regional capitalist expansion over the past three decades are in the process of disintegration and disarray. The previous economic engines of global expansion, the U.S. and the European Union, have exhausted their potentialities and are in open decline. The new centers of growth, China, India, Brazil, Russia, which for a ‘short decade’ provided a new impetus for world growth have run their course and are de-accelerating rapidly and will continue to do so throughout the new year.

The Problem -- Krugman - Richard Koo has another paper on balance sheet recession out (pdf), with good charts for a number of countries. I still have some differences with him over monetary policy — I still don’t understand why he doesn’t see debt-eroding inflation as something helpful in dealing with debt overhang — but his view of the sources of our Lesser Depression is completely right. Let me just focus on the United States. Here’s gross private saving minus gross private investment — the private-sector financial surplus: This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, and a slump in business investment due to lack of customers. Given this reality, it’s not hard to see why massive government borrowing hasn’t led to soaring interest rates; we’re awash in saving with no place to go. And that’s also why we’re in a liquidity trap, in which large increases in the monetary base don’t lead to inflation. And the question is, how do people who want us to slash the budget deficit now now now think this is going to work?

Getting the U.S. economy growing - We can sit and wring our hands, or we can get to work. Nobel laureate and Columbia University economics professor Joseph Stiglitz sees a long-term problem in the current U.S. economics malaise: Stiglitz' Columbia colleague Jeffrey Sachs had a similar assessment: I agree with Stiglitz and Sachs that America's long-term problems played an important role in putting us we are today. However, I take a different view from either of them on what we should try to do about it. My suggestion is that America should try to return to what some scholars maintain was the original source of America's success, which came from using North America's abundant natural resources as a basis for a competitive advantage in manufacturing. I recently highlighted one way that process made an important contribution in 2011. In 2008, the U.S. imported 1.8 million more barrels every day of refined petroleum products than we exported. Increased production of North American crude oil together with declining U.S. consumption have given Midwest refiners a huge competitive advantage internationally since then. As a consequence, the U.S. moved from being a net importer of refined products to exporting 0.4 more million barrels a day than we imported in the second half of this year.

Correction to Long-Term Debt Projections - Back in October, I wrote a post laying out my long-term projections for the national debt, which were basically an adjustment to existing CBO projections. Peter Berezin recently pointed out a misleading ambiguity in that post. There, I used the same long-term growth rate of tax revenues in both my extended-baseline scenario and in my “realistic” scenarios. I got that long-term growth rate from the CBO’s extended baseline scenario in its 2011 Long-Term Budget Outlook, which assumes that current law remains unchanged. In my realistic scenarios, I assumed that the AMT would be adjusted through 2021 but that the long-term growth rate would apply thereafter. I didn’t say anything explicitly about the AMT after 2021, but by using the long-term growth rate from the extended baseline, I was implicitly assuming that the AMT would not be indexed after 2021. This is certainly a possible policy choice, but I think it is optimistic (from a budgetary perspective), and a more conservative assumption is that the AMT will be indexed forever. This means that you would have to use the long-term growth rate from a world in which the AMT is indexed. Such a world is portrayed in the CBO’s 2009 Long-Term Budget Outlook, alternative fiscal scenario, Figure 5-1.

Debt and Growth in the G7 – Krugman - I’ve written fairly often about the often-cited Reinhart/Rogoff claim that terrible things happen to economic growth if the ratio of debt to GDP exceeds 90 percent. It’s a claim that has been pretty thoroughly debunked – yet it continues to circulate among Very Serious People as a known fact. Anyway, I was looking at some debt data, and thought that it might be useful to look at debt of the major advanced economies since World War II, and see what gets picked out by the 90 percent criterion. So here’s the debt/GDP ratios of the G7 countries since 1946, together with a line representing the famous 90 percent threshold. What do we see? The answer is that the >90 club consists of the English-speaking nations in the immediate aftermath of World War II, Britain for a longer postwar stretch, Italy since the late 80s, Japan since the mid-90s, and a couple of years in Canada. The English-speaking economies contracted in the years immediately after the war, not because of debt, but because Rosie the Riveter went back to being a housewife. Italy and Japan both experienced sharp growth slowdowns before their debt went so high, and you can make a strong case that slow growth caused high debt, not the other way around. So this really looks like a case of spurious correlation – not that this will have any influence on the people who seized on this correlation because it confirmed their preconceptions.

Debt Is (Mostly) Money We Owe To Ourselves - Krugman - I want to expand a bit on something Dean Baker said yesterday: As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Bill Gates’ children may own all the debt — but that is within generations, not between generations. As a group, our children’s well-being will be determined by the productivity of the economy (which Brooks complained about earlier), the state of the physical and social infrastructure and the environment. One can make the point that much of the debt is owned by foreigners, but this is a result of our trade deficit, which is in turn caused by the over-valued dollar.I think it’s worth looking at some numbers here. Below are two series, both expressed as percentages of GDP: total domestic nonfinancial debt (public plus private), and U.S. net foreign debt, as measured by the negative of the net international investment position:What you can see here is that there has been a big rise in debt, with a much smaller move into net debtor status for America as a whole; for the most part, the extra debt is money we owe to ourselves.

Notes on Debt - Paul Krugman wades into debt fundamentals People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources. That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. Just to keep each other honest. I am pretty sure I know what Paul means but the bolded line is not exactly true. Most likely there will be real resource transfer, just within the country not between countries. Such resource transfer is not frictionless, however. This is easiest to see when the resources are transferred from taxpayers to bondholders . Even if these are the exact, exact same people the transfer itself involves taxation and thus deadweight loss. Whether it involves measurable loss of production is another issue, but its fairly clear that it involves deadweight loss.

More On The Burden Of Debt - Krugman - I suspect that I may have been too cryptic in my post on the real burden of debt. So let me give you a thought experiment that may help clarify matters. Suppose that for some reason the nation temporarily ends up being ruled by a guy who is driven mad by power, and decrees that ~~everyone will have to wear their underwear on the outside~~ (sorry, Woody Allen reference) everyone will receive a large allotment of newly printed government bonds, adding up to 500 percent of GDP.The government is now deeply in debt — but the nation has not directly gotten any poorer: the public, in its role as taxpayers, now owes 500 percent of GDP, but the public, in its role as investors, now owns new assets equal to 500 percent of GDP. It’s a wash. So where’s the problem? Well, to pay interest on that debt, the government will have to raise a lot more revenue. Again, this is a wash — the extra revenue is matched by the extra income people receive as bondholders. But tax rates will have to go way up; and because lump-sum taxes don’t exist in the real world, this means that marginal tax rates will have to go way up. And you don’t have to be a right-winger to acknowledge that yes, very high marginal tax rates act as a disincentive to productive activity. So real GDP may well fall significantly. This is what I mean when I say that the burden of debt is about incentives, not about having to deliver resources to other people.

The Burden of Debt, Again Again - Krugman - I admit to having been surprised by the reaction to my two posts on the burden of debt. I thought I was saying something that would be obvious once it was pointed out; instead, many of the comments were baffled, and quite a few were utterly enraged. First, instead of a hypothetical example, let’s talk about a real case: US debt after World War II. The government emerged from the war with debt exceeding 100 percent of GDP; because there was almost no international capital movement at the time, essentially all that debt was owned by domestic residents, with a sizable fraction consisting of savings bonds bought by individuals. Now, here’s the question: did that debt directly make America poorer? More specifically, did it force America as a whole to spend less than it would have if the debt hadn’t existed? The answer, clearly, is no. Yes, American taxpayers had to pay the interest on that debt. But who received that interest? American taxpayers. Not exactly the same people, of course — although savings bonds were held pretty widely. Today, of course, we live in a more complicated world, in which American financial markets are intertwined with other nations, and in which a substantial part of our debt is indeed owned by foreigners. But what a lot of people apparently don’t know is that while foreigners have a lot of claims on America, America also has a lot of claims on foreigners. Here’s the way the national balance sheet vis-a-vis the rest of the world has evolved:The Unintended Empire - A new year is almost upon us, so now seems like a perfect time to step back from the (many) crises at hand and take stock of the big picture. According to my friend & fellow thinker George Friedman, the big picture of the next 10 years is this: America will dominate, and the American president will have to figure out how to act as global emperor without admitting that’s what he is.George’s newest book, The Next Decade, comes out in paperback in January; and he’s graciously agreed to let me send you the first chapter, which backs up the bold statements above. We don’t always agree, but I have to give George credit. He’s an expert at constructing an argument.

A Thought on Debt History - Krugman - One thing that apparently comes as a surprise to many people who love to intone about what history tells us about the dangers of debt is the fact that Britain has had remarkably high public debt relative to GDP for most of its modern history. But here’s a question: how relevant are these historical debt levels to current concerns? Leave on one side the notion that the discipline of capital markets is somehow a new thing. The point that occurred to me is that since the real burden of debt is the possible distortionary effect of the taxes that must be levied to service that debt, it probably matters that both taxation and spending were very different in the 19th century, or even in the interwar period, than they are now. These differences cut both ways. On one side, government was much smaller in bygone days, and the level of taxation required to pay for things other than debt service was correspondingly low. Now, the distortionary effects of taxation, at least according to standard Econ 101, are nonlinear in the tax rate: going from 40 to 45 creates a much bigger deadweight loss than going from 10 to 15. So this would seem to suggest that other things equal, the small governments of the 19th century should have been more able than the big governments of today to handle high levels of debt.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy - A new year is upon us. And even before its first hour has been rung in, 2012 is already taking shape before us as a pivotal year in global politics. We can all feel the awakening under way. A revived longing for equality, shared prosperity and democratic solidarity is inspiring a vibrant new politics around the world. This new activist spirit is quickened by the keen apprehension of young people on every continent that something is very, very wrong with the present economic and political order. The rising generation, heirs to sick and damaged societies that have been unbalanced by decades of plutocratic rule and antisocial cupidity, have now begun to rouse themselves – and in the process they have rallied the moral outrage of their fellow citizens. The task the new activists have set themselves is formidable, because the economic disorders in need of repair are so numerous. The maladies here in the United States are particularly acute: Real unemployment is well up into the double digits – despite standard government habits of cooking the official unemployment books by not counting various classes of people without jobs. Unemployment rates among the young are especially appalling. Income disparities and polarization are staggering: For example, CEO pay in the US is now many hundreds of times higher than average worker pay, and the share of national income going to workers is now at its lowest level since the country began measuring that share almost 60 years ago. The share of income going toward corporate profits, on the other hand, is at the highest level since 1950, and yet many of these profits have been harvested by firing workers and cutting costs, not from new production. And by some recent measures, the proportion of Americans who count as either “poor” or “lower income” is close to 50%. As always, political power follows wealth, and that ineluctable social fact poses a large part of the challenge for reform. The greater the gap between the rich and the not-rich, the greater the capacity of the rich to buy the kinds of political influence they need to prevent change.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part II - Before considering what it would mean to make our monetary system more democratic, let’s begin by calling to mind a few familiar features of money and modern monetary systems in general, features we all intuitively understand as users of money in a modern monetary economy. First, money obviously comes in very different forms. Not only are there different currency systems – the dollar system, the euro system, the renminbi system, etc. – but even within a single system, money can take significantly different forms. There is all of that familiar paper and metal currency, consisting of tangible objects that can be physically transported from one hand to another, and that are denominated with different face values. But money might also exist simply as “points” electronically credited to someone’s digital monetary scorecard at a bank. These points are debited from and credited to various accounts, and need never be exchanged for physical currency. We can already see a near future in which the traditional material currency of metal coins and paper notes will no longer be used. In thinking about our modern monetary system, then, it is useful to think of it as a network of such monetary scorecards. And we can think of the exchange of physical paper and metal currency as just one among several ways of adding and subtracting points from the monetary scorecards of those who exchange the money. Each individual possess such a scorecard, but so do businesses, governments and other organizations.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part III - - Now so far, I have described the operations of the monetarysovereign as though money were the only thing in the world. But this is clearly not the case. The model of themonetary sovereign I have developed is intended to be a model of agovernment. And while governments might have nearly unlimited and very easily deployed power in the creation and destruction of money, a government also participates in the exchange of real goods and services. And these goods and services are clearly finite. So there is something very special about money which is yet to be considered. Let’s remember that government spending – insertions ofmoney – can come in different varieties: there are purchases, in which money is inserted into a private sector account in exchange for some good or service delivered to the sovereign; and there are straight transfers, in which some money is inserted into a private sector account without condition, with the government receiving nothing in return. Similarly,we need to recall that government receipts – removals of money – can come also in different varieties: there are sales, in which money is removed from aprivate sector account in exchange for some good or service delivered by the government to the owner of that account – as when someone buys a carton from the postal service, for example – and there are taxes,in which some money is removed from a private sector account without condition, with the owner of that account receiving nothing in return.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part IV - I have set out a simplified model of a monetarily sovereign government. But near the end of the previous section, I began to suggest that the United States government is indeed a monetary sovereign by this kind. The reader might now suspect that I have yielded my rational mind over to a simplistic fiction of my own creation. And by this point, the reader is probably thinking that however interesting it might be to imagine this fictional entity, the so-called monetary sovereign, such fictions have nothing to do with the complexities of the real world, because actual governments maintain accounts that are indeed constrained by the amount of money in those accounts and by the external sources of funding to which they have access. After all, can’t a government default on its debt? What about the recent debt ceiling debate in the US? What about what is happening in Europe with the sovereign debt crisis? Also, if a government like the United States government was a monetary sovereign of the kind I have described, the consequences would seem to be enormous. Surely if a democratic government possessed this kind of power, we would make much more use of it than we do. In short, monetary sovereignty as described seems both too simple to be real and too good to be true.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part V - I have asked the reader to follow me through a lengthy series of reflections and thought experiments on the nature and role of money in modern economies. Some might ask why this issue is so important. How can these ruminations on the nature of modern monetary systems help guide our thinking on the task of building a more fair and decent society of democratic equals? How can they help us create a society in which democratic solidarity trumps self-regarding and avaricious greed, and in which broad and shared prosperity replaces the concentrated economic privilege and supremacy of the few? It is important to keep the political problem of money in proper perspective. No one needs to be reminded that money plays an incredibly significant role in modern societies. But it is also important not to overrate the role of money. The most important reason to reflect on the nature of money is that by doing so we better understand all those things that are not money, all of the sources of real and non-instrumental value in the world that are the ultimate ends we seek and the ultimate sources of our happiness. And as we improve our understanding of the purposes served by money and monetary systems, our improved understanding can help liberate us from our dependency on monetary systems controlled by the powerful.

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part VI - I will conclude by proposing six social tasks for the rising generation – six challenging tasks whose successful pursuit will help us achieve a more just, equal and democratic society. It is my view that the resulting society will not only be fairer and more decent. It will also be more economically productive, and will better promote human happiness and flourishing by more effectively distributing the goods and services we produce. Most of us will be happier in such a society as well, because the practices of democratic equality do a better job satisfying the human desires for cooperation, solidarity, trust, stability and fellowship that are the foundation of the social life for which human beings are naturally framed.

2011 Financial Report of the US Government - There is little to no fanfare for the release of this report, (why do they release at such a distracted time of year, where people will ignore it?) which strips away a lot of the malarkey that the US Government delivers by providing data on an accrual basis, rather than on a cash basis, which is what the politicians argue about. As a result, the politicians take actions that hurt the future in order to benefit the present. If we viewed the national budget the way this report does, we would have had very different policies over the last 25 years. As it is the report gives credit to Obamacare for lowering the costs of Medicare, as if a stroke of the law could reduce the medical needs of the elderly. If it does decrease actual demands on Medicare, unlikely but good. If not, we need to revise estimates up, as the alternative scenario on page 134 does. (PDF pg 156) And perhaps more than that. Here are the figures for the last three years:

The Government Accountability Office and Washington's Fiscal Future - The Government Accountability Office (GAO) recently released its 2011 Financial Report of the United States Government. I actually like this report; since I have a business background, I find that it reads more like a corporate annual report. In this case, the Financial Report provides the President, Congress and Main Street America with a comprehensive look at how the Federal Government is (mis)managing taxpayer dollars by outlining the Government's financial position, its revenues, costs, assets and future liabilities. Let's open with Timothy Geitner's introduction to the report: "This report provides another sobering picture of our long-term fiscal challenges.". That sounds, well, rather sobering, doesn't it, especially since it's coming from a former Fed President?Here's a snapshot of the condition of America's finances at the end of fiscal 2011 compared to: If you think of this as a report card for both the Presidency and Congress, one would have to think that any teacher would assign a letter grade of "F". Now, let's break down the data a bit further. Here is a graph showing the United States' budget deficits and net operating costs for the past five years:

Dollar usurps gold as safe haven -As the mood on Europe soured this week, the behaviour of investors was an unwelcome development for gold bugs: the precious metal dipped to its lowest level since September, while the dollar soared. In fact, the dollar has been trumping gold as the safest haven this year when things have looked particularly ugly for the global economy. The dollar index – which weighs the dollar against a basket of six other major currencies – rose to its highest level since January this week as investors expressed their frustration with the lacklustre outcome of last week’s EU summit. In contrast, gold tumbled 8.8 per cent to its lowest in almost three months at $1,560 a troy ounce. In the process, it fell below its 200-day moving average – a technical indicator closely watched by some traders – for the first time in almost three years. The move has prompted some to question whether gold’s decade-long bull market is coming to an end. Indeed, some traders have started actively betting against the gold price in the past week, bankers say.

US body sees renminbi as threat to dollar - The Chinese renminbi could pose a threat to the international dominance of the US dollar within a decade, according to an independent commission set up by the US Congress. The annual report of the US-China Economic and Security Review Commission, published on Wednesday, said China’s efforts to spread international use of its currency were succeeding in broadening its reach. “[It] no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years,” said the commission, chaired by William Reinsch, president of the National Foreign Trade Council, a business group. “Chinese financial authorities are laying the groundwork for these ambitions via a series of bilateral arrangements with foreign companies and financial centres.” The report also said China was continuing to intervene heavily in its domestic economy through a combination of subsidies and protections to state-owned enterprises, rules on forced transfer of technology from foreign investors and limiting government procurement to Chinese companies – the so-called indigenous innovation policy. “Chinese officials including [President Hu Jintao] have pledged to modify China’s indigenous innovation policy in response to protests from US business leaders and top officials,” the report said. “These promises have not been implemented at the local and provincial levels, however.”

Investors' Demand for U.S. Debt Skyrockets - In 2011, bond buyers fought tooth and nail to get their hands on U.S. government debt. This morning, Bloomberg reported that investors' demand for Treasury bonds was the highest it's been since 1995. For taxpayers, the timing could not be better. The more banks, pension funds, and foreign countries clamor for Treasuries, the lower the interest rate our government has to pay. So in this age of gargantuan budget deficits, we're getting dirt-cheap loans to keep the lights on in Capitol Hill. How cheap? According to Bloomberg, during an auction of short-term bonds last week, the Treasury received nine-times as many bids as it needed to sell off all its $30 billion worth of debt. The interest rate it offered: 0%. Let me repeat that: The U.S. government can sell its debt without paying any interest at all. Zilch. At Wonkblog, Ezra Klein says there's an obvious policy response in this situation: borrow more. He points out that once inflation is taken into account, Treasury yields are actually negative for five, seven, and ten-year bonds. In other words, investors are essentially paying the government to take their money. It's an ideal time to borrow and spend to put Americans back to work, while passing a deficit reduction bill that takes effect in a couple years.

Obama Wins Most Demand for Debt Since 1995 - The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits. The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest. While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of U.S. assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses. “If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,”

Twist in the tale of bond market’s orphan asset - All investors are warned that “past performance is no guarantee of future results” and such advice looms large over the US Treasury market as a spectacular year for owning boring old long bonds draws to a close. In characteristic low volume trading ahead of Christmas, the rise in long-dated Treasury yields this week has stood out with 30-year bond yields jumping back over 3 per cent from Monday’s low of 2.78 per cent. Higher yields, accompanied by tumbling prices, have occurred after the US Federal Reserve completed its final bond purchases under “Operation Twist” for this year. That temporary halt in Fed support only demonstrates the power of central bank buying in keeping long-term interest rates at low levels that, over time, are designed to stabilise the housing sector and ultimately boost the economy. There is no question that the Fed’s purchases of long bonds that began in August have helped power substantial returns for bond investors with the Barclays Capital index of long-term Treasuries up 28 per cent this year, its best annual run since 1995. But the real twist in the Fed’s late summer policy for bond managers was that the central bank did not focus its efforts on the 10-year sector as many investors had expected. Instead, the Fed under Operation Twist is, in effect, removing 90 per cent of new 30-year bond issuance until its purchases end next June.

Treasuries Update: Yields Drop as Treasuries Rally - The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been been below 2.00% 5 of the 9 days prior to the much-rumored announcement, closed at a new low of 1.88% on the day of the announcement and reached the historic closing low of 1.72 the next day, September 22. What has the 10-year note done since the "Twist" announcement? The interim high daily close was 2.42 on October 27. The interim closing low is the most recent (December 19) close. It's too soon, of course, to tell how successful the "Twist" strategy will be for lowering interest rates; the program is barely off the ground. According to the Freddie Mac survey, the 30-year mortgage rate has fluctuated between 3.94% and 4.18% since the first week in September, and the most recent average (as of December 15) smack on the bottom of that range at 3.94%. I will continue to watch Treasury yields and mortgage rates in the months ahead to see if Operation Twist lives up to the Fed's expectations. The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Treasury Sees U.S. Debt Near Limit By End Of Friday - The U.S. debt will come within $100 billion of its ceiling on Friday, and the Treasury Department anticipates the Obama administration will begin steps to seek a $1.2 trillion increase in the limit.A senior Treasury official on Tuesday told reporters the administration will need to let Congress know when the debt gets within $100 billion of the ceiling, expected to happen by the close of business Friday. Currently, the debt limit is $15.194 trillion, and it would be $16.394 trillion after an increase.Under the Budget Control Act of 2011, the president submits a written certification to Congress when the debt subject to the limit is within $100 billion. Congress can consider “a joint resolution of disapproval.” If such a resolution is not enacted within 15 calendar days, the debt limit will be increased. If a resolution is enacted within the 15 days, the debt limit will not be increased. If Congress adopted such a resolution, the president could veto it. Under the law and assuming a resolution isn’t enacted, the debt limit would be increased on Jan. 14. The Treasury anticipates the debt limit will not be reached again until later in 2012.

Obama to ask for debt limit hike: Treasury official - The White House plans to ask Congress for an increase in the debt limit before the end of the week, according to a senior Treasury Department official. The approval is expected to go through without a challenge, given that Congress is in recess until later in January and the request is in line with an agreement to keep the U.S. government funded into 2013. The debt is projected to fall within $100 billion of the current cap by December 30, when the United States has $82 billion in interest on its debt and payments such as Social Security coming due. President Barack Obama is expected to ask for authority to increase the borrowing limit by $1.2 trillion, part of the spending authority that was negotiated between Congress and the White House this summer. Under the agreement struck in August during the showdown over the government's debt limit, the cap is automatically raised unless Congress votes to block the debt-ceiling extension. Lawmakers have 15 days within receiving the request to vote, which is largely symbolic because the president can veto it and Congress would be unlikely to muster the two-thirds majority to override it. Moreover, the U.S. House of Representatives also is in recess until January 17.

The Smoke and Mirrors Agreement: Debt Ceiling to be Lifted by Another $1.2 Trillion - Remember just last summer when Congressional Republicans and the White House brought the nation to the brink of debt default before passing a "compromise" to lift the federal debt ceiling? Oh, how it seemed as though there was a real possibility they might fail to reach an agreement, and then all hell was going to break loose in the financial markets. What a load of crap. The fix was in from the very beginning. Our so-call "leaders" made a big show of creating the deficit reduction "super" committee, which then failed, as nearly every sane commentator predicted it would. So back to the drawing board, right? Nope. Just more business as usual, in fact, as reported by Reuters: The White House plans to ask Congress by the end of the week for an increase in the government's debt ceiling to allow the United States to pay its bills on time, according to a senior Treasury Department official on Tuesday. The approval is expected to go through without a challenge, given that Congress is in recess until later in January and the request is in line with an agreement to keep the U.S. government funded into 2013.

Latest Debt Ceiling Increase Dispute Won't Stop Debt Ceiling From Being Raised On Time - There was a flurry of activity in the media and on Wall Street yesterday after the White House let it be known that it was going to request a $1.2 trillion increase in the federal debt ceiling on Friday. I received a number of calls from reporters and clients wanting to know if this was just a bureaucratic exercise of the government's responsibilities or a power play by the Obama administration that would end up angering Congress and starting yet another round of hyperbolic and hyperventilating fights over the budget. Everyone please take a deep breath. This may be fun to talk about but doesn't change the very likely outcome -- an on time increase in the debt ceiling -- in any way.

White House Caves On Debt Ceiling Increase Request - Roll Call is reporting that the White House has decided to delay making the formal request to Congress that it previously announced it would make today for the third increase in the federal debt ceiling that is allowed by the Budget Control Act, the debt ceiling increase deal enacted in early August.This means that the 15-day period during which Congress may consider a resolution of disapproval will not expire while the House and Senate are out of session and that representatives and senators who want or need to vote against the $1.2 trillion increase in the government's borrowing limit will have an opportunity to do so. As I posted several days ago, there is no practical effect of this change because the debt ceiling is virtually guaranteed to be raised whether or not there's a vote. The disapproval legislation will be vetoed anyway in the unlikely event that both houses adopt it, and there isn't a two-thirds majority in either the House or Senate to override.

Why Is The Term “Financial Repression” Being Sold? - Over the past few months, the concept of “Financial Repression” has come into the lexicon and is increasingly used to describe a possible set of government strategies that constrains the financial sector. Economists Carmen M. Reinhart and M. Belen Sbrancia reintroduced it with this paper, explaining that the public debts accrued during the financial crisis might be reduced through such strategies. Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. In other words, financial repression means doing things rentiers hate, like preventing them from moving their capital anywhere in the world at a moment’s notice, stopping them from engaging in predatory lending and usury, directing investment to national priorities (like public investment, war, health care and education, a safety net, etc), and regulating banks so they don’t become casinos. Keynes called the process of reducing the return on capital “the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”

Robert Samuelson Again Forgets What He Said About the Budget Deficit, by Dean Baker: Less than a month ago Robert Samuelson told readers that it was unreasonable to expect the Super Committee to solve the country's deficit problem since the real issue is health care. He said that the Super Committee was not going to come up with a politically acceptable way to fix health care in three months so it was unrealistic to imagine that it would produce a solution to the long-run deficit problem. His comments in today's column suggest that he is unfamiliar with the piece he wrote last month. (Hot rumor: there are two Robert Samuelsons.) This one tells us that the problems is that the Republicans don't want to raise taxes and the Democrats refuse to consider cuts in spending, therefore we are going to have a long-term budget problem that will lead to an enormous economic crisis.Of course Samuelson's column last month was completely right. We pay more than twice as much per person as the average for other wealthy countries. If we get out health care costs in line with other countries we would be looking at budget surpluses not deficits.

Me Not Scared of Big Numbers - Look, it’s important to recognize that we face an unsustainable budget outlook. The two key points are 1) in the medium term—over the next decade–we can’t bring down the deficit without new tax revenues (in the very near term, we temporarily need larger budget deficits to help complete the recovery from the great recession). Spending cuts alone won’t work. And 2) in the long term, we must slow the growth of health care spending.I’m not saying either of these imperatives are a piece of cake, but them’s the facts and pretty much all else is noise. Like this. It’s one of those pieces that throws around big numbers to scare the heck out of you, with no context to understand them.In fiscal 2011, the cost of the promises [of Medicare and Social Security] grew from $30.9 trillion to $33.8 trillion. To put that in context, consider that the total value of companies traded on U.S. stock markets is $13.1 trillion, based on the Wilshire 5000 index, and the value of the equity in U.S. taxpayers’ homes, according to Freddie Mac, is $6.2 trillion. OK. Forget that you’re comparing a 75-year obligation with point-in-time values. Forget that you’re squishing together Social Security and Medicare, when the pressures on the two systems are very different, with Mcare a much tougher problem. The thing that should immediately make you put such articles aside is the huge dollar figures with no reference to the rest of the economy, which we can also expect to grow a bit over the next 75 years.

Most GOP Presidential Candidates Get An F On The Budget - I was interviewed by Sarah Eisen on Bloomberg Television this past Tuesday to give grades to the Republican presidential candidates on the budget. The full interview is here for what I hope will be your viewing pleasure. But we ran out of time before we could go through the full candidate list so here's a quick summary of my grades.First, it's important to keep in mind that few candidates for any public office ever talk directly about the federal budget because there aren't too many voters who want to hear that their taxes will go up or that the services they get from the government will go down or be eliminated. Not only is that true in this case, but almost all of the GOP presidential candidates are currently talking about plans that would make the deficit and debt situation worse even though they're labeled as deficit reduction. Second, as you'll see if you watch the interview, for comparison purposes I gave President Obama a C-. The administration still doesn't have a plan for dealing with the long-term deficit, but it does get credit for creating the Bowles-Simpson commission when the Senate failed to pass legislation that would have set up a congressional commission, for pushing House Speaker John Boehner (R-OH) to consider a "go-big" deficit reduction plan, and for being willing to compromise on budget -related when that was the only way to get something done.

The Best of CBPP Graphs: Guideposts on the Road Back to Factville - My CBPP colleagues contributed many important graphics to the debates of 2011 in lots of different areas, including fiscal, poverty, inequality, health care, and more. But which ones to highlight in this end-of-year look back at the best of 2011? I generally used a market test: these are the ones that were most widely circulated. Tiny bits of commentary where necessary, though more importantly, I’ve tried to provide links to the underlying docs. Arm yourselves with the knowledge herein, and you’ll be immune to the fact-free hand-waving that too often passes for debate these daze. Think of them not as wonky graphs, but as guideposts on the road back to the land where facts matter.

A Slump Is A Good Time To Invest In Infrastructure - Krugman - Multiplier issues aside, funding is cheap, and many of the resources you would use would otherwise be unemployed. There’s really a compelling argument that we should be doing a lot of public investment right now. Ahem:

Fiscal Policy Can Help the Economy - For the doubters: Fiscal Policy Works, by Paul Krugman: Via Brad DeLong, there’s a paper by David Romer (pdf) summarizing recent research on fiscal policy, inspired by the crisis and aftermath. And his conclusion is not at all what you hear on the talk shows; it is that there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy. And since we’re now in a liquidity trap in which conventional monetary policy has no traction, that’s the world we’re in. And for the austerity minded, stabilization policy works the same in both directions -- expansionary policy is expansionary, and contractionary policy is contractionary.

Keynes Was Right, by Paul Krugman - “The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as FDR was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way. Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover... And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again. In declaring Keynesian economics vindicated ... the real test hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real GDP in both countries down by double digits.

A Note On The Ricardian Equivalence Argument Against Stimulus (Slightly Wonkish) Krugman - There have been a lot of shockingly bad performances among macroeconomists in this crisis; but if I had to pick the one that is most startling, it is the way freshwater economists have demonstrated that they don’t understand one of their own doctrines, that of Ricardian equivalence. Ricardian equivalence says that what determines consumption is the lifetime present value of after-tax income, and hence that, say, a temporary tax cut won’t stimulate spending, because people will figure that whatever they gain now will be offset by higher taxes later. It is a dubious doctrine even done right; many people are liquidity constrained, and very few people have the knowledge or inclination to estimate the impact of current government budgets on their lifetime tax liability. But even if you assume that the doctrine is right, it does NOT imply that government spending on, say, infrastructure will be met by offsetting declines in private spending. In other words, Robert Lucas was betraying a complete misunderstanding of his own doctrine when he said this:

Shallow Be Thy Name - Krugman - Karl Smith says something true: One thing that can easily pass you by is the dearth of analytical ability in the world. When you talk to experts you can be confused into thinking that they are sharper than they are because they have been thinking and talking about the same things for a long time. However, in the fast and furious world of the blogosphere it quickly becomes apparent how shallow much of that understanding is and how widespread the inability to transfer insights between domains is as well. Indeed. The real-time conversation about economics that blogging makes possible has been deeply revealing, as we see that famous economists have a remarkably hard time thinking straight about what should be simple issues, like the relevance or lack thereof of Ricardian equivalence to the effects of government spending. It has also been striking how, when caught doing something foolish — say. forgetting that there was rationing during World War II — many of these people try to pull rank. It doesn’t work: in cyberspace, everyone can see that the emperor is naked. And that’s a very good thing.

Problems of Reading Comprehension - Krugman - David Adolfatto seems so determined to take a swipe at me that he can’t actually read straight. I accused Lucas of not understanding Ricardian equivalence. Here’s Lucas’s argument: But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) That’s saying that the spending response to expected future taxes leads to a fall in consumption that exactly offsets the expansionary fiscal policy. If that’s not a Ricardian equivalence argument, what is it? Then Andolfatto says that Lucas was arguing that it matters how government spending is financed. No, he wasn’t. Right there, he argues that government spending doesn’t matter at all:If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part. So he was saying that government spending can’t raise aggregate demand. Period. Look, I know people want to defend Lucas and hit at me, but what Lucas said there betrayed a fundamental failure to understand the implications of debt-financed spending — followed by an outright smear against Christy Romer.

Ricardian equivalence, for the last time - I want to comment on Mark Thoma's post today about the Ricardian Equivalence Theorem (RET). Linking up to the interview with Barro was a good idea, Mark. Everyone agrees that the theorem has nothing to say about the effectiveness of G, and Barro explains all of this splendidly. Moreover, everyone agrees that since the conditions needed to render the proposition valid are violated in reality, the proposition cannot possibly be expected to make a perfectly accurate prediction of how altering the timing of taxes (holding G fixed) is likely to impact the economy. I guess that this is about where our mutual agreement ends. What is there left to argue about? It's the holidays--I'm sure we'll find something. Let's start with Mark's opening paragraph: I haven't said much about the recent flare up over Ricardian equivalence. Why? The answer's simple, the empirical evidence does not support it. Why argue about something when we already know it fails to adequately explain the data? Making the Ricardian equivalence assumption might be okay as a first approximation for some questions--though I'd argue that it mostly isn't--but in any case the theory does not adequately capture economic behavior.

The Great Ricardian Equivalence Throwdown! - This week's econ-blogosphere mayhem started when Paul Krugman wrote a post about the idea of Ricardian Equivalence (the idea that the timing of taxes doesn't matter), and why it doesn't imply that fiscal stimulus can't work. As an example of someone who does think that Ricardian Equivalence makes stimulus a non-starter, Krugman cited some remarks by uber-macroeconomist Robert Lucas: But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. Krugman's argument: Ricardian Equivalence says that the timing of taxes can't matter for the economy, not that the level of government spending can't matter. Mark Thoma concurred: Ricardian Equivalence does not say that stimulus can't work, and Ricardian Equivalence is wrong anyway. Then Krugman came under fire from David Andolfatto, who says that Lucas's statement was obviously not talking about Ricardian equivalence, and, hence, Krugman must not understand what Ricardian Equivalence is. Steve Williamson takes a somewhat less harsh line, saying that Krugman must not understand what Lucas was trying to say. Krugman fired back, as did Andolfatto and Williamson. Much fun was had by all. I think I'm going to dub Andolfatto and Williamson the "Krugman-Teasing Brigade of St. Louis." So allow me to wade in here.

Ricardianoid Arguments - Paul Krugman - Well, I wasn’t going to say more about Lucas and his smear of Christy Romer, but since Brad DeLong has weighed in, let me make one more entry. The defense of Lucas seems to be that he wasn’t making a Ricardian-equivalence argument, because Ricardian equivalence says nothing about the effect of changes in government spending. But that’s precisely the point! He made an argument that was the kind of thing you use to argue that a temporary tax cut or transfer payment has no effect, and applied it wrongly to actual government purchases of goods and services. So it was something that sounded like Ricardian equivalence but wasn’t; call it Ricardianoid. And it was, whatever you call it, just wrong. Now Noah Smith tries to argue that Lucas was actually invoking Say’s Law rather than a Ricardianoid proposition. But as Brad says, he clearly wasn’t; if you have a Say’s Law view of the world, you believe that monetary as well as fiscal policy cannot affect spending. And the whole business about taxes now or later wouldn’t have been relevant if it was a Say’s Law argument. But in any case the bottom line is that the great Lucas made a nonsense argument by any standard — and on the basis of that argument went on to accuse Christy of “shlock economics” and corruptly inventing a reason to serve her political masters.

America Is Not Exceptional - Krugman - Ezra Klein points out, correctly, that the big economic story of 2011 was that the conventional wisdom of Washington about the urgency of deficit reduction was totally contradicted by the bond market. But Ezra makes at least a slight nod in the direction of a new conventional wisdom, which says that it’s about the unique safe haven status of the United States: This is not, to be fair, a bet on America’s economic strength. It’s a judgment about the rest of the world’s economic weakness. U.S. Treasuries are what savvy investors buy when they’re in a canned-goods-and-ammunition sort of mood and they think gold is overvalued. But though that makes the demand we’re seeing more depressing, it doesn’t make it any less real. What such stories miss is the fact that interest rates have dropped sharply for every country that borrows in its own currency. Here are 10-year bond rates for a sample: What we’re looking at is a world of depressed demand, where government securities look like a good buy everywhere except in countries that either don’t have their own currency or have large debts in foreign currency, making them vulnerable to self-fulfilling panic. It’s a world in which deficit obsession is mad, bad, and dangerous.

Pentagon Whitewash Watch - In a report released today, the Pentagon claims its self-investigation shows that its Bush-era attempt to manipulate news coverage by military analysts on TV was all legal and proper. Yeah, right. Friday after 5pm is when you release stuff you want to get minimal media. The runup to Christmas is when you release the stuff you really really want to bury. The poor Pentagon investigators were stymied by the absence of a smoking gun in the official records. (Surprise! The people running the media manipulation campaign didn’t write down their strategic objective. Maybe because they knew it was illegal?) They got nothing useful from interviews of the participants. (Amazingly not one Bush neocon, not to mention not a single retired General or Admiral, including combat veterans, broke down under gentle and long-delayed questioning from the Inspector General’s office.) It was all such a long time ago, can’t we just be friends. This deadpan NYT report, Finds no Fault In Its Ties to TV Analysts, just gives you such a good feeling about it all: The report found that at least 43 of the military analysts were affiliated with defense contractors. The inspector general’s office said it asked 35 of these analysts whether their participation in the program benefited their business interests. Almost all said no. Based on these answers, the report said, investigators were unable to identify any analysts who “profited financially” from their participation in the program.

US Wars Far From Over - Yves Smith - This Real News Network interview with David Swanson, which focuses on Obama’s PR on the “end” of the war in Iraq, also underscores a theme in Matt Stoller’s post on Ron Paul yesterday: the deep commitment of both parties to a large and active military.

Why America Can’t Afford Its Military - Through the last year the defense industries and their supporters in Congress worked overtime to ensure the federal government kept the armed forces in a perpetual procurement cycle. Inside the Pentagon, the generals and admirals who lead the defense bureaucracies worked to minimize procurement costs. This was not altruistic behavior. It’s the only way to protect the armed forces’ outdated force structures from more debilitating cuts; cuts that threaten the single service way of warfare along with the bloated overhead of flag officer headquarters. Meanwhile, public pronouncements from the office of the Secretary of Defense on cost savings initiatives or about imminent strategic disaster if defense spending is reduced fell flat. In fact, everything in 2011 related to defense, from the controversial F-35 program to the multi-billion dollar contracting fiascos in Iraq and Afghanistan, looked like window dressing designed to buy more time for an anachronistic, insolvent defense establishment. It’s no secret what’s required in 2012 and beyond: an efficient and effective organization of military power for the optimum utilization of increasingly constrained resources. More specifically, a serious audit of the U.S. Department of Defense, along with a national reset where the roles of politicians, bureaucrats and four stars are recast as servants, not masters, of the national interest.

The Defeatism of Depression - Paul Krugman - A number of people have asked me to weigh in on David Brooks’s piece today. Sorry, not gonna do a tit-for-tat. Let me instead just make a more general point. All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it’s unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus — and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you. There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

David Brooks Is Projecting His Self Indulgence Again - Undoubtedly projecting from the fact that he can draw a nice 6-figure income for little obvious work, David Brooks complained in his column: " Today, the country is middle-aged but self-indulgent. Bad habits have accumulated."For the most part the column is a confused diatribe against the Obama administration's economic policies with a lecture on moral rectitude thrown in for good measure. He starts by condemning the efforts to stimulate the economy by telling readers: "Today, Americans are more likely to fear government than be reassured by it. According to a Gallup survey, 64 percent of Americans polled said they believed that big government is the biggest threat to the country. As a result, the public has reacted to Obama’s activism with fear and anxiety." One might think that the fact that the Obama administration relied on a stimulus that was only designed to lower the unemployment rate by 1.5-2.0 percentage points might have played a big role in the election defeat. (Read the number of jobs the stimulus was projected to create, not the baseline forecasts for the economy.) If the government had used bigger stimulus to get the unemployment rate down to say -- 7 percent -- it is difficult to believe that the Democrats would have suffered such a big defeat last year, in spite of people's fear of big government.

Robert Samuelson, Wrong Again - To his credit, in his column today Robert Samuelson apologized for a mistake in an earlier column. In the prior column he claimed that if Keynes saw the level of indebtedness of countries today, he would not be arguing that governments should be running deficits to stimulate the economy. The problem is that the level of indebtedness in the UK, where Keynes was writing, was far larger in the 30s than the level of indebtedness currently faced by the United States and every other wealthy country, except Japan. However, he makes up for this apology by making several new mistakes or misrepresentations. In the former category he repeats what he said in the prior column: "I was arguing that today’s highly indebted governments have less leeway to adopt massive “Keynesian” stimulus programs of spending increases or tax cuts without triggering a backlash from bond markets — higher interest rates that undermine the stimulus. I still believe that’s true; the evidence is Greece, Ireland, Portugal, Spain and Italy." Spain certainly cannot belong on this list since it was not and is not heavily indebted. Samuelson again refuses to note the fact that these countries are in a fundamentally different situation than the United States because they are on the euro and therefore do not issue their own currency. Countries with greater debt burdens, like the UK and Japan, pay far lower interest rates than these euro zone countries. This presumably has something to do with the fact that they have central banks that can buy up their debt if there is a panic in the market.

Payroll Tax Extension Will Be Only Hostage-Taking Opportunity For GOP In 2012 - And taking the payroll tax extension hostage may not be as likely as it seems either. The most important thing you need to consider when thinking about what's ahead on the budget, spending, and taxes in Washington in 2012 is that, even though it's an election year and the stakes will be higher, there will be dramatically less opportunities for the type of Perils of Pauline cliff hangers that were frustratingly routine in 2011. Actually, there will only be one until next fall: the possible extension of the payroll tax cut at the end of February...and even that probably won't be the do-what-I-say-or-the-government-gets-it kind of showdown that we saw over and over and over again this year. But the most important outcome of this year's continuously torturous negotiations on everything having to do with federal spending, revenues, the deficit, and debt may well be that, except for the payroll tax cut extension, all of the issues were settled either through the start of fiscal 2013 on October 1 or until after the election. And that will take away all but one of what congressional Republicans used this year to try to force congressional Democrats and the White House to do what they wanted.

How Politics Came to Dominate Payroll Tax Debate - Virtually all of the coverage of the debate over extending the temporary cut in the payroll tax has centered on the politics. Almost none has examined the economics of the issue. Indeed, it is nearly impossible to tell exactly why Republicans were so adamantly opposed to extending the tax cut. I’m still not sure. The first thing to know is that the payroll tax cut was not originally part of the $787 billion stimulus bill enacted in February 2009. Another tax cut, the Making Work Pay credit, was the principal tax cut in the legislation. It provided a $400 to $800 tax cut for every person or family with a positive tax liability and an income below $75,000 for individuals and $150,000 for couples. All tax provisions taken together, including those for businesses, added up to $326 billion – more than 40 percent of the total cost of the stimulus package, according to the Joint Committee on Taxation. At the end of 2010, all of the tax cuts enacted during the George W. Bush administration were scheduled to expire, as well as the Making Work Pay credit. Although President Obama wanted the tax cuts for the rich to expire on schedule, Republicans insisted on an all-or-nothing strategy. Republicans also asked that the Making Work Pay credit be replaced by a temporary two-percentage-point cut in the employees’ share of the payroll tax.

Don't Forget Wingnut Welfare – Krugman - Steve Benen asks why Congressional Republicans were willing to pursue what looked like a “suicidal” political strategy in the payroll tax fight. But he somehow fails to mention an important factor: reliable conservatives are assured of a safe landing even if they are defeated. Consider the case of Rick Santorum, rather humiliatingly beaten in 2006. What came next? The Ethics and Public Policy Center is delighted to announce that the Honorable Rick Santorum is joining EPPC as a Senior Fellow. Mr. Santorum will establish and direct a program, titled America’s Enemies, that will focus on identifying, studying, and heightening awareness of the threats posed to America and the West from a growing array of anti-Western forces that are increasingly casting a shadow over our future and violating religious liberty around the world. And who funds the Ethics and Public Policy Center? Just who you’d expect: a couple of Richard Mellon Scaife foundations, the Koch brothers, etc.. Follow the money.

Whatever Happened to All Those Expiring Tax Breaks? - In two days, 53 targeted tax breaks will, officially at least, die. By the congressional Joint Committee on Taxation’s count, that’s the number of temporary tax subsidies that are due to expire on December 31. They’ve become known as the extenders, which sounds like the name of a wonky rock band but isn’t. They got the name because every year or so, like clockwork, Congress mindlessly continues them for another year or so. But this month, in the last–minute kerfuffle over the payroll tax, the extenders never quite got into the conversation. Most of these special interest baubles are hardly worth keeping. They include a menagerie of alternative energy credits, special depreciation rules (including the ever-popular tax break for NASCAR race tracks), extraordinary deductions for certain charitable gifts, and various investment incentives for developers in tax-favored communities (enterprise zones, Gulf coast opportunity zones and lower Manhattan–a distressed neighborhood if ever there was one). Congress would do the nation and the budget a great favor if it let most of these goodies quietly fade away. But the list also includes two very popular individual provisions and two lucrative business breaks. On the individual side, the most valuable hostage is the provision that protects about 30 million middle-income households from the Alternative Minimum Tax. Another high-profile captive is an extra-generous tax subsidy for employees who commute by mass transit. That subsidy will drop from $230-a-month to $125 in a few days.

Possible Implementations of a Brandeis Tax - Last Monday, Aaron Edlin and I published a cri de coeur op-ed in the New York Times calling for a Brandeis tax, an automatic tax that would put the brakes on income inequality. This is the third in a series of posts (the first and second posts are here and here) explaining more about our rationale and providing more details on how a Brandeis tax might be implemented. You can also listen to my hour-long interview on Connecticut Public Radio’s “Where we Live” here. Remarkably of the hundreds of emails we received in reaction to our op-ed, almost no one questioned Brandeis’s idea that we can have great concentrations of wealth, or democracy but not both. People questioned other aspects of our proposal, asking questions like (1) how would it work in a world of income bunching; (2) would people still have the incentive to work hard; and (2) is it fair to have very high tax rates on the affluent. Our last post talked about alternative potential triggers. Here we tackle some more detailed questions about implementation including how to trade off different kinds of distortions.

Ian Ayres on the Brandeis Tax - Linda Beale - I've often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome. Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us. Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water. The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich--lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies. The main defenses that a society has against such developments are twofold: 1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system--especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work. Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring. Most redistribution will be 'upwards' for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution 'downwards' to assist those in the middle and lower income groups. Ian Ayres has a series of postings on a proposed "Brandeis" tax intended to impose limitations on the inequality gap.

A Random Observation About the 1970s... and the 1980s - People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don't reach consistent conclusions. Here's an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that's the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter. What followed, of course, was the Great Recession. Now, 14.5% growth over 20 quarters lacks context. So here's context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. Now... let us discuss a more recent period. Reagan famously cut taxes - top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%. Data here.

U.S. cracks down on foreign tax evasion (Xinhuanet video) -- With the U.S. fiscal deficit running stubbornly high, the country is looking for more ways to help balance the budget and cut debt. For the 2012 financial year, the U.S. government will slap more rigorous penalties on those who have been hiding assets overseas from the tax department. According to the Internal Revenue Service, U.S. residents or foreign immigrants with more than 50 thousand dollars in assets or 10 thousand dollars in deposits, have to report their overseas financial situations to the U.S. tax authorities. People who cheat would be fined up to 10 thousand dollars per month. Experts say the new measure will affect many Chinese in America, and that they may rather give up their residency, in order to maintain their own assets.

Law to Find Tax Evaders Denounced - Legislation meant to help the United States government locate overseas assets of American tax cheats created little stir when it was quietly slipped into a jobs bill last year. But the Foreign Account Tax Compliance Act, or Fatca, as it is known, is now causing alarm among businesses outside the United States that fear they will have to spend billions of dollars a year to meet the greatly increased reporting burdens, starting in 2013. American expatriates also say the new filing demands are daunting and overblown. Congress created the act after the Justice Department’s successful pursuit in 2009 of UBS that resulted in the Swiss bank — which had encouraged American citizens to set up secret offshore accounts — paying $780 million and turning over client details to avoid criminal prosecution. The law is meant to ensure Americans cannot use hidden trusts overseas to evade taxes, a goal that is widely applauded. But critics say that it amounts to gross legislative overreach, and that the $8 billion the Treasury expects to reap in taxes owed over 10 years pales next to the costs it will impose on foreign institutions. Those entities are being asked, in effect, to pay for the cost of tracking down American tax evaders.

New Year's Tax Wishes: If I Was Dictator of America - Based on the notions of economic efficiency that I laid out here, if I could do whatever I wanted I would make the following changes over a ten-year period. (Some faster, some slower, some phased in, some implemented instantly on a given date.) The appropriate amounts in each case require a better calculator than I have access to.

Tax All Corporate Profits Like S-Corps, and Eradicate Taxes on Corporations, Dividends, and Capital Gains.
Eradicate Tax Deductions for Interest Payments -- Personal and Corporate.
Eradicate Business Deductions for Employee Health Care/Insurance.
Scrap the Cap on Social Security Taxes.
Change All Local Property Taxes to Land-Value-Only Taxes.
Greatly Expand and Simplify the Earned Income Tax Credit, and Deliver it on Weekly Paychecks.
Tax Carbon.
Reduce Income Taxes and Make Them More Progressive.

Overall Results:
1. Make the whole tax system -- local, state, and federal combined -- actually progressive. All the way from the bottom to the top.
2. Increase the total tax take by a few percentage points of GDP.

Growing wealth widens distance between lawmakers and constituents - Between 1984 and 2009, the median net worth of a member of the House more than doubled, according to the analysis of financial disclosures, from $280,000 to $725,000 in inflation-adjusted 2009 dollars, excluding home equity. Over the same period, the wealth of an American family has declined slightly, with the comparable median figure sliding from $20,600 to $20,500, according to the Panel Study of Income Dynamics from the University of Michigan. The comparisons exclude home equity because it is not included in congressional reporting, and 1984 was chosen because it is the earliest year for which consistent wealth statistics are available. The growing disparity between the representatives and the represented means that there is a greater distance between the economic experience of Americans and those of lawmakers.

Repo Men - If you’re making money on the Wall Street scale — which is nothing like your boring, middle-management in the Fortune 500, Hamptons-and-Mercedes, barely–a–1 percenter type money — then you can buy basically anything. When real-estate investor Robert Rosania put part of his storied champagne collection up for sale in 2008, the auction was predicted to fetch $5 million — couch-cushion change to Rosania, who had not yet reached his 40th birthday, making him a good deal younger than many of the vintages in his cellar. (Known in the wine world as Big Boy, he brandishes a special saber designed for decapitating head-clutchingly expensive bottles of champagne. Bespoke vintage-champagne cutlery: That’s how you know you’re rich.) Not far from Zuccotti Park, where Occupy Wall Street was fragrantly encamped, I noticed a young man wandering into a store to buy a pack of cigarettes on a bright Saturday morning, wearing blue jeans, a T-shirt, and a $237,000 Vacheron-Constantin watch. In a world of $600,000 cars (consult your local Maybach dealer) and $4,300-a-night whores (consult Eliot Spitzer), it’s no big deal to buy a president, which is precisely what Wall Street did in 2008 when, led by investment giant Goldman Sachs, it closed the deal on Barack Obama.

Government of the rich, by rich and for the rich - According to a study reported Tuesday, nearly half the members of the United States Congress are millionaires. Of the 535 legislators (100 members of the Senate and 435 members of the House of Representatives), at least 250 are millionaires and the median net worth is $913,000. Sixty-seven senators are millionaires and the median wealth of the body's 100 members is $2.63 million... The median net worth of members of the House of Representatives, excluding home equity, has more than doubled over the last 25 years, from $280,000 in 1984 to $725,000 in 2009 in inflation-adjusted dollars. During that same period, the median net worth of an American family fell from $20,600 to $20,500.

Who Are the 1%? - Taryn Hart - A week or so back, Dan from Angry Bear passed along this Boston Globe article. On its face, the article bemoans rising inequality through a comparison of two Massachusetts neighborhoods: Sherborn, the State’s wealthiest neighborhood and Springfield, a former working-class neighborhood that now resembles a globalized ghost town. However, as Dan correctly pointed out, Sherbonites are not the 1%: The median income of Sherborn is $190,000 per year; not peanuts, I know, but the lowest paid one percenters make $500,000 per year (even using a significantly narrower definition of income, one percenters make in excess of $330,000 per year). Moreover, the biggest gains over the past thirty-odd years have gone to the top .1%. When Occupy Wall Street identifies its opposition as the 1%, it’s not talking about people who live in posh neighborhoods with great schools; it’s talking about people who can hire teams of lobbyists who live in posh neighborhoods with great schools. As Gordon Gekko put it: I'm not talking a $400,000 a year working Wall Street stiff flying first class and being comfortable, I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player, or nothing. As Matt Taibbi has pointed out in response to the one-percenter meme that those who are so poor they don’t pay federal income tax have “no skin in the game,” concentration of wealth creates perverse incentives that ensure most of the mega rich are terrible citizens: The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live in gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

The Most Popular Post of 2011: Who are the 1% and What Do They Do for a Living? - A lot of emphasis is on the “99%” versus the “1%” in these protests. But who are the 1% and what do they do for a living? Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It’s same as it ever was — high-level management and the financial sector. Suzy Khimm goes through the numbers here. I’m curious about occupations. I’ll hand the mic off to “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data” by Bakija, Cole, and Heim. This is the latest and greatest report on occupations and inequality. Here’s a chart of the occupations of the top 1%: Inequality has fractals. Let’s go into the top 0.1% — what do they look like? Here’s the chart of the occupations of the top 0.1%, including capital gains:It boils down to managers, executives, and people who work in finance. From the paper: “[o]ur findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005.”

A Christmas Message From America's Rich - Taibbi - It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments. Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS: “Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?” Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm: “If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles. Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line...

When Ivy Grads Pick Teaching Over Wall Street - We are witnessing the decline and fall of the investment-banking profession as we have known it for the past 40 years. The evidence is everywhere. The increasing regulations on Wall Street -- as required by the Dodd-Frank law and still being written by the Federal Reserve, the Securities and Exchange Commission, the Commodities Futures Trading Commission and others agencies in the U.S. and Europe -- will require the remaining companies to increase their capital, curb their risk- taking and reduce their principal investing. Not being able to make those big proprietary bets when you see them developing -- in effect, the closing of the casino that Wall Street has become over the past few decades -- will severely limit bankers’ money-making opportunities.The most reliable leading indicator of Wall Street’s future prospects is the way recent graduates of Harvard, Princeton and Yale -- supposedly our best and brightest -- choose to spend their time after graduating. For years, hordes of graduates from those schools beat a fast path to Wall Street. Now the road is far more difficult to travel. For those who choose to make the journey, there is the prospect of incurring the wrath and scorn of fellow students who make up the various Occupy Wall Street movements -- a fact not likely to deter many -- and then there are dimmer prospects for a job on Wall Street generally, what with the slowdown in business.

Utopian Capitalism - The blond prince hasn’t renounced his throne, but now criticizes the system that put him there. The superstar capitalist Richard Branson, founder of the global Virgin corporate empire, announced in November that the “short-term focus on profit has driven most businesses to forget about the long-term role in taking care of people.” His new book urges businesses to embrace morality through “philanthrocapitalism.” He does have a point. If all owners, bankers and corporate executives were virtuous souls, capitalism might function flawlessly. Adam Smith outlined a similar argument in the mid-18th century, in “The Theory of Moral Sentiments.” The pursuit of economic self-interest, he explained, would generally be tempered by natural morality. The economist Russell Roberts offers a modern version of this argument in his novella “The Invisible Heart.” Socialists are usually the ones accused of having an overly optimistic view of human nature. Today, some capitalists have started to sound utopian. Most economists, whatever their political stripes, generally put more emphasis on incentives than on virtue. And most ordinary people understand that the incentives built into the global capitalist system tend to reward some very bad behaviors.

The Big Lie - As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head—and about time, too. At the end of the day, the convulsion to come won’t really be about Wall Street’s derivatives malefactions, or its subprime fun and games, or rogue trading, or the folly of banks. It will be about this society’s final opportunity to rip away the paralyzing shackles of corruption or else dwell forever in a neofeudal social order. You might say that 1384 has replaced 1984 as our worst-case scenario. I have lived what now, at 75, is starting to feel like a long life. If anyone asks me what has been the great American story of my lifetime, I have a ready answer. It is the corruption, money-based, that has settled like some all-enveloping excremental mist on the landscape of our hopes, that has permeated every nook of any institution or being that has real influence on the way we live now.

A Christmas Carol 2011 - Kunstler - Slouched in woe beside the Christmas tree, a lot of Americans missed the point of 2011: Santa Claus had already emptied his goodie sack before the night of wonders and miracles arrived and was back at the North Pole checking the balance sheet to see if he could raise a little cash selling some remaining assets off to the Blackstone Group or maybe work a leveraged buyout deal with Kohlberg Kravis Roberts. A few elves would have to join the unemployment line, but they could probably get by on half-rations of food stamps. Or maybe Henry Kravis could feed them reindeer steaks... at a discount, as long as they last. I reckon it will take a few weeks, perhaps through the whole winter, for a sense of swindle to set in among the rooked. You may notice a pervasive undertone of grumbling in the background - and winter is the right time for that - like the eerie, ominous chords of ice groaning in the darkness on a still night around the frozen lake. But eventually come the tumults and torrents of spring. I suppose what baffles many of us in the ethers of bloggery is the apparent failure of that demographic slice acquainted with thinking to register any objection to the travesties and organized brigandages of these times. At any other time in the life of this republic, such folk with active frontal lobes would have identified arrant criminal activity for what it is. Apparently, the nostrums of Paul Krugman are as powerfully narcotic as the raptures of Nascar. I'm afraid events are a little too far gone now. There was some hope that Mr. Obama would restore the rule of law, but he has gone even farther in the opposite direction by disabling even the levers of truth - and in so genial a style that nobody noticed that, either. That thinking demographic slice of the public I averred to must have mortgaged their souls the past three years just to keep on keeping on. Hence, when the truly rooked wake from their zombie sleepwalk, there will be hell to pay for sure.

Massachusetts Senate race tests feelings about Wall Street - The race is for a U.S. Senate seat in Massachusetts, but it's really a referendum on Wall Street. On one side is Democrat Elizabeth Warren, the architect of the new Consumer Financial Protection Bureau and an inspiration for the Occupy Wall Street movement. On the other: incumbent Republican Scott Brown, one of the biggest recipients of campaign contributions from the financial industry.Brown is campaigning on traditional Republican themes of smaller government and lower taxes. But Warren is taking a more unusual tack — aligning herself squarely with the Occupy protesters.

How Banks Cheat Taxpayers - Taibbi - A good friend of mine sent me a link to a small story last week, something that deserves a little attention, post-factum. The Bloomberg piece is about J.P. Morgan Chase winning a bid to be the lead underwriter on a $400 million bond issue by the state of Massachusetts. Chase was up against Merrill for the bid and won the race with an offer of a 2.57% interest rate, beating Merrill’s bid of 2.79. The difference in the bid saved the state of Massachusetts $880,000. Afterward, Massachusetts state treasurer Steven Grossman breezily played up the benefits of a competitive bid. "There's always a certain amount of competition going on out there," . "That's good. We like competition.” Well … so what, right? Two banks fight over the right to be the government’s underwriter, one submits a more competitive bid, the taxpayer saves money, and everyone wins. That’s the way it ought to be, correct?. Except in four out of five cases, it still doesn’t happen that way. From the same piece [emphasis mine]: Nationwide, about 20 percent of debt issued by states and local governments is sold through competitive bids. Issuers post public notices asking banks to make proposals and award the debt to the bidder offering the lowest interest cost. The other 80 percent are done through negotiated underwriting, where municipalities select a bank to price and sell the bonds. By "negotiated underwriting," what Bloomberg means is, "local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians."

Who Would You Trust With Your Money: GE or Occupy? - News that GE Capital is getting into the retail banking business by purchasing an online bank from MetLife not only shocked analysts; it shocked the market. GE's new adventures in banking are being frowned upon down on Wall Street. Reuters says that the "speed of the move took some analysts by surprise, as it has only been three weeks since GE said it wanted to start taking bank deposits from consumers." But do you know what else is being frowned upon down on Wall Street these days? Banking, in general. Big banks' stocks are all suffering (especially Bank of America's) now that the costs of paying the government back for the Recession they helped to instigate with their shady business practices. And after being evicted from Zuccotti Park, the deeply motivated Occupy protesters have set up shop in an office at 60 Wall Street, spitting distance from the New York Stock Exchange. As whispers of the movement's imminent demise continue to float through the surrounding streets, at least one pundit thinks now might be the right time for those in the Occupy office to consider a classic if-you-can't-beat-em trick. Why doesn't Occupy just open its own credit union? The Nation's Carne Ross makes the suggestion and then immediately explains the challenges Occupy would face:

Banks still waiting on most Dodd-Frank rules - A year and a half has gone by since the Dodd-Frank financial reform act was signed into law, but barely a quarter of the rules in the legislation have been finalized, though federal regulators are rolling out key components of the bill. Regulators released a highly anticipated proposal on capital and liquidity requirements last week, several weeks after issuing a long-awaited rule on bank trading activity. The proposals are subject to comment periods and possible amendments before they take effect. As of Dec. 1, regulators have issued 154 proposals, finalized 74 of them and missed 200 deadlines, according to a monthly progress report by law firm Davis Polk. Bankers have complained that the slow-going implementation makes it difficult to get a handle on added compliance costs and regulators’ expectations. Regulators argue they are moving as fast as they can considering 30 federal agencies are tasked with writing some 400 rules of varying complexity. There is still a ways to go before the full impact of the legislation is felt, more than half of the rules are not due until 2012 or later. But there has been meaningful movement in the past year.

SEC Wins Emergency Stop In Citigroup Fraud Case - The Securities and Exchange Commission won a delay in its securities fraud lawsuit against Citigroup Inc, as the regulator tries to appeal a judge's decision to reject its $285 million settlement with the bank. The case will be put on hold until a motions panel on January 17 begins considering the SEC's bid for a longer delay so it can pursue an expedited appeal, the 2nd U.S. Circuit Court of Appeals in New York said in its order on Tuesday afternoon. That order was made public 78 seconds before U.S. District Judge Jed Rakoff, who rejected the Citigroup settlement last month, issued a ruling opposing any delay in the case, court records show. Citigroup supported the SEC's request for a delay. The rulings come as the SEC tries to ensure it can continue settling enforcement cases without requiring corporate defendants to address whether they did anything wrong. That practice was called into question when Rakoff on November 28 harshly rejected the proposed settlement with New York-based Citigroup. He said the SEC's failure to require Citigroup to admit or deny its charges left him no way to know whether the settlement was fair. Rakoff also called the $285 million payout "pocket change" for the third-largest U.S. bank. But the SEC said that ruling was "legal error," at odds with decades of court decisions allowing such settlements and letting investors get faster recoveries, and could affect its ability to reach similar accords with other companies.

Rakoff accuses SEC of misleading federal court -The war of words between the Securities and Exchange Commission and Judge Jed Rakoff escalated on Thursday after the jurist accused the corporate regulator of misleading two federal courts. Judge Rakoff’s claims were levelled in an order in response to an emergency request by the SEC for an appeals court to temporarily halt proceedings in the regulator’s litigation against Citigroup. The jurist accused the SEC of making “materially misleading” statements to the appeals court and of misleading his own court through its application for a stay in proceedings. Judge Rakoff’s claims that the SEC misled him and the appeals court threaten to worsen the regulator’s already fractured relationship with a judge who has derailed its previous settlements with alleged Wall Street wrongdoers. The allegations come as the SEC scrambles to salvage a $285m settlement it reached with Citi in October to resolve allegations that the bank defrauded investors in a $1bn mortgage-linked investment. In a rebuke to the agency, Judge Rakoff last month rejected the settlement, arguing that it was neither reasonable nor in the public interest, in part due to the SEC’s longstanding refusal to force defendants to admit guilt when settling cases. As the SEC tried to keep the deal intact, it requested that Judge Rakoff halt proceedings while it pursued an appeal. Meanwhile, Judge Rakoff had set a January 3 deadline for Citi to answer the SEC’s fraud charges.

Bill Black: What if the SEC investigated Banks the way it is investigating Mutual Funds? - The Wall Street Journal ran a story yesterday (12/27/11) entitled “SEC Ups Its Game to Identify Rogue Firms.” The trivialization of the most destructive elite frauds is one of the most common forms of what criminologists call “neutralization” of the moral content of wrong doing. Neutralization increases crime.The actual story makes it clear that the criminals that the SEC was identifying were not “rogues.” They were the CEOs of seemingly legitimate firms. The SEC is identifying “accounting control frauds” – the frauds that cause greater financial losses than all other forms of property crime combined. The SEC is not identifying a few rotten apples, but roughly 100 hedge funds likely to have engaged in accounting fraud. The WSJ describes the SEC’s identification system: “The list is the low-tech product of a high-tech effort by the SEC to crack down on fraud at hedge funds and other investment firms. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud. In 2009, the SEC began developing a computer-powered system that now analyzes monthly returns from thousands of hedge funds. Officials won’t say exactly how it works or how much it cost to build, but the agency has announced four civil-fraud lawsuits filed as a result of what it calls the “aberrational performance initiative.”” The SEC should be applauded for finally understanding that “if it’s too good to be true; it probably isn’t true.” Our agency put a similar system in place in 1984 to identify the S&L accounting control frauds that were driving that crisis. A quarter-century later, the SEC began to follow our well-trodden trail – but only with regard to felons inhabiting the middle of the fraud food chain (hedge funds). The SEC has, inevitably, discovered that accounting fraud is common among hedge funds.

Today on the Eurozone Crisis -- Tyler Cowen writes, Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities. He strongly praises Ben Bernanke, for having the Fed greatly expand its balance sheet. Because it has long-term, risky assets (mortgage securities) and short-term riskless liabilities (bank reserves), the rest of the financial sector can do the opposite. Implicit in Cowen's point of view is the assumption that what we need to avoid right now is a shrinking banking sector. I find that notion hard to swallow. My view on fiscal policy is similar. There are those who argue that now is not the time to cut government deficits, because that would be contractionary. My reaction on cutting back both bloated banking and bloated deficits: if not now, when?

Internal BNY Mellon Documents Show Panic - An informant in a state fraud case against Bank of New York Mellon Corp. has provided prosecutors a rare inside peek into how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation, according to hundreds of pages of confidential documents. As investigators sought to determine whether the bank overcharged clients to execute their currency trades, a senior BNY Mellon executive nicknamed "Rambo" urged traders not to tell clients how much money they made on trading, according to the informant. Bank officials worried clients would switch to negotiating their own foreign-exchange trades, where the bank's profit margin was far lower, an internal bank memo states. The bank also altered its website, changing the wording of its trading practices. And when a veteran bank official heard about the government investigation, she said: "It's over, it's all over," according to the informant. The documents, which include company materials, emails and observations, were submitted to Florida prosecutors by lawyers for whistleblower Grant Wilson and obtained by The Wall Street Journal in an open-records request. Mr. Wilson operated as a government informant for two years while working as a currency trader at BNY Mellon, giving him an extraordinary view of what was happening inside the bank as the investigation unfolded. The extensive documentation, including his descriptions of how the bank processed trades that allegedly resulted in client overcharges, could increase pressure on BNY Mellon as it battles a widening law-enforcement probe.

Moral Bankruptcy, the Bankers Edition - We all know that when it comes to character, actions speak louder than words. So let’s call the moral bankruptcy showcased daily what it is. Let’s start with the bankers. To show you the moral bankruptcy displayed by people like Bryan Moynihan (Bank of America), Jamie Dimon (JPMorganChase), John Stumpf (Wells Fargo) and the rest as clearly as possible, I need to set the stage using a hypothetical top banking executive–Banker Bob. Banker Bob came in as CEO from a different industry; he’s some kind of turnaround specialist. That already puts him on higher moral ground than the people running our bailed-out banks. BofA’s Moynihan got the top job as of January 1, 2010. But Moynihan was promoted from within; he’d been with FleetBoston Financial, which was swallowed by BofA, since 1993. And since 2004 he’d held “senior leadership positions at Bank of America representing experience across virtually all business lines,” as the press release announcing Moynihan’s promotion pitched him. Dimon’s an even more culpable insider; he’s been running JPMorgan Chase as President since 2004 and CEO since 2006. Dimon fully consolidated his control by becoming Chairman at the start of 2007. Over at Wells Fargo, Stumpf has 29 years of experience at the company, taking over as President in 2005 and CEO 2007, and Chairman in 2010.

America’s Financial Leviathan, by J. Bradford DeLong - In 1950, finance and insurance in the United States accounted for 2.8% of GDP. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006. Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...” But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics. At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.

A new banking crisis: You can bank on it - You can bank on a banking crisis. You can bank on bankers who are primarily interested in their own portfolios. You can bank on banks remaining key behind-the-scenes players in our politics and outspoken when they sense that regulators are moving in on their permanent party of payouts. You can bank on their outrage when someone, anyone, suggests that they should pay their fair share or that their greed has to be checked or practices punished. Bankers are circling their guilded wagons to fight off attacks on many fronts. In the public arena, they are increasingly fed up with the "imbecilic" - stronger language to come - critics from the likes of Occupy Wall Street that they fear are inspiring public hostility to the lords of finance. There have even been protests at recruiting conferences on campuses where the MBA's used to stand in line for a chance to rake in the outsized salaries that awaited kids blessed as bankster-worthy.

MF Global Scrutinized on Money Moves - Federal authorities investigating the demise of MF Global think that the firm began improperly moving customer money to a middleman on Oct. 27, according to people briefed on the matter. The transfers, which indicate the brokerage firm misused client funds earlier than previously believed, represent a new line of inquiry in the hunt for more than $1 billion in missing money. In MF Global’s last days, the brokerage house was frantically winding down trades to shore up its balance sheet and stave off bankruptcy. Investigators are examining whether the firm — as part of that effort — began moving client funds to the Depository Trust & Clearing Corporation, a financial intermediary responsible for closing out some of MF Global’s transactions, these people say. The new details bolster claims that MF Global was careless with customer money, regardless of the company’s intentions. Authorities previously found that MF Global had used roughly $200 million of client funds to replenish an overdrawn account at JPMorgan Chase in London on Oct. 28, the last business day before the firm filed for bankruptcy.

A Run On The Global Banking System - How Close Are We? - Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal. Our own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner. We critics of the current, corrupt state of affairs also sometimes confuse the SIFI’s with the system itself, whenever we say, “The whole system is corrupt!” But the system is not corrupt—it’s the regulators and SIFI’s who are corrupt. If nothing else, the handling of the MF Global bankruptcy has proven that, once and for all. That’s why we’re pulling out our money now—while we still can. Because once the general public catches on to what we already know . . . oh boy.

MF Global chief missing $1.2B is financial adviser to EPA - During two days of recent congressional hearings into how as much as $1.2 billion disappeared from MF Global customer accounts, the chief operating officer of the imploding investment firm responded again and again that he did not know. Yet as the House and Senate interrogated Bradley I. Abelow and other top executives at MF Global Holdings Ltd., lawmakers did not mention Mr. Abelow’s role as a financial adviser for the Environmental Protection Agency, which as of Tuesday listed him as the chairman of its financial advisory board. Even as he finds himself the public face of a bankruptcy and admitted to lawmakers that he had no idea how client funds disappeared, Congress and the administration have voiced no public concern about Mr. Abelow’s role advising the $8.6 billion government agency on its finances. “EPA relying on Wall Street for financial guidance is like the blind leading the blind,” said Jeff Ruch, president of Public Employees for Environmental Responsibility, a nonprofit environmental advocacy group based in Washington. “In Abelow, you have a Wall Street executive who just presided over the disappearance of $1 billion in investor funds purporting to help guide federal infrastructure financing.”

The Miracle of Solvency - The lies which got us to the purgatory we are in, are being told all over again, right now, in every bank in the Western World. Not by accident, but on purpose, by men with calculators and degrees, in the full knowledge of what they are doing, why and for whose benefit. Every religion has its holy days. The days when the priests face their god and perform the rituals that renew the covenant between them. For believers it is the renewal of their faith, of their promise to believe in and serve their chosen God in return for which God will protect them. Global Finance is no different, and these days approaching New Year are their Holiest of Holies. Bankers have the Day of Reconciliation – when the year’s accounts must be reconciled. When all their deeds must be accounted for, all their actions weighed and a final reckoning made. So spare a thought this New Year for the auditors of Deloitte, PcW, Ernst & Young and of course, Ireland’s favourite, KPMG as they, in solemn convocation with Chief Risk Officers, Chief Finance Officers, of the world’s largest banks, perform the Ritual of Reconciliation and reveal, by the grace of creative accountancy, number massaging and rank but ordained lying, the great Miracle of Solvency once again. Sing Hallelujah!

Why is finance so complex? -Lisa Pollack at FT Alphaville mulls a question: “Why are we so good at creating complexity in finance?” The answer she comes up with is the “Flynn Effect“, basically the idea that there is an uptrend in human intelligence. Finance, in this view, gets more complex over time because financiers get smart enough to make it so.That’s an interesting conjecture. But I don’t think it’s right at all. Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.

American Firms See Europe Woes as Opportunities - As Europe struggles with its debt crisis¹, American businesses and financial firms are swooping in amid the distress, making loans and snapping up assets owned by banks there — from the mortgage on a luxury hotel in Miami Beach to the tallest office building in Dublin. The sales are being spurred on because European banks are scrambling to raise capital and shrink their balance sheets, often under orders from regulators. European financial institutions will unload up to $3 trillion in assets over the next 18 months, according to an estimate from Huw van Steenis, an analyst with Morgan Stanley. This month a team of three bankers from the London office of the buyout giant Kohlberg Kravis Roberts headed to Greece to examine a promising private company that cannot get Greek banks to provide credit for future growth. The Blackstone Group² agreed to buy from the German financial giant Commerzbank $300 million in real estate loans that are backed by properties, including the Mondrian South Beach hotel in Florida and four Sofitel hotels in Chicago, Miami, Minneapolis and San Francisco.

$6.3tn wiped off markets in 2011 - Almost $6.3tn was erased from global stock markets this year as the eurozone financial crisis reverberated across the world in the latter half of 2011, calling into question the future of the world’s largest currency bloc.Global stock market capitalisation dropped 12.1 per cent to $45.7tn according to Bloomberg data, while the euro ended the year as the worst performing major currency after finally starting to succumb to the continent’s financial and economic woes in December. The euro had proved resilient for much of the year – burning hedge funds that bet on a steeper decline – but on Friday touched a 10-year low against the Japanese yen, and is near lows against the dollar last touched a year ago.“Investors were more optimistic at the start of the year, but as the year progressed they were forced to come to grips with the debt levels in the western world,” said Navtej Nandra, the international head of Morgan Stanley’s asset management arm. The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 per cent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 per cent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets. Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 per cent this year, Hong Kong’s Hang Seng index 20 per cent and the Shanghai Composite 22 per cent.

Wall Street Layoffs: More Than One-Third Of Morgan Stanley Job Cuts To Hit NYC: More than one-third of job cuts at Morgan Stanley will likely hit workers in New York City. Nearly 600 of the 1,600 job cuts that Morgan Stanley announced last month will probably come from New York City, according to a regulatory filing cited by Bloomberg. The Morgan Stanley layoffs are just one part of a wider trend; Wall Street firms have said they will eliminate more than 200,000 jobs around the world this year. Thomas DiNapoli, the New York State Comptroller estimated earlier this year that 10,000 New York-based employees of the securities industry will lose their jobs by 2012, according to The New York Times. Bank of America announced in September that it would slash 30,000 jobs over the next few years to save $5 billion. Since the announcement, BofA employees have been flooding rival banks with resumes, Reuters reported last month. Still, they may be hard-pressed to find a job. Citigroup is planning to cut 4,500 jobs over the next few quarters, while Barclays said in August that it would slash 3,000 jobs. UBS plans to reduce its workforce by one-tenth over the next five years. Though financial industry workers may be plagued by constant layoff announcements, those who survive will likely be handsomely rewarded. Seven big banks' pay data indicate that Wall Street compensation is on track to exceed 2010 levels, according to an analysis from the Public Accountability Initiative.

Banks not lending? Corporate borrowing soars in 2011 - Consumers may be cutting debt and banks may be tightening up their balance sheets, but borrowing by U.S.¹ corporations is in full swing. At a time when the popular narrative centers on how tight-fisted banks are getting with their lending, end-of-year data for syndicated loans tell a different story. Corporations use syndicated loans for longer-term financing. The loans usually are provided by a group of deep-pocketed lenders who can distribute liability among them and thus decrease their risk. Big Wall Street² investment banks are usually the source of such loans. So far in 2011, syndicated loan volume has increased a whopping 56% compared to 2010, according to Dealogic. The total of $1.76 trillion is the highest single-year sum since the pre-financial crisis days of 2007.

How Does the New Federal Venue Law Affect Corporate Bankruptcy? - On December 7, 2011, President Obama signed the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63. The bill does not amend 28 U.S.C. 1408, the primary venue provision for bankruptcy cases in the U.S. Nonetheless, the changes should make us think again about the propriety of place of incorporation as a basis for chapter 11 venue. H.R. 394 substantially rewrote 28 U.S.C. 1391, the basic venue provision for federal actions. Section 1391(c) guides where parties "reside" for purposes of interpreting all venue provisions. For corporate (and equivalent) parties, new section 1391(c) divides the residence determination into the party as defendant and the party as plaintiff. If the applicable venue statute permits venue based on the residence of the plaintiff, the residence for a corporation is limited to the "judicial district in which it maintains its principal place of business." It does not extend to other locations in which the corporation would be subject to personal jurisdiction - such as place of incorporation.

Fed Policy Delivers a Tonic for Stocks - Treasury yields don't show it, but most analysts agree the Federal Reserve's Operation Twist program has been a boon for investors during the year's final quarter. The program, which has its final sale of short-dated debt for the year on Wednesday, pushed up a volatile U.S. stock market over the past few months and helped lower mortgage rates, breathing some life into the otherwise struggling U.S. housing sector, they said. Last week, Freddie Mac showed a variety of loan rates notching or matching record lows; the 30-year fixed rate fell to 3.91%, a record low.

Final 2011 Thoughts: Homeowners Drowning, Banks Soaring - As we await the results of a tea-party-driven GOP vote in Iowa--a tea party movement that got its name from a 2009 anti-government rant against "subsidizing losers' mortgages" by CNBC's Rick Santelli --let's take stock of what must be considered one of the most lopsided and pathological non-recoveries in American history. Here is what does not add up in our economy today: no one wants to risk the "moral hazard" of helping Rick Santelli's "losers," the mortgage holders, in a big way--lest it undermine the proper working of capitalism--but we've just spent the last four years pouring hundreds of billions of dollars into helping deadbeat banks (while asking nothing in return), thus also undermining capitalism. Why aren't we talking about this? The "losers' mortgages," of course, continue to be the biggest dead weight on American recovery. The underwater mortgage and foreclosure crisis has prevented a resurgence of demand in a consumer economy that, because of stagnant wages, had become dependant on debt and refinancing until the crash. So it is an economy that now has no great new life in it, with so many households still drowning in the deluge left behind by an unnatural-- this had little to do with authentic capitalism, Mr. Santelli! -- and fraud-driven housing mania, as I wrote in a post on Dec. 20.

BofA $8.5 Billion Mortgage Accord Fight to Be Heard by U.S. Appeals Court - A group of institutional investors including BlackRock Inc. (BLK) persuaded a federal appeals court to consider its request to return an $8.5 billion bond settlement with Bank of America (BAC) Corp. to state court for possible approval. The U.S. Court of Appeals in New York today agreed to review the appeal of U.S. District Judge William Pauley’s ruling in October to keep the case in federal court for review, rather than sending it back to New York State Supreme Court. The proposed agreement, first filed in New York state court, would settle claims from investors in the mortgage bonds of Countrywide Financial Corp., which Charlotte, North Carolina- based Bank of America bought in 2008. The deal was reached with the institutional investor group that includes BlackRock and Pacific Investment Management Co. and would apply to 530 mortgage-securitization trusts. Bank of New York Mellon Corp. (BK), the trustee for the mortgage-bond trusts, filed the settlement in state court and planned to seek approval of it there. Under the state proceeding, approval would bind investors outside the group that negotiated the agreement. Bank of New York had also asked the court to review Pauley’s ruling.

Who Is Really Responsible for the Housing Crisis? - Barney Frank - Peter Wallison's recent article in The Atlantic, "Hey, Barney Frank: The Government Did Cause the Housing Crisis," is part of his ongoing attempt to show that the private financial industry was the victim, not the cause, of the financial crisis. Mr. Wallison protests my characterization of him in a recent interview in The Atlantic as "a real extremist." Yet his article again proves his extremism which is marked by his denial that a failure of regulation of reckless or imprudent practices in the private financial services industry played any significant role in the crisis, and his complete rejection of the regulatory reforms in the 2010 Wall Street Reform and Consumer Protection Act. It is important to remember that Wallison's unique interpretation of the financial crisis has been rejected by every other member of the Financial Services Inquiry Commission, including the three Republican commissioners on the panel. Wallison's disagreement with the other members was so strong that he refused to sign their dissent and instead wrote his own dissent to the majority opinion. In subsequent Congressional testimony Wallison referred to them disparagingly as the "The Group" because he found them woefully inadequate because in his mind they did not place sufficient blame on the government for the housing crisis.

Joe Nocera nails it - He writes: ...Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point. Pinto and Wallison's definition of "subprime" is any loan that goes to a neighborhood they wouldn't live in or to a person they wouldn't have lunch with. According to the American Housing Survey, there were around 52 million mortgages outstanding in the US in 2009. This means that according to Wallison and Pinto, the median borrower is a subprime borrower.

Fannie and Freddie Fantasies - Bill Black - An important but fundamentally flawed debate about Fannie and Freddie’s role in the ongoing crisis has raged since the SEC sued the former senior managers of both entities for securities fraud. The Wall Street Journal and Peter Wallison (in the WSJ) have claimed that the suit vindicates their positions and discredits the Federal Crisis Inquiry Commission (FCIC). Joe Nocera, in his New York Times column, has thundered at the SEC and then Wallison, accusing him of “The Big Lie.” Nocera’s column is also interesting because it (implicitly) argues that the thesis of Reckless Endangerment is incorrect. His colleague Gretchen Morgenson and Joshua Rosner co-authored that book. I write to provide yet another view, distinct from each of the sources. There are two primary issues about Fannie and Freddie and the crisis discussed in the debate. First, why did Fannie and Freddie, relatively suddenly, change their business practices radically and begin purchasing large amounts of nonprime mortgages? Second, what role did declining mortgage credit quality that did not descend to the level of loans that the industry described as “subprime” play in the Fannie and Freddie crisis? The first issue is vastly more important and this article focuses on it. (The short answer to the second question is: “The first issue, for everyone except the SEC, comes down to this question: did Fannie and Freddie’s controlling officers (eventually) cause them to buy large amounts of nonprime loans for the same reason their counterparts running Lehman, Bear Stearns and Merrill Lynch did (the higher nominal short-term yield maximized their current compensation) or because “the government” made them buy the loans?)

Bill Black: Did OFHEO Fix Fannie and Freddie’s Compensation Systems after discovering their Frauds? - My friend notes that Fannie, under pressure from OFHEO and with its prior approval, changed its compensation system after the initial accounting fraud. My sentence would be clearer if it was revised to read as follows: “Here is the crazy thing – the SEC, OFHEO, and the Department of Justice all failed to prevent Fannie and Freddie from using perverse executive compensation systems that made the executives wealthy through fraud and put the entities and the government at risk.” The new compensation systems at Fannie and Freddie remained exceptionally perverse after the changes. Their CEOs continued to cause them to engage in systematic accounting fraud by not providing remotely adequate loss reserves and allowances for loan losses despite purchasing massive amounts of fraudulent liar’s loans and fraudulent subprime liar’s loans. The same scam that made the officers rich was certain to destroy Fannie and Freddie. I have also examined a number of statements by both of OFHEO’s leaders during the relevant period, concerning compensation and the initial Fannie accounting fraud. James Lockhart issued a hard hitting release on May 23, 2006 accompanying OFHEO’s report on its investigation of Fannie entitled: “FANNIE MAE FAÇADE: Fannie Mae Criticized for Earnings Manipulation.” The release begins with this passage that directly ties the accounting fraud to the controlling officers’ desire to trigger bonuses.

Morgenson on the Sham of the OCC’s Foreclosure Reviews - - Yves Smith - Given that the ~~Office of Bank Boosterism~~ Office of the Comptroller of the Currency is the clear first among the highly competitive ranks of bank-friendly regulators, the fact that the OCC launched a program for borrowers to obtain restitution for financial harm suffered due to foreclosures seemed more than a bit sus. Gretchen Morgenson does an admirable job of exposing the multiple shortcomings of this OCC program. She quotes Alys Cohen of the National Consumer Law Center, who nails it: “Not only will it not help people, it could easily harm them.” This is yet another Obama Administration “pretend we are helping ordinary citizens when we are in fact helping the banks” scheme. The most damning tidbit comes late in the article, that borrowers may (I’d assume will) be asked to sign releases that are far broader than the matters under examination. In other words, to get whatever relief the OCC provides, borrowers may unwittingly give up rights worth far more: For example, participants in line to get remuneration may be asked to give up their rights to defend themselves if they get into financial trouble again. Morgenson’s account depicts several shortcomings. The banks hire “independent” auditors of their practices, and Morgenson identifies two that look compromised (including one flagged by Michael Olenick on this site). And why, pray tell, isn’t the OCC conducting these reviews? Similarly, the review covers only 2009 and 2010, when many subprime borrowers hit the wall earlier. It’s pretty clear that this process, like the bogus Foreclosure Task Force (which reviewed 2800 loan files and did no validation of the data in those files) is designed to give servicers a clean bill of health, with only some problems that will be deemed to be minor and on their way to being remedied.

Is the OCC the Most Corrupt US Bank Regulator? - Yves Smith - As much as I’m fond of the name “Naked Capitalism,” I am beginning to wonder whether a more accurate description of this blog’s beat might be “Naked Corruption.” Our continuing discussion of the Office of the Comptroller of the Currency’s foreclosure ~~whitewash~~ reviews serves as an object lesson. The Fed and the Treasury are pilloried much more regularly than the OCC by virtue of the fact that they are more visible. But pound for pound, the OCC is arguably more pernicious. It was the OCC that decided to decamp from the then 50 state attorney general negotiations because, apparently, they might not produce a bank-friendly-enough outcome (remember, even though these negotiations keep being depicted in the press as “state attorney general” negotiations, a whole passel of regulators Federal agencies are involved, including the Fed, the DoJ, the FDIC, and HUD). But while the talks were underway, the OCC decamped and launched its own cease and desist order process, which was intended to reduce the impact of the settlement from the federal regulatory side. And if you think that the OCC was not trying to advance the banks’ agenda, the language the OCC used in the C&D orders was cribbed from the banks’ counterproposal to the attorneys general. Similarly, although I can’t prove it, I strongly suspect the OCC played a major role in the nuking of Elizabeth Warren. I am told she is a skilled bureaucratic infighter and had to have been aware of Geithner’s antipathy for her and hence would have been watching his game closely. The development that hurt her the most was the leak of a 7 page analysis prepared by the CFPB for the state AGs to Shahien Nasiripour, then of the Huffington Post. He anticipated the firestorm that resulted:

Michael Olenick: The Coming of the Light - About three years ago a local bankruptcy lawyer, head of a large firm, called asking if I’d take a software project creating a system to intake and analyze debtor information, to find mistakes or patterns of fraud. He was persistent, calling repeatedly like only a lawyer on a mission can, so I finally agreed to spend some time and at least do the analysis about the market and how the software would might work. I learned the basics of bankruptcy, met some clients, worked with the staff, and studied the software and systems in use. One item persistently caught my eye; the foreclosure progress dockets, the items filed by the banks to win their case, often didn’t make sense. I had a foreclosure of my own, filed by now-known fraudster David J. Stern, after Aurora Loan Services told me to stop paying my full-doc, 15% down-payment loan to qualify for a short-sale. I hadn’t paid it much attention; I bought that house with an ex-girlfriend in an area of town I didn’t especially like, and just wanted to be finished with it. Even though they’d told me to, it was I who stopped paying so .. time to leave. I received two strong short-sale offers, both at or above generally accepted market value. Aurora eventually accepted both, but long after the deadlines on the offers ran and the home’s value had plunged considerably further.

Homeowner David Brash wins $21MILLION in lawsuit against PHH Mortgage - It's a rare case of the little guy taking on a big corporation - and winning. U.S. Army sergeant David Brash has won more than $21million in damages from PHH Mortgage after it falsely claimed he defaulted on his loan. The 29-year-old was awarded the enormous sum by a Columbus jury after he sued the mortgage company - the country's eight-biggest - for reporting him as 'seriously delinquent' to credit rating companies.PHH claimed he was behind on his mortgage payments, when in fact they had been automatically deducted out of his Army pay cheque every month. He set up a direct debit in 2007 when he bought the house, in Columbus, Georgia, so he wouldn't miss any of his instalments while he was on active duty at Fort Benning. Austin Gower, one of his lawyers, told WTVM: 'This soldier was never behind on his payments. They were taking his money and not crediting it properly.

Fannie Mae and Freddie Mac Serious Delinquency Rates: Slight increase for Freddie in November - Fannie Mae reported that the Single-Family Serious Delinquency rate was unchanged at 4.00% in November. This is down from 4.50% in November of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate increased to 3.57% in November, up from 3.54% in October. This is down from 3.85% in November 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". The increase in November (unchanged for Fannie) is probably seasonal. The serious delinquency rates have been declining, but declining very slowly. The reason for the slow decline is most likely the backlog of homes in the foreclosure process. The "normal" serious delinquency rate is under 1%, and at this pace of decline, the delinquency rate will not be back to "normal" for a long time.

Occupy Bank of America? - Who knew that Mitt Romney had outflanked Obama on the left? Well, it took Nixon to go to China, but I expect we'll see a lot of backpedaling here. It's a bit troublesome, though, that a Harvard Law grad like Romney would believe that small claims court would possibly be the venue for resolving a wrongful foreclosure. Leaving aside jurisdictional issues, small claims courts are basically debt collection courts: they're used by debt collectors, not by homeowners who can't afford legal counsel and are seeking injunctive relief. It explains a lot about the state of our legal system if the Romneys of the world honestly believe that small claims court is a the way middle class folks can receive justice.

Short Sales of Homes Increasing - In my post on the economy in 2012, I questioned whether the fourth or fifth prediction of a “bottom” in housing was accurate. As if to slap me in the face with statistics, a report today showed pending home sales at their highest point in a year and a half. But that only takes us to the middle of 2010, not exactly boom times for the housing market. In addition, there’s a growing trend of pending sales getting called off at the last minute, which means a lot of these sales will not come to fruition. What I do think is a genuine trend, and one that’s slightly better than a crush of foreclosures, is theincrease in short sales as an alternative to evictions and repossessions. It’s a tarnished silver lining for people at risk of losing their houses and homeowners in neighborhoods blighted by bank-owned properties, but the robosigning scandal that slowed the foreclosure process to a crawl appears to have increased lender interest in short sales. Short sales, in which the lender agrees to let the owner sell the home for less than the amount owed on the mortgage, and foreclosures both climbed in 2010, but while short sales rose by 26,000 this year, the number of foreclosures fell by 255,000, according to Hope Now. Short sales, along with deed-in-lieu of foreclosure deals in which the lender takes the deed essentially as payment for the mortgage, still upend families, torch credit ratings and hurt neighboring property values, but they’re far less toxic than foreclosures.

Charities get more donated homes - The homes, typically low-value ones, may be refurbished and resold or demolished to rid neighborhoods of blight. By donating, mortgage owners free themselves from the cost of maintaining homes they can't sell. The bigger benefit is that cleaned-up neighborhoods help stabilize values of surrounding homes, banks say. "It's a win, win, win" for the neighborhood, the bank and the investor, says Rebecca Mairone, head of Bank of America's donation program. BofA donated 150 homes in 2011. It plans to donate more than 1,200 next year, Mairone says. Wells Fargo donated more than 1,120 homes this year, up from 295 last year, it says. Nationwide, Habitat for Humanity rehabilitated 1,210 homes that it received as donations or bought at distressed prices in the year ended last June. That's nearly twice as many as Habitat rehabbed a year before, says Sue Henderson, vice president of U.S. operations.

An Absurdly Low Number Of Foreclosure Sales Were Completed In 2011 - From economist Tom Lawler: While data on the number of loans either seriously delinquent or in the foreclosure process suggested that an increase in the number of residential properties lost to foreclosure this year was a “slam dunk,” incoming data suggest that in fact the numbers will be down significantly from 2010, and will in fact probably come in at the lowest level since 2007! Of course, there are no “official” data on completed foreclosure sales. However, estimates both from RealtyTrac through November and Hope Now through October suggest that this will in fact be the case. Moreover, estimates from Hope Now on the number of completed foreclose sales on owner-occupied properties suggest that such foreclosures will be down very sharply this year. Unfortunately, Hope Now only started reporting the breakout by occupancy status in December 2009. Short sales and DILs, in contrast are likely to be up in 2011 compared to 2010, at least according to estimates derived from Hope Now data. Unfortunately, Hope Now data doesn't allow for an estimate of SS/DILs by occupancy type, and HN didn’t start releasing data that allowed one to derive estimated short sales/DILs until early 2010. Here is a table of what completed foreclosure sales and short sales/DILs for residential first-lien mortgages might end up looking like for 2011, compared to the last 3 years.

Millions Of Americans Are Realizing They Can Default On Their Mortgage And Live Scot-Free For Years: Thanks to record long waits for foreclosure reviews this year, 40 percent of homeowners in default have been sitting pretty in their homes for the last two years without paying a dime, CNN Money reports. And they know exactly what they're doing. "It is happening and it's happening more frequently," says Chantay Bridges, a senior real estate specialist with Clear Choice Realty & Associates. "They know they have a least a year (for the foreclosure to go through), at minimum, and people are taking advantage of it." By enlisting a host of tactics to delay the foreclosure process, like filing bankruptcy, pushing back short sale dates and hitting lenders with requests for more documentation, consumers are able to further delay the inevitable. But in some cases, the system drags on long enough without extra roadblocks. The loan modification process alone can take a year or longer and often consumers won't bother making mortgage payments in the process. After all, if you show banks you can afford you monthly mortgage, why would they consider modifying your loan? The key here is to keep in touch with lenders throughout the modification process. Once you're in, they won't contact your creditors about missed payments.

U.S. Home Prices Fell More Than Forecast - Residential real estate prices dropped more than forecast in the year ended October, showing a broad-based decline that indicates the U.S. housing market continues to be weighed down by foreclosures. The S&P/Case-Shiller index of property values in 20 cities dropped 3.4 percent from October 2010 after decreasing 3.5 percent in the year ended September, the New York-based group said today. The median forecast of 27 economists in a Bloomberg News survey projected a 3.2 percent decrease. The real-estate market is bracing for another wave of foreclosures that may keep pressure on home prices, indicating any housing recovery will take time to develop. Nonetheless, rising builder confidence, a pickup in construction and fewer unsold new properties for sale are among signs the industry that triggered the last recession is steadying.

Case Shiller: House Prices fall to new post-bubble lows in October (seasonally adjusted) - S&P/Case-Shiller released the monthly Home Price Indices for October (a 3 month average of August, September and October). This release includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities). Note: Case-Shiller reports NSA, I use the SA data. Here is a table of the year-over-year and monthly changes for both SA and NSA. From S&P: The Fourth Quarter Starts with Broad-based Declines in Home Prices According to the S&P/Case-Shiller Home Price Indices Data through October 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices ... showed decreases of 1.1% and 1.2% for the 10- and 20-City Composites in October vs. September. Nineteen of the 20 cities covered by the indices also saw home prices decrease over the month. The 10- and 20-City Composites posted annual returns of -3.0% and -3.4% versus October 2010, respectively.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 32.9% from the peak, and down 0.5% in October (SA). The Composite 10 is at a new post bubble low (Seasonally adjusted), but still above the low NSA. The Composite 20 index is off 33.0% from the peak, and down 0.6% in October (SA). The Composite 20 is also at a new post-bubble low. The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Prices increased (SA) in 4 of the 20 Case-Shiller cities in October seasonally adjusted (only one city increased NSA). Prices in Las Vegas are off 61.3% from the peak, and prices in Dallas only off 8.8% from the peak.

Nasty Case-Shiller Shows Home Prices Barely Off Their Crisis Lows - The widely followed S&P/Case-Shiller Home Price index continues to deliver bad news. October data, released on Tuesday, showed both the 10 and 20 city indices down on a monthly and yearly basis, with markets still hitting new lows. High foreclosure rates and a weak labor market, coupled with inherent real estate market weakness, will remain a drag on economic growth going forward. On a monthly basis, the 10-city composite fell 1.1%, while the 20-city slid 1.2% from September to October. Annual numbers were even more troubling, with the 10-city down 3% and the 20-city tanking 3.4%. Fourteen of the twenty cities surveyed showed price declines. The data doesn’t look good at all. Four markets show prices that remain below their January 2000 levels (Atlanta, Cleveland, Detroit, Las Vegas), while two of those posted new lows (Atlanta and Las Vegas), more than three years since the demise of Lehman Brothers. Atlanta was down 11.7% on an annual basis. One of the major problems in the sector is the extremely high rate of foreclosures in some markets. Barclays’ capital research team noted that markets that exhibit high concentrations of foreclosures are down 4.9% on an annual basis, compared with a 2.5% decline for the remaining cities.

Home prices in largest US cities fall in October from September - Home prices in the nation's largest cities fell in October for the second straight month, suggesting that prices will head down further next year and dashing hopes that the sluggish housing market was headed for an upturn. The Standard & Poor's/Case-Shiller index, a measure closely followed by economists, showed price drops in 19 of 20 cities since September. Overall, the price index slipped 1.2% month over month and fell 3.4% compared with October 2010. The decline is typical of the season, when home buyers back off after the busy summer period. But coming off five straight months of increases through August, the retreating prices in the fall suggest that weakness in the market may stretch into 2012. Atlanta was on particularly shaky ground, according to Case-Shiller data. The price index there declined 5% in October after falling 5.9% in September and was down 11.7% over the last 12 months. Atlanta, Cleveland, Detroit and Las Vegas had average prices that were lower than they were in January 2000.

A Look at Case-Shiller by Metro Area - Home prices declined in October on a monthly and annual basis, according to the S&P/Case-Shiller indices. The composite 20-city home price index, a key gauge of nationwide home prices in the U.S., dropped 1.2% from September and fell 3.4% from a year earlier. Nineteen cities posted monthly declines; only Phoenix showed a monthly gain. Nationwide home prices, measured by the 20-city index, are down 32.1% from their mid-2006 peak — and back to their mid-2003 levels. (The 20-city index hit its low in March 2011.) Atlanta posted the lowest annual return, a drop of 11.7%. Only two cities in the index notched annual gains: Detroit, at 2.5% and Washington, D.C., at 1.3%. Fourteen of the 20 areas saw their annual returns improve compared to the September data. Miami saw no change in its annual returns, while five others – Atlanta, Detroit, Las Vegas, Los Angeles and Minneapolis – saw their annual rates worsen. See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Detroit an unexpected bright spot in U.S. housing market - An unlikely name has been popping up lately as a rare bright spot in the nation’s still-abysmal housing market: Detroit. Among the nation’s top 20 metropolitan regions, only the Detroit and Washington, D.C., areas posted annual home price increases, according to S&P/Case-Shiller home price data for October released this week. At 2.5 percent, Detroit’s gain was almost double the increase reported for Washington, where unemployment and foreclosures have remained relatively low despite the financial crisis. Improbable as it might seem, the Detroit area is seeing an increase in building permits. Construction firms are dusting off their equipment and returning to work, and bidding wars are breaking out over desirable homes. “It is a rapid climb back,” said Howard Wial, a fellow for the Metropolitan Policy Program at the Brookings Institution, who with two colleagues published a paper recently about the economic recovery in America’s 100 largest metropolitan areas. “It’s not anywhere near a bounce back, but it’s something.”

U.S. Homes Expected to Lose Nearly $700 Billion in Value in 2011 - Zillow News - Homes in the United States are expected to lose more than $681 billion in value during 2011, according to Zillow analysis released today. While this year’s total value loss is high, it is 35 percent less than the $1.1 trillion lost in 2010. Additionally, this year’s total value loss is the lowest recorded during the last five years. “While homeowners suffered through another year of steep losses, the good news is that homes are losing value at a substantially slower pace as the market works its way towards the bottom,” . “Compared to last year when we saw sharp declines following the expiration of the homebuyer tax credits, this year we saw some organic improvement in home values, in terms of a slowed depreciation rate, which resulted in a smaller total value loss for the year.” Zillow’s analysis shows less value was lost in the latter half of the year due to increased stabilization of home values. Over $454 billion in value was lost from January to June compared to $227 billion lost from July to December. Despite the fact that the majority (92 percent) of the 128 markets analyzed showed home value loss this year, 81 markets saw an improvement in home value loss in 2011. .

$9,000,000,000,000 - A new report from Zillow puts an absolutely jaw-dropping figure on the housing crash: $9 trillion. That's the total home value destroyed since June 2006. It gets worse. $1.7 trillion of that damage occurred this year, primarily in the first half. More loss is coming next year, as Zillow economist Stan Humphries predicts a double dip in housing that won't hit bottom until summer -- or later by Case Shiller estimates. See how much equity your city lost here:

Home values fell 17% in three years, state assessors say - Home values in Maryland communities reassessed by the state this year have fallen an average of 17 percent since 2008, a sizable drop but smaller than in the last two rounds of property evaluations. Nine out of 10 residential properties that were reassessed lost value, the state Department of Assessments and Taxation said Tuesday. Some homes were more valuable because their owners renovated. But assessors say they're seeing signs of stabilization in some neighborhoods — a new trend. "There are communities that have already hit bottom and they've flattened out," said Robert E. Young, director of the agency, who sees examples in pockets across the state. At the other extreme are neighborhoods in Prince George's County that have been pummeled by distress sales. The county's average decline in home values — 37 percent — is by far the biggest in the state. "Over 80 percent of their market involves either a short sale or a foreclosure,"

Gloomy Price Picture Forecast for 2012 - Expect at least another full year of falling home prices before things get better. That’s the bottom line from Fannie Mae’s economists in their final forecast for 2011. Home prices will end 2011 4.1 percent below a year ago for the second year in a row, as measured by the Federal Housing Finance Administration Home Price Index. Prices will lose a total of 8.2 percent over two years running but here is more bad news to come, according to Fannie Mae’s economists. Fannie’s experts predict 2012 prices won’t be much better, falling an additional 2 percent during the first quarter and ending with a 0.89 percent year-over-year decline before home prices finally stabilize, turn the corner and slowly begin to improve the following year. They see prices increasing 2 percent in 2013. The sour note on prices reflects recent price declines recorded by S&P/Case-Shiller and the CoreLogic house price index. “The recent decline in prices was mainly driven by distressed sales, as prices were up when distressed sales are excluded,” the economists said.

Real House Prices and House Price-to-Rent - A monthly update: Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels. The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through October) in nominal terms (as reported). In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to March 2003 levels, and the CoreLogic index is back to May 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to March 2000. In October 2004, Fed economist's Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph using the Case-Shiller Composite 20 and CoreLogic House Price Index.On a price-to-rent basis, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to May 2000.

Existing Home Inventory declines 18% year-over-year in December - Another update: I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. Tom Lawler mentioned this back in June. According to the deptofnumbers.com for monthly inventory (54 metro areas), listed inventory is probably back to early 2005 levels. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through November (left axis) and the HousingTracker data for the 54 metro areas through December. This is the first update since the NAR released their revisions for sales and inventory. Now the NAR and HousingTracker are pretty close. There is a seasonal pattern for inventory, bottoming in December and January and peaking during the summer months. So inventory will probably decline again next month and then start increasing in February. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the December listings - for the 54 metro areas - declined 17.6% from the same month last year. For the final week in December, inventory is down 18.4% from a year ago. This is just inventory listed for sale, sometimes referred to as "visible inventory". There is also a large "shadow inventory" that is currently not on the market, but is expected to be listed in the next few years.

Sales of U.S. Homes Beat the Forecasts -The number of Americans signing contracts to buy previously owned homes rose more than forecast in November as falling prices and low borrowing costs boosted demand. The index of pending home sales increased 7.3 percent to the highest level since April 2010 after climbing 10.4 percent the prior month, figures from the National Association of Realtors showed today in Washington. Economists forecast a 1.5 percent gain, according to the median estimate in a Bloomberg News survey. The industry that triggered the 18-month recession that ended in June 2009 is showing signs of stabilizing as construction picks up, builder confidence improves and the number of houses on the market declines. Nonetheless, another wave of foreclosures may weigh on real-estate values next year. “It looks like buyers are becoming more confident and are attracted to record-low mortgage rates,” At the same time, he said, “activity still looks depressed by historical standards.”

Pending-Home Sales Hit 19-Month High -The housing market showed signs of improvement as the number of Americans signing contracts to buy existing homes increased in November to the highest level in 19 months. The National Association of Realtors' seasonally adjusted index for pending sales of existing homes increased 7.3% on a monthly basis to 100.1, the industry group said Thursday. Sales increased in all four regions of the country. Economists surveyed by Dow Jones Newswires had expected pending-home sales would climb by 0.5% in November. November's 100.1 level was the highest since April 2010. The NAR credited the increase partly to pent-up demand from buyers who have been on the sidelines for months and may have previously failed to obtain a mortgage. "Some of the increase in pending home sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage," The NAR's pending sales gauge is 5.9% above its level in November 2010.

Nov. pending home sales rise – – The number of Americans who signed contracts to buy homes in November rose to the highest level in a year and a half. Normally, such a gain would suggest a turnaround for the depressed housing market. But a growing number of buyers are canceling their contracts at the last minute, making it a less reliable gauge. The National Association of Realtors said Thursday that its index of sales agreements jumped 7.3% last month to a reading of 100.1. A reading of 100 is considered healthy. The last time the index was that high was in April 2010, one month before a federal home-buying tax credit expired. Contract signings usually indicate where the housing market is headed. There's a one- to two-month lag between a signed contract and a completed deal. But a sale isn't final until a mortgage is closed and many are falling apart before that happens. One-third of Realtors say they've had at least one contract scuttled in November and October, according to the Realtors group. That's up from 18% in September.

A Pickup for Housing in 2012? - Residential investment made a small positive contribution to GDP in 2011, for the first time since 2005. And construction employment turned slightly positive in 2011. Now the question is what will happen in 2012? I think some pickup is likely, but I'm not as optimistic as some other people... From the WSJ: Hedge Funds See Rebirth for U.S. Housing Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc. Ivy Zelman [predicts] that rising rents will push would-be buyers to purchase homes. A housing recovery isn't "happening as fast as everyone would like," she says. But there are "a lot of pillars in place to give us some optimism." Of course there are still housing bears: "The smartest money in the world has been carried out on stretchers betting on a true recovery for housing," says Mark Hanson I think we will probably see some increase in new home sales in 2012, but it will be from a very low level (around 300 thousand new homes will be sold in 2011, a record low since the Census Bureau started tracking new home sales in 1963). I'll have more on housing and residential investment soon.

What Really Caused the Crisis? - I was looking at some employment data and was reminded of this figure: This figure shows that construction employment reached a peak in April, 2006 and started descending thereafter. The housing recession was on, but remarkably employment in the rest of the economy continued to grow through early 2008. In fact, layoffs and discharges did not dramatically change during this almost 2-year period as seen below: In other words, the Great Recession did not emerge because of the collapse of the housing market in early 2006. Something else had to happen about 2 years later to turn a sectoral recession turn into the Great Recession. As the figure above suggests, I see the evidence pointing toward a failure by the Federal Reserve to stabilize nominal spending and by implication nominal income. This failure meant that nominal income growth expectations of about 5% a year assumed by household and firms when they signed nominal debt contracts would not be realized. A debt crisis was therefore inevitable. This understanding is corroborated by the data on personal income. The figure below shows that despite the fall in the growth rate of personal income from construction and real estate services that began in early 2006, personal income in the rest of the economy continued to grow at about 5% a year up through mid-2008.

Consumer confidence hits 8-month high -— Consumers showed the most confidence in December in eight months, heartened by the availability of more jobs, according to a closely followed survey. The Conference Board said its index of consumer confidence jumped to 64.5 this month from a revised 55.2 in November. Economists surveyed by MarketWatch were expecting the index to climb to 60.0. Consumer confidence has jumped nearly 25 points in the past three months and now sits at its highest level since April. An acceleration in U.S. hiring since fall has contributed to the rebound, economists say. The U.S. has added an average of 143,000 jobs from September through November after hiring nearly dried up in early summer.

Consumer Confidence at an Eight-Month High - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through December 14th. The 64.5 reading is substantially above the consensus estimate of 58.0 reported by Briefing.com and Briefing.com's own estimate of 60.0. This is the highest reading since April. The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is fractionally below the 64.8 average confidence level of recessions a full 31 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research). The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing gauge of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today's reading of 64.5 is dramatically below the 81.6 of the current regression level (20.9% below, to be precise).

Sometimes Inflation Is Less (Or More) Than It Seems - The American mindset is conditioned to treat high/rising inflation as forever bad, and low and falling inflation as perennially good. Most of the time the relevant analysis can be reduced to a simple rule: higher inflation is bad; lower inflation is good. The trouble arises in those rare periods when disinflation/deflation dominates. Recent history is one of those periods. Hold that thought as you consider an article in today's Wall Street Journal: U.S. inflation is slowing after a surge early in the year. This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth. In normal times—such as the 40 years or so through 2008—the statement above would be regarded as a self-evident truth. But a few things changed in 2008 and so the standard narrative for inflation and the economy no longer applies. Economist David Glasner complains that equating falling inflation with "good news for Americans" harbors an "unstated assumption that the number of dollars people have in their pockets has nothing to do with how much inflation there is." Glasner charges that "it is inexcusable to ignore the truism that rising prices necessarily put more dollars in people’s pockets and simultaneously assert, as if it were a truism, that rising prices reduce real income."

DOT: Vehicle Miles Driven declined 2.3% in October - The Department of Transportation (DOT) reported:

• Travel on all roads and streets changed by -2.3% (-6.0 billion vehicle miles) for October 2011 as compared with October 2010.
• Travel for the month is estimated to be 254.0 billion vehicle miles.
• Cumulative Travel for 2011 changed by -1.4% (-36.0 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 47 months - so this is a new record for longest period below the previous peak - and still counting! And not just moving sideways ... the rolling 12 months is declining. The second graph shows the year-over-year change from the same month in the previous year. This is the eight straight month with a year-over-year decline in miles driven. This decline is probably due to high gasoline prices and the sluggish economy. Maybe habits are changing ...

Oil price above $101 on rising consumer confidence - The price of oil climbed above $101 a barrel in light holiday trading on growing consumer confidence and prospects for stronger demand. Benchmark crude rose $1.52 on Tuesday to $101.19 per barrel in New York. Brent crude rose $1.21 to $109.17 per barrel in London. Prices have risen in the past week as encouraging U.S. economic news pointed to stronger future demand. A private survey released Tuesday showed consumer confidence this month surged to levels not seen since April and was near a post-recession peak. The New York-based Conference Board its Consumer Confidence Index rose almost 10 points from November, to 64.5. The increase was surprisingly strong, with most analysts expecting a reading of 59. Higher confidence is in line with retail reports of a decent holiday shopping season. Retailers saw a surge of shopping the week before Christmas as consumers took advantage of better discounts. The National Retail Federation now expects a 3.8 percent increase in holiday sales, up from its original forecast of 2.8 percent made in September. Consumer spending accounts for about 70 percent of the U.S. economy, so an uptick in spending could boost growth and demand for oil. Consumers have cut back in recent years because of uncertainty about the economy, fed by a weak jobs market and a stagnant housing market. Gasoline demand has been steadily declining since spring.

Weekly Gasoline Price Update: The Oil-Gasoline Price Divergence - Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump -- both regular and premium -- rose three cents over the past week. Regular is now 17.8% off its 2011 interim high set in early May. Premium is down 16.2%. WTIC closed today at 101.24. It is 11.1% off its 2011 interim high, which also dates from early May. As the first chart below shows, the price of oil has risen significantly since the interim low in early October while gasoline prices have trended downward. This is not a sustainable divergence. As I write this, GasBuddy.com shows no states with the average price of regular above $4. The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index. The chart below offers a comparison of the broader aggregate category of energy inflation since 2000, based on categories within Consumer Price Index (commentary here).

Gasoline prices climb to record end-of-year highs ... again - The most expensive year ever for gasoline purchases in the U.S. is heading to a close, but not without one last snatch at motorists' wallets. Pain levels at the pump are rising again in California and across the rest of the nation, assuring that 2011 will mark the second year in a row that prices have posted record December highs. The average price of a gallon of regular gasoline in California on Tuesday is $3.562, up 2.2 cents since last week, according to the AAA Fuel Gauge Report. That was enough to shatter the old record for Dec. 27 of $3.301, set last year. Previous to that, the worst that Californians had seen on this day was $3.266 a gallon in 2007. Nationally, the numbers tell the same story. The U.S. average for a gallon of regular gasoline Tuesday is $3.231, up 1.8 cents since last week. That broke the old record set last year, which was an average of $3.042 a gallon. Before that, the highest U.S. average for this day was $2.981 in 2007.

New signs of economic weakness -Heading into an election year, there were new signs Friday that the economy isn’t getting much better — consumer spending ticked up 0.1 percent in November while incomes also rose just 0.1 percent. The anemic growth in both areas, announced ¹by the Commerce Department² in its monthly report, fell below economists’ expectations. The income growth was the weakest since a 0.1 percent decline in August. Meanwhile, new orders for manufactured durable goods increased 3.8 percent or $7.5 billion in November to $207 billion, the Census Bureau announced. This increase, up four of the previous five months, comes after a slight increase in October. Much of this growth was in transportation equipment, which saw the largest increase of $7 billion, or a whopping 14.7 percent, following two consecutive monthly declines. Excluding transportation, new orders increased only 0.3 percent.

Consumer, business spending point to slower growth (Reuters) - Consumer spending was tepid in November and a gauge of business investment fell for a second straight month, suggesting the economy lost some of its recent momentum. Some analysts trimmed fourth-quarter growth forecasts after the weak consumption and factory data on Friday. But many still expected output to expand at an annual pace of more than 3 percent, faster than the 1.8 percent in the July-September period."The economy got off to a solid start this quarter, but it seems to have cooled a little bit in November. Growth is still going to be strong this quarter, but it's going to slow in the first half of 2012 because of Europe," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.Consumer spending ticked up 0.1 percent last month, the Commerce Department said, after rising by the same margin in October. Economists had expected spending, which accounts for two-thirds of U.S. economic activity, to rise 0.3 percent. In another report, the department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.2 percent last month after declining 0.9 percent in October. Shipments of these so-called core capital goods, which go into calculations of U.S. gross domestic product, dropped for a third straight month.

Rail-Freight Surge Before Holiday Shows U.S. Skirting Recession - North American railroads’ freight volumes surged 17 percent last week, the most in a year, in an indication that the U.S. economy will avoid a second recession. Rising shipments of retail goods helped drive the jump in carloads for the period ended Dec. 24, the Association of American Railroads said today. The trade group released the results after government data showed U.S. jobless claims fell to a three-year low in the past month. The double-dip recession “that people feared only six, eight, 10 weeks ago never materialized,” . “Things are going pretty well in a variety of the commodities that the railroads carry.” Analysts focused on pre-Christmas rail traffic this year because record retail sales over the Thanksgiving weekend suggested that the seasonal peak in freight shipping might extend into December. Many retailers delayed building inventory amid concerns that the economy was weakening. Commodity carloads such as chemicals posted the second- largest jump of 2011, up 12 percent. Intermodal carloads, which can move by rail, road and sea and often move retail goods, rose 23 percent, the most in a year.

Restaurant Performance Index increased in November - From the National Restaurant Association: Restaurant Industry Outlook Improved in November as Restaurant Performance Index Rose to Five-Month High The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.6 in November, up 0.6 percent from October. In addition, November represented the second time in the last three months that the RPI stood above 100, which signifies expansion in the index of key industry indicators. “The November increase in the Restaurant Performance Index was fueled by broad-based gains in both the current situation and forward-looking indicators,” . “Restaurant operators reported their strongest net positive same-store sales results in more than four years, while customer traffic levels also grew in November.” The index increased to 100.6 in November (above 100 indicates expansion). (see graph) Restaurant spending is discretionary and is impacted by the overall economy. This index showed contraction in July and August, but is now positive again.

Penny-Wise and No Fools in Stores - On Monday, the day after Christmas, TLC’s cameras were cruising Forever 21, Lane Bryant and GameStop stores in Florida and California for a future episode of recession-era entertainment: “Extreme Couponing.” At this penny-pinching moment in American history, this reality show about moms (and a few dads) who compulsively clip coupons and stockpile free stuff is a breakout hit for TLC, the cable channel formerly best known for Kate Gosselin. So the channel is trying to make the most of it, filming holiday specials and conceiving two spinoffs that will be shown this week. The first, “Extreme Couponing: All-Stars,” is a series that has its premiere on Tuesday, about people competing to save the most money on their groceries. The second, “Extreme Cheapskates,” is a special on Wednesday, about people who barter, Dumpster-dive and forage for free goods and services.

Delayed Gratification - Buy now, pay later” has long been the unofficial mantra of American retailing. But this holiday season plenty of American shoppers have gone the other way—paying first and buying later. ’Tis the season of layaway. Not long ago, layaway looked like a relic, thanks to the widespread availability of credit cards. The dismal economy has changed all that. As early as the fall of 2008, with the recession in full swing, Kmart started a campaign pushing layaway, and, as shoppers embraced the idea, retailers across the country have made it a big part of their holiday sales drive. Walmart had killed its layaway program for everything but jewelry in 2006. But this year it acceded to reality and brought layaway back. The return of layaway makes historical sense, since it first became widespread during the Great Depression, when the country, just as it is now, was dealing with the hangover from a colossal credit binge. During the nineteen-twenties, the vast majority of consumer durables, like refrigerators, washing machines, and furniture, had been purchased on installment. But credit dried up during the Depression. Similarly, one reason for layaway’s resurgent popularity is that credit, for many Americans, is much harder to come by these days. Credit-card companies have tightened their standards, dropped customers, and shrunk credit lines. But consumers aren’t using layaway just because they don’t have other options. They’re using it as a way to manage their money better. It’s a question not necessarily of spending less but of learning how to spend smarter.

More than spirits are being lifted - During the four weeks leading up to Christmas this year, an estimated $1.8 billion in merchandise will be shoplifted from U.S. retailers, according to The Global Retail Theft Barometer, a survey of retailers worldwide. That's up about 6 percent from $1.7 billion during the same period last year. "They shoplift for Christmas gifts, they steal for themselves, for their family," says Joshua Bamfield, executive director of the Centre for Retail Research and author of the survey. Sticky fingers are common during the holidays. The crowded stores and harried clerks make it easier to slip a tablet computer into a purse or stuff a sweater under a coat undetected. But higher joblessness and falling wages have contributed to an even bigger rise this year. People steal everything from necessities (think food) to luxuries they can no longer afford (think electronics or Gucci purse).

I Have Seen the Future of Retail… This is the main checkout area at the Walgreens at the corner of North Avenue and Wells St. in Chicago. As you can see, it has no human cashiers at all; just a guy (in the striped sweater) roving and troubleshooting if customers have problems during the checkout process. I’ve seen plenty of self-checkout stations, but they’ve always been accompanied by at least one human cashier to accommodate customers who for whatever reason — unfamiliarity, techno-fear, the desire to chat, whatever — don’t want to deal with a machine. I assumed the same would be true at this Walgreens. They were right and I was wrong. There are six NCR self-checkout kiosks at the entrance / exit, and no cashiers at all there. There are human cashiers at the photo lab and the pharmacy and customers can take their purchases to these two locations if they want, but at the main checkout area you can’t get rung up by a person any more.

Sears to close 100-120 Kmart, Sears full-line stores - — Sears Holdings Corp. plans to close between 100 and 120 Sears and Kmart stores after poor sales during the holidays, the most crucial time of year for retailers. The closings are the latest and most visible in a long series of moves to try to fix a retailer that has struggled with falling sales and shabby stores. In an internal memo Tuesday to employees, CEO and President Lou D'Ambrosio said that the retailer had not "generated the results we were seeking during the holiday." Sears Holdings Corp. said it has yet to determine which stores will close but said it will post on http://www.searsmedia.com when a final list is compiled. Sears would not discuss how many, if any, jobs would be cut. The company has more than 4,000 stores in the U.S. and Canada. The company's revenue at stores open at least a year fell 5.2 percent to date for the quarter at both Sears and Kmart, the company said Tuesday. That includes the critical holiday shopping period.

Thanksgiving Day Massacre: Sears Slaughtered On Collapsing Margins, To Shutter Hundreds Of Stores, Provides Revolver Update - That retailer Sears, aka K-Mart, just preannounced what can only be described as catastrophic Q4 results should not be a surprise to anyone: after all we have been warning ever since the "record" thanksgiving holiday that when you literally dump merchandize at stunning losses, losses will, stunningly, follow. Sure enough enter Sears. What we, however, are ourselves stunned by is that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone - there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words "revolving credit facility" and "availability" appear in the same press release. Just recall MF Global. From Sears: Specific actions which we plan to take include: Close 100 to 120 Kmart and Sears Full-line stores. We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate. Further, we intend to optimize the space allocation based on category performance in certain stores. Final determination of the stores to be closed has not yet been made. The list of stores closing will be posted at www.searsmedia.com when final determination is made.

Goodbye "Shop Til You Drop" Mentality: Renegade Band of Economists Call for "Degrowth" Economy - Consumer spending, which makes up about 70 percent of the economy, is a sort of patriotic duty -- never more so than in the last four years of economic malaise. So news from the National Retail Federation that the country is on track for a record-breaking holiday shopping season -- $469.1 billion in sales, up 3.8 percent from last year -- could only be a good thing, right? But what if all roads to prosperity don't lead to the shopping mall, as most economists would have us believe? What if, in fact, all that shopping -- and the imperative to grow corporate profits quarter after quarter and continuously expand the economy -- was actually the root of many of the problems we face today? That's the view of a renegade but increasingly influential band of economists, who say the myth of perpetual economic growth and "the iron cage of consumerism" are the chief causes of world economic dysfunction and environmental crisis -- and the biggest obstacle to our very happiness. While the term may seem like an oxymoron to some, ecological economics places the economy inside the larger "ecosphere" that supports all life on Earth, rather than seeing the economy and job creation in direct opposition to environmental protection.

The Walmartization of America Redux: How the Relentless Drive for Cheap Stuff Undermines Our Economy, Bankrupts Our Soul, and Pillages the Planet - If you want to know why the middle class disappeared and where they went, look no further than your local Walmart. People walked in for the low prices, and walked out with a pile of cheap stuff, but in a figurative sense, they left their wages, jobs, and dignity on the cutting room floor of the House of Cheap. Welcome to the logical end point of Reagonomics. Welcome to Ayn Rand’s nightmare vision of morality, where we know the price of everything but the value of nothing; where predatory behavior is celebrated and the notion of community is blasphemy.In his excellent documentary, Walmart: The High Cost of Low Price, Robert Greenwald carefully documents how Walmart’s giant box stores lower wages across the entire retail sector, impose high social and economic costs on the states and communities in which they operate, and destroy local businesses. Yet the low prices – which come at such a high cost – are irresistible to American consumers. Walmart has virtually cornered the retail market and amassed astounding wealth in the process. But it’s not just Walmart. Big box stores now rule across the board in the US retail economy in everything from electronics to pet supplies. And it’s not just retail. The entire US economy is now organized around the notion that getting us cheap stuff – the more the better – is the sine qua non of economic policy.

My chart of the year: The investment drought continues - I’m sorry, every time I hear about the need to boost consumer spending I have to stop myself from pounding the table. As we round into 2012, the real weakness in the economy lies on the investment side, not the consumption side. Take a look at the following graph of net domestic investment as a share of net domestic product (‘net’ means depreciation is subtracted). I consider this graph, which expands on one I gave to the Atlantic, to be my ‘chart of the year’. This chart, which runs through the third quarter of 2011, displays several disturbing patterns:

Despite rebounding from its recession valley, net business investment as a share of net domestic product is still far below historical levels.
Household and institutional net investment as a share of net domestic product is at a 40-year low.
And perhaps most disturbing, government net investment is only 1% of net domestic product, a 40-year low.

Obama to Approve a Series of Anti-Small Business Policies That Will Cheat the Middle Class out of Billions - The Obama administration has quietly adopted a series of anti-small business policies that will cost small businesses and minority-owned small businesses billions of dollars a month. In the midst of the worst economic downturn in U.S. history, President Obama is abolishing the nation's oldest and most successful program to direct infrastructure spending to minority-owned small businesses, which could cost them between $25 and $50 billion a year. The President has continued to allow billions of dollars a month in federal small business contracts to be diverted into the hands of big businesses. His administration tried to cover up the diversion of federal small business contracts to corporate giants by destroying data in the Federal Procurement Data System such as the "small business flag" and the "parent DUNS number," that allowed watchdogs like myself, and the media, to monitor the actual recipients of federal small business contracts. And now, President Obama will reauthorize a Department of Defense program known as the Comprehensive Subcontracting Plan Test Program (CSPTP) that makes it easier for prime contractors to cheat small businesses out of billions. Under the CSPTP, large defense contractors are exempt from reporting their subcontracting actions and also exempt from any penalty of non-compliance with congressionally mandated small business procurement goals. The idea of the CSPTP is ludicrous.

U.S. Tax Breaks for Investments May Be Fading as Job Creator - Campbell Fittings, a maker of industrial hose couplings, used the break to buy equipment that allowed the family-owned business about 50 miles northwest of Philadelphia to offer more innovative products at a lower cost to better compete with overseas rivals. The investment paid off, and Campbell doubled its payroll in the past 18 months to 92 workers, who are receiving training in skilled labor and improving their standard of living, McGlynn said. Overshadowed in the year-end congressional bickering over extending a payroll tax cut is the fate of so-called bonus depreciation and other expiring business tax breaks. The accelerated depreciation tax benefit allowed businesses to write off 100 percent of some capital investments made this year, rather than spreading it out over several years. The incentive costs the U.S. Treasury little in forgone revenue, has bipartisan support and some companies say that in their experience it is doing what it’s supposed to: stimulate the economy. The write-off will drop to 50 percent in 2012 if Congress doesn’t act to continue the full expensing. The House and Senate haven’t agreed on whether to include it in a broader tax measure.

Chicago PMI, Pending Home Sales Show Continued Momentum in US Economy - In a leading indicator the Chicago PMI came in stronger-than-expected for the December period. The index posted a reading of 62.5, basically matching November 62.6 and much stronger than the forecast of a 60.4 print which would have meant a slower expansion of activity. New orders eased to 60.0 from November 70.2, while the employment index rose to 58.6 from 56.9 - a positive for the US labor market. The Chicago PMI is important because the factories in that region track the US auto industry quite nicely and the report shows that the pick up in momentum in the US economy, which we have seen from data over the last couple of months, continues. That furthers the "growth divergence story" between America and that of Europe and Asia. The Chicago PMI is used as a curtain opener for the ISM manufacturing index which will get in Tuesday’s session next week.

Kansas City Fed manufacturing index "eased slightly" in December - This is the last of the regional Fed surveys for December. The regional surveys provide a hint about the ISM manufacturing index - and the regional surveys were mixed in December although they showed some improvement in the aggregate. From the Kansas City Fed: Tenth District Manufacturing Activity Eased Slightly According to the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity eased slightly, but expectations for future months improved somewhat. The month-over-month composite index was -4 in December, down from 4 in November and 8 in October, and the first negative reading since December 2009 ... Most other month-over-month indexes also fell somewhat in December. The employment index dropped to its lowest level since mid-2009, and the new orders for exports index edged down. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:The New York and Philly Fed surveys are averaged together (dashed green, through December), and five Fed surveys are averaged (blue, through December) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through November (right axis).

US Manufacturing Competitiveness in Global Trade - Those of us ensconced in debates in support US manufacturing often hear opponents claiming that the over-regulated US labor market and unionized heavy industry render us uncompetitive in global markets. That may sound convincing given competition from emerging markets, but there are lots of advanced economies with long records of positive net exports, while we continue to run large deficits in manufactured goods, year after year. This new BLS report (including a link to their rockin’ new dashboard—go BLS!!) provides the data in the form of manufacturing compensation costs across countries, with conversions to dollars using market exchange rates. First, as shown in the first figure, in the most recent year for which they have complete data, we’re toward the low end of the advanced economies in terms of compensation costs. Second, in dollar terms, manufacturing compensation costs have increased much faster elsewhere over the past decade (figure two; these summary measures use trade-weighted currencies, based on each countries relative share of US trade; you can use the dashboard link above (open the Excel file) to view individual countries).

The US Auto Industry Drifts Off To China - Though practically every car sold in the US today contains Chinese-made components, the announcement that a few Chinese-made cars would arrive in Canada raised a lot of eyebrows. It would be a Honda Fit assembled in the same plant where the European version, the Jazz, has been built for years. But Chinese-designed and branded vehicles have not made it yet. Chinese automakers, of which there is a whole slew, are scrambling to improve their technologies from nice-looking but shoddy copy-and-paste models to reliable products that would be competitive in developed markets. It’s a government priority. And they’re getting there through the back door. China's automotive market, with new vehicle sales in the 18-million-unit range in 2011, has leapfrogged the US market with its 12 million units. Some analysts estimate that sales will reach 28 million units in 2017 (highly optimistic if the China bubble blows up before then), and no major automaker wants to miss out on the opportunity. The push to develop new technologies is immense. China has already outdistanced the US in published patent applications, according to a report from Thomson Reuters, though it is still lagging behind the US, Japan, and Europe in patent grants. The surge in applications is in part due to incentives that the government is offering in its amazing effort to push the country up the industrial and intellectual food chain to where products are designed from ground up in China. Targets: pharmaceuticals, technology, and ... the auto industry.

Factory Jobs Gain, but Wages Retreat — Manufacturers are hiring again in America, softening a long slide in factory employment. But for a new generation of blue-collar workers, even those protected by unions, the price of employment is likely to be lower wages stretching to retirement. That is particularly true of global manufacturers like General Electric¹. With labor costs moving down at its appliance factories here, the company is bringing home the production of water heaters as well as some refrigerators, and expanding its work force to do so. The wages for the new hires, however, are $10 to $15 an hour less than the pay scale for hourly employees already on staff — with the additional concession that the newcomers will not catch up for the foreseeable future. Such union-endorsed contracts are also showing up in the auto industry², at steel and tire companies, and at manufacturers of farm implements and other heavy equipment, according to Gordon Pavy, president of the Labor and Employment Relations Association and, until recently, the A.F.L.-C.I.O.’s director of collective bargaining.

How Germany Builds Twice as Many Cars as the U.S. While Paying Its Workers Twice as Much - In 2010, Germany produced more than 5.5 million automobiles; the U.S produced 2.7 million. At the same time, the average auto worker in Germany made $67.14 per hour in salary in benefits; the average one in the U.S. made $33.77 per hour. Yet Germany’s big three car companies—BMW, Daimler (Mercedes-Benz), and Volkswagen—are very profitable. How can that be? The question is explored in a new article from Remapping Debate, “the salient difference is that, in Germany, the automakers operate within an environment that precludes a race to the bottom; in the U.S., they operate within an environment that encourages such a race.” There are “two overlapping sets of institutions” in Germany that guarantee high wages and good working conditions for autoworkers. The first is IG Metall, the country’s equivalent of the United Automobile Workers. Virtually all Germany’s car workers are members, and though they have the right to strike, they “hardly use it, because there is an elaborate system of conflict resolution that regularly is used to come to some sort of compromise that is acceptable to all parties,” according to Horst Mund, an IG Metall executive. The second institution is the German constitution, which allows for “works councils” in every factory, where management and employees work together on matters like shop floor conditions and work life. Mund says this guarantees cooperation, “where you don’t always wear your management pin or your union pin.”

The Job Guarantee as an Alternative to Enforced Idleness. But What Will They Do? Examples from the WPA - Wray - As I concluded in my previous blog: A sovereign government faces no financial constraints. We can have payroll tax holiday extensions and unemployment benefit extension. Heck why don’t we go whole-hog and actually create jobs for the unemployed? We need 25 million of them. We can afford them. All we need to do is to find useful things for them to do. That ain’t hard. The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years…I should think it is obvious that we’ve got plenty that would keep 25 million pairs of hands usefully busy. But maybe it is not. After decades of “fuddled” brains, maybe it is difficult to come up with tasks. Let us look to the past for some examples—back to a time when people were (apparently) still able to engage in rational thought.

Why Work Hours Are Limited - Robin Hanson asks, Why Work Hour Limits? Many laws discourage and limit work hours. Laws require holidays and vacations, limit hours per day and week, and require extra payment for work over these limits. . The standard economic explanation for these limits is to prevent inefficient signaling. People motivated to gain relative status, to show their extra dedication to success, and to appear more able, work extra hours, for a net social loss. Work hour limits can reduce such losses. (Academic articles here, here, here, here, here.) . Yet we don’t at all limit housework, and place few limits on self-employed work. Furthermore, high status occupations are especially exempt. Doctors, lawyers, managers, financiers, artists, writers, athletes, academics, and software engineers often work crazy hours. Yet the signaling argument would seem to apply nearly as well if not better to such high status work. Why are we so selective in our limits? This strikes me as an example of thinking like an economist–a world where all things are magically held equal for the sake of theoretical argument–without regard for history. Work hour limits, after all, go back to the early days of the Industrial Revolution and have been in place in most developed countries since the mid-1800s.

Hoping Employment Takes Off......but can't help worrying that this will happen. Things do look better, but assuming recent trends don't end up like the skier in the link the question is how strong growth will be. Will it be just enough to absorb population growth, but no more? Or will there be an acceleration of growth that allows us to provide jobs for new entrants to the labor force and also begin to reemploy the milllions of people who lost jobs during the recession and have had no luck finding new ones?I wish I was confident that will happen, and happen fairly soon. In the past, such bursts of activity during the recovery phase were normal and expected. But as I noted recently, it's hard to see where the needed jump in demand will come from: ...no matter which sector you point to, government, business, households, or foreigners, there is little reason to expect the large increase in demand needed to drive an economic recovery. Things are looking better, and the green shoots might just be real this time around, but we are still a long, long way from returning to whatever our new normal might be.It doesn't have to be this way. Although recessions that are caused by financial collapses are among the most difficult to recover from and lost decades are not at all unusual, as Christina Romer recently highlighted effective government policy (monetary and fiscal) can shorten the recovery time considerably.

Weekly Initial Unemployment Claims increase to 381,000 - The DOL reports: In the week ending December 24, the advance figure for seasonally adjusted initial claims was 381,000, an increase of 15,000 from the previous week's revised figure of 366,000. The 4-week moving average was 375,000, a decrease of 5,750 from the previous week's revised average of 380,750. The following graph shows the 4-week moving average of weekly claims since January 2000. . The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 375,000. This is the lowest level for the 4-week average since June 2008. And here is a long term graph of weekly claims: Although initial claims increased this week, the 4-week moving average is still falling and is now well below 400,000.

Weekly Unemployment Claims Jump by 15,000 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 15,000 increase was from an upward adjustment of 2,000 for the previous week. The less volatile and closely watched four-week moving average came in at 380,250, the sixth week below 400K for the 4-week MA after 29 consecutive weeks above that benchmark. Here is the official statement from the Department of Labor: In the week ending December 24, the advance figure for seasonally adjusted initial claims was 381,000, an increase of 15,000 from the previous week's revised figure of 366,000. The 4-week moving average was 375,000, a decrease of 5,750 from the previous week's revised average of 380,750. Today's seasonally adjusted number came in well above the Briefing.com consensus estimate of 368K and their own expectation of 370K. As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

Jobless Claims in U.S. Hit Three-Year Low - Fewer Americans filed applications for unemployment benefits over the past month than at any time in the past three years, a sign the U.S. labor market is on the mend heading into the new year. The four-week moving average for claims, a less volatile measure than the weekly figures, dropped to 375,000 last week, the lowest level since June 2008, Labor Department figures showed today in Washington. Applications (INJCJC) rose for the first time in a month in the week ended Dec. 24, climbing by a more-than- forecast 15,000 to 381,000. The jump in claims last week may say more about their volatility during this time of year than about the state of the job market, according to economists like Eric Green. Their recent decline has stoked speculation the world’s largest economy was on the cusp of showing bigger gains in employment.

After One Month Respite, Pink Slips Are Flying Again - Following 4 weeks of supposed improvements in the labor picture courtesy of declining initial jobless claims, even as we all know too well that Wall Street has been firing thousands and thousands of highly paid bankers and CNBC talking heads left and right (are bankers too good for that $400/week paycheck from Uncle Sam?) today initial claims for the week ended December 24 once again resumed their drift higher, printing at 381k, up 15k from the perpetually upward revised prior week total of 366K (previously 364K). And as usual, the Seasonal Adjustment process smoothed out a whooping jump in actual terminations of 69k, which rose from 421K to 490K. Continuing claims also rose by 34K, from 3567K (upwardly revised, duh) to 3601K. Finally, those on EUCs and Extended Benefits once again saw a net drop off from the 99 week cliff as more and more people fall out out of the workforce in perpetuity following 2 years of being unable to find a job. The total amount of jobless on extended claims is now down by 1 million from a year ago, down from 4.5 million to 3.5 million, and dropping. We for one, can't wait to hear what the media spin will be next month when employers put the pinkslipmobile on turbo boost next month and fire all those temp workers they has been stockpiling to help with the EOY inventory liquidations, and we get another 400K claims print.

Jobless Claims becoming tough to ignore - While it is a bit of a stretch to say that economists are snug in their beds with visions of jobless claims dancing in their heads, there is no denying that they are growing more excited about the improvement in claims over the past month and will be focusing on that release in the holiday-shortened week. “People are going to be focusing pretty heavily on claims,” said Josh Shapiro, chief U.S. economist at MFR Inc. Claims have fallen by 40,000 over the past four weeks to a post-recession low of 364,000. After initial doubts when the decline started, many analysts are putting more weight on the down trend. See story about most recent jobless claims report. “The claims drop is looking more authentic,” said Robert Brusca, chief economist at FAO Economics. “One unexpectedly low number can easily be a fluke; two are interesting; three are telling us something real is happening in the labor market,”

Number of the Week: More Jobs in 2011, But Still Not Enough - 131 million: The average number of people working in the United States in 2011, through November. December’s employment figures, which will be released by the Labor Department on Friday, will likely boost that number, but only slightly. Most economists think the U.S. added somewhere in the neighborhood of 150,000 jobs in December, which would only bump the full-year average by around 65,000. Either way, when it comes to jobs, 2011 was an improvement over 2010. For the full year, the economy likely gained about 1.3 million jobs in 2011, the first increase since the start of the recession. The numbers would look even better if budget cuts hadn’t wiped out hundreds of thousands of government jobs; private-sector employers added some 1.7 million jobs this year. (The 2011 figures are seasonally adjusted to account for the still-unknown December number. Numbers from the previous years are full-year averages and aren’t seasonally adjusted.) But the U.S. still has about 6.5 million fewer jobs than in 2007, the peak year for U.S. employment. At the current rate of increase, it would take until about 2016 to get back to that level. And that only looks at the number of jobs; adjusting for population growth, it would take even longer.

Labor Force Exits are Complicating Unemployment Forecasts - NY Fed - Although many other variables involved in the translation of GDP growth forecasts into unemployment rate forecasts (such as productivity and population growth) receive a great deal of attention from economists, the one that has been written about a lot recently is the labor force participation rate. (See, for example, Congressional Budget Office projections.) The labor force participation rate is defined as the percentage of the civilian noninstitutional population aged 16 and over that is in the labor force, meaning that they are either working or actively looking for work. Changes in this variable over time reflect numerous demographic, economic, and behavioral forces. Even if you were certain how much the U.S. economy (gross domestic product, or GDP) would grow over the next year or two, it would still be difficult to forecast the unemployment rate over that period. The link between GDP growth and unemployment is complex in part because it depends on how many people decide to work or look for work—that is, the labor force participation rate. In this post, we discuss the recent steep decline in the labor force participation rate and explain how uncertainty regarding the future path of that variable contributes to conflicting views about the future path of the unemployment rate.

The Daily Beast Acts Up on the Economy - Dean Baker - Sometimes a little kid will deliberately be bad just to get attention from her teacher or parents. This seems to be the philosophy of a Daily Beast column by Zachary Karabell, which uses what seems to be some deliberately bad economic analysis to tell us things are really pretty good. The piece begins with the incredible assertion: "years from now, when we look back at 2011, it may be remembered as one of the best worst years of the early 21st century. You’d be hard-pressed to come up with an extended period where people were more negative, yet remarkably, in the United States at least, not much actually happened." No, 2011 looks better than 2009 and 2010 and certainly better than ending of 2008, but most of the country would be hard-pressed to find a reason to put 2011 ahead of any of the years prior to the crash. The unemployment rate for the year is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security.

These Economists Think The Government Should Guarantee Everyone A Job Unemployment has become a lot like the weather. Everyone talks about it but no one really does anything about it. One group of heterodox economists would like to change that. The Modern Monetary Theory school of economists would like to see the government act as an employment backstop. When people cannot find employment elsewhere, they would be able to turn to the government for a job. The federal government, in other words, would act on employment much like the Federal Reserve does for bank liquidity. It would be the employer of last resort. The MMT crowd tends to call this the "Jobs Guarantee." It's a good slogan. And after years of persistent unemployment, I bet a lot of Americans might think it is not too bad of an idea. Regular readers will have noticed that I've been writing a lot about MMT recently. I was introduced to MMT by Cullen Roche at the blog Pragmatic Capitalism after someone mentioned that my writings on the debt ceiling sounded a lot like MMT. I had been explaining that the federal government could never run out of money, even if it refused to borrow because it had hit the debt ceiling. A government that pays for things with currency it creates can always just create more currency, regardless of what the bond markets say. What I hadn't realized until I was directed to the MMT crowd was that an entire school of economics had been built around this core insight. But the MMTers do not limit themselves to explaining that the government is not revenue constrained. Many of them also subscribe to the idea that the government should guarantee everyone a job. In fact, one of the key proponents of MMT recently argued that the Jobs Guarantee is a "central aspect" of the school.

Should a Job Guarantee program be permanent? - I had been meaning to post on this since I read Cullen Roche's post. While I subscribe to most points of MMT, this is also my point of minor disagreement with MMT. I've never really focused much on the Job Guarantee (JG) in this blog, and I prefer to call it Employer of Last Resort (ELR) program instead. ELR sounds more like a countercyclical program, which gets activated to take the place of lost private sector demand during large economic downturns. JG sounds like a more permanent program, one that guarantees that anyone who wants a job, and who is unwilling and unable to find one in the private sector, is guaranteed to get one in government, anytime anywhere. In other words, I believe this program should be a program that is market-oriented, rather than a fixed-in-place government policy instrument. Why do I believe the ELR shouldn't be fixed and permanent? My main concern is that a permanently-fixed JG program that pays the industry-standard minimum wage could ultimately replace market resilience, and impede its ability to adapt. An important starting point is to make distinctions between structural and cyclical downturns. A structural downturn is when the private sector is laying off people because they are losing market share in their current realms of activity, and should therefore retool and restructure themselves. When private companies are retooling, and need to hire the skills they will need to support their new initiatives, they should not be competing with the government as buyers of labour.

Keeping the JG during a boom and private sector business formation - This is a followup to my previous post, as further need for clarification came about from comments (hat tip Mario). I don't object to the JG itself, as you may already know from past posts, I advocate a government jobs program during a deep cyclical downturn, I just have issues to the permanence being proposed. To me it comes down to either not making JG permanent OR if you want to make it permanent in order to set a stable price level, it should pay at a much lower wage than private sector, especially when going into an economic upturn. Otherwise, why would anyone take a private sector job that can someday be made obsolete by the market when you can always take a safe government-guaranteed JG job that will always be there no matter what. In an upturn, keeping the JG would make the cost to hire more prohibitive for new businesses, and looking at tradeoffs for both employees and would-be employers, it would entail a much higher assured premium for private business to make up for the higher risk of joining or setting up in private industry, when there are government-assured jobs for the taking for all posterity. Usually no one changes jobs unless it's for a higher wage, and no one will want to make the risk for so low a spread over riskless government positions.

Casey Mulligan Wonders Why People Use Unemployment Insurance - Casey Mulligan is curious: what could have caused the big uptick in the uptake on unemployment insurance in recent years? It's a mystery. Or, maybe not: Sorry, the JOLTS data only goes back to 2001. Which directly addresses Mulligan's basic assertion: People are lazy. They don't like to work. Well yeah. (People especially don't like working at unpleasant jobs -- those at the low end of the spectrum.) But how lazy are they? Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco do a lot to answer that question. Returning here to an earlier post, on Valletta and Kuang's study of unemployment insurance and unemployment. This graphic stands out: People who quit their jobs or are just entering the job market aren't eligible for unemployment compensation. People who lose their jobs are. The money quote: The differential increase of 1.6 weeks for job losers is the presumed impact of extended UI benefits on unemployment duration. It is straightforward to translate this increase in unemployment duration into an effect on the unemployment rate, based on their proportional relationship and adjusted for the share of job losers in overall unemployment, which was about 67% in December 2009. The implied increase in the unemployment rate is quite small, slightly less than 0.4 percentage point, indicating that without UI extensions, the measured unemployment rate would have been 9.6% in December 2009 rather than the observed 10.0%.

Wages and the Great Vacation: Casey Mulligan responds... Two posts back, I explained why the "Great Vacation" idea doesn't pass the smell test. If U.S. unemployment had been caused by a negative shock to labor supply, we should have expected to see an increase in real wages. Casey Mulligan, one of the leading proponents of the Great Vacation story, responded on his blog: A number of bloggers have recently discovered real wages as a labor market indicator. They are at least 3 years late to the party. Three years ago I blogged about the effect of labor supply on real wages. I noted how real wages had risen since 2007, and predicted that they would begin to decline in 2010. I have continued to update this work, eg here, and here. The fact is that the real wage time series fits my recession narrative very well. Well, in response to that, let's look at the numbers. Here, courtesy of FRED, is a graph of real compensation per hour in the nonfarm business sector:

The Biggest Cut in Unemployment Benefits - While Congress has been debating whether to cut the duration of unemployment benefits, perhaps the largest unemployment benefit cut occurred when the stimulus law expired. Unemployment insurance offers funds, for a limited eligibility period, to people who lost their jobs and have not fyet been able to find and start a new job. In 2008, “emergency unemployment” legislation, plus automatic triggers in the unemployment insurance rules, extended the eligibility period to up to 99 weeks from 26 weeks. Several times since then, and as recently as last week, new legislation has prevented the eligibility period from returning to 26 weeks. The length of the eligibility period has received much attention; it affects how much the program spends and how much unemployed people receive. For example, if the weekly benefit were $275, and an unemployed person were unemployed for a year, then the average weekly benefit he would receive under the 26-week rule would be about $138 ($275 for half the year, and zero for the other half). By extending the eligibility period to more than 52 weeks, this person would see his average weekly benefit increase to $275 from $138. The green line in the chart below shows the average weekly benefit

Michigan Borrows Record $3.3 Billion to Repay Jobless Benefits -- Michigan, whose joblessness led the nation during 2006-09, will issue $3.3 billion of variable-rate bonds -- its largest-ever sale, according to treasury officials -- to repay federal unemployment-benefit loans. The two-year bonds underwritten by a unit of Citigroup Inc. were selling at a yield of 0.24 percent, said Tom Saxton, deputy state treasurer. That compares with estimated 3 percent interest on federal loans next year, Saxton said. Repaying the U.S. government by Dec. 31 will save as much as $100 million in interest and avoid federal penalties, he said. “This is a good deal for the employer community,” he said. The sale through the Michigan Finance Authority closes today. The state joins Texas and Idaho in tapping debt markets to repay unemployment loans after the 18-month recession that ended in June 2009. Michigan’s 9.8 percent jobless rate in November marked the first time in two years it’s been below 10 percent. The national rate for November was 8.6 percent. Twenty-seven states and the Virgin Islands owed the federal unemployment trust fund a combined $39.3 billion as of Dec. 22, according to the U.S. Department of Labor. California owes the most, $9.7 billion, followed by New York and Michigan.

ID errors put hundreds in L.A. jails - Hundreds of people have been wrongly imprisoned inside the Los Angeles County Sheriff's Department jails in recent years, with some spending weeks behind bars before authorities realized those arrested were mistaken for wanted criminals, a Times investigation has found. The wrongful incarcerations occurred more than 1,480 times in the last five years. They were the result of a variety of factors, including officials' overlooking fingerprint evidence and working off incomplete records. The errors are so common that in some years people were jailed because of mistaken identity an average of once a day. Many of those wrongly held inside the county's lockups had the same names as criminals or had their identities stolen — problems that took days or weeks for authorities to sort out.

Food Banks See Drop In Donations - audio - Nearly 50 Americans million now live below the poverty line, according to the Census Bureau. Many food banks are not only reporting an increase in the number of people they're serving, but also a drop in food and cash donations — as much as 30 percent in some areas. Guest host Allison Keyes talks with two people working on the front lines of hunger relief.

TVA facilities see an increase in copper thefts - Tennessee Valley Authority police are reaching out to their neighbors to help stop copper thefts. "On a weekly basis we're dealing with copper theft in the Tennessee Valley," said TVA Police Director David Jolley. They're going door to door to homes around substations to ask neighbors to pick up the phone if they see any suspicious activity. Since TVA uses copper wire at all of their substations, they're a prime target for thieves looking to make a buck. The thefts are happening more frequently, so TVA police are asking residents near substations to pay extra attention. TVA's police force currently patrols their substations and distributions centers and uses surveillance cameras. However, they said they can't be everywhere at once.

The truth about the U.S. poverty crisis - It's official: There are now more poor people in America than at any other time in the 52 years records have been kept. We knew that the 2010 poverty numbers, released by the Census Bureau on Sept. 13, weren't going to be good. They turned out to be, in the words of Brookings senior fellow Ron Haskins, "extraordinarily bad." More than 15% of Americans live below the poverty line. The total rose for the fourth consecutive year. For a family of four, poverty means scraping by on roughly $22,000 a year. The new poverty crisis has emerged in part out of the other economic crisis we are facing: unemployment. The fastest way to poverty is job loss, and 6.5 million jobs were lost in the recession. Today, a full two years into the "recovery," more than 9% of Americans are still out of work. But a fact that may be buried in the copious coverage of these new figures is that the poverty problem didn't start with the financial crisis and the subsequent downturn. Its roots go much deeper, possibly to the recession of 2000, after which poverty levels didn't drop back to their prerecession numbers as they typically do after a recovery.

Why America’s 99% Have Rebelled - If you haven't seen it yet, you owe yourself a visit. If you're already familiar with it, go back to remind yourself why the #Occupy movement is so powerful. I am referring to the "We Are the 99%" Tumblr, the most direct and articulate explanation available of why so many—across America and beyond—have rebelled. The site is a blog to which people submit pictures of themselves. Usually, a person holds out a notebook or sheet of paper, their face partially obscured. On the paper, they have written their stories. Almost always, you can see their eyes. A stocky man with a short beard, maybe in his forties, has written neatly in marker: "947 days unemployed. 2,000+ resumes sent out. 0 job prospects."A young woman in light lipstick: "I'm a full-time grad student and a full-time worker. I have chronic, excruciating migraines. I live in fear of the next attack. I can barely cover rent, gas, and groceries. I can’t afford a doctor’s visit, let alone health insurance." A woman with a weary stare: "My husband has been looking for work for five years. I support him, myself, our 6-year-old-son, and (increasingly) my aging parents. Now my job is in jeopardy too."They write: "I am one paycheck away from not being able to make my loan payments." "I am 32 years old and live with my mother." "I have lost hope." "What am I doing wrong?"They sign their messages, "I am the 99%."

Online publication recognizes Walker - Wisconsin Gov. Scott Walker has been named 2011 Governor of the Year by Governors Journal. The online publication said Walker "served as the embodiment of the state by state battle to balance budgets and the best symbol of the struggle between the two political parties about how best to meet those fiscal challenges." New York Gov. Andrew Cuomo, a Democrat, was first runner up; Connecticut Gov. Dannel Malloy, a Democrat, received honorable mention. Governors Journal just celebrated it's one-year anniversary, and is put out by Pagani Public Affairs and edited by Dean Pagani, who is based in Washington, D. C., according to the web site. He served under Connecticut Gov. John Rowland and worked on the recent failed gubernatorial campaign of Tom Foley, also a Connecticut Republican. The publication said of Walker: "He is cited by both Democrats and Republicans as the best of example of what is wrong, or what is right with a conservative approach to government. Although they will never admit it, many Democratic governors are different from Walker only in a matter of degrees."

Even profitable firms fleeing California - Democratic reaction to the news that Waste Connections, a $3.6-billion company and major Sacramento-area employer, is headed to Houston to seek a friendlier business climate tells other businesses all they need to know about the attitudes of those who run California's government. "In this instance you have a company that is, in fact, profitable, making significant revenue gains in 2011 and 2010. That doesn't speak to a bad business climate here in California when a good company is able to thrive in that way. So whatever Mr. Middelstaedt's (company CEO) reasons are to leave the great state of California, I know I'm pushing back." "The decision by Waste Connections to relocate, despite the 17 percent revenue increase and the $18 million cost to move to Texas, illustrates that businesses will endure short-term costs to ensure long-term prosperity," wrote state Sen. Mimi Walters, R-Laguna Niguel, in response to Steinberg's message. Walters quotes business-relocation expert Joe Vranich of Irvine, who notes that businesses typically save 40 percent in costs by leaving California because of lower taxes and more manageable regulations found elsewhere.

In Government We Don’t Trust - Nearly a decade ago, Alabama’s Gov. Bob Riley was supporting a measure that would have cut taxes for the less fortunate of the state’s population, and raised taxes for the more fortunate. The increased revenues that would have accrued as a result were intended for education. The state Legislature passed the measure, which then had to be approved in a referendum vote by the citizens of Alabama. The state’s business community was in favor of the proposal, believing that better education was a key to Alabama’s future. A variety of groups -- some from outside the state -- were against it. After a contentious, three-month campaign on the so-called “tax and accountability” package, the measure was defeated resoundingly by a 2-to-1 vote. This may be the saddest story of all those we’ve heard about state government over the last couple of decades. And here’s why: The people who would have most benefited -- the folks who would have paid less taxes for a better education -- came out against it. When we spoke with Riley a few months after the vote, he told us that the problem was that the citizens of Alabama simply didn’t trust the state, and so if state leaders were for it, they mistrusted it. We bring this up now, because this tale powerfully demonstrates the importance of trust in government.

Prichard asks to file brief supporting Jefferson County’s bankruptcy filing - The south Alabama city of Prichard has asked to file a court brief supporting Jefferson County's contention that it should be allowed to continue with its Chapter 9 bankruptcy case. Several of Jefferson County's major creditors have asked a court to throw out the county's $4.23 billion bankruptcy filing because they say Alabama law requires counties and cities in the state have a certain kind of debt -- funding or re-funding bonds -- that Jefferson County does not have. The county had bond-like debt called warrants not addressed in the state law, creditors say. Jefferson County attorneys have argued that the county had issued bonds in the past and in July the county commission had considered doing it again. Attorneys for Prichard on Friday filed a request in U.S. Bankruptcy Court in Birmingham asking that U.S. Bankruptcy Judge Thomas Bennett accept their amicus curie brief -- often called a friend of the court brief. In the brief, Prichard attorneys explain how that city had its 2009 bankruptcy filing thrown out because the judge determined it did not have funding or refunding bonds.

Bankruptcy Filing Raises Doubts About a Bond Repayment Pledge - People who own what is considered the safest type of municipal bond may be in for a surprise. This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a “full faith and credit” pledge. That means the government that issued it will pay it on time, no matter what. But now Jefferson County, Ala., has stopped paying such debt, breaking with convention and setting up a fundamental test of what full faith and credit truly means. The few places that have gone bankrupt with general obligations outstanding have sent reassuring signals, making payments even though they were not required to in bankruptcy. Jefferson County, by contrast, is taking advantage of the automatic stay granted in bankruptcy, which bars creditors from demanding payments or grabbing collateral. Officials say they stopped sending cash to the county’s paying agent in November and will not send any money this month, either. Bankruptcy experts have long known that in theory a municipality could use the stay to revoke its full faith and credit pledge, but they have not watched a big distressed city or county go through with it. “You’ve got a case here where the rubber has hit the road,”

State budget cuts delay forensic tests - The funding crisis in Alabama's General Fund budget is being felt in particular by law enforcement agencies and district attorney's offices with delays in critical lab work results needed to investigate crimes and bring cases to trial. This includes tests to determine if something found in a car or on a suspect is an illegal substance like cocaine or marijuana or contains legal ingredients like talcum powder or pencil shavings. Also being delayed are tests to determine how a person died and those that show if arrested drivers were under the influence of alcohol or drugs. State Forensic Sciences Director Michael Sparks said his agency's funding has been cut 33 percent in the past three years and there are 27 fewer employees than in 2009. He said the funding shortfall is causing backlogs, particularly in drug tests and on toxicology tests that determine cause of death.

Cost Cutting Leaves Residents in the Dark - When the sun sets in this small city, its neighborhoods seem to vanish. In a deal to save money, two-thirds of the streetlights were yanked from the ground and hauled away this year, and the resulting darkness is a look that is familiar in the wide open cornfields of Iowa but not here, in a struggling community surrounded on nearly all sides by Detroit. Parents say they now worry more about allowing their children to walk to school early in the morning. Motorists complain that they often cannot see pedestrians until headlights — and cars — are right upon them. Some residents say they are reshaping their lives to fit the hours of daylight, as the members of the Rev. D. Alexander Bullock’s church did recently when they urged him to move up Saturday Bible study to 4 p.m. from the usual 7 p.m. “I come out of the church, and I can’t see what’s in front of me. What happened to our streetlights is what happens when politicians lose hope. All kinds of crazy decisions get made, and citizens lose faith in the process.” Cities around the nation, grappling with what is expected to be a fifth consecutive year of declining revenues and having exhausted the predictable budget trims, are increasingly considering something that would once have been untouchable: the lights.

Falling home values mean budget crunches for cities - The nation’s housing crisis is five years old, but for local governments across the country, the worst of the reckoning might only now be at hand. Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenues in communities from coast to coast. The problem is unlikely to subside soon. For instance, Baltimore collected $815 million in property taxes during the most recent fiscal year, according to Bill Voorhees, Baltimore’s director of revenue and tax analysis. Next year, the figure is predicted to shrink to $803.5 million. The following year, $773 million. The year after that, $735.7 million. The year after that, $729.4 million. Only in 2016 do city officials anticipate tax revenues increasing again. “I don’t see any quick fixes over the next four or five years, to be honest,” said Voorhees, noting that Baltimore already faces a budget deficit of more than $50 million next year. “Obviously, it means we have much lower revenues than we had in past. It’s creating gaps in our budget. . . . It’s a very large problem.” Because many states require officials to reassess properties only every so often — the laws vary widely, but a common time frame is every three years — communities generally see a significant lag time before property taxes reflect the true value of a home.

Lure of Chinese Tuition Squeezes Out Asian-Americans - Kwanhyun Park, the 18-year-old son of Korean immigrants, spent four years at Beverly Hills High School earning the straight As and high test scores he thought would get him into the University of California, San Diego. They weren’t enough. The sought-after school, half a mile from the Pacific Ocean, admitted 1,460 fewer California residents this year to accept higher-paying students from out-of-state, many from China. “I was shocked,” said Park, who also was rejected from four other UC schools, including the top-ranked campuses in Berkeley and Los Angeles, even with a 4.0 grade-point average and an SAT score above the UC San Diego average. “I took it terribly. I felt like I was doing well and I failed.” The University of California system, rocked by budget cuts, is enrolling record numbers of out-of-state and international students, who pay almost twice that of in-state residents. Among those being squeezed out: high-achieving Asian-Americans, many of them children of immigrants, who for decades flocked to the state’s elite public colleges to move up the economic ladder.

Keeping Students From the Polls - Next fall, thousands of students on college campuses will attempt to register to vote and be turned away. Sorry, they will hear, you have an out-of-state driver’s license. Sorry, your college ID is not valid here. Sorry, we found out that you paid out-of-state tuition, so even though you do have a state driver’s license, you still can’t vote. Political leaders should be encouraging young adults to participate in civic life, but many Republican state lawmakers are doing everything they can¹ instead to prevent students from voting in the 2012 presidential election. Some have openly acknowledged doing so because students tend to be liberal. Seven states have already passed strict laws requiring a government-issued ID (like a driver’s license or a passport) to vote, which many students don’t have, and 27 others are considering such measures. Many of those laws have been interpreted as prohibiting out-of-state driver’s licenses from being used for voting. It’s all part of a widespread Republican effort to restrict the voting rights of demographic groups that tend to vote Democratic. Blacks, Hispanics, the poor and the young, who are more likely to support President Obama, are disproportionately represented in the 21 million people without government IDs.

Young Women Go Back to School Instead of Work - Workers are dropping out of the labor force in droves, and they are mostly women. In fact, many are young women. But they are not dropping out forever; instead, these young women seem to be postponing their working lives to get more education. There are now — for the first time in three decades — more young women in school than in the work force. “I was working part-time at Starbucks for a year and a half,” said Laura Baker, 24, who started a master’s program in strategic communications this fall at the University of Denver. “I wasn’t willing to just stay there. I had to do something.” Many economists initially thought that the shrinking labor force — which drove down November’s unemployment rate¹ — was caused primarily by discouraged older workers giving up on the job market. Instead, many of the workers on the sidelines are young people upgrading their skills, which could portend something like the postwar economic boom, when millions of World War II² veterans went to college through the G.I. Bill instead of immediately entering, and overwhelming³, the job market.

The Trouble with Principles: Or, How to Not Lose Friends and Alienate People When Learning Economics (#OccupyWallStreet, #OWS) - Economics has always been something of a battleground, but in November a group of about seventy Harvard students opened a new front in the ongoing hostilities: its introductory pedagogy. In solidarity with the Occupy movement, the students staged a walkout of their principles course to protest what they called its “inherent bias.”In his rebuttal in the New York Times, Greg Mankiw countered that his teaching is careful to avoid policy conclusions and that its subject matter falls squarely within the current mainstream of the discipline. Narrowly correct, he nonetheless profoundly missed the broader points that his students, to be fair, seemed unable to articulate fully. The great irony and tragedy of “intro econ” is that it is at its introductory level that economic theory is both most broadly consumed and most malignantly simplistic. In a recent study, economists at the University of Washington found there to be an “indoctrination effect” for non-majors who take an economics course: on average, they behave more selfishly and hold less regard for others after taking such a course.

Chris Bray: Boston College: Time for Resignations - Boston College has done something disgraceful, and everyone involved should lose their jobs. This post will be long and difficult to read, with a large set of embedded documents (that you can enlarge to full screen, if you have trouble reading them). But when you make it to the end, you'll clearly see two things:
1.) BC has shamed itself as an institution, and has unnecessarily broken a set of extraordinarily serious promises, and
2.) You don't have to take my word for it, because the evidence speaks clearly, and the documentary evidence appears right here on the page.
Some background: Boston College sponsored the Belfast Project, an effort to secure interviews with former members of paramilitary organizations on both sides of the Troubles in Northern Ireland. Because such a project would require people to speak frankly about their participation in acts of unlawful violence, the project's researchers promised participants that their interviews would be embargoed until their deaths. Each tape and transcript of an interview with a former member of the Provisional IRA, for example, or the Ulster Volunteer Force, would be closely held in BC's Burns Library, securely locked away from historians and journalists until the contents of the material could no longer cause legal harm or political retribution to the interviewee.

Why Faculty Should Join Occupy Movement Protesters on College Campuses - In both the United States and many other countries, students are protesting against rising tuition fees, the increasing financial burdens they are forced to assume, and the primacy of market models in shaping higher education while emphasizing private benefits to individuals and the economy. Many students view these policies and for-profit industries as part of an assault on not just the public character of the university but also as an attack on civic society and their future. For many young people in the Occupy movement, higher education has defaulted on its promise to provide them with both a quality education and the prospects of a dignified future. They resent the growing instrumentalization and accompanying hostility to critical and oppositional ideas within the university. They have watched over the years as the university is losing ground as a place to think, dissent, and develop a culture of questioning, dialogue, and civic enlightenment. They are rethinking what should be the role of the university in a world caught in a nightmarish blend of war, massive economic inequities and ecological destruction. What role should the university play at a time when politics is being emptied out of any connection to a civic literacy, informed judgment, and critical dialogue, further deepening a culture of illiteracy, cruelty, hypermasculinity and disposability? Young people are not only engaging in a great refusal; they are also arguing for the social benefits and public value of higher education while deeply resenting the fact that, as conservative politicians defund higher education and cut public spending, they do so in order to be able to support tax breaks for corporations and the rich and to ensure ample funds for sustaining and expanding the warfare state.

Middle-aged borrowers piling on student debt (Reuters) - Middle-aged borrowers are piling up student debt faster than any other age group, according to a new analysis obtained by Reuters. Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma.com. That group saw its school debt burden increase by a staggering 47 percent, according to the analysis. The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon. Credit Karma CEO Kenneth Lin says the reason is obvious: The tough economy has pushed people to seek mid-career training."More and more people are going back to school," he says. "High unemployment, rising tuition costs, artificially low interest rates from the government, and increased for-profit school advertising... (adds up to) consumers taking on student loan debt at an alarming pace." For-profit schools tend to saddle more debt on older students with poorer credit than traditional institutions, he said.

College Debt? Where is your Sugar Daddy? - College students graduated to one of the highest unemployment rates for grads in US history this year.They are on average burdened with over 25,000 dollars in debt. With a dire job market, trying to find new ways to pay off that debt can get very tricky...An anonymous Ivy League college grad RT spoke with, is facing tens of thousands of dollars worth of debt. With no job and financial aid, she wants a sugar daddy. “Prostitution should be legal. I am not looking for love. I am looking for someone who I can casually date who might be able to provide some kind of financial support for myself,” she said. The former student believes relationships for money are on their way to becoming a trend. “Given hikes in tuition, and the current state of the economy, more and more people are looking for alternative ways to finance their educations. There are plenty of young men looking to date older women,” she explained. Men like Joseph. Also burdened by college debt, he is looking for a rich lady to take care of him.

U.S. State, Local Pensions Drop 8.5 Percent as Stocks Slide - U.S. public pension-fund assets fell in the third quarter by the most since 2008 as stocks sank amid concern that Europe’s debt crisis would curb economic growth, Census Bureau data showed. Assets of the 100 largest public-worker plans decreased $237 billion, or 8.5 percent, from the prior quarter to $2.53 trillion by Sept. 30, the bureau said today in a report. It marks the first decline since the second quarter of 2010 and the biggest since the last three months of 2008, when holdings slid 13 percent during Wall Street’s credit crisis. The setback may strain state and local governments that have set aside more money to cover retirement benefits. That’s pressured governments already coping with diminished tax collections and has propelled efforts to reduce benefit costs. The asset decline was driven by losses in stock holdings, which slipped $134.7 billion to $769.6 billion, the Census Bureau said. The value of holdings of corporate bonds, U.S. treasuries, and international securities also fell.

State cuts to Medicaid affect many -- Just as Medicaid prepares for a vast expansion under the federal health care overhaul, the 47-year-old entitlement program for the poor is under increasing pressure as deficit-burdened states chip away at benefits and cut payments to doctors. Nearly every state has proposed or implemented a plan in its current budget to rein in costs, and many are considering additional cuts in the year ahead. For the tens of millions of poor and disabled who rely on the programapproaching nearly one in five Americansthe cuts translate into longer waits for doctors, restrictions on prescription drugs, a halt to vision and dental care, staff cuts at nursing homes and dwindling access to home health care. States are reshaping the Medicaid landscape even as the need has grown along with joblessness during the recession. The $427 billion-a-year program, a combination of state and federal funding, also had been targeted for additional cuts at the federal level this year as members of Congress sparred over how to reduce the nation's debt. But funding seems safe for now after a special committee failed last month to reach an agreement on how to cut overall spending. Already, many changes at the state level have been dramatic and are testing the legal bounds of what Medicaid must provide:

Mentally ill flood ER as states cut services (Reuters) - On a recent shift at a Chicago emergency department, Dr. William Sullivan treated a newly homeless patient who was threatening to kill himself. "He had been homeless for about two weeks. He hadn't showered or eaten a lot. He asked if we had a meal tray," Sullivan said the man kept repeating that he wanted to kill himself. "It seemed almost as if he was interested in being admitted." Across the country, doctors like Sullivan are facing a spike in psychiatric emergencies - attempted suicide, severe depression, psychosis - as states slash mental health services and the country's worst economic crisis since the Great Depression takes its toll. This trend is taxing emergency rooms already overburdened by uninsured patients who wait until ailments become acute before seeking treatment. "These are people without a previous psychiatric history who are coming in and telling us they've lost their jobs, they've lost sometimes their homes, they can't provide for their families, and they are becoming severely depressed,"

The Haves’ Children Are Healthier Than the Have-Nots’ - Eighty-three percent of the fifth graders tested at Sycamore Valley aced the test by receiving healthy scores on all six different measurements — of aerobic capacity, abdominal strength, upper body strength, trunk strength, body composition and flexibility, most of them gauged through physical activity¹. One part of the Physical Fitness Test measures a child’s body composition, usually through body mass index, which is calculated using weight and height and is used to determine who is overweight. Statewide, only 31 percent of public school students performed as well, according to the California Department of Education. An analysis of state data by The Bay Citizen revealed a large variation in how fifth graders in Bay Area elementary schools perform on the test. The schools that performed the best have few students from low-income families, for reasons that experts say are not surprising. At Sycamore Valley Elementary, in an affluent suburban community, not a single student was eligible to receive a free or reduced-price lunch because of low family income last year, according to the state’s data. Across the Bay, in San Francisco’s Mission district, none of the fifth graders at Cesar Chavez Elementary School received six healthy scores on the test. More than a quarter of them were found to “need improvement” on every measure of fitness.

Wyden Isn't The Only Democrat Who Wants To Help Paul Ryan Kill Medicare-- Blue Dogs Are Salivating - Last week we saw how Wisconsin Democrat Rob Zerban pushed back against Ron Wyden's harebrained scheme of working with Paul Ryan to destroy Medicare. Obviously Wyden isn't the only bad Democrat in Congress. Many of the worst conservative handmaidens of the 1%-- the Blue Dogs and the New Dems (essentially Blue Dogs without the KKK robes and the anti-gay/anti-Choice fanaticism)-- are quietly lining up behind Wyden and Ryan in the push for a transpartisan death blow against the New Deal and the middle class. Shamus Cooke guessed Christmas Day would be as good a time as any to expose this unholy alliance. Politicians are attacking Medicare and Medicaid on all sides--Democrats and Republicans alike. Obama's national health care bill will slash hundreds of billions from Medicare over the next decade, an act supported by so-called "progressive" Democrats. Soon after this "victory" Obama created the Super Committee to balance the budget, which included automatic "triggers"-- if no decision was reached-- that are now slated to cut $600 billion more from Medicare. On a state-by-state basis, Medicaid-- a program that provides health care to the poor-- is being cut in virtually every state, where they are using their manufactured budget crises as an excuse. This under-funding of Medicaid has created a lack of doctors for patients, according to USAToday: But it gets worse.

Wyden-Ryan's Unrealistic Assumptions - Laura D’Andrea Tyson - In a surprising year-end act of bipartisanship, Representative Paul D. Ryan, Republican of Wisconsin, and Senator Ron Wyden, Democrat of Oregon, offered a proposal to reduce the growth of Medicare spending, envisioning a fundamental transformation of Medicare to a “managed competition” or “premium support” system. In their plan, the government would provide a subsidy to Medicare beneficiaries to choose among competing insurance plans, including the traditional fee-for-service Medicare program. Mr. Ryan and Mr. Wyden say their system would control the growth of Medicare spending better than the current system by encouraging more efficient cost-sensitive decision-making by both providers and consumers. This incentive argument has considerable analytical appeal, especially among economists – competition usually reduces costs in most markets. But the markets for insurance and health services are not like most markets, and there is scant evidence to support the Ryan-Wyden assertion, as Uwe E. Reinhardt noted in Economix last week. The cost savings from managed competition are hypothetical and uncertain – in fact, there are reasons to fear that such a system could actually increase costs.

When Medicare Isn't Medicare - As I noted last week, PolitiFact, the St. Petersburg Time’s fact checker, decided that the Democrats’ claim that Ryan’s plan would mean the end of Medicare was so blatantly untrue it merited designation as the 2011 “Lie of the Year.” Republicans, whose erroneous claims about health care reform garnered “Lie of the Year” prizes in 2009 and 2010, cheered. Democrats, as you might imagine, jeered — as did some journalists and pundits. PolitiFact’s Washington-based editor defended the choice by contending that Ryan’s proposal to restructure Medicare by providing beneficiaries subsidies to buy private insurance would not “end” the program. It would still be Medicare, he reasoned. What he’s missing is that Ryan’s proposal would change the program so fundamentally as to represent the equivalent of replacing the engine and transmission. Ryan’s plan would be a continuation of what Yale professor Jacob Hacker wrote about in his 2006 book, The Great Risk Shift. As Hacker pointed out, big corporations, aided and abetted by their political allies, have been methodically shifting more and more of the risk of providing benefits from them to us. Ryan’s plan would accelerate the trend and take it a major step further by gradually shifting much of the financial obligation of paying for benefits from the government to Medicare beneficiaries. Under Ryan’s blueprint, the government would be doing just what big corporations have been doing for several years now: off-loading risk.

High-deductible health plans on rise - More workers will have to pay higher deductibles before their health benefits kick in next year — and insurance experts say that soon will become the norm. Corporate employers, small businesses and nonprofit organizations are increasingly requiring their workers to spend between $1,200 and $5,000 before filing a health insurance claim. Employers save money on premiums. They share those savings so take-home pay often goes up for workers. Health costs go down because people spend less on doctor visits and drugs when the money’s coming out of their own pockets. But high-deductible plans don’t work for everyone. Nearly three in four employers will offer at least one of these plans next year, according to a survey by the National Business Group on Health, a nonprofit association that represents large employers. Helen Darling, its president, predicts that by 2016 the majority of all health plans will have high deductibles.

Why Americans Pay So Much For Brand-Name Drugs - infographic

One in Five American Families Have Medical Bill Problems - According to this new report. As Mirya Holman and I have explained in the bankruptcy context, measuring medical bill problems and debt is notoriously contested, but the Center for Studying Health System Change does try to make clear its methods and also uses similar metrics over time. The report also contains statistics on the proportion of their sample that considered filing for bankruptcy and actually did file. Definitely worth reading.

Without Autopsies, Hospitals Bury Their Mistakes - When Renee Royak-Schaler unexpectedly collapsed and died on May 22, no one ordered an autopsy. Not the doctors at Howard County General Hospital in Columbia, Md., where the 64-year-old professor and cancer researcher was pronounced dead. Not the Maryland Office of the Chief Medical Examiner, which passed on the case because no foul play was involved. And not Royak-Schaler’s physicians at Johns Hopkins University School of Medicine who had diagnosed cancer in her hip two days beforehand but acknowledged they didn’t know what had caused her unforeseen death. A half-century ago, an autopsy would have been routine. Autopsies, sometimes called the ultimate medical audit, were an integral part of American health care, performed on roughly half of all patients who died in hospitals. Today, data from the Centers for Disease Control and Prevention show, they are conducted on about 5 percent of such patients. As Royak-Schaler’s husband, Jeffrey Schaler, discovered, even sudden unexpected deaths do not trigger postmortem reviews. Hospitals are not required to offer or perform autopsies. Insurers don’t pay for them. Some facilities and doctors shy away from them, fearing they may reveal malpractice. The downward trend is well-known — it’s been studied for years.

Taking multi-vitamin pills 'does nothing for our health' - They are a daily essential for millions of Britons hoping to ward off ill-health. But despite the millions of pounds spent on vitamin pills, they do nothing for our health, according to a major study.Researchers spent more than six years following 8,000 people and found that those taking supplements were just as likely to have developed cancer or heart disease as those who took an identical-looking dummy pill.And when they were questioned on how healthy they felt, there was hardly any difference between the two groups.Experts said the study – one of the most extensive carried out into vitamin pills – suggested that millions of consumers may be wasting their money on supplements.Many users fall into the category of the ‘worried well’ – healthy adults who believe the pills will insure them against deadly illnesses – according to Catherine Collins, chief dietician at St George’s Hospital in London. She said: ‘It’s the worried well who are taking these pills to try and protect themselves against Alzheimer’s disease, heart attacks and strokes.

Can a molecule make us moral? (CNN) -- The longest debate since humans have been having debates is whether we are good or evil. It underlies the stories of Adam and Eve, Cain and Abel, Jesus and Judas. What is our human nature? Of course, the answer is we can be both good and evil. But what determines which part of our character emerges? About a decade ago, my lab made an unexpected breakthrough in the understanding of good and evil. We discovered that the neurochemical oxytocin makes people trustworthy. We then found oxytocin was responsible for many other moral behaviors, from being generous to sacrificing to help a stranger. Editor's note: Paul Zak is professor of Economics and Department Chair and director of the Center for Neuroeconomics Studies at Claremont Graduate University. He's the author of "The Moral Molecule: The Source of Love and Prosperity." Zak spoke at the TED Global conference in July in Edinburgh. TED is a nonprofit dedicated to "Ideas worth spreading" which it makes available through talks posted on its website.

The FDA's Christmas Present for Factory Farms - On Dec. 22, while even the nerdiest observers were thinking more about Christmas plans than food-safety policy, the FDA snuck a holiday gift to the meat industry into the Federal Register. The agency announced it had essentially given up any pretense of regulating antibiotic abuse on factory farms, at least for the time being. Wired's diligent Maryn McKenna has the background. She reports that way back in 1977—when livestock farming was much less industrialized than it is today—the FDA announced its intention to limit use of key antibiotics on animal farms. The reason: By that time, it was already obvious that routine use of these drugs would generate antibiotic-resistant pathogens that endanger humans. In the decades since, the agency has ruminated and mulled, appointed committees and consulted experts, all the while delaying making a final decision on the matter. Meanwhile, the meat industry built a multibillion-dollar business based on stuffing animals by the thousands into tight spaces amid their own waste. To keep them alive and growing to slaughter amid such conditions, feedlot operators give their animals daily doses of antibiotics. The FDA recently revealed that factory animal farms now burn through fully 80 percent of all antibiotics consumed in the United States.

Concerns grow over salmonella that survives antibiotics - The frequency of outbreaks linked to antibiotic-resistant salmonella is rising, causing concern among consumer groups and food scientists.They fear it will take a deadly poisoning on the scale of the 1993 E. coli outbreak from Jack in the Box hamburgers to force change in federal regulation.Contaminated ground beef sold in Maine this month is the latest salmonella "superbug" to send Americans to hospitals.The meat — which has sickened 16 people — is tainted with one of four strains of salmonella that became resistant to multiple antibiotics as they evolved to survive.The Center for Science in the Public Interest petitioned the U.S. Department of Agriculture this year to prohibit the sale of poultry or ground meat containing those four strains of salmonella; the USDA has taken the petition "under consideration."Government regulators and meat processors contend that if meat sold in stores contains the bacteria, proper cooking will destroy the bacteria and make the food safe to eat.Still, hundreds of people were sickened in 2011 because one of the four strains of antibiotic-resistant salmonella was in their meat.

Bacteria 1, FDA 0 - Earlier this month, the Maine-based grocery chain Hannaford issued a ground beef recall after at least 14 people were infected with an antibiotic-resistant strain of salmonella. Chances are this is the first you’ve heard of it. After all, it’s not much compared to the 76 illnesses and one death back in August that led Cargill to recall almost 36 million pounds of ground turkey products potentially contaminated with drug-resistant salmonella. The particulars get confusing, but the trend is unmistakable: our meat supply is frequently contaminated with bacteria that can’t readily be treated by antibiotics. A study earlier this year by a nonprofit research center in Phoenix analyzed 80 brands of beef, pork, chicken and turkey from five cities and found that 47 percent contained staphylococcus aureus, a bacteria that can cause anything from minor skin infections to pneumonia and sepsis, more technically called systemic inflammatory response syndrome (SIRS), and commonly known as blood poisoning — but no matter what you call it, plenty scary. Of those bacteria, 52 percent were resistant to at least three classes of antibiotics. So when you go to the supermarket to buy one of these brands of pre-ground meat products, there’s a roughly 25 percent chance you’ll consume a potentially fatal bacteria that doesn’t respond to commonly prescribed drugs.

The New Frontier: Genetically Modified Oil Wars - Consumer Beware: the next generation of biotech crops focus directly on you. Unlike most of GM crops currently on the market, which are genetically altered to be herbicide and pesticide resistant, the new generation of GM crops are designed to express alleged nutritional benefits. Focusing on soybean oil - the fastest way to reach the broadest number of consumers because of its ubiquitous presence in many foods - biotech companies are mutating seeds used to produce oil designed to express various types of "nutritional" benefits. Since we do not yet know whether genetically modified crops and food products made from them are safe, and in fact studies have suggested otherwise, it is hard to swallow and digest (no pun intended) the news that GM oils are designed to express nutritional benefits. How nutritious can food be if it has, as is suggested by studies, adverse health impacts? But that is not stopping biotech companies from R&D. And so the oil wars have officially begun.

Too late to contain killer flu science, say experts - Attempts to censor details of controversial influenza experiments that created a highly infectious form of bird-flu virus are unlikely to stop the information from leaking out, according to scientists familiar with the research. The US Government has asked the editors of two scientific journals to refrain from publishing key parts of research on the H5N1 strain of bird-flu in order to prevent the information falling into the hands of terrorists intent on recreating the same flu strain for use as a bioweapon. However, scientists yesterday condemned the move. Some said that the decision comes too late because the information has already been shared widely among flu researchers, while others argued that the move could obstruct attempts to find new vaccines and drugs against an infectious form of human H5N1 if it appeared naturally.

Springtime for Toxics, by Paul Krugman - Here’s what I wanted for Christmas: something that would make us both healthier and richer. And since I was just making a wish, why not ask that Americans get smarter, too? Surprise: I got my wish, in the form of new Environmental Protection Agency standards on mercury and air toxics for power plants. These rules are long overdue: we were supposed to start regulating mercury more than 20 years ago. But the rules are finally here, and will deliver huge benefits at only modest cost. As far as I can tell, even opponents of environmental regulation admit that mercury is nasty stuff. It’s a potent neurotoxicant: the expression “mad as a hatter” emerged in the 19th century because hat makers of the time treated fur with mercury compounds, and often suffered nerve and mental damage as a result. A lot of mercury gets into the atmosphere from old coal-burning power plants that lack modern pollution controls. From there it gets into the water, where microbes turn it into methylmercury, which builds up in fish. And what happens then? The E.P.A. explains: “Methylmercury exposure is a particular concern for women of childbearing age, unborn babies and young children, because studies have linked high levels of methylmercury to damage to the developing nervous system, which can impair children’s ability to think and learn.” That sort of sounds like something we should regulate, doesn’t it?

Just How Harmful Are Bisphenol A Plastics? - On the day Patricia Hunt’s career veered into an entirely different field, her graduate students at Case Western Reserve University were grumbling, itching to use some exciting new data in their own experiments, but were told to wait while Hunt (just one last time) checked on her subjects. Hunt, a geneticist, was exploring why human reproduction is so rife with complications. She had a hunch the chromosomally abnormal eggs that plague human pregnancies were tied to our hormones. A paper outlining the results of Hunt’s experiments on the hormone levels of female mice was ready for publication. All she needed was to ensure that her control population, the mice left alone in the study, was normal. Instead Hunt stumbled on a disturbing result—40 percent had egg defects. Hunt shelved hopes of publication and scrutinized every method and piece of lab equipment used in her experiment. Four months later she finally fingered a suspect. It was the janitor. In the laboratory. With the floor cleaner.

Potential Neuropoison Could Be In Our Food - One of the most comprehensive analyses yet of human exposure to PBDEs, or polybrominated diphenyl ethers, shows that the chemical — long used in everything from computers to sleeping bags — enters humans through their diets, not just their household. “The more meat you eat, the more PBDEs you have in your serum,” said Alicia Fraser, who headed the new study, published this month in Environmental Health Perspectives.PBDEs are chemical cousins of polychlorinated biphenyls, or PCBs, which are known to cause birth defects and neurological impairments. PCBs were banned throughout the world by the mid-1970s, when PBDEs were gaining popularity as flame retardants. PBDEs were soon found in most plastic-containing household products.By the late 1990s, trace amounts of PBDEs had been found in people all over the world, with the highest exposures measured in the United States. Researchers became nervous: Low doses caused neurological damage in laboratory animals, and the highest human PBDE levels were found in breast milk. Whether PBDEs posed an immediate threat to humans was uncertain. Direct testing is unethical, and population-wide epidemiological studies are difficult to run. But there’s enough reason for concern that the European Union banned two of the three most common PBDE formulations in 2004.

The FDA Is Totally Cool With Us Eating Seafood 10,000 Times Over The Contamination Limit - A new study has concluded that the FDA severely underrated the risk of contaminants in seafood following the BP oil spill of 2010, according to Environmental Health Perspectives (via Alternet). The report, conducted by non-governmental scientists, says that 53 percent of Gulf shrimp samples tested revealed "levels above concern" of carcinogenic polycyclic aromatic hydrocarbons (PAHs). Some cases showed carcinogenic levels up to 10,000 times more than what is considered safe. This leaves pregnant women, children and big seafood eaters at risk to develop issues stemming from the consumption of these chemicals. Prenatal exposure to PAHs has been shown to lower IQs and increase the risk of asthma, heart malformations and low birth weight.The researchers at the Natural Resources Defense Council also included internal FDA emails — procured using the Freedom of Information Act — that showed a concerted effort to downplay the effects of the contaminants. Emails also showed decisions to ignore alarms raised by FDA staff concerning this issue.

The billion-dollar pest: U.S. beetle is developing resistance to one of the most widely used genetically modified crops, say scientists - One of America’s most widely planted crops – a genetically engineered corn plant that makes its own insecticide – may be losing its effectiveness because a major pest appears to be developing resistance more quickly than scientists expected. The U.S. food supply is not in any immediate danger because the problem remains isolated. But scientists fear potentially risky farming practices could be blunting the hybrid’s sophisticated weaponry. If rootworms do become resistant to Bt corn, it ‘could become the most economically damaging example of insect resistance to a genetically modified crop in the U.S.,’ said Bruce Tabashnik, an entomologist at the University of Arizona. ‘It’s a pest of great economic significance – a billion-dollar pest.’

In search of a better bee - From their five bee yards in Frederick County, Rausch and Finkelstein run a business called VP Queen Bees, which supplies breeder queens to producers at up to $165 a queen. The producers, in turn, propagate daughter queens by the thousands and sell them to commercial beekeepers and backyard hobbyists for about $30 each. The object: a queen that will pass on to her colony the traits of disease and pest resistance, gentleness, productivity and winter hardiness. The single greatest threat is an Asian mite called the varroa. It feeds on honeybee young and adults and spreads viruses. Commercial beekeepers have turned to heavy feeding and medication to try to keep hives strong in advance of their biggest gig of the year. In the new year, beekeepers will assemble more than a million hives — half the nation’s stock — in the almond groves of California’s San Joaquin Valley, to ensure a successful pollination of the 2012 nut crop. One of the bright spots has been the development of a bee that battles the mite.

The True Hive Mind – How Honeybee Colonies Think - I find this from Thomas Seeley’s Honeybee Democracy: We will see that the 1.5 kilograms (3 pounds) of bees in a honeybee swarm, just like the 1.5 kilograms (3 pounds) of neurons in a human brain, achieve their collective wisdom by organizing themselves in such a way that even though each individual has limited information and limited intelligence, the group as a whole makes first-rate collective. Like many other biologists, Seeley sees a bee colony as not just a collection of individuals but as a sort of super-organism. Thus the brain analogy above. Thus this: A colony of honeybees is, then, far more than an aggregation of individuals, it is a composite being that functions as an integrated whole. Indeed, one can accurately think of a honeybee colony as a single living entity, weighing as much as 5 kilograms (10 pounds) and performing all of the basic physiological processes that support life: ingesting and digesting food, maintaining nutritional balance, circulating resources, exchanging respiratory gases, regulating water content, controlling body temperature, sensing the environment, deciding how to behave, and achieving locomotion. This extends to decision-making, which is the main subject of Honeybee Democracy. The bees exercise a collective intelligence that mimics not just small-group decision-making but the cognitive deliberations of our own brains:

Big Corn, Big Sugar in bitter US row on sweetener - Big Corn and Big Sugar are locked in a legal and public relations fight in the US over a plan to change the name of a corn-based sweetener that has gotten a bad name. The fight began last year when Corn Refiners Association, a trade association, proposed changing the name of high-fructose corn syrup to merely "corn sugar."The group said the new name "more accurately describes this sweetener and helps clarify food products labeling for manufacturers and consumers alike." But the sugar industry argued this change would be a bitter pill for US consumers and would only add to the confusion about a sweetener that has drawn criticism by some health advocates.Sugar producers have filed suit alleging the corn industry has spent $50 million in "a mass media rebranding campaign that misleads the consuming public by asserting falsely that HFCS is natural and is indistinguishable from the sugar extracted from sugar cane and sugar beets." The lawsuit, which seeks an end to the ads using the term "corn sugar," states that use of the corn syrup increased over 1,000 percent between 1970 and 1990 and that this rise "bears a strong temporal relationship to the growth in American obesity."

Congress ends corn ethanol subsidy - The United States has ended a 30-year tax subsidy for corn-based ethanol that cost taxpayers $6 billion annually, and ended a tariff on imported Brazilian ethanol. Congress adjourned for the year on Friday, failing to extend the tax break that's drawn a wide variety of critics on Capitol Hill, including Sens. Tom Coburn, R-Okla., and Dianne Feinstein, D-Calif. Critics also have included environmentalists, frozen food producers, ranchers and others. The policies have helped shift millions of tons of corn from feedlots, dinner tables and other products into gas tanks. Environmental group Friends of the Earth praised the move. "The end of this giant subsidy for dirty corn ethanol is a win for taxpayers, the environment and people struggling to put food on their tables," biofuels policy campaigner Michal Rosenoer said Friday. The subsidy has provided the oil and agribusiness industries with 45 cents per gallon of ethanol blended into gasoline. By some estimates, Congress has awarded $45 billion in subsidies to the ethanol industry since 1980.

US shells out record for peanuts - Peanuts no longer cost peanuts. The price of the bar snack has leapt to a record high on the back of scorching weather and severe drought in key growing regions. Prices in 2011 have almost tripled in the US, while in Europe, the largest importer, they are up 60 per cent as the global peanut industry, worth about $18.5bn a year, is hit by lower supplies in India, the second-largest producer, Argentina, a leading exporter, and the US. The peanut price jump has been felt most acutely in the US, where it has forced retailers to push through large increases in the price of peanut butter – a staple of kitchen cupboards and food banks. US food manufacturers including Kraft – which owns the Planters brand – and Jif peanut butter manufacturer JM Smucker last month increased their peanut butter prices by 30-40 per cent. “You’ve got to wait and spread that peanut butter thinner and make it last a little bit longer until next year,” said Bill George, peanut specialist at the US Department of Agriculture. Two years of drought conditions in the peanut-growing areas in the US have dramatically reduced the quality of peanuts used in snacks and confectionery as plants have withered before maturity or produced very few peanuts.

Monsanto’s GM Corn Linked To Organ Failure - Make sure you have a GMO-free Christmas y’all! Katherine Goldstein and Gazelle Emami report on the consequences of genetic engineering of seeds by Monsanto, for Huffington Post: In a study released by the International Journal of Biological Sciences, analyzing the effects of genetically modified foods on mammalian health, researchers found that agricultural giant Monsanto’s GM corn is linked to organ damage in rats. According to the study, which was summarized by Rady Ananda at Food Freedom, “Three varieties of Monsanto’s GM corn – Mon 863, insecticide-producing Mon 810, and Roundup® herbicide-absorbing NK 603 – were approved for consumption by US, European and several other national food safety authorities.” Monsanto gathered its own crude statistical data after conducting a 90-day study, even though chronic problems can rarely be found after 90 days, and concluded that the corn was safe for consumption. The stamp of approval may have been premature, however.

David Versus Monsanto - YouTube (52min Documentary) - Imagine that a storm blows across your garden and that now, genetically-manipulated seeds are in your crops. A multi-national corporation pay you a visit, demand that you surrender your crops - and then sue you for $200 000 for the illegal use of patented, GM seeds. In this definitive David and Goliath battle, one farmer stands up against a massive multinational, and their right to claim ownership to a living organism.

Is Dow Planning to Poison America? - Exclusive: Dow seeking deregulation of GE corn resistant to 2,4-D, a major component of Agent Orange So reads the headline over at Natural News where Mike Adams (The Health Ranger) is keeping watch over America’s large corporations. According to Mike: Dow AgroScience, LLC, is petitioning the U.S. government to deregulate a genetically engineered variety of corn that is resistant to 2,4-D, an extremely toxic pesticide that was 50% of the recipe to making Agent Orange (used in the Vietnam War as a weapon of mass destruction). The only reason to deregulate GMO corn that is resistant to 2,4-D is so that the herbicide/ pesticide can be used on crops. Corn happens to be the most widely grown crop in the U.S. and the use of these particular strains of GMO corn could not just result in widespread spraying of a toxic substance, but could poison our entire food supply. Corn, in recent years, is used in virtually all processed foods in one form or another.

Occupy Our Food - On this past December 4, food activists from across the country joined the Occupy Wall Street Farmers March for "a celebration of community power to regain control over the most basic element to human well-being: food." The rally began at La Plaza Cultural Community Gardens where urban and rural farmers talked about the growing problems with the industrial food system and the solutions based in organic, sustainable and community based agricultural production. This was followed by a three-mile march from the East Village of Manhattan to Zuccotti Park, the birthplace of the Occupy Wall Street movement. This video by Anthony Lappe offers an inspiring glimpse into this new movement. Check it out and then go to Food Democracy Now, a grassroots community dedicated to building a sustainable food system, to find out how you can help.

Washington's big dig aims to clean up "nation's river" - Washington is starting to dig deep in a $2.6 billion underground solution aimed at helping clean up the polluted Potomac River and the ailing Chesapeake Bay, the biggest U.S. estuary. In the U.S. capital's biggest public works project in more than 40 years, work started this fall to cut about 16 miles of tunnels to keep overflow sewage and stormwater from running into the Potomac. The project, designed to be finished in 2025, is seen by environmentalists as part of resolving the next great water pollution challenge facing the United States -- keeping fouled runoff out of lakes, streams and rivers. The Potomac carries so much sex-changing pollutants that male bass have been found carrying eggs. Swimming is banned after heavy rains because of polluted runoff.

NTMWD to Consider Stage 4 Water Restrictions - More than 1 million water customers face the possibility of Stage 4 restrictions. Mike Rickman, of the North Texas Municipal Water District, said board members would consider starting Stage 4 restrictions earlier than expected. The board will decide in late January. Stage 4 restrictions would mean water customers could not water their yards or wash their cars. The district is currently under Stage 3 water restrictions, which allow outdoor watering once per week. The NTMWD serves Allen, Farmersville, Forney, Frisco, Garland, McKinney, Mesquite, Plano, Princeton, Richardson, Rockwall, Royse City and Wylie, as well as a number of North Texas towns. Click here to see a full list.

Drought Leads to Stray Donkey Deluge - Law-enforcement agencies in Texas are grappling with an unusual problem: stray donkeys, which are roaming roads and fields in growing numbers and overwhelming animal shelters. The donkey predicament is one of the odder ramifications of the record-setting drought that has dried up Texas. Hay supplies have shriveled, causing prices for a bale to more than double over the past year. Now, authorities say, owners who no longer can afford to feed their donkeys are turning them loose. "The donkey problem is epidemic," said Patrick Bonner, senior sergeant at the Dallas County Sheriff's Department. "We're inundated." Donkey-catching duties are eating up his officers' time, he said, taking them away from patrolling traffic and writing tickets. The donkey population at his agency's livestock center on the outskirts of Dallas has expanded from four on average at the beginning of this year to more than 20.

A Hypothesis about Global Drying - I've been trying to understand how the PDSI seems to suggest that the land is on the whole drying out as a result of global warming (though there are regional exceptions), while in the paleo-climate, warmer periods were generally wetter, and colder periods drier (and in more modern times, for example, volcanically caused reductions in sunlight resulted in global droughts). There would appear to be a contradiction: why won't a globally warmed world be wetter, not drier? Here is a speculation about it. Bear in mind the usual caveat that I'm not a climate scientist - just a non-specialist (albeit with a Physics PhD) trying to understand the implications for humanity. The two temperature series shown above represent the global land temperature (on the left) and the global ocean temperature (on the right) - the figures come from the Wiki article on the instrumental temperature record. To crudely summarize, the ocean has warmed about 0.7^oC since the pre-industrial era, while the land has warmed about 1.3^oC. Thus the land has warmed 0.6^oC more than the ocean over the twentieth century. The reason for this is that as we have thickened the CO₂ blanket over the planet, and thus warmed it, the oceans and land have responded differently.

Feinstein Earmark Quietly Paves Way for Easier Water Sales - Democratic Sen. Dianne Feinstein quietly used a $915 billion spending bill to accomplish a long-standing and, in some circles, controversial goal of easing Central Valley water sales. With one sentence, the 1,221-page bill signed Saturday by President Barack Obama helps the Westlands Water District and privately owned Kern Water Bank, among others, buy more from irrigation districts served by the federal Central Valley Project. With a second sentence, the bill orders a study designed to streamline water sales, including those from north of the Sacramento-San Joaquin Delta to south of the Delta.Feinstein describes the measure as a sensible way to move water around the state. But opponents, who had earlier resisted the proposals when presented as separate legislation, consider it a boon for some well-connected farmers.

Global warming or the apocalypse? 2011's record-breaking weather - MONSTER BLIZZARDS. Record rains. Abnormal heat. Freak storms that shut the subways and cloaked Halloween in winter white. New York’s wild weather — part of an extraordinary year of Mother Nature extremes around the country — made 2011 a year for the history books. “I’ve never seen a year quite like 2011,” “I can’t remember a year like this, in which we experienced record-breaking extremes of nearly every conceivable type of weather.” Records fell like hail. New York had its snowiest ever January, warmest night ever (84 degrees on July 22), wettest month ever (August) and first ever measurable October snow. “We had pretty spectacular records,” said Stephen Fybish, New York’s unofficial weather historian, who can recite snowfall totals for every year back to 1869. “Unusual heat, high winds, strong storms, big rains. It was lacking perhaps only a major cold wave. We seem to have had a good deal of everything else.”

Extreme Weather Map - 2011 has been a year of unparalleled extremes: 14 disastrous weather events in the US so far this year have resulted in over a billion dollars in property damage – an all-time record breaking number – and their estimated $53 billion price tag doesn’t include health costs. As shown recently, in a first-of-its-kind study published in the journal Health Affairs1, when health-related costs of extreme events are calculated, the total tally increases substantially and will likely continue to climb due to climate change. 7 of the 2011 extreme events – a record-high number – are the type expected to worsen due to climate change. Climate scientists are saying that these events may be part of a troubling trend influenced by climate change2. This trend has also been identified by the international reinsurance company MunichRe [PDF]; they concluded that from 1980 through 2011, the frequency of extreme events in the U.S. is rising.3 A newly-released analysis by international climate scientists (IPCC)4 concluded that climate change will amplify extreme heat, heavy precipitation, and the highest wind speeds of tropical storms.

The weather: La Niña rolls in for a second round - The commodities markets this year felt the punch of the La Niña weather phenomenon, the strongest in the past 60 years. Prices of commodities surged worldwide – from coffee in South America, corn in the US, to coal in Australia – as the extreme weather events of “the little girl” affected producers round the world. Values have stabilised but markets now face another La Niña, which has been developing since September. Although this new La Niña is expected to be weaker, extreme weather will continue to be a factor affecting commodity prices. Supply disruptions will be “more frequent due to changing climate patterns and the increasing number and magnitude of extreme weather events they will cause,” says John Drzik, chief executive of Oliver Wyman Group, the consultancy. “Floods, droughts, hurricanes and many other types of extreme weather events are all projected to increase in the next decade,” he warns. The two consecutive years of La Niña – which brings cooler temperatures in the Pacific Ocean, leading to higher rainfall in south-east Asia and northern and eastern Australia, and lack of rain in the south of the US – follows a year of El Niño, the opposite weather phenomenon.

Climate Change May Modify Half Earth's Plants - By 2100, global climate change will modify plant communities covering almost half of Earth's land surface. Climate change will also drive the conversion of nearly 40% of land-based ecosystems from one major ecological community type - such as forest, grassland or tundra - toward another, according to a new NASA and university computer modelling study. Researchers from NASA's Jet Propulsion Laboratory (JPL) and the California Institute of Technology investigated how Earth's plant life is likely to react over the next three centuries as Earth's climate changes in response to rising levels of human-produced greenhouse gases. Study results are published in the current issue of the journal Climatic Change. "For more than 25 years, scientists have warned of the dangers of human-induced climate change," "Our study introduces a new view of climate change, exploring the ecological implications of a few degrees of global warming. While warnings of melting glaciers, rising sea levels and other environmental changes are illustrative and important, ultimately, it's the ecological consequences that matter most."

NASA: Climate Change May Flip 40% of Earth’s Major Ecosystems This Century - The results of studies that try to quantify the effects of climate change on biodiversity loss — which include damage to the micro scale level of subspecies and genetic variation — are perhaps most shocking. When, however, you focus on the response to climate change at the macro level, the ecosystem level, you get a better understanding of what is one of the major drivers of that biodiversity loss: forced migrations. And even here, the numbers may be larger than one would expect, as a new assessment by NASA and Caltech published in the journal Climatic Change shows that by 2100 some 40 percent of “major ecological community types” – that is biomes like forest, grassland, tundra – will have switched to a different such state. Based on IPCC temperature projections for 2100 [which are probably on the conservative side] of 2-4 degrees Celsius warming scientists of NASA’s Jet Propulsion Laboratory and the California Institute of Technology ran special computer models to calculate the most probable ecosystem responses across the planet. This average temperature rise is of similar magnitude to the warming that occurred between the Last Glacial Maximum and the onset of the (milder) Holocene – with the big exception that the current warming is happening about 100 times faster – and for ecology that makes a huge difference, the authors stress.

Why Warmer Water Leads to Male Offspring -- If You're a Fish - To a list that includes extreme weather patterns and disappearing polar bears, you can add another dispiriting effect of climate change: too many males. Three years ago, Francesc Piferrer and other scientists working at Barcelona's Institute of Marine Sciences proved that rising water temperatures caused some species of fish to produce a disproportionate ratio of males to females. Now, Piferrer and his team have gone on to discover something of a mechanism behind that imbalance. Most fish species don't have the X and Y chromosomes that differentiate the sexes in humans. In fact, at least 40 species of fish — as well as many reptiles — are more dependent on temperature than genes when it comes to separating the boys from the girls. In these TSD (temperature-dependent sex determination) species, the sex of offspring is fixed by temperatures experienced during embryonic development. In the 2008 study, Piferrer's team showed that in a species like the Atlantic silverside, a water-temperature increase of 4°C could result in a population that was 98% male.

Republicans deny funding for study of extreme weather events and global warming - At the end of one of the most bizarre weather years in American history, climate research stands at a crossroads. Scientists say they could, in theory, do a much better job of answering the question “Did global warming have anything to do with it?” after extreme weather events like the drought in Texas and the floods in New England. But for many reasons, efforts to put out prompt reports on the causes of extreme weather are essentially languishing. Chief among the difficulties that scientists face: the political environment for new climate-science initiatives has turned hostile, and with the federal budget crisis, money is tight. And so, as the weather becomes more erratic by the year, the public is left to wonder what is going on. A typical year in this country features three or four weather disasters whose costs exceed $1 billion each. But this year, the National Oceanic and Atmospheric Administration has tallied a dozen such events, including wildfires in the Southwest, floods in multiple regions of the country and a deadly spring tornado season. And the agency has not finished counting. The final costs are certain to exceed $50 billion. “I’ve been a meteorologist 30 years and never seen a year that comes close to matching 2011 for the number of astounding, extreme weather events,” Jeffrey Masters, a co-founder of the popular Web site Weather Underground, said last month. “Looking back in the historical record, which goes back to the late 1800s, I can’t find anything that compares, either.”

2011 is UK's second warmest year on record - This year was the second warmest on record for the UK, the Met Office says. Provisional figures show that only 2006, with an average temperature of 9.73C (49.5F), was warmer than 2011's average temperature of 9.62C (49.3F). This year saw high temperatures for lengthy periods; including the warmest April and spring on record, the second warmest autumn and the warmest October day. Early figures suggest 2011 is ending with a "close to average" December.The Met Office said its figures were a mean temperature taken over day and night. The mean temperature for the first 28 days of December was 4.7C (40.5F); a big swing from 2010, says the Met Office, when temperatures were 5C below average for the coldest December on record.

Global Warming Hates A White Christmas - This winter has been unusually warm, crippling ski resorts, ruining holiday traditions, and dashing hopes of a white Christmas across the northern hemisphere. While the billions of tons of greenhouse pollution in our atmosphere sometimes encourage freak snowstorms, the primary effect of global warming on winter is, well, warmer temperatures — making white Christmases less likely. Temperature increases in some regions were off the charts in November, with northern Norway about 10 °F warmer than average. In Finland, snow has been replaced by rain, killing World Cup and European Cup ski races, hurting retail sales, and adding to the gloom people feel from the long winter dark. This “black Christmas” shows the “footprint of global warming“: Helsinki is experiencing uncharacteristically mild December temperatures, and only light dustings of snow have come and gone. “At the beginning of December it was on average six degrees warmer than is usual for this time of year,” meteorologist Pauli Jokinen told AFP. He said the snow’s no-show in the south of the country this year was partly due to natural variations, but also a footprint of global warming. “You can’t put a single season down to climate change, but we have seen that climate change has lifted the baseline temperatures,” he explained.

Peru's Glaciers Melting, Decreasing Water Supply 20 Years Earlier Than Expected -Pay attention, as this sort of thing could hit other mountainous areas that are dependent on glaciers for their water supply. A new study in the Journal of Glaciology shows that the glaciers in Peru's Cordillera Blanca mountain range are melting so quickly that the water they supply to the arid region is being threatened 20-30 years earlier than expected. Lead researcher Michel Baraer, from McGill University, told IPS News that the time needed for the region to adapt to the coming water shortages, previously thought to be decades off, "those years don't exist." Baraer said that the glaciers feeding the Rio Santo watershed are now too small to maintain past flows of water. During the dry season water availability is expected to be 30% lower than historic levels. In the 1930s glaciers in the Cordillera Blanca covered 850 square kilometers. Today they cover less than 600 sq km.

Arctic Report Card 2011 – NOAA video -

Atmosphere - Higher temperatures in the Arctic and unusually lower temperatures in some low latitude regions are linked to global shifts in atmospheric wind patterns.
Sea Ice & Ocean - A shift in the Arctic Ocean system since 2007 is indicated by the decline in ice age and summer extent, and the warmer, fresher upper ocean.
Marine Ecosystems - Since 1998, biological productivity at the base of the food chain has increased by 20%. Polar bears and walrus continue to lose habitat in Alaskan waters.
Terrestrial Ecosystems - Increased “greenness” of tundra vegetation in Eurasia and North America linked to increase in open water and warmer land temperatures in coastal regions.
Hydrology and Terrestrial Cryosphere - Continued dramatic loss of ice sheet and glacier mass, reduced snow extent and duration, and increasing permafrost temperatures are linked to higher Arctic air temperatures.

South Pole Records Warmest Temperature on Record : Weather Underground: On Christmas Day, December 25th, the temperature at the Amundsen-Scott South Pole site soared to an all-time record high of 9.9°F (-12.3°C) at 3:50 p.m. local time, eclipsing the former record of 7.5°F (-13.6°C) set on December 27, 1978. The low temperature on December 25th was a mild (relatively!) 0°F (-17.8°C). Records at the site began in January 1957. Its elevation is 9,301 feet (2,835 meters). This infrared satellite animation shows how a tongue of relatively warm air intruded inland over the Antarctic continent to the South Pole (identified by the red square). Temperatures in degrees Fahrenheit are displayed for the time period of the animation (from December 24th through December 25th). Two other AWS sites near the South Pole (100 kilometers to the north—along the prime meridian-and east of the pole) also broke their all-time heat records with Nico and Henry AWS sites reporting 17.2°F (-8.2°C) and 16.0°F (-8.9°C) respectively.

Global Carbon Sink Not Degrading Yet - In Friday's post, I noted that continued drying of tropical forests raises the potential that the global carbon sink might weaken in the future. This is one of a variety of such possibilities that one sees news stories about every so often (for example here and here). The background is that, as humanity has been emitting fossil fuel carbon dioxide over the last 150 years or so, not all of it stays in the atmosphere: the elevated concentrations in the air mean that the atmosphere and the ocean and land biosphere are out of equilibrium and some of the CO₂ leaves the atmosphere and goes into the ocean and biosphere each year, partially offsetting our emissions. Once out of the atmosphere it no longer affects the climate (though it may have other effects such as ocean acidification and causing ecological changes). It's pretty easy to assess this oneself with no more than a basic memory of high school chemistry, the Mauna Loa CO₂ data, and the BP data on carbon dioxide emissions. From the Mauna Loa data we know how the concentration of CO₂ in the air changes each year and we want to convert that into a number of gigatonnes of extra carbon floating above us

Solar opportunity or new trade war? - The Solyndra uproar and the International Trade Commission Dec. 2 decision to investigate Chinese solar panel manufacturers for dumping their products below cost in the United States threatens to distract us from what we need most: a proactive, long-term clean and sustainable energy strategy. The solar industry worldwide is the fastest-growing source of electricity generation. What was once largely a rooftop-by-rooftop industry is now seeing major utility-scale projects that can rapidly meet regional energy needs. For example, a typical midsize utility-scale solar power plant takes 18 to 24 months to build, while new coal plants take years, and new nuclear facilities can take a decade or more. And small-scale solar continues to rollout as well. When paired with energy efficiency, solar projects can transform local economies and increase the value of commercial and residential properties. Solar installation creates five times or more the number of jobs than does investment in a natural gas plant of comparable capacity. Not only has the U.S. solar industry produced more than 100,000 jobs (a doubling since 2009) with another 25,000 expected in the next 12 months, the vast majority of these jobs are in finance, services and installation - not manufacturing.

Paint-on solar cells developed - Imagine if the next coat of paint you put on the outside of your home generates electricity from light -- electricity that can be used to power the appliances and equipment on the inside. A team of researchers at the University of Notre Dame has made a major advance toward this vision by creating an inexpensive "solar paint" that uses semiconducting nanoparticles to produce energy. "We want to do something transformative, to move beyond current silicon-based solar technology," says Prashant Kamat, John A. Zahm Professor of Science in Chemistry and Biochemistry and an investigator in Notre Dame's Center for Nano Science and Technology (NDnano), who leads the research. "By incorporating power-producing nanoparticles, called quantum dots, into a spreadable compound, we've made a one-coat solar paint that can be applied to any conductive surface without special equipment." The team's search for the new material, described in the journal ACS Nano, centered on nano-sized particles of titanium dioxide, which were coated with either cadmium sulfide or cadmium selenide. The particles were then suspended in a water-alcohol mixture to create a paste. When the paste was brushed onto a transparent conducting material and exposed to light, it created electricity.

Rising Asian demand drives global coal consumption growth -- U.S. Energy Information Administration (EIA): Global coal demand has almost doubled since 1980, driven by increases in Asia, where demand is up over 400% from 1980-2010. In turn, Asian demand is dominated by China; demand in China increased almost five-fold between 1980-2010 and accounted for 73% of Asia's consumption and almost half of coal consumption globally in 2010. Asia coal consumption by country, 1980-2010 (click to animate) Note: In the animation, the bar at the bottom reflects each country's share of total Asian coal production in that year. The share of coal consumption has shifted from Europe and the Former Soviet Union to Asia. For example, Europe and the Former Soviet Union were the only two regions with declining coal consumption between 1980 and 2010, falling 32% and 42% respectively. Divergent coal use trends mean that Asia's share of global coal use rose from 24% to 63% during this period (see chart). Asia's growing coal demand has fueled large increases in global coal production.

Some Basic Facts About Coal Exports - Arguments over Northwest coal exports have been hot and heavy in 2011. As one might expect, there’s been plenty of disagreement about values, but there’s also been quite a bit of disagreement over facts. After nearly a year of wrangling, here’s my attempt to establish a few foundational and un-contestable basics about coal export dynamics. Even if we disagree, we can at least argue from a common view of reality. So here’s a fact: the US currently exports about 80 million tons of coal per year, including both thermal coal and metallurgical coal. That figure was sometimes higher during the 1980s and 1990s, but it’s been even lower in recent years. In other words, plans for Northwest coal exports—moving 60 million tons from Longview, Washington plus 50 million tons from Bellingham, Washington—would more than double the existing total volume of US coal exports. Here’s another fact: only a fraction of US coal exports go to Asia.The biggest destination by far is Europe (orange line). Brazil is also a major importer (blue line). Yet imports to Asia are not insignificant. In addition to Japan (dark red line), exports to Asia account for some share of the ”other” category (purple line). They also account for some of the exports to Canada (green line), which transships some US coal to market in Asia

Canada shipping bomb-grade uranium to U.S.: memo - Weapons-grade uranium is quietly being transported within Canada, and into the United States, in shipments the country's nuclear watchdog wants to keep cloaked in secrecy. A confidential federal memo obtained through the Access to Information Act says at least one payload of spent, U.S.-origin highly enriched uranium fuel has already been moved stateside under a new Canada-U.S. deal. The shipments stem from the highly publicized agreement signed last year by Prime Minister Stephen Harper and U.S. President Barack Obama, amid fears that nuclear-bomb-making material could fall into the hands of terrorists. The Canadian stash gradually being shipped from Chalk River, Ont., contains hundreds of kilograms of highly enriched uranium -- large enough to make several Hiroshima-sized nuclear bombs. But even as the radioactive freight travels toward the U.S. border, the Canadian Nuclear Safety Commission has no plans to hold public hearings or disclose which communities lie along the delivery route.

Diseased seals in Alaska tested for Fukushima radiation - Scientists in Alaska are investigating whether local seals are being sickened by radiation from Japan's crippled Fukushima nuclear plant. Scores of ring seals have washed up on Alaska's Arctic coastline since July, suffering or killed by a mysterious disease marked by bleeding lesions on the hind flippers, irritated skin around the nose and eyes and patchy hair loss on the animals' fur coats. Biologists at first thought the seals were suffering from a virus, but they have so far been unable to identify one, and tests are now underway to find out if radiation is a factor.

Diseased Alaska seals tested for radiation have abnormal brain growths, undersized lymph nodes — Environmental cause indicated — Also found in Russia, Canada — Bacteria becoming blood borne — White spots on liver — Walruses next? Unusual Mortality Event Declared

National Oceanic and Atmospheric Administration declared the recent deaths of ringed seals in [...] Alaska an unusual mortality event

Since mid-July, more than 60 dead and 75 diseased seals, most of them ringed seals, have been reported in Alaska

Reports continuing to come in

U.S. Fish and Wildlife Service also identified diseased and dead walruses

A decision by the Service on making an an unusual mortality declaration for Pacific walrus in Alaska is pending

Tests indicate a virus is not the cause

Walruses and ringed seals in Russia, and ringed seals in Canada, have reportedly suffered similar symptoms

While it is not clear if the disease events are related, the timing and location of the disease suggests the possibility of transmission between the populations, or shared exposure to an environmental cause

TEPCO says it 'no longer owns' Fukushima fallout - In terms of sheer chutzpah, Tokyo Electric Power Co's claim that it no longer owns the radioactive isotopes that spewed out of its Fukushima Daiichi nuclear plant in March takes some beating. In defending a lawsuit from a Fukushima Prefecture golf club, lawyers said the radioactive cesium that had blighted the Sunfield Nihonmatsu golf course's fairways and greens was the club's problem. The utility has taken a similarly hard line defending claims from ryokan (inn) and onsen (spa) owners. TEPCO's lawyers used the arcane legal principle of res nullius to argue the emissions that escaped after the meltdown[s] were no longer its responsibility. "Radioactive materials (such as cesium) that scattered and fell from the Fukushima Daiichi nuclear plant belong to individual landowners, not TEPCO," the utility told Tokyo District Court.

Report slams response to nuclear crisis - The operator of the Fukushima nuclear power plant and its regulators all failed in their duty to adequately prepare for and respond promptly to a major emergency, contributing to the worst nuclear accident in a quarter century, according to a committee investigating the disaster. Tokyo Electric Power, the operator of the Fukushima plant, and its regulators were so unprepared for a major nuclear emergency that they lacked even the basic safety measures to respond to a disaster of the scale that hit Fukushima Daiichi nuclear power plant in the wake of the March 11 tsunami, the committee states in an interim report of its findings. Tepco’s off-site emergency response headquarters for example, was housed in a building that “was not designed to withstand elevated radiation levels, although it was intended for use in nuclear emergencies”, and did not even have air cleaning filters, it says. “Tepco did not take precautionary measures in anticipation that a severe accident could be caused by tsunami such as the one (that hit Fukushima Daiichi) … Neither did the regulatory authorities,” the committee states in its report. The committee of 10 independent experts, which was commissioned by the government, also cites insufficient information gathering and poor communication among those in the government, the regulators and at Tepco as major factors that worsened the situation.

Report Condemns Japan’s Response to Nuclear Accident - From inspectors who abandoned the Fukushima Daiichi nuclear power plant as it succumbed to disaster to a delay in disclosing radiation leaks, Japan¹’s response to the nuclear accident caused by the March tsunami fell tragically short, a government-appointed investigative panel said on Monday. The problems, which the panel said had exacerbated the extent of the disaster, were outlined in a 500-page interim report detailing an investigation into Japan’s response to the calamitous events that unfolded at the Fukushima plant after the March 11 quake and tsunami knocked out all of the site’s power. Three of the plant’s six reactors overheated and suffered fuel meltdowns, and hydrogen explosions blew the tops off three reactor buildings, leading to a massive leak of radiation at levels not seen since Chernobyl in 1986. The panel attacked the use of the term “soteigai,” which translates to “unforeseen,” by plant and government officials to describe the unprecedented scale of the disaster and to explain why they were unable to stop it. Running a nuclear power plant required officials to foresee the unforeseen.

Japan Recommends Temporary State Control for Tokyo Electric - The Japanese government told the operator of the ravaged Fukushima Daiichi nuclear power plant on Tuesday to consider accepting temporary state control in return for a much-needed injection of public funds, in effect proposing an interim nationalization of the struggling utility. The order came after Tokyo Electric Power requested ¥689.4 billion, or $8.8 billion, in government aid to help pay for its response to the nuclear accident at its Fukushima site. The calamity, caused by the March 11 earthquake and tsunami, forced the evacuation of more than 100,000 people and led to a massive radiation leak. The utility may have to pay ¥4.5 trillion in compensation payments by 2013, a government panel said in October, a sum that threatens to render the company insolvent. The company will also most likely be forced to decommission all six nuclear reactors at Fukushima Daiichi at a huge cost, while the future of four other reactors at a second site is also on the line after a national outcry over the disaster.

Japan's Nuclear Exclusion Zone - The Big Picture - What does a sudden evacuation look like? After everyone is gone, what happens to the places they've abandoned? National Geographic Magazine sent Associated Press photographer David Guttenfelder to the nuclear exclusion zone around Japan's Fukushima Daiichi power plant to find out. Evacuated shortly after the March 11 earthquake and tsunami led to a nuclear radiation crisis, the area has been largely untouched, with food rotting on store shelves and children's backpacks waiting in classrooms. The area may face the same fate as the town of Pripyat, Ukraine after the Chernobyl disaster 25 years ago. This isn't the first time Guttenfelder has gotten a rare glimpse of a place few see, as The Big Picture featured his photographs of North Korea in an earlier post. Collected here are Guttenfelder's haunting images just released of a place abandoned, and of people dealing with the loss. -- Lane Turner (39 photos total)

Public Health Fallout From Japanese Quake - “culture of coverup” and inadequate cleanup efforts have combined to leave Japanese people exposed to “unconscionable” health risks nine months after last year’s meltdown of nuclear reactors at the Fukushima Dai-ichi power plant, health experts say. Although the Japanese government has declared the plant virtually stable, some experts are calling for evacuation of people from a wider area, which they say is contaminated with radioactive fallout. They’re also calling for the Japanese government to reinstate internationally-approved radiation exposure limits for members of the public and are slagging government officials for “extreme lack of transparent, timely and comprehensive communication.” But temperatures inside the Fukushima power station's three melted cores have achieved a “cold shutdown condition,” while the release of radioactive materials is “under control,” according to the International Atomic Energy Agency (www.iaea.org/newscenter/news/2011/coldshutdown.html). That means government may soon allow some of the more than 100 000 evacuees from the area around the plant to return to their homes.

What Were The Top 10 Energy Stories Of 2011? - Here are my choices for the Top 10 energy related stories of 2011. Don’t get too hung up on the relative rankings. They are mostly in no particular order, although I think the top story is pretty obvious.

Natural Gas Drops Below $3 - U.S. natural gas prices fell to their lowest point in more than two years, underscoring how the nation's booming energy business is becoming a victim of its own success. Mild weather and oversupply have pushed the fuel's price below $3 (see chart above). Prices for the commodity have been under pressure over the last couple of years, as new drilling techniques unlocked vast new stores of natural gas from shale formations and other so-called unconventional reservoirs. But in the last two months, the steady price decline has turned into a free-fall, as unusually mild temperatures across much of the U.S. have damped demand for gas to heat homes and offices. Natural gas for February delivery settled Friday at $2.989 per million British thermal units, the lowest closing price for the commodity since September 2009 (see chart). It closed below $3 in the winter for the first time in nearly a decade. "The sub-$3 levels for gas prices in the winter really point to the incredible amount of nonconventional gas that has come onto the market the last two years," said Gene McGillian, analyst at Tradition Energy in Stamford, Conn. "Our production levels, our mild winter and the gas we have in storage have combined to crush natural gas prices this month."

Plan to add pumps may boost natural gas autos -The United States has record supplies of natural gas and plenty of reasons to promote natural-gas powered cars. But so far, consumers, manufacturers and fuel suppliers haven't shown much interest. Now, a major natural gas developer's plans to vastly increase the number of truck stops that offer liquid natural gas could help boost its use in the vehicles that burn the most fuel, while promoting its availability to a wider market. Lots of natural gas is available, if U.S. drivers decide to use it. In just a few years, domestic natural gas supplies have increased by trillions of cubic feet through shale finds, boosting the supply to the point where plans are in place to export part of the overflow. The growth of natural gas vehicles in the United States so far has been dominated by fleets of buses, taxis and garbage haulers. Only one natural gas car is commercially produced in the country: the Honda Civic GX, recently renamed the NG. It has sold a grand total of about 13,000 in 13 years of production. The reasons for the lackluster sales of natural gas cars are many: The fuel is only available at a handful of public stations, tethering the vehicles within a certain distance of a fuel source. And even though the pump price of natural gas can run $1 to $2 less per gallon equivalent than gasoline, natural gas vehicles carry a higher sticker price.

The Benefits of Shale Gas Far Outweigh the Negatives of Fracking - Natural gas is a critical feedstock to many chemical production processes, and has many environmental benefits over coal as a fuel for electricity generation; over electricity and traditional heating fuels in the industrial, commercial and residential sectors; and over gasoline as a fuel for the transportation industry. Because natural gas has the lowest carbon content of all fossil fuels and not a mixture of other carbon containing compounds with other inorganic impurities, it is the cleanest “burning” fossil fuel, including lower emissions of sulphur, metal compounds, and carbon dioxide. But to produce natural gas from shale has some questionable environmental, safety and health risks. These environmental issues are the result of modern methods of subsurface extraction. Specifically, the unconventional methods involve horizontal drilling and “fracking” or more formally “hydraulic fracturing.” Fracking is a current societal hot a button. Almost as pervasive as the subject of Climate Change! Both topics give rise to highly polarized groups with strong unwavering sentiments. These groups are mirrored by disbelievers basing opinions on perception and anecdotal information rather than facts.

Venezuela to Open up Massive Natural Gas Field with European Investment - On 23 December Spain's biggest oil firm Repsol YPF, S.A. and Italy’s Ente Nazionale Idrocarburi S.p.A., better known by the acronym ENI, signed a $1.5 billion deal with state-owned oil company Petroleos de Venezuela SA, (PDVSA) to develop a huge new gas reserve in Venezuela. Repsol YPF, S.A. Chairman Antonio Brufau, ENI S.p.A. Chairman Paolo Scaroni and Venezuelan Minister for Oil and Mining Rafael Ramirez signed the agreement in Caracas. How big? According to a statement released by Repsol YPF, S.A., Perla (the pearl) field is 31 miles off Venezuela’s coast in the Cardon IV block of the Gulf of Venezuela in 200 feet of water and holds 17 trillion cubic meters of natural gas, equivalent to 3.0 billion barrels of oil. Repsol YPF, S.A.’s recent pronouncement is more than double the estimate it gave three months ago when it first announced the initial results of its test drilling. The Perla field was discovered in 1976 and in 2009 the partners began initial exploratory activities to estimate the field’s reserves. Four test wells have now been drilled.

Oh, Canada’s Become a Home for Record Fracking - Early last year, deep in the forests of northern British Columbia, workers for Apache Corp. performed what the company proclaimed was the biggest hydraulic fracturing operation ever. The project used 259 million gallons of water and 50,000 tons of sand to frack 16 gas wells side by side. It was "nearly four times larger than any project of its nature in North America," Apache boasted. The record didn't stand for long. By the end of the year, Apache and its partner, Encana, topped it by half at a neighboring site. As furious debate over fracking continues in the United States, it is instructive to look at how a similar gas boom is unfolding for our neighbor to the north. To a large extent, the same themes have emerged as Canada struggles to balance the economic benefits drilling has brought with the reports of water contamination and air pollution that have accompanied them. The Canadian boom has differed in one regard: The western provinces' exuberant embrace of large-scale fracking offers a vision of what could happen elsewhere if governments clear away at least some of the regulatory hurdles to growth. Even as some officials have questioned the wisdom of doing so, Alberta and British Columbia have dueled to draw investment by offering financial incentives and loosening rules. The result has been some of the most intensive drilling anywhere.

Satellite Photos Illustrate Dramatic Expansion of Canadian Tar Sands - Extraction of Alberta’s energy-intensive tar sands has expanded steadily in recent years, with about 232 square miles now exposed by mining operations. That expansion is expected to double over the next decade, which could mean the destruction of 740,000 acres of boreal forest and a 30% increase in carbon emissions from Canada’s oil and gas sector. New satellite images show the dramatic expansion that has taken place from 2001 through 2011. (Photos by Robert Simmon, NASA/Landsat/USGS.) So what’s the actual impact on the ground? Here’s what happens when you turn a carbon sink like the Boreal Forest into a carbon-spewing pit of tar sands

The Key to Keystone -- I’ve found much of the Keystone Pipeline analysis to be lacking. One of the main arguments against it—the potential damage caused by leaks of the particularly dense goop extracted from the Canadian tar sands—is of course perfectly sound, especially given the environmental sensitivity of the planned route. But a) they’ll just change the route (as TransCanada, the potential builder, has already announced), and b) this is kind of a NIMBY argument anyway. Why should we feel better is this stuff mucks up Vancouver, BC instead of Nebraska? The more convincing arguments are those of climate scientists who warn that based on the magnitude of Canada’s tar sands deposits and the energy needed to extract oil from them, this stuff will dangerously accelerate global warming. Here, the work of the reliably correct James Hansen is…um…sobering, to put it mildly. But there’s a fundamental problem with this argument as well, and it’s not with the science, it’s with the politics. As long as this stuff a) exists in known deposits, b) is in demand, c) can be profitably extracted, and d) is not viewed as a global hazard for which there are safe, economic alternatives, then extracted it will be.

Oil sands pipeline seems likely to endure - The Obama administration confirmed last week that if forced by Congress to quickly decide the fate of the proposed Keystone XL oil pipeline from western Canada to the Gulf Coast, it would probably kill the project. But does that mean the $7 billion pipeline project is dead forever? Will it curb the inexorable global demand for the exploitation of Canada’s huge oil sands deposits? Will it affect the concentration of atmospheric carbon dioxide in beneficial ways and slow the pace of climate change? The answer to all three questions, barring unexpected changes in the politics and economics of oil, appears to be no. State Department officials and industry analysts say there is nothing to prevent TransCanada, the company proposing to build Keystone, or a different pipeline operator, from submitting a new application to build a similar project. A State Department official said that such an application would have to begin from scratch and require a new series of public hearings and the completion of another environmental impact statement, a process that in Keystone XL’s case has already taken more than three years.

Oil storage: Few rooms for workers but lots of room for oil - Terry Maxwell has just opened a park to house trailers. The impetus can be seen on the horizon: huge oil tanks in varying phases of construction. Mr Maxwell’s land is on the outskirts of Cushing, Oklahoma, a city of 7,800 people and enough tanks to store three times as much crude as the US consumes daily. As the real estate market languishes, there is a building boom here to house hydrocarbons. Energy companies such as BP, traders such as Vitol and banks such as Morgan Stanley, which also trades physical oil, either lease space in tanks or are building their own in the rolling country north and south of town. Capacity has grown by 11.4m barrels, or 20 per cent, in the past year, to 66.5m barrels, according to the US Department of Energy. New projects will bring the total to 79m barrels in a year, says Lipow Oil Associates, a consultancy. Capacity was just 32m barrels as recently as 2006. With local accommodation full, itinerant welders, equipment operators and inspectors hired to build tanks sleep at trailer parks such as Mr Maxwell’s, where the rent is $350 a month. “They’re building as fast as they can,” observes Mr Maxwell, himself a retired pipeline worker. Oil traders pay close attention to Cushing. Its tanks are the designated place to make deliveries to fulfil the benchmark West Texas Intermediate (WTI) crude futures traded on the New York Mercantile Exchange.

The Next "Oil" Miracle Will Be In Ohio! - News reports have surfaced lately that the next oil production miracle will be in ... Ohio! Steve Hargreaves' Ohio set to see oil boom thanks to fracking is typical. (CNNMoney) -- Ohio hasn't been an oil powerhouse for nearly 100 years.... the new production, which is coming from a layer of previously untapped shale rock deep beneath the state, relies on hydraulic fracturing and horizontal drilling. If given the proper development, Ohio could be producing 200,000 barrels of crude a day by 2020. Your intrepid reporter did a little research. That deep shale layer turns out to be the Utica Shale. We get the crucial details from geology.com. The Utica Shale is a rock unit located a few thousand feet below the Marcellus Shale. It also has the potential to become an enormous natural gas resource. Hang on! Wait a minute! Didn't geology.com just say the Utica has the potential to become an enormous natural gas resource? Where's the beef crude oil? The next thing you know Newt Gingrich or some other sociopath will start prattling on about how we can achieve energy independence in the United States, so we better nip this story in the bud.

Ohio sand turns to gold as drilling boom comes to Buckeye State - Rob Sidley is sitting on a gold mine, thanks to Mother Nature. His family-owned company produces the special sand needed for the drilling boom in Ohio’s deep layer of Utica shale. The sand is perfect for the hydraulic fracturing process — or fracking — which uses force to open cracks in the shale and free up natural gas, oil and other lucrative products. The sand is nearly 100 percent quartz. It is round and spherical. It is hard and strong. It is resistant to water and chemicals. It is a sand that flows almost like a liquid. It can survive heavy pressures deep underground. It takes 6,000 to 8,000 tons to frack one well, depending on the size of the well, so Sidley has a valuable commodity as drillers begin to focus their attention on eastern Ohio. His company, R.W. Sidley Inc., is based in Painesville and its sand operation is in Thompson, about 20 miles northeast of Cleveland in Geauga County. Fracking is the term used to describe the process in which water, sand and certain toxic chemicals are pumped under pressure into horizontal wells thousands of feet below the ground to free up natural gas, oil and wet gases such as propane, ethane and butane. The grains of sand act as pillars deep underground, keeping tiny fissures open so that more natural gas can be extracted

‘Tight oil’ holds promise of ending U.S. oil imports -The drilling rigs puncture the horizons and tuck into the valleys of the bald North Dakota landscape. Their steel towers have taken root on a tableau of badlands and treeless plains that extends for more than 100 kilometres.They are like steeples in the French countryside, erected in ever greater numbers, more every month, by an industry whose only deity is oil. Near many are the flares, the votive candles of the hydrocarbon age, where natural gas not worth enough to save is burned in enormous fireballs, some the size of small cars, so brilliant they blind drivers at night. This is the place the energy companies call the Bakken, an oil play that has erupted across a forgotten corner of the U.S. It is a frenzy of drilling and pumping and moneymaking. It is also a place where a new energy future is emerging, one that holds the promise of ending U.S. dependence on overseas oil and kick-starting the country’s stagnant economy. Government estimates suggest it could yield 4.3 billion barrels of oil. One industry estimate is five times higher, which would mean the Bakken alone could hold as much recoverable oil as the rest of the country. All those drills turning in all those places have sweeping ramifications for North America. The Bakken and its followers have fundamentally altered the energy outlook for the continent. If energy consultant IHS CERA is right, in the span of merely one decade, tight oil wells will pump more oil than the entire oil sands.

Bakken shale and U.S. oil production - National Public Radio’s All Things Considered program had a segment consisting of what I considered highly questionable information concerning oil production in the Bakken Shale region of North Dakota and U.S. oil production in general. The segment indicated that U.S. oil production would rise dramatically in the foreseeable future due to new technological developments. Segments like this may play well to the public’s desire for optimism but they don’t present an accurate assessment of future oil production in the Bakken Shale region or in the U.S. Early in the segment, the host, Guy Raz, stated that there were 11 to 20 billion barrels of oil in the Bakken Shale formation. I was surprised by the 11 and 20 billion barrel figures because an April 2008 U.S. Geological Survey (USGS) report estimated the amount of technically recoverable oil within the Bakken Shale formation at 3.0 to 4.3 billion barrels, with a mean of 3.65 billion barrels. The state of North Dakota also released a report in April 2008 which estimated that there are 2.1 billion barrels of technically recoverable oil in the Bakken Shale formation. In reality, the actual volume of oil that can be economically recovered from a region will be considerably less than the technically recoverable estimates by government agencies, assuming the estimates are reasonably accurate. I personally think that an ultimate recovery from the Bakken Shale formation of 1.5 Gb is realistic if not a bit optimistic. Based upon my modeling of Bakken Shale oil production with a 1.5 Gb ultimate recovery, peak production would occur in the 2013-2014 period.

The Divergence Between Gasoline And Oil Prices Can't Last For Long - Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump -- both regular and premium -- rose three cents over the past week. Regular is now 17.8% off its 2011 interim high set in early May. Premium is down 16.2%. WTIC closed today at 101.24. It is 11.1% off its 2011 interim high, which also dates from early May. As the first chart below shows, the price of oil has risen significantly since the interim low in early October while gasoline prices have trended downward. This is not a sustainable divergence. As I write this, GasBuddy.com shows no states with the average price of regular above $4.

U.S. net exports of petroleum products - One big story of 2011 was the United States switched from being a net importer to a net exporter of petroleum products. Here are the details behind that development. The graph below plots the difference between U.S. exports and imports of petroleum products. On average in 2008, we had been importing about 1.8 million barrels per day more than we exported. So far in the second half of 2011, the difference has swung to an average positive net export balance of 0.4 million barrels per day. The exports are coming in the form of diesel and gasoline that is being sold all over the world, with the top 10 buyers in terms of growth of demand for U.S. products being Mexico, Netherlands, Chile, Canada, Spain, Brazil, Guatemala, Turkey, Argentina, and France. The first thing to understand about this number is that it refers only to net exports of refined petroleum products, calculated for example by subtracting the amount of gasoline that the U.S. imports from the amount of gasoline that we export. These imports or exports of refined products are far smaller in magnitude than the imports of crude oil, which is the raw material from which refined products are made. The small positive net export balance on petroleum products is still completely dwarfed by the huge negative balance on crude petroleum.

Gasoline Prices and Brent WTI Spread - The year is almost over and once again a key downside risk for the economy is high gasoline prices. According to Bloomberg, Brent Crude is up to $108.10 per barrel, while WTI is up to $99.76. These prices have kept gasoline prices high, and pushed down vehicle miles driven in the US. Although prices were higher in the first half of 2008, it is possible that the average annual price for oil and gasoline in 2012 will see a new record high. If the global economy really slows, oil and gasoline prices will probably fall - and probably offset some of the impact from lower exports. Unfortunately turmoil in the Middle East (this time with Iran) might be pushing up oil prices. This following graph shows the prices for Brent and WTI over the last few years. Usually the prices track pretty closely, but the "glut" of oil at Cushing pushed down WTI prices relative to Brent. The spread has narrowed over the last couple of months following the announcement of a partial reversal of the Seaway pipeline to transport crude oil from Cushing, Oklahoma, to the Gulf Coast (the pipeline is scheduled to be reversed in Q2 2012). And below is a graph of gasoline prices. Gasoline prices have been slowly moving down since peaking in early May. Note: The graph below shows oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices.

Oil Prices Predicted to Stay Above $100 a Barrel Through Next Year - The United States economy managed to cope this year despite triple-digit prices for barrels of oil. The lessons may come in handy, economists say, because those prices will probably be sticking around. With Iran threatening to cut off about a fifth of the world’s oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from $100 a barrel to $120 a barrel in 2012. For consumers, who have been driving less and buying more fuel-efficient cars, weakened demand has helped lower gasoline prices 70 cents since May, to a national average of $3.24 for a gallon of regular unleaded, according to the AAA Fuel Gauge Report¹. Now, though, the focus has turned to Iran.

The New Age of America's Energy Abundance: The No. 1 U.S. Export This Year Will Be Petroleum - -- "For the first time, the top export of the United States, the world's biggest gas guzzler, is — wait for it — fuel. Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990 (see table above of the top 15 categories for U.S. exports through November of this year). It will also be the first year in more than 60 that America has been a net exporter of these fuels. The last time the U.S. was a net exporter of fuels was 1949, when Harry Truman was president. A decade ago, fuel wasn't even among the top 25 exports. Fuel exports, worth an estimated $88 billion in 2011, have surged for two reasons:

1. Crude oil, the raw material from which gasoline and other refined products are made, is a lot more expensive. Oil prices averaged $95 a barrel in 2011, while gasoline averaged $3.52 a gallon — a record.
2. The volume of fuel exports is rising. The U.S. is using less fuel because of a weak economy and more efficient cars and trucks. That allows refiners to sell more fuel to rapidly growing economies in Latin America, for example.

Six common myths about US and global energy issues - At times politicians, bloggers, and even financial professionals make comments about US domestic and global energy issues that are factually inaccurate. When you are having a cocktail at the New Year's Eve party in a week, ask around what people think about energy dependence, production, global supplies, etc. and you may hear some of the following six myths:
Myth #1: US crude oil comes from the Middle East/Persian Gulf. Not true. A large portion of imports is coming from Canada and other non-OPEC nations. Only about 18% is coming from the Persian Gulf
Myth #2: The US domestic energy production continues to dwindle. Not true. The US domestic energy production is in fact increasing.
Myth #3: If the US produced more of its energy requirements, the price at the pump would be lower. This is a common misconception and is not true in the global economy.

Oil on Nigerian coast after major Shell spill: NGO - An environmental group said Tuesday that an oil slick had approached Nigeria’s coastline after a major Shell spill last week, but the company insisted that its spill had been largely dispersed. Nigerian group Environmental Rights Action, which closely monitors oil spills in the country, said oil was reported along the shoreline of fishing communities in Bayelsa state as well as Delta state. The group said it sent monitors out after reports from fishermen. It said it suspected the oil had come from the Shell spill, but the claim could not be independently verified. “In the course of the visit, spreading slick was sighted close to the coastline of Odioama and along St. Nicholas,” it said in a report that included photos of streaks of what appeared to be oil just off the coastline.

Saudi Oil Break-Even Price Rise to $71.5 Next Year, NCB Says - Saudi Arabia’s break-even price to balance next year’s budget will rise to $71.5 a barrel from $70.9 this year, according to National Commercial Bank, the kingdom’s largest lender by assets. Saudi Arabia, the world’s largest crude exporter, is expected to produce 9.2 million barrels a day on average in 2011, Jarmo Kotilaine, the bank’s chief economist, said today in response to e-mailed questions. The lender, known as NCB, forecasts the country’s average oil production to fall to 8.8 million barrels a day in 2012, he said. The Organization of Petroleum Exporting Countries signaled in its meeting in Vienna on Dec. 14 that it’s prepared to allow Saudi Arabia, the biggest member, to keep pumping crude at near the highest rate in at least 30 years, while increasing its combined output limit to 30 million barrels a day.

Saudi Oil Breakeven Now at $91, Moubayed Says -- Alia Moubayed, senior economist at Barclays Capital, talks about the oil industry in the Middle East and the outlook for the economy in the region. Moubayed speaks with Tom Keene on Bloomberg Television's "Surveillance Midday."

OPEC in pact on Libyan oil, minister says — Libya’s Oil Minister Abdurahman Benyezza said Saturday that there is a “gentlemen” agreement inside OPEC to accommodate the country’s crude oil as production recovers. “There is a gentlemen agreement to accommodate Libya’s production ... but nothing formal,” the minister said, when asked if Gulf countries promised to cut output next year when production at the North African country recovers. Libya is currently producing over 1 million barrels of crude oil per day and expects to boost output to pre-war levels of about 1.6 million barrels a day by mid-2012, the head of the country’s National Oil Co. had said earlier Saturday. Arab oil ministers are in Cairo for a meeting of the Organization of Arab Petroleum Exporting Countries, or OAPEC, on Saturday. Seven of the members of OAPEC are also members of OPEC. They are Algeria, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates. OPEC, responsible for about a third of the world’s oil production, earlier this month unified in an agreement to maintain the bloc’s output levels, but in a sign of continuing tension among members, avoided a decision on how much oil each individual member would produce.

This Monster From The Deep Could Change Everything For Norwegian Oil: With relatively little fanfare on the international stage, Lundin Petroleum and Statoil (and partners) have just recently jointly discovered one of the largest oil fields ever found in the North Sea. The Aldous Major South - Avaldsnes discovery on the Utsira High structure is currently estimated to contain 1.7 to 3.3 billion barrels of recoverable oil. The astonishing thing about this discovery is that it has lain undiscovered in a mature oil province for so long providing ample encouragement for explorers to go on exploring. The recoverable resource estimates have grown with every well drilled and with a new delineation well spudded on 28th November, further news on the size of this giant is expected in early January. The Aldous Major South - Avaldsnes story has been a year in the making. The 16/2-6 discovery well was announced in September 2010, but the story only gained traction on 30th September 2011 when the recoverable resource estimate was substantially increased following evaluation of data from the 16/2-7a sidetrack well. Prior to then recoverable resource estimates for Avaldsnes were in the range 100-400 million barrels - not enough to get overly excited about. The 16/2-7a well extended the area of proved hydrocarbons but also "proved" that Avaldsnes and Aldous Major South were part of the same gigantic structure. Avaldsnes is now estimated to hold 0.8 to 1.8 billion barrels of recoverable oil and promises to be a giant field in its own right.

Iran inks oil products deal with Afghanistan; Tehran to export one million tons per year of gasoil - Iran signed an agreement with Afghanistan on Monday to export one million tons per year of gasoil, gasoline and jet fuel to the neighboring country starting next year, the official IRNA news agency reported. The Islamic state, which was long dependent on imported gasoline for 30 to 40 percent of its consumption, said last year it had started exporting the fuel. The sales were confirmed to Reuters by trade sources, but they did not know at the time where the cargoes were being exported. “Iran has exported gasoil to Afghanistan over the past years but the export of gasoline and jet fuel will begin next year,” IRNA quoted Ali Reza Zeighami, managing director of the National Iranian Refining and Oil Products Distribution Company, as saying. Zeighami said the price of the products will be determined based on International prices. In April, trade sources said Iran had struck a deal to sell gasoline to Iraq but that the rare cargo did not mean the Islamic Republic had became a net exporter and free from its dependence on gasoline imports. Shipping data obtained by Reuters in November showed Iran’s October gasoline imports rose more than 21 percent to 63,279 barrels per day from 51,986 bpd in September.

Agenda Driven: Federal judge rules Iran shares responsibility for 9/11 terror attacks - In an historic hearing in the federal courthouse in Manhattan on Thursday, U.S. District Court Judge George Daniels said he planned to issue a ruling in the coming days declaring that Iran shares in the responsibility for the 9/11 terror attacks. “The extensive record submitted to this court, including fact witnesses and expert testimony, is satisfactory to this court,” Judge Daniels said. The court “accepts as true” the various allegations of the plaintiffs and their experts, he declared, and “will issue an order” in the coming days that Iran bears legal responsibility for providing “material support” to the 9/11 plotters and hijackers. Family members of 9/11 victims who attended the open-court hearing broke into tears. They had nervously sat through a four-hour presentation by attorneys Thomas E. Mellon, Jr., and Timothy B. Fleming, consisting of evidence backing up their claims that Iran had foreknowledge of the 9/11 attacks and actively assisted the hijackers in planning, preparing, and executing their plan.

Iran Threatens to Block Oil if West Sets New Sanctions — Iran1 issued a blunt warning on Tuesday that it would block the Strait of Hormuz, the world’s most important oil2 transit point, if Western powers attempt to impose an embargo on Iranian petroleum exports in their campaign to isolate the country over its suspect nuclear energy3 program. The warning, issued by Vice President Mohammad Reza Rahimi, came as Iran’s naval forces were in the midst of a 10-day war games exercise in a vast area of the Arabian Sea and Gulf of Oman. The Strait of Hormuz, a narrow passage that connects the Gulf of Oman to the Persian Gulf, is the route for one third of the world’s oil-tanker traffic. “If Iran oil is banned not a single drop of oil will pass through Hormuz Strait,” Mr. Rahimi was quoted as saying by the official Islamic Republic News Agency at a conference in Tehran. “We are not interested in any hostility,” he was quoted as saying. “Our motto is friendship and brotherhood, but Westerners are not willing to abandon their plots.” Mr. Rahimi appeared to be referring to efforts under way by the United States and European Union to restrict Iran’s ability to sell oil, its most important export, as part of their increasingly strict economic sanctions in response to Iran’s uranium enrichment program.

IRAN: 'Not A Drop Of Oil Will Pass Through The Strait' If Sanctions Increase: Three days into their 10-day naval exercise, Iran announced it will shut the Strait of Hormuz and close off nearly one-third of all tanker-carried oil if sanctions against its own oil exports are enforced. Al-Arabiya News reports Iranian Vice President Ahi Rah imi said “If sanctions are adopted against Iranian oil, not a drop of oil will pass through the Strait of Hormuz."“We have no desire for hostilities or violence ... but the West doesn’t want to go back on its plan” [to impose sanctions], he said. The most recently imposed sanctions on Iran fell in November, which prompted the British embassy in Tehran to be stormed by militia members. But the U.S. is leading a push to restrict Iran's oil exports, as well, which would cripple its national economy. On December 1, the U.S. Senate sanctioned the Central Bank of Iran, a first step in limiting crude export. Indira A.R. Lakshaman and Asijylyn at Businessweek report: The Senate measure would give the Obama administration power to bar foreign financial institutions that do business with the central bank from having correspondent bank accounts in the U.S. If enacted, it could be much harder for foreign companies to pay for oil imports from Iran, the world’s third largest exporter of the commodity.

Oil price climbs amid Iranian threat - Iran on Tuesday threatened to close the Strait of Hormuz, a chokepoint for a third of the world’s seaborne oil trade, if the west imposes oil sanctions on Tehran, causing a rise in oil prices. The warning by Mohammad Reza Rahimi, Iran’s first vice-president, came days after Iran staged naval war exercises in the strait. “If they [the West] impose sanctions on Iran’s oil exports, then not even one drop of oil can flow through the Strait of Hormuz,” he told the official Iranian news agency Irna. Iranian officials have in the past threatened to shut down oil traffic through the strait, but the comments by Mr Rahimi are the strongest yet. France, Germany and the UK are pushing for an embargo on Iranian oil exports to Europe, although several countries, including Greece, have some reservations. EU foreign ministers are scheduled to consider the embargo on January 30. It was not immediately clear whether Mr Rahimi had official backing for his comments. Only senior commanders of Iran’s Revolutionary Guards can take actions such as closing the strait in the face of foreign threats. Cabinet members such as Mr Rahimi can only try to influence their decision.

Iran Outlines Key Steps And Actors In A Potential Straits Of Hormuz Closure -- While the Iranian war game naval exercises have been ongoing for almost five days, or half of the projected 10, tensions in the Straits of Hormuz region have been rising culminating with today's interchange between the head of the Iranian Navy and the US 5th Fleet (which for various reasons we can not present you with a status update today). One question that remains is just what would a closure of the Straits looks like. Luckily, the Middle East Media Research Institute's blog has caught a release by an Iranian website Mashreq News, which spells out the step by step details of just how such a closure would be enacted.

Oil above $107, US stocks and Iran in focus (Reuters) - Oil rose on Thursday as gains in the stock market and shortcovering helped shake off early losses caused by a rise in U.S. crude stockpiles. Crude dipped early after U.S. inventory data showed an unexpected build in stockpiles last week, adding to pressure from the dollar's gain against the euro, which weighed on dollar-denominated commodities. Crude turned positive in the afternoon as the euro rebounded and stock markets rose, putting Brent crude on track for gains of 13 percent for the year and U.S. oil futures in line for an 8 percent gain. "The euro got oversold and recovered, but who wants to go home short for the holiday weekend with Iran and all the geopolitical powder kegs out there? This is just a bit of short covering," said Rich Ilczyszyn, chief market strategist and founder of brokerage iirtrader.com. Tehran again threatened to block traffic through the Strait of Hormuz, a crucial passage for Middle Eastern crude suppliers after the European Union's decision to tighten sanctions on Iran over its nuclear program. The U.S. said it would preserve oil shipments in the Gulf. Brent crude traded up 45 cents to settle at $108.01 a barrel, off earlier lows of $106.50. U.S. crude rose 29 cents to settle at $99.65 a barrel.

Oil - It Still Has the United States Over a Barrel - Oil, the world's most vital commodity, may threaten another U.S. economic recovery in 2012 If the price of oil, which traded Monday morning at $99.70 per barrel, vectors above $100 on emerging market GDP growth and tensions over Iran's nuclear program, this will be the United States' third oil shock since 1970 -- the fourth if you count the $147.27 per barrel price surge reached during the leveraging bubble in 2007. The first two oil shocks occurred in 1973-74 and 1979-80. Further, whether it's the third or fourth, it represents bad news for the United States from an economic policy and from a national security / foreign policy flexibility standpoints. Moreover, although short-term several key lobbies/interest groups benefit from the U.S.'s high per capita oil consumption (primary big oil, and related sectors, such as refining and petroleum product delivery), the nation at large is not well-served. Oil results in a net-outflow of wealth -- dollars that with a national energy policy would remain in the U.S. and serve as a source of business investment.

Oil Prices - Saudis, Gulf States Ready to Offset Loss of Iran Oil - Iran's threat to block all oil shipments in the Strait of Hormuz -- a vital shipping lane through which one-sixth of the world's oil flows -- has initially boosted oil prices, but traders may calm down if they view a potential counter-move by Persian Gulf states as adequate supply compensation. Gulf Arab nations are prepared to compensate for any loss of Iranian oil in the world market, in the event Western nations impose sanctions on Iran's oil shipments, a senior Saudi official said after Iran amped-up its rhetoric Tuesday about shutting off the key supply route on the Persian Gulf, The Associated Press reported Wednesday. Oil, which had traded above $101 per barrel Tuesday, eased slightly on Wednesday, with West Texas Intermediate Crude dropping 71 cents to $100.60 per barrel. France Wednesday urged Iran to adhere to international law allowing freedom of navigation in the Strait of Hormuz after Tehran's threat. The strait links the Persian Gulf to Indian Ocean. As noted, one-sixth of the world's oil -- and one-third of the world's oil transported on the sea -- passes through the strait daily.

Oil price falls as Saudis trump Iran threat — Oil prices fell on Wednesday, after Saudi Arabia said it will offset any loss of oil from a threatened Iranian blockade of a crucial tanker route in the Middle East. The U.S. Navy warned that any disruption of traffic through the vital Strait of Hormuz "will not be tolerated." In New York, benchmark crude fell $1.98, or about 2 percent, to finish at $99.36 a barrel. Brent crude fell $1.71 to end at $107.56 a barrel in London. On Tuesday Iran's vice president said that his country was ready to close the Strait of Hormuz — a vital waterway through which a third of the world's tanker traffic flows — if western nations embargo the country's oil because of Iran's ongoing nuclear program. The head of the country's navy added on Wednesday that his fleet can block the strait if need be. His comments came as Iran held a 10-day drill in international waters near the strategic route, which is 21 miles wide at its narrowest point. A Saudi oil ministry official told The Associated Press that Saudi Arabia and other Gulf producers are ready to provide more oil if Iran tries to block the strait. The official spoke on condition of anonymity because he was not authorized to discuss the issue. He didn't specify other routes that could be used to transport oil, although they would likely be longer and more expensive for getting crude to the region's customers.

Iran unlikely to block oil shipments through Strait of Hormuz, analysts say — The latest in a series of Iranian threats to block the vital Strait of Hormuz triggered a sharp response Wednesday from the U.S. Navy, although there appeared to be little chance that Tehran would make good on its warnings. Iran, which feels threatened by the presence of U.S. bases and warships in the region, has warned for years that it would choke off the Strait of Hormuz in the case of war or economic sanctions. The passage at the entrance to the Persian Gulf hosts a daily caravan of tankers that transport roughly a third of the world’s oil shipments. Despite threats to close the narrow waterway if Western nations tighten sanctions on Iran by imposing an oil embargo, the Islamic republic needs the strait at least as much as its adversaries do, Iranian and foreign analysts said.

War Imminent in Straits of Hormuz? $200 a Barrel Oil? - There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security. Furthermore, there is the wild card of Iran’s oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions. But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a “cakewalk” victory with “mission accomplished” declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington’s, NATO’s and Tel Aviv’s resources to quell.

Iran: An Oil Giant - Back in late November, I posted an article outlining Iraq's contribution to the world's natural gas resource base. As you may recall, Iran is one of the world's leading producers of both natural gas and oil; it is OPEC's second largest oil producer and exporter after Saudi Arabia and, in 2010, was the world's third largest exporter of oil after Saudi Arabia and Russia. In this posting, I will be taking a look at Iran's oil industry, particularly since they have threatened to shut down the Strait of Hormuz, a very narrow body of water near the exit and entry point of the Persian Gulf through which passes 15 million BOPD or one-sixth of the world's supply of oil. Iran is a founding member of OPEC. According to OPEC's website, Iran has the third largest oil reserves among the 12 nations that comprise the cartel as shown here: OPEC's oil reserves of 1193 billion barrels make up 81.33 percent of the world's total oil reserves. Among OPEC nations, Venezuela has the largest reserves totaling 296 billion barrels and Saudi Arabia has the second largest at 264 billion barrels. With reserves of 151.17 billion barrels, Iran has 12.7 percent of the world's total oil reserves. Iran is OPEC's second-largest oil producer and the world's third-largest crude oil exporter (or fourth largest depending on the source). Here is a map showing Iran's main oil and gas fields and pipeline infrastructure:

Iran Plans Letter to EU to Restart Nuclear Talks, Mehr Says - Iran’s top nuclear negotiator Saeed Jalili plans to submit a letter to European Union foreign policy chief Catherine Ashton to restart talks on the country’s nuclear program, Mehr news agency reported today, citing Iran’s ambassador to Germany. A new round of talks between Iran and the five permanent members of the UN Security Council and Germany may follow, Alireza Sheikh Attar told the state-run news agency. Iran is facing new Western efforts to halt its suspected nuclear weapons program, including U.S. sanctions that are awaiting President Barack Obama’s signature and a possible European Union ban on imports of oil from Iran, the world’s third-largest oil exporter. Iran denies seeking to develop atomic weapons.

Oil Heading for Third Annual Increase Fluctuates on China, Middle East - Crude futures headed for a third yearly advance on speculation that a recovery in the U.S. economy will bolster demand as escalating tension in the Middle East may disrupt supplies. Futures are poised to gain more than 8 percent this year as data signaled that the world’s biggest oil consumer was weathering Europe’s crisis. Iran threatened this week to block the Strait of Hormuz if sanctions are imposed on its crude exports. It also faces a possible boycott by European buyers. “There is a slight improvement in the U.S. economy and that’s reflected in higher oil prices,” said Phil Flynn, an analyst with PFGBest in Chicago. “The odds are looking very high that there will be an oil embargo on Iran next year.”

Oil interests push China into Sudanese mire - The Chinese “are very worried,” said Stephen Dhieu Dau, South Sudan’s minister of petroleum and mining, who attended the lunch with Liu. “Their wish is to see the continuation of production and the flow of the crude. This is their concern.” China, which gets nearly a third of its imported crude oil from Africa, has invested billions of dollars in the past 15 years to pump crude from this war-scarred land. But the division of what until five months ago was a united country has pushed Beijing into a political minefield in defense of its assets, straining China’s “just business” insistence that it doesn’t get involved in the internal affairs of foreign lands. China’s involvement revolves largely around the interests of a single company, the China National Petroleum Corp., or CNPC, a state-owned giant that, in its quest to match the global reach of Western oil majors and to feed China’s appetite for fuel, has dragged usually risk-averse Chinese diplomats into one of Africa’s most poisonous feuds.

China cuts 2012 rare earths export quota - China announced a cut Tuesday in its rare earths export quota as it tries to shore up sagging prices for the exotic metals used in mobile phones and other high-tech goods. China accounts for 97 percent of rare earth output and its 2009 decision to curb exports while it builds up an industry to create products made with them alarmed foreign companies that depend on Chinese supplies. In its latest quota, the Commerce Ministry said exporters will be allowed to sell 10,546 tons of rare earths in the first half of 2012. That is a 27 percent reduction from the quota for the first half of 2011. China's export restrictions have strained relations with the United States the European Union, Japan and other governments that have called on Beijing to remove its curbs and make its intentions clear. Despite production and expor curbs, rare earths prices in China have tumbled as U.S. and European economic woes dent demand for its exports. The government ordered its biggest producer to suspend output for a month in October to shore up prices.

Surge in spending on agriculture to boost farmers - China's central government is stepping up fiscal spending to develop agriculture and rural regions as well as to improve farmers' livelihoods in an effort to bridge the rural-urban wealth and development gap. Xie Xuren, minister of finance, said yesterday that fiscal spending from the central government for agriculture-related projects and farmers is likely to top 1.04 trillion yuan ($164 billion) this year, which represents a 21.3-percent surge compared to last year's figure. Spending has allowed for more water-related facilities to be built and small reservoirs to be consolidated. The central government has also urged financial institutions to increase lending to agriculture-related businesses through incentive policies, Xie said at a national finance work conference held in Beijing.

China tests 500 km/h super high-speed train - China launched a super-rapid test train over the weekend which is capable of travelling 500 kilometers per hour, state media said on Monday, as the country moves ahead with its railway ambitions despite serious problems on its high-speed network. The train, made by a subsidiary of CSR Corp Ltd, China's largest train maker, is designed to resemble an ancient Chinese sword, the official Xinhua news agency reported. It "will provide useful reference for current high-speed railway operations," it quoted train expert Shen Zhiyun as saying. But future Chinese trains will not necessarily run at such high speeds, CSR chairman Zhao Xiaogang told the Beijing Morning News. "We aims to ensure the safety of trains operation," he said.

China reveals its space plans up to 2016 — China plans to launch space labs and manned ships and prepare to build space stations over the next five years, according to a plan released Thursday that shows the country's space program is gathering momentum. China has already said its eventual goals are to have a space station and put an astronaut on the moon. It has made methodical progress with its ambitious lunar and human spaceflight programs, but its latest five-year plan beginning next year signals an acceleration. By the end of 2016, China will launch space laboratories, manned spaceship and ship freighters, and make technological preparations for the construction of space stations, according to the white paper setting out China's space progress and future missions. The country will continue exploring the moon using probes, start gathering samples of the moon's surface, and "push forward its exploration of planets, asteroids and the sun." The paper also says China will improve its launch vehicles, improve its communications, broadcasting and meteorological satellites and develop a global satellite navigation system, intended to rival the United States' dominant global positioning system (GPS) network.

Occupy Beijing? - The outbreak of spontaneous mass protest against corruption and abuse of power in China is showing no signs of abating. In the latest instance, which received sustained Western press coverage, thousands of villagers in Wukan, a farming community in Guangdong Province, “occupied” their village for nearly two weeks before successfully extracting important concessions from the provincial government, which had to dispatch a deputy party secretary to negotiate with the villagers. The specific trigger for this unusually large mass protest is a common scourge plaguing Chinese farmers: the theft of their land by local officials. Although farmers in China have, nominally at least, 30-year leases on their state-owned land, local officials often sell leases, for a huge profit, to commercial developers without bothering to consult the affected farmers. The lion’s share of proceeds from such illegal transactions go into the coffers of local governments and the pockets of corrupt officials, with the farmers, now landless and without income, receiving a pittance.

China manufacturing activity falls again - Chinese manufacturing activity declined for the second consecutive month in December but showed tentative signs of stabilising, according to a survey published on Friday. The HSBC purchasing managers’ index for China hit 48.7 this month, weighed down by falling orders and remaining below the 50 mark that denotes a contraction. Yet the decline was softer than November’s 47.7 reading, signalling that the fall in Chinese manufacturing growth may be nearing a bottom, at least in the short term. Qu Hongbin, chief China economist with HSBC, warned it was still too early to sound the all-clear and that “more aggressive action on both fiscal and monetary fronts” was needed to shore up growth. “A hard landing should be avoided so long as easing measures filter through in the coming months,” Mr Qu said.With inflation falling sharply and growth slowing in recent months, China has cautiously started to relax its tight monetary policy settings. It trimmed banks’ required reserves at the end of November – its first such move in three years – and analysts expect another cut in the coming weeks, if not days. With Europe still struggling and the US recovery proceeding in fits and starts, the global economy has become increasingly reliant on China as an engine of growth.

China Contraction in Manufacturing Boosts Case for Easing Policy: Economy - China’s manufacturing contracted for a second month in December as Europe’s debt crisis cut export demand, fueling speculation that the central bank may cut lenders’ reserve requirements within days. A purchasing managers’ index was at 48.7 in December from 47.7 in November, HSBC Holdings Plc and Markit Economics said today. A reading below 50 indicates a contraction. Export orders fell in December for the first time in three months and domestic demand was “sluggish,” today’s report said. Demand for cash ahead of the week-long Chinese Lunar New Year holiday starting Jan. 23 may give officials an additional reason to cut banks’ reserve ratios after a reduction last month that was the first since 2008. “A reserve ratio cut is likely to happen by Jan. 3, before markets resume trading,” . China’s exports are under threat because “the euro area is slipping into a recession and the U.S. is also expected to slow down in early 2012,” Li said. A deeper slowdown in China, the world’s second-biggest economy, would impair a global expansion that is already faltering because of Europe’s austerity measures

China to Damp Foreign Investment in Auto Sector -China will withdraw its support for foreign capital in the country's auto-manufacturing sector in an effort to build up its domestic industry, state media reported late Thursday. The report from the state-run Xinhua news agency didn't disclose additional details, and it was unclear whether it would impact existing operations by foreign auto makers. U.S. and European auto makers, including General Motors Co. and Volkswagen AG, and Japanese auto makers like Toyota Motor Corp. and Honda Motor Co. have long produced cars in the country through joint ventures with local partners. Foreign auto makers have played a key role as China has shot up to become the world's No. 1 auto market. After blistering growth, auto sales this year are expected to grow no more than 3%, which would total 18.6 million vehicles, according to the China Association of Automobile Manufacturers, an industry group. The report said officials would encourage more foreign investment into environmentally friendly technologies, alternative-fuel cars and other areas with guidelines taking effect Jan. 30. The government will lower foreign restrictions by allowing companies to invest in more sectors and increasing caps on the amount of foreign capital in some areas, the report said.

Beijing's Great Bailout to Defuse Ticking Local Debt Bombs - In the previous post, we briefly mentioned that"....there could be some hidden debt bombs as a recent Bloomberg finding suggests that China's banks may be understating their exposure to runaway local borrowing by possibly billions of dollars that is raising fears of a government bailout." Here are more details. It appears that based on a Bloomberg News survey, the construction boom by many local governments as part of China's stimulus program that started in November 2008 have now become too big to complete and may require a bailout even bigger than the Euro debt crisis. From Bloomberg and chart below [emphasis ours]:"Provinces and cities are going deeper into the red to finish projects....With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.

China's external debt hit 697 bln U.S. dollar at end of September (Xinhua) -- China's foreign debt totaled 697.16 billion U.S. dollars at the end of September, up from 548.9 billion U.S. dollars at the end of 2010, the country's foreign-exchange regulator said Tuesday. Short-term debt hit 507.63 billion U.S. dollars, equivalent to 72.81 percent of the country's total foreign debt, while mid- and long-term debt amounted to 189.54 billion U.S. dollars, accounting for 27.19 percent of the total debt, the State Administration of Foreign Exchange said in a statement on its website.

China eclipses US as top IPO venue - China has again outshone the US as the top venue for initial public offerings despite steep share price falls on the mainland and Hong Kong stock markets, highlighting the shift in global financial activity from west to east. Companies raised $73bn from IPOs in Shanghai, Shenzhen and Hong Kong this year, according to Dealogic – almost double the amount of money raised on the New York Stock Exchange and Nasdaq combined. Hong Kong retained its crown as the top bourse for the third year in a row, with $30.9bn raised this year. That figure compares with $30.7bn and $18bn, respectively, on the New York and London stock exchanges. The results belied much weaker deal flow on mainland and Hong Kong exchanges this year, as market turmoil forced companies to delay share offerings and, in some cases, call them off at the last minute. The $73bn they raised was less than half last year’s total, compared with a 6 per cent decline in IPO fundraising on US exchanges. The US last topped the IPO league tables in 2008.

Treasury: China not a currency manipulator, however "movement of the RMB is insufficient" - From Reuters: U.S. says China is not a currency manipulator [T]he Treasury, in a semi-annual report, said that statutes covering a designation of currency manipulator "have not been met with respect to China." Even so, Treasury said appreciation in the yuan has been too slow. The value of the yuan, which Beijing manages closely, has risen by 4 percent against the dollar this year and 7.7 percent since China dropped a firm peg against the greenback in June 2010. Here is the report from Treasury: Report to Congress on International Economic and Exchange Rate Policies (includes a discussion of the global economy). And from Treasury: The Report highlights the need for greater exchange rate flexibility, most notably by China, but also in other major economies. Based on the ongoing appreciation of the RMB against the dollar since June 2010, the decline in China's current account surplus, and China's official commitments at the G-20, APEC, and the U.S.-China Strategic and Economic Dialogue (S&ED) that it will move more rapidly toward exchange rate flexibility, Treasury has concluded that the standards identified in Section 3004 of the Act during the period covered in this Report have not been met with respect to China. Nonetheless, the movement of the RMB to date is insufficient.

To rebalance the global economy: Just let China grow - Since the global economy is a closed trading system, trade deficits and surpluses across all national economies must sum exactly to zero always. Therefore, that one part of the world saves too much and thereby runs trade surpluses means other parts of the world — notably the US — must be running trade deficits. However, just because deficits and surpluses are tightly inter-connected does not mean that trade surpluses in China, say, have been responsible for US trade deficits: absent further information, causality could well have flowed in the opposite direction. Moreover, China’s high savings might be dynamically welfare-optimizing for its citizens — for instance, private enterprise in China might find self-accumulation the only way to generate investment funds — and, at the same time, only minimally if at all welfare-reducing for already-rich US citizens. Finally, it might be that global imbalances should best be viewed not as a bilateral (US-China) problem but instead a multi-lateral one. Be all that as it may, many US policy-makers focusing on US trade deficits and China’s trade surpluses urge policy actions against China to rebalance the global economy. China will find it domestically too difficult to shift away from its reliance on export promotion, infrastructure investment, and restrained consumption towards a more balanced growth path (e.g., Michael Pettis, Nouriel Roubini, Martin Wolf). My proposal: Let China grow rich as quickly as possible. Why might this do the trick?

America’s Threat to Trans-Pacific Trade - As if undermining the World Trade Organization’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the United States has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP). President Barack Obama announced this with nine Asian countries during his recent trip to the region. The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening. One hopes that this knowledge will trigger what I call the “Dracula effect”: expose that which would prefer to remain hidden to sunlight and it will shrivel up and die. The TPP is a testament to the ability of US industrial lobbies, Congress, and presidents to obfuscate public policy. It is widely understood today that free-trade agreements (FTAs), whether bilateral or plurilateral (among more than two countries but fewer than all) are built on discrimination. That is why economists typically call them preferential-trade agreements (PTAs). And that is why the US government’s public-relations machine calls what is in fact a discriminatory plurilateral FTA, a “partnership” invoking a false aura of cooperation and cosmopolitanism.

China, Japan to Back Direct Trade of Currencies --Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. The deals between the world’s second and third-largest economies come as the two-year-old European debt crisis keeps global financial markets volatile. Japan will start to buy “a small amount” of China’s bonds, a Japanese government official said on condition of anonymity because of the ministry’s policy, without elaborating on when and how much of the debt the nation plans to purchase. “Given the huge size of the trade volume between the Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd.

Japan and China: Small Beer - The main financial development over the Christmas holiday was an apparent agreement between Japan and China on a wide range of financial issues. The two key aspects are an effort to settle more of the bilateral trade in yen or yuan and that Japan will apply to buy Chinese bonds next year. Japanese officials had already signaled interest in buying Chinese bonds. Contrary to what several press reports intimate, this is hardly an effect to diversify reserves. Recall Japan’s reserve holdings at over $1 trillion is the second largest in the world behind China. The fact of the matter is that China’s bond market is simply too small to absorb the scale of funds that would be necessary for Japan to meaningful diversify its reserves. The entire Dim Sum bond market, which has captured the imagination of many investors and observers, has a market cap of about $30 bln. If Japan’s interest in Chinese bonds is not for diversification purposes, what is going on? Japan wants market intelligence. Japan also wants access to China’s capital markets because China has access to Japan’s capital markets. Japanese policy makers seem ambivalent about Chinese purchases of Japanese securities, which some see as exacerbating the destabilizing appreciation of the yen.

Intervention Failing as Yen Poised to Gain - There’s been no better currency in 2011 than the yen and strategists forecast more gains, even as Japan promises to intervene again in foreign-exchange markets and expands the world’s biggest debt burden. The yen’s advance against every major currency, including a 4.1 percent climb against the dollar, illustrates the anxiety in global markets as Europe’s debt crisis stretched into a second year on the heels of the collapse of Lehman Brothers Holdings Inc. and the U.S. housing market crash. Though bond yields in Japan are the second-lowest in the world and government borrowings are double the size of the economy, foreign ownership of its debt is the highest since 2008. Japanese officials sold at least 14.3 trillion yen ($183 billion) this year to stem gains that cut profits for exporters from Toyota Motor Corp. to Nintendo Co., and Finance Minister Jun Azumi has pledged more action. Intervention in 2012 may fail again as financial turmoil attracts investors to the world’s third-most traded currency for its low volatility.

Japan Seeks to Market Record 145 Trillion Yen Bonds in 2012; Kicking the Can Japanese Style - Japan, the country with the highest debt-to-GDP ratio in the G7 to Sell Record 149.7 Trillion Yen Debt in Fiscal 2012 Japan’s government said it will increase bond sales to the market to a record 149.7 trillion yen ($1.9 trillion) in the fiscal year starting April 1. The amount for investors such as banks and life insurers is 4.8 trillion yen more than 144.9 trillion yen in the initial plan for fiscal 2011. Total debt issuance, including securities to replace maturing debt and so-called zaito bonds sold for government agencies, will increase by 4.6 trillion yen to a record 174.2 trillion yen. Japan ought to be financing its debt for as long as possible, as cheap as it can, while it still can. Instead, the bulk of it is 5-year duration or less, with next to nothing at the extreme long end. Ability to roll this debt over at perpetually low rates is going to be a problem sooner or later, and I think sooner, rather than later.

Japan Industrial Output -2.6% In November -

Industrial production in Japan declined a seasonally adjusted 2.6 percent on month in November, the Ministry of Economy, Trade and Industry said in Wednesday's preliminary reading - suggesting that Japan's recovery from the devastating earthquake and tsunami on March 11 may be stalling.The November headline figure was well shy of forecasts for a 0.8 percent contraction following the 2.2 percent fall in October. On an annual basis, industrial production dropped 4.0 percent - again missing expectations for a 2.0 percent fall following the 0.1 percent gain in the previous month. As a result of the data, the METI maintained its assessment of industrial production, saying: "Industrial production appears to be flat." Industries that contributed to the decrease include transport equipment, communications equipment and steel. Commodities that contributed to the decrease include large and small passenger automobiles, and cellular telephones.

Deflation Grip Returns in Japan as Production Declines - Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago. Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed today in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month. The weakening economy, hurt by Europe’s debt crisis and plans by companies from Panasonic Corp. to Nissan Motor Co. to shift production abroad, may undermine Prime Minister Yoshihiko Noda’s plan to raise taxes and cut the world’s largest debt burden. Lawmakers told reporters in Tokyo today that a tax panel set up by Noda’s party has proposed doubling the nation’s sales tax by 2015, a move opposed by some ruling party members who’ve threatened to quit over the issue. “Fundamentally, Japan’s economy is on a downward slope,” . “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”

A Yen For Yen - Krugman - The FT has an article noting the strength of the yen against the euro, which it attributes to the yen’s “enduring status as a haven against the global financial turmoil.” Well, yes — Japan is seen as safe, despite its high level of debt, just like all the other advanced countries that have retained their own currencies. But there’s a special feature of Japan that is important in understanding the high yen: the interaction between deflation and the zero lower bound. Japan, of course, has deeply embedded deflation, while both the euro area and the US still have modest positive expected inflation. Expectations of deflation tend to push interest rates down. But short rates can’t go below zero. And the Japanese long rate has to stay some ways above zero, because it in effect contains an option value: short rates can go up, but they can’t go down. So Japan has expected inflation that is around 2 points less than in other safe haven countries, but it has long interest rates that are only about 1 percentage point lower; Japan is a high real rate country. And this pushes up the value of the yen. Just to be clear, this is a bad thing from Japan’s point of view; the country really needs more exports, and the high yen prevents that. Another reason why you really, really don’t want to get into a deflation trap.

Japan to Double Sales Tax by 2015 as Noda Fights Off Ruling Party Revolt - Japan’s ruling party agreed on a plan to double the sales tax by 2015 after weeks of internal debate and a member revolt as Prime Minister Yoshihiko Noda fights to head off another credit-rating downgrade. The proposal would raise the sales tax from 5 percent to 8 percent in April 2014 and to 10 percent in October 2015. A panel headed by Finance Minister Jun Azumi approved the measures today, clearing them for discussion with an opposition led by the Liberal Democratic Party, which has already hinted at its disapproval. “It will be very tough,” “The bill may not pass parliament as the LDP may oppose the Democratic Party of Japan bill for political reasons.” Noda is staking his job on raising the sales tax, a stance that already contributed to his predecessor’s resignation. Standard & Poor’s said last month it was considering lowering the country’s sovereign rating, already cut in January to AA-, as Noda’s government makes little progress tackling the country’s debt burden.

Japan Set to Unveil $10 Billion India Currency Swap Deal During Noda Visit - Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week. Finance Minister Jun Azumi told reporters today in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that starts today, with the amount of the swap line about $10 billion, a Japanese government official said on condition of anonymity. Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh’s administration contends with a slump in the rupee that risks stoking inflation. The rupee has plunged about 15 percent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe’s protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among so-called BRIC nations, with the benchmark wholesale-price index rising more than 9 percent in each of the past 12 months.

India's external debt rises to $326.6 billion - India's external debt climbed 6.6 percent to $326.6 billion by September-end from $306 billion at the beginning of the current financial year on account of a sharp increase in commercial borrowings, export credits and short-term debts, official data showed Friday. Short-term debt accounted for 21.9 percent of the country's total external debt by the end of the second quarter of 2011-12, while the rest 78.1 percent was long-term. "The increase in external commercial borrowings reflects some concern, given that the depreciation of the rupee leads to higher debt service burden in rupee terms that could impact profitability and the balance sheets of corporate borrowers," a finance ministry statement said.

Why is India so low in the Pisa rankings? That is a request from J. and here is one recent story, with much more at the link: A global study of learning standards in 74 countries has ranked India all but at the bottom, sounding a wake-up call for the country’s education system. China came out on top. On this question, you can read a short Steve Sailer post, with comments attached. Here are my (contrasting) observations:

1. A big chunk of India is still at the margin where malnutrition and malaria and other negatives matter for IQ. Indian poverty is the most brutal I have seen, anywhere, including my two trips to sub-Saharan Africa or in my five trips to Haiti.
2. Significant swathes of Indian culture do not do a good job educating women or protecting their rights, even relative to some other very poor countries.
3. Countries taking the test for the first time may face a disadvantage in manipulating the results to their advantage; admittedly this cannot account for most of the poor performance.
4. Indian agricultural productivity is abysmal, in large part due to legal restrictions. I discuss this in more detail in my next book An Economist Gets Lunch, due out in April.

India tycoon's got tons of cash, nowhere to invest - Ajay Piramal is sitting on a mountain of cash. Yet the billionaire Indian tycoon, working in one of the world's fastest growing economies, is struggling to figure out what to do with the money. The problem isn't opportunity, he said. It's India. "Every large investment, there was no transparency," Piramal said. His dilemma is a worrying sign for India. With the country mired in corruption, bureaucratic red tape and unclear and changing government policies, many of the men who made their billions here are saying maybe it's time to quit India. It's got to be easier to do business elsewhere.

Taiwan economy shows further weakening in November - Taiwan's economy continued to weaken in November amid concerns over the global economy and the European debt crisis, according to the composite index of monitoring indicators released Tuesday by the Council for Economic Planning and Development (CEPD). The index fell to 17 in November (on a scale of 9-45), down 2 points from a month earlier. The lower score and the monitoring indicator's "yellow-blue" light for the fourth consecutive month both indicated an economic slowdown. CEPD officials said the European debt crisis, the anemic global economy and weakening consumerism were the main factors that contributed to the slowdown in Taiwan's financial, trade, and manufacturing sectors. The global economic situation has also affected business confidence, the officials said. With the index at 17 in November, it was just one point above the "blue" indicator, which would point to a recession, CEPD officials noted.

BRIC Decade Ends With Record Stock Outflows as Goldman Says Growth Peaked - In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s. Now Goldman Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerging markets.BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050. BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe’s sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.

Brazil Overtakes UK As Sixth-Largest Economy - Brazil has overtaken the UK to become the world's sixth-largest economy, according to a team of economists. The banking crash of 2008 and the subsequent recession has relegated the UK to seventh place in 2011, behind South America's largest economy, which has boomed on the back of exports to China and the far east. Russia and India are expected to benefit from a surge in growth over the next 10 years and push the UK into eighth place. Like most economies, India is struggling with high inflation and slowing growth, but its highly educated workforce and skills in growth areas from IT and services to engineering will push the economy into fifth place. After a decade of selling oil and gas to Europe and other parts of Asia, Russia will be at number four. The only compensation for ministers concerned by Britain's relative fall is that France will fall at a faster pace. Nicolas Sarkozy can still boast that France is the fifth-largest economy behind the US at number one, China, Japan and Germany, but by 2020, the Centre for Economics and business Research (CEBR) forecasts it will fall past the UK into ninth spot. Germany will also slip to seventh place in 2020.

Unit 2 Macro: Brazil Overtakes UK in Economic Size - The Guardian has reported new research from the CEBR that Brazil is set to overtake the UK to become the sixth biggest economy in the world. The U.S., China, Japan, Germany and France occupy the top five places. Typically the Sun newspaper gets their economics muddled with this piece of sloppy writing “BRITAIN will fall to seventh in the league table of the world’s richest countries next year when it is leap-frogged by buoyant Brazil.” Brazil richer than the UK? The Sun is confusing the size of GDP with the level of real GDP per capita (adjusted to a purchasing power standard). And as our Timetric chart shows below there remains an enormous gap in average living standards between the UK and Brazil.

Brazil to Remain Ahead of U.K. as Economy Now Sixth in World, Mantega Says - Brazil will remain one of the fastest-growing nations in the coming years after overtaking the U.K. this year to become the world’s sixth-largest economy, the country’s Finance Minister Guido Mantega said. "The countries that will grow the most are the emerging markets such as Brazil, China, India and Russia,” Mantega said in a statement published on the finance ministry’s web site, referring to findings by the London-based Center for Economics and Business Research, or CEBR. “The trend is for Brazil to remain one of the world’s top economies.” The CEBR echoed forecasts earlier this year by the International Monetary Fund showing that Brazil’s $2.5 trillion economy had overtaken the U.K. to become the world’s sixth- largest. The IMF expects Brazil to climb past France to become the fifth-largest economy by 2016. While Brazil’s economic growth is forecast to slow from 7.5 percent in 2010 to 3 percent this year, that’s still faster than the 0.9 percent growth economists expect from the U.K., according to Bloomberg surveys.

Give Us Your Tired, Your Poor, Your Brazilians - Americans looking for a cheap vacation when I was growing up used to head south to Mexico, where we could live like kings for a few bucks a day. Now, Miami has become Brazil’s Mexico… Kinda. The NY Times has the story, which has some great quotes and anecdotes. Even in a city that has embraced so many waves of Latinos that it is jokingly referred to as the only South American capital in North America, no one group has been as courted and pampered as the Brazilians. Flush with cash from a booming economy and enamored of luxury, Brazilians are visiting South Florida in droves and spending millions of dollars on vacation condominiums, clothes, jewelry, furniture, cars and art, all of which are much less expensive here than in Brazil. As a thank-you, Floridians are creating innovative ways to make the Brazilians happy and to encourage them to keep dipping into their wallets.” Ok, so Miami is rolling out the WELCOME mats for Brazilians. This took me by surprise though: “We come to Miami to invest because in my country housing is very expensive,” said Claudio Coppola Di Todaro, a hedge fund investor from São Paulo who recently bought a condominium at Trump Towers in Sunny Isles Beach and another at the Trump SoHo in Manhattan (Brazilians also love New York). Aiyahhh! Trump Towers in Miami and NYC are bargains compared to what’s available in Sao Paulo? Ouch.

Brazil: Crop and ore riches skew economy - Brazil’s natural wealth is so immense that at times the country’s prosperity seems assured. Sales of iron ore and soyabeans have soared; large reserves of oil and fertilisers are starting to be exploited. This year, with its best terms of trade for at least 30 years, it may overtake the UK to become the world’s sixth-largest economy. “We have resources that you Americans had at the turn of the century,” Eike Batista, the country’s richest man and one of its most flamboyant cheerleaders, told a US audience this year. Brazil, he added, had in effect allowed him to “play Monopoly”. Brazil’s largest commodities companies have had disappointments too. Petrobras, the state-controlled oil company that is exploring massive deep-sea deposits, will again miss its production targets this year. And Vale, the world’s largest iron ore miner, has struggled under the perception that it is dependent on China, its biggest market. Brazil is the world’s largest exporter of sugar, and one of the pioneers of sugarcane ethanol, a much-vaunted source of clean energy. No other country has the land, water and knowhow to increase production as easily. To meet global demand, “the rest of the world would have to increase its sugar production about three times as fast as it is currently doing, to allow Brazilian production to stay stable,”

Are Commodities Topping Out? - The past several years have seen a growing backlash against "paper" investments as more and more investors consider hard assets to be a safe haven against the implications of central bank money printing. But as the global economy visibly slows, this question arises in many minds: Are commodities, which have been on a tear since the March 2009 bottom, finally topping out? The question requires both a fundamental economic response as well as a technical chart analysis. We can start by observing the common-sense connection between demand for commodities such as copper, cement, steel,etc. and economic expansion. When demand rises faster than supply, prices rise. Since supplies of commodities face all sorts of restraints in terms of extraction rates, energy costs, and declining reserves, increased demand quickly pushes prices higher. As developing world nations such as China, India, and Brazil have expanded, their consumption of basic commodities has skyrocketed, pushing prices higher and stimulating exploration for additional sources of these materials. Now there is evidence that these developing world economies are slowing, along with the developed economies of Europe, Asia, and North America. If demand for commodities falls significantly while supply remains ample, then prices will soften. If demand continues to exceed available supply, then prices will rise.

The year of borrowing trouble - For debt-addled Canadians across the country, 2012 will be a crucial test of whether they can rein in their borrowing in another year of super-low interestrates¹. After Boxing Week caps off a holiday spending spree that by many measures outstripped the previous year’s, households will be back to the unpleasant reality of an uncertain economic climate, stagnant wages and the risk that global threats like the European crisis cause job losses at home. But experts say spending money helps people calm their nerves, even when they’re nervous about their financial burdens, so there’s no guarantee Canadians will hunker down, other than those who have literally exhausted their capacity to borrow.

IMF’s Lagarde warns global economy threatened (Reuters) - The head of the International Monetary Fund said the world economy was in danger and urged Europeans to speak with one voice on a debt crisis that has rattled the global financial system. In Nigeria last week, IMF Christine Lagarde said the IMF's 4 percent growth forecast for the world economy in 2012 could be revised downward, but gave no new figure. "The world economy is in a dangerous situation," she told France's Journal du Dimanche in an interview published on Sunday. The debt crisis, which continues into 2012 after a European Union summit on December 9 only temporarily calmed markets, "is a crisis of confidence in public debt and in the solidity of the financial system," she said. European leaders drafted a new treaty for deeper economic integration in the euro zone, but it is not certain that the accord will stem the debt crisis, which began in Greece in 2009, and now threatens France and even economic powerhouse Germany. "The December 9 summit wasn't detailed enough on financial terms and too complicated on fundamental principles," said Lagarde. "It would be useful for Europeans to speak with a single voice and announce a simple and detailed timetable," she said. "Investors are waiting for it. Grand principles don't impress."

Unrelenting Global Economic Crisis: A Doomsday View of 2012 - The economic, political and social outlook for 2012 is profoundly negative. The almost universal consensus, even among mainstream orthodox economists is pessimistic regarding the world economy. Although, even here, their predictions understate the scope and depth of the crises, there are powerful reasons to believe that beginning in 2012, we are heading toward a steeper decline than what was experienced during the Great Recession of 2008 – 2009. With fewer resources, greater debt and increasing popular resistance to shouldering the burden of saving the capitalist system, the governments cannot bail out the system. Many of the major institutions and economic relations which were cause and consequence of world and regional capitalist expansion over the past three decades are in the process of disintegration and disarray. The previous economic engines of global expansion, the US and the European Union, have exhausted their potentialities and are in open decline. The new centers of growth, China, India, Brazil, Russia, which for a ‘short decade’ provided a new impetus for world growth have run their course and are de-accelerating rapidly and will continue to do so throughout the new year.

ECB’s €489bn will ‘buy valuable time’ but is no debt bazooka - The European Central Bank's (ECB) unprecedented provision of a €489bn (£407.5bn) in cheap loans will "buy valuable time" for eurozone banks but has not improved their credit outlook, a director of Standard & Poor's (S&P) has warned. Amid a fresh raft of poor eurozone economic data, Scott Bugie, head of S&P's financial institutions division doused the key cause for pre-Christmas optimism. Although he agreed Wednesday's long-term refinancing operation was a "big deal", Mr Bugie told Reuters: "It is not solving the fundamental issues though... It's kicking the can a long way down the road rather than just a little bit, but in the end it is still kicking the big old can down the road." He said the action did not "change the fundamental picture but it does buy valuable time". He added: "The move in itself will not lead to any improvement in (banks') credit ratings." Earlier this month S&P put 15 of the 17 eurozone countries and some of their biggest banks on credit downgrade watch. The agency is expected to deliver a verdict on the credit watch in January.

European Fiscal Zombies - Krugman - Dean Baker is unhappy at seeing yet another article asserting as fact something that is actually just something fiscal hawks imagine: the claim that Europe’s problem economies were running up government debt before the crisis. Dean, this is a zombie; you can’t kill it unless you shoot it in the head. Maybe the problem is that when Dean and I try to point out that Spain and Ireland don’t look anything like Greece, that’s just too complicated. So here’s another attempt: let’s construct an “average” troubled European government. I take debt to GDP from the IMF debt database, and weight the five GIPSI countries by their GDP in 2007. Here’s what I get: The debt/GDP ratio for the group was falling before the crisis. Maybe it should have been falling faster — but at the time, Europeans were happy to declare Ireland and Spain major success stories, and there wasn’t much call for them to do even better. What we have now is the result of the crisis, not of fiscal profligacy before the crisis.

Euro Economy Probably Contracted for Third Month, Eurocoin Shows - The euro area’s economy probably shrank for a third month in December amid falling consumer demand, the Eurocoin index showed. The gauge measuring economic activity in the 17-nation region was stable at minus 0.2 percent, the London-based Centre for Economic Policy Research and the Bank of Italy, which co- produce the index, said today in an e-mailed report. The reading reflects “the worsening in the indicators of demand,” according to the report. Still, “the outcome reflects the improvement in some qualitative surveys of industrial and service firms which offset” the other indicators. In October, the Eurocoin showed a negative reading for the first time since September 2009. The index, which includes price figures and stock-market performances, industrial production and business and consumer confidence readings, aims to provide a real-time estimate of economic growth.

EU warns wasting environmental resources could spark new recession - The overuse and waste of valuable natural resources is threatening to produce a fresh economic crisis, the European Union's environment chief has warned. Janez Potočnik, the EU commissioner for the environment, linked the current economic crisis gripping the eurozone with potential future crises driven by price spikes in key resources, including energy and raw materials. "It's very difficult to imagine [lifting Europe out of recession] without growth, and very difficult to imagine growth without competitiveness, and very difficult to be competitive without resource efficiency." Unless consumers and businesses take action to use resources more efficiently – from energy and water to food and waste, and raw materials such as precious metals – then their increasing scarcity, rising prices and today's wasteful methods of using them will drive up costs yet further and reduce Europe's standard of living, Potočnik warned. He said: "We have simply no choice. We have to use what we have more efficiently, or we will fail to compete. Resource efficiency is a real competitiveness issue for European companies."

The French Don’t Get It - The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries. French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros. If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP. There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.

French unemployment at 12-year high - The number of jobless people in France hit a 12-year high in November in the latest sign the French job market is deteriorating ahead of the April-May presidential election. Labour ministry data issued on Monday showed that the number of registered jobseekers in mainland France rose by 29,900 in November to reach 2.85 million, up 1.1 per cent on the month and 5.2 per cent on the year. The increase, which brought the jobless total to its highest level since November 1999, deals a fresh blow to Nicolas Sarkozy, the French president, as he struggles to convince voters he is the best person to drive the euro zone’s second-biggest economy as he seeks a second mandate. The monthly labour ministry data are the most frequently reported domestic jobs indicator in France, although they are not prepared according to widely used International Labour Organisation (ILO) standards and are not expressed as an unemployment rate – the number of job seekers compared to the total workforce. According to ILO-compliant data from the INSEE national statistics office issued on December 1, the unemployment rate in mainland France rose in the third quarter to 9.3 per cent from 9.1 per cent in the previous three months.

France to hold jobs summit as unemployment hits 12-year high - A sharp rise in France's unemployment figures is putting pressure on President Nicolas Sarkozy to deliver, with over half the French population wanting the candidates for the spring presidential election to focus their energies on maintaining jobs. Figures released by the labour ministry this week show that the number of those unemployed hit 2.85 million in November, a 12-year high and the seventh consecutive monthly increase. The numbers have sparked a debate in France about the nature and future of employment with Sarkozy convening a jobs summit on 18 January. Unemployment as an issue is a number-one priority on French voters' minds. According to a poll in La Croix newspaper, 52 percent of French people want the candidates for the April presidential elections to focus on responses that "maintain employment." Of the main candidates in the running, socialist contender Francois Hollande is seen as proposing the best solutions to the daily problems of French citizens by 24 percent of those polled. Sarkozy comes in second with 20 percent and far-right politician Marine Le Pen in third place (16%).

Sarkozy Outlines Jobs Plan - Largely inspired by measures Germany relied on to navigate the 2009 economic recession, [Sarkozy's] draft plan calls for companies to retain all staff even if they are faced with a slump in orders, and for workers to accept lower pay. As an incentive and to help pay for the move, the government would kick in for some of the lost wages and social-security contributions, according to officials at the French Labor Ministry and union leaders who were briefed on the proposed pact. Mr. Sarkozy intends to discuss both the job-saving scheme, and the flexibility idea at a meeting with labor and employer unions on Jan. 18. By then, the government must answer a key question: how to finance measures that officials say could cost more than €1 billion ($1.3 billion) next year. Five months ahead of presidential elections, Mr. Sarkozy is already fighting on multiple fronts to reduce the budget deficit, preserve the country's triple-A debt rating and find a comprehensive solution to the protracted euro-zone debt crisis.

French CEO About Ratings Agencies: ‘We Have To Shoot All These Guys’ - "We’re experiencing the beginning of the repercussions of the financial crisis,” said Michel-Edouard Leclerc on Wednesday during an interview on Europe 1, France’s largest radio network. He is the CEO of the second largest retailer in France, E. Leclerc, a privately owned cooperative association with 555 stores—mostly hypermarkets—in France and 117 stores in other countries. Sounding like a CEO one minute and like a populist presidential candidate the next, he emphasized that his company has done relatively well in 2011, sales being up 5%. Strategy: offer deals and cut prices. The whole industry, he said, “ate up inflation” with their margins, but his stores were particularly aggressive as shoppers have become less spontaneous and much more concerned about price. In his 30 years in the industry, he has never seen so much “rational behavior among consumers” and so much “fear of getting screwed.” Until now, the financial crisis of 2008 has touched mostly the financial world, he said, but in 2012, it would impact the real economy. “I’m very worried,” he said. All the "stupidities" going on before the financial crisis, the speculative building bubble in the suburbs of Madrid or in Florida, or the "Madoffs" all over the place, there was so much waste, but... “It’s always the people who end up paying.”

20% of Irish mortgage holders behind on their payments - The Irish Times reports that 20 percent of the Irish mortgage borrowers are struggling to make their monthly payments.This figure is staggering. According to the article, more than one-third of all Irish mortgage borrowers from four banks are underwater. For the borrowers in the 2004-2008 boom, more than one-half of them are underwater. This suggests that there is going to be on-going downward pressure on Irish house prices. So how is the bailed out banking system holding up under all of this bad mortgage debt? New figures show that one-in-five homeowners across the country are in trouble with their mortgage repayments. First-time buyers tend to be the worst affected by home-loan difficulties, especially those who bought between 2005 and 2008. Almost 63,000 homeowners are in arrears for three months or more. On top of this, close to 70,000 people have been forced to do deals with their lenders to lower monthly repayments.

Spanish mortgage market continues to collapse - A Bloomberg article reports on the on-going collapse of the Spanish real estate market. According to the article, the value of mortgages funded in Spain decreased by over 40% since last year. At the same time, house prices in Spain declined by 7%. All this while the banks were allowed to hide their bad real estate exposures. As previously discussed on this blog, it would make sense for the Spanish government to require banks to provide ultra transparency as part of the effort to address the real estate exposures. By requiring banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, all market participants could see that the real estate exposure is properly valued.The advantage to the Spanish government of requiring ultra transparency is that the Spanish government will not be required to a) bailout the banks or b) set up a bad bank to acquire the assets.Instead, the banks can workout the bad real estate assets while all the market participants watch!

Spain to fall back into recession, minister says - Spain will slide back into recession early next year with the current quarter and the first of 2012 both registering negative growth, new Economy Minister Luis de Guindos said Monday. Mr. De Guindos said he expects the economy — the euro zone's fourth largest — to contract by between 0.2 per cent and 0.3 per cent on the previous quarter in the final three months of this year and again in the first quarter of next year. He said the outlook for next year was poor. If the Spanish economy were to contract by between 0.2 per cent and 0.3 per cent for an entire year, it would shrink roughly 1 per cent. “Let nobody be fooled, the next two quarters are not going to be easy either in terms of growth or employment,” Mr. de Guindos said. Spain began to emerge from a near two-year recession last year. It had two successive quarters of growth in 2011 before posting zero growth in the third period. Mr. de Guindos took office last week as part of the new conservative Popular Party government. He said then he was confident the country would emerge from its severe economic crisis and return to prosperity and its former status as a job creator.

Greek Hospitals Have Turned Away Expectant Mothers Who Can't Pay -- Elli Zachariadou could not hide her shock a few weeks ago when she heard reports about women having to pay at least €900 up front in order to give birth at public hospitals. Even more shocking to Zachariadou and other Greeks was the news that a number of hospitals had turned away pregnant women because they did not have the necessary cash. “My immediate thought on hearing about the hospital charges was, how am I going to have this baby?” Zachariadou said. “You know, €900 is about three months’ rent. It’s not the kind of money we have lying around.” In years gone by, the 33-year-old Athenian’s social-security fund would have picked up most of her hospital bill, but she has joined the growing ranks of Greece’s long-term unemployed who have no such coverage.

Greek retailers say Christmas sales worst in years amid acute financial crisis - Greek retailers say sales fell an estimated 30 per cent this Christmas, in the worst festive showing for shopowners in years as the country grapples with a debt crisis and a severe recession. Preliminary figures from the National Confederation of Greek Commerce Tuesday found clothes and shoe sales took the heaviest hit, falling 40 per cent compared to last Christmas. It added that consumption of food and drinks fell 15 per cent, while toy sales suffered least. The statement said 90 per cent of Greeks spent less in Christmas 2011, "out of necessity, not choice."

Austerity Fuels Worst Christmas in 10 Years for Italy’s Retailers - Italian retailers had the worst Christmas in 10 years, consumer group Codacons said, as austerity measures to combat the sovereign debt crisis prompted households to cut spending. Italians spent 48 euros ($62.75) less per person this holiday season than the average of the past five years, Rome- based Codacons said in a statement on its website. The shoe and clothing sector was hit the most, with sales dropping 30 percent from previous years, it said, adding retailers won’t recover the decline during seasonal promotions that start in January. The discount period “will be a flop,” with sales declining as much as 40 percent compared with 2010, Carlo Rienzi, the head of Codacons, said in the statement.

Italian Bond Yields Rise Before Year-End Auction - Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome's plans to sell 8.5 billion euros worth of debt. Ten-year Italian bond yields rose 8 basis points on the day to 7.10 percent, widening the spread over German Bunds to 515 bps. Italy plans to sell three- and 10-year debt in its regular month-end tender on Thursday. "The 10-year is the area where Italy has to rely more on foreign investors and it will be very tough to sell especially at this point in the year, so I expect further cheapening of the bond going into the auction," ING rate strategist Alessandro Giansanti said. "The three-year would be easier to sell, there is some demand from the domestic investors. If they see really weak demand in the 10-year ... they may sell more short-term (debt)." The 7 percent level is roughly the threshold beyond which other euro zone governments have been forced to seek bailouts and markets will get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year. Investors fear that Italy, although having different debt dynamics than Ireland, Greece and Portugal, could suffer the same fate, especially as it faces around 100 billion euros in bond redemptions and coupon payments between January and April.

Italy Braces Itself for the Full Monti - The Italian government, Mario Monti informed the country’s parliament last Thursday, is now planning to concentrate its attentions on achieving economic growth. A timely decision this, since the statistics office announcement a day earlier that the country had once more fallen back into recession, while not being a surprise nonetheless does constitute a cause for concern. Not that Italy is any stranger to recession, since the country has now had five of them since entering Europe’s Monetary Union at the turn of the century. In fact the Italian economy has now contracted in eight of the last 15 quarters, and GDP is back in the good old days of 2003, stuck below the level it first attained in the first three months of 2004. And of course it is now going backwards in time again. Depending on the depth of the recession now being provoked it is touch-and-go whether the economy might not at some point even revisit levels last seen in the closing years of the 1990s. And remember, this is not deflation ridden Japan, this is real, not nominal GDP we are talking about here. So far Italy hasn’t been experiencing deflation, or at least not yet it hasn’t.

Feisty Italy union chief stands between Monti and reform (Reuters) - A formidable battle is taking shape over the future of Italy's labor market between Prime Minister Mario Monti, a detached, professorial economist and Susana Camusso, the pugnacious, chain-smoking leader of the country's largest trade union. After years of division the three main union confederations appear to have united against reforms Monti says are vital to regain financial markets' faith, and analysts say he must move fast while his popularity is high and the sense of emergency over Italy's debt crisis is acute. Led by Camusso, the unions not only have the ability to put millions on the streets but also have a powerful lobbying presence that may shake the parties Monti depends on for his parliamentary majority as the scale of changes become clear. The prime minister has yet to give details of his reform program, but he has made clear that at the top of his agenda is re-writing outdated labor rules that hamper employment, productivity and investment. "We have to get away from a dual labor market where some are too protected while others are totally without protection or insurance in the case of unemployment," Monti said. However, the blonde, husky voiced Camusso, the first female leader of the left-wing CGIL, rejects his claim that only by easing firing restrictions for regular, salaried employees can he give rights and job prospects to the young and unemployed. "Monti is the only one who is too protected," "I would like him to introduce me to these 'too-protected' workers."

Germany more than 2 trillion euro in red: data - Germany, Europe's biggest economy, had debt totalling 2.028 trillion euros ($2.65 trillion) at the end of the third quarter of this year, according to provisional official data published on Tuesday. That represents a fractional increase of 0.5 percent or 10.4 billion euros over the figure recorded for the end of the second quarter, the national statistics office said in a statement. The lion's share of the debt, or 1.289 trillion euros, was attributable to the federal government, while the regional states had debt totalling 610 billion euros and the municipal authorities had debt of 129 billion euros. The total figure represents more than 80 percent of Germany's gross domestic product of 2.5 trillion euros in 2010, way above the 60-percent ceiling laid down by the European Union. Nevertheless, the German debt ratio is better than many other eurozone countries. Italy's, for example, stands at 120 percent, and the eurozone average at more than 85 percent.

ECB overnight deposits reach record -- Use of the European Central Bank's overnight deposit facility reached a new, all-time high Monday, as euro-zone banks increasingly turned to the ECB as a safe-haven for extra funds. Banks deposited EUR411.813 billion overnight Monday, up from EUR346.994 billion deposited overnight Thursday ahead of the Christmas holiday, ECB data showed Tuesday. Monday night's deposit figure surpasses the previous all-time high record of EUR384.3 billion reached in June 2010. The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the low-risk ECB facility for excess funds rather than lending them to other banks. The high deposit level also suggests markets aren't fully convinced that the ECB's massive long-term loan allotment last week is enough to fortify the currency bloc's banking sector. The central bank extended nearly half a trillion euros in long-term loans to euro-zone banks last week, hoping to ease fears of a new credit crunch as banks struggle to borrow from markets. The ECB further said banks borrowed EUR6.131 billion from the ECB's overnight lending facility, compared to EUR6.341 billion borrowed Thursday. When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.

Deposits at ECB Hit Record High - Use of the European Central Bank's overnight deposit facility hit the second all-time high in a row Tuesday as euro area banks increased the amount of cash they park at the central bank's safe haven, ECB data showed Wednesday. Banks parked €452.034 billion ($589.72 billion) at the ECB, up from €411.813 billion the previous day. The high level reflects prevailing distrust among banks which prefer using the ECB's facility rather than lending to each other. The increase in deposits follows the ECB's first-ever three-year liquidity tender last week in which it allocated nearly half a trillion euros to more than 500 banks. The ECB also said banks borrowed €6.225 billion via its overnight lending facility, up from €6.131 billion the previous day. When markets are functioning properly, banks use the facility to the tune of a few hundred million euros overnight.

Banks Bunker Hundreds of Billions in Deposits at ECB - Ministers are considering draconian plans to prevent a flood of money and people heading to Britain from Europe if the ailing single currency collapses. Experts fear that the collapse of the euro would lead to the widespread movement of both people and money – with potentially damaging consequences for Britain if left unchecked. The Treasury has drawn up contingency plans to prevent investors shifting huge sums of cash from the Eurozone to Britain – amid fears it could lead to a surge in the value of the Pound.And it emerged yesterday that Britain’s borders could also be temporarily sealed against economic refugees from Europe if the collapse of the euro sparks widespread civil unrest on the Continent. The Foreign Office is also working on contingency plans for the emergency evacuation of thousands of British expats and holidaymakers from stricken countries.

ECB Says Banks Increased Overnight Deposits to All-Time High - The European Central Bank said overnight deposits from the region’s financial institutions increased to an all-time high. Euro-area banks parked 452 billion euros ($591 billion) with the Frankfurt-based ECB yesterday, the most since the euro’s introduction in 1999 and up from the previous record of 412 billion euros a day earlier. The ECB last week lent 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. It lent the money at its benchmark rate of 1 percent. Banks are depositing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it at a better rate. Barclays Capital estimates the three-year loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. Since the three-year loans started on Dec. 22, overnight deposits have jumped by 187 billion euros, suggesting banks are parking almost all the additional liquidity back with the ECB.

Record use made of ECB deposit facility - The amounts of cash being deposited by eurozone banks at the European Central Bank increased further on Wednesday, just days after the ECB provided unprecedented levels of liquidity in an effort to reduce tension in the financial system. Banks placed almost €452bn ($591bn) overnight on Tuesday in the ECB’s deposit facility, which attracts a low rate of interest and in normal times is typically used by banks only to park excess cash, often at a loss. That pushed use of the deposit facility to a further record high after €412bn was deposited over the Christmas holiday. The huge use of the overnight facility comes after more than 520 banks borrowed €489bn from the ECB last week under a new three-year liquidity scheme, suggesting that much of the funding provided by the central bank has yet to be put to use by banks, analysts said. But they also cautioned that it was too early to judge the success of the ECB’s action in granting the loans, its largest single liquidity operation, at a time of thin holiday trading.The previous record for use of the ECB deposit facility was €384bn in June 2010. The facility’s popularity has fluctuated through the financial crisis but any large increases have often been seen as evidence of market tension – suggesting that banks favour the safety of an ECB deposit over higher returns in the interbank market. Interbank lending volumes have slumped in recent months.

ECB Deposits Jump 10% More To Record EUR452BN - While sovereign spreads are leaking modestly tighter this morning as European credit markets emerge from the holiday hibernation, the ECB Deposit Facility surged 10% further to a LTRO-busting EUR452bn. While we assume there is some year-end 'management' involved here (and some will argue that putting the LTRO-carry-trade to work takes time), the sheer velocity and scale of the ramp in deposits suggests this is not a game-theoretically optimal use of this new-found cash (neg-carry-trade) but instead a clear message that banks will delever and remain risk averse no matter what the central banks 'suggest' is appropriate. Didn't we learn this lesson already in Japan (for two decades of debt minimization as opposed to profit maximization) and the US (Fed reserves skyrocketed as dealer bond inventories drop precipitously?). Also, those saying that banks are just waiting for the new year to start putting LTRO cash to use, there is no reason to wait - Italian BTPs are already at 7% - all banks are doing by delaying is giving up on days of free carry trade, thus this argument is pure rubbish. We are also seeing EUR-USD basis swaps starting to decompress (worsen) once again. In summary: since LTRO day, EUR187 billion of the 210 billion free money has been redeposited at the ECB.

ECB Deposit Facility Usage Declines Nominally, Still At Nosebleed Levels - Following yesterday's surge to an all time record high of EUR 452 billion, which confirmed that virtually all LTRO cash had been redposited back at the ECB to lose 75 bps as per the "inverse carry trade" first presented here, today's update shows that yesterday the cash held by banks at the ECB declined by EUR 15 billion to EUR 437 billion - a delta of just over the amount raised by Italy in its 6 month and Zero Coupon bond issues yesterday. And despite said successful auctions, today the Italian 10 Year BTP is once again over the critical 7% benchmark level, even as Italy prepares to issue between 8 and 11 billion in 3 and 10 Year bonds - an auction which will prove far more challenging as it falls outside the LTRO maturity date and thus leaves banks exposed to non-carry trade covered risk.

ECB balance sheet expands by 239.4 bln euros - The European Central Bank on Wednesday said its balance sheet expanded by 239.4 billion euros ($312.9 billion) to 2.733 trillion in the week ended Dec. 23. The expansion was driven by a 214.1 billion euro rise in lending to euro-area credit institutions. Analysts credited the jump with renewed pressure on the euro and on European and U.S. equities amid thin trading volume.

Euro Falls to 10-Year Low Against Yen as ECB Balance Sheet Reaches Record - The euro dropped against the yen to the lowest level since 2001 as the European Central Bank’s balance sheet soared to a record after it lent regional banks more money last week to keep credit flowing. The 17-nation currency fell against the dollar to the least since January as concern increased that the region’s sovereign- debt crisis will curb growth, even as rates fell at an Italian bill sale. The dollar gained as stocks dropped, boosting demand for haven assets. The yen strengthened after a U.S. Treasury report criticized Japan for intervening in the currency market and as economic reports signaled slowing economic growth. “We’re still so far from being out of the woods that even on a day of being positive, people decided that the euro should continue to fall,” “It’s quite a sharp rise in the ECB balance sheet. It’s concern about monetization already on the way in Europe.”

Euro Swan Dive Splashes Santa - This morning’s swan dive in the euro stopped the Santa rally right in its tracks.We have two questions: 1) Has the ECB shot its wad as the lender of last resort providing massive liquidity to the banking system and leaving little ammunition for the distressed sovereigns; 2) Will money demand remain stable in the eurozone as the monetary base explodes? That is, will the Germans keep their money in Europe? As we’ve stated many times on this blog, monetizing debt that nobody wants is much different than quantitative easing in an effort to goose the economy. Furthermore, economists have yet to come up with a clear definition of money. As base money explodes in Europe the overall monetary aggregates can still decline as credit contracts. This can partially offset any potential down shift in money demand without causing inflation. This assumes liabilities of the central bank remain in the system as they are in the U.S., in the form of excess bank reserves. If bond investors sell their bonds to the ECB, either directly or indirectly, and take their money out, Super Mario will have a problem.

Update On The "Non-Printing" ECB's Parabolically Rising Balance Sheet -- While the surge in the ECB's balance sheet has been discussed to death on these pages, with a particular emphasis on what we believe the key correlation driver-cum-pissing contest of 2012 will be - namely the relative size of the ECB vs Fed balance sheets - it is often best to see things for oneself. Such as the fact that the balance sheet of the European Central Bank, which has been accused of not printing, has grown at the fastest non-pre apocalypse pace in history for a modern central bank (the only exception is the Fed, whose balance sheet grew from under $1 trillion to over $2.2 trillion in the aftermath of the money market collapse), increasing by EUR800 billion, or over $1 trillion, in six months, to E2.73 trillion (obviously an all time record). Annualized this is an increase of over $2 trillion or more than the Fed did in all of QE1. So, just what happens next year when the banks box Draghi in a corner and the Goldmanite decides to actually... print. Perhaps this is a question, as before, left best to our German readers, who unlike their detached from reality peers in the US, know that hyperinflation is and can be all too real.

Deposits at Greek, Italian banks fall 1 pct in Nov -ECB (Reuters) - Private-sector deposits in commercial banks in Greece and Italy fell about 1 percent in November from the previous month, but banks in other states caught up in the euro zone debt crisis fared better, European Central Bank data showed on Thursday. Deposits at Greek banks fell to 179.6 billion euros ($232.5 billion) from 182.5 billion the previous month. They are now down 26 percent from the peak in December 2009 and at their lowest level since February 2007. Italian banks saw a similar decline, to 1.364 trillion euros from 1.402 trillion in October. There were smaller falls in Spain and Portugal. In Spain, deposits fell to 1.684 trillion euros from 1.691 trillion euros, and in Portugal to 234.2 billion from 234.9 billion. Deposits at Irish banks remained at 196.9 billion in November. Monthly fluctuations in the figures are common, though such sharp consecutive drops in countries with stable banking systems are unusual.

Libor Gap Hints at Debt Crisis Money-Market Freeze: Euro Credit -- The gap between the highest and the lowest rates that banks say they can borrow from each other in dollars is close to a 2 ½-year high, a sign Europe's failure to end the debt crisis is straining the financial industry. The divergence from reported fixings by the 18 banks contributing to the three-month London interbank offered rate reached 28 basis points today, within two basis points of the widest since May 2009. Libor for three-month loans climbed to 0.581 percent, the most since July 2009, even as central banks injected cash into the market. "The interbank market remains broken," said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. "We used to say during the financial crisis a few years ago that interbank rates are rates at which banks won't lend to each other, and sadly that's still the case today. The amount of peripheral government debt banks hold raises questions about counterparty risks."

Euro dips beneath 100 yen for first time in ten years. - The euro is near its low for the year following a tumultuous 12 months in which its existence has been questioned. But Germany's Finance Minister Wolfgang Schaeuble said he was confident that the currency union would survive. "I think we will be far enough along in the next 12 months that we will have banished the dangers of contagion and stabilised the eurozone." The euro was at $1.2960, a day after reaching a 15-month low of $1.2858. The European single currency also fell below 100 yen for the first time in ten years. Germany, the eurozone's largest economy, has been instrumental in organising bailouts of its neighbours, without which the monetary union might have fallen apart already. Asked whether he could rule out the 17-nation eurozone breaking up, Mr Schaeuble said: "According to everything that I know at the moment, yes."

The euro crisis deepens - Europe's leaders have spent most of the euro crisis denying there's a euro crisis. A "specific Greek problem", that they'd give you. Irish and Portuguese aberrations. As for the Spanish, that really was hard manchego. Wherever disaster struck over the past two years it was always the member's fault, never the club's. The denialism ended this summer, as the financial bushfire moved to Italy and even began to menace Belgium and France. Sequestered in their conference rooms in northern Europe, policy-makers found it easy to wave away catastrophe in the distant, poorer periphery – but far harder when the second and third-largest economies in the entire bloc were under threat. If the rhetoric and the not-so-faint snobbery have vanished, to be replaced by panic about "a last wakeup call" and "a crucial crossroads", the actual policy-making is as clueless as ever. The eurocrats can impose austerity, and bring in Goldman Sachs employees such as Mario Monti to run newly impoverished economies; but anything that might actually break the fire still eludes them. In the meantime, the crisis has just kept growing. They have agreed four "comprehensive packages", each more comprehensive than the last, yet none has created any sense that the continent is fortified against the battering it is about to get. Because it is almost certain that 2012 is going to be worst year yet for the eurozone. Easily the worst financially, terrible economically and increasingly grim politically.

Merkel Says She’ll ’Do Everything’ to Save Euro - German Chancellor Angela Merkel said she expects turbulence in 2012 as she does “everything” to save the euro amid Europe’s sovereign debt crisis. “The path to overcoming this won’t be without setbacks but at the end of this path Europe will emerge stronger from the crisis than before,” Merkel said in a New Year’s television speech to the nation, sent in advance by e-mail. Merkel will meet with French President Nicolas Sarkozy in Berlin on Jan. 9 to discuss revisions to Europe’s fiscal rulebook following decisions made at a Dec. 9 summit. A final accord by euro leaders on the German-French proposals agreed at the summit is due in March. “Today, you can trust that I will do everything to strengthen the euro,” Merkel said. “This will only succeed if Europe learns from the mistakes of the past. One of these is that a common currency can only be successful if we cooperate more than in the past in Europe.”

'Euro will be stable' claim is ridiculed - Germany's finance minister has been accused of groundless optimism after he claimed that Europe's leaders will have "banished the dangers" of the euro crisis within 12 months. Wolfgang Schauble said he was confident that the currency union will survive and the political measures will underpin the shattered eurozone economies. "We will be far enough along in the next 12 months that we will have banished the dangers of contagion and stabilised the eurozone," he told newspaper Handelsblatt. As the euro plunged against the yen to its lowest level for 10 years, Mr Schauble was reported as saying he could rule out the eurozone breaking up: "According to everything that I know at the moment, yes." Terry Smith, chief executive of Tullett Prebon, said the Mr Schauble was "talking his own book" in hoping the current agreements will save the euro. "The German finance minister has not said anything substantive which changes the situation," . "If the eurozone crisis could be solved by confident pronouncements, it would already be saved. I would be shocked if Greece does not leave the eurozone in 2012 and this does not lead the markets to test the resolve to defend the positions of Portugal, Spain, Italy and, ultimately, France." Jurgen Michels, an economist at Citigroup, said that Mr Schauble was being "optimistic" as "we expect a severe recession in the euro area and sharp contractions in the periphery countries including Italy and Spain – 2012 will be a very difficult year for the euro area."

"It's a Mistake To Pursue a United States of Europe" says German Supreme Court Justice in Spiegel Interview ; Interpretation of Interview from Saxo Bank Chief Economist - Those looking for a reason for a sinking Euro and falling stock markets today just may find the answer in a Spiegel Interview with German Constitutional Court Judge Udo Di Fabio who says "It's a Mistake To Pursue a United States of Europe". Steek Jakobsen, chief economist for Saxo Bank in Denmark writes ... This was a very open and interesting interview. The “killer stuff” is in the late part of the interview. Here are my notes:

Di Fabio does not see Constitutional Court and Basic Law as Euro unfriendly, actually states the opposite

Euro-bonds are “illegal” in his view (p.5 top)

Wrong to pursue United States of Europe – you need intra- government coordination but also strong individual states – not one without the other

No state can save the world on its own!

Europe…a “security construction” – (the good old excuse for slow non-working EU)

KEY SENTENCE (p.2 top) : “….. Anyone who voluntarily agrees to something has to accept they will be checked to ensure that this contractual obligation is fulfilled. Such a veto could come from Karlsruhe, however, were a violation of the new debt brake (an amendment to Germany’s constitution that requires the government to balance its budget each year by 2016!)

How Goethe’s masterpiece is shaping Europe - From the wreck of the sovereign debt crisis Germany has unquestionably emerged as Europe’s pre-eminent power. And a central tenet of the German solution to the crisis – for it is primarily a German solution – is that other eurozone members must be recast in their mould of fiscal orthodoxy and financial conservatism. Debt is to be regarded as immoral; current account surpluses are de rigueur; all but marginal budget deficits will be punished; and financial innovation is to be throttled by regulation. What, fellow Europeans might ask, is the wellspring of this providentialism and homespun finance? The usual explanation emphasises the traumatic experience of the 1920s Weimar inflation, which lingers in the German memory more than the slump that brought Hitler to power. There are nonetheless deeper factors at work, not the least the etymological link between debt and guilt in the German word schuld. The fear of currency debasement was entrenched long before the 20th century. Frederick the Great in the Seven Years War debauched the currency several times to fund the fighting. Note, too, that Goethe’s Faust Part II brilliantly describes the perils of inflation. Mephistopheles urges the emperor to use undiscovered gold beneath his lands as putative collateral for promissory notes to pay the army. When the emperor and his court find they can print money without restraint, their wild spending leads to an inflationary spiral and civil chaos.

Successful Italy bond auction lifts mood - Italy saw its short-term funding costs fall by half on Wednesday, as the first big test of market sentiment since the European Central Bank’s pre-Christmas bid to support banks provided a glimmer of hope in the eurozone debt crisis. The successful auction of €9bn of six-month bills – sold at an average yield of 3.25 per cent, down from a euro-era record of 6.5 per cent last month – brought some relief early on Wednesday to Italy’s bond market, the world’s third largest. But in thin trading, Italian bonds and the euro came under selling pressure in the afternoon, leaving Rome’s benchmark borrowing costs stuck above the crucial 7 per cent level. In a topsy-turvy day, Italian 10-year bond yields dropped 25 basis points in the morning but rose the same amount in the afternoon.

Italy Sells Long-Dated Bonds To Weak Demand, 10 Year Prices Just Inside Of 7%, Bids To Cover Miss -- Today's most anticipated economic headline - the sale of 3 and 10 Year Italian bond - auction has crossed, and judging by the selloff in the Italian secondary bond market (north of 7% now) and the drop in the EURUSD, now under 1.2900, it was a solid disappointment. Italy sold well below the targeted EUR 8.5 billion in 2014, 2018, 2021 and 2022 notes, with the key 10 Year 5% bonds pricing in line with the target EUR 2.5 billion, and optically successful at 6.98%, just inside the 7% critical level. The Bid To Cover was a weak 1.36, barely an improvement from the 1.34 from November 29, the day before the coordinated Fed bailout of Europe, when the same auction cost Italy 7.56%. And this was the good news: virtually all the other discrete auctions were far uglier than the headline indicated with demand weaker across the board.

Italian yields above 7% after lackluster auction -- Weak demand for long-term Italian bonds at its final auction of the year Thursday sent the yield of the country's 10-year debt above the troubling 7% level. Overall, the auction sold just over €7 billion, or about $9 billion, of long-term bonds, out of an offering range of between €5 billion to €8.5 billion. Italy will end up paying slightly less for these bonds than at its previous auction a month ago. The auction of 10-year bonds drew a yield of 6.98%, down from 7.56%. But in trading Thursday, the yield on the Italian 10-year edged up to 7.07% from just under 7% the previous day. A yield of 7% or more for 10-year bonds sets off warning bells among investors since that's widely seen as an unsustainable level that can force a country to seek a bailout, as was the case in Portugal, Ireland and Greece. Italian yields first topped 7% in November amid fears that Italy could be the next to need a bailout. But yields dropped sharply in the first week of December on hopes that a "fiscal pact"3 reached by European leaders would become the much needed solution to the long-running debt crisis.

Now Here's What A Failed Bond Auction Looks Like: No one is excited about the Italian 10-year selling at 6.8%, but at least it sold. A Hungarian bond auction this morning failed as Hungary rejected all bids in a 3-year bond sale. The 3-year is trading at a staggering 9.1%. Hungary was able to sell HUF5B ($21 million) of a June 2022 Bond at an average yield of 9.70%. Altogether Hungary sold HUF15B ($63 million)in government bonds after trying to sell HUF33B ($138) (data via @Uldis_Zelmenis). Hungary's debt was downgraded to junk by S&P and Moody's last week. Here's the 3-year:

Spain gears up for austerity under new government - Spain's new conservative government is set to unveil its first austerity measures later Friday as it tries to reassure markets that it has a plan to get a grip on its public finances at the same time as kickstarting an economy saddled with sky-high unemployment.With much of the country on holiday, Prime Minister Mariano Rajoy of the Popular Party was presiding over a Cabinet meeting that will approve the first in what is expected to be a painful series of spending freezes or cuts and other reforms over the next few months. Rajoy's Popular Party won a sweeping victory in Nov. 20 elections over the Socialists and his government took power only last week. All the ministers have been named but many other senior positions have not even been filled yet.

Spain Will Temporarily Raise Taxes to Plug Bigger-Than-Forecast 8% Deficit - Spanish Prime Minister Mariano Rajoy’s government plans to temporarily raise tax on income, savings and high-value homes after the euro-region’s third- biggest budget deficit topped forecasts for this year. The government will raise the levies for two years in a bid to move the deficit toward the euro-region limit of 3 percent of gross domestic product. The deficit this year will reach 8 percent, more than the 6 percent forecast by the outgoing government that Rajoy unseated in Nov. 20 general elections, said government spokeswoman Soraya Saenz de Santamaria at a press conference in Madrid.

Spending by Regions Makes Spain’s Fiscal Picture Worse - Facing a wider then expected budget deficit, Spain’s new government announced a $19.3 billion package of tax hikes and spending cuts Friday and admitted the picture was likely even worse than it appeared because of overspending by the country’s autonomous regions. The new budget minister, Cristóbal Montoro, made clear Friday: serious budget shortfalls in its 17 autonomous regions, which have spent recklessly in the past decade. The Bank of Spain announced this month that regional debt had surged 22 percent, to $176 billion in September from $144 billion the year before. And some experts say that there remain tens of billions of dollars in “hidden” regional debt yet to be discovered. That “hidden debt,” most of it in unpaid bills, is not included in Spain’s total national indebtedness of $915 billion. That could easily amount to $25 billion to $40 billion more, experts say.

Spain's Budget Minister says "Serious Budget Shortfalls in All 17 Autonomous Regions"; Primer Minister Announces $19.3 Billion Package of Tax Hikes - Spain's prime minister, Mariano Rajoy, has finally admitted three things I have been saying for a long time:

Spain's regions were in deep fiscal trouble if not bankrupt
Spain could not possibly hit its deficit targets for 2012
It is mathematically impossible for Spain to meet deficit goals without raising taxes, no matter how much he insisted otherwise.

The truth (at least partial truth) is out today with an announcement from Rajoy regarding a major tax hike, and an announcement from the budget minister regarding "serious budget shortfalls in its 17 autonomous regions, which have spent recklessly in the past decade."The budget deficit target is 6%, but the Prime Minister says it will "unexpectedly" be 8% so further austerity measures will be needed.

Spain opts for more austerity in 2012 - Spain’s new government has said the public deficit for 2011 will be 8% of GDP, well above its target of 6%, and has announced increases in income and property tax along with a wage freeze for civil servants to tackle it. Looks like a very tough year ahead for the Spaniards, one of several in the last few years,as illustrated in this timeline. This Reuters video provides more background information on the proposed austerity measures;

Poland's central bank intervenes to prop up zloty - The National Bank of Poland says it has intervened in the foreign currency market to prop up the zloty, which has weakened significantly in recent months. The central bank said late Thursday in a statement on its website that it had "sold a certain amount of foreign currency for zlotys." It gave no further details. The zloty has depreciated significantly this year against major currencies like the dollar, euro and Swiss franc. The central bank and the state-run Bank Gospodarstwa Krajowego have intervened several times in recent months to shore it up. The intervention caused the zloty to strengthen from about 4.46 zlotys to the euro in the early afternoon to about 4.41 after the bank's move.

The EU And IMF Watch In Horror As Everything Goes To Hell In Hungary - Hungary just approved a new central bank law, to the dismay of the International Monetary Fund and European Union. It's the same law that caused the two international organizations to withdraw their support for Hungary's bailout earlier this month. The law changes the way Hungary's central bank is managed, in a way the EU and IMF have argued will to compromise its independence from politics. Hungary has been at the center of quiet economic angst in Eastern Europe, largely overshadowed by the sovereign debt crisis in southern Europe. Standard & Poor's downgraded Hungarian government debt to junk last week and the government staged the latest in a series of failed bond auctions yesterday. However, Austrian banks' ties to the struggling country are the primary cause for concern in the European economy. They have an estimated $226 billion in exposure to Eastern Europe, with €1.14 trillion ($1.6 trillion) of assets held in the region. Though the silent beneficiary of liquidity measures by the European Central Bank, yields on Austrian 10-year government bonds have risen to more than 2.93% this morning. The fact that an estimated 50% of government debt is denominated in foreign debt seriously calls into question Hungary's ability to pay back lenders. The forint is hitting its lowest value against the dollar since early 2009 and bailout aid is in jeopardy, the prognosis is grim for investors.

Treasury Plans For Euro Failure - The Government is considering plans to restrict the flow of money in and out of Britain to protect the economy in the event of a full-blown euro break-up. The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls. The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies. Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports.

UK prepares emergency measures for euro collapse to prevent an influx of people and money Just before Christmas, the European Central Bank flooded the financial markets with 500 billion euros -- a move that may not ultimately have the desired effect of stabilizing banks. Instead of passing that money on in loans to businesses to spur the economy, European banks have redeposited the money with the ECB at low interest rates. The sum of overnight deposits at the European Central Bank (ECB) is often considered to be an indicator of the level of fear brewing within the financial sector. The greater the degree of distrust between banks, the more money banks tend to deposit on a daily basis with the ECB, where interest rates are low, but deposits more secure. This week has seen the level of deposits at the ECB's overnight facility rise to close to €412 billion ($538.4 billion) -- the greatest amount seen since the euro's introduction, and representing a single overnight increase on Monday of €65 billion.

A year of struggle for growth against high inflation - The government’s fiscal tightening - its Plan A - clearly had an impact on growth during 2011. The Treasury would point out that there was also such a tightening during 2010 and so this alone does not account for the growth disappointment. It is a fair point, though perhaps the nature of 2011’s changes, the Vat hike at the start of the year to a new high of 20% and April’s increases in national insurance contributions, brought home to people the fact that we are all in this together when it comes to cutting the deficit. The big explanation for 2011’s growth disappointment, however, was the squeeze on real incomes - and to a certain extent business margins - from high inflation. Some of that was due to the Vat hike. Most was not. A year ago, when we knew about the Vat hike, the consensus among forecasters was that consumer price inflation in the fourth quarter of 2011 would average 2.8%. In the event it has been roughly two percentage points higher. That makes the difference between a mild squeeze on real household incomes and a savage one. The Office for Budget Responsibility says 2011’s drop in real incomes was the biggest in the post-war era. It made the single biggest difference to economic growth, turning the prospect of a dull but respectable recovery year into a disappointing one. Without high inflation, growth of 2% would easily have been in reach in 2011. As it is, consumer spending has never been so depressed at this stage of a recovery.

First-time UK home buyers plunge to record low: Halifax - The number of first-time home buyers in Britain fell to a record low in 2011, despite house prices declining to their most affordable levels in eight years, mortgage lender Halifax said in a survey on Monday. Halifax, which is part of Lloyds Banking Group, estimated there were around 187,000 first-time home buyers in 2011 — down 7 percent from 2010 and representing the lowest annual total since its records began in 1974. The findings come a month after Conservative Finance Minister George Osborne announced plans to help Britons onto the property ladder, with the housing market hit by the country's economic slowdown. Osborne said the Conservative/Liberal Democrat coalition government would provide a mortgage guarantee scheme to help struggling first-time buyers put down deposits for property loans.

Family household income falls 8pc this year - Telegraph: The latest Asda Income Tracker showed that the average family lives on just £161 a week. Inflation may have showed signs of easing but family budgets continued to be squeezed thanks to higher energy and transport costs. The latest Asda Income Tracker has revealed that family spending power fell by £15 a week in November 2011, leaving the average UK family with £161 of weekly disposable income – 8.4 per cent down from this time last year. Annual growth in the cost of basics decreased to 5 per cent in November but budgets continue to be squeezed by the rising costs of running a family home. In October, gas prices were some 25.3 per cent higher than a year ago, while electricity prices grew by 15.5 per cent, Asda said. Transport costs continue to put pressure on the inflation rate too, with the cost of getting around remaining a large driver of the headline rate of CPI inflation. Figures from the AA show the cost of unleaded petrol grew by 12.3 per cent over the year to November, while diesel prices increased by 14.6 per cent during the same period.

NHS private income cap to be lifted - Health service reforms will pave the way for NHS hospitals to earn up to half of their income from private work, it was reported today. The current cap on income generated from private patients is typically limited to just a few percent but is set to rise to 49% in a move slipped out by the Government last week, according to The Times. It is expected to cause more friction within the coalition with a senior Liberal Democrat warning that it was part of an ideological drive that many in the party would oppose, the newspaper said. Labour claimed the plans showed Prime Minister David Cameron was determined to mirror health care provision operated in the United States of America. Shadow Health Secretary Andy Burnham told the newspaper: "This surprise move, sneaked out just before Christmas, is the clearest sign yet of David Cameron's determination to turn our precious NHS into a US-style commercial system, where hospitals are more interested in profits than people.

Britain's poorest hit by £2.5bn 'stealth tax' - Tax cuts for low and middle-income families in April will be dwarfed by hidden reductions in tax credits, according to a study for The Independent.The analysis found that the £1bn of tax cuts in April will be outweighed by reductions of more than £2.5bn in the complex tax-credit scheme. Most of the cuts to credits, which top up the wages of low-income families in work, will take effect from April and could catch families unaware. The Government's flagship policy of raising income-tax thresholds has been trumpeted by the Liberal Democrats as their main achievement since the Coalition was formed last year – and a major boost for the low-paid. But the Resolution Foundation think tank, which undertook the study, questions the fairness of the changes.

Rises in taxes and bills cost families £5 a day - The rising cost of living and changes to the tax regime have cost middle-class families £1,650 since January, equivalent to almost £5 per day, research by The Daily Telegraph has revealed. The figure represents the biggest squeeze on household incomes for at least 80 years, economists said. The rapid decline in people’s quality of life highlights the toll that the UK’s stuttering economic recovery is having on households. “Over 2011 there has been the biggest squeeze on incomes since the 1920s,” said Douglas McWilliams, the chief executive of thinktank the Centre for Economics and Business Research (CEBR). Howard Archer, chief UK and European economist at IHS Global Insight, warned that households have suffered from a “major” and “extended” reduction in their wealth over the course of 2011. Consumer confidence is expected remain subdued until next summer at least, as wages fail to keep pace with rising prices.

1,000 metal thefts every week as growing 'menace' blights Britain - Metal theft has reached "epidemic" proportions in Britain with more than 1,000 offences taking place every week, according to official figures obtained by The Daily Telegraph. The number of metal thefts has doubled in the past five years with 60,000 offences in the first 10 months of this year alone. Some of the worst-hit areas are Lancashire, Kent, Nottinghamshire and County Durham, where officers have recorded more than 2,500 metal thefts in 2011. Thieves have targeted railway lines, church roofs, community centres, war memorials, irreplaceable works of art, manhole covers and even plaques in cemetaries. The number of thefts from churches has doubled in the past three years alone. “The damage done to churches is out of all proportion to the value of the melted down lead."

Strike paralyses London underground train system - London's underground train service was virtually halted by a strike over pay on Monday, disrupting the start of the post-Christmas sales and sporting fixtures. Most lines were shut or operating a vastly reduced service, with people forced to use buses or taxis to reach shops which are desperate for business after disappointing sales in recent months. Members of the London Underground train drivers' union ASLEF voted overwhelmingly to hold a 24-hour strike on December 26, a public holiday in Britain known as Boxing Day, and on three more dates in the coming weeks. Drivers are angry that their employer is refusing to give them extra pay and a day off for working on Boxing Day. The operator has described their demands as "outrageous".

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